Engineering Economy

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ENGINEERING ECONOMY
Presented By

Dr. Ali Ahsan

My Introduction Your Introduction
Name GPA Where do you wish to see your self after 10 years?

The course design The benefits of the course The course outline Teaching method and requirement from students Yahoo group Photocopier Books Course Material Assignments Quiz Class Participation Presentation Exams Stationery Requirements Calculators Reading Lecture timings

Chapter 1

Why Engineering Economy is important to Engineers (and other professionals)

Engineering Economy
Why is Engineering Economy important? Practical everyday questions Should you finance your car or pay cash? Finance for $6995 –vs- pay $4000 in cash. At what interest rate would you have to invest the $4000 so either option is equivalent.

Buying a new car: should you take 0% financing for the next 4 years, or a $2000 cash rebate.

Engineering Economy
Why is Engineering Economy important?
Purchasing rental property: I just offered committed to purchase a house near campus for $70,000 with 20% down. What are my month P&I payments if interest rates are 6.25% for a 30 year loan or 5.875% for a 15 year loan. What would I pay over the lifetime of each of these mortgages?

Engineering Economy
Why is Engineering Economy important? As an Engineer
Engineers tend to work on projects. Projects use capital (money) to improve a process, develop a new product, improve a product , improve the safety of a process, etc… Engineers are typically responsible for “writing the project” which determines the cost of the project and the return on investment.

Engineering Economy
Why is Engineering Economy important? As an Engineer
When doing a project study, Engineers compare and contrast alternative options for accomplishing the goals of a project. These alternative are often compared from an economic standpoint. Lease –vs- Buy. Payback period. Rate of Return. Return on Investment.

Few Important Concepts
Management ????? Inflation Income Tax Cost of Capital Opportunity Cost Social Benefits & Costs Externalities Private / Public Investments Mutually Exclusive Mutually Independent

Few Important Concepts Cont…
Accounting / Financing William 7 Rules Personal Decisions
Goals / Objectives Feasibility Analysis

Importance
Engineers “Design” Engineers must be concerned with the economic aspect of designs and projects they recommend and perform; Analysis Design Synthesis

Questions
Engineers must work within the realm of economic and justification of engineering projects. Work with limited funds (capital) Capital is not unlimited (capital rationing) Capital does not belong to the firm Belongs to the owner of the firm Capital is not “free”… it has a “cost”

In general capital is developed in two ways:
1.

Equity financing: Corporation uses its own funds. e.g. Cash on hand, stock sales etc. Dept financing: Corporation borrows from outside sources. e.g. loans, bonds, mortgage etc.

2.

Definition
ENGINEERING ECONOMY IS INVOLVED WITH THE FORMULATION, ESTIMATION, AND EVALUATION OF ECONOMIC OUTCOMES WHEN ALTERNATIVES TO ACCOMPLISHED A DEFINED PURPOSE ARE AVAILABLE

Definition
ENGINEERING ECONOMY IS INVOLVED WITH THE APPLICATION OF DEFINED MATHEMATICAL RELATIONSHIPS THAT AID IN THE COMPARISION OF ECONOMIC ALTERNATIVES

Questions
Knowledge of Engineering Economy will have a significant impact on you, personally. Make proper economic comparisons
In your profession
Private sector Public sector

In your personal life

2 Principles or 7 Principles?
Much of this course can be described with only 2 principles
1.

Maximize Profit
Profit is usually = Revenue – Cost Sometimes, Profit is = Benefits - Cost

2. If revenue or benefits is unknown, then minimize cost

The Text’s 7 Principles
The 7 Principles in the textbook may be useful in avoiding mistakes. They outline the steps that are necessary in an engineering economy study.

The Text’s 7 Principles
1. 2. 3. 4. 5. 6. 7....
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