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FUNDAMENTALS OF
ENGINEERING ECONOMY
CHE40: Engineering Economy
 Definition of Engineering Economy

Principles of Engineering Economy

Fundamentals of Engineering Economy

Economic Analysis Procedure

Outline
 Define engineering economy.
State the principles of engineering
economy.

Fundamentals of Engineering Economy

Outline the economic analysis procedure.

Learning Objectives
 Engineering
the profession in which a knowledge of the
mathematical and natural sciences gained
by study, experience and practice is applied
with judgment to develop ways to utilize,
economically, the materials and forces of

Fundamentals of Engineering Economy

nature for the benefit of mankind (ABET)

Engineering Economy
systematic evaluation of the economic
merits of proposed solutions to engineering
problems
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Definition of Engineering Economy

 Must demonstrate a positive balance of
long-term benefits over long-term costs
Promote well-being and survival of an
organization
Embody creative and innovative

Fundamentals of Engineering Economy

technology and ideas
Translate profitability to the bottom line
through a valid and acceptable measure
of merit

Solutions to Engineering Problems

 Balancethe trade-offs in the most
economical manner
Trade-off between performance and cost
Response time, safety, weight, reliability,
etc.

Fundamentals of Engineering Economy

Technical considerations are an integral
part of engineering economy studies

Mission of Engineering Economy

1 Develop the alternatives
Carefully define the problem. The choice is
among the alternatives. The alternatives
need to be identified and defined for
subsequent analysis.

Fundamentals of Engineering Economy

2 Focus on the Differences
Only the differences in expected future
outcomes among the alternatives are
relevant to their comparison and should be
considered in the decision.
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Principles of Engineering Economy

3 Use a Consistent Viewpoint
The prospective outcomes of the
alternatives, economic and other, should be
consistently developed from a defined
viewpoint or perspective.

Fundamentals of Engineering Economy

4 Use a Common Unit of Measure
Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will simplify the
analysis and comparison of the alternatives.
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Principles of Engineering Economy

5 Consider All Relevant Criteria
Selection of a preferred alternative requires
the use of a criterion or several criteria. The
decision process should consider both the
outcomes enumerated in the monetary

Fundamentals of Engineering Economy

unit and those expressed in some other unit
of measurement or made explicit in a
descriptive nature.

Principles of Engineering Economy

6 Make Risk and Uncertainty Explicit
Risk and uncertainty are inherent in
projecting the future outcomes of the
alternatives and should be recognized in
their analysis and comparison.

Fundamentals of Engineering Economy

7 Revisit Your Decisions
Improved decision making results from an
adaptive process; to the extent practicable,
the initial projected outcomes of the
selected alternatives should be
subsequently compared with actual results
achieved. 10

Principles of Engineering Economy

 An engineering economy study is
accomplished using a structured procedure
and mathematical modeling techniques
Economic results are used in a decision
situation that normally includes other

Fundamentals of Engineering Economy

engineering knowledge and input
Always with reference to the basic
engineering economy principles

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Engineering Economy and the Design Process

While studying for the Engineering Economy final exam, you and
two friends find yourselves craving for a fresh pizza. You cant
spare the time to pick up the pizza and must have it delivered.
Pick-Up-Sticks offers a 1 thick (including toppings), 20 square
pizza with your choice of two toppings for $15 plus 5% sales tax
and a $1.50 delivery charge (no sales tax on delivery charge).
Freds offers the round, deep-dish Sasquatch which is 20 inches
in diameter. It is 1-3/4 thick, which includes two toppings, and
costs $17.25 plus 5% sales tax and free delivery.

Fundamentals of Engineering Economy

a) What is the problem in this situation? Please state it in a
lucid manner.
b) Systematically apply the seven principles of engineering
economy to the problem you have defined in part (a).
c) Assuming that your common unit of measure is $ (i.e., cost),
what is the better value for getting a pizza based on the
criterion of minimizing cost per unit of volume?
d) What other criteria might be used to select which pizza to
purchase?

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AN EXAMPLE PROBLEM TAKEN FROM AN OLD
EXAM
a) One problem involves how to satisfy the hunger of three students--
assume a piping hot, delicious pizza will satisfy this need. (Another
problem is to learn enough about Engineering Economy to pass--
or better yet earn an A or a B--on the final examination and
ace the course. Maybe a pizza will help solve this problem too?)
Lets use hunger satisfaction with a pizza as the problem/need
definition.
Principle 1 - Develop the Alternatives

Fundamentals of Engineering Economy

b)

i) Alternative A is to order a pizza from Pick-Up-Sticks.

ii) Alternative B is to order a pizza from Freds.
Other options probably exist but well stick to these two
alternatives.

Principle 2 - Focus on the Differences

Difference in delivery time could be an issue. A perceived
difference in the quality of the ingredients used to make the pizza
could be another factor to consider. Well concentrate our 13
attention on cost differences in part (c) to follow.
Solution
 Principle 3 - Use a Consistent Viewpoint
Consider your problem from the perspective of three customers
wanting to get a good deal. Does it make sense to buy a pizza
having a crust that your dog enjoys, or ordering a pizza from a
shop that employs only college students? Use the customers point
of view in this situation rather than that of the owner of the pizza
shop or the driver of the delivery vehicle.

Fundamentals of Engineering Economy

Principle 4 - Use a Common Unit of Measure
Most people use dollars as one of the most important measures
for examining differences between alternatives. In deciding which
pizza to order, well use a cost-based metric in part (c).

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Solution
 Principle 5 - Consider All Relevant Criteria
Factors other than cost may affect the decision about which pizza
to order. For example, variety and quality of toppings and
delivery time may be extremely important to your choice.
Dynamics of group decision making may also introduce various
political considerations into the final selection (can you name a
couple?).

Principle 6 - Make Uncertainty Explicit

Fundamentals of Engineering Economy

The variability in quality of the pizza, its delivery time and even its
price should be carefully examined in making your selection.
(Advertised prices are often valid under special conditions--call
first to check on this!)

Principle 7 - Revisit Your Decision

After youve consumed your pizza and returned to studying for
the final exam, were you pleased with the taste of the toppings?
On the downside, was the crust like cardboard? Youll keep these
sorts of things in mind (good and bad) when you order your next
pizza!
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Solution
c) Finally some numbers to crunch--dont forget to list any key assumptions
that underpin your analysis to minimize the cost per unit of volume
(Principles 1, 3, 3, 4 and 6 are integral to this comparison).

Assumptions: (i) weight is directly proportional to volume (to avoid a

meringue pizza with lots of fluff but meager substance), (ii) you and your
study companions will eat the entire pizza (avoids variable amounts of
discarded left-overs and hence difficult-to predict cost of cubic inch
consumed) and (iii) data provided in the Example Problem are accurate

Fundamentals of Engineering Economy

(the numbers have been confirmed by phone calls).

Analysis:
Alternative A Pick-up Sticks: Alternative B Freds
Volume = 20 x 20 x 1 = 400 in3 Volume = (3.1416)(10)2(1.75) = 550
in3
Total Cost = $ 15 (1.05) + $ 1.50 = $ Total Cost = $ 17.25 (1.05) = $ 18.11
17.25
Cost per in3 = $ 0.043 Cost per in3 = $ 0.033 16
Therefore, order the pizza from Freds to minimize total cost per in3
Solution
Fundamentals of Engineering Economy
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 Problem Development of
recognition, Development of the outcomes and
definition and feasible alternative cash flows for each
evaluation alternative

Fundamentals of Engineering Economy

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Economic Analysis Procedure

 Selection of a Analysis and Selection of the
criterion (or comparison of preferred
criteria) the alternatives alternative

Fundamentals of Engineering Economy

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Economic Analysis Procedure

 Performance monitoring and
post-evaluation of results

Fundamentals of Engineering Economy

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Economic Analysis Procedure

 Definition of Engineering Economy

Principles of Engineering Economy

Fundamentals of Engineering Economy

Economic Analysis Procedure

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Outline
 Sullivan,W., Wicks, E. and Luxhoj, J.,
Engineering Economy, 12th ed, USA:
Pearson Education, Inc., 2003

Blank,L. and Tarquin, A., Engineering

Cost Concepts and Design Economics

Economy, 4th ed, Singapore: McGraw-Hill
Book Co, 1998

Eschenbach, T., Engineering Economy

Applying Theory to Practice, USA: 1995
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References
 FUNDAMENTALS OF
ENGINEERING ECONOMY
CHE40: Engineering Economy