Engineering Economics (Introduction) Lecture # 1

1. Engineering Economics (Introduction) Lecture # 1

2. Profile of the Visiting Lecturer • Name : Engr. Ejaz Gul Aurakzai • Affiliation : SCEE, NUST • Qualification • BSc Civil Engineering (CGPA 3.9) • MS Geotechnical Engineering (CGPA 3.7) • MS Economics with specialization in Engineering Economics • Selected for PhD Economics from University of Innsbruck, Austria • Address : Hilal Road, Rawalpindi Cantt • Contact : 0300 – 5906405 • Email : ejazjazz@yahoo.com

3. Course Outline • Credit Hours: 3 • Text Books: Engineering Economy by Leland Blank & Anthony Tarquin Engineering Economy by E Paul Degarmo Please make a note book for this subject

4. Grading Policy • Assignments - 10% • Project - 10% • Quizzes - 10% • Mid Term - 20% • Final Exam - 50% • Assignments will be handwritten, submitted in proper folder. • Project will be computer generated of not less than 10 – 12 Pages, TNR, 12 Size, 1.5 spacing, submitted in proper folder. • Quizzes will be unannounced. • Project will be in groups. • No plagiarism and copying as per HEC Policy.

5. Course Syllabus • Introduction to Engineering Economy • Time value & Interest rates • Alternatives • Corporate finance • Inflation • Depreciation • Decision Making

6. Engineering & Science • Engineering a profession in which knowledge of the mathematical and natural sciences gained by study, experience and practice is applied with judgment to develop ways to • Utilize the material and forces economically • For the benefit of mankind • Engineering is not a science but application of science • Nature of engineering – application • Role of scientist - Discover the universal laws of nature / behaviour • Role of engineer – Apply knowledge to particular situation to produce products and services

9. Engineering & Economics • Engineering activities are means of satisfying human rights and requirements • Concerns – material / forces and needs • Because of resource constraints, engineering is closely associated with economics • Its essential that an engineering proposal is evaluated in terms of economics (worth & cost) before it is undertaken • Essential pre-requisite of successful engineering application is economic feasibility

10. Dependence on Engineering • Modern civilization depends to a large degree on engineering • Products and services such a communication, machines, roads etc are result of engineering • Production is through of engineering • Jobs and kill development • Economic improvement • Business and economic growth

11. Engineering Economics • Engineering economy is a collection of mathematical / analytical techniques that simplify economic comparison • Engineering economy – formulation, estimation and evaluation of the economic outcomes out of various available alternatives to accomplish a defined purpose • Discipline that involves the systematic evaluation of the cost and benefit of proposed technical projects

12. Principles of Engineering Economy • Analyze the idea • Develop the alternatives • Focus on differences in the alternatives • Use a consistent view point • Use a common unit of measurement • Consider all relevant criteria • Make uncertain explicit • Revisit your decision

13. Role of Engineering Economy in Decision Making • Assist people in making decisions • Timeframe – future • Actual value may differ from estimated one • Sensitivity analysis – changes in decisions with varying estimates • Analysis of present and past situations based on observed data to predict the future

14. Engineering Economy • Engineering economy is an answer to following questions • Which engineering projects are worthwhile? (project worthiness) • Which engineering projects should have a higher priority? (priority for available alternatives) • How should the engineering project be designed? (economic design)

17. Money Money

18. Bi-Environmental Nature of Engineering • Engineers are confronted with two interconnected environments the physical and economical Physical environment Economic environment

19. Bi-Environmental Nature of Engineering • Engineers are confronted with two interconnected environments the physical and economical • Success of engineers to alter physical environment to produce goods and services depends upon the knowledge of physical laws • Benefits / worth of these goods and services are measured in economic terms, that is why, all engineering products should be economically viable • Physical environment is based on physical laws (formulas, maths, calculations), therefore, it is certain • Economic environment is affected by the behaviour of people, therefore, its not certain and economic laws are not exact and certain • The function of engineering is to manipulate the physical environment to create value in economic environment

20. Physical and Economic Efficiency • Physical efficiency = output / input • Physical efficiency is always less than unity or 100% • Economic efficiency = worth / cost • Economic efficiency can 100% or even more • Overall economic efficiency = economic/physical = physical x worth / cost

21. Example

22. The Engineering Process • Determination of objectives • Identification of strategic factors – limiting factors vs strategic factors • Determination of means • Evaluation of engineering proposals • Assistance in decision making

23. Limiting Factors Vs Strategic Factors • Truck driver is hampered coz he has difficulty in lifting the huge box • Limiting factors : Gravity, mass of box, strength of man • Exam / analysis: reduce gravity, reduce mass, strength of man • Strategic factor : strength • Way forward : lifting devices • Strategic factors give way forward for a problem

24. Acquisition Phase Utilization Phase Product Use/ Phase out/ Disposal Establish need Conceptual preliminary design Detail design / Development Production Product Life Cycle

25. Life Cycle Cost Analysis • The ultimate value of the product that result from engineering is measured in economic terms • Economic aspect is not examined until detail design (too late !!!!!!) • Life cycle analysis – To ensure that entire life of the system is considered from inception till end • Engineering design – should ensure design compatibility through life cycle • Life cycle outcome is measured in terms of performance, effectiveness, productivity, reliability, maintenance, support, quality and cost

26. Economic & cost concepts

27. Concept of Value & Utility • Value • It is a measure of the worth that a person ascribes to a good or a service • Value of an object is not inherent but in the regard that a person has for it • It should not be confused with price or cost of an object • Utility • It is a measure of the power of a good or a service to satisfy human wants • Not inherent to object but in the regard that a person has for it • Value and utility are related. Value is an appraisal of utility in terms of medium of exchange

28. Consumer & Producer Goods(two classes of goods are recognized by the economist) • Consumer goods are the goods and services that directly satisfy human wants TV, houses, shoes, books • Producer goods are the goods and services that satisfy human wants indirectly as part of the production or construction process. They are not desired for themselves, but they are instrumental in producing something that can be consumed Machines, dozers, equipment, energy, coal

29. Economic Aspects of Exchange • Economy of exchange occurs when utilities are exchanged by two or more people • In this connection, a utility means anything that a person may receive in an exchange that has any value whatsoever—for example, an appliance for the home, a pair of shoes, a meal, or a friendly gesture • Mutual benefit in exchange • Seller believe that the amount received has equal or greater utility than the object • Buyer believe that object has equal or greater utility than the amount spent • Exchange is made when mutual benefit is involved • Exchange is possible when the object is not valued equally by parties of exchange

30. Classification of Cost • First cost • It is the initial cost of capitalized property, including transportation, installation, and other related initial expenditures • Normally made of elements that do not recur • Occurs once • Operation and Maintenance Cost • It is that group of costs experienced continually over the useful life of the activity • Labor cost for operating and maintenance, fuel and power cost, spares and repair cost, insurance and taxes and overburdon

31. Fixed Cost • Fixed cost is that group of costs involved in a going activity whose value is constant in the future regardless of operation • Lease, rent, sales programmes, research, pays to permanent staff • Investment that give rise to fixed cost are made in the present with the hope that it will be recovered with a profit as a result of reduction in variable cost or increase in the income • Variable Cost • It is that group of costs that vary in some relationship to the level of operational activity • It is related to the rate of use or activity level • Material needed per unit of product is expected to be constant • Amount of paint used may be expected to be proportional to the area painted

32. Incremental and Marginal Cost • It is the additional cost that will be incurred as the result of increasing output by one more unit • Marginal cost is an increment of output whose cost is barely covered by the monetary return derived from it • Sunk Cost • A sunk cost is a past cost that cannot be altered by future action and is therefore irrelevant • Disregarded by principle but difficult to apply • Accept the present loss and use the money more efficiently from now into the future Life-cycle Cost Life cycle cost is defined as all costs, both nonrecurring and recurring, that occur over the life cycle of a product

33. Interest and Interest Rates

34. Interest & Interest Rate • Interest • It is a rental amount charged by financial institutions for the use of money • It is the difference between end amount and the beginning amount • If the difference is zero than there is no interest • Interest = Amount now – original amount • Interest Rate • Interest rate, or the rate of capital growth, is the rate of gain received from an investment • When interest paid over specific time period is expressed as %age of principal (original) amount, it is called as interest rate • Interest Rate = (Interest per unit time/original amount) *100 • Time unit of interest rate is interest period • Interest period is normally 1 year

35. Time Value of Money • The change in the amount of money over a period of time is called the time value of money • A dollar received at some future date is not worth as much as a dollar in hand at present • Money makes money ….. If invested