 Every young technologist on entering his profession comes across problems, which require, in addition to requisite technical knowledge, reasonably good knowledge of economics and accounts.  In addition, he is required to posses a good knowledge of business management.  With knowledge of engineering, economy he can learn about accounts, and management which helps him to cope with administrative as well as managerial demands of his profession

 Engineers are familiar with all the technicalities of machinery and production.  They are the best judges of the useful lives of an asset.  They also possess the technical knowledge to calculate the number of units a proposed plant would produce when operational.  Engineering economy is at the heart of making decisions.  These decisions involve the fundamental elements of cash flows of money, time, and interest rates.

 Economic decision making for engineering systems is called engineering economy.  Engineering economy is the study of industrial economics and the economic and financial factors which influence industry.  Helps in Financial understanding of engineering problems and projects, as well as the techniques needed for evaluating and making sound economic decisions.  Covers cost estimation, depreciation, and taxes

 Engineering economy is a collection of techniques that simplify comparisons of alternatives on an economic basis.  In defining what engineering economy is, it might also be helpful to define what it is not.  Engineering economy is not a method or process for determining what the alternatives are.  On the contrary, engineering economy begins only after the alternatives have been identified.

The alternatives in engineering considerations usually involve such items as:  purchase cost (first cost),  Anticipated useful life,  yearly costs of maintaining assets (annual maintenance and Operating costs),  anticipated resale value (salvage value), and  the interest rate.

 In today’s competitive world of business it has become essential that engineers should practice financial project analysis for engineering projects and make rational decisions.  Engineering economy also includes the study of accounting practices for manufacturing concerns.  Engineering economy includes process costing, batch costing, cost allocation.

 Project selection is also a subject matter of Engineering economy.  In business environments, many if not all, decisions are justified using monetary criteria such as “profit”.  Such decisions are made at the managerial level and many engineers become managers in manufacturing environment.

 All engineers, regardless of their employment, should know methods and tools used in evaluation of projects.  Even though, engineering economy deals mostly with selection of projects in business environment, the tools and methods can be and are used by individuals and non-profit organizations such as government, hospitals, and charitable entities, etc.

 The estimated inflows (revenues) and outflows (costs) of money are called cash flows.  These estimates are truly the heart of an engineering economic analysis.  They also represent the weakest part of the analysis, because most of the numbers are judgments about what is going to happen in the future.  After all, who can accurately predict the price of oil next week, much less next month, next year, or next decade?

 Every situation has at least two alternatives.  In addition to the one or more formulated alternatives, there is always the alternative of inaction, called the do- nothing (DN) alternative.  This is the as-is or status quo condition.  In any situation, when one consciously or subconsciously does not take any action, he or she is actually selecting the DN alternative.  Of course, if the status quo alternative is selected, the decision-making process should indicate that doing nothing is the most favorable economic outcome at the time the evaluation is made.

 Whether we are aware of it or not, we use criteria every day to choose between alternatives.  For example, when you drive to campus, you decide to take the “best” route.  But how did you define best? Was the best route the safest, shortest, fastest, cheapest, most scenic, or what?  Obviously, depending upon which criterion or combination of criteria is used to identify the best, a different route might be selected each time.  In economic analysis, financial units (dollars or other currency) are generally used as the tangible basis for evaluation.

 In many cases, alternatives have noneconomic or intangible factors that are difficult to quantify.  When the alternatives under consideration are hard to distinguish economically, intangible factors may tilt the decision in the direction of one of the alternatives.  A few examples of noneconomic factors are goodwill, convenience, friendship, and morale.

 It is often said that money makes money.  The statement is indeed true, for if we elect to invest money today, we inherently expect to have more money in the future.  If a person or company borrows money today, by tomorrow more than the original loan principal will be owed.

 Feasibility analysis is the process by which feasibility is measured.  Feasibility should be measured throughout the life cycle.  The scope and complexity of an apparently feasible project can change after the initial problems and opportunities are fully analyzed or after the system has been designed.  Thus, a project that is feasible at one point in time may become infeasible at a later point in time.

In technical feasibility the following issues are taken into consideration.  Whether the required technology is available or not  Whether the required resources are available –  -Manpower- programmers, tester - Software and hardware  Once the technical feasibility is established, it is important to consider the monetary factors also.  Since it might happen that developing a particular system may be technically possible but it may require huge investments and benefits may be less. For evaluating this, economic feasibility of the proposed system is carried out.

 For any system if the expected benefits equal or exceed the expected costs, the system can be judged to be economically feasible.  In economic feasibility, cost benefit analysis is done in which expected costs and benefits are evaluated.  Economic analysis is used for evaluating the effectiveness of the proposed system.

 In economic feasibility, the most important is cost-benefit analysis.cost-benefit analysis  As the name suggests, it is an analysis of the costs to be incurred in the system and benefits derivable out of the system.

 Operational feasibility is mainly concerned with issues like whether the system will be used if it is developed and implemented.  Whether there will be resistance from users that will effect the possible application benefits?

 Does management support the project?  Are the users not happy with current business practices?  Will it reduce the time (operation) considerably? If yes, then they will welcome the change and the new system.  Have the users been involved in the planning and development of the project?  Early involvement reduces the probability of resistance towards the new system.  Will the proposed system really benefit the organization?  Does the overall response increase?  Will accessibility of information be lost?  Will the system effect the customers in considerable way?

 A small manufacturing company needs to buy a forklift truck for material handling.  Two different brands, say A and B, are being considered.  Which truck should be bought?  The decision will probably be based on minimization of cost.

 A project for widening a two lane highway to four lanes is being considered by the county board.  A four lane highway may reduce the traffic accident rate but is expected to lower property values in the immediate neighborhood of the highway.  Should the proposed highway be built?  The county board must weigh the relative benefit of lower accident rates against the possible loss in value of homes as well as the construction cost.

 A new college graduate needs a new car.  Should this new car be bought or leased?  Methods from engineering economy can be used for determining the best choice.

 Engineering economy plays a crucial role in : 1. Choosing the best design for a high-efficiency gas furnace 2. Selecting the most suitable robot for a welding operation on an automotive assembly line 3. Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased 4. Considering the choice between reusable and disposable bottles for high- demand beverages

1. Recognize a decision problem 2. Define the goals or objectives 3. Collect all the relevant information 4. Identify a set of feasible decision alternatives 5. Select the decision criterion to use 6. Select the best alternative 25

1. Recognize a decision problem 2. Define the goals or objectives 3. Collect all the relevant information 4. Identify a set of feasible decision alternatives 5. Select the decision criterion to use 6. Select the best alternative  Need a car  Want mechanical security  Gather technical as well as financial data  Choose between Vento and Honda  Want minimum total cash outlay  Select Honda 26

27 Planning Investment Marketing Profit Manufacturing

 Estimating a Required investment  Forecasting a product demand  Estimating a selling price  Estimating a manufacturing cost  Estimating a product life 28

29 Create & Design Engineering Projects Evaluate Expected Profitability Timing of Cash Flows Degree of Financial Risk Analyze Production Methods Engineering Safety Environmental Impacts Market Assessment Evaluate Impact on Financial Statements Firm’s Market Value Stock Price

 The five main types of engineering economic decisions are:  (1) service improvement,  (2) equipment and process selection,  (3) equipment replacement,  (4) new product and product expansion, and  (5) cost reduction