ENGINEERING

ECONOMIC

Bhesh R Kanel, Coordinator

College of Biomedical engineering And Applied sciences

June, 2015

COURSE CONTENT

1. Introduction: (3 hours)

1. Essential business and accounting

terminology.

2. Definition of cash flow.

3. Economic systems

2. Cost Classification and Analysis: (5 hours)

1. The elements of cost.

2. Classification of cost: overhead, prime cost.

3. Cost variance analysis.

4. Job and process costing.

3. Interest and the Time Value of Money:

(6 hours)

1. Simple interest, compound interest, interest

tables, interest charts.

2. Present worth.

3. Nominal and effective interest rates.

4. Continuous compounding and compounding

formula.

5. Interest calculations for uniform gradient.

4. Basic Methodologies of Engineering

Economic Studies: (7 hours)

1. Present worth and annual worth methods.

2. Future worth method.

3. Internal rate of return method.

4. Drawbacks of the internal rate of return

method.

5. External rate of return method.

6. Minimum attractive rate of return method.

7. The playback (payout) period method

5. Cost/Benefit Analysis: (4 hours)

1. Conventional cost/benefit ratio.

2. Modified cost/benefit ratio.

3. Break-even analysis.

6. Investment Decisions: (8 hours)

1. Comparison of alternatives having some useful life.

2. Comparison of alternatives having different useful

life.

3. Comparison of alternatives including of excluding

the time value of money.

4. Comparison of alternatives using the capitalized

worth method.

5. Definition of mutually exclusive investment

alternatives in terms of combinations of projects.

6. Comparison of mutually exclusive alternatives.

7. Risk Analysis: (4 hours)

1. Projects operating under conditions of certainty.

2. Projects operating under conditions of

uncertainty.

3. Decision tree.

4. Sensitivity analysis.

8. Taxation System in Nepal: (3 hours)

1. Taxation law in Nepal.

2. Depreciation rates for buildings, equipment,

furniture etc.

3. Recaptured depreciation.

4. Taxes on normal gains.

5. Taxes on capital gains.

9. Demand Analysis and Sales

Forecasting: (5 hours)

1. Demand analysis.

2. Correlation of price and consumption rate.

3. Market research.

4. Sales forecasting.

5. Criteria for desirable sales forecasting

procedures.

6. Factors affecting accuracy of forecasting.

Before completing the course

Assignments -3

case studies -3

Project Evaluation

Practice - 1

Text Book References

TextBook: Engineering Economy, W.G

Sullivan, Pearson 2001

Engineering Economics, Er.Kiran Thapa

References: www.prenhall.com/sullivan_engineering

www.ocw.mit.edu/courses/engineering-systems-division/esd-

70i......

MS Excel functions

Referece Books

E.P. DeCramo, W.G. Sullivan and J.A. Bontadelli, 8th

Edition, Macmillan Publishing Company, 1988.

N.N. Borish and S. Kaplan, “Economic analysis: For

Engineering and Managerial Decision Making”, McGraw-

Hill.

“Contemporary Engineering Economics” by

Chan S. Park

“ Engineering Economic Analysis” by Tony and

Blank.

INTRODUCTION

Economics Definition

Economics:

Study allocation of its scarce resources – Examining Which Goods and Services wind up in the hands of which people

Scarce Resource: Resource which are not abundant. And are not easily available

Where resources are abundant, no issue on allocation

Economics

Allocation of the resources to fulfill the unlimited desires of the human beings.

Branch of social science that deals with the production and consumption of goods and services as well as the distribution for the human welfare and their management.

Positive and Normative Analysis

Positive Analyis: Study of Econonic relationships

without value judgenent like electrodynamics

Normative: Analysis with Value judgement e.g.

effect of taxation on poor family and whether it is

desirable or not.

Monetization: Measure of value in terms of

money

Economic Reasoning & Analysis

Ceteris Paribus: Other Things remaining Equal

economics is a complex System, so cosider effect of one

variable at one time

Homo economicus: self-interested behabiour or

selfishness

People or organization make choices based on “their

own welfare only”

Marginal … : the Derivative of …

Model: A relationship between variables, a functional

equation

Engineering Economics

Deals with the methods that enable one to take

economic decision towards minimizing the cost or

maximizing benefits to business organization.

Chooses between alternatives

The field of engineering economy is concerned with the

systematic evaluation of the benefits and costs of the

projects involving engineering design and analysis.

In manufacturing or construction, engineering is

involved in every detail of a product’s production

from conceptual design to distribution, for the best

alternatives

Engineers must decide if the benefits of a project

exceed its costs and must make this comparison in a

unified framework.

The frame work within which to make this

comparison is the field of engineering economics.

Definition1:

“Engineering economics is the application of

economic techniques to the evaluation of design

and engineering alternatives. The role of

engineering economics is to assess the

appropriateness of a given project, estimate its

value, and justify it from an engineering

standpoint”. (Dr. John M.Watts)

Definition 2:

“Engineering economics deals with the methods that

enable one to take economics decision towards

minimizing the cost or maximizing benefits to

business organization”.

Definition 3:

“Engineering economy involves formulating,

estimating, and evaluating the economic outcomes

when alternatives to accomplish a defined purpose

are available. Another way to define engineering

economy is as a collection of mathematical

techniques that simplify economic comparison”.

STRATEGIC ECONOMIC DECISIONS

Once project ideas are identified, they are

typically classified as:

1. Equipment and process selection

2. Equipment Replacement

3. New product and product expansion

4. Cost reduction, and

5. Service improvement

Principles of Engineering Economics

Develop alternatives

Focus of the differences

Use a consistent view point

Use common unite of measure

Consider all relevant criteria

Make uncertainty explicit

Revisit your decision