Introduction to Engineering Economy

Background:

The sole purpose of this blog is to presents the concepts and principles of engineering economy.

Imagine a future where landfills are obsolete and trash is used as fuel. Although this vision is not new, a southern based US company has this plan to make this a reality. Instead of placing the consumers waste into the landfills, trash would be vaporized into steam and a synthetic gas that can be used as a substitute for natural gases. The steam could be sold to the neighboring facilities as a power source, and enough synthetic gas could be produced to power of 43,000 homes annually.

The company plans to let no by product go unused. Organic materials would be melted and hardened into materials that could be used for roadways and construction projects. It is projected that the sale of the transformed trash would allow the company to recoup the initial $425 million investment within 20 years. This project deals not only with environmental concern of waste disposal but also the need of alternate energy sources.

Introduction:

The technological and social environments in which we live continue to change at a rapid rate. In recent decades, advances in science and engineering have made space travel possible, transformed our transportation systems, revolutionized the practice of medicines, and miniaturized electronic circuits so that a computer can be placed on a semiconductor chip. The list of such achievements seems almost endless.

The utilization of scientific and engineering knowledge for our benefit is achieved through the design of things we use, such as furnaces for vaporizing trash and structures for supporting magnetic railways. However, these achievements don’t occur without a price, monetary or otherwise. Therefore, the purpose of this Engineering Economy is to develop and illustrate the principles and methodology required to answer the basic economic question of any design: Do its benefits exceed its cost?

The Accreditation Board of Engineering and Technology states that engineering,” is 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 nature for the benefit of mankind”. In this definition, the economic aspect of the engineering are emphasized, as well as the physical aspects. Clearly, it is essential that the economic part of engineering practice be accomplished well. Thus, engineers use knowledge to find new ways of doing things economically.

Engineering Economy involves the systematic evaluation of the economic merits of proposed solutions to the engineering problems. Engineering Economy is the dollars and cents side of the decisions that engineers make or recommend as they work to position a firm to be profitable in a highly competitive market place. To be economically acceptable i.e affordable, solutions to the engineering problems must demonstrate a positive balance of long term benefits over a long term costs, and they must also:

·        Promote the well being and survival of an organization,

·        Embody creativity and innovative technology and ideas,

·        Permit identification and scrutiny of their estimated outcomes,

·        Translate profitability to the bottom line through a valid and acceptable measure of merit.

A few more of the myriad situations in which engineering economy plays a crucial role in the analysis of the project alternative come to mind:

·        Choosing the best design for a high efficiency boiler plant,

·        Selecting the most suitable robot for mechanical riveting operation on an automotive assembly line,

·        Making a recommendation about whether jet planes for overnight delivery services should be purchased or leased,

·        Determining the optimal staffing plan for a computer help desk.

From these illustrations, it should be obvious that engineering economy includes significant technical considerations. Thus, engineering economy involves technical analysis, with emphasis on the engineering aspects, and has the objective of assisting decisions.

An engineering economy study is accomplished using a structural procedure and mathematical modeling techniques. The economic results are then used in a decision situation that normally includes other engineering knowledge and input.

The Principles of Engineering Economy:

The development, study and application of any discipline must begin with a basic foundation. We define the foundation of engineering economy to be a set of principles that provide a comprehensive doctrine for developing the methodology.

 Once a problem or need has been clearly defined, the foundation of the discipline can be discussed in terms of the seven principles:

       I.            Develop the alternatives:

The choice (decision) is among the alternatives. The alternatives need to be identified and then defined for subsequent analysis.

   II.            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.

III.            Use a consistent viewpoint:

The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint.

 IV.            Use a common unit of measurement:

Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will simplify the analysis of alternatives.

    V.            Consider all relevant criteria:

Selecting a preferred alternative (decision making) requires the use of a criterion (sometimes several criteria). The decision process should consider both the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

 VI.            Make risk and uncertainty explicit:

Risk and uncertainty are inherent in estimating the future outcomes of the alternatives and should be recognized in their analysis and comparison.

VII.            Revisit your decision:

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.

Summary:

Engineering economy is a collection of problem solving tools and techniques that are applied to engineering, business, and environmental issues. Experience has shown that most errors in engineering economic analysis can be traced to some violation of these principles.