ENGINEERING

ECONOMY
Course Code and Title: ENGG107-ENGINEERING ECONOMY
Credit Units: 3.0 units
Prerequisite: 2nd Year Standing
Schedule:
Course Description:
• This course is common to the Bachelor of Science in Civil Engineering, BSCE,
Bachelor of Science in Environmental and Sanitary Engineering, BSENSE and
Bachelor of Science in Computer Engineering, BSCpE. It was designed to discuss
the concepts of the time value of money and equivalence; basic economy study
methods; decisions under certainty; decisions recognizing risk; and decisions
admitting uncertainty. It is of vital importance to help the learners understand
the need for the knowledge of Economics to become an effective manager and
decision maker. Also, it involves quantification the benefits and costs associating
with engineering projects to determine if they save enough money to warrant
their capital investments. Further, it encourages the learners the application of
engineering design and analysis principles to provide goods and services that
satisfy the consumer at an affordable cost.
Content Outline:

1. SPUP Vision- Mission and Paulinian Core Values

2. Introduction
2.1. Principles of Engineering Economics
2.2. Engineering Economics and the Design Process
2.3. Cost Concepts for Decision Making
2.4. Present Economic Studies
3. Money-Time Relationships and Equivalence
3.1. Interest and the Time Value of Money
3.2. The Concept of Equivalence
3.3. Cash Flows
4. Economic Study Methods
4.1. The Minimum Attractive Rate of Return
4.2. Basic Economic Study Methods: Present Worth, Future Worth, Annual Worth, Internal Rate of Return, External
Rate of Return
4.3. Other Methods: Discounted Payback Period, Benefit/Cost Ratio
5. Decisions Under Certainty
5.1. Evaluation of Mutually Exclusive Alternatives
5.2. Evaluation of Independent Projects
5.3. Effects of Inflation
5.4. Depreciation and After-Tax Economic Analysis
5.5. Replacement Studies
6. Decisions Recognizing Risk
6.1. Expected Monetary Value of Alternatives
6.2. Discounted Decision Tree Analysis
7. Decisions Admitting Uncertainty
7.1. Sensitivity Analysis
7.2. Decision Analysis Models
 Economics - is one of the social sciences which consists of that body of knowledge dealing
with people and their assets or resources.
Economics - has also been defined as the sum total of knowledge which treats of the
creation and utilization of goods and services for the satisfaction of human wants.
Engineering Economy- is the discipline concerned with the economic aspects of
engineering and involves the systematic evaluation of the costs and benefits of proposed
technical and business project ventures. The principles and methodology of EE are
integral part of the daily operation and management of private sector companies and
corporations regulated public utility government units or agencies and non-profit
organizations.
- It also involves formulating, estimating and evaluating the expected economic outcomes
of alternatives designed to accomplish define purpose. These decisions involved the
fundamental elements of EE.
“An engineer who is unprepared to excel at engineering economy is not properly equipped
for his or her job.” -- Sullivan, Wicks, and Koelling (2015)
DECISIONS- are made routinely to choose one alternative over the other by individuals in
everyday life of the engineers on the job, by managers who supervise the activities of others;
by corporate presidents who operate a business, and by government officials who work for
public good. Most decisions involved money, added capital; or capital funds which is usually
limited in amount. The decisions of where and how to invest this limited capital is motivated
by a primary goal of adding value as future anticipated results of the selected alternative are
realized. Engineers play a vital role in capital investment decisions based upon their ability
and experience to design, analyse and synthesize. The factors upon which a decision is based
are commonly a combination of economic elements.
Principles of Engineering Economy
The development, study, and application of any discipline must begin with a basic foundation.
We define the foundation for engineering economy to be a set of principles that provide a
comprehensive doctrine for developing the methodology.

(7) fundamental principles of engineering economy.

1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint Principle
4. Use a Common Unit of Measure Principle
5. Consider All Relevant Criteria Principle
6. Make Risk and Uncertainty Explicit Principle
7. Revisit Your Decisions
1. Develop the Alternatives- the choice(decision) is among the alternatives that need to
be identified and then define for subsequent analysis. A decision situation involves
making a choice among two (2) or more alternatives. Developing and defining the
alternatives for detailed evaluation is important because of the resulting impact on the
quality of decision.
2. Focus on the Differences – Only the differences is expected for future outcomes among
the alternatives and are relevant to their comparison and should be considered in the
decision. Differences in the future outcomes of the alternatives that are important. The
purpose of an engineering economic analysis is to recommend a future course of action
based on the differences among feasible alternatives.
3. Use a Consistent Viewpoint Principle-the prospective outcomes of the alternatives,
economic, and other should consistently develop from a defined point of view. The
viewpoint is important particularly in decision making and used consistently in the
description, analysis, and comparison of the alternatives.
4. Use Common Unit of Measurement- using a common unit of measurement to enumerate as
many of the prospective outcomes as possible will make the analysis easier and the comparison
of the alternatives. It is desirable to make directly comparable the maximum numbers of
prospective using a monetary unit such as Pesos or Dollars as the common unit of
measurement.
5. Consider all relevant criteria- Selection of a preferred alternatives (decision making)
requires the use of criteria or criterion. The decision process should consider the outcomes
enumerated in the monetary unit and those expenses in some other unit of measurement or
made explicit in a descriptive manner.
6. Make uncertainty explicit (make it clear)-uncertainty is inherent in projecting the future
outcomes of the alternatives and should be recognized in their nalysis and comparison. The
analysis of the alternatives involves projecting the future consequences associated with each of
them. Estimating the magnitude and the impact of the future outcomes of any course of action
is uncertain.
7. Revisit Your Decisions
Engineering Economy and the Design Process
-An engineering economy study is accomplished using a structured
procedure and mathematical modelling techniques. The economic results are then
used in a decision situation that normally includes other engineering knowledge and
input.
Relationship between the Engineering Economic Analysis Procedure and the
Engineering Design Process

Engineering Economic Analysis Procedure Engineering Design Process

Steps: Activity
1. Problem/nee definition
1.Problem recognition, definition, and 2. Problem/need formulation and
evaluation evaluation
2.Development of the feasible alternative 3. Synthesis of possible solutions
3.Development of the outcomes and cash flows (alternative)
4. Analysis, optimization, and evaluation
for each alternative
5. Specification of preferred alternative
4.Selection of the criterion (or criteria) 6. Communication
5.Analysis and comparison of the alternative
6.Selection of the preferred alternative
7.Performance monitoring and post evaluation
of results.
Cost Concepts for Decision Making
There are a variety of costs to be considered in an engineering economic analysis. These costs
differ in their frequency of occurrence, relative magnitude, and degree of impact on the study.

1. Fixed costs - are those unaffected by changes in activity level over a feasible range of
operations for the capacity or capability available. Typical fixed costs include insurance and
taxes on facilities, general management and administrative salaries, license fees, and interest
costs on borrowed capital.
2. Variable costs - are those associated with an operation that varies in total with the quantity
of output or other measures of activity level.
3. Incremental cost (or incremental revenue)- is the additional cost (or revenue) that results
from increasing the output of a system by one (or more) units.
4.Direct costs - are costs that can be reasonably measured and allocated to a specific output
or work activity. The labor and material costs directly associated with a product, service, or
construction activity are direct costs.
5. Indirect costs - are costs that are difficult to allocate to a specific output or work activity.
Normally, they are costs allocated through a selected formula (such as proportional to direct
labor hours, direct labor dollars, or direct material dollars) to the outputs or work activities.
6. Standard costs- are planned costs per unit of output that are established in advance of
actual production or service delivery.
7. Cash costs - are costs that involve payments of cash or increases in liability. Other common
terms are “out-of-pocket costs” or “cash flows”. A cost that involves payment of cash is called
a cash cost (and results in a cash flow) to distinguish it from one that does not involve a cash
transaction and is reflected in the accounting system as a noncash cost. This noncash cost is
often referred to as a book cost.
8. Book costs - are costs that do not involve cash payments, but rather represent
the amortization of past expenditures for items of lengthy durability.
9. Sunk cost - is one that has occurred in the past and has no relevance to
estimates of future costs and revenues related to an alternative course of action.
10. Opportunity cost- is a cost which, although hidden or implied, is incurred
because of the use of limited resources in such a manner that the chance or
opportunity to use those resources to monetary advantage in an alternative use is
forgone.
11. Life-cycle cost, in engineering practice, is often encountered. This term refers
to a summation of all the costs related to a product structure, system, or service
during its life span.
Present Economy Studies
When alternatives for accomplishing a specific task are being compared over one year or less
and the influence of time on money can be ignored, engineering economic analyses are
referred to as present economy studies. Rules, or criteria are used to select the preferred
alternative when defect-free output (yield) is variable or constant among the alternatives
being considered.

Rule 1: When revenues and other economic benefits are present and vary among
alternatives, choose the alternative that maximizes overall profitability based on the number
of defect-free units of a product or service produced.
Rule 2: When revenues and other economic benefits are not present or are constant among
all alternatives, consider only the costs and select the alternative that minimizes total cost
per defect-free unit of product or service output.
Present Economy involves the analysis of problems for manufacturing a product or rendering
service based on present or immediate costs. Present Economy studies usually occur when the
effects of time such as interest and depreciation are negligible. Present Economy analysis is
employed when the alternatives to be compared will provide the same result and the length of
time involved in the study is relatively short.
Present economy studies occur in the following situations:
1. Selection of Materials
2. Selection of Method
3. Selection of Design
4. Site Selection
5. Comparison of Proficiency of Workers
6. Economy of Toll and Equipment maintenance
7. Economy in the Utilization of personnel
CLASSROOM ACTIVITY
Brainstorm on the given scenario
Selection of Material
An equipment part is due for machining it may be made either from an
alloy of aluminum or steel. There is an order for 8,000 units. Steel costs
₱8.00 per kg, while aluminum costs ₱12.00 per kg. If steel is used,
the steel per unit weighs 110 grams; for aluminum, 30 grams. When
steel is used, 50 units can be produced per hour; for aluminum, 80 units
per hour with the aid of a tool costing ₱640, which will be useless after
the 8,000 units are finished. The cost of the machine and operator is
₱50.00 per hour. If all other costs are identical, determine which material
will be more economical.
Selection of Method
The ore of a gold mine in the Mountain Province contains, on the
average, 0.5 gram of gold per ton. One method of processing cost ₱1,650
per ton and recovers 93% of the gold, while another method cost only
₱1,500 per ton and recovers 81% of the gold. If the gold can be sold at
₱8,500 per gram, which method is better and by how much?
Selection of Design
A company manufactures 1,000,000 units of a product yearly. A new design
of the product will reduce materials cost by 12% but will increase processing
cost by 2%. If materials cost is ₱1.20 per unit and processing will cost ₱0.40
per unit, how much can the company afford to pay for the preparation of the
new design and making changes in equipment?
Site Selection
A certain masonry dam requires 200,000 cu.m. of gravel for its construction. The contractor
found two possible sources for the gravel with the following data:

Items with complete description SOURCE A SOURCE B

Ave. distance, gravel pit to Dam site 3.0 KM 1.2 KM
Gravel cost/cu.m at pit - Php 10.00
Road construction necessary Php 45,000 -
Overburden to be removed at - 90,000 cu.m
Php4.20/cu.m
Hauling cost/cu.m per KM Php 4.00 Php 4.00

Which of the two(2) sites will give lesser costs?

Worker Proficiency
Two workers, A and B, produce the same product on identical machines.
A receives ₱25.00 per hour and he produces 100 units per hour. B is
able to produce 120 units per hour. The machine rate or cost of
operation of the machines used by them is ₱100.00 per hour. a.
Determine the cost per unit for worker A. b. Determine the hourly wage
of worker B in order that his cost per unit will equal that of A.
Equipment Maintenance
A machine used for cutting materials in a factory has the following outputs per hour at
various speeds and requires periodic tool grinding at the intervals cited.
SPEED OUTPUT/HR TOTAL REGRINDING
A 200 PCS Every 8hrs
B 250PCS Every 7 hrs
C 280PCS Every 5 hrs
A set of tools costs ₱1,800 and can be ground twenty times. Each regrinding cost
₱18.00 and the time needed to regrind and change tools is 1 hour. The machine
operator is paid ₱28.00 per hour, including the time the tool is changed. The tool
grinder who also sets the tools to the machine is paid ₱25.00 per hour. The hourly
rate chargeable against the machine is ₱54.00, regardless of machine speed. Which
speed is the most economical?
Utilization of Personnel
A contractor has a job which should be completed in 100 days. At present, he has 80 men
on the job and it is estimated that they will finish the work in 130 days. Of the 80 men, 50
are each paid ₱120.00 a day, 25 at ₱180.00 a day, and 5 at ₱250.00 a day. For each day
beyond the original 100 days, the contractor has to pay ₱500.00 liquidated damages. a.
How many more men should the contractor add so that he can complete the work on
time? b. If of the additional men, 2 are paid ₱180.00 a day, and the rest at ₱120.00 a day,
would the contractor save the money by employing more men and not paying the fine?
The correct solution to any problem depends primarily on a true understanding of
what the problem really is.” -- Arthur M. Wellington (1887)