MN 4022 Engineering EconomicsObjectives To explain syllabus, method of assessment and text books, etc.To give a brief introduction to engineering economics.To show relationships between Economics and Engineering.

A hybrid vehicle: Given that 52 different models of hybrid vehicles will be available by 2012 (which is currently about 4.2% U.S. market), and the market share of the hybrid vehicles is expected to rise to 7% by 2015, what economic and non-economic factors the customers may be concerned about regarding the conversion to alternative fuel vehicles?

MN 4022 Engineering EconomicsLecturer: Gayithri KuruppuDept. of Management of TechnologyUniversity of Moratuwa.

Learning ObjectivesTo give basic economic ingredients for operational level decision making (costs benefits, cost effectiveness, opportunity costs, time value of money, marginal analysisetc).To give basic economic ingredients to select preferred course of action.

Learning OutcomesUnderstanding the most relevant economic concepts for engineering decisions mainly at operational level.Application of these economic concepts to practical engineering projects and decisions.

SyllabusIntroduction (The relationships between Engineering and economics, and importance of engineering economics as a separate discipline for practicing engineers).Fundamentals (time value of money, equivalence and cash flow diagrams) Cash flows (time value equivalence, single payment and annuity factors and numerical examples. Cash flows and compounding) Comparison methods (assumptions, net present value, annual worth, equivalent annual cost with/without salvage value, equivalent annual worth of fixed asset lives and perpetual lives, internal rate of return (IRR) and minimum acceptable rate of return and IRR irregularities, numerical examples)

SyllabusAnalysis of alternatives (classification, mutually exclusive alternatives, incremental analysis and preferred method for decision making) Project feasibility analysis (financial feasibility, market price analysis, cost of capital and weighted average, economy feasibility, shadow pricing, benefit cost (B/C) analysis, irregularities of B/C analysis and preferred method for decision making) Sensitivity analysis (What if?, sensitivity graph and interpretation of the analysis, discounted decision trees and application of decision trees) Risk management (Risk identification, risk analysis and risk response)

Assessment and Text BookCredits : 2, Lecture sessions: 15

Assignments:Group assignment 20%In class quizzes 10%

Assessment: 30% on assignments and quizzes 70% on two hour closed book written examination (Six questions and four questions have to answer).

Text BooksMain Text:

James L Riggs, David D Bedworth, Sabah U. Randhawa (2004) Engineering Economics, Fourth Ed.,

Supplementary Text:

Park, C (2011) Contemporary Engineering Economics, 5th Edition.

IntroductionEngineers role have changed over the years from Technocrats (designers, builders and planners) to problems solvers, various types of managers, decision makers, sellers and finally for overall persons.

For most of these overall functions engineers have to use economics for their decision makings.

Engineering economics as a separate discipline emerge in 1930s on wards and today it is well established in academia and industry.

Engineering economics has micro economic foundation and some engineering background as well.

What Actually Engineering Economist doEngineering economists use accumulated knowledge of engineering and economics to identify alternative uses of limited resources and to select the preferred course of action.For this preferred course of action they use models, techniques, data, personnel judgment based on experience...etc

Why Engineering Economy is Important to EngineersDecisions made by engineers, managers, corporation presidents, and individuals are commonly the result of choosing one alternative over another. Decisions often reflect a persons educated choice of how to best invest funds (capital). The amount of capital is usually restricted, just as the cash available to an individual is usually limited.

Why Engineering Economy is Important to EngineersThe amount of capital is usually restricted, just as the cash available to an individual is usually limited. The decision of how to invest capital will invariably change the future, hopefully for the better; that is, it will be value adding. Engineers play a major role in capital investment decisions based on their analysis, synthesis, and design efforts.

Why Engineering Economy is Important to EngineersThe factors considered in making the decision are a combination of economic and noneconomic factors. Fundamentally, engineering economy involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available.

Economic Consideration based Choices faced by the EngineersWhich design to select?How to replace the existing machines?Which investment alternative should be used under capital scarcity?Which alternative to use under risk and uncertainty?How to related risk and rates of returns?How to carry out a break-even analysis?

How to select the right investment proposals among the same worthwhile but different cash flows? How to carry out costs benefits analysis for public sector projects? How to carry out cost effectiveness analysis for NGO and community projects? How to carry out investment profitability analysis for private sector projects? How the customer affordability of your design and products? How to select the right sources of financing mode (loans, equity, partnerships)

All these questions are related with choices among the alternatives and economic considerations.

These are embodied with decision making role of engineering economists in terms of

Identify alternative uses for limited resources. Analyze the data to determine the preferred course of action.

What is Engineering

Engineering is a practicing profession. It mainly consists of the body of knowledge of the mathematical and natural science gained by study, experience and practice. It is applied with judgment to develop ways to utilize economically materials and forces of the nature for the benefits of man kind.

Generally an engineer applies his knowledge to particular situations to produce goods and services. In this process Economics specially economic theories, principles, frameworks, norms and strands helps in many ways.

Generally Engineers are planners, builders, problem solvers, mangers and decision makers. They direct the management functions towards the economic objectives and monitor them through economic measures.

Economics in General Sense Economics is an unusual subject that plays a different roles for different people. A major in economics will come closest to learning the basic of the business or with economics you can study the core reasoning that underlies all business decisions. So you can learn economics to prepare for mainly business. Economics is an approach to decision making that is valuable for all aspects of life. Individuals, employers, and graduate schools find techniques used in economics very useful to draw correct conclusions. Economics is the best major that trains you to think to make decisions in very rational way.

Definition for EconomicsWealth related definitionsWelfare related definitionsScarcity and wants related definitionsModern definitions

Wealth related definitionsAdam Smith An inquiry into nature and causes of the wealth of nations.David Ricardo To determine the laws which regulates distribution of the wealth generated.J.B. Say Economics is a science which treats of wealth.F.A. Walker Economics is the name of that part of the knowledge which relates to wealth.

In overall these classical economists consider the problems of production, distribution and exchange of wealth as the main issue in economics.

Welfare related definitionsA. Marshall Economics is the study of mankind in the ordinary business of life and it examines that how he acquires and spends wealth for material welfare of whole nation.E. Cannon Economics is an explanation of the general causes on which material welfare of human beings depends.

Scarcity and wants related definitionsL. Robbinson Economics study problems arise due to scarcity of resources. Scarcity emerge due to limited resources and unlimited wants. Therefore, economics is the study of how people choose to allocate limited resources to satisfy their unlimited wants.Wicksteed Economics is about study of without wastage how resources should be utilized by community through proper regulation and administration.Stiglar.J - Economics study principles of governance of allocation of scare resources among the competing ends.Scitovosky Economics is a social science which consider administration of scare resources. Enrich Roll Main issue in economics is choice related ones and it occurs due to limited resources and their alternative uses.

Modern definitionsH. Smith Economics is the study of how in a civilized society obtains the share of what other people have produced (distribution) and how the total product of society changes (growth) and determined (factors behind determination of growth).

Jacob Viner Economics is all about what economists do.

Engineering and Economics

Engineers were highly concerned with the design, construction, and operation of machines, structures and processes in 1940s whereas they gave less attention to the resources, humans and physical that helps to produce final output.But from 1950s on especially 1990 onwards, engineers role spread to other soft areas as well.The relationships between Engineering to economics same as such engineering to physics. But laws and rules in economics not as precise as physics. Because Economics deals with humans economic behavior which is very hard to predicts.

The Development of Engineering Economics Wellington. A (1887), The economic theory of location of railways. First attempt of combining engineering to economics by using economic concepts to select preferred lengths of railways and its curvatures.Goldman. B and Fish. L (1920), These two contributed heavily to financial engineering area by introducing many models lining engineering and economics.Grants. L (1930), Principles of Engineering Economics. This person consider as father of Engineering Economics due to his many contributions to many areas linking engineering and economics.Joel Dean introduced many micro and macro concepts to engineering.Today engineering economics mainly focus on risks, sensitivity, feasibility, costs benefits and cost effectiveness, etc.

Questions to discussGive a definition for Engineering Economics.Explain how engineers are using Economics for their day to decision making.Why most of the engineers are ending as Economists in their latter part of professional life?Explain why engineering economists are considered as more practical compared to general economists.

.Thank you