Tutorial 1 of SEEM2440A/B

September 11, 2011

• Concepts Review

– Principles of engineering economy

Principle 1: Develop the alternatives

Principle 2: Focus on the differences

Principle 3: Use a consistent viewpoint

Principle 4: Use a common unit of measure

Principle 5: Consider all relevant criteria

Principle 6: Make uncertainty explicit

Principle 7: Revisit your decisions

– Procedure of engineering economic analysis

1. Problem recognition, formulation, and evaluation.

2. Development of the feasible alternatives. (Principle 1)

3. Development of the outcomes and cash flows for each alternative. (Principle 2, 3

and 4)

4. Selection of a criterion (or criteria). (Principles 3 and 5)

5. Analysis and comparison of the alternatives. (Principle 5)

6. Selection of the preferred alternative. (Principle 6)

7. Performance monitoring and post-evaluation of results. (Principle 7)

• Examples

Example 1

MIT has designed an environmentally friendly car which will run on biodiesel. Biodiesel can

be produced from the Jatropha plant for about $0.2 per liter and blended with gasoline cost-

ing 0.8 per liter. The mixture costs $0.5 per liter. Assume that fuel consumption is 15km per

liter and engine performance in general is not affected by 20:80 blends.

(a) How much money can be saved on driving 15,000km per year?

(b) How much gasoline per year is being conserved if 1 million people use the blended fuel?

Example 2

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Stan Moneymaker needs 15 gallons of gasoline to top off his automobile’s gas tank. If he

drives an extra eight miles (round trip) to a gas station on the outskirts of town, Stan can

save $0.10 per gallon on the price of gasoline. Suppose gasoline costs $3.00 per gallon and

Stan’s car gets 25 mpg for in-town driving. Should Stan make the trip to get less expensive

gasoline? Each mile that Stan drives creates one pound of carbon dioxide. Each pound of

CO2 has a cost impact of $0.02 on the environment. What other factors (cost and otherwise)

should Stan consider in his decision making?

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