MT 483Engineering Economics Introduction Course Objectives Understand cost concepts and how to make an economic decision with present economy studies Discuss time value of money for personal & professional finance issues Learn methods for determining whether an investment project is acceptable (profitable) or not, and how to compare two or more investment alternatives using these methods. Finally, develop models for breakeven analysis. Spring 2016 Engineering Economy : Chapter 1 2 Course Topics Chapter 1: • Introduction to Engineering Economy Chapter 2: • Cost Concepts and Design Economics Chapter 3: • Cost-Estimation Techniques Chapter 4: • The Time Value of Money Chapter 5: • Evaluating a Single Project Spring 2016 Engineering Economy : Chapter 1 3 Course Topics Chapter 6: • Comparison and Selection among Alternatives Chapter 7: • Depreciation and Income Taxes Chapter11: • Breakeven and Sensitivity Analysis Spring 2016 Engineering Economy : Chapter 1 4 . William G. 2015. Elin M. Wicks. Patrick Koelling. “Engineering Economy”. Spring 2016 Engineering Economy : Chapter 1 5 . C.MT-483 : Text Books 1. — Sixteenth edition. Sullivan. ISBN-13: 978-0-13-343927-4. and Ledbetter B. J. M. Engineering Economic and Cost Analysis by Collier. E. Engineering Economy by DcGarmo. Macmillan publishing company. W. E.. K. Agee H. and Bontadelli. W. Harper and Row Publishers. A. by White. Latest Edition 2. A. C. Sullivan G. Principles of Engineering Economic Analysis. And Case.. P. Latest Edition..MT-483 : Reference Books 1. Spring 2016 Engineering Economy : Chapter 1 6 . New York. J. John Wiley and Sons. A. Latest Edition 3. MT-483 : Engineering Economy Grading Based on Assignments : 10% Quizzes : 15% Mid-Term : 30% Final : 45% Violation of academic integrity First offense : zero score for the test (applies to assignments as well) Second offense : failure of the course Spring 2016 Engineering Economy : Chapter 1 7 . homework assignments are extremely important in this class! – Homework sets will be carefully designed. If you study and understand the homework. you should not have to struggle with the exams Spring 2016 Engineering Economy : Chapter 1 8 .Assignments • Philosophy – One of the best ways to learn something is through practice and repetition – Therefore. challenging. and comprehensive. 50% penalty if turned in after 2:00 the next school day. Spring 2016 Engineering Economy : Chapter 1 9 . 10% penalty if turned in after class. No credit if turned in after one week – Your chances of scoring well in quizzes are directly proportional to the effort put in doing the homework. but by 2:00 the next school day 3.Assignments Policy – Homework in a week is due before first class of next week (at the beginning of class). – Homework turned in late will receive partial credit according to the following rules: 1. 25% penalty if turned in after 2:00 on the due date. but before 2:00 on the due date 2. but within one week 4. MT 483 Chapter 1 Introduction to Engineering Economy Lect: 01 . Introduction Most engineering problem can have multiple possible solutions Engineering economy involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. Spring 2016 Engineering Economy : Chapter 1 11 . e.Introduction To be economically acceptable (i. affordable). the solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term costs Spring 2016 Engineering Economy : Chapter 1 12 .. Spring 2016 Engineering Economy : Chapter 1 13 . • Permit identification and scrutiny of their estimated outcomes • Translate profitability as the “bottom line” for measuring the success of the project. • Embody creative and innovative technology and ideas.Introduction These solutions must also: • Promote the well-being and survival of the organization. Introduction Engineering economy is the dollars-and-cents side of the decisions that engineers make as they work to position a firm to be profitable. Spring 2016 Engineering Economy : Chapter 1 14 . e: • Response time • Safety • Weight • Reliability.Introduction Inherent to these decisions are trade-offs among different types of costs and the performance provided by the proposed design i. Spring 2016 Engineering Economy : Chapter 1 15 . etc. Introduction The mission of engineering economy is to balance these trade-offs in the most economical manner Spring 2016 Engineering Economy : Chapter 1 16 . if an engineer at a Motor Company invents a new transmission lubricant that increases fuel mileage by 10% and extends the life of the transmission by 30. how much can the company afford to spend to implement this invention? Engineering economy can provide an answer Spring 2016 Engineering Economy : Chapter 1 17 .000 miles.Introduction For instance. Introduction A few situations in which engineering economy can play a crucial role in the analysis of project alternatives could be: 1. Choosing the best design for a high-efficiency gas furnace. 2. Selecting the most suitable robot for a welding operation on an automotive assembly line. 3. Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased. 4. Determining the optimal staffing plan for a computer help desk. Spring 2016 Engineering Economy : Chapter 1 18 Introduction An engineer who is unprepared to excel at engineering economy is not properly equipped for his or her job Spring 2016 Engineering Economy : Chapter 1 19 MT 483 Chapter 1 The Principles of Engineering Economy Lect: 02 – Creativity and innovation are essential to the process. – Engineers and managers should place a high priority on this responsibility.The Principles of Engineering Economy PRINCIPLE: 1 . – Developing and defining the alternatives for detailed evaluation is important because of their impact on the quality of the decision.Develop the Alternatives • Carefully define the problem! • The alternative solutions need to be identified and then defined for subsequent analysis. • A decision situation involves making a choice among two or more alternatives. Spring 2016 Engineering Economy : Chapter 1 21 . Spring 2016 Engineering Economy : Chapter 1 22 . only the differences in the future outcomes of the alternatives are important. – Instead. the decision would depend on other factors.The Principles of Engineering Economy PRINCIPLE: 2 . if your feasible housing alternatives were two residences with the same purchase (or rental) price. price would be inconsequential to your final choice. • Outcomes that are common to all alternatives can be disregarded in the comparison and decision. – For example. such as location and annual operating and maintenance expenses.Focus on the Differences • Obviously. Spring 2016 Engineering Economy : Chapter 1 23 . the basic purpose of an engineering economic analysis is: to recommend a future course of action based on the differences among feasible alternatives.The Principles of Engineering Economy Thus. would normally be used.The Principles of Engineering Economy PRINCIPLE: 3 . which is often that of the owners of the firm. economic and other. Spring 2016 Engineering Economy : Chapter 1 24 .Use a Consistent Viewpoint • The prospective outcomes of the alternatives. should be consistently developed from a defined viewpoint (perspective). • The perspective of the decision maker. Spring 2016 Engineering Economy : Chapter 1 25 . • It is desirable to make as many prospective outcomes as possible directly comparable.The Principles of Engineering Economy PRINCIPLE: 4 .Use a Common Unit of Measure • Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will simplify the analysis of the alternatives. Spring 2016 Engineering Economy : Chapter 1 26 .Use a Common Unit of Measure……. • For economic consequences. • You should also try to translate other outcomes (which do not initially appear to be economic) into the monetary unit.. a monetary unit such as dollars / Rupee is the common measure.The Principles of Engineering Economy PRINCIPLE: 4 . • 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.The Principles of Engineering Economy PRINCIPLE: . Spring 2016 Engineering Economy : Chapter 1 27 .5 Consider All Relevant Criteria • Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). though. Spring 2016 Engineering Economy : Chapter 1 28 . there are other organizational objectives you would like to achieve with your decision. and these should be considered and given weight in the selection of an alternative. the primary criterion relates to the longterm financial interests of the owners / organization. • Often.The Principles of Engineering Economy PRINCIPLE: . • This is based on the assumption that available capital will be allocated to provide maximum monetary return.5 Consider All Relevant Criteria • In engineering economic analysis. The magnitude and the impact of future outcomes of any course of action are uncertain.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. • The analysis of the alternatives involves projecting or estimating the future consequences associated with each of them. Spring 2016 Engineering Economy : Chapter 1 29 .The Principles of Engineering Economy PRINCIPLE: 6 . the probability is high that today’s estimates of.The Principles of Engineering Economy PRINCIPLE: 6 . dealing with uncertainty is an important aspect of engineering economic Spring 2016 Engineering Economy : Chapter 1 30 . future cash receipts and expenses will not be what eventually occurs.Make Risk and Uncertainty Explicit……. • Even if the alternative involves no change from current operations. for example. • Thus. even though relatively successful. Spring 2016 Engineering Economy : Chapter 1 31 . to the extent practicable. • A good decision-making process can result in a decision that has an undesirable outcome. • Learning from and adapting based on our experience are essential and are indicators of a good organization. will have results significantly different from the initial estimates of the consequences.Revisit Your Decisions • Improved decision making results from an adaptive process. Other decisions.The Principles of Engineering Economy PRINCIPLE: 7 . the initial projected outcomes of the selected alternative should be subsequently compared with actual results achieved. MT 483 Chapter 1 Engineering Economy and the Design Process Lect: 03 . Spring 2016 Engineering Economy : Chapter 1 33 .Engineering Economy and the Design Process An engineering economy study is accomplished using structured procedure and mathematical modeling techniques. The economic results are then used in a decision situation that normally includes other engineering knowledge and input. Analysis. 1. 2. Performance monitoring and post-evaluation of results. Problem/need definition. optimization. 6. definition. Development of the outcomes and cash flows for each alternative. 2. Selection of a criterion (or criteria). Communication. 3. 4. 4. Development of the feasible alternatives. Specification of preferred alternative. Problem/need formulation and evaluation.1 : General Relationship between the Engineering Economic Analysis Procedure and the Engineering Design Process Engineering Economic Analysis Procedure Engineering Design Process Step Activity 1. 7.Engineering Economy and the Design Process Table 1. Spring 2016 Engineering Economy : Chapter 1 34 . Selection of the preferred alternative. and evaluation. Problem recognition. 6. 5. 3. Synthesis of possible solutions (alternatives). Analysis and comparison of the alternatives. and evaluation. 5. Engineering Economy and the Design Process Problem Definition • The first step of the engineering economic analysis procedure is problem definition. the boundary or extent of the situation needs to be carefully defined. • A problem must be well understood and stated in an explicit form before the project team proceeds with the rest of the analysis. • Once the problem is recognized. Spring 2016 Engineering Economy : Chapter 1 35 . That is. • It includes all decision situations for which an engineering economy analysis is required. its formulation should be viewed from a systems perspective. thus establishing the elements of the problem and what constitutes its environment. Searching for potential alternatives. Screening them to select a smaller group of feasible alternatives for detailed analysis. based on preliminary evaluation. Spring 2016 Engineering Economy : Chapter 1 36 . to meet or exceed the requirements established for the situation.Engineering Economy and the Design Process Development of Alternatives • The two primary actions in Step 2 of the procedure are: 1. • The term feasible here means that each alternative selected for further analysis is judged. 2. One proposed solution is to sell waste wood chips and shavings to a local charcoal manufacturer instead of using them to fuel space heaters for the company’s office and factory areas. (Don’t concern yourself with feasibility at this point.). Next. Spring 2016 Engineering Economy : Chapter 1 37 .1 Defining the Problem and Developing Alternatives • The management team of a small furniture-manufacturing company is under pressure to increase profitability to get a much-needed loan from the bank to purchase a more modern pattern-cutting machine. reformulate the problem in a variety of creative ways. a) Define the company’s problem.Engineering Economy and the Design Process EXAMPLE: 1. b) Develop at least one potential alternative for your reformulated problems in Part (a). 4. The problem is an accounting system that provides distorted cost information.Engineering Economy and the Design Process EXAMPLE 1: Solution (a) • The company’s problem appears to be that revenues are not sufficiently covering costs. The problem is that the new machine is really not needed (and hence there is no need for a bank loan). Several reformulations can be posed: 1. Spring 2016 Engineering Economy : Chapter 1 38 . 3. 2. The problem is to increase revenues while reducing costs. The problem is to maintain revenues while reducing costs. high volume products. engineering. Spring 2016 Engineering Economy : Chapter 1 39 . and other white-collar support services with other small firms in the area by contracting with a local company involved in providing these services. accounting.Engineering Economy and the Design Process EXAMPLE 1: Solution (b) • Based only on reformulation 1. • Another alternative is to discontinue the manufacture of specialty items and concentrate on standardized. • Yet another alternative is to pool purchasing. an alternative is to sell wood chips and shavings as long as increased revenue exceeds extra expenses that may be required to heat the buildings. Engineering Economy and the Design Process 1. and only a few of all feasible ideas can be developed. Developing Investment Alternatives • There are usually hundreds of opportunities for a company to make money. knowledge. • Engineers are at the very heart of creating value for a firm by turning innovative and creative ideas into new or reengineered commercial products and services. • Most of these ideas require investment of money. due to lack of time. or resources. Spring 2016 Engineering Economy : Chapter 1 40 . It is based on the fundamental principles of deferment of judgment and that quantity breeds quality. (a) Classical Brainstorming • Classical brainstorming is the most well-known and often-used technique for idea generation. 4. 3. Criticism is ruled out. • There are four rules for successful brainstorming: 1. Spring 2016 Engineering Economy : Chapter 1 41 . Freewheeling is welcomed. 2.Engineering Economy and the Design Process 2. Quantity is wanted. Combination and improvement are sought. • A classical brainstorming session has the following basic steps: 1. 3. 2. A warm-up session with simple unrelated problems is conducted.. The participants are selected.. the relevant problem and the four rules of brainstorming are presented. The ideas are evaluated relative to the problem. Preparation.. Brainstorming. and ideas are generated and recorded using checklists and other techniques if necessary. Evaluation. (a) Classical Brainstorming….Engineering Economy and the Design Process 2. Spring 2016 Engineering Economy : Chapter 1 42 . and a preliminary statement of the problem is circulated. Individual round-robin feedback and recording of ideas 3. Individual voting and ranking to prioritize ideas 5. Group clarification of each idea 4. Discussion of group to achieve consensus Spring 2016 Engineering Economy : Chapter 1 43 .Engineering Economy and the Design Process 2. it is possible for groups of people (preferably. • The basic format of an NGT session is as follows: 1. Individual silent generation of ideas 2. 5 to 10) to generate investment alternatives or other ideas for improving the competitiveness of the firm. (b) Nominal Group Technique • By correctly applying the NGT. MT 483 Chapter 1 Engineering Economy and the Design Process ……cont’d Lect: 04 . Spring 2016 Engineering Economy : Chapter 1 45 . Development of Prospective Outcomes • Step 3 of the engineering economic analysis procedure incorporates Principles mentioned above and uses the basic cash-flow approach employed in engineering economy. a cash flow represents the economic effects of an alternative in terms of money spent and received.Engineering Economy and the Design Process 3. • A cash flow occurs when money is transferred from one organization or individual to another. • Thus. if the particular alternative were implemented. Net Cash Flow = Cash Outflows . Development of Prospective Outcomes……… • The key to developing the related cash flows for an alternative is estimating what would happen to the revenues and costs.Engineering Economy and the Design Process 3. • The net cash flow for an alternative is the difference between all cash inflows (receipts or savings) and cash outflows (costs or expenses) during each time period.Cash Inflows Spring 2016 Engineering Economy : Chapter 1 46 . Achieving good public relations or being an exemplary member of the community Spring 2016 Engineering Economy : Chapter 1 47 . • In addition to the economic aspects of decision making. Examples of objectives other than profit maximization or cost minimization that can be important to an organization include the following: 1. Improving employee satisfaction 4. Meeting or exceeding all environmental requirements 6. Maintaining production flexibility to meet changing demands 5. Development of Prospective Outcomes……. nonmonetary factors (attributes) often play a significant role in the final recommendation. Safety to employees and to the public 3.Engineering Economy and the Design Process 3. Meeting or exceeding customer expectations 2. • It is also true that the economic decision criterion should reflect a consistent and proper viewpoint (Principle 3) to be maintained throughout an engineering economy study.Engineering Economy and the Design Process 4. Selection of a Decision Criterion • The selection of a decision criterion (Step 4 of the analysis procedure) incorporates Principle 5 of Engineering Economy (consider all relevant criteria). Spring 2016 Engineering Economy : Chapter 1 48 . • The decision maker will normally select the alternative that will best serve the long-term interests of the owners of the organization. • A substantial effort is normally required to obtain reasonably accurate forecasts of cash flows and other factors in view of. inflationary (or deflationary) pressures.Engineering Economy and the Design Process 5. exchange rate movements. and regulatory (legal) mandates that often occur. for example. Analysis and Comparison of Alternatives • Analysis of the economic aspects of an engineering problem (Step 5) is largely based on cash-flow estimates for the feasible alternatives selected for detailed study. Spring 2016 Engineering Economy : Chapter 1 49 . alternatives can be compared based on their differences as called for by Principle 2. Usually. the consideration of future uncertainties (Principle 6) is an essential part of an engineering economy study. Analysis and Comparison of Alternatives …… • Clearly. • When cash flow and other required estimates are eventually determined.Engineering Economy and the Design Process 5. these differences will be quantified in terms of a monetary unit such as dollars. Spring 2016 Engineering Economy : Chapter 1 50 . Engineering Economy and the Design Process 6. Selection of the Preferred Alternative • When the first five steps of the engineering economic analysis procedure have been done properly. • Step 6 is included in Activity 5 of the engineering design process (specification of the preferred alternative) when done as part of a design effort. the soundness of the technical-economic modeling and analysis techniques dictates the quality of the results obtained and the recommended course of action. • Thus. the preferred alternative (Step 6) is simply a result of the total effort. Spring 2016 Engineering Economy : Chapter 1 51 . Engineering Economy and the Design Process 7. • Monitoring project performance during its operational phase improves the achievement of related goals and objectives and reduces the variability in desired results. • Step 7 is also the follow-up step to a previous analysis. Performance Monitoring and Post-evaluation of Results • This final step implements Principle 7 and is accomplished during and after the time that the results achieved from the selected alternative are collected. Spring 2016 Engineering Economy : Chapter 1 52 . comparing actual results achieved with the previously estimated outcomes. therefore. like Step 1. it needs particular attention to ensure feedback for use in ongoing and subsequent studies. this final step is often not done consistently or well in engineering practice. Spring 2016 Engineering Economy : Chapter 1 53 . • Unfortunately.Engineering Economy and the Design Process 7. and the feedback from post implementation evaluation is important to the continuing improvement of operations in any organization. Performance Monitoring and Post-evaluation of Results…… • The aim is to learn how to do better analyses. MT 483 Chapter 1 Examples of Engineering Economy and the Design Process Lect: 05 . Spring 2016 Engineering Economy : Chapter 1 55 .2 Application of the Engineering Economic Analysis Procedure A friend of yours bought a small apartment building for $100.000 in a college town.000. The annual mortgage payment to the bank is $10.000 ($1. Your friend also expects that annual maintenance on the building and grounds will be $15.500 ($875 per month).Engineering Economy and the Design Process EXAMPLE: 1.250 per month).000 of her own money for the building and obtained a mortgage from a local bank for the remaining $90. She spent $10. There are four apartments (two bedrooms each) in the building that can each be rented for $360 per month. 2. Application of the Engineering Economic Analysis Procedure Refer to the seven-step procedure in Table 1. Development of the outcomes and cash flows for each alternative.2 …….Engineering Economy and the Design Process EXAMPLE: 1. 7. Development of the feasible alternatives.. 5. definition. 3. Spring 2016 Engineering Economic Analysis Procedure Step 1. Selection of a criterion (or criteria).1 to answer these questions: a) Does your friend have a problem? If so. Engineering Economy : Chapter 1 56 . Problem recognition. Selection of the preferred alternative.) c) Estimate the economic consequences and other required data for the alternatives in Part (b). Analysis and comparison of the alternatives. Performance monitoring and post-evaluation of results. what is it? b) What are her alternatives? (Identify at least three. 6. and evaluation. 4. and use it to advise your friend on which course of action to pursue. e) Attempt to analyze and compare the alternatives in view of at least one criterion in addition to cost..Engineering Economy and the Design Process EXAMPLE: 1. Application of the Engineering Economic Analysis Procedure d) Select a criterion for discriminating among alternatives.2 ……. f) What should your friend do based on the information you and she have generated? Spring 2016 Engineering Economy : Chapter 1 57 . 500) than is being received (4 × $360 × 12 = $17.280). A lot more money is being spent by your friend each year ($10. what is it?) a) A quick set of calculations shows that your friend does indeed have a problem. Application of the Engineering Economic Analysis Procedure Solution (a): (Does your friend have a problem? If so.000 = $25. The problem could be that the monthly rent is too low.Engineering Economy and the Design Process EXAMPLE: 1.220 per year. (Now.500+ $15. that is a problem!) Spring 2016 Engineering Economy : Chapter 1 58 .2 ……. She’s losing $8.. ) Option (1): Raise the rent. Application of the Engineering Economic Analysis Procedure Solution (b): (What are her alternatives? Identify at least three. Option (3): Sell the apartment building.2 ……. Spring 2016 Engineering Economy : Chapter 1 59 .. (Will the market bear an increase?) Option (2): Lower maintenance expenses (but not so far as to cause safety problems).Engineering Economy and the Design Process EXAMPLE: 1. (What about a loss?) Option (4): Abandon the building (bad for your friend’s reputation). Note that the minimum increase in rent would be: Expenses – Income = ($2.Engineering Economy and the Design Process EXAMPLE: 1.125. Raise total monthly rent to $1. Spring 2016 Engineering Economy : Chapter 1 60 .440) = $685 per month Or $685/4= $171. Almost a 50% increase in rent!.125 − $1.25 per apartment per month.440+$R for the four apartments to cover monthly expenses of $2.2 ……. Application of the Engineering Economic Analysis Procedure Solution (c): (Estimate the economic consequences and other required data for the alternatives) Option (1).. 440 − $10. This represents more than a 50% decrease in maintenance expenses. This would have to be accomplished primarily by lowering the maintenance cost. Lower monthly expenses so that these expenses are covered by the monthly revenue of $1. Spring 2016 Engineering Economy : Chapter 1 61 .2 …….. (Mortgage cost is fixed by the Bank. Application of the Engineering Economic Analysis Procedure Solution (c): Option (2).440 per month.500/12) = $565 pm (from $1250 pm).Engineering Economy and the Design Process EXAMPLE: 1.) Monthly maintenance expenses would have to be reduced to: Income – Mortgage = ($1. . Application of the Engineering Economic Analysis Procedure Solution (c): Option (3).2 ……. Will she find a buyer willing to give her $10.685/.000 investment and (ideally) recovers the $685 per month loss ($8.220 ÷ 12) on the venture during the time it was owned. Try to sell the apartment building for $X.Engineering Economy and the Design Process EXAMPLE: 1. which recovers the original $10.within a month? Especially. when the building is obviously showing a loss! Spring 2016 Engineering Economy : Chapter 1 62 . This option would also be very bad for your friend’s reputation.. Walk away from the venture and kiss your investment good-bye. The bank would likely assume possession through foreclosure and may try to collect fees from your friend. Application of the Engineering Economic Analysis Procedure Solution (c): Option (4).000/and whatever foreclosure fees the Bank charges! Can you think of a better Option? Spring 2016 Engineering Economy : Chapter 1 63 .2 ……. Also your friend will face a loss of her initial investment of $10.Engineering Economy and the Design Process EXAMPLE: 1. Application of the Engineering Economic Analysis Procedure Solution (d): (Select a criterion for discriminating among alternatives).Engineering Economy and the Design Process EXAMPLE: 1. you might advise your friend to pursue a combination of Option (1) & (2) or exercise Option (3). One criterion could be to minimize the expected loss of money. In this case.. Spring 2016 Engineering Economy : Chapter 1 64 .2 ……. Application of the Engineering Economic Analysis Procedure Solution (e): (Attempt to analyze and compare the alternatives in view of at least one criterion in addition to cost) For example. Option (4) is immediately ruled out.Engineering Economy and the Design Process EXAMPLE: 1. Thus. Exercising Option (3) could also harm your friend’s credit rating. let’s use “credit worthiness” as an additional criterion. Options (1) and (2) or a combination of the two may be her only realistic and acceptable alternatives.2 ……. Spring 2016 Engineering Economy : Chapter 1 65 .. Application of the Engineering Economic Analysis Procedure Solution (f): (What should your friend do based on the information you and she have generated)? Your friend should probably do a market analysis of comparable housing in the area to see if the rent could be raised (Option: 1). the rent can probably be raised while keeping 100% occupancy of the four apartments.2 ……. If so.. (Option: 2) Spring 2016 Engineering Economy : Chapter 1 66 . Maybe a fresh coat of paint and new carpeting would make the apartments more appealing to prospective renters.Engineering Economy and the Design Process EXAMPLE: 1. Economic benefit could be further balanced by reducing the annual maintenance cost. When the time value of money is NOT a key ingredient in a problem.Engineering Economy and the Design Process EXAMPLE: 1. Chapter 2 should be referenced. Spring 2016 Engineering Economy : Chapter 1 67 .3 Get Rid of the Old Clunker? Engineering economy is all about deciding among competing alternatives. an interest rate) is integral to an engineering problem. Chapter 4 (and beyond) provides an explanation of how to analyze these problems.. If the time value of money (e.g. Or. Linda’s 25 mpg car can be traded in toward a new hybrid vehicle that averages 50 mpg..Engineering Economy and the Design Process EXAMPLE: 1. Get Rid of the Old Clunker? Consider the following situation: Linda and Jerry are faced with a car replacement opportunity where the interest rate can be ignored. can be traded in toward a vehicle that gets 15 mpg.3 ………. Jerry’s old clunker that averages 10 miles per gallon (mpg) of gasoline. If they drive both cars 12. as an alternative.000 miles per year and their goal is to minimize annual gas consumption. which car should be replaced—Jerry’s or Linda’s? They can only afford to upgrade one car at this time. Spring 2016 Engineering Economy : Chapter 1 68 . 200 gallons/year − 800 gallons/year = 400 gallons/year.000 miles/year)/10 mpg − (12.(12..000 miles/year)/50 mpg = 480 gallons/year − 240 gallons/year = 240 gallons/year.(12. Therefore. Linda’s trade-in will save: .000 miles/year)/15 mpg = 1.Engineering Economy and the Design Process EXAMPLE: 1. Spring 2016 Engineering Economy : Chapter 1 69 .3 ……….000 miles/year)/25 mpg − (12. Get Rid of the Old Clunker? Solution: Jerry’s trade-in will save: . Jerry should trade in his vehicle to save more gasoline. 1. 1.2.10.6. 1.11. 1.8. from Chapter 1 of text book Spring 2016 Engineering Economy : Chapter 1 70 . 1. 1.Assignments / Self Study Do problems 1.
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