Introduction to Engineering Economics — Exam Notes
1. What is Engineering Economics?
Engineering Economics is the application of economic principles to engineering decisions. It helps engineers choose the most cost-effective solution among alternatives.
In simple terms:
> It is about making the best technical decision with money in mind.
Engineers use it to analyze:
Costs
Benefits
Risks
Time value of money
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2. Why Engineering Economics is Important
Engineers rarely make decisions based only on technology. Money, resources, and time matter.
Importance:
1. Helps select the best project or design.
2. Reduces waste of money and resources.
3. Helps companies make profitable investments.
4. Supports long-term planning.
5. Improves decision making under limited resources.
Example:
Choosing between two machines with different purchase costs and maintenance costs.
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3. Basic Principles of Engineering Economics
1. Develop Alternatives
Always compare different options.
Example:
Machine A
Machine B
Machine C
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2. Focus on the Differences
Ignore similarities and analyze what makes the options different.
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3. Use a Consistent Viewpoint
All calculations should be from the same perspective, such as:
Company
Investor
Government
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4. Consider All Relevant Costs
Include:
Initial cost
Operating cost
Maintenance cost
Salvage value
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5. Consider the Time Value of Money
Money today is worth more than money in the future.
Reasons:
Inflation
Investment opportunities
Risk
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4. Types of Costs in Engineering Economics
Fixed Cost
Costs that do not change with production.
Examples:
Rent
Insurance
Salaries
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Variable Cost
Costs that change with production level.
Examples:
Raw materials
Fuel
Power
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Incremental Cost
Extra cost when choosing one alternative over another.
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Sunk Cost
Money that has already been spent and cannot be recovered.
Important Rule:
> Sunk costs should not affect future decisions.
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5. Interest and Time Value of Money
Interest
The cost of borrowing money or reward for investing money.
Types of Interest
Simple Interest
Interest calculated only on the original amount.
Formula:
I = PRT
Where:
P = Principal
R = Interest rate
T = Time
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Compound Interest
Interest calculated on principal + previous interest.
Formula:
F = P(1+i)^n
Where:
F = Future Value
P = Present Value
i = Interest rate
n = Number of periods
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6. Economic Decision Making
Engineers evaluate projects using:
1. Present Worth Analysis
Compares alternatives using today's money value.
2. Future Worth Analysis
Compares alternatives at a future date.
3. Annual Worth Analysis
Converts all costs into equal yearly amounts.
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7. Steps in Engineering Economic Analysis
1. Define the problem
2. Identify alternatives
3. Gather relevant data
4. Evaluate alternatives
5. Select the best option
6. Implement and review
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8. Example Question (Exam Style)
Question
An engineer can buy a machine for $10,000. It will generate $3,000 per year for 5 years. If the interest rate is 10%, should the engineer invest?
Steps
1. Identify cash inflow and outflow
2. Convert to present worth
3. Compare benefits and costs
4. Make decision
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9. Advantages of Engineering Economics
Better financial decisions
Efficient resource allocation
Increased profitability
Reduced risk
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10. Limitations
Future predictions may be wrong
Economic conditions may change
Requires accurate data
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Quick Exam Summary (Very Important)
Engineering Economics = Using economic methods to choose the best engineering option.
Key Concepts
Time value of money
Cost analysis
Interest
Economic comparison of alternatives
Important Formula
Future Value:
F = P(1+i)^n
Simple Interest:
I = PRT
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If you want, I can also give you:
Likely exam questions and answers
Short exam cram sheet (1-page revision)
Past question patterns teachers like to set.
