University of Duhok

College of Engineering

Engineering Economy

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Introduction :
Economy is the word is derived from Latin which means Ecos=home and
Nomos=low .Considered Engineering economy, the analysis of the
economic consequences of engineering decisions There are many bad ways
to make decisions. Because of the uncertainties of the future, even traditional
method of decision-making can sometimes result in bad choices. However, a
bad result is almost guaranteed by a poor decision-making process. A
fundamental principle is that choices can be made only among alternatives,
and that only the differences between these alternatives are material.

In any engineering decision, all reasonable alternatives should be study

Definition:
Economy: is the use of the minimum amount of money, time, or other
resources needed to achieve something, so that nothing is wasted.
Economy: is the science that that studies the wealth nature and its
production and distribution lows and the reasons behind

Economy: you try to save money by not spending money on unnecessary

things. Welfare and poverty.

Economy: is used to describe large packs of goods which are cheaper than
normal-sized packs.

Economy: When you design a structure, depending on your choice it could

be expensive or not. The best engineer make the optimal choice that means
the strongest structure with the quality required for the lowest price.

Engineering economy: involves formulating, estimating, and evaluating

the expected economic outcomes of alternatives designed to accomplish a
defined purpose. Mathematical techniques simplify the economic evaluation
of alternatives.

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Economy Elements:
1. Utility: It’s the capability of the need for human desire satisfaction
regardless of its necessity or not.

2. Want: It’s the desire to satisfy human requirement whether it’s material
or not or it’s the desire that human feels to satisfy his needs.

3. Wealth: It’s the summation of things and money that satisfy human
needs directly or indirectly within certain time.

Economy Aspects:

1. Demand: It’s the requirement quantity from a certain product within

certain period of time with constant conditions.

Or Demand : Is an economic term that refers to the amount of products or

services that consumers wish to purchase at any given price level. The mere
desire of a consumer for a product is not demand. Demand includes the
purchasing power of the consumer to acquire a given product at a given
period. In other words, it’s the amount of products or services that
consumers are willing and able to purchase.

Factors affecting demand:

1. Income and price variation.

2. Customers number variation
3. Customer’s attitudes variation.
4. Wealth distribution variation.
5. Products alternatives.

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2. Supply:

The quantity of products that supplied to the markets for selling with a
certain price during certain period of time.

Or the total amount of a product (good or service) available for purchase at

any specified price.
Supply is determined by: (1) Price: producers will try to obtain the highest
possible price whereas the buyers will try to pay the lowest possible price
both settling at the equilibrium 3) Price of other goods: lower prices of
competing goods will reduce the price and the supplier may switch to switch
to more profitable products thus reducing the supply.

Supply and Demand relationship:

It means getting equivalent price which can be identity when both supply
and demand powers intersect within time in a perfect market .

In classical economic theory, the relation between these two factorsdetermi

nes the price of a commodity. This relationship is thought to
be the driving force in a free market. As demand for an item increases,
prices rise. When manufacturers respond to the price increase by producing
a larger supply of that item, this increases competition anddrives the price
down. Modern economic theory proposes that manyother factors affect pric
e, including government regulations,monopolies, and modern techniques of
marketing and advertising.

Factors affecting Supply:

1. Manufacturer consumes his productions.

2. Production costs variation.

3. Production methods variations.

4. Environmental variation.

5. Taxes variations.

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 Engineering Economy Objectives:

1. To find most efficient projects within :

-Design capacity.

-Available resources utilization.

-Technical personal skills development.

- Decrease depreciation.

- Technology transport.

-Decrease maintenance costs.

-Decrease operation costs .

2. To select the lowest cost and maintain.

3. Best capital investment.

Time –Money Relationship:

A bank sign in Malawi advertises the interest rates for lending money to its
customers

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Interest is payment from a borrower or deposit-taking financial institution
to a lender or depositor of an amount above repayment of the principal
sum (i.e., the amount borrowed), at a particular rate.[1]It is distinct from
a fee which the borrower may pay the lender or some third party. It is also
distinct from dividend which is paid by a company to its shareholders
(owners) from its profit or reserve, but not at a particular rate decided
beforehand, rather on a pro rata basis as a share in the reward gained
by risk taking entrepreneurs when the revenue earned exceeds the total
costs.[2][3]
For example, a customer would usually pay interest to borrow from a bank,
so they pay the bank an amount which is more than the amount they
borrowed; or a customer may earn interest on their savings, and so they may
withdraw more than they originally deposited. In the case of savings, the
customer is the lender, and the bank plays the role of the borrower.
Interest differs from profit, in that interest is received by a lender, whereas
profit is received by the owner of an asset, investment or enterprise. (Interest
may be part or the whole of the profit on an investment, but the two concepts
are distinct from each other from an accounting perspective.)
The rate of interest is equal to the interest amount paid or received over a
particular period divided by the principal sum borrowed or lent (usually
expressed as a percentage).
Compound interest means that interest is earned on prior interest in addition
to the principal. Due to compounding, the total amount of debt grows
exponentially, and its mathematical study led to the discovery of the
number e.[4] In practice, interest is most often calculated on a daily, monthly,
or yearly basis, and its impact is influenced greatly by its compounding rate.
Interest: It’s the amount of increase added to the original borrowed or
invested amount of money.

Calculation of interest
Simple interest: is calculated only on the principal amount, or on that
portion of the principal amount that remains. It excludes the effect
of compounding. Simple interest can be applied over a time period other
than a year, e.g., every month.

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Interest = total accumulative amount – original amount

Interest rate = * %

Interest rate: Is the amount of interest earned by a unit time of a unit of

principal.

Ex.

A company borrowed 100000$ before one year and now repaid 110000 $.
compute the interest and interest rate .

Sol.

Interest =110000 – 100000 = 10000$

Interest rate = * 100 = %10

Ex.

The company invested 100000 $ on 1st May and the repaid a total 106000$
exactly one year later. Compute the interest gained from original
investment and the interest rate.

Interest =106000 – 100000 = 6000

Interest rate = * 100 = 6%

Simple Interest: Is calculated by using the principal only ignoring any

interest that had occurred in preceding periods Simple Interest I= pni

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Ex.

Calculate the principal that have been borrowed 5 years ago, which must
be returned it as 5000$. The interest rate simple was 7%. find the interest
added to this principal during the 5 years. List a table of calculations.

Sol .

Total amount = P + I

I=P+Pni

5000 = P + P * 5 *

P= = 3703.7 $

I = 5000 - 3703.7 = 1296.3 $

Borrowed Owned
Years Interest
money amount
0 3703.7 ---- 3703.73
1 ---- 3703.73*1*0.07 259.3 3962.93
2 ---- 259.3 4222.23
3 ---- 259.3 4481.53
4 ---- 259.3 4740.83
5 ---- 259.3 5000