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ECONOMY
MS-326
THEORY CREDIT HOURS=2
COURSE OBJECTIVE
• This course deals with the thought processes, concepts, methods, and knowledge bases
used by engineers to cost engineering projects and to evaluate the merit of making a
particular investment and to choose the best of a series of alternative investments to
achieve a desired objective.
• At the end of this course, the student would have clear understanding of cost concepts,
money time relationship, break-even analysis, benefit-cost analysis and depreciation.
COVERED PLOS
• PLO-11
Project Management:
An ability to demonstrate management skills and apply engineering principles to one’s own work, as a
member and/or leader in a team, to manage projects in a multidisciplinary environment.
• PLO-4
Investigation:
An ability to investigate complex engineering problems in a methodical way including literature survey,
design and conduct of experiments, analysis and interpretation of experimental data, and synthesis of
information to derive valid conclusions.
COVERED CLOS
• CLO-1: Relate projects on the concepts of cost, accounting and life cycles. (C-1)
• CLO-3: Analyze economic situations for estimation of economic elements and feasibilities
for economic decision making. (C-5)
ENGINEERING & ECONOMICS
The Accreditation Board for Engineering and Technology (ABET) defines Engineering as:
• The resources that are available have alternative uses. You could purchase
the latest smart phone, but if you did that means forgoing some other use
for your money such as saving it or purchasing new cloths. Your decision is
an economic one. You make it with the goal of maximizing your self-
interest (Pursuing your self-interest doesn’t necessarily mean being selfish.
You might decide to forgo a smart phone in order to make a larger
donation to your favorite charity. Your self-interest might be helping
others.)
PHYSICAL & ECONOMIC EFFICIENCY
• You and 3 classmates agree to share evenly the cost of renting a Rs.1000/month
apartment for 3 years. One of your roommates, agrees to pay the Rs. 2000 deposit. How
much less should he pay each month in percentage?
• Consider a power plant having input of 200000 Btu while its output is 86900 Btu.
Suppose electrical energy have worth of $19.75 per million and coal have cost of $2.65
per million, then calculate its physical efficiency as well as economic efficiency?
ENGINEERING ECONOMY
The development, study and application of any discipline must begin with a basic foundation.
So, we have to define the foundation for engineering economy to be a set of principles that
provide a comprehensive doctrine for developing the methodology.
• Once the problem and need has been clearly defined, then the methodology is as follows:
1. Develop the Alternatives
A decision situation involves making a choice among two or more alternatives. Developing
and defining the alternatives for detailed evaluation is important because of the resulting
impact on the quality of the decision. Engineers should place a high priority on this
responsibility. Creativity and innovation are essential for this process.
ENGINEERING ECONOMY
• A friend of yours bought a small apartment building for $100,000 in a university town. He
spent $10,000 of his own money for the building and obtained a mortgage from a local
bank for the remaining $90,000. The annual mortgage payment to the bank is $10,500. He
also expects that annual maintenance on the building and grounds will be $15,000. There
are four apartments in the building that can each be rented for $360 per month.
a) Does your friend have a problem? If so, what is it?
b) What are his alternatives? (Identify at least three.)
c) Estimate the economic consequences and other required data for the alternatives?
CONTD.
EXAMPLE
In connection with surfacing a new highway, a contractor has a choice of two sites on which
to set up the asphalt-mixing plant equipment. The contractor estimates that it will cost
$2.75 per cubic yard mile (yd3-mile) to haul the asphalt-paving material from the mixing
plant to the job location. Factors relating to the two mixing sites are as follows (production
costs at each site are the same):
Suppose that One finds a motorcycle he likes and pays $40 as a down
payment, which will be applied to the $1,300 purchase price, but which must
be forfeited if he decides not to take the cycle. Over the weekend, He finds
another motorcycle he considers equally desirable for a purchase price of
$1,230. For the purpose of deciding which cycle to purchase, the $40 is a
sunk cost and thus would not enter into the decision, except that it lowers
the remaining cost of the first cycle. The decision then is between paying an
additional $1,260 ($1,300 − $40) for the first motorcycle versus $1,230 for
the second motorcycle.
EXAMPLE-3