ENGINEERING ECONOMIC Bhesh R Kanel, Coordinator College of Biomedical engineering And Applied sciences June, 2015
COURSE CONTENT 1. Introduction: (3 hours) 1. Essential business and accounting terminology. 2. Definition of cash flow. 3. Economic systems 2. Cost Classification and Analysis: (5 hours) 1. The elements of cost. 2. Classification of cost: overhead, prime cost. 3. Cost variance analysis. 4. Job and process costing.
3. Interest and the Time Value of Money: (6 hours) 1. Simple interest, compound interest, interest tables, interest charts. 2. Present worth. 3. Nominal and effective interest rates. 4. Continuous compounding and compounding formula. 5. Interest calculations for uniform gradient.
4. Basic Methodologies of Engineering Economic Studies: (7 hours) 1. Present worth and annual worth methods. 2. Future worth method. 3. Internal rate of return method. 4. Drawbacks of the internal rate of return method. 5. External rate of return method. 6. Minimum attractive rate of return method. 7. The playback (payout) period method
5. Cost/Benefit Analysis: (4 hours) 1. Conventional cost/benefit ratio. 2. Modified cost/benefit ratio. 3. Break-even analysis.
6. Investment Decisions: (8 hours) 1. Comparison of alternatives having some useful life. 2. Comparison of alternatives having different useful life. 3. Comparison of alternatives including of excluding the time value of money. 4. Comparison of alternatives using the capitalized worth method. 5. Definition of mutually exclusive investment alternatives in terms of combinations of projects. 6. Comparison of mutually exclusive alternatives.
7. Risk Analysis: (4 hours) 1. Projects operating under conditions of certainty. 2. Projects operating under conditions of uncertainty. 3. Decision tree. 4. Sensitivity analysis. 8. Taxation System in Nepal: (3 hours) 1. Taxation law in Nepal. 2. Depreciation rates for buildings, equipment, furniture etc. 3. Recaptured depreciation. 4. Taxes on normal gains. 5. Taxes on capital gains.
9. Demand Analysis and Sales Forecasting: (5 hours) 1. Demand analysis. 2. Correlation of price and consumption rate. 3. Market research. 4. Sales forecasting. 5. Criteria for desirable sales forecasting procedures. 6. Factors affecting accuracy of forecasting.
Before completing the course Assignments -3 case studies -3 Project Evaluation Practice - 1
Text Book References TextBook: Engineering Economy, W.G Sullivan, Pearson 2001 Engineering Economics, Er.Kiran Thapa References: www.prenhall.com/sullivan_engineering www.ocw.mit.edu/courses/engineering-systems-division/esd- 70i... MS Excel functions
Referece Books E.P. DeCramo, W.G. Sullivan and J.A. Bontadelli, 8 th Edition, Macmillan Publishing Company, 1988. N.N. Borish and S. Kaplan, Economic analysis: For Engineering and Managerial Decision Making, McGraw- Hill. Contemporary Engineering Economics by Chan S. Park Engineering Economic Analysis by Tony and Blank.
INTRODUCTION Economics Definition Economics: Study allocation of its scarce resources Examining Which Goods and Services wind up in the hands of which people Scarce Resource: Resource which are not abundant. And are not easily available Where resources are abundant, no issue on allocation
Economics Allocation of the resources to fulfill the unlimited desires of the human beings. Branch of social science that deals with the production and consumption of goods and services as well as the distribution for the human welfare and their management.
Positive and Normative Analysis Positive Analyis: Study of Econonic relationships without value judgenent like electrodynamics Normative: Analysis with Value judgement e.g. effect of taxation on poor family and whether it is desirable or not. Monetization: Measure of value in terms of money
Economic Reasoning & Analysis Ceteris Paribus: Other Things remaining Equal economics is a complex System, so cosider effect of one variable at one time Homo economicus: self-interested behabiour or selfishness People or organization make choices based on their own welfare only Marginal : the Derivative of Model: A relationship between variables, a functional equation
Engineering Economics Deals with the methods that enable one to take economic decision towards minimizing the cost or maximizing benefits to business organization. Chooses between alternatives The field of engineering economy is concerned with the systematic evaluation of the benefits and costs of the projects involving engineering design and analysis.
In manufacturing or construction, engineering is involved in every detail of a product s production from conceptual design to distribution, for the best alternatives Engineers must decide if the benefits of a project exceed its costs and must make this comparison in a unified framework. The frame work within which to make this comparison is the field of engineering economics.
Definition1: Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives. The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint. (Dr. John M.Watts)
Definition 2: Engineering economics deals with the methods that enable one to take economics decision towards minimizing the cost or maximizing benefits to business organization. Definition 3: Engineering economy involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available. Another way to define engineering economy is as a collection of mathematical techniques that simplify economic comparison.
STRATEGIC ECONOMIC DECISIONS Once project ideas are identified, they are typically classified as: 1. Equipment and process selection 2. Equipment Replacement 3. New product and product expansion 4. Cost reduction, and 5. Service improvement
Principles of Engineering Economics Develop alternatives Focus of the differences Use a consistent view point Use common unite of measure Consider all relevant criteria Make uncertainty explicit Revisit your decision