Introduction to Engineering Economics

Dr. Mohsin Siddique

Assistant Professor

Email: msiddique@sharjah.ac.ae

Office: 0650509431

Date: 08/09/2014

Engineering Economics

University of SharjahDept. of Civil and Env. Engg.

INTRODUCTION

� DR. MOHSIN SIDDIQUE

� Specialization:

� Coastal Engineering, Hydraulic Engineering, Sediment transport, hydrodynamics, Numerical modeling, Water resources

� Education:

� Ph.D. (2008-2011):

� The University of Tokyo

� M.Sc. (2005-2007):

� The University of Tokyo

� B.Sc. (2000-2004):

� UET Lahore

Teaching Experiences:Asst. Prof (9/2013~)Asst. Prof (8/2012~9/2013): FAST NUAsst. Prof (1/2012-8/2012): UET LahoreLecturer (12/2004~12/2011); UET Lahore

• Contact Detail:

• Email: msiddique@sharjah.ac.ae

• Phone: 06-5050943

Class Rules

� Come in time

� No disturbance during lecture

� Bring your text book, class notes, note book, pen and calculator

� DO NOT MISS YOUR QUIZ AND MID EXAM

� No cell phone calls, No SMS

� Copying of assignments is strictly prohibited

� Meet the deadlines of assignments

� Maintain your attendance

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Course name Engineering Economics- 0401301

Lecturer Dr. Mohsin Siddique

Credits 3 3-0

Pre- and co-

requisites

3rd Year Standing

� Goal: To provide engineering student with the knowledge of basic concepts of engineering economics as a decision making tool to select the suitable alternatives for engineering projects

� Instructional Objectives

� On successful completion of this course, the students should attain:

� Understand the role of engineering economic analysis as a decision-making and management/planning tool.

� Gain knowledge and understanding of theoretical concepts/principles that form the basis of engineering economics, such as time value of money, interest, and depreciation

� Identify and apply various alternative evaluation methods that are commonly used in economic decision-making processes faced by engineers.

Engineering Economics-0401301

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Detailed Topics

� The following topics will be addressed during lectures

� Introduction to Engineering Economics

� The decision making process

� Cost estimation

� Interest and Equivalence

� Different interest formulae

� Present worth analysis

� Uniform cash flow analysis

� Benefit cost analysis

� Rate of return analysis

� Depreciation

Engineering Economics-0401301

6

� Components of the Assessment

� The final course mark will be made up as follows:

� Quizzes 20%

� Midterm test 20%

� Assignment/ tutorial 15%

� Final Exam 45%

� An overall mark of 60% must be obtained for the course.

� Assessment Criteria: The student must demonstrate the ability to:

� Prepare a various decision making plans on their engineering economics analysis;

� Estimate the economic aspects for the engineering projects/products;

� Calculate the interests and economic equivalences on various cash flow situations;

� Perform an economic analysis for various engineering alternatives; and

� Calculate the depreciation of engineering products and decision making based on the analysis.

Text and Reference Books

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� 2. Engineering Economy By Leland Blank & Anthony Tarquin, 7th Ed

� 1. Engineering Economic Analysis by Donald G Newman, Ted G. Eschenbach & Jerome P. Lavelle

Reference BooksAny other standard book on engineering economics &You may get help from Google search engine

Tentative Course Schedule

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Week Week StartingTopics

CommentsEngineering Economics - 0401 301 01

1 7th Sep- 11th Sep Introduction

2 14th Sep- 18th Sep Engineering Economics and Decision Making

3 21st Sep- 25th Sep Engineering Cost and Estimation / Tutorial (or) Assignment - 1

4 28th Sep -2nd Oct Interest and Equivalence/ Quiz-I

5 5th Oct- 9th Oct More Interest Formulas

1 class only

(Eid Al-Adha

Holiday)

6 12th Oct -16th Oct More Interest Formulas / Tutorial (or) Assignment - 2

7 19thOct-23rd Oct More Interest Formulas- Quiz 2

8 26th Oct -30th Oct Present Worth Analysis

9 2nd Nov- 6th Nov Present Worth Analysis

10 9th Nov- 13th Nov Mid Exam

11 16th Nov- 20th Nov Annual Cash Flow Analysis/ Tutorial (or) Assignment - 3

12 23rd Nov-27th Nov Rate of Return Analysis / Quiz-3

13 30th Nov- 4th Dec Benefit to Cost Ratio Analysis

1 class only

(National Day

Holiday)

14 7th Dec- 11th Dec Depreciation

15 14th Dec-18th Dec Revisions/ Tutorial (or) Assignment - 4/ Quiz 4

16 21st Dec-25th Dec Review

17 4th Jan- 8th JanFinal Exam

18 11th Jan- 15th Jan

Engineering Economics and Decision Making

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� Engineering economy involves formulating, estimatingand evaluating the expected outcomes of alternativesdesigned to accomplish a defined purpose.

� Mathematical techniques are used to simplify economic evaluation of alternative and these techniques are equally good for individual, business or government projects.

� Thus this course may also offer you an economic analysis toolfor making decisions such as car purchase, house purchase,and major purchase on credit card etc

Engineering Economics and Decision Making

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� Decision Making is broad topic. It’s is a major aspect of every human existence. We are surrounded by sea of problems which may be classified depending on difficulty level as given below;

� 1. Simple Problems

� 2. Intermediate Problems

� 3. Complex Problems

� The Decision Making Process

� 1. Irrational Decision making

� 2. Rational Decision making

Rational Decision making process

Engineering Costs

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� Fixed Cost: These constant or unchanging regardless of the level of output or activity.

� Variable Costs: These are not constant and depends in level of out or activity.

� Marginal Costs: It is the variable cost for one more unit.

� Average Costs: It is total cost divided by number of units

� ________________________________________________________

� Profit-loss breakeven chart

Engineering Costs

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� Sunk Cost: A sunk cost is money already spent as a result of past decision.

� Opportunity cost: An opportunity cost is associated with using a resource in one activity instead of another.

� Recurring and Nonrecurring costs

� Recurring costs refers to any expense that is know and anticipated and that occurs at regular interval.

� Nonrecurring costs are one-of-a-kind expenses that occur at irregular intervals and thus are sometimes difficult to plan for or anticipate from a budgeting perspective.

Cost Estimating

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� Types of Estimates

� 1. Rough Estimate

� 2. Semi-detailed estimate

� 3. Detailed estimate

� Estimating Models

� 1. Per unit model

� 2. Segmenting model

� 3. Cost indexes

� 4. Power-sizing model

� 5. Triangulation

� 6. Improvement and learning curve

Cash Flow Diagram (CFD)

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� Cash flow diagrams visually represent income and expenses over some time interval.

� It is graphical representation of cash flows drawn on the y-axis and a time scale along x-axis.

Cash Flow Diagram (CFD)

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� Categories of Cash Flows

� The expenses and receipts due to engineering projects usually fall into one of the following categories:

� First cost: expense to build or to buy and install

� Operations and maintenance (O&M): annual expense, such as electricity, labor, and minor repairs

� Salvage value: receipt at project termination for sale or transfer of the equipment (can be a salvage cost)

� Revenues: annual receipts due to sale of products or services

� Overhaul: major capital expenditure that occurs during the asset’s life

Revenue

Interest

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� 1. Simple interest� Simple interest is computed only on original sum (principal), not on prior

interest earned and left in the account.

� A bank account, for example, may have its simple interest every year: in this case, an account with $1000 initial principal and 20% interest per year would have a balance of $1200 at the end of the first year, $1400 at the end of the second year, and so on.

� 2. Compound Interest� Compound interest arises when interest is added to the principal of a

deposit or loan, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.

� A bank account, for example, may have its interest compounded every year: in this case, an account with $1000 initial principal and 20% interest per year would have a balance of $1200 at the end of the first year, $1440 at the end of the second year, and so on.

Uniform Series Formula

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( ) [ ]niFAFi

iF

n%,,/

11A =

−+=

0 1 2 n-1 n

AF

( )( ) ( )niPAP

i

iiP

n

n

%,,/11

1A =

−++=

0 1 2 n-1 n

A

P

Arithmetic Gradient Series

18

( ) [ ]niGFGi

iniGF

n

%,,/11

2=

−−+= ( )( ) [ ]niGPG

ii

iniGP

n

n

%,,/1

112

=

+−−+=

Analysis Techniques

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� Present Worth Analysis

� Annual Cash Flow Analysis

� Rate of Return Analysis

� Incremental Analysis

� Other Techniques:

� Future Worth Analysis

� Benefit-Cost Ratio Analysis

� Payback Period Analysis

Analysis Types

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� Comparing Alternatives using Annual Cash Flow Analysis:

� Same-Length Analysis Period

� Different-Length Analysis Periods

� Infinite-Length Analysis Period

� Other Analysis Periods

Depreciation

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� Depreciation is a decrease in value of an asset each year:

� a decrease in market value

� a decrease in the value to the owner

� Important reasons for depreciation include

� deterioration

� obsolescence

Question of the Day ?

22

� Write your impression on need of engineering economics course for your study?

� (only a few lines are enough)

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� That’s all. Have fun…however from next week we will study well

Thank you

� Questions….

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