Introduction to

Engineering Economy
Lecture No.1
Chapter 1
Contemporary Engineering Economics
Third Canadian Edition
Copyright 2012

2012 Pearson Canada Inc., Toronto, Ontario

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Engineering Economic Decisions:

Concepts and Types

Some Concepts:

Any investment decision in an engineering project

Alternatives from the economic perspective

Common Types:

Equipment and process selection

Equipment replacement
New product and product expansion
Cost reduction
Improvement of product quality
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Engineering Economic Decisions:

Engineers and Organizations

Engineers work in businesses

Proprietorship: business owned by one individual

Partnership: business with more than one owner
Corporation: legal entity created under provincial
or federal law, separate from its owners & managers

Engineers plan for capital expenditures

(e.g., equipment purchases) enabling a firm to
design & produce products economically
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Engineering Economic Decisions:

Engineers and Decisions

In projects, engineers estimate or forecast:

The required investment in a project

The product demand
The selling price
The manufacturing cost
The product life

In personal life, investments are made

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Engineering Economics: Principles

Principle 1 Time (A nearby penny is worth a

distant dollar)
Principle 2 Difference (All that counts are the
differences among alternatives)
Principle 3 Increment (Marginal revenue must
exceed marginal cost)
Principle 4 Risk (Additional risk is not taken
without the expected additional return)

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Principle 1: A nearby penny is worth a

distant dollar

Money has a time value associated with it

because we can earn interest on money invested today.

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Principle 2: All that counts are the

differences among alternatives
Option

Monthly
Cash
Salvage
Fuel
Monthly
Outlay at Monthly Value at End
Cost
Maintenance Signing Payment
of Year 3

Buy

$960

$550

$6,500

$350

$9,000

Lease

$960

$550

$2,400

$550

Irrelevant items in decision making

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Principle 3: Marginal revenue must exceed

marginal cost
$2
Marginal
cost
Cost of Goods Sold

1 unit

$4
Marginal
revenue
Gross Revenue

1 unit

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Principle 4: Additional risk is not taken

without the expected additional return
Investment Class

Potential
Risk

Expected
Return

Savings account Low/None

(cash)

1.5%

Bond (debt)

Moderate

4.8%

Stock (equity)

High

2012 Pearson Canada Inc., Toronto, Ontario

11.5%

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