Engineering Economy Lecture1

Engineering Economy

Learning Objectives • Define what is economics and engineering economy. • Determine the role of engineering economy in the decision-making process. • Identify what is needed to successfully perform an engineering economy study. • Identify the engineering economy terminologies and symbols.

What is Economics? • Economics – A social science concerned with man’s problem of using scarce resources to satisfy human wants.

What is Engineering Economy? • Engineering Economy – Define as branch of economics which involves the application of definite laws of economics, theories of investment and business practices to engineering problems involving cost. – It also involves the study of cost features and other financial data and their application in the field of engineering as bases for decision.

– It involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable, solution to engineering problems must demonstrate a positive balance of long term benefit over long term cost, and they must also • Promote the well being and survival of an organization • Embody creative and innovative technology and ideas • Permit identification and scrutiny of their estimated outcomes • Translate profitability to the bottom line through a valid and acceptable measure of merit.

Reason of Studying Engineering Economics • Engineers have wrought immense changes in improving the economic well being of mankind through their inventions and their applications of scientific principles to varied problems in industry. • In the professional life of engineers, it is readily observed that the most successful ones are those who gradually divorce themselves from the technical aspect of engineering and who devote their time and efforts to financial problems related to engineering works.

Important Applications of Engineering Economy • Seeking of new objectives for the applications of engineering. • Discovery of factors limiting the success of a venture or enterprise. • Analysis of possible investment of capital. • Comparison of alternatives as a basis for decision. • Determination of bases for decision.

Engineering Economy Technique • Economy analysis – Consider all factors affecting the economy of the project which can be reduced to specific monetary values. Example: ROR, Initial Capital, Working capital…etc

• Financial Analysis – Primary purpose is the determination of the methods and sources of financing the project either equity capital or borrowed capital.

• Intangible Analysis – Determines all aspects of the project which cannot be reduced to monetary values and considers the uncertainty and risk inherent in the project. – Also include the so called judgment factor whose analysis depends upon the judgment of responsible persons involved in the project.

Seven Principles of Engineering Economy

• • • • • • •

Develop alternatives Focus on differences Use a consistent view point Use a common unit of measure Consider all relevant criteria Make uncertainty explicit Revisit your decisions

General Relationship between Engineering Economic Analysis and Engineering Design Process Engineering Economic Procedure

Engineering Design Process

1. Problem recognition, definition and evaluation.

1. Problem/ need definition 2. Problem/need formulation and evaluation

2. Development of the feasible alternatives

3. Synthesis of possible solutions (alternatives

3. Development of the outcomes and cash flow for each alternative. 4. Selection of a criterion (or criteria) 5. Analysis and comparison of the alternative

4. Analysis, Optimization and evaluation

6. Selection of the preferred alternative

5. Specification of preferred alternative

7. Performance monitoring and postevaluation of result

6. Communication

Basic Terms in Principles of Economics • Goods – anything that yields satisfaction to human • Economic resources – inputs used in the production of goods and services. • Economic goods – a good which is both useful and scarce. • Land – natural resources • Labor – human effort expended in production

• Capital – materials used in the production of goods and services including money. • Entrepreneur – organizes all other factors of production to be used in the creation of goods and services. • Essentials – goods which are used to satisfy the basic needs of man. • Luxury goods – goods man can do without. • Opportunity costs – cost or benefits foregone in the alternative use of a resource

• Normative Economics – an analysis of economics, which deals with what should be • Positive economics – an analysis of economics, which deals with what actually is. • Macroeconomics – is the division of economics that deals with aggregates. • Microeconomics – is the division of economics that studies the economy in parts

• Tangible factors – which can be expressed in terms of monetary values. • Intangible factors – are those which are difficult or impossible to express definitely in terms of monetary values. • Perfect competition – occur when a certain product is offered for sale by many vendors or suppliers and no restriction against other vendor from entering the market. • Monopoly – opposite of perfect competition. • Oligopoly – occurs when there are few suppliers and any action taken by anyone of them will definitely affect the course of action of the others.

• Market – define to be a place where sellers and buyers come together. • Demand – is the quantity of a certain commodity that is bought at a certain price at a given place and time. • Law of Demand – states as price increases, the demand decreases

• Supply – is the quantity of a certain commodity that is offered for sale at a certain price at a given place and time. • Law of Supply – states that as price increases, the supply also increases.

• Law of Diminishing Utility – States that an increase in the quantity of any good consumed or acquired by an individual will decrease will decrease the amount of satisfaction derived from that good.

• Law of Diminishing Returns – States when one factor of production is fixed in quantity or is difficult to increase, increasing the other factors of production will result in a less than proportionate increase in output.

PRESENT ECONOMY • Present Economy – involves the analysis of problems for manufacturing a product or rendering a service based on present or immediate cost. The effects of time such as interest and depreciation are negligible.

Situations of Present Economy • Selection of Materials – Cost of materials and their processing are taken into account. • Selection of Method – Reduces by determining the most economical among the different methods. • Site Selection – Choice of factory site many factors are to be considered which are cost of land, construction cost…etc

• Comparison of Proficiency of Workers – Efficiency of the workers is a factor affecting costs, it is usually observed that worker have varying efficiencies. • Economy of Tool and Equipment Maintenance – In many activities, tools have to be sharpened from time to time and equipment have to be kept in optimum operating condition all the time.

• Economy in the utilization of personnel – Economy dictates that only a sufficient number of workers be assigned to minimize idleness.

Problem 1.0 • A machine part to be machined may be made either from an alloy of aluminum or steel. There is an order for 8,000 units. Steel costs. P3.80 per kg. while aluminum costs P8.70 per kg. If steel is used, the steel per unit weighs 110 grams, for aluminum, 30 grams. When steel is used, 50 units can produced per hour, for aluminum, 80 units per hour with the aid of a tool costing P640, which will be useless after the 8,000 units are finished. The cost of the machine and the operator is P10.80 per hour. If all other cost are identical, determine the material will be more economical

Problem 2.0 • A certain manufacturing company received an order for producing 100,000 pieces of a certain machine part. A jig is necessary for production and two design are presented whose properties are as follows If the only consideration is economy of operation, determine which jig should be used.

Jig A

Jig B

Estimated Life 100,000.00 100,000.00 First Cost P5000 P4200 Hr wage of operator P30 P25 No. of pieces/hr 100 80

Problem 3.0 • The ore of a gold mine in the Mountain Province contains, on the average, 0.5 gram of gold per ton. One method of processing cost P1650 per ton and recovers 93% of the gold while another method costs only P1500 per ton and recovers 81% of the gold. If gold can be sold at P8500 per gram, which method is better and by how much.

Problem 4.0 • A man decided to paint his house himself after office hours. He can paint 25sq.m per hr on the average. It takes him 15mins to prepare his materials and 20 minutes to keep the materials after painting. If there are 900 sq.m to be painted, how long will it take him to paint his house if he devotes 2.5hrs each day.

Problem 5.0 • An equipment installation job in the completion stage can be completed in 40 days of 8 hour day work, with 40 men working. With the contract expiring in 30 days, the mechanical engineer contractor decided to add 10 men on the job, overtime not being permitted. If the liquidated damages is P2,000 per day of delay, and the men are paid P80 per day, how much money he saved if he add workers • Ans: P16,000

Example 6.0 • By selling balut P5 per dozen,a vendor gains 20%. The cost of the egg rises by 12.5%. If he sell at the same price as before, find his new gain in % • Ans: 6.58%

Problem 7.0 • An engineer bidding on the asphalting of 7km stretch or road is confronted with a problem of choosing between two possible sites on which to set up the asphalt mixing machine. Site A

Site B

Average hauling distance

2.5km

2.75km

Monthly rental

P35,000

P6,500

Installing and dismantling of machine

P20,000

P10,000

• At site A, it would be necessary to hire 2 flagmen at P150 per working day. The job can be completed in 32 weeks working 6 days a week. The project requires 16,670 cu.m of asphalt mix per kilometer of road. If the asphalt mix is to be hauled by a contractor at P42 per cubic meter - km of haul, which site is more economical. • Ans: P949,645

Exercises 1.0 • A paint manufacturing company uses a sand mill for fine grinding of paint with an output of 100 liters per hour using glass beads as grinding media. Media load in the mill is 25 kgs costing P200per kg and is fully replenished in 2 months time at 8 hrs per day operation,25 days a month. A ceramic grinding media is offered to paint this company, costing P400 per kg and needs 30kg load in the sand mill but guarantees an output of 120 liter per hour and full replenishment of media in 3 months. If profit on paint production is P15 per liter, which media is more profitable and how much is the difference in profit. • Ans: P473,000

Exercise 2.0 • The assembly of a certain components for television sets has been done by two skilled workers, each of whom is paid P4 per hour and can produce 10 units per hour. Of the 10 units, one will be defective and will have to be discarded at a material loss of P2.50. it has been proposed that this operation could be done by 3 persons of lesser skill who could be paid only P3.50 per hour and who as a group could complete 13 units per hour. It is estimated that the number defects per hour would not be changed if this alternative procedure is used. Which procedure will you recommend and how much is the unit cost of this procedure.

Exercise 3.0 • Mineral water contains 2.5kg of magnesium per ton. By using processing method of A, 82% of the metal can be recovered at a cost of P4 per ton of water pump and processed. It method B is used 68% of the available metal is recovered at a cost of only P2.80 per ton of water pumped and processed. The two processes are substantially equal as to investment cost and time requirements. – If the extracted metal can be sold for P2.50 per kg which processing method should be used and what would be the difference in profit for your selection. – At what selling price for the metal would the two processes be equally economical.

Exercise 4.0 • Jojo bought a second hand Betamax, VCR and then sold it to Rudy at a profit of 40% Rudy then sold the VCR to Noel at a profit of 20%. If Noel paid P2,856 more than it cost Jojo, How much did Jojo pay for the unit?

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