GET 323 / GEC 321 Engineering Economics - Introduction

Course Identification: GET 323 / GEC 321 Engineering Economics, Lecture 1: Introduction.
Institutional Origin: Covenant University, Raising a new Generation of Leaders. Presented by Engr. Dr. A. T. Ayeni.
Defining Engineering Economics: Engineering Economics is the application of economic principles to engineering decision-making processes. It serves as a tool for engineers to evaluate the financial viability of projects, systems, and investments.
Key Questions Addressed by Engineering Economics: Engineers frequently encounter choices that require systematic answers provided by this field, such as:
- Determining which design alternative is the most cost-effective.
- Evaluating whether a project should be initiated immediately or delayed to a future date.
- Identifying the most economical lifespan of specific equipment or machinery.
Core Focus Areas:
- Cost analysis.
- Financial comparison of different alternatives.
- Decision-making under specific constraints.
- Synthesis of engineering problem-solving with economic evaluation.

Requirement for Justification: Engineering decisions cannot rely solely on technical feasibility; they must also be economically justified to be viable.
Key Rationale for Study:
- Efficient Resource Allocation: Ensuring the best use of limited resources.
- Profitability and Sustainability: Ensuring projects are financially healthy over the long term.
- Cost Control and Budgeting: Managing expenses during the lifecycle of a project.
- Risk and Uncertainty Management: Accounting for potential financial hazards and variations in outcomes.

1. Develop Alternatives: Analysis must always identify multiple possible solutions rather than settling on the first option.
2. Focus on Differences: Comparisons between alternatives should be based strictly on incremental costs and benefits ( $\text{differences}$ ) rather than common factors.
3. Use a Consistent Viewpoint: Analysts must adopt a clear perspective, such as that of the company, the investor, or the government.
4. Consider All Relevant Criteria: evaluation must include both financial and non-financial factors.
5. Make Uncertainty Explicit: Risks and potential variability in data must be explicitly accounted for in the analysis.
6. Use Time Value of Money (TVM): Analysts must recognize that money holds different values at different points in time.

Time Value of Money (TVM):
- The principle states that money available today is worth more than the same amount in the future because of its earning potential.
Interest and Interest Rates:
- Interest: Defined as the cost of borrowing money or the return generated from an investment.
- Interest Rate: The percentage charged by a lender or earned by an investor over a specific period.
- Types of Interest:
  - Simple Interest.
  - Compound Interest.
Cash Flow:
- Refers to the stream of cash inflows and outflows over a period of time.
- Examples of Inflows: Revenue generated from operations.
- Examples of Outflows: Operating costs and maintenance expenses.
Economic Decision-Making Criteria:
- Decisions are made by choosing the best alternative based on:
  - Cost-benefit analysis.
  - Rate of return.
  - Payback period.

Classifying Costs in Engineering:
- Fixed Costs: Costs that do not vary based on production levels (e.g., rent payments).
- Variable Costs: Costs that change in direct proportion to output (e.g., raw materials).
- Sunk Costs: Costs that have already been incurred and cannot be recovered, thus they should not affect future decisions.
- Opportunity Cost: The value or benefit of the next best alternative that is foregone when a specific choice is made.
Professional Responsibilities of Engineers:
- Analyzing the comprehensive cost implications of various designs.
- Optimizing the use of available resources.
- Communicating the financial impacts and economic feasibility of technical decisions to stakeholders.

Economics of Business Settings: Detailed costing of production systems and the objectives of cost analysis and control.
Project Financing: Study of sources of finances, money, and credit available for engineering projects.
Investment Appraisals: Evaluation of resource allocation, involving interest rates, interest formulas, and related problem-solving.
Economic Metrics: Calculation of annual costs, present worth, rates of return, and strategies for cost reduction.
Assets and Accounting: Depreciation accounting and the valuation of physical assets.
Financial Management: Overview of accounting methods and the interpretation of financial statements.
Costing Elements: Specific components of costing.
Budgetary Control: Development of budgets and control procedures.
Handling Complexity: Planning and decision-making procedures when dealing with multiple alternatives and uncertainties.
Macro-Level Economics: Study of macroeconomics, economic growth, and national income.
Technological Change: The specific economics regarding technological evolution and change.

Engineering Economy ( $16\text{th}/17\text{th}$ Edition) by William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling.
Principles of Engineering Economic Analysis ( $6\text{th}$ Edition) by John A. White, Kellie S. Grasman, Kenneth E. Case, Kim LaScola Needy, and David B. Pratt.
Contemporary Engineering Economics ( $7\text{th}$ Edition) by Chan S. Park.
Engineering Economic Analysis ( $14\text{th}/15\text{th}$ Edition) by Donald G. Newnan, Ted G. Eschenbach, and Jerome P. Lavelle.
Basics of Engineering Economy ( $2\text{nd}$ Edition) by Leland Blank and Anthony Tarquin.