Ms.
Sherine Stanly
Research Scholar, Department of Civil Engineering
National Institute of Technology Puducherry,
Karaikal – 609609
sherinestanly.nitpy@gmail.com
Contents
Basic Principles of Engineering Economy – Time Value of Money – Present, Future and
Annual Worth Comparison of Alternatives by Different Methods – Break-even comparisons –
Benefit-Cost Analysis – Capitalized Cost Analysis – Depreciation – Taxes – Inflation –
Equipment Economics – Equipment Costs – Buy/Rent/Lease Options – Replacement
Analysis of Equipments – Cost Estimating – Factor Estimate – Cost indexes – Parametric
Estimate – Life Cycle Cost – Financial Management – Financial Statements – Construction
Accounting –Working capital management
#Lecture1
Economics
The word "Economics" originates from the Greek word oikonomia.
Oikonomia literally means "household management" or "management of th
home.
Ancient Greece: The term referred to managing household resources, includi
agriculture, labor, and finances.
Medieval Period: The term was extended to management of estates and kingdom
involving administration of large-scale resources.
resources
Modern Usage (18th century onwards):
onwards) Adam Smith (father of modern economics)
his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations" used t
term to describe the study of national wealth, production, and trade.
#Lecture1
Cont…
Economics is the science that deals with the production and consumption of goods an
services and the distribution and rendering of these for human welfare.
The following are the economic goals.
A high level of employment
Price stability
Efficiency
An equitable distribution of income
Growth
Some of the above goals are interdependent..
The economic goals are not always complementary, in many cases they are in conflict.
For example, any move to have a significant reduction in unemployment will lead to
increase in inflation.
#Lecture1
Engineering Economy
A systematic evaluation of economic aspects of engineering projects and alternatives.
Involves comparing costs and benefits over time.
time
Core to making decisions on:
Equipment purchase
Project selection
Maintenance vs. replacement
Process improvement
Example: Choosing between diesel and electric generators for a construction site. #Lecture1
Need for Engineering Economy
Helps engineers make economically sound decisions.
Resources (money, time, materials) are limited.
Resources
Important when:
Projects have long-term impact
Multiple alternatives exist
Budget constraints are present
Encourages cost-effectiveness
effectiveness and sustainability.
#Lecture1
Seven Principles of Engineering Economy
You're a civil engineer deciding between buying or renting a concrete mixer for a sm
construction project that will last 6 months.
1. Develop the Alternatives: Identify all viable options before comparing, List all possible
options to solve the problem.
In our example:: Option A: Buy the concrete mixer.
Option B: Rent the concrete mixer.
2. Focus on the Differences: Only differences in cash flows matter. Only consider costs and
benefits that are different between the options.
In our example: Both options require operator salary and fuel. So ignore them.
Focus on:
Initial purchase cost (only for buying)
Rental charges (only for renting)
Maintenance cost (may differ) #Lecture1
Resale value (if bought)
Cont…
3. Use a Consistent Viewpoint: Stakeholder perspective must be consistent. Analyze from
the same perspective (e.g., the company’s viewpoint).
In our example:
Don’t switch between owner’s and contractor’s views.
Stick to costs borne and benefits gained by your company.
4. Use a Common Unit of Measure: All comparisons must use the same units (₹, $).
Compare everything in monetary terms (₹ or $), even if they are in different forms.
In our example:
Rental: ₹15,000/month → ₹90,000 total
Buying: ₹1,50,000 upfront – ₹50,000 resale → Net ₹1,00,000
Maintenance: ₹10,000 (only for buying)
All values are now in ₹, making comparison possible.
5. Consider all Relevant Criteria: Both monetary and non-monetary
non factors (safety,
environment). Include both financial and non--financial factors.
#Lecture1
Cont…
In our example:
Renting is flexible, no long-term
term storage needed.
Buying may cause storage issues or idle equipment after the project.
Safety, convenience, environmental impact (noise, emissions) might differ.
6. Make Uncertainty Explicit: Use risk analysis, sensitivity analysis. Acknowledge what
could change in the future.
In our example:
What if the project extends to 9 months?
What if rental charges increase?
What if the resale value of the mixer drops more than expected?
7. Revisit Your Decisions: Review periodically and update decisions if conditions change.
In our example:
If halfway through the project, a second project is awarded – maybe buying is better now.
If the rented mixer fails repeatedly – maybe buying becomes more economical.
#Lecture1
