File Name: engineering economics and costing .zip
Define economics? Mention two factors each which in fluencies the demand and supply?
For the application of engineering economics in the practice of civil engineering see Engineering economics Civil Engineering. Engineering economics , previously known as engineering economy , is a subset of economics concerned with the use and " Thus, it focuses on the decision making process, its context and environment.
Engineers seek solutions to problems, and along with the technical aspects, the economic viability of each potential solution is normally considered from a specific viewpoint that reflects its economic utility to a constituency. Fundamentally, engineering economics involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available.
In some U. Considering the time value of money is central to most engineering economic analyses. Cash flows are discounted using an interest rate , except in the most basic economic studies. For each problem, there are usually many possible alternatives. One option that must be considered in each analysis, and is often the choice , is the do nothing alternative. The opportunity cost of making one choice over another must also be considered.
There are also non-economic factors to be considered, like color, style, public image, etc. Costs as well as revenues are considered, for each alternative, for an analysis period that is either a fixed number of years or the estimated life of the project.
The salvage value is often forgotten, but is important, and is either the net cost or revenue for decommissioning the project. Some other topics that may be addressed in engineering economics are inflation , uncertainty , replacements, depreciation , resource depletion , taxes , tax credits , accounting , cost estimations, or capital financing. All these topics are primary skills and knowledge areas in the field of cost engineering. Since engineering is an important part of the manufacturing sector of the economy , engineering industrial economics is an important part of industrial or business economics.
Major topics in engineering industrial economics are:. Some examples of engineering economic problems range from value analysis to economic studies. Each of these is relevant in different situations, and most often used by engineers or project managers. For example, engineering economic analysis helps a company not only determine the difference between fixed and incremental costs of certain operations, but also calculates that cost, depending upon a number of variables.
Further uses of engineering economics include:. Each of the previous components of engineering economics is critical at certain junctures, depending on the situation, scale, and objective of the project at hand. Critical path economy, as an example, is necessary in most situations as it is the coordination and planning of material, labor, and capital movements in a specific project.
The most critical of these "paths" are determined to be those that have an effect upon the outcome both in time and cost. Therefore, the critical paths must be determined and closely monitored by engineers and managers alike. Engineering economics helps provide the Gantt charts and activity-event networks to ascertain the correct use of time and resources. Proper value analysis finds its roots in the need for industrial engineers and managers to not only simplify and improve processes and systems, but also the logical simplification of the designs of those products and systems.
Further, value analysis helps combat common "roadblock excuses" that may trip up managers or engineers. Sayings such as "The customer wants it this way" are retorted by questions such as; has the customer been told of cheaper alternatives or methods?
Questions like these are part of engineering economy, as they preface any real studies or analyses. Linear programming is the use of mathematical methods to find optimized solutions, whether they be minimized or maximized in nature. This method uses a series of lines to create a polygon then to determine the largest, or smallest, point on that shape. Manufacturing operations often use linear programming to help mitigate costs and maximize profits or production.
Considering the prevalence of capital to be lent for a certain period of time, with the understanding that it will be returned to the investor, money-time relationships analyze the costs associated with these types of actions. Capital itself must be divided into two different categories, equity capital and debt capital.
Equity capital is money already at the disposal of the business, and mainly derived from profit, and therefore is not of much concern, as it has no owners that demand its return with interest. Debt capital does indeed have owners, and they require that its usage be returned with "profit", otherwise known as interest.
The interest to be paid by the business is going to be an expense, while the capital lenders will take interest as a profit, which may confuse the situation. To add to this, each will change the income tax position of the participants. Interest and money time relationships come into play when the capital required to complete a project must be either borrowed or derived from reserves.
To borrow brings about the question of interest and value created by the completion of the project. While taking capital from reserves also denies its usage on other projects that may yield more results. Interest in the simplest terms is defined by the multiplication of the principle, the units of time, and the interest rate.
The complexity of interest calculations, however, becomes much higher as factors such as compounding interest or annuities come into play. Engineers often utilize compound interest tables to determine the future or present value of capital. These tables can also be used to determine the effect annuities have on loans, operations, or other situations.
All one needs to utilize a compound interest table is three things; the time period of the analysis, the minimum attractive rate of return MARR , and the capital value itself. The table will yield a multiplication factor to be used with the capital value, this will then give the user the proper future or present value.
Using the compound interest tables mentioned above, an engineer or manager can quickly determine the value of capital over a certain time period. This is of course under the assumption that the company will make a lump payment at the conclusion of the five years, not making any payments prior.
A much more applicable example is one with a certain piece of equipment that will yield benefit for a manufacturing operation over a certain period of time. The compound interest tables yield a different factor for different types of analysis in this scenario. This is 6. These scenarios are extremely simple in nature, and do not reflect the reality of most industrial situations.
Thus, an engineer must begin to factor in costs and benefits, then find the worth of the proposed machine, expansion, or facility.
The fact that assets and material in the real world eventually wear down, and thence break, is a situation that must be accounted for. Depreciation itself is defined by the decreasing of value of any given asset, though some exceptions do exist.
Valuation can be considered the basis for depreciation in a basic sense, as any decrease in value would be based on an original value.
The idea and existence of depreciation becomes especially relevant to engineering and project management is the fact that capital equipment and assets used in operations will slowly decrease in worth, which will also coincide with an increase in the likelihood of machine failure. Hence the recording and calculation of depreciation is important for two major reasons. Both of these reasons, however, cannot make up for the "fleeting" nature of depreciation, which make direct analysis somewhat difficult.
To further add to the issues associated with depreciation, it must be broken down into three separate types, each having intricate calculations and implications. Calculation of depreciation also comes in a number of forms; straight line, declining balance, sum-of-the-year's, and service output.
The first method being perhaps the easiest to calculate, while the remaining have varying levels of difficulty and utility. Most situations faced by managers in regards to depreciation can be solved using any of these formulas, however, company policy or preference of individual may affect the choice of model.
The main form of depreciation used inside the U. Certain classes are given certain lifespans, and these affect the value of an asset that can be depreciated each year. This does not necessarily mean that an asset must be discarded after its MACRS life is fulfilled, just that it can no longer be used for tax deductions.
Capital budgeting , in relation to engineering economics, is the proper usage and utilization of capital to achieve project objectives.
It can be fully defined by the statement; " The actual acquisition of that capital has many different routes, from equity to bonds to retained profits, each having unique strengths and weakness, especially when in relation to income taxation. Factors such as risk of capital loss, along with possible or expected returns must also be considered when capital budgeting is underway. The high risk project failed to offer proper returns to warrant its risk status. The decision here would be much more subject to factors such as company policy, extra available capital, and possible investors.
Then the available capital should be tentatively allocated to the most favorable projects. The lowest prospective rate of return within the capital available then becomes the minimum acceptable rate of return for analyses of any projects during that period.
Being one of the most important and integral operations in the engineering economic field is the minimization of cost in systems and processes. Time, resources, labor, and capital must all be minimized when placed into any system, so that revenue, product, and profit can be maximized.
Hence, the general equation;. There are a great number of cost analysis formulas, each for particular situations and are warranted by the policies of the company in question, or the preferences of the engineer at hand. Economic studies, which are much more common outside of engineering economics, are still used from time to time to determine feasibility and utility of certain projects. They do not, however, truly reflect the "common notion" of economic studies, which is fixated upon macroeconomics, something engineers have little interaction with.
Therefore, the studies conducted in engineering economics are for specific companies and limited projects inside those companies. At most one may expect to find some feasibility studies done by private firms for the government or another business, but these again are in stark contrast to the overarching nature of true economic studies. Studies have a number of major steps that can be applied to almost every type of situation, those being as follows;. From Wikipedia, the free encyclopedia.
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After the completion of the course, students will be able to:. The Theory of demand, Demand function, Law of demand and its exceptions, Elasticity of demand, Law of supply and elasticity of supply. Theory of production, Law of variable proportion, Law of returns to scale. Time value of money: Simple and compound interest, Cash flow diagram, Principle of economic equivalence. Evaluation of engineering projects: Present worth method, Future worth method, Net present value method, internal rate of return method, Cost-benefit analysis in public projects. Cost concepts, Elements of costs, Preparation of cost sheet, Segregation of costs into fixed and variable costs. Break-even analysis Simple numerical problems to be solved.
In this article we will discuss about the meaning and characteristics of engineering economics. Engineering is the profession in which knowledge of the mathematical and natural sciences gained by study experience and practice is applied with judgment to develop ways to utilise economically the material and forces of nature for the benefit of mankind. Engineering Economics is a subject of vital importance to Engineers. This subject helps one understand the need for the knowledge of Economics for being an effective manager and decision maker. The Economics theories are used to take decisions related to uncertain and changing business environment.
Engineering Economics & Costing. Module-II: (12 hours). Cost and revenue concepts,. Basic understanding of different market structures,. Determination of.
Make or buy decision, Value engineering — Function, aims, Value engineering procedure. Interest formulae and their applications —Time value of money, Single payment compound amount factor, Single payment present worth factor, Equal payment series sinking fund factor, Equal payment series payment Present worth factor- equal payment series capital recovery factor — Uniform gradient series annual equivalent factor, Effective interest rate, Examples in all the methods. Replacement and Maintenance analysis — Types of maintenance, types of replacement problem, determination of economic life of an asset, Replacement of an asset with a new asset — capital recovery with return and concept of challenger and defender, Simple probabilistic model for items which fail completely.
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