Engineering Economic Analysis

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The Role of Engineering Economic Analysis 5

Germangovernmentpass legislationto prevent the overseasplant? What about

German labor unions?

·The selection of a girlfriend or a boyfriend (who may later become a spouse) is

obviously complex. Economic ~alysis can be of little or no help.

·The annual budget ofa corPoration-isan allocation of resources, but the budget pro-

cess is heavily influenced by noneconomic forces such as power struggles, geograph-

ical balancing, and impact on individuals, programs, and profits. For multinational

corporations there are even national interests to be considered.

The Role of Engineering Economic Analysis

Engineering economic analysis is most suitable for intermediate problems and the economic

aspects of complex problems. They have these qualities:

1. The problem isimportant enoughto justify our giving it serious thought and effort.


2. The problem can't be worked in one's head-that is, a careful analysisrequires that
   we organizethe problem and all the various consequences, and this is just too much
   to be done all at once.


3. The problem haseconomic aspectsimportant in reaching a decision.

When problems meet these three criteria, engineering economic analysis is an appropri-

ate technique for seeking a solution. Since vast numbers of problems that one will encounter

in the business world (and in one's personal life) meet these criteria, engineering economic

analysis is often required.

Examples of Engineering Economic Analysis

Engineering economic analysis focuses on costs, revenues, and benefits that occur at dif-

ferent times. For example, when a civil engineer"designs a road, a dam, or a building, the

construction costs occur in the near future; the benefits to users begin only when construction

is finished, but then the benefits continue for a long time.

In fact nearly everything that engineers design calls for spending money in the design

and building stages, and after completion revenues or benefits occur-usually for years.

Thus the economic analysis of costs, benefits, and revenues occurring over time is called

engineeringeconomic analysis.

Engineering economic analysis is used to answer many different questions.

·Which engineering projects are worthwhile? Has the mining or petroleum engineer

shown that the mineral or oil deposit is worth developing?

· Which engineering projects should have a higher priority? Has the industrial engi-

neershownwhichfactoryimprovementprojectsshouldbe fundedwiththeavailable-

dollars?

· How should the engineering project be designed? Has the mechanical or electrical

engineer chosen the most economical motor size? Has the civil or mechanical engi-

neer chosen the best thickness for insulation? Has the aeronautical engineer made

the best trade-offs between 1) lighter materials that are expensive to buy but cheaper

to fly and 2) heavier materials that are cheap to buy and more expensive to fly?