The Role of Engineers in Business

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  8. Metode Depresiasi dan perhitungan pajak

  10. Analisis Penggantian

  Tugas-3: Menyusun suatu rencana bisnis/usaha beberapa tahun kedepan, dan dapat mengantisipasi segala kemungkinan agar rencana usaha tersebut layak secara ekonomis.

  6. Evaluasi Investasi

  5. Bunga Nominal. Efektif. MARR

  4.Bunga majemuk dalam ekivalensi Tugas-1: Menyusun beberapa skema pinjaman dengan tingkat suku bunga tertentu

  3. Konsep Nilai Uang terhadap Waktu

  Tugas-2: Menganalisis rencana investasi dengan metode NPV; BCR; PBP;IRR.


9. After Tax Cash Flow

7. Analisis Sensitivitas

2. Konsep Biaya

1. Pengenalan Ekonomi Teknik



The Role of Engineers in Business

  • Engineering Projects
  • Production Methods • Engineering Safety • Environmental Impacts • Market Assessment
  • Expected Proftability • Timing of Cash Flows • Degree of Financial Risk
  • Impact on Financial Statements • Firm’s Market Value • Stock Price

  3 Create & Design



  Evaluate Why Engineering Economy is Important to Engineers

   Designing involves economic decisions

  Engineers design and create

   Engineers must be able to incorporate

   economic analysis into their creative eforts

   Often engineers must select and implement from multiple alternatives Understanding and applying time value of

   money, economic equivalence, and cost estimation are vital for engineers A proper economic analysis for selection and

   execution is a fundamental task of engineering


   estimating, and evaluating the economic outcomes of alternatives designed to accomplish a defned purpose. It is a tool to assist people in

  Involves : Formulating,

   making decisions.

  Role of engineering economy in decision making ·



  Sensitivity analysis


  Observed value in the future will differ form the estimate made now


  Interest rates

  Time of occurrence

  Assist people in making decisions


  Cash flows


  Best estimates of what is expected to occur


  Time frame is the future


  Performed during the engineering economic study to determine how the decision might change based on varying estimates

   systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable


   (afordable), solutions to engineering problems must demotrate a positive

balance of long-term benefts over long-

term costs, and they must also promote

the well being and survival of an organisation.

   and-cents side of the decisions that

engineers make or recommend a frm

to be proftable in highly competitive marketplace Trade ofs among diferent types of

  Engineering economy is the dollars-

   costs and the performance provided by the proposed design or problem solution.

  Engineering Economic Decisions Needed e.g. in the following (connected) areas:

  Profit! Then continue at the next stage… Manufacturing

  Design Financial

  Investment planning and loan



  Accounting vs. Engineering Economy

  10 Present Future Past

  Engineering Economy Accounting


Evaluating past performance Evaluating and predicting future events

  What Makes Engineering Economic

Decisions Difficult? Predicting the Future

   required investments Estimating product

  Estimating the

   manufacturing costs Forecasting the

   demand for a brand new product Estimating a “good”

   selling price Estimating product

   life and the proftability of


  Key Factors in Selecting Good Engineering Economic Decisions

  Objectives, available resources, time and uncertainty are the key defning aspects of all engineering economic decisions



Types of Strategic Engineering Economic

Decisions in the Manufacturing Sector

  Service Improvement * 

  Equipment and Process Selection * 

  Equipment Replacement * 


New Product and Product Expansion

  Cost Reduction *


  Example : Healthcare Service Improvement

  1 Traditional Plan : Patients visit the service providers


  2 New Strategy : Service

  1 providers visit the patients

  Which one of the two plans is more economical? The answer typically depends on the type of patients and the services ofered. Examples? service providers patients


  14 Service Improvement 

  How many more jeans would Levi need to sell to justify the cost of additional robotic tailors?

  Example 2: Equipment and Process Selection How do you choose between using

   alternative materials for an auto body panel? The choice of material will dictate

   the manufacturing process and the associated manufacturing costs

  16 Which Material to Choose?

  Example 3:

Equipment Replacement Problem

   When is the right time to replace an old machine or equipment

  Key question:




Equipment Replacement Problem

Now is the time to

   replace the old machine? If not, when is the

   right time to replace the old equipment?

  Example 4:

New Product and Product Expansion

   acquire a new facility to meet the increased (increasing forecasted) demand? Is it worth spending

  Shall we build or

   money to market a new product?


  Example 5: Cost Reduction Should a company buy

   new equipment to perform an operation that is now done manually? Should we spend money

   now, in order to save more money later? The answer obviously

   depends on a number of factors.


  22 Further Areas of Strategic

Engineering Economic Decisions in

the Service Sector



  Hospitality and Entertainment




  Financial Engineering and Banking

  Electronic Markets and Auctions



  Healthcare Industry


  Logistics and Distribution


  Commercial Transportation

  Customer Service and Maintenance



  1. Develop the Alternatives;

  2. Focus on the Diferences;

  3. Use a Consistent Viewpoint;

  4. Use a Common Unit of Measure;

  5. Consider All Relevant Criteria;

  6. Make Uncertainty Explicit;

  7. Revisit Your Decisions

  Principle 1


  The fnal choice (decision) is among alternatives. The alternatives need to be identifed and then defned for subsequent analysis.

  Principle 2


  Only the diferences in expected future outcomes among the

alternatives are relevant to their

comparison and should be considered in the decision.

  Principle 2 Only the cost (resource) difference among alternatives counts Option Monthly Fuel Cost Monthly Maintenance Cash paid at signing (cash outlay ) Monthly payment Salvage Value at end of year 3 Buy $960 $550 $6,500 $350 $9,000 Lease $960 $550 $2,400 $550

  26 The data shown in the green felds are irrelevant items for decision making, since their fnancial impact is identical in both cases


Principle 3


  The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defned viewpoint (perspective).

  Principle 4


  Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparison of alternatives.


Principle 5



Selection of a preferred alternative

(decision making) requires the use

of a criterion (or several criteria).

The decision process should consider the outcomes enumerated in the monetary unit.

  Principle 6


  Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives

and should be recognized in their

analysis and comparison.

  Principle 7


  Improved decision making results from an adaptive process; to the extent practicable, the initial projected outcomes of the selected alternative should be subsequently compared with actual results achieved.

  The Others Principles of Engineering Economics 1.

  An instant dollar is worth more than a distant dollar… $

  2. Marginal revenue must exceed marginal cost, in order to carry out a proftable increase of operations

  3. Additional risk is not taken without an expected additional return of suitable magnitude $


1 An instant dollar is worth more than a distant dollar…

  33 Today

  6 months later



Marginal (unit) revenue has to exceed marginal

cost, in order to increase production

  Marginal cost 1 unit

  Manufacturing cost Marginal revenue

  Sales revenue 1 unit




Additional risk is not taken without a

suitable expected additional return

  Investment Class Potential Expected Risk Return

  Savings account Lowest 1.5%

  (cash) Bond (debt) Moderate

  4.8% Stock (equity) Highest

  11.5% A simple illustrative example. Note that all investments imply some risk: portfolio management is a key issue in fnance


  1. Problem recognition, formulation, and evaluation.

  2. Development of the feasible alternatives.

  3. Development of the cash fows for each alternative.

  4. Selection of a criterion ( or criteria).

  5. Analysis and comparison of the alternatives.

  6. Selection of the preferred alternative.

  7. Performance monitoring and post- evaluation results.

  Steps in an Engineering Economy Study


Rational Decision-Making Process

Recognize the decision

   problem

   Collect all needed (relevant) information

   Identify the set of feasible decision alternatives

   Defne the key objectives and constraints

   Select the best possible and implementable decision alternative


  A Simple Illustrative Example: Car to Lease – Toyota or Honda?

    Need to lease a car

  Recognize the decision problem

   Gather technical and

   Collect all needed fnancial data

  (relevant) information

   Select cars to consider

   Identify the set of

   Wanted: small cash outlay, feasible decision safety, good performance, alternatives aesthetics,…

   Defne the key Choice between Toyota

   and Honda (or others) objectives

   Select a car (i.e., Honda, and constraints

  Toyota or another brand)

   Select the best possible and

  39 Conclusion An engineering economy study is

accomplished using a structured

procedure and mathematical modeling techniques. The economic results are then used in

a decision situation that involves

two or more alternatives and normally includes other engineering knowledge and input.

   refers to any investment or other decision related to an engineering project The fve main types of engineering economic

  The term engineering economic decision

   decisions are (1) service improvement, (2) equipment and process selection, (3) equipment replacement, (4) new product and product expansion, and (5) cost reduction

The factors of time, resource limitations and


uncertainty are key defning aspects of any

investment project

  41 Mumu natapriatna

Instructor : Mumu Natapriatna Mobile phone No.: 0812 Time : Wed,Thu, 08:30 2023600 to 12:30 pm

   Location :

  Telp. No. : 022 7311908 Ofce hours: Ofce location: C3

  IEG2H2-Engineering Economy Even Semester, 2015 Syllabus Course Description:

  The purpose for this course is to introduce the economic justifcation and decision making of engineering projects, programs, and organizational asset management. This course provide an introduction to discounted cash-fow analysis and its application to practical problems using spreadsheets, an understanding of how to structure practical decision problems and how to model them analytically as well as the role of, and the necessity for, engineering management of private and public organizations.

  Required Text

  William G. Sullivan, Elin M. Wicks, & James T. Luxhoj, “Engineering Economy,” 12th Ed., Pearson,

  • 2003, ISBN 0-13-039555-2

  Newnan, Donald G., “Engineering Economic Analysis”, Engineering Press,Inc., 1992, California, USA

  • Other References

  : Grant, Ireson, Levenworth, ” Dasar-Dasar Ekonomi Teknik”, PT Rineka Cipta, 2001, Jakarta

  • Thuesen, G.J. & Fabrycky, W.J., ” Engineering Economy”, 9th Edition, Prentice Hall, Inc., 2001, New • Jersey, USA
  • New Jersey, USA

  DeGarmo, Sullivan, Bontadelli, Wicks, ”Engineering Economy”, Tenth Edition, Prentice Hall, Inc., 1997,

  Steiner, H.M., ”Engineering Economy Principles”, Mc. Graw Hills International, 1996, Singapore

  • Grant, Ireson, Leavenworth, “Principles of Engineering Economy”, John Wiley&Sons, 1990, Singapore •


  An ability to set up and manipulate simple spreadsheets in Excel is expected. The use of the HP-12C or T I fnancial calculator may be recommended.


  • Homework/Quiz 20% , Midterm examination 25%,
  • Final examination 35%,
  • Project 20%,
  • >Participation %,
The policy for the student fnal grade will be based on: > = 85 : A

  70 – 84,99 : B

  55 – 69,99 : C

  40 – 54,99 : D

  < 40 : E

  Assessment: Homework

  • Homework will be assigned about every week in the form of a problem set. For each problem set, 50% of the points will be awarded for completeness (i.e., a serious attempt at all problems), 50% will be allocated to accuracy in the selected problems. Homework is due at the beginning of the class in Room .... on its due date. Will be collected in class, graded, and returned. Late homework receives 1/2 credit. The basis for grading is efort – full credit for most incorrect answers.
  • There will be a midterm exam in the 8 week in class. The fnal exam will be given after the 16th week. Mid- term and Final exam will be open book and notes in class exam. You are expected to take the midterm and fnal exam on the dates given. There are no makeup exams! If you have a justifed scheduling confict, you will have to make an arrangement with me one weeks before the exam. Any requests made after that day (other than documented emergencies) may or may not be granted.

  Exams th

  Class Participation

  • Your presence and participation in class are essential for gaining mastery of the material. At frst sight it might seem to you that the concepts in this course are easy and might be quickly “crammed” before an exam. Experience shows that this frst impression is more often than not incorrect, and in this course we therefore require your attendance and participation. From time to time there may be a mini-quiz in class. The results will enter into your class participation grade. Cellar phone is not allowed during the class. Please turn of your cellar phone before you enter the classroom. We will do 360 degree evaluation in each class.


  • At least three students will be grouped as a project team. Two to three teams will be organized in the frst class. Each team needs to fnd out a subject for your team project related to the course issues taught in the class and to develop a project by the team members together. A fve-page written project report with double space & font size 12 point is required to submit before your fnal project presentation. Each team needs to present your projects in the 13th week of the semester. For the project, 60% of the points will be awarded for completeness of project based on the project report, 20% will be allocated to the team work, and 20% will be counted on the team presentation. Your team needs to submit Microsoft Power Point fle as the team work, and 20% will be counted on the team presentation. Your team needs to submit Microsoft Power Point fle as well as the fnal report before one week of the project presentation. No late report will be accepted and there is no makeup report! The 360 degree evaluation from each team will be used as a reference to assign a grade for each team.
  • Money-time relationship (Time Value Of Money)

  Week Date Content Reading Assignment

  10 Sensitivity Analysis Newnan. Ch.9

  16 Final Examination Schedule

  15 Project Presentation (2); Review

  14 Project Presentation (1)

  13 Replacement Analysis; Quiz WGS,Ch.9; Newnan, Ch.12


  12 After Tax Cash fow Newnan,Ch.10,1


11 Depreciation and Income Taxes; Quiz WGS, Ch.6

  9 PP and other analysis WGS, Ch.4,5


1 Introduction to Engineering Economy WGS, Ch.1

2 •Cost concept

  8 Midterm Examination


7 BCR Analysis; Quiz WGS,Ch.11

  6 RoR Analysis WGS, Ch.4,5

  5 Annual Worth analysis; Quiz WGS, Ch. 4, 5

  4 Present Worth Method/analysis WGS, Ch. 4, 5


3 Economic Equivalence WGS, Ch. 3

  WGS, Ch.2,3



Case #1: Buy, Rent or Repair?

• You wreck your car! And you absolutely need one to get around.

  • • A wholesaler offers $2,000 for the wrecked car, and $4,500 if it is

    repaired. The car’s standing mileage is 58,000 miles.
  • Your insurance company offers $1,000 to cover the cost of the accident.
  • To repair the car costs $2,000.
  • A newer second–hand car costs $10,000 with a standing mileage of 28,000 miles.
  • • A part–time technician can repair the car for $1,100, but it takes a

    month. In the meantime, you need to rent a car, which costs $400 per month.
  • Question: What should you do?




  48 IEG2H2-Example1


No panic!

  • Apply the engineering economic analysis


  Case #2 Six college students are making plans for spring break. They are

considering traveling 1200 miles to Florida by bus, train, plane, rental

cars, or rental van. Due to bus and train schedules, they limited their options to plane, two rental cars, or a rental van.

  The final data used in their analysis of transportation options are as

follows: round-trip airfare per person ($300); daily rental rate for each

car, all charges except fuel ($50); rental car gas mileage (20 miles/gallon); drop charge for each car ($150); daily rental rate for a van, all charges except fuel ($80); rental van gas mileage (12

miles/gallon); drop charge for the van ($225); cost to travel to or from

the airport at the spring break destination ($50 per cab, two cabs required); and average price of gasoline ($4.25/gallon). If they keep the rental vehicle, the charges will be for 7 days; if they drop the rental vehicle, the charges will be for 2 days.




Case #3

  • A firm is considering three investment proposals (A,B, & C). A requires $1M investment, B requires $2.5M, and C requires $3M. The firm has $4.5M to invest. C is contingent on A; B and C are mutually exclusive. The “do nothing” alternative is not

    feasible. Form the set of mutually exclusive

    investment alternatives that exists.




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