Course Description

This course provides a comprehensive introduction to the principles and techniques of engineering economic analysis. Students will learn how to systematically evaluate the monetary consequences of engineering projects and design alternatives that occur over time. The course emphasizes practical applications and decision-making in both private and public sectors.

Textbook

Newnan, D. G., Eschenbach, T. G., Lavelle, J. P., & Lewis, N. A. (2017). Engineering economic analysis (Thirteenth edition). Oxford University Press.

Course Objectives

Upon successful completion of this course, students will be able to:

  • Apply the rational decision-making process to engineering challenges.
  • Distinguish various cost concepts and develop cost estimates.
  • Utilize the time value of money concept to find equivalence between cash flows occurring at different times.
  • Compare mutually exclusive investment alternatives using the three primary economic analysis methods.
  • Incorporate factors such as uncertainty, inflation, taxes, and replacement necessity into economic decision models.
  • Understand the importance of ethical considerations in engineering decisions.

Grading Structure (Example)

Component Weight
Homework & Assignments 20%
Quizzes 20%
Midterm Exam 30%
Final Exam 30%
Total 100%

Lecture Schedule

This course consists of 10 sequential lectures covering fundamental techniques and advanced topics essential for engineering practice.

Lecture 1: Making Economic Decisions and Costs Fundamentals

Topics:

  • Distinguishing simple, intermediate, and complex problems.
  • The role and purpose of engineering economic analysis.
  • The nine steps in the economic decision-making process.
  • Selecting appropriate economic criteria (e.g., maximize profit, minimize cost, maximize output).
  • Ethics and the ethical dimension in engineering decision making.

Lecture 2: Estimating Engineering Costs and Benefits

Topics:

  • Defining key cost concepts: fixed, variable, marginal, and average costs.
  • Understanding sunk costs (and why they must be ignored) and opportunity costs.
  • The concept of life-cycle costs.
  • Types of engineering estimates (rough, semidetailed, detailed) and common estimation difficulties (e.g., learning curves).
  • Creating and interpreting cash flow diagrams.

Lecture 3: Interest and Equivalence

Topics:

  • The fundamental concept of the time value of money.
  • Distinguishing between simple and compound interest.
  • The concept of equivalence of cash flows at different points in time.
  • Using single-payment compound interest formulas (P/F and F/P).
  • Defining and applying nominal and effective interest rates.

Lecture 4: Equivalence for Repeated Cash Flows

Topics:

  • Solving problems using the uniform series (annuity) compound interest formulas.
  • Analyzing cash flows using arithmetic gradients.
  • Analyzing cash flows using geometric gradients.
  • Introduction to using spreadsheets (financial and block functions) as tools for economic analysis.

Lecture 5: Present Worth Analysis

Topics:

  • Defining and applying the Present Worth (PW) criterion.
  • Assumptions critical to economic analysis (e.g., end-of-year convention, ignoring taxes/inflation initially).
  • Comparing alternatives with equal lives.
  • Comparing alternatives with unequal lives (using the least common multiple or a fixed study period).
  • Analysis over an infinite time period (Capitalized Cost).

Lecture 6: Annual Cash Flow Analysis

Topics:

  • Defining Equivalent Uniform Annual Cost (EUAC), Benefits (EUAB), and Worth (EUAW).
  • Resolving cash flow streams into annual equivalents.
  • Comparing alternatives using the annual worth method (EUAW).
  • Handling irregular cash flows (e.g., mid-life overhauls) in annual worth analysis.
  • Using spreadsheets for loan analysis and amortization.

Lecture 7: Rate of Return Analysis and Comparison Methods

Topics:

  • Defining the Rate of Return (ROR) or Internal Rate of Return (IRR).
  • Solving for the unknown interest rate when comparing costs and benefits.
  • Choosing the best alternative from a set of mutually exclusive options.
  • Applying the incremental analysis approach.
  • Graphical methods for comparing alternatives (e.g., plotting PW versus interest rate).

Lecture 8: Depreciation and Income Taxes

Topics:

  • The fundamental concepts of depreciation (e.g., book costs).
  • Calculating depreciation schedules (e.g., Modified Accelerated Cost Recovery System - MACRS).
  • Understanding the framework of income taxes for corporations.
  • Developing after-tax cash flows (ATCF).
  • Analyzing projects on an after-tax basis.

Lecture 9: Uncertainty, Sensitivity, and Other Techniques

Topics:

  • Measuring investment consequences using Future Worth (FW) analysis.
  • Applying the Benefit-Cost (B/C) ratio method.
  • Calculating the approximate measure of return: payback period.
  • Dealing with future uncertainty by analyzing a range of estimates (optimistic, pessimistic, most likely).
  • Performing sensitivity and breakeven analysis (what-if analysis).
  • Introduction to expected value concepts.

Lecture 10: Replacement and Public Sector Analysis

Topics:

  • The context of replacement analysis (challenger vs. defender).
  • Calculating the minimum cost life (economic life) for new assets.
  • Analysis viewpoint and objectives in the public sector.
  • Selecting an appropriate interest rate for public projects.
  • Application of the Benefit-Cost ratio in the public sector (conventional and incremental).