Engineering Economics Principles

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Questions and Answers

Engineering economy focuses solely on the financial aspects of engineering projects, ignoring other crucial factors like environmental impact.

False (B)

What is the primary goal of engineering economy?

To evaluate and compare the economic merits of different engineering solutions to identify the most cost-effective option.

The first step in applying the principles of engineering economy is to ______ the problem.

define

Which of the following is NOT typically considered when evaluating engineering alternatives?

<p>Number of employees involved (D)</p> Signup and view all the answers

Which of the following is NOT considered a primary resource area for the operation phase?

<p>Finance (D)</p> Signup and view all the answers

Which of the following is NOT considered a fixed cost?

<p>Costs of material and labor used in a product or service (A)</p> Signup and view all the answers

Disposal costs are recurring costs associated with shutting down an operation.

<p>False (B)</p> Signup and view all the answers

Match the engineering economy principle with its description:

<p>Develop the Alternatives = Clearly defining the problem and identifying potential solutions. Focus on the Differences = Comparing only the relevant variations between alternatives. Use a Consistent Viewpoint = Analyzing outcomes from a consistent perspective. Use a Common Unit of Measure = Expressing outcomes in a standardized unit for easier comparison. Consider All Relevant Criteria = Incorporating both monetary and non-monetary factors in decision making. Make Risk and Uncertainty Explicit = Recognizing and addressing the inherent uncertainties in future estimations. Revisit your Decisions = Continuously evaluating the performance of the chosen solution against initial projections.</p> Signup and view all the answers

What is the primary difference between consumer goods and producer goods?

<p>Consumer goods are used directly by individuals to satisfy their needs and wants, while producer goods are used to produce other goods or services.</p> Signup and view all the answers

What does it mean for an engineering solution to be "economically acceptable"?

<p>It demonstrates a favorable balance of long-term benefits over costs. (D)</p> Signup and view all the answers

The 'do-nothing' alternative is a valid option in evaluating different alternatives.

<p>True (A)</p> Signup and view all the answers

In a ______ market, there are many suppliers of a product, and new suppliers can freely enter the market.

<p>perfectly competitive</p> Signup and view all the answers

The interest rate is a crucial factor in engineering economy, as it reflects the time value of money.

<p>True (A)</p> Signup and view all the answers

What is the term used to describe the change in the amount of money over time due its potential to grow or shrink?

<p>Time Value of Money</p> Signup and view all the answers

Costs that can be directly allocated to a specific output or work activity are called ______ costs.

<p>direct</p> Signup and view all the answers

Match the following economic scenarios with their corresponding descriptions:

<p>Perfect Competition = A market with a single supplier dominating the market. Monopoly = A market with many suppliers and free entry and exit. Rule No. 1 of Present Economy Studies = Select the alternative that minimizes total cost per defect-free unit. Rule No. 2 of Present Economy Studies = Select the alternative that maximizes overall profitability based on defect-free units.</p> Signup and view all the answers

What is the significance of Principle No. 7 in engineering economy?

<p>Principle No. 7 emphasizes the importance of ongoing monitoring and evaluation to ensure that the chosen solution continues to be the most effective option over time. It encourages a proactive approach to decision making based on actual performance.</p> Signup and view all the answers

Match the following cost types with their corresponding examples:

<p>Fixed Costs = Salaries of general management Variable Costs = General maintenance costs for a factory Direct Costs = Materials used in building a bridge Indirect Costs = Utilities costs for a manufacturing plant</p> Signup and view all the answers

Give an example of an intangible factor that could influence a decision.

<p>Goodwill, Convenience, Friendship, Morale</p> Signup and view all the answers

In economic analysis, the alternative with the highest overall cost is generally preferred.

<p>False (B)</p> Signup and view all the answers

Which of the following is NOT an example of a variable cost?

<p>General management and Administrative Salaries (D)</p> Signup and view all the answers

Which of the following is NOT a component of the acquisition phase of a product's life cycle?

<p>Production or construction (A)</p> Signup and view all the answers

Opportunity costs are sunk costs because they represent past decisions.

<p>False (B)</p> Signup and view all the answers

What is the main difference between a cash cost and a book cost?

<p>A cash cost involves an actual payment of money, while a book cost is a non-cash expense that represents the recovery of past expenditures.</p> Signup and view all the answers

The ______ cost is the sum of all costs related to a product throughout its entire life.

<p>life-cycle</p> Signup and view all the answers

Match the following cost types with their descriptions:

<p>Incremental cost = The additional cost incurred by producing one more unit Standard cost = A planned cost per unit established before production Sunk cost = Unrecoverable expenses from past decisions Opportunity cost = The potential benefit lost by choosing one alternative over another</p> Signup and view all the answers

Which of the following is an example of a sunk cost?

<p>The cost of developing a new product that was ultimately unsuccessful (D)</p> Signup and view all the answers

Investment cost is primarily associated with the operation phase of the life cycle.

<p>False (B)</p> Signup and view all the answers

What is typically included in Operation and Maintenance (O&M) costs?

<p>Recurring annual expenses associated with the operation phase, such as utilities, repairs, and labor.</p> Signup and view all the answers

Flashcards

Engineering Economy

The evaluation of economic merits for engineering solutions.

Alternatives

Stand-alone solutions for engineering problems.

Purchase Cost

The initial cost to acquire an asset.

Salvage Value

The anticipated resale value of an asset at the end of its life.

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Consistency in Viewpoint

Maintaining a defined perspective when analyzing alternatives.

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Common Unit of Measure

A standardized measurement for comparing alternatives.

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Risk and Uncertainty

Factors that affect future outcomes in decision-making.

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Decision Revisit

The process of comparing projected vs. actual outcomes.

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Primary Resource Areas

Five main categories of resources in the operation phase: people, machines, materials, energy, and information.

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Disposal Cost

Nonrecurring costs related to shutting down operations and disposing of assets at the end of their life cycle.

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Consumer Goods

Products or services directly used by people to satisfy their wants, such as food and clothing.

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Perfect Competition

Market condition where many suppliers exist, and new entrants can easily join without restrictions.

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Rule No. 1

Choose the alternative that maximizes profitability when revenues vary among options based on defect-free units produced.

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Cash Flow

The estimated inflows and outflows of money.

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Do-Nothing Alternative

The alternative of inaction, or status quo.

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Evaluation Criteria

Basis for decision-making using financial units like dollars.

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Intangible Factors

Noneconomic factors influencing decision-making that are hard to quantify.

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Time Value of Money

Change in money's value over time, crucial in economic analysis.

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Fixed Costs

Costs unchanged by activity level, within a certain range.

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Variable Costs

Costs that change with the level of output or activity.

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Direct Costs

Costs directly tied to a specific output or task.

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Incremental Cost

The additional cost or revenue from increasing output by one or more units.

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Standard Costs

Planned costs per unit of output established before production.

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Cash Cost

Costs that involve actual cash payments.

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Sunk Costs

Irretrievable costs from past decisions irrelevant for future analysis.

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Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

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Life-Cycle Cost

Total costs related to a product or service over its life span.

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Investment Cost

Capital required for activities during the acquisition phase.

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Operation and Maintenance Cost (O&M)

Recurring expenses related to the operation phase of a product or service.

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Study Notes

Engineering Economics

  • Engineering economy systematically evaluates the economic merits of proposed solutions to engineering problems.
  • Solutions must demonstrate a positive balance of long-term benefits over long-term costs to be economically acceptable (affordable).
  • Engineering economy simplifies comparisons of alternatives using a collection of techniques.
  • An alternative is a stand-alone solution to a particular situation. Alternative considerations include purchase cost (initial cost), anticipated useful life, annual maintenance and operating costs, anticipated resale value (salvage value), and the interest rate.

Principles of Engineering Economy

  • Principle 1: Develop Alternatives: Clearly define the problem and identify all potential solutions.
  • Principle 2: Focus on Differences: Only consider the differences in future outcomes between alternatives, not the overall outcomes.
  • Principle 3: Consistent Viewpoint: Develop prospective outcomes (economic and others) consistently from a defined perspective.
  • Principle 4: Common Unit of Measure: Use a consistent unit of measurement for all relevant prospective outcomes.
  • Principle 5: Consider All Relevant Criteria: Make decisions based on multiple criteria, including monetary and non-monetary factors.
  • Principle 6: Make Risk and Uncertainty Explicit: Acknowledge risk and uncertainty when estimating future outcomes. Explicitly acknowledge this in analyses.
  • Principle 7: Revisit Decisions: Continuously evaluate and adapt initial projections to actual results.

Cash Flow

  • Cash flow refers to estimated inflows (revenues) and outflows (costs) of money.

Alternative Selection

  • Every situation has at least two alternatives, including a "do-nothing" (DN) alternative. The "do-nothing" alternative represents the existing situation.

Evaluation Criteria

  • Financial units (dollars or others) are typically used for economic analysis.
  • The best alternative is the one with the lowest overall cost or highest overall net income.

Intangible Factors

  • Non-economic or intangible factors (goodwill, convenience, morale) may influence a decision if economic differences are marginal.

Time Value of Money

  • The change in the amount of money over time is a primary consideration in engineering economy.

Cost Terminology and Concepts

Fixed Costs

  • Unaffected by activity level over a feasible operating range. Examples: Insurance & taxes, salaries.

Variable Costs

  • Vary with output or activity level. Examples: materials & labor costs.

Direct Costs

  • Easily assigned to specific outputs or work activities. Examples: materials.

Indirect Costs/Overhead Costs

  • Difficult to assign to specific outputs. Examples: general supplies, maintenance.

Incremental Cost/Revenue

  • The additional cost or revenue from increasing output.

Standard Costs

  • Planned costs per unit; based on anticipated resource consumption.

Cash Costs

  • Costs that involve a cash payment.

Book Costs

  • Costs not involving cash outflow; represent the recovery of prior expenditures.

Sunk Costs

  • Irreversible costs from past decisions; irrelevant for future decisions.

Opportunity Costs

  • Forgone benefits from using resources in an alternative way.

Life-Cycle Cost

  • Sum of all costs associated with a product, structure, system, or service throughout its life. It includes acquisition and operation phases.

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