Econ 121 - Module 1A - PDF

Module 1: INTRODUCTION TO ENGINEERING ECONOMY 1.1 Introduction Engineering Economy is the analysis and evaluation of the factors that will affect the economic success of engineering projects to the end that a recommendation can be made which will insure the best use of capital. Engineering econom...

Module 1: INTRODUCTION TO ENGINEERING ECONOMY 1.1 Introduction Engineering Economy is the analysis and evaluation of the factors that will affect the economic success of engineering projects to the end that a recommendation can be made which will insure the best use of capital. Engineering economy (Sullivan Wicks) involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable (i.e., affordable), solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term costs, and they must also Promote the well-being and survival of an organization, Embody creative and innovative technology and ideas, Permit identification and scrutiny of their estimated outcomes, and Translate profitability to the “bottom line” through a valid and acceptable measure of merit. Engineering Economy involves formulating, estimating, and evaluating the expected economic outcomes of alternatives designed to accomplish a defined purpose. Mathematical techniques simplify the economic evaluation of alternatives. (Blank and Tarquin, 2012) Engineering Economy is the analysis and evaluation of factors that will affect the economic success of engineering projects to the end that a recommendation can be made which insure the best use of capital. (H.B. Sta. Maria, 2000) In summary, Engineering Economy is a collection of problem-solving tools and techniques that are applied to engineering, business, and environmental issues. Common, yet often complex, problems involving money are easier to understand and solve when you have a good grasp of engineering economy approach to the problem solving and decision making. In short, Engineering Economy is the analysis and evaluation of economic worth of a project. Engineering economy is the dollars-and-cents side of the decisions that engineers make or recommend as they work to position a firm to be profitable in a highly competitive marketplace. Inherent to these decisions are trade-offs among different types of costs and the performance (response time, safety, weight, reliability, etc.) provided by the proposed design or problem solution. The mission of engineering economy is to balance these trade-offs in the most economical manner. For instance, if an engineer at Ford Motor Company invents a new transmission lubricant that increases fuel mileage by 10% and extends the life of the transmission by 30,000 miles, how much can the company afford to spend to implement this invention? Engineering economy can provide an answer. A few more of the myriad situations in which engineering economy plays a crucial role in the analysis of project alternative come to mind: 1. Choosing the best design for a high-efficiency gas furnace. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 1  Module 1: INTRODUCTION TO ENGINEERING ECONOMY 2. Selecting the most suitable robot for a welding operation on an automotive assembly line. 3. Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased. 4. Determining the optimal staffing plan for a computer help desk. From these illustrations, it should be obvious that engineering economy includes significant technical considerations. Thus, engineering economy involves technical analysis, with emphasis on the economic aspects, and has the objective of assisting decisions. This is true whether the decision maker is an engineer interactively analyzing alternatives at a computer-aided design workstation or the Chief Executive Officer (CEO) considering a new project. An engineer who is unprepared to excel at engineering economy is not properly equipped for his or her job. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 2  Module 1: INTRODUCTION TO ENGINEERING ECONOMY 1.2 The Principles of Engineering Economy Principle 1 An earlier dollar is worth more than a later dollar. A fundamental concept in engineering economics is that money has a time value associated with it. Because we can earn interest on money received today, it is better to receive money earlier than later. Principle 2 All that counts is differences among alternatives. An economic decision should be based on the differences among the alternatives considered all that is common is irrelevant to the decision. Principle 3 Marginal revenue must exceed marginal cost. Any increase economic activity must be justified based on the following fundamental economic principles: Marginal revenue must exceed marginal cost. Principle 4 Additional risk is not taken without expected additional return. For delaying consumption, investors demand a minimum return that must be greater than the anticipated rate of inflation or than any perceived risk. The steps in an engineering economy study are as follows: 1. Develop the Alternatives Carefully define the problem! Then the choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis. A decision situation involves making a choice among two or more alternatives. Developing and defining the alternatives for detailed evaluation is important because of the resulting impact on the quality of the decision. Engineers and managers should place a high priority on this responsibility. Creativity and innovation are essential to the process. One alternative that may be feasible in a decision situation is making no change to the current operation or set of conditions (i.e., doing nothing). If you judge this option ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 3  Module 1: INTRODUCTION TO ENGINEERING ECONOMY feasible, make sure it is considered in the analysis. However, do not focus on the status quo to the detriment of innovative or necessary change. RINCIPLE 2 2. Focus on the Differences Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision. If all prospective outcomes of the feasible alternatives were exactly the same, there would be no basis or need for comparison. We would be indifferent among the alternatives and could make a decision using a random selection. Obviously, only the differences in the future outcomes of the alternatives are important. Outcomes that are common to all alternatives can be disregarded in the comparison and decision. For example, if your feasible housing alternatives were two residences with the same purchase (or rental) price, price would be inconsequential to your final choice. Instead, the decision would depend on other factors, such as location and annual operating and maintenance expenses. This simple example illustrates Principle 2, which emphasizes the basic purpose of an engineering economic analysis: to recommend a future course of action based on the differences among feasible alternatives. NCIPLE 3 3. Use a Consistent Viewpoint The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective). The perspective of the decision maker, which is often that of the owners of the firm, would normally be used. However, it is important that the viewpoint for the particular decision be first defined and then used consistently in the description, analysis, and comparison of the alternatives. As an example, consider a public organization operating for the purpose of developing a river basin, including the generation and wholesale distribution of electricity from dams on the river system. A program is being planned to upgrade and increase the capacity of the power generators at two sites. What perspective should be used in defining the technical alternatives for the program? The “owners of the firm” in this example means the segment of the public that will pay the cost of the program, and their viewpoint should be adopted in this situation. Now let us look at an example where the viewpoint may not be that of the owners of the firm. Suppose that the company in this example is a private firm and that the problem deals with providing a flexible benefits package for the employees. Also, assume that the feasible alternatives for operating the plan all have the same future costs to the company. The alternatives, however, have differences from the perspective of the employees, and their satisfaction is an important decision criterion. The viewpoint for this analysis should be that of the employees of the company as a group, and the feasible alternatives should be defined from their perspective. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 4  Module 1: INTRODUCTION TO ENGINEERING ECONOMY 4. Use a Common Unit of Measure Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will simplify the analysis of the alternatives. It is desirable to make as many prospective outcomes as possible commensurable (directly comparable). For economic consequences, a monetary unit such as dollars is the common measure. You should also try to translate other outcomes (which do not initially appear to be economic) into the monetary unit. This translation, of course, will not be feasible with some of the outcomes, but the additional effort toward this goal will enhance commensurability and make the subsequent analysis of alternatives easier. What should you do with the outcomes that are not economic (i.e., the expected consequences that cannot be translated (and estimated) using the monetary unit)? First, if possible, quantify the expected future results using an appropriate unit of measurement for each outcome. If this is not feasible for one or more outcomes, describe these consequences explicitly so that the information is useful to the decision maker in the comparison of the alternatives. 5. Consider All Relevant Criteria Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). The decision process should consider both the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner. The decision maker will normally select the alternative that will best serve the long- term interests of the owners of the organization. In engineering economic analysis, the primary criterion relates to the long-term financial interests of the owners. This is based on the assumption that available capital will be allocated to provide maximum monetary return to the owners. Often, though, there are other organizational objectives you would like to achieve with your decision, and these should be considered and given weight in the selection of an alternative. These nonmonetary attributes and multiple objectives become the basis for additional criteria in the decision-making process. 6. Make Risk and Uncertainty Explicit Risk and uncertainty are inherent in estimating the future outcomes of the alternatives and should be recognized in their analysis and comparison. The analysis of the alternatives involves projecting or estimating the future consequences associated with each of them. The magnitude and the impact of future outcomes of any course of action are uncertain. Even if the alternative involves no change from current operations, the probability is high that today’s estimates of, for example, future cash receipts and expenses will not be what eventually occurs. Thus, dealing with uncertainty is an important aspect of engineering economic analysis. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 5  Module 1: INTRODUCTION TO ENGINEERING ECONOMY 7. Revisit Your Decisions 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. A good decision-making process can result in a decision that has an undesirable outcome. Other decisions, even though relatively successful, will have results significantly different from the initial estimates of the consequences. Learning from and adapting based on our experience are essential and are indicators of a good organization. The evaluation of results versus the initial estimate of outcomes for the selected alternative is often considered impracticable or not worth the effort. Too often, no feedback to the decision-making process occurs. Organizational discipline is needed to ensure that implemented decisions are routinely post evaluated and that the results are used to improve future analyses and the quality of decision making. For example, a common mistake made in the comparison of alternatives is the failure to examine adequately the impact of uncertainty in the estimates for selected factors on the decision. Only post evaluations will highlight this type of weakness in the engineering economy studies being done in an organization. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 6  Module 1: INTRODUCTION TO ENGINEERING ECONOMY 1.3 Engineering Economy and the Design Process An engineering economy study is accomplished using a structured procedure and mathematical modelling techniques. The economic results are then used in a decision situation that normally includes other engineering knowledge and input. A sound engineering economic analysis procedure incorporates the basic principles discussed in Section 1.2 and involves several steps. We represent the procedure in terms of the seven steps listed in the left-hand column of Table 1-1. There are several feedback loops (not shown) within the procedure. For example, within Step 1, information developed in evaluating the problem will be used as feedback to refine the problem definition. As another example, information from the analysis of alternatives (Step 5) may indicate the need to change one or more of them or to develop additional alternatives. The seven-step procedure is also used to assist decision making within the engineering design process, shown as the right-hand column in Table 1-1. In this case, activities in the design process contribute information to related steps in the economic analysis procedure. The general relationship between the activities in the design process and the steps of the economic analysis procedure is indicated in Table 1-1. The engineering design process may be repeated in phases to accomplish a total design effort. For example, in the first phase, a full cycle of the process may be undertaken to select a conceptual or preliminary design alternative. Then, in the second phase, the activities are repeated to develop the preferred detailed design based on the selected preliminary design. The seven-step economic analysis procedure would be repeated as required to assist decision making in each phase of the total design effort. This procedure is discussed next. 1.3.1 Problem Definition ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 7  Module 1: INTRODUCTION TO ENGINEERING ECONOMY The first step of the engineering economic analysis procedure (problem definition) is particularly important, since it provides the basis for the rest of the analysis. A problem must be well understood and stated in an explicit form before the project team proceeds with the rest of the analysis. The term problem is used here generically. It includes all decision situations for which an engineering economy analysis is required. Recognition of the problem is normally stimulated by internal or external organizational needs or requirements. An operating problem within a company (internal need) or a customer expectation about a product or service (external requirement) are examples. Once the problem is recognized, its formulation should be viewed from a systems perspective. That is, the boundary or extent of the situation needs to be carefully defined, thus establishing the elements of the problem and what constitutes its environment. Evaluation of the problem includes refinement of needs and requirements, and information from the evaluation phase may change the original formulation of the problem. In fact, redefining the problem until a consensus is reached may be the most important part of the problem-solving process! 1.3.2 Development of Alternatives The two primary actions in Step 2 of the procedure are (1) searching for potential alternatives and (2) screening them to select a smaller group of feasible alternatives for detailed analysis. The term feasible here means that each alternative selected for further analysis is judged, based on preliminary evaluation, to meet or exceed the requirements established for the situation. 1.3.2.1 Searching for Superior Alternatives In the discussion of Principle 1 (Section 1.2), creativity and resourcefulness were emphasized as being absolutely essential to the development of potential alternatives. The difference between good alternatives and great alternatives depends largely on an individual’s or group’s problem-solving efficiency. Such efficiency can be increased in the following ways: 1. Concentrate on redefining one problem at a time in Step 1. 2. Develop many redefinitions for the problem. 3. Avoid making judgments as new problem definitions are created. 4. Attempt to redefine a problem in terms that are dramatically different from the original Step 1 problem definition. 5. Make sure that the true problem is well researched and understood. In searching for superior alternatives or identifying the true problem, several limitations invariably exist, including (1) lack of time and money, (2) preconceptions of what will and what will not work, and (3) lack of knowledge. Consequently, the engineer or project team will be working with less-than-perfect problem solutions in the practice of engineering. 1.3.2.2 Developing Investment Alternatives “It takes money to make money,” as the old saying goes. Did you know that in the United States the average firm spends over $250,000 in capital on each of its employees? So, to make money, each firm must ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 8  Module 1: INTRODUCTION TO ENGINEERING ECONOMY invest capital to support its important human resources—but in what else should an individual firm invest? There are usually hundreds of opportunities for a company to make money. Engineers are at the very heart of creating value for a firm by turning innovative and creative ideas into new or reengineered commercial products and services. Most of these ideas require investment of money, and only a few of all feasible ideas can be developed, due to lack of time, knowledge, or resources. Consequently, most investment alternatives created by good engineering ideas are drawn from a larger population of equally good problem solutions. But how can this larger set of equally good solutions be tapped into? Interestingly, studies have concluded that designers and problem solvers tend to pursue a few ideas that involve “patching and repairing” an old idea. Truly new ideas are often excluded from consideration! This section outlines two approaches that have found wide acceptance in industry for developing sound investment alternatives by removing some of the barriers to creative thinking: (1) classical brainstorming and (2) the Nominal Group Technique (NGT). (1) Classical Brainstorming. Classical brainstorming is the most well-known and often-used technique for idea generation. It is based on the fundamental principles of deferment of judgment and that quantity breeds quality. There are four rules for successful brainstorming: 1. Criticism is ruled out. 2. Freewheeling is welcomed. 3. Quantity is wanted. 4. Combination and improvement are sought. A. F. Osborn lays out a detailed procedure for successful brainstorming. A classical brainstorming session has the following basic steps: 1. Preparation. The participants are selected, and a preliminary statement of the problem is circulated. 2. Brainstorming. A warm-up session with simple unrelated problems is conducted, the relevant problem and the four rules of brainstorming are presented, and ideas are generated and recorded using checklists and other techniques if necessary. 3. Evaluation. The ideas are evaluated relative to the problem. Generally, a brainstorming group should consist of four to seven people, although some suggest larger groups. (2) Nominal Group Technique. The NGT, developed by Andre P. Delbecq and Andrew H. Van de Ven, involves a structured group meeting designed to incorporate individual ideas and judgments into a group consensus. By correctly applying the NGT, it is possible for groups of people (preferably, 5 to 10) to generate investment alternatives or other ideas for improving the competitiveness of the firm. Indeed, the technique can be used to obtain group thinking (consensus) on a wide range of topics. For example, a question that might be given to the group is, “What are the most important problems or opportunities for improvement of...?” The technique, whenproperly applied, draws on the creativity of the individual participants, while reducing two undesirable effects of most group meetings: (1) the dominance of one or more participants and (2) the suppression of conflicting ideas. The basic format of an NGT session is as follows: ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 9  Module 1: INTRODUCTION TO ENGINEERING ECONOMY 1. Individual silent generation of ideas 2. Individual round-robin feedback and recording of ideas 3. Group clarification of each idea 4. Individual voting and ranking to prioritize ideas 5. Discussion of group consensus results The NGT session begins with an explanation of the procedure and a statement of question(s), preferably written by the facilitator. The group members are then asked to prepare individual listings of alternatives, such as investment ideas or issues that they feel are crucial for the survival and health of the organization. This is known as the silent-generation phase. After this phase has been completed, the facilitator calls on each participant, in round-robin fashion, to present one idea from his or her list (or further thoughts as the round-robin session is proceeding). Each idea (or opportunity) is then identified in turn and recorded on a flip chart or board by the NGT facilitator, leaving ample space between ideas for comments or clarification. This process continues until all the opportunities have been recorded, clarified, and displayed for all to see. At this point, a voting procedure is used to prioritize the ideas or opportunities. Finally, voting results lead to the development of group consensus on the topic being addressed. 1.3.3 Development of Prospective Outcomes Step 3 of the engineering economic analysis procedure incorporates Principles 2, 3, and 4 from Section 1.2 and uses the basic cash-flow approach employed in engineering economy. A cash flow occurs when money is transferred from one organization or individual to another. Thus, a cash flow represents the economic effects of an alternative in terms of money spent and received. Consider the concept of an organization having only one “window” to its external environment through which all monetary transactions occur—receipts of revenues and payments to suppliers, creditors, and employees. The key to developing the related cash flows for an alternative is estimating what would happen to the revenues and costs, as seen at this window, if the particular alternative were implemented. The net cash flow for an alternative is the difference between all cash inflows (receipts or savings) and cash outflows (costs or expenses) during each time period. In addition to the economic aspects of decision making, nonmonetary factors (attributes) often play a significant role in the final recommendation. Examples of objectives other than profit maximization or cost minimization that can be important to an organization include the following: 1. Meeting or exceeding customer expectations 2. Safety to employees and to the public 3. Improving employee satisfaction 4. Maintaining production flexibility to meet changing demands 5. Meeting or exceeding all environmental requirements 6. Achieving good public relations or being an exemplary member of the community 1.3.4 Selection of a Decision Criterion ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 10  Module 1: INTRODUCTION TO ENGINEERING ECONOMY The selection of a decision criterion (Step 4 of the analysis procedure) incorporates Principle 5 (consider all relevant criteria). The decision maker will normally select the alternative that will best serve the long-term interests of the owners of the organization. It is also true that the economic decision criterion should reflect a consistent and proper viewpoint (Principle 3) to be maintained throughout an engineering economy study. 1.3.5 Analysis and Comparison of Alternatives Analysis of the economic aspects of an engineering problem (Step 5) is largely based on cash-flow estimates for the feasible alternatives selected for detailed study. A substantial effort is normally required to obtain reasonably accurate forecasts of cash flows and other factors in view of, for example, inflationary (or deflationary) pressures, exchange rate movements, and regulatory (legal) mandates that often occur. Clearly, the consideration of future uncertainties (Principle 6) is an essential part of an engineering conomy study. When cash flow and other required estimates are eventually determined, alternatives can be compared based on their differences as called for by Principle 2. Usually, these differences will be quantified in terms of a monetary unit such as dollars. 1.3.6 Selection of the Preferred Alternative When the first five steps of the engineering economic analysis procedure have been done properly, the preferred alternative (Step 6) is simply a result of the total effort. Thus, the soundness of the technical-economic modeling and analysis techniques dictates the quality of the results obtained and the recommended course of action. Step 6 is included in Activity 5 of the engineering design process (specification of the preferred alternative) when done as part of a design effort. 1.3.7 Performance Monitoring and Post-evaluation of Results This final step implements Principle 7 and is accomplished during and after the time that the results achieved from the selected alternative are collected. Monitoring project performance during its operational phase improves the achievement of related goals and objectives and reduces the variability in desired results. Step 7 is also the follow- up step to a previous analysis, comparing actual results achieved with the previously estimated outcomes. The aim is to learn how to do better analyses, and the feedback from post implementation evaluation is important to the continuing improvement of operations in any organization. Unfortunately, like Step 1, this final step is often not done consistently or well in engineering practice; therefore, it needs particular attention to ensure feedback for use in ongoing and subsequent studies. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 11  Module 1: INTRODUCTION TO ENGINEERING ECONOMY Cost Terminology There are a variety of costs to be considered in an engineering economic analysis. These costs differ in their frequency of occurrence, relative magnitude, and degree of impact on the study. in this section, we define a number of cost categories and illustrate how they should be treated in an engineering economic analysis. Fixed costs are those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. (Insurance and taxes, salaries, license fees, and interest) Variable costs are those associated with an operation that varies in total with the quantity of output or other measures of activity level. (Cost of material and labor used in a product or service) An increment cost (or incremental revenue) is the additional cost (or revenue) that results from increasing the output of a system by one (or more) units. (“go-no-go”, limited change in output or activity level) Direct costs are costs that can be reasonably measured and allocated to a specific output or work activity. (Labor and material costs) Indirect costs are costs that are difficult to allocate to a specific output or work activity. (Such as proportional to direct labor hours, or direct material dollars) Standard costs are planned costs per unit of output that are established in advance of actual production or service delivery. Cash Cost involves payment of cash estimated from the perspective established for the analysis and are the future expenses incurred for the alternatives being analyzed. Book Cost one that does not involve a cash transaction (noncash cost) do not involve cash payments but rather represent the recovery of past expenditures over a fixed period of time. Depreciation A sunk cost is one that has occured in the past and has no relevance to estimates of future cost and revenues related to an alternative course of action. common to all alternatives not part of the future (prospective) cash fows ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 12  Module 1: INTRODUCTION TO ENGINEERING ECONOMY can be disregarded in an engineering economic analysis. For instance, sunk costs are non-refundable cash outlays, such as earnest money on a house or money spent on a passport. An opportunity cost is incurred because of the use f limited resources, such that the opportunity to use those resources to monetary advantage in an alternative use is foregone. The concept of an opportunity cost is often encountered in analyzing the replacement of a piece of equipment or other capital asset. Economics deals with the interactions between people and wealth. Engineering concerned with the cost-effective use of scientific knowledge to benefit humankind. CONSUMER GOOD AND SERVICES are those products or services that are directly used by people to satisfy their wants. Food, clothing, homes, cars, television sets, haircuts, opera, and medical services are examples. PRODUCER GOOD AND SERVICES are used to produce consumer goods and services or other producer goods. Machine tools, factory buildings, buses, and farm machinery are examples. Measures of Economic Worth Goods and services are produced and desired because they have utility - the power to satisfy human wants and needs. Thus, they may be used or consumed directly, or they may be used to produced other goods or services. Utility = Value, expressed in some medium of exchange as the price that must be paid to obtain the particular item. Much of our business activity, including engineering, focuses on increasing the utility (value) of materials and products by changing their form or location. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 13  Module 1: INTRODUCTION TO ENGINEERING ECONOMY Necessities VS Luxuries Obviously, these terms are relative, because, for most goods and services, what one person considers a necessity may be considered a luxury by another. General Price - Demand Relationships For all goods and services, there is a relationship between the prices that must be paid and the quantity that will be demanded or purchased. This general relationship is depicted in figure. PERFECT COMPETITION occurs in a situation in which any given product is supplied by a large number of vendors and there is no restriction on additional suppliers entering the market. Under such conditions, there is assurance of complete free dom on part of both buyer and seller. PERFECT MONOPOLY exists when a unique product or service is only available from single supplier and that vendor can prevent the entry of all others into the market. Under such conditions, the buyer is at the complete mercy of the supplier in terms of the availability and price of the product. ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 14  Module 1: INTRODUCTION TO ENGINEERING ECONOMY References 1. Chan S. Park, Fundamentals of Engineering Economy, 3rd ed. Pearson Limited, 2013. 2. W.G. Sullivan, E.M. Wicks and C.P. Koelling, Engineering Economy, 6th ed., Pearson Higher Education, Inc., 2015 3. L. Blank and A. Tarquin, Engineering Economy, 7th ed., McGraw-hill Companies, Inc., 2012 4. Hipolito B. Sta. Maria; Engineering Economy; 3rd Edition ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 15  Module 1: INTRODUCTION TO ENGINEERING ECONOMY Activity No. 1: Self-Assessment Question A friend of yours bought a small apartment building for $100,000 in a college town. he spent $10,000 of her own money for the building and obtained a mortgage from a local bank for the remaining $90,000. The annual mortgage payment to the bank is $10,500. Your friend also expects that annual maintenance on the building and rounds will be $15,000. There are four apartments (two bedrooms each) in the building that can each be rented for $360 per month. Refer to the seven-step procedure in Table 1-1 (left-hand side) to answer these questions: (a) Does your friend have a problem? If so, what is it? (b) What are her alternatives? (Identify at least three.) (c) Estimate the economic consequences and other required data for the alternatives in Part (b). (d) Select a criterion for discriminating among alternatives, and use it to advise your friend on which course of action to pursue. (e) Attempt to analyze and compare the alternatives in view of at least one criterion in addition to cost. (f) What should your friend do based on the information you and she have generated? ECON 121: ENGINEERING ECONOMICS Engr. LAURENCE A. ADVIENTO 16