MEE 505 Engineering Economics Lecture Notes PDF

BELLS UNIVERSITY OF TECHNOLOGY …Only the best is good for Bells. OTA, NIGERIA MEE 505 {ENGINEERING ECONOMICS} MECHANICAL ENGINEE...

BELLS UNIVERSITY OF TECHNOLOGY …Only the best is good for Bells. OTA, NIGERIA MEE 505 {ENGINEERING ECONOMICS} MECHANICAL ENGINEERING DEPARTMENT COLLEGE OF ENGINEERING BELLS UNIVER SITY OF TECHNOLOGY, OGUN STATE, NIGERIA PROF. M.K ONIFADE AND ENGR O.A BELLO www.bellsuniversity.edu.n  Introduction to Engineering Economics Engineering economics evaluates the monetary consequences of the products, projects, and processes that engineers design, balancing initial costs with future operational expenses What to consider in design and project selection: Project Goals and Objectives, Feasibility and Constraints, Risk Assessment, Stakeholder Analysis, Return on Investment (ROI), Design Considerations, Project Management Approach, Environmental and Social Impact Bells University of Technology, Ota, Nigeria  Applications of Engineering Economics Project Evaluation: Feasibility Studies, Capital Budgeting, Risk Assessment Equipment Selection: Cost-Benefit Analysis, Life-Cycle Costing, Replacement Analysis Cost Reduction: Value Engineering, Cost Control, Process Improvement Investment Decisions: Capital Structure, Dividend Policy, Mergers and Acquisitions Environmental and Sustainability: Cost-Benefit Analysis of Environmental Projects, Life-Cycle Assessment, Sustainable Design Bells University of Technology, Ota, Nigeria  Basic Concepts of Engineering Economics Scarcity: Scarcity refers to the fundamental economic problem of having limited resources to meet unlimited wants. Engineers most make trade-offs when deciding how to use resources Supply and Demand: Demand refers to how much of a product or service is desired by buyers and supply represents how must the market can offer. Prices are determined by the balance between supply and demand Market equilibrium: When supply and demand meet, the economy is in equilibrium, ensuring efficient allocation of resources without surplus or shortage. Bells University of Technology, Ota, Nigeria  Basic Concepts of Engineering Economics cont’d Law of Demand: if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. Law of supply: the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue. Bells University of Technology, Ota, Nigeria  Basic Concepts of Engineering Economics cont’d Market equilibrium: When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. Bells University of Technology, Ota, Nigeria  Decision-making process Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criteria to use Select the best alternative Bells University of Technology, Ota, Nigeria  Types of Strategic Engineering Economic Decisions Service or Quality Improvement New Products or Product Expansion Equipment and Process Selection Cost Reduction Equipment Replacement Bells University of Technology, Ota, Nigeria  Fundamental Principles of Engineering Economics Principle 1: A nearby Naira is worth more than a distant Naira Principle 2: All that counts is the differences among alternatives Principle 3: Marginal revenue must exceed marginal cost Principle 4: Additional risk is not taken without the Bells Universityexpected additional of Technology, Ota, return. Nigeria  Importance of time value of money The principle that one Naira today is more valued than one Naira in the future due to its earning potentials. This core concept guides economic decision-making in engineering Bells University of Technology, Ota, Nigeria  Understanding Financial Statements The financial statements are contained in the annual report of a corporation, which includes the balance sheet, the income statement, the statement of changes in financial position, and the auditors' report Bells University of Technology, Ota, Nigeria  Components of financial statement Balance sheet: summarizes the financial position of the corporation and lists the values of its assets and financial obligations or liabilities. Income statement: lists the revenues and expenses during the year, together with the net income and retained earnings at the end of the year. Cash flow statement: a financial report that provides aggregate data regarding all cash inflows a company receives as well as all c ash outflows during a given quarter. Bells University of Technology, Ota, Nigeria  Interest Rate and Rate of Return Interest is paid when a person or organization borrowed money (obtained a loan) and repays a larger amount over time. Interest is earned when a person or organization saved, invested, or lent money and obtains a return of a larger amount over time. Interest is used to calculate the time value of money, and it is crucial to the practice of engineering. Bells University of Technology, Ota, Nigeria  Interest Rate and Rate of Return Interest paid on borrowed funds (a loan) is determined using the original amount, also called the principal Interest = amount owed now - principal Interest rate (%)= X 100%% Bells University of Technology, Ota, Nigeria  Worked example An employee of Bells University borrows 10,000 on May 1 and must repay a total of N10,700 exactly 1 year later. Determine the interest amount and the interest rate paid. Bells University of Technology, Ota, Nigeria  Solution Interest paid = $10,700 - $10,000 = $700 Percent interest rate = X 100% = 7% per year Bells University of Technology, Ota, Nigeria  Definition of Terms P=Value or amount of money at a time designated as the present time t =0. Initial deposit, investment made at t=0. F= Value or amount of money at some future time. A= Series of equal consecutive end of period amounts of money n= Number of interest periods (year, month, day). i= Interest period per time period(percent per year, percent per month). t= Stated time period (years, months, days). Bells University of Technology, Ota, Nigeria  Simple Interest With simple interest, the interest calculated for years 2, 3,... is based on the initial deposit. No interest is computed on the accrued interest F = P(1 + Ni) Bells University of Technology, Ota, Nigeria  Compound Interest Compound Interest: is interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). F = F = P(1 + i )N Bells University of Technology, Ota, Nigeria