BES 5

ENGINEERING ECONOMICS
Module 1: INTRODUCTION

Prepared by:
ENGR. CATHERINE P. ACUPIDO
Faculty, ME Department
College of Engineering, Architecture & Technology
Palawan State University
This module has the following sections and corresponding icons:
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module.

The topics in this module are included

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in this section.

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in this section. It helps you explore new
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that you learned from real-life
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lectures as an additional practice.
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References module uses for creation.

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Overview

COURSE DESCRIPTION:
This course deals with the study of concepts of
the time value of money and equivalence; basic
economic study methods; decisions under
certainty; decisions recognizing risk; and
decisions admitting uncertainty.

COURSE OUTCOMES:
At the end of this module, students will be able to:
Apply the fundamental principles of
CONTENTS
engineering economics in solving problems
involving decision making, interest and the time
1.1. Terms and Symbols
value of money
1.2. Principles of
PROGRAM OUTCOMES: Engineering
Apply knowledge of mathematics and sciences Economics
to solve complex engineering problems;
Identify, formulate and solve complex
1.3. Engineering
problems in electrical engineering;
Understand the impact of engineering Economics and the
solutions in a global, economic, Design Process
environmental, and societal context; and
Apply techniques, skills and modern 1.4. Cost Concepts for
engineering tools necessary for electrical Decision Making
engineering practice.
1.5. Present Economic
TIME FRAME: Studies
This module can be covered in two weeks.

INTENDED LEARNING OUTCOMES

At the end of this module, you should be able to:

1. use engineering economic terminology and
symbols in engineering economy studies
2. discuss the steps in an engineering
economy study; and
3. apply the decision-making procedures in
engineering economic studies

3
Engineering Economic Terms
and Symbols
efore we proceed to the fundamental principles of Engineering Economy, let us

B first define the terminologies used in this course.

Engineering Economy – The application of economic principles to engineering

problems, for example in comparing the comparative costs of two alternative capital
projects or in determining the optimum engineering course from the cost aspect.

Economics – is the science that deals with the production, allocation and use of goods
and services.

The two major subdivisions of economics are:

a. Macroeconomics is the study of the entire system of economics.
b. Microeconomics is the study of how the systems affect one business or
parts of the economic system.

Necessities – are products or services that are required to support human and activities
that will be purchased in somewhat the same quantity even though the prices vary
considerably.

Luxuries – are products and services that are desired by humans and will be purchased
if money is available after the required necessities have been obtained.

Goods – is defined as anything that anyone wants or needs.

Services – would be the performance of any duties or work for another; helpful or
professional activity.

Marketing – refers to the distribution of goods and services.

Marketing a Product – refers to the advertising, and other efforts to promote a

products sale.

Different Types of Goods

1. Consumer Goods – are those such as food and clothing that satisfy human
wants and needs.
2. Producer Goods – are those such as raw materials and tools, used to make
consumer goods.
3. Capital Goods – are the machinery, used in the production of commodities
in producer goods.

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Supply – refers to how many of a certain good or services are available for people to
purchase.

Demand – means how many people wish to buy that good or service.

Law of Supply and Demand - Under conditions of perfect competition, the price at
which a given product will be supplied and purchased is the price that will result in the
supply and demand being equal.

Demand – it refers to the people’s willingness to buy a product or service.

Demand Curve – is the plot or graph of the quantity demanded versus the price.

Demand Schedule – is the schedule or table listing of the quantity demanded with the
corresponding price.

Types of Demand
1. Elastic Demand – exists when there is a greater change in quantity
demanded as a response to a change in price.
2. Inelastic Demand – exists when there is a lesser change in quantity
demanded as a response to a change in price.
3. Unitary Demand – exists when there is an equal change in price and
quantity demanded (increase or decrease).

Factors that Influence Demand are:

1. Income
2. Population
3. Taste and preference
4. Price Expectation
5. Price of Related Goods

Supply – it is the willingness of a producer to manufacture goods.

Supply Curve – is the plot or graph of the quantity supplied versus the price.

Supply Schedule – is the schedule or table listing of the quantity supplied with the
corresponding price.

Factors that Influence Supply are:

1. Price of Goods
2. Cost of Production
3. Availability of Resources

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4. Number of Producer and Sellers
5. Technological Advancement
6. Taxes
7. Subsidies

Relationship of Supply and Demand

a. Shortage – the supply is less than the demand.

b. Surplus – the supply exceeds the demand.
c. Equilibrium Point – the supply is equal to the demand.

Market – is the place where the vendors and buyers meet to transact.

Market Structures

a. Perfect Competition – occurs in a situation where a commodity or service

is supplied by a number of vendors and there is nothing to prevent
additional vendors entering the market.
b. Perfect Monopoly – exist when a unique product or services is available
from a single vendor and that the vendor can prevent the entry of all others
into the market.
c. Oligopoly – exist when there are so few suppliers of a product or service
that action by one will almost inevitably result in similar action by the
others.

Aside from these terms, Engineering Economics also uses equations and procedures
which utilize the following symbols:

𝑷 = value or amount of money at a time designated as the present or time 0. Also, P

is referred to as present worth (PW), present value (PV), net present value
(NPV), discounted cash flow (DCF), and capitalized cost (CC); monetary
units, such as pesos
𝑭 = value or amount of money at some future time. Also, F is called future worth
(FW) and future value (FV); pesos
𝑨 = series of consecutive, equal, end-of-period amounts of money. Also, A is called
the annual worth (AW) and equivalent uniform annual worth (EUAW); pesos
per year, pesos per month
𝑰 = amount of money earned or paid over time based on an initial amount and
interest rate; monetary units, such as pesos
𝒏 = number of interest periods; years, months, days
𝒊 = interest rate per time period; percent per year, percent per month
𝒕 = time, stated in periods; years, months, days

Additional symbols used in this course are defined in the succeeding modules.

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Principles of Engineering
Economics
or you to be able to understand how an engineer can take economic principles

Fmust:
into account in any engineering problem, you must first know the
requirements of the solutions to be made. Solutions to engineering problems

1. Promote the well-being and survival of an organization;

2. Embody creative and innovative technology and ideas;
3. Permit identification and scrutiny of their estimated outcomes; and
4. Translate profitability to the “bottom line” through a valid and acceptable
measure of merit.

Here are some situations where engineering economic analysis plays an important
role.

1. Choosing the best design for a high-efficiency gas furnace.

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.

These are the seven fundamental principles of engineering economy.

1. Develop the alternatives.
The final choice (decision) is among alternatives.
Alternatives need to be identified and then defined for subsequent analysis.

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.

3. Use a consistent viewpoint.

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

4. Use a common unit of measure.

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.

5. Consider all relevant criteria.

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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 and those expressed in some other unit of measurement or made explicit in
a descriptive manner.

6. Make uncertainty explicit.

Uncertainty is inherent in projecting (or estimating) the future outcomes of the
alternatives and should be recognized in their analysis and comparison.

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.

Engineering Economics and the

Design Process
ngineering economics study comprises various factors: recognizing

E problems, determining goals, estimating cash flow, financial analysis ,

and decision-making. The easiest way to choose the best approach is to
introduce a formal process.

The procedure in an engineering economy analysis are as follows:

1. Problem definition. Identify and understand the problem; identify the

objective of the project.

2. Development of alternatives. Collect relevant, available data and define

viable solution alternatives.

3. Development of prospective outcomes. Make realistic cash flow estimates.

4. Selection of a decision criterion. Identify an economic measure of worth

criterion for decision making.

5. Analysis and comparison of alternatives. Evaluate each alternative; consider

noneconomic factors; use sensitivity analysis as needed.

6. Select the best alternative.

7. Performance monitoring and post evaluation of results. Implement the

solution and monitor the results.

This process ensures that the best solution to an engineering problem is selected.

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Cost Concepts for Decision
Making

ational analysis approach is used in the decision-making process to

R choose one of the best alternatives available.

The following nine steps can be followed sequentially, but decision makers
often repeat some steps, undertake some simultaneously, and skip others altogether.
1. Recognize the problem.
2. Define the goal or objective: What is the task?
3. Assemble relevant data: What are the facts? Are more data needed, and is it
worth more than the cost to obtain it?
4. Identify feasible alternatives.
5. Select the criterion for choosing the best alternative: possible criteria include
political, economic, environmental, and humanitarian. The single criterion may
be a composite of several different criteria.
6. Mathematically model the various interrelationships.
7. Predict the outcomes for each alternative.
8. Choose the best alternative.
9. Audit the results.

Engineering decisions include solving significant problems of engineering

where economic aspects dominate and the criterion of preference is economic
performance. The entire decision-making process is a special event. Some of the
exceptional facets of the decision-making process are:

1. Cost-accounting systems, while an important source of cost data, contain

allocations of indirect costs that may be inappropriate for use in economic
analysis.

2. The various consequences--costs and benefits---of an alternative may be of

three types:
(a) Market consequences-there are established market prices
(b) Extra-market consequences-there are no direct market prices, but
prices can be assigned by indirect means
(c) Intangible consequences-valued by judgment, not by monetary
prices

3. The economic criteria for judging alternatives can be reduced to three cases:
(a) For fixed input: maximize benefits or other outputs.
(b) For fixed output: minimize costs or other inputs.

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(c) When neither input nor output is fixed: maximize the difference
between benefits and costs or, more simply stated, maximize profit. The
third case states the general rule from which both the first and second
cases may be derived.

4. To choose among the alternatives, the market consequences and extra-market

consequences are organized into a cash flow diagram. You will see in the
preceding chapters that engineering economic calculations can be used to
compare differing cash flows. These outcomes are compared against the
selection criterion. From this comparison plus the consequences not included in
the monetary analysis, the best alternative is selected.

5. An essential part of engineering decision making is the post audit of results.

This step helps to ensure that projected benefits are obtained and to encourage
realistic estimates in analyses.

Present Economic
Studies
ngineering economic analysis is ideally suited for studies of this nature:

E 1. The issue is sufficiently important to explain our serious considerations and

efforts.
2. The problem cannot be solved in one's own mind, that is, a thorough study
would require us to organize the problem and all its various consequences.
3. In making a decision the issue is economically relevant.

Engineering economic analysis is used to answer many different questions.

➢ Which engineering projects are worthwhile: Has the mining or petroleum
engineer shown that the mineral or oil deposit is worth developing?
➢ Which engineering projects should have a higher priority: Has the industrial
engineer shown which factory improvement projects should be funded with the
available fund?
➢ How should the engineering project be designed: Has the mechanical or
electrical engineer chosen the most economical motor size? Has the civil or
mechanical engineer chosen the best thickness for insulation? Has the
aeronautical engineer made the best trade-offs between: 1) lighter materials that
are expensive to buy but cheaper to fly and 2) heavier materials that are cheap
to buy and more expensive to fly?

Engineering economic analysis can also be used to answer questions that are personally
important.
➢ How to achieve long-term financial goals: How much should you save each
month to buy a house, retire or fund a trip around the world? Is going to graduate

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school a good investment-Will your additional earnings in later years balance
your lost income while in graduate school?
➢ How to compare different ways to finance purchases: Is it better to finance your
car purchase by using the dealer's low interest rate loan or by taking the rebate
and borrowing money from your bank or credit union?
➢ How to make short and long-term investment decisions: Is a higher salary better
than stock options? Should you buy a 1-or 2-semester parking pass?

Present Economy involves the analysis of problems for manufacturing a product or

rendering a service based on present or immediate costs. Present economy studies
usually occur when the effects of time Such as interest and depreciation are negligible.
Present economic analysis is employed when the alternatives to be compared will
provide the same result and the length of time involved in the study is relatively short.

Present economy studies occur in the following situations:

1. selection of materials;
2. selection of method to be used;
3. selection of design;
4. selection of site location for a project;
5. comparison of proficiency among workers;
6. economy of tool and equipment maintenance; and
7. economy of number of workers.

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1. SELECTION OF MATERIAL. In manufacturing a product, it usually
happens that two or more materials are available and such materials will be
equally satisfactory. The problem therefore reduces to which among the
materials will result in the most economical product and at the same time give
the best results. In the studies the costs of the materials and their processing are
taken into account.
Example 1.
A machine part to be machined may be made either from alloy
of aluminum or steel. There is an order for 8,000 units. Steel
costs ₱ 38.00 per kg, while aluminum costs ₱ 87.00 per kg. If
steel is used, the steel per unit weighs 110 grams; for aluminum,
30 grams. When steel is used, 50 units can be produced per
hour; for aluminum, 80 units per hour with the aid to a tool
costing ₱ 6,400.00, which will be useless after the 8000 units are
finished. The cost of the machine and operator is ₱ 108.00 per
hour. If all other costs are identical, determine which material will
be more economical.

Solution
Steel Aluminum
(110 𝑔/𝑢𝑛𝑖𝑡)(₱ 38.00/𝑘𝑔) (30 𝑔/𝑢𝑛𝑖𝑡)(₱ 87.00/𝑘𝑔)
1000 𝑔 1000 𝑔
Material Cost ( ) ( )
𝑘𝑔 𝑘𝑔
= ₱4.18 = ₱2.61
Labor and ₱ 108.00/hr ₱ 108.00/hr
= ₱ 2.16 = ₱ 1.35
Machine 50 𝑢𝑛𝑖𝑡𝑠/ℎ𝑟𝑠 80 𝑢𝑛𝑖𝑡𝑠/ℎ𝑟𝑠
₱ 6,400.00
Tool None = ₱0.80
8,000 𝑢𝑛𝑖𝑡𝑠
Cost per
₱ 6.34 ₱ 4.76
piece
Cost of 8,000
₱ 50,720.00 ₱ 38,080.00
units

Answer:
Aluminum is more economical than steel.

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2. SELECTION OF METHOD. In digging ditches or irrigation canals, manual
labor or ditch digging machine may be used and both methods will give
satisfactory results. In mechanical operations, a product may be made by two or
more methods giving equivalent results. Some goods may be delivered by
various methods such as by using different capacity trucks, and the results
would still be the same regardless of the truck used. These are but a few of the
examples that may be cited to show that certain operations are capable of being
accomplished by two or more methods. The present economy study reduces to
determining the most economical among the different methods.

Example 2.
The ore of a gold mine in the Mountain Province contains on the
average, 0.5 gram of gold per ton. One method of processing
costs ₱ 1,650.00 per ton and recovers 93% of the gold, while
another method costs only ₱ 1,500.00 per ton and recovers 81%
of the gold. Of gold can be sold at ₱ 8,500.00 per gram, which
method is better and by how much?

Solution: Consider the income and cost per ton of ore.

First Method:
𝐼𝑛𝑐𝑜𝑚𝑒 = (93%)(0.5)(₱ 8,500.00 ) = ₱ 3,952.50
𝐶𝑜𝑠𝑡 = ₱ 1,650.00
𝑁𝑒𝑡 𝑅𝑒𝑐𝑒𝑖𝑝𝑡 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑜𝑠𝑡
= ₱ 3,952.50 − ₱ 1,650.00
= ₱ 𝟐, 𝟑𝟎𝟐. 𝟓𝟎

Second Method:
𝐼𝑛𝑐𝑜𝑚𝑒 = (81%)(0.5)(₱ 8,500.00 ) = ₱ 3,442.50
𝐶𝑜𝑠𝑡 = ₱ 1,500.00
𝑁𝑒𝑡 𝑅𝑒𝑐𝑒𝑖𝑝𝑡 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑜𝑠𝑡
= ₱ 3,442.50 − ₱ 1,500.00
= ₱ 𝟏, 𝟗𝟒𝟐. 𝟓𝟎

Answer:
The first method of processing is better by ₱ 360.00

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3. SELECTION OF DESIGN. In the design of a machine to produce a certain
product, the engineer responsible for the work will usually make as many
designs as possible and from which, by a process of elimination, he will select
the design best suited for the work to be done with particular care being given
to the one which will do the work with the utmost economy. I the design of
packages for goods sold in the market, the manufacturer will always select that
one which he believes has the best appeal to the buying public.

Example 3.
A company manufactures 1,000,000 units f a product yearly. A
new design of the product will reduce materials cost by 12%, but
will increase processing cost by 2%. If materials cost is ₱ 𝟏. 𝟐𝟎
per unit and processing will cost ₱𝟎. 𝟒𝟎 per unit, How much can
the company afford to pay for the preparation of the new design
and making changes in equipment?

Solution: The maximum amount the company should spend

should not exceed the savings they will make on the
new design.

𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝐶𝑜𝑠𝑡𝑠 = (1,000,000)(12%)(₱ 1.20)

= ₱ 𝟏𝟒𝟒, 𝟎𝟎𝟎. 𝟎𝟎
𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝑠 = (1,000,000)(2%)(₱ 0.40)
= ₱ 𝟖, 𝟎𝟎𝟎. 𝟎𝟎

𝑁𝑒𝑡 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 𝑜𝑛 𝑛𝑒𝑤 𝑑𝑒𝑠𝑖𝑔𝑛 = ₱ 𝟏𝟒𝟒, 𝟎𝟎𝟎. 𝟎𝟎 − ₱ 𝟖, 𝟎𝟎𝟎. 𝟎𝟎

= ₱ 𝟏𝟑𝟔, 𝟎𝟎𝟎. 𝟎𝟎

Answer:
The Net savings on new design is ₱ 136,000.00

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4. SITE SELECTION. In the choice of a factory site, many factors are to be
considered, among which are the cost of the land, the construction cost at the
different possible sites, the availability of skilled labor, and many other factors.
In highway or dan construction, the location of the borrow pit will affect the
cost of the earth to be transported in these canes, care must be taken in the
economic study to include all pertinent factors that will affect the work.

Example 4.
A certain masonry dam requires 200,000 m³ of gravel for its
construction. The contractor found two possible sources for the
gravel with the following data:

Source A Source B
Average distance, gravel pit to dam site 3 km 1.2 km
Gravel cost/m³ at pit N/A ₱10.00
Purchase price of pit ₱800,000.00 N/A
Road construction necessary ₱450,000.00 None
Overburden to be removed at ₱4.20/m³ N/A 90,000 m³
Hauling cost/m³/km ₱4.00 ₱4.00

Which of the two sites will give lesser cost?

Solution:
Cost of 200,000 m³ of gravel, Source A
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑟𝑎𝑣𝑒𝑙 𝑝𝑖𝑡 = ₱ 800,000.00
𝑅𝑜𝑎𝑑 𝑐𝑜𝑛𝑠𝑡𝑟𝑢𝑐𝑡𝑖𝑜𝑛 = ₱ 450,000.00
𝐻𝑎𝑢𝑙𝑖𝑛𝑔: (200,000 𝑚3 )(3 𝑘𝑚)(₱4/𝒎³/𝒌𝒎) = ₱ 2,400,000.00
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = ₱ 𝟑, 𝟔𝟓𝟎, 𝟎𝟎𝟎. 𝟎𝟎

Cost of 200,000 m³ of gravel, Source B

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑟𝑎𝑣𝑒𝑙 𝑎𝑡 𝑝𝑖𝑡: (200,000 𝑚3 )(₱10.00/𝑚3 ) = ₱ 800,000.00
𝑅𝑒𝑚𝑜𝑣𝑎𝑙 𝑜𝑓 𝑜𝑣𝑒𝑟𝑏𝑢𝑟𝑑𝑒𝑛: (90,000 m3 )(₱4.20/𝑚³) = ₱ 450,000.00
𝐻𝑎𝑢𝑙𝑖𝑛𝑔: (200,000 𝑚3 )(1.2 𝑘𝑚)(₱4/𝒎³/𝒌𝒎) = ₱ 960,000.00
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = ₱ 𝟑, 𝟑𝟑𝟖, 𝟎𝟎𝟎. 𝟎𝟎

Answer:
Source B is cheaper by ₱312,000.00

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5. COMPARISON OF PROFICIENCY OF WORKERS. In industrial
operations where the efficiency of workers is a factor affecting costs, it is
usually observed that workers have varying efficiencies. Where the
proficiencies of workers can be translated into monetary values, efficient and
diligent workers are paid higher wages

Example 5.
Two workers, A and B, produce the same product on identical
machines. Worker A receives ₱ 25.00 per hour and he produces
100 units per hour. Worker B is able to produce 120 units per
hour. The machine rate or cost of operation of the machines
used by them is ₱100.00 per hour.
a. Determine the cost per piece for Worker A.
b. Determine the hourly wage of worker B in order that his
cost per piece will equal that of Worker A.
Solution:
₱ 25.00+₱100.00
a. Cost per piece of Worker A = = ₱𝟏. 𝟐𝟓
100 𝑢𝑛𝑖𝑡𝑠

b. Let W = wage of Worker B per hour so that his cost piece is

equal to that of Worker A

W + ₱100.00
1.25 =
100 𝑢𝑛𝑖𝑡𝑠

𝑾 = ₱𝟓𝟎. 𝟎𝟎
Answer:
a. ₱ 1.25
b. ₱ 50.00

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6. ECONOMY OF TOOL AND EQUIPMENT MAINTENANCE. In many
activities, tools have to be sharpened from time to time, and equipment have to
be kept in optimum operating condition all the time. In certain cases, experience
will indicate the best time to perform certain operations to maintain equipment
at the highest level of efficiency.

Example 6.
A machine used for cutting materials in a factory has the
following outputs per hour at various speeds and requires
periodic tool regrinding at the intervals cited.
Speed Output per hour Tool regrinding
A 200 pieces Every 8 hours
B 250 pieces Every 7 hours
C 280 pieces Every 5 hours
A set of tools costs ₱ 1,800.00 and can be ground twenty times.
Each regrinding costs ₱ 18.00 and the time needed to regrind
and change tools is one hour. The machine operator is paid
₱28.00 per hour, including the time the tool is changed. The tool
grinder who also sets the tools to the machine is paid ₱25.00 per
hour. The hourly rate chargeable against the machine is ₱54.00,
regardless of the machine speed. Which speed is the most
economical?

Solution:
Speed A: 200 pieces/hr
Pieces produced in 8 hours: (200 pieces/hr)(8 hrs) = 1,600
Cost of Production:
₱1,800
Tool Cost: = ₱90.00
20 𝑡𝑖𝑚𝑒𝑠
Regrinding Cost = ₱18.00
Wage of Machine Operator
= (8 ℎ𝑟𝑠 + 1 ℎ𝑟)(₱28.00) = ₱252.00
Wage of Tool Grinder = (1 ℎ𝑟)(₱25.00) = ₱25.00
Machine cost = = (8 ℎ𝑟𝑠)(₱54.00) = ₱432.00

𝑇𝑂𝑇𝐴𝐿 𝐶𝑂𝑆𝑇 = ₱𝟖𝟏𝟕. 𝟎𝟎

₱817.00
𝐶𝑂𝑆𝑇 𝑃𝐸𝑅 𝑃𝐼𝐸𝐶𝐸 = = ₱𝟎. 𝟓𝟏𝟎𝟔
1,600

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Example 6. (Contiuation)

Speed B: 250 pieces/hr

Pieces produced in 7 hours: (250 pieces/hr)(7 hrs) = 1,750
Cost of Production:
₱1,800
Tool Cost: = ₱90.00
20 𝑡𝑖𝑚𝑒𝑠
Regrinding Cost = ₱18.00
Wage of Machine Operator
= (7 ℎ𝑟𝑠 + 1 ℎ𝑟)(₱28.00) = ₱224.00
Wage of Tool Grinder = (1 ℎ𝑟)(₱25.00) = ₱25.00
Machine cost = = (7 ℎ𝑟𝑠)(₱54.00) = ₱378.00

𝑇𝑂𝑇𝐴𝐿 𝐶𝑂𝑆𝑇 = ₱𝟕𝟑𝟓. 𝟎𝟎

₱735.00
𝐶𝑂𝑆𝑇 𝑃𝐸𝑅 𝑃𝐼𝐸𝐶𝐸 = = ₱𝟎. 𝟒𝟐𝟎
1,750

Speed C: 280 pieces/hr

Pieces produced in 5 hours: (280 pieces/hr)(5 hrs) = 1,400
Cost of Production:
₱1,800
Tool Cost: = ₱90.00
20 𝑡𝑖𝑚𝑒𝑠
Regrinding Cost = ₱18.00
Wage of Machine Operator
= (5 ℎ𝑟𝑠 + 1 ℎ𝑟)(₱28.00) = ₱168.00
Wage of Tool Grinder = (1 ℎ𝑟)(₱25.00) = ₱25.00
Machine cost = = (5 ℎ𝑟𝑠)(₱54.00) = ₱270.00

𝑇𝑂𝑇𝐴𝐿 𝐶𝑂𝑆𝑇 = ₱𝟓𝟕𝟏. 𝟎𝟎

₱571.00
𝐶𝑂𝑆𝑇 𝑃𝐸𝑅 𝑃𝐼𝐸𝐶𝐸 = = ₱𝟎. 𝟒𝟎𝟕𝟗
1,400

Answer:
The foregoing comparative analysis indicates that Speed C is
the most economical.

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7. ECONOMY IN THE UTILIZATION OF PERSONNEL. In many industrial
operations, it is observed that a certain number of workers cooperating on a
specific phase of the work will lead to the highest productivity. An increase
beyond this number will often cause the taking into effect of the Law of
Diminishing Returns. An excess of workers will result in some being idle at
certain periods while waiting for the work of others to be completed. In such
case, economy dictates that only a sufficient number of workers be assigned to
minimize idleness.

Example 7.
A man decided to paint his house himself after office hours. He
can paint 25 m² per hour on the average. It takes him 15
minutes to prepare his materials and 20 minutes to keep the
materials after painting. If there are 900 m² to be painted, how
long will it take him to paint his house if he devotes 2.5 hours a
day?

Solution:

900m²
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 ℎ𝑜𝑢𝑟𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 = = 36 ℎ𝑜𝑢𝑟𝑠
25m2 /hour

𝑁𝑒𝑡 𝑡𝑖𝑚𝑒 𝑑𝑎𝑖𝑙𝑦 𝑑𝑒𝑣𝑜𝑡𝑒𝑑 𝑡𝑜 𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑎𝑖𝑛𝑡𝑖𝑛𝑔

15 𝑚𝑖𝑛𝑠 + 20 𝑚𝑖𝑛𝑠
= 2.5 − = 1.92 ℎ𝑜𝑢𝑟𝑠
𝑚𝑖𝑛𝑠
60
hour
36 ℎ𝑜𝑢𝑟𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 = = 18.8, 19 𝑑𝑎𝑦𝑠
1.92 ℎ𝑜𝑢𝑟𝑠/𝑑𝑎𝑦

Answer:
It will take him 19 days to paint his house.

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PRACTICE PROBLEMS
1. Identify the four engineering economy symbols and their values from the
following problem statement. Use a question mark with the symbol whose value
is to be determined. Vision Technologies, Inc., is a small company that uses
ultra-wideband technology to develop devices that can detect objects (including
people) inside of buildings, behind walls, or below ground. The company
expects to spend ₱5 Million per year for labor and ₱6.25 Million per year for
supplies before a product can be marketed. At an interest rate of 15% per year,
what is the total equivalent future amount of the company’s expenses at the end
of 3 years?

2. Identify the four engineering economy symbols and their values from the
following problem statement. Use a question mark with the symbol whose value
is to be determined. A green alga, Chlamydomonas reinhardtii, can produce
hydrogen when temporarily deprived of sulfur for up to 2 days at a time. A small
company needs to purchase equipment costing ₱170 million to commercialize
the process. If the company wants to earn a rate of return of 10% per year and
recover its investment in 8 years, what must be the net value of the hydrogen
produced each year?
3. An executive receives an annual salary of ₱300.000 and his secretary salary of
₱60,000 a year. A certain task be performed by the executive, working alone, is
4 hours. If he delegates the task to his secretary it wiil require him 30 minutes
to explain the work and another 45 minutes to check the finished work. Due to
the unfamiliarity of the secretary to do the task, it takes her an additional time
of 6 hours after being instructed. Considering salary cost, only determine the
cost of performing the task by each method, if the secretary works 2,400 hours
a year and the executive 3,000 hours a year.
4. A contractor has a job which should be completed in 100 days. At present, he
has 80 men on the job and it is estimated that they will finish the work in 130
days. Of the 80 men, 50 are each paid ₱120.00 a day, 25 at ₱180.00 day, and 5

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at ₱250.00 day. For each day beyond the original 100 days, the contractor has
to pay ₱500.00 liquidated damages.
a. How many more men should the contractor add so tht he can complete
the work on time?
b. If of the additional men, 2 are paid ₱180.00 day, and the rest at ₱120.00
a day, would the contractor save money by employing more men and
not paying the fine?

ASSESSMENT
Case Study: REFRIGERATOR SHELLS

Background
Large refrigerator manufacturers may subcontract the molding of their
plastic liners and door panels. Because of improvements in mechanical
properties, the molded plastic can sustain increased vertical and horizontal
loading, thus significantly reducing the need for attached metal anchors for
some shelving. However, improved molding equipment is needed to enter this
market now. The company president of one of the prime national subcontractors
wants a recommendation on whether the company should offer the new
technology to the major manufacturers and an estimate of the necessary capital
investment to enter this market. You work as an engineer for the subcontractor
company. At this stage, you are not expected to perform a complete engineering
economic analysis, for not enough information is available. You are asked to
formulate reasonable alternatives, determine what data and estimates are needed
for each one, and ascertain what criteria (economic and noneconomic) should
be utilized to make the final decision.

Information: Some information useful at this time is as follows:

• The technology and equipment are expected to last about 10 years before
new methods are developed.
• Inflation and income taxes will not be considered in the analysis.
• The expected returns on capital investment used for the last three new
technology projects were compound rates of 15%, 5%, and 18%.
The 5% rate was the criterion for enhancing an employee-safety
system on an existing chemical-mixing process.
• Equity capital financing beyond ₱250 million is not possible. The amount
of debt financing and its cost are unknown.
• Annual operating costs have been averaging 8% of first cost for major
equipment.

21
• Increased annual training costs and salary requirements for handling the
new plastics and operating new equipment can range from ₱40
million to ₱60 million.
There are two manufacturers working on the new- generation equipment.
You label these options as alternatives A and B.

Case Study Exercises

1.Use the first four steps of the decision-making process to generally
describe the alternatives and identify what economic-related estimates
you will need to complete an engineering economy analysis for the
president.
2.Identify any noneconomic factors and criteria to be considered in making
the alternative selection.
3.During your inquiries about alternative B from its manufacturer, you learn
that this company has already produced a prototype molding machine
and has sold it to a company in Germany for ₱150 million. Upon inquiry,
you further discover that the German company already has unused
capacity on the equipment for manufacturing plastic shells. The
company is willing to sell time on the equipment to the subcontractor
immediately to produce its own shells for U.S. delivery. This could
allow immediate market entry into the United States. Consider this as
alternative C, and develop the estimates necessary to evaluate C at the
same time as alternatives A and B.

SUPPLEMENTARY KNOWLEDGE

For additional information, you may visit and view the following videos:

https://vimeo.com/267155456E Economics in Engineering Decision Making

https://youtu.be/j5j8p9a0gSw Introduction to Economics | Engineering Economics

ANSWER KEY
Practice Problems
1. P = ₱ 11.25 Million
i = 15%
n = 3 years
F = ?, ₱

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2. P = ₱ 170 Million
i = 10%
n = 8 years
A = ?, ₱

3. Executive alone: ₱400.00

Executive and Secretary: ₱287.50

4. a. 24 men
b. The contractor saves ₱67,500.00

Assessments.
Refer to rubrics for case study.

References
1. Koelling C.P., et.al. Engineering economy 16th Edition
2. Blank L., et.al.; Engineering economy 7th Edition, 2012
3. Sta. Maria, Hipolito; Engineering economy 3rd Edition
4. Arreola, M.; Engineering economy 3rd Edition
5. Fraser, N.M., et.al., Engineering economics: Financial decision making for engineers 5th
Edition, Pearson, 2013
6. Blank,L., et.al., Basics of engineering economy; McGraw-Hill, 2008
7. Eschenbach T.G., et.al., Engineering economy: Applying theory to practice 2nd Edition,
2003
8. Riggs, JL., et.al., Engineering economics 4th Edition, McGraw-Hill, 2002
9. Chadderton, R.A., Purposeful engineering economics, Springer, 2015
10. Pannerselvam, R., Engineering economics 2nd Edition, PHI Learning Private Limited, Delhi
2013

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