1. Lecture # 1
Foundation
1-1 Dr. A. Alim

2. Chemical Process Economics II
 Foundation of engineering economy.
 Interest / Time value of money:
Compounding factors.
Gradient factors.
Effects of inflation.
Nominal and effective interest rates.
Variable interest rates.
1-2Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

3. Chemical Process Economics II
 Analysis of cost estimation:
Money business cycle
Capital costs.
Product costs.
Depreciation and Depletion.
Taxes and Economic Value Added (EVA).
Disposal of Assets.
1-3Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

4. Chemical Process Economics II
 Analysis of profitability:
Measures of profitability.
Investment alternatives - PW and AW.
IRR and incremental analysis.
Replacement / Retention.
Public sector projects
Breakeven analysis
 Optimization.
Systems with no constraints: One variable and
multivariable.
Systems with constraints: Linear and nonlinear
programming.
1-4Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

5. Chemical Process Economics II
 Variation and Decision Making Under Risk:
Sensitivity analysis.
Decision Trees.
Certainty, risk and uncertainty.
Expected value analysis (EV).
Random variables / sampling.
Probability distribution functions.
1-5Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

6. What is Engineering Economy and why it
is important to study?
 Engineering designs must satisfy:
- Technical feasibility : the solution obeys the laws of
nature and science.
- Technical efficiency: best solution should generate least
waste, consumes least energy,..etc.
 In addition to technical requirements, there are always
economic requirements:
- Economic feasibility: solutions proposed must not
exceed budget limits.
- Economic efficiency: The most economical of many
alternatives should be selected.
1-6 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

7. Engineering Economy
 Every technical solution has financial consequences.
 Engineering economic analysis determines whether a proposed solution is
financially viable.
 Will it pay?
 Is this the minimum cost solution?
 Will it generate an acceptable return?
Three major types of engineering economic decisions:
 Profit enhancing programs
 Cost control programs
 Public improvement programs.
1-7 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

8. Engineering Economic Decisions
Profit Enhancing Programs: projects
designed to generate revenues.
New product development
New product acquisition
Product/service capacity expansion
Improved customer service
1-8 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

9. Engineering Economic Decisions
Cost Control Programs: projects
designed to generate savings.
Improving efficiency
Streamlining operations
Eliminating waste / Reducing costs
Reducing liabilities
1-9 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

10. Engineering Economic Decisions
Public Improvement Programs:
government entities also make capital
expenditures.
Increased public satisfaction
Increased public safety
Improved infrastructure
1-10 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

11. Investment Categories
New business
New products or services.
Expansion
Capacity increase.
Replacement
Replacement/Retention decision.
Abandonment
Eliminating products, services, or capacity.
1-11 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

12. Investment Decisions
Invest
Releases funds to start a project
Do Not Invest
Eliminates the project from further consideration
Wait (Delay)
Time to gather information about the future can aid in
decision-making
1-12 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

13. The Decision Making Process
1. Understand the problem – define objectives
2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply
sensitivity analysis and risk potential.
6. Select the “best” alternative
7. Implement the alternative and monitor
results
1-13Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

14. The Decision Making Process
Successful application of decision making
process requires:
* Technical ability, good understanding of
fundamentals of engineering economics.
* Strict adherence to codes of ethics.
1-14 © 2012 by McGraw-Hill, New York, N.Y All Rights ReservedSlide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012

15. Ethics – Different Levels
 Universal morals or ethics – Fundamental
beliefs: stealing, lying, harming or murdering
another are wrong
Personal morals or ethics – Beliefs that an
individual has and maintains over time; how a
universal moral is interpreted and used by
each person
 Professional or engineering ethics – Formal
standard or code that guides a person in work
activities and decision making
1-15Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

16. Code of Ethics for Engineers
All disciplines have a formal code of ethics. National Society of
Professional Engineers (NSPE) maintains a code specifically for
engineers; many engineering professional societies have their own code
1-16Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

17. In this course, you will learn:
The fundamentals of engineering economy (time
value of money, interest, economic equivalence)
To perform the 7-steps in the economic decision
making process
To financially evaluate engineering projects under
certainty, risk, uncertainty, and multiple options
Numerous methods in which to determine the best
choice from a feasible set with multi-attributes
To solve a variety of problems dealing with capital
investments
1-17Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

18. You will appreciate:
The basics of making a capital investment decision.
The risk associated with capital investments.
The level at which most companies invest.
The “globalization” of our world, as companies
make investments all over the world in various
currencies.
The entire decision-making process.
1-18Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved