Introduction
Engineering economy is a field of economics that deals with the dynamic environment of economic principles and calculations through the prism of engineering. Engineering economy entails the formulation, estimation, and evaluation of the expected economic outcomes of alternatives designed to achieve a defined purpose. Students undertaking this course learn the approaches that enable engineers to make economic decisions towards assessment of design and engineering alternatives. Engineering economics assists in examining the relevancy of an engineering project, estimating its value and also justifying it from the engineering perspective (Sasmita, Mishra, 6). The primarily component dealt with in engineering economic studies is money- money which is to be spent or received in different amounts at varying points in time in an engineering project or firm. The course involves the study of different financial and economic challenges pervasive to engineers in a wide range of industries. Similarly to all engineering courses, engineering economy has a strong quantitative component, and the study requires extreme elasticity in the learning style that is conducive towards understanding the interdisciplinary material. The study of engineering economy is crucial to engineers as the techniques and calculations learned are widely applied in widespread engineering operations and related activities.
Importance and Application of Engineering Economy
Engineering economics is critical since it allows for the application of engineering or mathematical analysis and synthesis to decision making in economics. Engineering economics is considered as the heart of decision making. Decisions are made by people, while mathematics, computers, concepts and guidelines assist people in their decision-making process. Making proper and well-informed decisions is crucial because it affects what will take place in the future and hence the time frame of engineering economy is the future. The engineering economy analysis presents the most suitable estimates of what is expected to happen. The estimates and the decision entail four essential elements namely cash flows, times of occurrence of cash flows, interest rates for the time value of money and also measure of economic worth for selecting an alternative. Time value of money (TVM) is a crucial concept that gets based on the idea that money that a person holds today is worth more since they can invest it and earn interest. The need for engineering economy is mainly motivated by the work done by engineers in carrying out analyses, synthesis and arriving at a conclusion as they undertake engineering projects of varying magnitudes. The knowledge and techniques learned by engineers in this course are concerned with assessing the worth of commodities and services about their cost. The roles of engineering economy in decision making including allowing engineers to understand a problem, enabling engineers to collect all the data/information about a problem, defining feasible alternatives, evaluating all the alternatives, selecting the best alternative and implementing and monitoring the alternative in the project. The economic assessment of the various alternatives is based on what is known as the “measure of worth” including present worth (the amount of money at current time), future value (money at later date), payback period (time to recover initial investment and a stated rate of return), rate of return and benefit/cost ratio.
Decisions are significant and are routinely made by many professionals in different industries in their day-to-day life, such as by managers in their supervision roles over other employees, by engineers as they implement or execute different projects, by corporate presidents who operate enterprises and by government officials in various public institutions. The majority of these decisions involve money that is commonly known as capital or capital funds, which usually gets limited in amount (Blank, Leland, and Anthony Tarquin, 1). Making the decision of where and how to invest this limited capital get motivated by a primary purpose of adding value as anticipated future outcomes of the selected alternative get realized. Decision making in engineering industry considers a wide range of factor, which are a combination of both economic and non-economic factors. Examples of non-economic factors considered in decision making include social, environmental, legal, political and personal factors. Engineers play a fundamental role in capital investment by making important decisions basing the economic analysis as well as design considerations. Therefore, decisions in projects often reflect the engineer’s choice of the proper and most seemingly suitable way to invest funds through selecting the alternative among a set of options.
Engineering economics offers the tools necessary to make a comparison of these varied technologies used in finding solutions to societal problems on a level playing field. The solution that is chosen is the technology that has the least cost. Thus, we can say that engineering economics provides a rational selection process so as to determine how to allocate capital. An example of this cost consideration in engineering sector is designing alternative fuel vehicles. Engineers who design these vehicles must consider the acceleration and engine power versus the fuel efficiency, the vehicle safety and maintenance cost versus the material choice, the distance between refuels versus the tank size and so on; on top of all kinds of technical decisions and ethical issues. These kinds of design decisions influence the manufacturing cost of the vehicle and eventually the final sale price. Therefore the entire supply, production, and service chains affect the design choices. Ultimately, the profits made from the design or lack thereof, of the new alternative fuel vehicle is determined by considering the design alternatives/choices of the engineer. The engineer must, therefore, use the knowledge and principles of engineering economy to choose an alternative that will ensure that the design is profitable.
The study of engineering economy is also crucial in assisting engineers in making professional ethical decisions. Morals and ethics often get used interchangeably, yet they have varying interpretations. Morals relate to the fundamental tenets that form the character and conduct of a person in judging between right and wrong. Ethical practices, on the other hand, are evaluated by the use of the code of morals or code of ethics that forms the standards to guiding decision making and the actions of people and organization in an engineering profession. Engineering ethics that are written in a formal standard or code guide professional engineers in undertaking their practice in which they are expected to exhibit the highest acceptable standard of honesty and integrity. The services that engineers provide ranging from civil to electrical to mechanical engineering require honesty, fairness, impartiality and equity and must get dedicated to the protection of health, safety, and welfare of the public (Kutz, Myer, 582). The code of ethics for engineers highlights the rules of practice as well as the professional obligations, which any member must comply with so as to not only solve the societal problems but also ensure that there is no compromise of public safety, health, and welfare. When making decisions, engineers must be mindful of the ethical dimensions or the technical as well as design choices. The compliance to professional or engineering ethics also protects a member of a professional body from legal suits or termination of their membership if their actions violate any of the rules of practice or professional obligations.
The study of engineering economy has to do with money and success. Economic is an important part of an engineer’s job. Globalization and economic complexity in the world today has necessitated for the need of engineers who have an in-depth understanding of the global markets and the manner in which the changes in these markets affect their bottom line. It is the responsibility of the engineer to translate scientific ideas in products and systems that better humankind. The ideas that the engineers translate need to make sense economically, and it is the engineer’s responsibility to convince other people working on the project that it is so. The study of engineering economy also prepares graduates with economic empowerment necessary to enable them to manage their personal wealth. Some of the various economic principles that engineers need to know and that assist them in managing their wealth include opportunity cost, understanding interest rates needed to increase or sustain levels of capital stock, net present value for the calculation of the value of investments and also the basic cost and revenue analysis. In the personal life of an engineer, they employ the economic principles such as nominal and effective interest rates in their financial considerations including all kinds of loans.
Engineering economy also allows engineers to learn the aspects of inflation and its impact on engineering projects and related operations. Inflation is a reality that has to be dealt with on a day to day basis in the professional and personal life of an individual. An engineering economy study can result in different results in environments with serious inflation concerns as compared to those with minor inflation considerations. The inflation rate is dependent on real and perceived factors of the economy that include interest rates, political stability, availability and cost of skilled labor, availability of materials and other less tangible factors that have short-term and long-term impacts on inflation. The study of engineering economy entails the study of basic techniques of integrating the effects of inflation in the economic analysis of real life engineering projects and related operations. The techniques include present worth calculations, future worth calculations, and capital recovery calculations.
The study of engineering economy provides an in-depth understanding of tax terminologies, income tax rates and tax calculations that are pertinent to an after-tax economic analysis. The perspective considered in engineering economy when conducting an after-tax evaluation is that of the engineering project and how relevant the tax rules and allowances influence the economic decision. Different nations have varying tax rules, and regulations and engineers must understand them and know how they affect the economic aspect of a project. The study of engineering economy allows engineers to analyze different tax measures of a country and international community such as sales tax, import tax, value-added tax, gasoline tax, highway tax and real estate tax.
Conclusion
The integration of economics and engineering in engineering economy is a crucial factor to the success of engineers in the 21st century. The knowledge and economic principles learned in the engineering economy assist engineers to make decisions that make sense economically by considering both economic and non-economic factors. Engineering economy also gets applied in real life as engineering ethics requires that engineers must work according to the code of ethics thus ensure the protection of public safety, health, and welfare. Engineering economy also enables engineers to understand economic aspects such as inflation and taxation; hence can consider them in making technical and design choices.
References
Blank, Leland, and Anthony Tarquin. Engineering economy. WCB/McGraw-Hill,, 1998. Pp. 1-3
Kutz, Myer, ed. Mechanical Engineers’ Handbook, Volume 1: Materials and Engineering Mechanics. John Wiley & Sons, 2015. Pp. 582-585
Sasmita, Mishra. Engineering economics and costing. PHI Learning Pvt. Ltd., 2010. Pp. 6
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