NAMASTE

Suvarna Singh Raut MSc. in Geotechnical Engg, IOE, Pulchowk Campus(2017)

BE in Civil Engg, Kathmandu University (2010)
DHOD Lecturer, HCOE (2017 – Till date)
Project Engineer at Nyam Nyam Hydropower(2015-2017), Nuwakot
Civil Department (Economic decision in coordination with CA)
HCOE Mistri Khola Hydropower (2015), Myagdi
Sanjen Hydropower (2013-2015), Rasuwa
ENGINEERING ECONOMICS
 CE655
• Lecture: 3
• Tutorial: 1
• Practical: 0

Course Objective:
To provide concept and knowledge of economic studies that
will be useful for the evaluation of engineering projects and
make decisions related to investment.
Chapters:
• 1. Introduction Course Book:

• 2. Interest and Time value of money Fundamentals of Engg Economic

Analysis;
• 3. Basic Methodologies of Engineering Economic Analysis Er. Santosh K. Sreshtha,
• 4. Comparative analysis of Alternatives Er. Ishwar Adhikari

• 5. Replacement Analysis &

• 6. Risk Analysis A Text Book of Engg Economics;
• 7. Depreciation and Corporate Income Tax Damodar Adhikari

• 8. Inflation and its Impact on Project Cash Flows

1. Introduction: 3 hrs
• 1.1 Origin of Engineering Economy
• 1.2 Principles of Engineering Economy
• 1.3 Role of Engineers in Decision Making
• 1.4 Cash Flow Diagram
Economics???
• Important role on taking the decision
• Selecting the alternatives
• Lowest possible cost
• Highest Benefit

The study of how people allocate their limited resources to

satisfy their unlimited wants.
The study of how people make choices.
Some Definitions(From Exam Point of view):

• Economics is the social science that examines how people choose to use
limited or scarce resources in attempting to satisfy their unlimited wants.

• Economics is a science which studies human behavior as a relationship

between ends and scarce means which have alternative uses.
• Ends: Unlimited wants
• Scarce means: Limited resources

When one wants is satisfied, other wants arises. It is impossible that a person
has all of his wants fulfilled. So, the struggle to produce more goods or get
more income continues for the whole life.

Give example of eating noodle when you are hungry.

• Q No. 1: Investment good on gold or FD or Land??
• Forefather investment Re.1 on FD good or Re.1 on Gold, Land???

What does it mean we need to be economical, many times????

Least cost, Maximum Benefit.

Difference Between Finance and Economics??

Finance: Study of Money Management. It studies Investments, Banking,

Credit, Assets, Liabilities and eth. else that makes up the monetary
system.

Social Benefits.
• In general, the focus of economics is more a focus on the big
picture, such as how a country, region, or market is
performing. Economics also focuses on public policy, while the
focus of finance is more company- or industry-
specific. Finance also focuses on how companies and investors
evaluate risk and return.
Difference between Economics and
Finance
Finance and Economics are interrelated and influences one another in many ways.
Economics is a social science. It studies the Production, Concumption and
Distribution of Goods and Services as well as larger topics such as Inflation,
Recession, and Supply and Demand. It teaches how government taxes are spent. It
teaches the impact of Policy. It gives investors a tool to use when analyzing
companies and markets.
In many respects, Finance is an offshoot of Economics. Finance is a tool to
understand cash flow and money management or any kind of an asset. Finance tells
the study of Prices, Interest rates, money flows, and the financial markets. Finance
provides the means to understand Pricing and the valuation of Future Cash Flows .
Economics usually have big picture such as How a country is doing. Finance focuses
on companies and industries.
Economics builds the Foundation and Finance builds the House.
IMP to Understand BUT DO NOT WRITE IN EXAMS:

Some of the topics of Finance are studied in Engg Economics.

Like Time value of Money,, Interest rates, Loan.

Economics: Supply Demand, Resource Utilization, GDP, GNP, Inflation

Anyways these are two sides of a coin.

Find out the reason yourself after studying all the chapters.
 WHY ENGG ECONOMICS??

• Why should Engineers need to study this subject?

Systematic Evaluation of the benefits and costs of the projects

involving Engineering Design and Analysis.
Engineer: Idea into Reality
Engineer: Existing products better or produce them at a lower cost.
Decisions made by the Engineers are commonly the result of
choosing one alternative over another.
How to best invest funds, also called capital.
• Engineering Economics deals with the methods that enables one
to take economic decision towards minimizing the cost or
maximizing benefits to business or organization.
• The techniques and models of Engineering Economy assist
people in making decisions.
• 3 Essential Elements: Cash Flows, Time of occurrence, Interest
rate
• We predict future though it is uncertain due to changing
circumstances.
• Give Example of Projects being delayed in Nepal. Price
Escalation, Band, Hadtal, Climate etc.
• Sensitivity Analysis; Performed to determine how the decision
might change based on varying estimate.
Principles of Engg Economics:

Focus on Process used to make an Economics based Decision.

The following Seven Principles are crucial to decision making and

accomplish good Engg Economy studies:
• Develop the alternatives
• Focus on the differences
• Use a Consistent Viewpoint
• Use a common unit of measure
• Consider all relevant criteria
• Make uncertainty explicit
• Revisit the decision
Engineering Economics is the application of economic techniques to evaluation
of design and engineering alternatives.

Role of Engineers in Decision Making:

An Engineering Economist have the knowledge of Engineering and Economics
to identify alternatives, use of resources efficiently and to select preferred
option in cause of action.
Decision often reflect to choice of how to make best use of capital funds.

1. Understand the problem and define the objective

2. Collect relevant information
3. Define the feasible alternative solutions and make realistic estimates.
4. Identify the criteria for decision making using one or more attributes.
5. Evaluate each alternative to enhance the evaluation.
6. Select the best alternative
7. Implement the solution and monitor the results.
In decision making process, role of engineers in different situation for
strategic economic decisions are in:

1. Equipment and process selection

2. Equipment replacement
3. New product development and product expansion
4. Cost reduction and
5. Service improvement
Essential Economic
Terminologies:
1. Annuity: An amount of money payable to a beneficiary at regular
Intervals for a prescribed period of time.
A series of equal payments occurring at equal periods of time.
Annuities can be classified by the frequency of payment dates. The
payments (deposits) may be made weekly, monthly,
quarterly, yearly, or at any other regular interval of time.
2. Assets: An economic resource of entity.
Assets are which your company owns that can provide future
economic benefits.
Liabilities are your company’s obligations either money that must be
paid or services that must be performed.
Anything that puts money in your pocket is an asset.
Anything that takes away from your pocket is liability.
• E.g. House itself is an asset if you get rent or when you sell it. But
house bought on loan and kept as mortgage is a liability to you.
• Assets:
• Current: Gold, Bank Balance, Savings, Fixed Deposits, Cash
• Fixed: a. Tangible: House, Land, Plant, Machinery, Building, Property,
Furniture
b. Intangible: Goodwill, Respect. Patents, Trademarks, Copyrights
Equity: Asset – Liability

• Breakeven Point: A point where the organization is in no gain and no

loss state.
• Capital: The financial resources involved in establishing and
sustaining an enterprise or project.
• Cash Flow: The statement showing actual amount coming into the
firm and/or going out of the firm.
• Capital Recovery: It is the Annual Equivalent Cost (AEC) of Capital Cost.
(Detail in Further chapters)
Earning back of the initial funds(Capital) put into an investment.
A A A A

I
Discount rate: The interest rate used to calculate the present value of the future cash
flow.

Rs. 121 Future if have to bring to Rs. 100 Present.

100*10 % = 110
110* 10% = 121
F=P(1+i)^n
i=?

Decision Making: A program of action undertaken as a result of established policy to

influence the final decision.
• Decision making under certainty: Simple decisions that assume complete
information and no uncertainties connected with the analysis of the decisions.
• Decision making under uncertainty: Decision for which the analyst elects to
consider several possible futures, the probabilities of which cannot be estimated.
Multiple outcomes for each alternative. No knowledge of probability of each.
• Decision under risk: A decision problem in which the analyst elects to consider
several possible futures, the probabilities of which can be estimated.
Multiple outcomes for each alternative. Probability known.

• Depreciation: A reduction in the value of an asset over time. (Particularly due to

wear and tear)
Tripper: 50 lacs; Life: yrs; Scrap : 0
Depreciation = ??
How about Land???
Except mines???
• Economic Life: The time frame an asset will be economically useful.
• Economic efficiency: Output/Input X 100
• Interest: It is the fee that is charged for use of someone else’s money. The size of
the fee will depend upon the total amount of money borrowed and the length
of time over which it is borrowed.
• Simple Interest: Fixed percentage of the principal(Money borrowed) multiplied
by the life of the loan. I = (P * R/100)*T
• Compound Interest: The type of interest that is periodically added to the
amount investment (or Loan) so that subsequent interest is based on the
cumulative amount. Interest on Interest
• Inflation: An increase in the average price paid for goods and services bringing
about reduction in the purchasing power. The inverse of inflation is deflation.
• Labor: The capacity of human effort (both mind and muscles) available for use
in producing goods and services.
• Opportunity cost: The value of benefits sacrificed in selecting a course of action
among alternatives. The value of next best opportunity foregone by deciding to
do one thing rather than another.
Give up movie for exam.
Opp. Cost: Cost of the movie and the enjoyment seeing it.

###################
Kodak, Gillete, Coke, Samsung, Motorola,Nokia

Salvage value: Estimated resale value of an asset at the end of its useful life.
Same as scrap value, residual value.
Time value of money: is the idea that the money available at the present time is
worth more than the same amount in the future due to its potential earning
capacity.
What is good??Keepig Re 1 and taking out after ages from bank.
Or Investment ???
• Utility: Satisfaction that a consumer obtains from goods and services that are
consumed. It is a measure of satisfaction.
• Capitalism and Socialism:
• Capitalism: (Privately Owned)
A capitalist economy is featured with free market and less government intervention
in the economy wherein top most priority is given to capital.
Private ownership of trade and industry. Prices determined by market, competition
very high, each individual works for the creation of his own wealth.

Socialism: (Socially Owned)

Socialist economy refers to organization or society, which is characterized by the
abolition of class relations and thus give more importance to people. Gov has
ownership and control over the economic activities. Prices determined by gov. No
competition between firms.
Subsidy
Mixed Economic System
Cash Flow and CFD
• Cash Flow is the statement which shows inflows and outflows of cash
and cash equivalents during life of projects. i.e. actual rupees coming
into or going out in different time periods.
• Bank Statement
• Cash Flow is the main basis for evaluation of different alternatives..
• The graphical representation of different cash flow streams is known as
CFD.
Where;
I - Initial Investment
R - Revenue
E - Expenses
S – Salvage Value
Note: Deposit is Cash Outflow; Expenditure
 • S
•
R1 R2 Rn
0 1 2 n

E1 E2 En

I
• Fig: CFD
The presentation should show three things:
1. A time interval divided into an appropriate number of equal periods.
2. All cash outflows (Deposits, Expenditures etc.) in each period.
3. All cash inflows (Withdrawls, Income etc.) for each period.

One person’s cash outflow(represented as a negative value) is another

person’s inflow(represented as a positive value)

Q. A man borrowed Rs. 1000 from a Bank at 8% interest. Two end-of-

year payments; at the end of the first year, he will repay half of the Rs.
1000 principal plus the interest that is due. At the end of the second
year, he will repay remaining half plus the interest for second year. Draw
CFD.
End of Year(Horizontal Line) Cash Flow (Vertical Line)
0 +1000
1 -500-80 = -580
2 -500-40 = -540

Rs. 1000

0 1 2

Rs. 580 Rs. 540

Fig: CFD
Q. Initial Investment = 50000
Annual Income = 5000
Annual Expenses = 2500
Salvage Value = 1000
Life (N) = 5 yrs.
Draw CFD.
Soln:
 End oF Year Cash Flow (Rs.)
Outflow Inflow
0 50000
1 2500 5000
2 2500 5000
3 2500 5000
4 2500 5000
5 2500 5000+1000

1000
5000 5000 5000
5000 5000

0 1 2 3 4 5
2500 2500 2500 2500 2500
50,000

Fig: CFD
Q. Tutorial

10000

0 1 2 3 4 5
500 500
1000
1500
2000
Notes:
Just for Information (Not needed for Exam)
Types of Money:
1. Commodity Money: Gold, Salt, Vegetables, Sheep (Direct Value)
2. Representative Money: Paper Money: Give Gold to Bank and get paper indicating
our Gold value. (Not Nowadays, 1900-1971)
Any country can Print their currency if only they have equal value of Gold in their
Reserves.
3. Fiat Currency: Fiat money is a government-issued currency that is not backed by
a commodity such as gold. Fiat money gives central banks greater control over the
economy because they can control how much money is printed. Most modern paper
currencies, such as the U.S. dollar, are fiat currencies.
Foreign Exchange,Currency value is calculated based on Import and Export.
BUT IN CRISIS, INVESTORS INVEST ON GOLD, AS GOLD HAS ALWAYS HUGE DEMAND
AND SAFE INVESTMENT. Fiat currency may go down during Inflation and crisis.
Share Market Terms:
Investors are often categorised as bulls and bears. A “bull” by definition is
an investor who buys shares because they believe the market is going to
rise; whereas a “bear” will sell shares as they believe the market is going
to turn negative.
Some Old Questions from this Chapter:

Q. State and Explain Principles of Engg Economics. [4] [2075]

Q. Define term Engg Economy. Explain Principles of Engg Economy. [4]
Q. ‘Knowledge of Engg Economics helps in decision making process.’ Justify

it by the principles of Engg Economics. [4]

Q. Explain why the subject of Engg Economics is important to Civil
Engineer. [4]