Engineering Law & Managerial Economics

(ENG 384)
Prepared by

Engr. OYEBODE, O.J.

BEng, MSc, MNSE, MASCE, MNIM, MSM,
MSN, REng.
College of Engineering, ABUAD
2nd March, 2023
 ENG 384: COURSE OUTLINE
 Managerial Economics: Managerial theories of firm
behaviours, price competition in various market structure,
non-price competitions and quality optimization. Efficiency
and performance evaluation. Demand estimating and
forecasting.
 Managerial Accounting and Control: Financial goals and
objectives. Analysis of cost behaviour standards for
manufacturing and non-manufacturing costs. Absorption
versus marginal costing. And large companies including
consideration of centralize versus decentralized financial
controls transfer, pricing etc. Control over capital projects,
integrating project financial analysis with corporate
strategy.
The construction industry consumes a wide employment
circle of labor. While the manufacturing industry
exhibit high-quality products, timelines of service
delivery, reasonable cost of service, and low failure
rates, the construction industry, on the other hand, is
generally the opposite. Most engineering projects exhibit
cost overruns, time extensions, lack of effectiveness,
inefficiency, waste of resources and conflicts among
parties involved in various contracts and all these issues
can be resolved by law. The knowledge of engineering
law and managerial economics is very important to
engineers around the globe.
ENG 384 Engineering
Economics (2 Units)

ENGR. O.J. OYEBODE

ABUAD, College of Engineering
28TH March 2023
 Course Outline
Economic analysis of engineering projects;
value systems economic decisions on
capital investments and choice of
engineering alternatives; new projects,
replacement and abandonment policies,
risky decisions; corporate financial
practices.
Objectives of valuation work/valuer's primary
duty and responsibility. Valuer's obligation to his
or her client, to other valuers, and to the society.
Valuation methods and practices. Valuation
reports. Expert witnessing. Ethics in valuation.
Valuation I Appraisal standards. Price, cost and
value. Depreciation and obsolescence. Valuation
terminology. Appraisal reporting and review. Real
property valuation. Personal property valuation.
 Machinery and equipment valuation. Oil and gas
valuation. Mines and quarries valuation. Cost and
schedule management- an engineering function.
Supporting skills and knowledge. Role of cost
engineer during evaluation phase. Role of cost
engineer during the basic design phase. Role of cost
engineer in contractor selection. Role of cost
engineer during detailed engineering design phase.
Role of cost engineer during construction. Cost
engineering function as distinct from Design
engineering function. Canon of ethics for cost
engineers. Basic capital cost estimating. Basic
operating cost estimating. Basic project
planning and scheduling. Cost engineering
terminology. Cost engineering standards.
 What is Engineering Economics
Engineering economics is a field that
addresses the dynamic environment of
economic calculations and principles through
the prism of engineering. It is a fundamental
skill that all successful engineering firms
employ in order to retain competitive
advantage and market share.
 What is Engineering Economics
Engineering economics is a discipline
concerned with the systematic evaluation of
costs and benefits of proposed technical and
business projects and ventures. It involves
technical economic analysis with a decision
assisting objectives.
Practice of Engineering
Planning
Operation
Maintenance
Supervision of Construction
Advising
Installation
Operating
Investigating
Evaluating
Analysis and Design 13
Engineering economy evaluates the monetary
consequences of the products, projects, and
processes that engineers design. These
products, projects, and processes usually
require spending money now, and they have
long lives. Often, two designs are compared,
and the question is: ―Which is cheaper in
the long run?‖
 Why do we study engineering
economics?
Engineering economics poses numerous benefits because it
allows those in industry to make strategic decisions for
their companies. While macroeconomic and financial
competencies are key for business operations, engineering
economics further provides a mechanism for decision-
making. The change in the amount of money over a given
time period is called the time value of money; it is the most
important concept in engineering economy.
Engineering design has five components:
1.execution of analysis
2.synthesis of solutions, followed by planning
3.Construction
4.Test and
5.evaluation. The overall goal and in each of the five
components is almost always to deliver a product that
fulfils certain requirements while being constrained with
respect to the availability of certain resources. Economics
is a collection of tools for addressing exactly this kind of
optimization problem.
Engineers work on technology. However technology is (to
be) used in an economic context. Technology is connected
with production. Each technology reflects a combination
of inputs (capital and labor). Hence it is related to the
choice of appropriate combination of these inputs to
minimize the cost of production. In certain cases, new
technology helps producing more with a given level of
inputs (productivity-enhancing).
The need for engineering economy is primarily motivated
by the work that engineers do in performing analysis,
synthesizing, and coming to a conclusion as they work on
projects of all sizes. In other words, engineering economy
is at the heart of making decisions. These decisions involve
the fundamental elements of cash flows of money, time,
and interest rates. This chapter introduces the basic
concepts and terminology necessary for an engineer to
combine these three essential elements in organized,
mathematically correct ways to solve problems that will
lead to better decisions.
 An engineering economy study involves
many elements: problem identification,
definition of the objective, cash flow
estimation, financial analysis, and decision
making. Implementing a structured
procedure is the best approach to select the
best solution to the problem
Definition of Engineering Economy
Engineering economy is the application of certain
principles of economics to the problem of
engineering related investment.
Engineering economic analysis is primarily
concerned with comparing alternative projects on
the basis of economy to measure effectiveness.
 Definition of Engineering Economy
Engineering economist uses the accumulated knowledge of
engineering and economics to identify alternative uses of
limited resources and to select the preferred course of
action.
It is the application of economic analysis techniques in the
comparison of engineering design alternatives.
 WHAT IS ENGINEERING ECONOMICS?
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 study of how people and society choose to
employ scarce resources that could have alternative uses in
order to produce various commodities and to distribute them
for consumption, now or in the future,

23
Engineering economy is a discipline concerned with
the systematic evaluation of costs and benefits of
proposed technical and business projects and
ventures.
It involves technical economic analysis with a
decision making objective. It involves economic
analysis, economic justification and capital
investment analysis.
 Engineering Economy
It is used to answer many different questions
– Which engineering projects are worthwhile?
• Has the mining or petroleum engineer shown that the mineral or
oil deposits 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 dollars?
– How should the engineering project be designed?
• Has civil or mechanical engineer chosen the best thickness for
insulation?

25
 Why Engineering Economy is Important to
Engineers
 Engineers design and create
 Designing involves economic decisions
 Engineers must be able to incorporate economic analysis
into their creative efforts
 Often engineers must select and implement from multiple
alternatives
 Understanding and applying time value of money,
economic equivalence, and cost estimation are vital for
engineers
 A proper economic analysis for selection and execution is
a fundamental task of engineering
1-26
 Cost and time overruns have become a cankerworm
within the Nigerian construction industry today as
well as lack of good quality work of its end product
which do not provide many of the clients’ value for
money. Constructions projects in Nigeria are known
for over- shooting their initial cost budget.
 Industry sector is the second most important
for absorbing human resources after the food. They
further stated that in the 1990’s, approximately 2.5
million laborers were involved directly in construction
projects.
The difference between efficiency and effectiveness is
that efficiency refers to doing things right, while
Effectiveness focuses on the means or the end result.
Efficiency is doing things right and effectiveness is doing
the right things.
The primary difference is efficiency is productivity
concerned while effectiveness is quality
concerned.
Efficiency is all about saving time, money or effort.
Effectiveness is all about getting the job done. It is
about productivity.
Efficient – Performing or functioning in the best
possible manner with the least waste of time and
effort. The difference between effectiveness and
efficiency can be summed up shortly, sweetly and
succinctly – Being effective is about doing the right
things, while being efficient is about doing things
right.
Effectiveness is a quality metrics meaning how good a
person is at testing. ... However, I also quote from
engineering background a definition of efficiency as
... This is because while efficiency is looking at how
a work is done.
efficacy and effectiveness both mean success or capability
of ... relative to the amount you put in (most work,
power, value for money, etc). ... The engineering
definition of 'efficiency' is correctly described above.
Efficiency means that we can get more done faster, and
it’s called ”working smarter”.
Effectiveness relates to what gets done. Or more aptly put
– results.
Strategic management decisions that promote efficiency
tend to be aimed at reducing the use of resources
through maximizing return.
Management effectiveness can be measured by results. Goals
such as increasing market share, improving customer
satisfaction ratings and achieving desired revenue levels
come under the heading of management effectiveness. This
is how you measure whether management decisions are
actually improving your business performance.
The degree to which objectives are achieved and the extent to
which targeted problems are solved. In contrast to
efficiency, effectiveness is determined without reference to
costs and, whereas efficiency means "doing the thing right,"
effectiveness means "doing the right thing."
 Managerial Economics
Scope of managerial economics. Managerial
models. Revenue of the firm. Pricing techniques.
Location and localization of industries.
Industrial growth in Nigeria. The size of the
firm. Integration and diversification. Marketing
demand and forecasting. Distributive trade in
Nigeria. Business finance. Investment. Capital
budgeting and management control. Government
policies and firm.
Objectives of this Lecture

1.To define and introduce

the Scope of managerial
economics.
2. To highlight the role of
Managerial Economists
in Engineering Projects
INTRODUCTION
Today’s construction organizations, in providing
their services, must be familiar with the latest
technology, improved machinery, and
sophisticated equipment, and most of all they
must have the ability to deliver the project
ahead of schedule.
Success will depend on the Engineer’s competence
in finding ways to increase profitability in an
augmented competitive market.
 INTRODUCTION
The role of engineers in society is changing.
In the past, engineers tended to have a
fairly narrow focus, concentrating on the
technical aspects of the problem and on
strictly computational aspects of
engineering economics. Today, engineers are
more likely to be the decision makers and
they need to be able to take into account
strategic and Policy issues.
 INTRODUCTION
Managerial economics is the science of directing
scarce resources to manage cost effectively.
Nearly every organization in our society—
whether it is a business, non-profit entity, or
governmental unit—can be viewed as providing
a set of goods, services, or both. The
responsibility for overseeing and making
decisions for these organizations is the role of
executives and managers.
In today’s competitive world of business it has
become essential that engineers should practice
financial project analysis for engineering
projects and make rational decisions.
Engineering economy also includes the study of
accounting practices for manufacturing
concerns. Unique features of accounting for
manufacturing concerns are process costing,
batch costing, cost allocation.
Most engineering projects exhibit cost overruns,
time extensions, and conflicts among parties
involved in various contracts because of lack of
knowledge about managerial economics.
The responsibility for overseeing and
making decisions for these organizations
is the role of executives and managers.
In a civilized society, nearly every
organization in our society—whether it is
a business, nonprofit entity, or
governmental unit—can be viewed as
providing a set of goods, services, or
both.
The purpose of managerial economics is to provide a
systematic framework for problem analysis and
solution. The pluses and minuses of various decision
alternatives must be carefully measured and weighed.
Costs and benefits must be reliably measured; time
differences must be accurately reflected. The
collection and characterization of relevant
information is the most important step of this
process. After all relevant information has been
gathered, managers must accurately state the goal or
goals that they seek to achieve. Without a clear
understanding of managerial objectives, effective
decision making is impossible.
Once all relevant information has been gathered, and
managerial objectives have been clearly stated, the
managerial decision making process can proceed to the
consideration of decision alternatives. Effective
managerial decision making is the process of efficiently
arriving at the best possible solution to a given problem.
If only one solution is possible, then no decision problem
exists. When alternative courses of action are available,
the decision that produces a result most consistent with
managerial objectives is the optimal decision. The
process of arriving at the best managerial decision, or
best problem resolution, is the focus of managerial
economics.
Managerial economics has been generally defined
as the study of economic theories, logic and tools
of economic analysis, used in the process of
business decision making. It involves the
understanding and use of economic theories and
techniques of economic analysis in analyzing and
solving business problems.
It is a general knowledge that there exists a gap
between theory and practice in the world of
economic thinking and behaviour. By implication,
a theory which appears logically sound might not
be directly applicable in practice.
The discovery of managerial economics as a
separate course in management studies has been
attributed to three major factors:
1. The growing complexity of business
decision-making processes, because of
changing market conditions and the
globalization of business transactions.
2. The increasing use of economic logic,
concepts, theories, and tools of economic
analysis in business decision-making
processes.
3. Rapid increase in demand for professionally
trained managerial manpower.
Decision-making involves a number of steps:
problem perception, definition of objectives,
examination of constraints, identification of
strategies, evaluation of strategies and
determination of criteria for choosing among
strategies.
Managerial economics is linked to the
disciplines of economic theory, decision
sciences and business functions.
The core elements of the economic theory
involved are the theory of the firm, consumer
and demand theory, production and cost theory,
price theory and competition theory.
 What is Managerial Economics
Managerial economics is a discipline that
combines economic theory with
managerial practice. It helps in covering
the gap between the problems of logic
and the problems of policy. The subject
offers powerful tools and techniques for
managerial policy making
 Managerial economics can bridge the gap between
economic theory and real world business decisions.
 The construction industry is the largest industry in the
world. It is more of a service than a manufacturing
industry. Growth in this industry in fact is an indicator
of the economic conditions of a country. This is because
the construction industry consumes a wide employment
circle of labor. While the manufacturing industry exhibit
high-quality products, timelines of service delivery,
reasonable cost of service, and low failure rates, the
construction industry, on the other hand, is generally the
opposite.
Economic decision making for engineering systems is called
engineering economy
Engineers are the people who are familiar with all the
technicalities of machinery and production therefore
they are the best judges of the useful lives of an asset
and they also have the technical knowledge to calculate
the number of units a proposed plant would produce
when in operation.
Engineering economy deals with justification and selection
of projects. Many engineers work on projects which
address a specified activity or a problem. Any decision
regarding the project must be justified.
Cost and time overruns have become a
cankerworm within the Nigerian construction
industry today as well as lack of good quality
work of its end product which do not provide
many of the clients’ value for money.
Constructions projects in Nigeria are known
for over- shooting their initial cost budget.
Industry sector is the second most
important for absorbing human resources
after the food. They further stated that in the
1990’s, approximately 2.5 million laborers were
involved directly in construction projects.
 The term engineering economic decision refers to all
investment decisions relating to engineering projects.
The five main types of engineering economic decisions are
(1) service improvement,
(2) equipment and process selection,
(3) equipment replacement,
(4) new product and product expansion, and
(5) cost reduction.
The factors of time and uncertainty are the defining
aspects of any investment project.

51
 Engineering Economic Decisions
Manufacturing Profit

Planning Investment

Marketing
52
Taking appropriate business decisions requires a
good understanding of the technical and
environmental conditions under which business
decisions are taken. Application of economic
theories and logic to explain and analyze these
technical conditions and business environment
can contribute significantly to the rational
decision-making process.
 What is Managerial Economics?
Douglas - “Managerial economics is .. the
application of economic principles and
methodologies to the decision-making process
within the firm or organization.”
Pappas & Hirschey - “Managerial economics
applies economic theory and methods to business
and administrative decision-making.”
Salvatore - “Managerial economics refers to the
application of economic theory and the tools of
analysis of decision science to examine how an
organisation can achieve its objectives most
effectively.” 54
 What is Managerial Economics?

Howard Davies and Pun-Lee Lam -

“It is the application of economic analysis to
business problems; it has its origin in
theoretical microeconomics.”

55
 Definition of Managerial Economics
Managerial economics has been generally defined as the
study of economic theories, logic and tools of
economic analysis, used in the process of business
decision making. It involves the understanding and
use of economic theories and techniques of economic
analysis in analyzing and solving business problems.
Economic principles contribute significantly towards
the performance of managerial duties as well as
responsibilities. Managers with some working
knowledge of economics can perform their functions
more effectively and efficiently than those without
such knowledge.
Managerial Economics is the application of
economic theory and methodology to
managerial decision making problems within
various organizational settings such as a
firm or a government agency.
Managerial economics, meaning the
application of economic methods in the
managerial decision-making process, is a
fundamental part of any business or
management course.
The emphasis in this course will be on demand
analysis and estimation, production and
cost analysis under different market
conditions, forecasting and decision making
under uncertainty. Students taking this
course are expected to be comfortable with
basic algebra.
It is the basis for some of the more rigorous
analysis of issues in Marketing and
Strategic Management.
 How Can Managerial Economics Assist
Decision-Making?

1. Adopt a general perspective, not a

sample of one
2. Simple models provide stepping stone to
more complexity and realism
3. Thinking logically has value itself and can
expose sloppy thinking

59
Importance of Managerial Economics
In a nutshell, three major contributions of economic theory
to business economics have been enumerated:
1. Building of analytical models that help to recognize the
structure of managerial problems, eliminate the minor
details that can obstruct decision making, and help to
concentrate on the main problem area.
2. Making available a set of analytical methods for
business analyses thereby, enhancing the analytical
capabilities of the business analyst.
3. Clarification of the various concepts used in business
analysis, enabling the managers avoid conceptual
pitfalls.
1 It is becoming more important for managers to
make good decisions and to justify them, as their
accountability either to senior management or to
shareholders increases.
2 As the number and size of multinationals
increases, the costs and benefits at stake in the
decision-making process are also increasing.
3 In the age of plentiful data it is more imperative
to use quantitative and rationally based
methods, rather than ‘intuition’.
4. The pace of technological development is increasing
with the impact of the ‘new economy’. Although the
exact nature of this impact is controversial, there is no
doubt that there is an increased need for economic
analysis because of the greater uncertainty and the need
to evaluate it.
5. Improved technology has also made it possible to
develop more sophisticated methods of data analysis
involving statistical techniques. Modern computers are
adept at ‘number-crunching’, and this is a considerable
aid to decision-making that was not available to most
firms until recent years.
 ROLE OF MANAGERIAL ECONOMIST
1. A managerial economist helps the management
by using his analytical skills and highly developed
techniques in solving complex issues of successful
decision-making and future advanced planning.
2. Accurately values all operations (support and
production) of an entity (i.e. the supply and
consumption of resources) in monetary terms.
3. Provides information that aids in immediate and
future economic decision making for optimization,
growth, and/or attainment of enterprise strategic
objectives.
4. Provides information to evaluate performance
and learn from results.
5. Provides the basis and baseline factors for
exploratory and predictive managerial activities
6. He studies the economic patterns at macro-
level and analysis it’s significance to the specific
firm he is working in.
7. He also carries cost-benefit analysis.
8. He has to consistently examine the
probabilities of transforming an ever-
changing economic environment into
profitable business avenues.
9. He assists the business planning process
of a firm.
10. He assists the management in the
decisions pertaining to internal
functioning of a firm
11. In addition, a managerial economist
has to analyze changes in macro-
economic indicators such as national
income, population, business cycles, and
their possible effect on the firm’s
functioning.
12. He is also involved in advising the
management on public relations, foreign
exchange, and trade. He guides the firm
on the likely impact of changes in
monetary and fiscal policy on the firm’s
functioning.
13. He also makes an economic analysis of the
firms in competition. He has to collect economic
data and examine all crucial information about
the environment in which the firm operates.
14. The most significant function of a
managerial economist is to conduct a detailed
research on industrial market.
In order to perform all these roles, a managerial
economist has to conduct an elaborate
statistical analysis.
He must be vigilant and must have ability to cope
up with the pressures.
He also provides management with economic
information such as tax rates, competitor’s price
and product, etc. They give their valuable
advice to government authorities as well.
At times, a managerial economist has to prepare
speeches for top management.
Increasing complexity in the business world has spewed
forth greater challenges for managers.
Managerial Economics plays an equally important role
in the management of non-business organizations
such as government agencies, hospitals and
educational institutions
Robbins has defined Economics as “the science that
studies human behavior as a relationship between
ends and scarce means which have alternative uses”.
Human wants are virtually unlimited and non-
satiable, but the means to satisfy them are limited.
The managerial economic logic and tools of
analysis guide business decision makers in:
1. Identifying their problems in the achievement
2. Collecting the relevant data and related facts;
3. Processing and analyzing the facts;
4. Drawing the relevant conclusions;
5. Determining and evaluating the alternative
means of achieving the goal; and,
6. Taking a decision.
A good mathematical model allows us to make
predictions and set hypotheses.
The predictions can be tested against the empirical
evidence
The predictions are supported by the empirical
evidence

71
 The Process of Model-building
The economics ‘method’
– ‘illicit relationships with beautiful models’
The steps: the hypothetical-deductive approach
– make assumptions about behaviour
– work out the consequences of those assumptions
– make predictions
– test the predictions against the evidence
– PREDICTIONS SUPPORTED? The model is
accepted as a good explanation (for the moment)
– PREDICTIONS REFUTED? Go back and re-work
the whole process
72
 Definitions
&
assumptions
If predictions
Theoretical not supported by
analysis data, model is
amended or
discarded
Predictions
If predictions
borne out by
Predictions data, the model
tested is valid, for
against data the moment
73
 Links between Managerial Economics
and Industrial Economics
In managerial economics, the emphasis is upon
the firm, the environment in which the firm
finds itself, and the decisions which individual
firms have to take.

In industrial economics (or industrial

organization), the emphasis is (or was) upon the
behavior of the whole industry, in which the
firm is simply a component.
74
 The Structure-Conduct-Performance Paradigm:
Basic Conditions: factors which shape the market of the
industry, e.g. demand, supply, political factors
Structure: attributes which give definition to the supply-side of
the market, e.g. economies of scale, barriers to entry, industry
concentration, product differentiation, vertical integration.
Conduct: the behavior of firms in the market, e.g. pricing
behavior advertising, innovation.
Performance: a judgement about the results of market
behaviour, e.g. efficiency, profitability, fairness/income
distribution, economic growth.
How can the government improve the performance in an
industry?
75
Basic Conditions

Structure Government
Policy

Conduct

Performance

76
Mathematical model is a set of equations
or formulas which describe and represent
a rear system in terms of its physical
organizational, behavioral and economic
attributes.
The total monetary value of the goods or
services sold is called revenue
Mathematical Modeling Technique in Managerial Economics
Mathematical model is necessary but judgment and
experience are pivotal input.
Cost of Production = Fixed cost + Price x Demand
function, Net Benefits = Total Benefits - Total Costs
Revenue = Demand function x Price
Profit = Revenue – Cost of production
P = Profit = TR – TC; At Break even point for a firm occurs
where its TR = TC. It is a no profit no loss situation.

TR=P*Q =D(p) x P, TC = VC + FC
Example on Mathematical modeling for managerial Economics
problem in industry:
From the market survey conducted by a company, the
result indicates that the unit demand function is
D(p)= -750p + 15000 where D stands for the amount
each retailer would buy at the price p . The unit cost of
that product is N4 while the fixed cost of the
engineering company for production is found to be
N7,000. Develop a mathematical model that will enable
the company extract the price that should be charged to
make a maximum profit. Calculate the price, the revenue
and cost of production at which the company will
maximize profit 79
 SOLUTION
Let D(p) denotes the number of units of products
produced and C(p) the cost of the product. If P denotes
the price of each product. Then,
C(P) = 4D(P) + 7000 --------Equation 1
To meet local demand D(p) = -750p + 15000
Substituting for D in equation 1, we get
C(P) = 4 (-750p + 15000) + 7000
C(P) = -3000p + 67000
The total revenue derived from the sales of the products
as a function of the price is R(p) = D(p) x p
= (-750p + 15000) p
The revenue derived from the sales of the product as a
function of the price is
R(P) = D(P)XP= -750P2+15000P
The profit function (Pr) accruing to the company =
Revenue function – Cost function
Pr(p) = R(p)-C(p)
Pr(p) = -750P2+15000P –(-3000p + 67000)
Pr(p) = -750P2 + 15000P +3000P– 67000
Pr(p) = -750P2 + 18000P – 67000
This is the mathematical model equation. This is a non linear
since it leads to quadratic equation. To maximize profit, we
differentiate this equation and equate it to zero.
Profit = Pr(p) = R(p)-C(p)
Pr(p) = 72000-31000 =₦41,000
Also Pr(p) = -750P2 + 18000P – 67000
Pr(p) = -750(12)2+18000(12)– 67000
= -108000+216000-67000 = ₦41,000
Hence, the mathematical model is
Pr(p) = -750P2 + 18000P – 67000
Revenue is ₦72,000
Cost of production is ₦31,000
The maximum profit is Pr(p) = N 41000,
The number of units produced at this
price D is 6000 units
 Links between Managerial Economics
and Management Science
Managerial economics: is often concerned with
finding optimal solutions to decision problems.
However, the primary purpose of using models is to
predict how firms will behave, not to advise them
what ought to do. Managers are assumed to find
the optimal solutions for themselves and that is
how predictions are made.
Management science: is essentially concerned with
techniques for the improvement of decision-making
and hence it is essentially normative; firms are not
assumed to find the optimal solutions for themselves.
They are found by the researchers who then present
84
them as prescriptions for what the firm should do.
Practice of Engineering
Planning
Operation
Maintenance
Supervision of Construction
Advising
Installation
Operating
Investigating
Evaluating
Analysis and Design 85
 Measuring
Designing
Specifying
Laying and Directing
Constructing
Commissioning
Testing( public or private utilities) structures,
buildings, machines, equipment, processes,
works or projects
86
 100% Construction Cost

Ability to Influence Costs

Level of Influence on Cost

0%

Concept & Design and

Procurement and Construction Startup Oper.
Feasibility Engineering

Ability to Influence Construction Costs over Time

 Project Management

Optimize the three attributes of: quality,

cost, and time
Principle objective of a construction
manager is to complete each project on
time and within budget, while
maintaining acceptable levels of safety
and risk
 Management
Determining the techniques to be used; the type
of materials, supplies, machinery, equipment or
tools to be used; or the merchandise to be
bought, stocked and sold
Providing for the safety and security of
employees or property
Planning and controlling the budget
Monitoring or implementing legal compliance
measures
Project
– series of related jobs usually directed toward some
major output and requiring a significant period of
time to perform. A temporary endeavor undertaken
to create a unique product or service.
– Project as “an organization of human, materials
and financial resources in a novel way, to
undertake a unique scope of work, of given
specification, within constraints of cost and time,
defined by quantitative and qualitative objectives
so as to achieve a beneficial change”.
Project Management
– planning, directing, and controlling
resources (people, equipment, material) to
meet the technical, cost, and time
constraints of the project.
– The application of knowledge, skills,
tools, and techniques to project objectives
to meet stakeholder needs and
expectations
 What is a Project?
A project is “a temporary endeavor undertaken to
accomplish a unique product or service”
Construction Project Management is the overall
planning, coordination and control of a project from
inception to completion aimed at meeting a client’s
requirements in order to produce a functionally and
financially viable project. The goal of construction
project is to build something. What differentiate the
construction industry from other industries is that
its projects are large, built on-site, and generally
unique. Time, money, labor, equipment, and,
materials are all examples of the kinds of resources
that are consumed by the project.
Management can be defined as the organ or body of an
organization specifically charged with planning, organizing,
directing and controlling the use of the organization’s
resources effectively and economically to attain the
organization’s objectives.
 Quality can be defined as “Degree to which a set of inherent
characteristics fulfills requirements”
The standard defines requirement as need for expectation
 Achieving Quality on Projects requires:
 Quality of the management process (most important)
 Quality of the product (ultimate goal)
Study of Managerial Economics helps in enhancement of
analytical skills, assists in rational configuration as well as
solution of problems.
 Achieving Quality on Construction Projects

Quality of
Management Process
ev i n ga t
Achi y Produc
it
Preve Qual
n
Medi tive l ity ce
ci n e ua ran
Q u
s s
A lity l
ua tro Cura
ti
Q on
C Med ve
icine
Ultimate
Goal
Quality of the
Product

Fig 1: Pre-requisites to achieving quality

 Managerial decision areas include:
Assessment of investible funds
selecting business area
Choice of product
Determining optimum output
Determining price of product
Determining input-combination and technology
Sales promotion.
 Project failure – Result of inadequate planning
- 28% of projects succeeded in 2000
Planning is the process of identifying all activities
necessary to complete the project while scheduling is the
process of determining the sequential order of activities,
assigning planned duration and determining the start and
finish dates of each activity.
Planning - Heart of successful project implementation

Planning Execution

Figure 1 (a)
 Project Life Cycle

14-Apr-23 Dr.Bokkasam Sasidhar

 Characteristics of a Good Plan
Well defined goals
Flexibility in approach
Appropriate level of analysis of opportunities and
constraints
Use of the planning for monitoring
Periodical review of the plan
Appropriate means of communicating results i.e., turning
raw data into useful information
Taking appropriate action
 Plans are used for:
Tendering a quoted project duration
Helping to estimate preliminaries
Helping with extension of time and prolongation
claims
Helping plan and monitor the project
Help with procurement of materials and equipment
Help undertake simulation studies
Resources in Engineering Projects include:
Materials
Manpower
Machinery
Money
Management
Time
Technology
Information
Quality Management Process
PLAN-DO-CHECK-ADJUST CYCLE
PLAN
QUALITY PLAN

ACT
DO
QUALITY
QUALITY ASSURANCE
IMPROVEMENT

CHECK
QUALITY CONTROL

Fig. 2: Quality Management Process

 Are Your Ready to Be a Manager?
Today’s environment is diverse, dynamic and ever-
changing
Organizations need managers who can build networks
and pull people together
Managers must motivate and coordinate others
Managers are dependent upon subordinates
They are evaluated on the work of others

102
 Why Innovation Matters
Managers must focus on innovation to stay competitive
In a hypercompetitive, global environment,
organizations must innovate more
Innovations may include:
– New products, services, technologies
– Controlling costs
– Investing in the future
– Corporate values

103
 The Four Management Functions
Planning. Identifying goals and resources or future
organizational performance.
Organizing. Assigning tasks, delegating authority and
allocating resources.
Leading. The use of influence to motivate employees to
achieve goals.
Controlling. Monitoring activities and taking corrective
action when needed.
104
The Process of Management

Copyright ©2010 by South-Western, a 105

division of Cengage Learning. All rights
 Management Skills
Conceptual Skills – cognitive ability to see the
organization as a whole system
Human Skills – the ability to work with and
through other people
Technical Skills – the understanding and
proficiency in the performance of specific tasks

106
Individual Performer to Manager

107
 Managerial Skills
A manager’s specialized areas
Technical
of knowledge and expertise, and
Skills
the ability to apply that knowledge

A manager’s interpersonal skills

Human Relations
used to accomplish goals through
Skills
the use of human resources

A manager’s ability to view the

Conceptual organization as a whole, understand
Skills the interdependencies, and its
relation to external environment

7 108
 Managerial Economics as a course required for
effective resource management was put in place due
to the following developments in the global business
environment:
(a) Growing complexity of business decision-making
processes.
(b) Increasing need for the use of economic logic,
concept, theories, and tools of economic analysis in
the process of decision-making.
(c) Rapid increases in the demand for professionally
trained managerial manpower.
These developments have made it necessary that every
manager aspiring for good leadership and
achievement of organizational objectives be equipped
with relevant economic principles and applications.
Unfortunately, a gap has been observed in this
respect among today’s managers. It is therefore the
aim of this course to bridge such gap.
Managerial Economics is the application of economic
theory and methodology to managerial decision
making problems within various organizational
settings such as a firm or a government agency.
It is becoming more important for managers
to make good decisions and to justify
them, as their accountability either to
senior management or to shareholders
increases.
As the number and size of multinationals
increases, the costs and benefits at stake
in the decision-making process are also
increasing.
The pace of technological development is
increasing with the impact of the ‘new
economy’. Although the exact nature
of this impact is controversial, there is
no doubt that there is an increased
need for economic analysis because of
the greater uncertainty and the need to
evaluate it.
Improved technology has also made it possible
to develop more sophisticated methods of
data analysis involving statistical
techniques.
Modern computers are adept at ‘number-
crunching’, and this is a considerable aid to
decision-making that was not available to
most firms until recent years.
 Marginalism
Firms as profit maximizers will make decisions in a
marginal way.
The manager looks, for example, at the marginal
profit from producing one more unit of output or
the additional profit from hiring one more unit of
labor.
When the incremental profit of an activity becomes
zero, profits are maximized.
119
 The Output Decision

Economic profits () are defined as

 = R(q) - TC(q)
where R(q) is the amount of revenues received and
TC(q) are the economic costs incurred, , both
depending upon the level of output (q) produced.
The firm will choose the level of output that
generates the largest level of profit.
120
 TABLE 7.1: Total and Marginal Revenue for Cassette
Tapes (q = 10 - P)

Price Quantity Total Revenue Marginal Revenue

(P) (q) (P·q) (MR)
$10 0 $0
9 1 9 $9
8 2 16 7
7 3 21 5
6 4 24 3
5 5 25 1
4 6 24 -1
3 7 21 -3
2 8 16 -5
1 9 9 -7
0 10 0 -9
121
 Profit Maximization
If firms are strictly profit maximizers, they will
make decisions in a “marginal” way
– examine the marginal profit obtainable from producing
one more unit of hiring one additional laborer

122
 Managerial Economics Defined
The application of economic theory and the tools
of decision science to examine how an
organization can achieve its aims or objectives
most efficiently.

The meaning of this definition can be

best examined with aid of figure
below:

123
 Managerial Decision Problems:
Managerial decision problems arise in
any organization (i.e. non-profit
organization such as a hospital or a
university or government agency),
when they seek to achieve some goal
or objective subject to limitations on
the availability of essential inputs and
in the face of legal constraints.
124
 Microeconomics:
This subject is the study of the economic
behaviour of individuals decision-
making units such as individual
consumers, resources owners and
business firm in the free enterprise
system.
125
 Macroeconomics:
On the other hand, this subject is the
study of the total or aggregate level
of output, income, employment,
consumption, investment and prices
for the economy viewed as a whole.

126
 Macroeconomics is a branch
Microeconomics is the branch
of economics dealing with
of economy which is concerned
the performance, structure,
with the behavior of individual
behavior, and decision-
entities such as market, firms
making of an economy as a
and households.
whole.

The foundation of
Microeconomics consists of
Foundation macroeconomics is
individual entities.
microeconomics.
Output and income,
Preference relations, supply
Basic Concepts unemployment, inflation
and demand, opportunity cost.
and deflation.

Used to determine an
Used to determine methods of
economy's overall health,
Applications improvement for individual
standard of living, and
business entities.
needs for improvement.
 The theory of firm

The theory of firm assumes that the firm seeks

to maximize profits and minimize cost and
on the basis of that it predicts how much of
a particular commodity the firm should
produce under different forms of market
structure or organization.

128
Managerial economics for engineers is concern with the
systematic evaluation of the costs and benefits of
proposed technical and business projects. It involves
technical-economic analysis with a decision assisting
objectives; mathematical modeling with emphasis on
the economic effects is the primary analytical
technique used to select between defined feasible
alternatives. An engineering economic draws upon the
accumulated knowledge of engineering and economics
to identify alternative uses of limited resources and to
select the preferred course of action..
 Making a decision on multiple alternatives requires a
common measure of performance. Costs and benefits occur
at different points in time and, hence, have different
values. Financial analysis methods are tools that will
enable us to evaluate the aggregate of these costs and
benefits with a common measure. We will see later that
these common measures are:
Net present worth
Net future worth
Benefit - cost ratio
Equivalent Uniform Annual Worth
Rate of return
 Economists, engineering managers, project
managers, and indeed any person involved in
decision making must be able to analyze the
financial outcome of his or her decision. The
decision is based on analyzing and evaluating the
activities involved in producing the outcome of
the project. These activities have either a cost or a
benefit. Financial analysis gives us the tools to
perform this evaluation.
 The Geometry of Optimization
Costs
Benefits & Costs
Benefits
Slope =MB

C
Slope = MC

Q* Q
 Costs and benefits do not always occur at one time; they
occur at different points of time during the life of the
project. In most cases, the lifetime worth, that is the lifetime
aggregate of all the costs and benefits, taking into account
the time of their occurrence, is used to compare different
projects and to decide which alternative to choose.

Engineers have an added responsibility and that is to

include economics in their calculation and decisions to
solve real life problem. Decision may be defined as a choice
that can be made from available alternatives.
 Demand & Marginal Revenue
(Table 6.3)
Unit sales (Q) Price TR = P  Q MR = TR/Q
0 $4.50 $ 0 --

1 4.00 $4.00 $4.00

2 3.50 $7.00 $3.00
3 3.10 $9.30 $2.30
4 2.80 $11.20 $1.90
5 2.40 $12.00 $0.80
6 2.00 $12.00 $0
7 1.50 $10.50 $-1.50
6-134
 Q TC AFC AVC ATC MC
0 - - - - -
1 105 60 45 105 45
2 145 30 42.5 72.5 40
3 180 20 40 60 35
4 210 15 37.5 52.5 30
5 245 12 37 49 35
6 285 10 37.5 47.5 40
7 330 8.57 38.57 47.14 45
8 385 7.5 40.63 48.13 55
9 450 6.67 43.33 50 65
10 525 6 46.5 52.5 75
Profit maximisation has been the prime objective of
classical business organizations. To
maximise profit, certain conditions must be met, the
first being that at optimum profit maximising
point, the firm’s marginal revenue must equal
marginal cost. Second, to ensure that maximum
profit is attained, the second derivative of the
profit function is expected to be less than zero.
Managerial Economics as a course required for effective
resource management was put in place due to the
following developments in the global business
environment:
(a) Growing complexity of business decision-making
processes.
(b) Increasing need for the use of economic logic,
concept, theories, and tools of economic analysis in
the process of decision-making.
(c) Rapid increases in the demand for professionally
trained managerial manpower.
 FINANCIAL ANALYSIS OF ENGINEERING
PROJECT
The financial analysis of a project involves the
computation of
The present worth of a certain future amount or the
benefits which would be derived from a project during
certain number of years
Amount to be recovered annually from the beneficiaries
of the project so that if needed the project may be
replaced by a new one and
Annual installments for the recovery of the investment
made for a project.
P = F (1  i )  n

The Present Value of a Stream of Cash Flows

CF1 CF2 CF3 CF4 CFT
|--------|--------|--------|--------|--------------|---> t
0 1 2 3 4 … T
Importance of Time (Time Value of Money)
The costs are paid and the benefits are received during different
periods of the life of the system. Money can have different values
at different times. This is because money can be used to earn
more money between the different instances of time. Obviously,
PV = PV
$10,000 now(isCF 1 )  PV (CF2 )  ...  PV (CFT )
worth more than $10,000 a year from now even if
there is no inflation. This is because it can earn money during the
interval. One
CFcould deposit
CF the money inCFthe bank and
T earn
CFt
interest=on it. Thisis the earning
1
 k ) of money,
(1value
called time
2
 ...  of money
power
(1  k )that is, $10,000
2
T
(1  know
T 
=over time andt is
(1 value
) hast =1more k)
than $10,000 six months from now.
 Economists, engineering managers, project managers, and
indeed any person involved in decision making must be able
to analyze the financial outcome of his or her decision. The
decision is based on analyzing and evaluating the activities
involved in producing the outcome of the project. These
activities have either a cost or a benefit. Financial analysis
gives us the tools to perform this evaluation.
Costs and benefits do not always occur at one time; they
occur at different points of time during the life of the
project.
 In most cases, the lifetime worth, that is the lifetime
aggregate of all the costs and benefits, taking into account
the time of their occurrence, is used to compare different
projects and to decide which alternative to choose.

When making an investment decision, the owners look at

their capital and decide what is the best use of it. Should
they invest their limited capital in the stock market, buy real
estate for resale, or what? Owners know that a dollar
received today is worth more than a dollar promised at a later
time. They also understand that in weighing options the risk
of losing their investment must be considered.
People who invested in the overseas stock market quickly
found during the late 1990s that they could lose a
substantial amount of their portfolio if the market
suddenly drops. For these reasons, a time value of
money must be placed on all cash flows into and out of
the company. When a choice is made between
alternatives that involve different receipts and
disbursements, it is essential that interest be considered.
Economic studies in facility management generally
involve decisions between such alternatives. When a
facility manager is evaluating alternative solutions to a
problem, the dollar value must be made comparable. The
time value of money allows these comparisons.
 Single Payment Present Worth (SPPW)
The P/F factor is used to determine the present worth P of a
future amount F invested at i percent interest for n years.
P = F (1  i)  n Sinking Fund Payment
The P/A factor is used to determine the present amount P
that can be paid in equal payments of A (uniform annual
payment) at i percent interest for n years.
The capital recovery factor is used to determine the annual payment A required
to pay off a present amount P at i percent interestifor n years. If the present
(1  i ) n
sum of money P spent today is unknown and A= the(1
uniform P
n payment A needed
 i)  1
to pay back P over a stated period of time.
 •Single payment Present worth (SPPW) of a future amount
n
P = F (1  i)
Uniform series Sinking fund factor (USSF): The amount to be recovered
annually from the beneficiaries of the project to develop a fund to replace
the project
i
A= F
(1  i)  1
n

•Annual installments for the recovery of the investment made for a project
•Using capital recovery factor (CRF)
i(1  i) n
A= P
(1  i)  1
n

145
1.What amount should be charged at
the end of every year from the
beneficiaries of a project so as to
replace it with a new one which will
cost N16o Million at the end of 20
years. The amount charged may be
assumed to earn interest @ 8%.
 Using above equation from sinking fund factor

i
A= P
(1  i )  1
n

0.08
A= x (160000000) = N 3500000
(1  0.08)  1
20
 Uniform Series Compound Amount (USCA)
The F/A factor is used to determine the amount F to
which an equal annual payment A will
accumulate in n years at i percent interest. If A (uniform
annual payment) is known and F
(the future worth of these payments) is required.

(1  i ) n  1
F= A
i
 Sunk Costs
Sunk costs cannot be changed by any decision. They are not
differential costs and should be ignored when making
decisions.
Example: You bought an automobile that cost $10,000 two
years ago. The $10,000 cost is sunk because whether you drive
it, park it, trade it, or sell it, you cannot change the $10,000
cost.
 Net Present Value
Suppose a manager can purchase a stream of future receipts
(FVt ) by spending “C0” dollars today. The NPV of such a
decision is

FV1 FV2 FVn

NPV =  C0  1  2  ...
1  i   1  i  1  i  n

NPV < 0: Reject

NPV > 0: Accept
 Quick Check 
Beginning finished goods inventory was $130,000. The
cost of goods manufactured for the month was
$760,000. And the ending finished goods inventory
was $150,000. What was the cost of goods sold for
the month?
A. $ 20,000.
B. $740,000.
C. $780,000. $130,000 + $760,000 = $890,000
D. $760,000. $890,000 - $150,000 = $740,000
 Beginning work in process was $125,000.
Manufacturing costs incurred for the month were
$835,000. There were $200,000 of partially finished
goods remaining in work in process inventory at the
end of the month. What was the cost of goods
manufactured during the month?
• A. $ 960,000
Beginning work in
• B. $ 960,000 process inventory $ 125,000
+ Mfg. costs incurred
• C. $ 760,000 for the period 835,000
= Total work in process
• D. $ 200,000 during the period $ 960,000
– Ending work in
process inventory 200,000
= Cost of goods
manufactured $ 760,000
 Examples
2. How much will you pay today for a project that is
expected to pay a dividend of $500,000 three year from
now, if the appropriate (risk-adjusted) annual discount
rate for this project is 10%?

3. What is the value of a project that is expected to pay

$150,000 one year from now and $500,000 three years
from now, if the appropriate (risk-adjusted) annual
discount rate for this project is 10%?
 n
P = F (1  i)
Solutions
2.
PV = $500,000/(1+0.1)3 = $375,657.40

3.
PV = $150,000/(1+0.1)1 + $500,000/(1+0.1)3
= $136,363.64 + $375,657.40
= $512,021.04
A man invested N7,000,000 in an
expected 12 years operating life.
Annual operating and
maintenance cost is N560,000 per
year. Using 10% interest rate.
What net annual income must be
received to recover the capital
investment of the project
Costs, Profit, Contribution and Break-Even Analysis
Cost Classification and Cost Allocation
In order to make meaningful decisions a
manager must have cost data for each product,
department and function of the business. The
problem with this is how to accurately define
the costs and how to allocate the costs to the
various products and departments
The management accountant classifies costs
into fixed and variable costs or direct and
indirect costs.
These costs are then allocated as accurately
as possible to the cost centres that
generate them. In this way centres are
made aware of their responsibility to control
costs. Production function is a formal
statement and a tool of analysis which
expresses the technical relation between
output of a good and different combination
of inputs used in its production. It indicates
the maximum amount of output what can be
produced with the help of each possible
combination of inputs.
 Direct and Indirect Costs
Indirect Costs – costs that cannot be allocated accurately
to a cost centre or product e.g. administration costs,
management salaries or maintenance costs. Another term
for this is overheads
Direct Costs – costs that can be directly identified with a
product or cost centre. They are mainly variable costs but can
include some fixed costs e.g. the rent of a building solely used
for one product. They are also referred to as prime costs.
Total Cost – this is the addition of all fixed and variable costs
(plus any semi-variable costs)
The total cost is used by the business to see how much finance
is required for each level of output
Construction Management & Engineering
 BILL OF ENGINEERING MEASUREMENT AND EVALUATION FOR THE REHABILITATION OF SECOND GATE ROAD

S/N DESCRIPTION QTY UNIT RATE AMT

A. PAVEMENT 125 m2 150 18,750

Scarify sub grade level, wet roll and compact to 100%
W.A. standard compaction.
B. Supply, spread, shape and compact approved lateric 125 m2 200 25,000
materials, filled and consolidated in layer of 150mm
thickness to make up level.
C. Provide, Spread, Shape And Compact To 100% W.A. 125 m2 250 31,250
Standard Compaction crushed stone base as base, not
exceeding 150mm thickness
D. Provide and spray prime coat using 60/70 Bitumen at the 125 m2 120 15,000
rate of 1 litre/m2 , blinds with quarry dust
E. Provide, lay and compact asphatic materials 40mm 125 m2 1,500 180,000
thickness
Sub Total 270,000
F
G. Add Contingencies 10% 27,000
Total 297,000
 Benefit Cost ratio analysis
Benefit cost ratio analysis is an economic
technique and formalized way of
comparing the benefit and cost of
undertaking an activity / project.
Cost-benefit analysis assesses the
profitability of a financial endeavor by
considering the present value of each cost
and benefit.
 Budget
An important instrument of the financial management

used as aid in planning, programming and control

A budget may be defined as a financial and quantitative

statement, prepared and approved prior to defined

period of time, of the policy to be pursued during that

period for the purpose of achieving the given

163
objective.
 Budget: advantages
It is a tool for -
a) Quantitative expression of the planning
b) Evaluation of financial performance in accordance with
plans
c) Controlling costs
d) Optimizing the use of resources
e) Directing the total efforts in to the most profitable
channels

164
 Factors Affecting Price Elasticity of Demand
Availability of substitutes
– The better & more numerous the substitutes for a
good, the more elastic is demand
Percentage of consumer’s budget
– The greater the percentage of the consumer’s budget
spent on the good, the more elastic is demand
Time period of adjustment
– The longer the time period consumers have to adjust
to price changes, the more elastic is demand
6-165
 Purpose / Chief objective of construction costing
To detect inefficiency
To reliably forecast results
To supply accurate data for future estimation
Responsibility of financial director
1. Advising the board about financial and legal matters
2. Planning and control of expenditure in accordance with
company policy
3. Administration of budgetary control
4. Design and control of management information system
5. Collection and payment of money, Keeping of books of
account, payment of dividends and preparation etc.
Maintenance of statutory records concerning wages,
salaries and national insurance, fulfillment of legal
responsibilities under the company act.
 Management Accounting
and Control Systems
The Cycle of Control

Plan

Execute Correct

Monitor Evaluate
 Management Accounting and Control Systems
Planning consists of developing an organization’s objectives,
choosing activities to accomplish the objectives, and
selecting measures to determine how well the objectives
were met.
Execution is implementing the plan.
Monitoring is the process of measuring the system’s current
level of performance.
Evaluation occurs when feedback about the system’s current level of
performance is compared to the planned level.
Correcting consists of taking the appropriate actions to return the
system to an in-control state.
Marginal (Incremental) Analysis
Control Variables
– Output
– Price
– Product Quality
– Advertising
– R&D
Basic Managerial Question: How much of the
control variable should be used to maximize net
benefits?
 Relationship to
The Capital Outlay Decision
The time value of money is used to
determine whether future benefits are
sufficiently large to justify current
outlays
Mathematical tools of the time value of
money are used in making capital
allocation decisions
The time value of money describes the greater benefit of
receiving money now rather than later. It is founded on
time preference. The principle of the time value of money
explains why interest is paid or earned: Interest, whether
it is on a bank deposit or debt, compensates the depositor
or lender for the time value of money. It also underlies
investment. Investors are willing to forgo spending their
money now if they expect a favourable return on their
investment in the future.
 Future Value – Single Amount
(Cont’d)
A generalized formula for Future Value:

Where
FV = Future value
PV = Present value
i = Interest rate
n = Number of periods;

In the previous case, PV = $1,000, i = 10%, n = 4, hence;

 time value of money
The time value of money (TVM) is the idea that
money available at the present time is worth more
than the same amount in the future due to its
potential earning capacity. This core principle of
finance holds that, provided money can earn
interest, any amount of money is worth more the
sooner it is received.
 The Rule of 72
Estimates how many years an investment will take to
double in value
Number of years to double =
72 / annual compound interest rate
Example -- 72 / 8 = 9 therefore, it will take 9 years for an
investment to double in value if it earns 8% annually

175
Example: Double Your Money!!!

Quick! How long does it take to double $5,000 at

a compound rate of 12% per year?

Approx. Years to Double = 72 / i%

72 / 12% = 6 Years
[Actual Time is 6.12 Years]
176
 Topics Today
• Single Payment, Present/Future Value Factor
• Sinking Factor, Capital Recovery Factor
• Conversion for Arithmetic Gradient Series
• Conversion for Geometric Gradient Series

177
 Compound Amount Factor
(Single Payment)

This factor finds the equivalent future worth, F, of a

present investment, P, held for n periods at i rate
of interest.

Example: What is the value in 9 years of $1,200

invested now at 10% interest

178
Compound Amount Factor
(Single Payment)
F

1 2 3 4 9

P = $1,200

F = P(1  i) n

= $1,200(1  0.10) 9

= $2,829
179
 Present Worth Factor
(Single Payment)

This factor finds the equivalent present value, P, of a single

future cash flow, F, occurring at n periods in the future
when the interest rate is i per period.

Example: What amount would you have to invest now to

yield $2,829 in 9 years if the interest rate per year is 10%?

180
Present Worth Factor
(Single Payment)
F = $2,829

1 2 3 4 9

n
P = F (1  i)
9
= $2,829(1  0.10)
= $1,200
181
 Compound Amount Factor
(Uniform Series)
This factor finds the equivalent future value, F, of the
accumulation of a uniform series of equal annual
payments, A, occurring over n periods at i rate of interest
per period.

Example: What would be the future worth of an annual

year-end cash flow of $800 for 6 years at 12% interest per
year?

182
Compound Amount Factor
(Uniform Series)
F

1 2 3 4 5 6

$800 $800 $800 $800 $800 $800

(1  i )  1 n
F=A
i
(1  0.12) 6  1
= $800
0.12
= $6,492
183
 Sinking Fund Factor
This factor determines how much must be deposited each
period in a uniform series, A, for n periods at i interest per
period to yield a specified future sum.

Example: If a $1.2 million bond issue is to be retired at the

end of 20 years, how much must be deposited annually
into a sinking fund at 7% interest per year?

184
 Capital Recovery Factor
This factor finds an annuity, or uniform series of payments,
over n periods at i interest per period that is equivalent to
a present value, P.

Example: What savings in annual manufacturing costs

over an 8 year period would justify the purchase of a
$120,000 machine if the firm’s minimum attractive rate
of return (MARR) were 25%?

185
 Capital Recovery Factor
A A A A A
1 2 3 8

$120,000
i (1  i ) n
A= P
(1  i ) n  1
0.25(1  0.25)8
= $120,000
(1  0.25)8  1
= $36,048
186
 Present Worth Factor
(Uniform Series)
This factor finds the equivalent present value, P, of a
series of end-of-period payments, A, for n periods
at i interest per period.

Example: What lump sum payment would be

required to provide $50,000 per year for 30 years
at an annual interest rate of 9%?

187
Present Worth Factor
(Uniform Series)
$50,000 $50,000 $50,000 $50,000 $50,000

1 2 3 30

P
(1  i ) n  1
P=A
i (1  i ) n
(1  0.07)30  1
= $50,000
0.07(1  0.07)30
= $620,452
188
 Compound Interest Factors
Discrete Cash Flow, Discrete Compounding

To Find Given Name of Factor Factor

Compound Amount
F P Factor (single payment) (1  i) n
Present Worth Factor
P F (single payment) (1  i )  n

Compound Amount (1  i ) n  1
F A Factor (uniform series) i
i
A F Sinking Fund Factor (1  i ) n  1

189
 Compound Interest Factors
Discrete Cash Flow, Discrete Compounding

To Find Given Name of Factor Factor

i (1  i ) n
A P Capital Recovery Factor (1  i ) n  1
(1  i) n  1
Present Worth Factor
P A (uniform series) i (1  i) n
Arithmetic Gradient
(1  i ) n  (1  ni )
Conversion Factor (to
A G uniform series) i[(1  i ) n  1]
Arithmetic Gradient
Conversion Factor (to 1  (1  ni)(1  i )  n
P G present value) i2
190
Single-Payment Factors (P/F, F/P)
Fundamental question: What is the future value, F, if a single
present worth, P, is invested for n periods at an ROR of i%
assuming compound interest?

In general, F = P(1+i)n

What is the present value, P, if a future value, F, is desired,

assuming P is invested for n periods at i% compound interest?

P = F/(1+i)n
Single-Payment Factors (P/F, F/P)
Example: If you were to invest $2000 today in a CD paying 8% per
year, how much would the CD be worth at the end of year four?
F = $2000(F/P,8%,4)
F = $2000(1.3605) from pg. 739
F = $2721

or,
F = $2000(1.08)4
F = $2000(1.3605)
F = $2721
Uniform Series Present Worth (P/A, A/P)
Example: What is your mortgage payment on a $56K loan if
you quoted 6.25% interest for a 30 year loan. (Remember
to first convert to months).

i = .5208, n = 360, P = $56,000

 .005208(1  .005208)360 
A = 56,000 
 (1  A.005208)  1 
360
= $344.79
Uniform Series Future Worth (F/A, A/F)
Knowing:
P = F/(1+i)n

 i(1  i) n 
A = P 
 (1  i)  1
n

F  i(1  i) n 
A=  
(1  i) n
 (1  i)  1
n

and,
 i   (1  i) n  1
A = F  F = A 
 (1  i )  1
n
 i 
 Uniform Series Future Worth (F/A, A/F)
Example: If you invest in a college savings plan by making equal
and consecutive payments of $2000 on your child’s birthdays,
how much will the account be worth when your child turns 18,
assuming an interest rate of 6% annually?
A = $2000, i = 6%, n = 18, find F.
F = 2000(F/A,6%,18)
F = $2000(30.907)
F = $61,814
or,
 (1  .06)18  1
F = $2000  = $61,811
 .06 
 Worked Example 4
Two alternative plans are suggested for a proposed
engineering project as follows:
Plan A: Uses one material, The cost of
construction is N900,000 with estimated life 100
years and annual maintenance cost of N8,000.
Plan B: Uses three materials X, Y and Z. The cost of X
construction is N240,000 with estimated life 100 years ,
cost of Y is N100,000 with estimated life 20 years, the
cost of R is N180,000 with estimated life 50 years.
Annual maintenance cost for this plan is N21,000.
As an Engineering Consultant to this project, calculate the total
annual costs for each of the two plans of the project and suggest
which one you would recommend assuming discount rate as 4%
per annum. All salvage values are assumed to be negligible
 i(1  i) n
P
(1  i)  1
n
 i (1  i ) n
P
(1  i )  1
n
It can be observed that the cost of production of plan
A (₦44,727.2) is less than that of plan B
(₦46,531.131). Plan A is recommended since it
cheaper and economically justifiable. [12 Marks]
Given: The Bureau of Reclamation is doing an irrigation project at
$1.5 million and maintenance of $25,000 per year. Agricultural
revenue is expected to be $175,000 per year. It’s a 20 year project
at 6% per annum.
Solution: Do a Benefit-Cost ratio analysis
AW = C = 1,500,000(A/P,6%,20) + 25,000
AW = C = 1,500,000(.08718) + 25,000
AW = C = $155,770
Annual revenue = B = $175,000 A = i (1  i ) n
P
(1  i )  1
n
B/C = 175,000/155,770
B/C = 1.12
B/C>1.0. The project is economically justifiable 471 slides
 SNAP TEST
1. Define Time value of money
2.What is the equivalent present worth at 10% interest of
three N6 million investments, one made now, one at the
end of the third year and last at the end of tenth year
from now
3. The Bureau of Reclamation is doing an irrigation project at
$1.5 million and maintenance of $25,000 per year.
Agricultural revenue is expected to be $175,000 per year.
It’s a 20 year project at 6% per annum. Do a Benefit-Cost
ratio analysis and check whether the project is justifiable.
3 Last Closing Thoughts

203
 Features of the four market structures
Type of Number Freedom of Nature of Examples Implications for
market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Very Builders, Downward sloping,

Unrestricted Differentiated but relatively
competition Many convenience
stores elastic

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Pure One Restricted or Unique company more inelastic than
Monopoly completely oligopoly. Firm has
blocked considerable
control over price
 n
P = F (1  i)
What is the equivalent present worth at 10% interest of
three N6 million investments, one made now, one at the
end of the third year and last at the end of tenth year
from now

PV = 6,000,000/(1+0.1)0 + 6,000,000/(1+0.1)3+
6,000,000/(1+0.1)10
= N6,000,000 + N4,507,800 +N2,313,000
The present worth of the future investment
P = P1+P2+P3 = N12.8208 Million
 Conclusion
In Engineering projects, we need to minimize the
cost in order to maximize benefits for the benefit
of mankind.
Make sure you include all costs and benefits when
making decisions (opportunity cost)
Optimal economic decisions are made at the margin
(marginal analysis)
Demand and Supply must be taken into
consideration before fixing market price
 Conclusion
Quality and cost control are basic requirements
for successful engineering projects and so we
should take them with the seriousness that
they deserve. We should ensure timely
completion of the project within the
allocated budget.
 SNAP TEST
1. Define Managerial Economics.
2.The process of arriving at the optimal decision
is the focus of managerial economics. Explicate
on this assertion in three sentences, listing five
roles of managerial economists to your area of
specialization as an engineering students.
3.Explain the difference between efficiency and
effectiveness and their importance for
organizational performance.
Practice these Questions before mid-semester Test
and Examination
Question # 1
An investor is being asked to invest in a project with an
initial investment of $3,000 with first year income of
$400 increasing by $100 every year for five years. His
MARR (Minimum acceptable rate of return) is 5%. If
he phones you with this problem when you have no
access to anything other than paper and pen, what
would be your recommendation to him? Should he
accept this proposal or not? Explain your answer.
 Question # 2: Board members at Darbol Corporation
received two proposals for a machine they may want to
purchase. They also can choose to invest their capital and
receive an interest rate of 15% annually. Using the
following data about the machine, what is their most
economical course of action? Use the net present worth method.
Data Machine A Machine B
Initial Cost $180,000 $240,000
Salvage Value $40,000 $45,000
Annual Benefit $75,000 $89,000
Annual Cost $21,000 $21,000
Life 5 years 10 years
 Question # 3
Two alternative plans are suggested for a proposed engineering project as
follows:
For plan A: Using one material, The cost of construction is N450,000 with
estimated life 100 years and annual maintenance cost of N4000.
Plan B: Using three materials X ,Y and Z. The cost of X construction is
N120,000 with estimated life 100 years , cost of Y is N50,000 with
estimated life 20 years, the cost of Y is N90,000 with estimated life 50
years. Annual maintenance for the construction and accessories is
N10,500. Calculate the total annual costs for each of the two plans of
the project and suggest which one you would recommend assuming
discount rate is
(i) 8% (ii) 4% per annum
All salvage values are assumed to be negligible
ENG 384 Mid Semester Test
On Monday
nd
2 May 2023
8am-10am
Students are to be seated by
8:00am
 Tutorial Questions
1. List the four functions of management and describe
how they interact to permit a firm to succeed.
2. 3. What is the difference between business management
and leadership?
4. Describe the decision-making process.
5. Differentiate between Perfect market, Monopoly,
duopoly, oligopoly market
 CLASS WORK/TEST
1. You have been invited by the current president of Nigeria,
General Muhammadu Buhari to make an argument for the
optimization of engineering resources in the country. As an
aspiring Engineer, briefly discuss your view on this and
make viable recommendations that will facilitate timely
completion of engineering projects within the allocated
budget without jeopardizing economic and legal regulations
of Nigeria
2. Economists, engineering managers, project managers, and
indeed any person involved in decision making must be able
to analyze the financial outcome of his or her decision.
Juxtapose this statements in three sentences
List the four functions of management and describe
how they interact to permit a firm to succeed.
Describe the four management functions and the type of
management activity associated with each.
Describe conceptual, human, and technical skills and their
relevance for managers.
Highlight ten roles that managerial Economist perform in
organizations.
Appreciate the manager’s role in small businesses and
nonprofit organizations.
Understand the personal challenges involved in becoming a
new manager.
Why is the understanding of the principles of Managerial
Economics necessary for a business manager?
216
Discussion Questions in Industrial
Organization:
a Why are some markets monopoly-like while
others are competitive?
a How can industry performance and structure
be measured or analyzed?
a How does the performance of individual
firms affect the structure and performance of
the industry in which they operate?
a If industry performance seems deficient but
remediable, which government policies are
likely to help more than they cost?
217
Thank you for
your attention!