Chapter 7

Engineering Economics

William B. Rouse

7.1 Introduction

The objective of this chapter is to summarize and illustrate the fundamentals of engineering economics. The focus is on the concepts, principles, models, methods, and tools that are necessary to understanding subsequent chapters, as well as address the economics of human systems integration (HSI) in general. Engineering economics builds on theories and principles of economics as presented in Chapters 4–6.

However, engineering economics is much more pragmatic and focused in that the primary concern is making specific decisions about allocations of resources to creation and operation of capabilities, processes, facilities, and so on. In other words, engineering economics is less concerned with decision making in general than with framing, analyzing, and making specific decisions. For example, rather than asking whether research and development (R&D) is a good investment in general, the question typically of interest is whether to invest in a particular project.

A central theme in this chapter is the difference between monies invested to create future returns versus monies expended for operating costs. Monies invested in upstream HSI can yield substantial returns in terms of downstream savings. Savings from decreased future operating costs, decreased operational mishaps, and decreased long-term health costs should be viewed as returns on HSI investments. Hence, the economic valuation of HSI should employ investment ...

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