Preface xi Green Content xviii
CHAPTER 1
Introduction to Engineering Economy 1
1.1 Introduction 2
1.2 The Principles of Engineering Economy 3
1.3 Engineering Economy and the Design Process 7
1.4 Using Spreadsheets in Engineering Economic Analysis 15
1.5 Try Your Skills 15
1.6 Summary 16
CHAPTER 2
Cost Concepts and Design Economics 20
2.1 Cost Terminology 21
2.2 The General Economic Environment 27
2.3 Cost-Driven Design Optimization 38
2.4 Present Economy Studies 43
2.5 Case Study–The Economics of Daytime Running Lights 49
2.6 Try Your Skills 51
2.7 Summary 52
Appendix 2-A Accounting Fundamentals 60
CHAPTER 3
Cost-Estimation Techniques 67
3.1 Introduction 68
3.2 An Integrated Approach 70
3.3 Selected Estimating Techniques (Models) 78
3.4 Parametric Cost Estimating 83
3.5 Case Study–Demanufacturing of Computers 94
3.6 Electronic Spreadsheet Modeling: Learning Curve 96
3.7 Try Your Skills 98
3.8 Summary 100
CHAPTER 4
The Time Value of Money 107
4.1 Introduction 108
4.2 Simple Interest 109
4.3 Compound Interest 110
4.4 The Concept of Equivalence 110
4.5 Notation and Cash-Flow Diagrams and Tables 113
4.6 Relating Present and Future Equivalent Values 123
4.7 Relating a Uniform Series (Annuity) to Its Present and Future Equivalent
4.8 Summary of Interest Formulas and Relationships for Discrete Compounding 133
4.9 Deferred Annuities (Uniform Series) 135
4.10 Equivalence Calculations Involving Multiple Interest Formulas 137
4.11 Uniform (Arithmetic) Gradient of Cash Flows 143
4.12 Geometric Sequences of Cash Flows 148
4.13 Interest Rates that Vary with Time 153
4.14 Nominal and Effective Interest Rates 155
4.15 Compounding More Often than Once per Year 157
4.16 Interest Formulas for Continuous Compounding and Discrete Cash Flows 160
4.17 Case Study–Understanding Economic “Equivalence” 163
4.18 Try Your Skills 166
4.19 Summary 169
CHAPTER 5
Evaluating a Single Project 186
5.1 Introduction 187
5.2 Determining the Minimum Attractive Rate of Return (MARR) 188
5.3 The PresentWorth Method 189
5.4 The Future Worth Method 196
5.5 The Annual Worth Method 197
5.6 The Internal Rate of Return Method 202
5.7 The External Rate of Return Method 213
5.8 The Payback (Payout) Period Method 215
5.9 Case Study–A Proposed Capital Investment to Improve Process Yield 218
5.10 Electronic Spreadsheet Modeling: Payback Period Method 220
5.11 Try Your Skills 222
5.12 Summary 224
Appendix 5-A The Multiple Rate of Return Problem with the IRR Method 236
CHAPTER 6
Comparison and Selection among Alternatives 240
6.1 Introduction 241
6.2 Basic Concepts for Comparing Alternatives 241
6.3 The Study (Analysis) Period 245
6.4 Useful Lives Are Equal to the Study Period 247
6.5 Useful Lives Are Unequal among the Alternatives 264
6.6 Personal Finances 277
6.7 Case Study–Ned and Larry’s Ice Cream Company 281
6.8 Postevaluation of Results 284
6.9 Project Postevaluation Spreadsheet Approach 284
6.10 Try Your Skills 287
6.11 Summary 291
CHAPTER 7
Depreciation and Income Taxes 308
7.1 Introduction 309
7.2 Depreciation Concepts and Terminology 309
7.3 The Classical (Historical) Depreciation Methods 312
7.4 The Modified Accelerated Cost Recovery System 317
7.5 A Comprehensive Depreciation Example 326
7.6 Introduction to Income Taxes 330
7.7 The Effective (Marginal) Corporate Income Tax Rate 333
7.8 Gain (Loss) on the Disposal of an Asset 336
7.9 General Procedure for Making After-Tax Economic Analyses 337
7.10 Illustration of Computations of ATCFs 341
7.11 Economic Value Added 353
7.12 Try Your Skills 355
7.13 Summary 356
CHAPTER 8
Price Changes and Exchange Rates 368
8.1 Introduction 369
8.2 Terminology and Basic Concepts 370
8.3 Fixed and Responsive Annuities 376
8.4 Differential Price Changes 381
8.5 Spreadsheet Application 383
8.6 Foreign Exchange Rates and Purchasing Power Concepts 385
8.7 Case Study–Selecting Electric Motors to Power an Assembly Line 390
8.8 Try Your Skills 393
8.9 Summary 394of Single Cash Flows 117
CHAPTER 9
Replacement Analysis 403
9.1 Introduction 404
9.2 Reasons for Replacement Analysis 404
9.3 Factors that Must Be Considered in Replacement Studies 405
9.4 Typical Replacement Problems 408
9.5 Determining the Economic Life of a New Asset (Challenger) 411
9.6 Determining the Economic Life of a Defender 415
9.7 Comparisons in Which the Defender’s Useful Life Differs from that of the Challenger 418
9.8 Retirement without Replacement (Abandonment) 421
9.9 After-Tax Replacement Studies 422
9.10 Case Study–Replacement of a Hospital’s Emergency Electrical Supply System 430
9.11 Summary 433
CHAPTER 10
Evaluating Projects with the Benefit−Cost Ratio Method 443
10.1 Introduction 444
10.2 Perspective and Terminology for Analyzing Public Projects 445
10.3 Self-Liquidating Projects 446
10.4 Multiple-Purpose Projects 446
10.5 Difficulties in Evaluating Public-Sector Projects 449
10.6 What Interest Rate Should Be Used for Public Projects? 450
10.7 The Benefit−Cost Ratio Method 452
10.8 Evaluating Independent Projects by B−C Ratios 458
10.9 Comparison of Mutually Exclusive Projects by B−C Ratios 460
10.10 Case Study–Improving a Railroad Crossing 465
10.11 Summary 467
CHAPTER 11
Breakeven and Sensitivity Analysis 475
11.1 Introduction 476
11.2 Breakeven Analysis 476
11.3 Sensitivity Analysis 483
11.4 Multiple Factor Sensitivity Analysis 489
11.5 Summary 493
CHAPTER 12
Probabilistic Risk Analysis 502
12.1 Introduction 503
12.2 Sources of Uncertainty 504
12.3 The Distribution of Random Variables 504
12.4 Evaluation of Projects with Discrete Random Variables 508
12.5 Evaluation of Projects with Continuous Random Variables 517
12.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation 522
12.7 Performing Monte Carlo Simulation with a Computer 526
12.8 Decision Trees 530
12.9 Real Options Analysis 535
12.10 Summary 538
CHAPTER 13
The Capital Budgeting Process 546
13.1 Introduction 547
13.2 Debt Capital 549
13.3 Equity Capital 550
13.4 TheWeighted Average Cost of Capital (WACC) 553
13.5 Project Selection 557
13.6 Postmortem Review 561
13.7 Budgeting of Capital Investments and Management Perspective 562
13.8 Leasing Decisions 563
13.9 Capital Allocation 565
13.10 Summary 571
CHAPTER 14
Decision Making Considering Multiattributes 575
14.1 Introduction 576
14.2 Examples of Multiattribute Decisions 576
14.3 Choice of Attributes 578
14.4 Selection of a Measurement Scale 578
14.5 Dimensionality of the Problem 579
14.6 Noncompensatory Models 579
14.7 Compensatory Models 584
14.8 Summary 592
Appendix A Using Excel to Solve Engineering Economy Problems 598
Appendix B Abbreviations and Notation 615
Appendix C Interest and Annuity Tables for Discrete Compounding 619
Appendix D Interest and Annuity Tables for Continuous Compounding 638
Appendix E Standard Normal Distribution 642
Appendix F Selected References 645
Appendix G Solutions to Try Your Skills 648
Appendix H Answers to Selected Problems 660
Index 664