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Contemporary Engineering Economics,9780130893109
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Contemporary Engineering Economics



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This book is intended for undergraduate engineering students taking the introductory engineering economics course at the university level. The third edition of Contemporary Engineering Economics has been thoroughly revised and updated while continuing to adopt a contemporary approach to the subject, and teaching, of engineering economics. This text aims not only to build a sound and comprehensive coverage of engineering economics, but also to address key educational challenges, such as student difficulty in developing the analytical skills required to make informed financial decisions.

Table of Contents

9Most chapters end with a Summary, Self-Test Questions, and Problems.


1. Engineering Economic Decisions.
The Rational Decision-Making Process. Economic Decisions. Predicting the Future. Role of Engineers in Business. Large-Scale Engineering Projects. Types of Strategic Engineering Economic Decisions.

2. Understanding Financial Statements.
Accounting: The Basis of Decision Making. Net Worth: How Well Am I Doing? Financial Status for Businesses. Using Ratios to Make Business Decisions.

3. Cost Concepts and Behaviors.
General Cost Terms. Classifying Costs for Financial Statements. Cost Classification for Predicting Cost Behavior. Cost Concepts Relevant to Decision Making. Thinking on the Margin: Fundamental Economic.


4. Time Is Money.
Interest: The Cost of Money. Economic Equivalence. Development of Interest Formulas. Unconventional Equivalence Calculations.

5. Understanding Money and Its Management.
Nominal and Effective Interest Rates. Equivalence Calculations when Payment Periods and Compounding Periods Coincide. Equivalence Calculations when Payment Periods and Compounding Periods Differ. Equivalence Calculations with Continuous Payments. Changing Interest Rates. Debt Management. Amortized Loans.

6. Principles of Investing.
Investing in Financial Assets. Investment Strategies. Investing in Stocks. Investing in Bonds.


7. Present Worth Analysis.
Describing Project Cash Flows. Initial Project Screening Method. Present Worth Analysis. Variations of Present Worth Analysis. Comparing Mutually Exclusive Alternatives.

8. Annual Equivalent Worth Analysis.
Annual Equivalent Criterion. Applying Annual Worth Analysis. Mutually Exclusive Projects. Design Economics.

9. Rate of Return Analysis.
Rate of Return. Methods for Finding Rate of Return. Internal Rate of Return Criterion. Mutually Exclusive Alternatives.


10. Depreciation.
Asset Depreciation. Factors Inherent to Asset Depreciation. Book Depreciation Methods. Tax Depreciation Methods. Depletion. Repairs or Improvements to Depreciable Assets.

11. Corporate Income Taxes.
After-Tax Cash Flow. Corporate Taxes. Tax Treatment of Gains or Losses on Depreciable Assets. Income Tax Rate to be Used in Economic Analysis.

12. Developing Project Cash Flows.
Estimating Cost/Benefit for Engineering Projects. Incremental Cash Flows. Developing Cash Flow Statements. Generalized Cash Flow Approach.

13. Inflation and Its Impact on Project Cash Flows.
Meaning and Measure of Inflation. Equivalence Calculations under Inflation. Effects of Inflation on Project Cash Flows. Rate of Return Analysis under Inflation.


14. Project Risk and Uncertainty.
Origins of Project Risk. Methods of Describing Project Risk. Probability Concepts for Investment Decisions. Probability Distribution of NPW. Decision Trees and Sequential Investment Decisions.

15. Replacement Decisions.
Replacement Analysis Fundamentals. Economic Service Life. Replacement Analysis When Required Service Is Long. Replacement Analysis with Tax Considerations.

16. Capital Budgeting Decisions.
Methods of Financing. Cost of Capital. Choice of Minimum Attractive Rate of Return. Capital Budgeting.

17. Economic Analysis in the Public Sector.
Framework of Benefit-Cost Analysis. Valuation of Benefits and Costs. Benefit-Cost Ratios. Analysis of Public Projects Based on Cost-Effectiveness.

Appendix A. Computing IRR for Nonsimple Investments.
Predicting Multiple i*s. Net Investment Test. External Interest Rate for Mixed Investments. Calculation of Return on Invested Capital for Mixed Investments. Trial-and-Error Method for Computing IRR.

Appendix B. Simulation.
Computer Simulation. Model Building. Monte Carlo Sampling. Simulation Output Analysis. Dependent Random Variables.

Appendix C. Electronic Spreadsheets: Summary of Built-In Financial Functions.
Nominal Versus Effective Interest Rates. Single-Sum Compounding Functions. Annuity Functions. Loan Analysis Functions. Bond Functions. Project Evaluation Tools. Depreciation Functions.

Appendix D. Interest Factors for Discrete Compounding.
Answers to Self-Test Questions.


Preface What is "Contemporary" About Engineering Economics? Decisions made during the engineering design phase of product development determine the majority of the costs of manufacturing that product (some say 85%). As design and manufacturing processes become more complex, the engineer is making decisions that involve money more than ever before. Thus, the competent and successful engineer in the twenty-first century must have an improved understanding of the principles of science, engineering, and economics, coupled with relevant design experience. Increasingly, in the new world economy, successful businesses will rely on engineers with such expertise. Economic and design issues are inextricably linked in the product/service life cycle. Therefore, one of my strongest motivations for writing this text was to bring the realities of economics and engineering design into the classroom and to help students integrate these issues when contemplating many engineering decisions. With the advent of information technology, the Internet becomes an indispensable tool in exchanging information. Accordingly, we have developed a comprehensive companion website to the book to provide numerous teaching and learning aids. I believe that our website is a critical resource for transitioning the teaching of engineering economy into the twenty-first century. Of course my underlying motivation for writing this book was not simply to address contemporary needs, but to address as well the ageless goal of all educators: to help students to learn. Thus, thoroughness, clarity, and accuracy of presentation of essential engineering economics was my aim at every stage in the development of the text. Changes in the Third Edition In the complex and changing world of a global economy in an age of information, the practice of engineering economics is dynamic and as new developments occur, they should be incorporated into a textbook such as this one. In addition, the author and publisher are constantly seeking ways of improving the book in terms of clarity and understanding. As a result, we have made several important changes in this edition, including the following: The overall book design style has been changed. The new design format allows us to use a second color more effectively to highlight the most important information and separate examples from the main text reading, providing an effective study and review tool for students. There are 17 chapters, including three new chapters. Each chapter is classified into one of five parts: Part I: Financial and Cost Information; Part II: Money and Investing; Part III: Evaluating Business and Engineering Assets; Part IV: Development of Project Cash Flows; and Part V: Special Topics in Engineering Economics. All sections were updated to reflect the latest tax laws, interest rates, and other financial developments. A discussion on end-of-chapter "Computer Notes" is consolidated into the website for Contemporary Engineering Economics: This allows us to remove all Microsoft Excel spreadsheet discussions from the main text. Now students can download various spreadsheet templates from the website and open directly in Excel for Windows. The obvious benefit is that it is no longer necessary to enter the spreadsheets by hand. Users can then modify the basic templates for the specific problem at hand. About one third of examples and self-test questions in the main chapters are either new or revised ones to reflect the contemporary nature of economic decision problems. In Chapters 9 and 14, some of the advanced topics (or optional materials) such as the multiple-rates of return problems and risk simulation have been removed from the main text and placed in the Appendix. This

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