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### What version or edition is this?

This is the 12th edition with a publication date of 11/29/2013.

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### Summary

The twelfth edition of the market-leading *Engineering Economic Analysis* offers comprehensive coverage of financial and economic decision making for engineers, with an emphasis on problem solving, life-cycle costs, and the time value of money. The authors' concise, accessible writing, practical emphasis, and contemporary examples linked to students' everyday lives make this text the most popular among students. In addition, with its extensive support package and logical progression of topics, this is the easiest book to teach from.

**New to the Twelfth Edition**

* **500 new or revised problems--**answers to most even problems now in Appendix E

*** Six new and nine updated chapter-opening vignettes** provide extended real-world examples

* **Twenty new Excel tutorial videos** added to the updated set of thirty-six from the eleventh edition

*** New visual "five-button solutions"** help simplify the use of spreadsheets and calculators

* A new Appendix 12A aggregates coverage of **personal income taxes**, which now includes time value of money problems

**INSTRUCTOR SUPPORT PACKAGE **

* An **Instructor's Manual** including full solutions to all text problems in print format

* An updated and expanded set of **supplemental materials**, including new test questions, as well as the solutions to the *Cases in Engineering Economy*, 2E, text available on Oxford's Ancillary Resource Center. Please contact your Oxford University Press sales representative for access.

* **Two PowerPoint-based lecture resources:** Fully customizable PowerPoint-based lecture outlines, ready for immediate use or modification, and slides of every figure and table in the text

*** Learning Management System support:** Most of the electronic ancillaries are available as pre-formatted cartridges for upload into a learning management system

**Instructor Support Package available to adopters of the twelfth edition (not included with book, available separately)**

**STUDENT SUPPORT PACKAGE**

* **Free casebook:** In-text CD includes *Cases in Engineering Economy*, 2E, a collection of fifty-four case studies designed to help students apply the theories and concepts of engineering economy to real-world situations

* **Study Guide:** Packaged with every copy of the student text; contains practice questions with detailed solutions for every chapter in the text

*** Companion Website (www.oup.com/us/newnan)** featuring:

* 100 additional sample FE exam problems

* Interactive tutorial questions for many chapters

* Video tutorials for Microsoft Excel, explaining how to use Excel to work specific financial calculations

* Updated interactive spreadsheet models

**Student Support Package available to adopters of the twelfth edition (not included with book, available separately)**

### Author Biography

**Donald G. Newnan **is Professor Emeritus of Industrial and Systems Engineering at San Jose State University.

**Ted G. Eschenbach** is a consultant and Professor Emeritus of Engineering Management at the University of Alaska Anchorage.

**Jerome P. Lavelle** is Associate Dean in the College of Engineering at North Carolina State University.

### Table of Contents

**1: MAKING ECONOMIC DECISIONS**

A Sea of Problems

Simple Problems

Intermediate Problems

Complex Problems

The Role of Engineering Economic Analysis

Examples of Engineering Economic Analysis

The Decision-Making Process

Rational Decision Making

Engineering Decision Making for Current Costs

**2: ENGINEERING COSTS AND COST ESTIMATING**

Engineering Costs

Fixed, Variable, Marginal, and Average Costs

Sunk Costs

Opportunity Costs

Recurring and Nonrecurring Costs

Incremental Costs

Cash Costs Versus Book Costs

Life-Cycle Costs

Cost Estimating

Types of Estimate

Difficulties in Estimation

Estimating Models

Per-Unit Model

Segmenting Model

Cost Indexes

Power-Sizing Model

Triangulation

Improvement and the Learning Curve

Estimating Benefits

Cash Flow Diagrams

Categories of Cash Flows

Drawing a Cash Flow Diagram

Drawing Cash Flow Diagrams with a Spreadsheet

**3: INTEREST AND EQUIVALENCE**

A Prescription for Success

Computing Cash Flows

Time Value of Money

Simple Interest

Compound Interest

Repaying a Debt

Equivalence

Difference in Repayment Plans

Equivalence Is Dependent on Interest Rate

Single Payment Compound Interest Formulas

Nominal and Effective Interest

Continuous Compounding

Single Payment Interest Factors: Continuous Compounding

**4. EQUIVALENCE FOR REPEATED CASH FLOWS**

Uniform Series Compound Interest Formulas

Expanded Factors as Calculator Functions

Cash Flows that Do Not Match Basic Patterns

Economic Equivalence Viewed as a Moment Diagram

Relationships Between Compound Interest Factors

Single Payment

Uniform Series

Arithmetic Gradient

Derivation of Arithmetic Gradient Factors

Reality and the Assumed Uniformity of A, G, and g.

Geometric Gradient

Compounding Period and Payment Period Differ

Spreadsheets for Economic Analysis

Spreadsheet Annuity Functions for Cash Flow Tables

Spreadsheet Block Functions

Using Spreadsheets for Basic Graphing

**5: PRESENT WORTH ANALYSIS**

Assumptions in Solving Economic Analysis Problems

End-of-Year Convention

Viewpoint of Economic Analysis Studies

Sunk Costs

Borrowed Money Viewpoint

Effect of Inflation and Deflation

Income Taxes

Economic Criteria

Applying Present Worth Techniques

Useful Lives Equal the Analysis Period

Useful Lives Different from the Analysis Period

Infinite Analysis Period: Capitalized Cost

Multiple Alternatives

Bond Pricing

Spreadsheets and Present Worth

**6: ANNUAL CASH FLOW ANALYSIS**

Lowest Prices on the Net! Buy Now!

Annual Cash Flow Calculations

Resolving a Present Cost to an Annual Cost

Treatment of Salvage Value

Annual Cash Flow Analysis

Analysis Period

Analysis Period Equal to Alternative Lives

Analysis Period a Common Multiple of Alternative Lives

Analysis Period for a Continuing Requirement

Infinite Analysis Period: Capitalized Cost

Multiple Alternatives

Using Spreadsheets to Analyze Loans

Building an Amortization Schedule

How Much to Interest? How Much to Principal?

Finding the Balance Due on a Loan

Pay off Debt Sooner by Increasing Payments

**7: RATE OF RETURN ANALYSIS**

Bar Codes Give a Number; RFID Codes Tell A Story

Internal Rate of Return

Calculating Rate of Return

Plot of NPW versus Interest Rate

Interest Rates When There are Fees or Discounts

Loans and Investments are Everywhere

Incremental Analysis

Present Worth Analysis

Analysis Period

Spreadsheets and Rate of Return Analysis

Summary

Problems

Appendix 7A: Difficulties in Solving for an Interest Rate

Why Multiple Solutions Can Occur

Modified Internal Rate of Return (MIRR)

**8: Choosing the Best Alternative**

Tapping Into Geometry

Incremental Analysis

Graphical Solutions

Elements in Comparing Mutually Exclusive Alternatives

Doing a Set of Incremental Challenger-Defender Comparisons

Choosing an Analysis Method

Spreadsheets and Goal Seek

**9: OTHER ANALYSIS TECHNIQUES**

Clean, Green, and Far Between

Future Worth Analysis

Benefit-Cost Ratio Analysis

Variations on the Theme of Benefit-Cost Ratio

Payback Period

Sensitivity and Breakeven Analysis

Graphing with Spreadsheets for Sensitivity and Breakeven Analysis

Doing What-If Analysis with Spreadsheets

**10: UNCERTAINTY IN FUTURE EVENTS**

They Only Thought They Were Done

Estimates and Their Use in Economic Analysis

A Range of Estimates

Probability

Joint Probability Distributions

Expected Value

Economic Decision Trees

Risk

Risk Versus Return

Simulation

Real Options

**11: DEPRECIATION**

Depreciation and Competitiveness

Basic Aspects of Depreciation

Deterioration and Obsolescence

Depreciation and Expenses

Types of Property

Depreciation Calculation Fundamentals

Historical Depreciation Methods

Straight-Line Depreciation

Sum-of-Years'-Digits Depreciation

Declining Balance Depreciation

Modified Accelerated Cost Recovery System (MACRS)

Cost Basis and Placed-in-Service Date

Property Class and Recovery Period

Percentage Tables

Where MACRS Percentage Rates (rt ) Come From

MACRS Method Examples

Comparing MACRS and Historical Methods

Depreciation and Asset Disposal

Unit-of-Production Depreciation

Depletion

Cost Depletion

Percentage Depletion

Spreadsheets and Depreciation

Using VDB for MACRS

**12: INCOME TAXES**

On With the Wind

A Partner in the Business.

Calculation of Taxable Income

Taxable Income of Individuals

Classification of Business Expenditures

Taxable Income of Business Firms

Income Tax Rates

Individual Tax Rates

Corporate Tax Rates

Combined Federal and State Income Taxes

Selecting an Income Tax Rate for Economy Studies

Economic Analysis Taking Income Taxes into Account

Capital Gains and Losses for Nondepreciated Assets

Investment Tax Credit

Estimating the After-Tax Rate of Return

After-Tax Cash Flows and Spreadsheets

Appendix 12A: Personal Finance

**13: REPLACEMENT ANALYSIS**

The Replacement Problem

Replacement Analysis Decision Map

Minimum Cost Life of a New Asset --- the Challenger

Do We Have Marginal Cost Data For the Defender?

Are These Marginal Costs Increasing?

Replacement Analysis Technique 1: Defender Marginal Costs Can Be Computed and

Are Increasing

Replacement Repeatability Assumptions

Replacement Analysis Technique 2: Defender Marginal Costs Can Be Computed and Are Not Increasing

Replacement Analysis Technique 3: When Defender Marginal Cost Data Are Not Available

Complications in Replacement Analysis

Defining Defender and Challenger First Costs

Repeatability Assumptions Not Acceptable

A Closer Look at Future Challengers

After-Tax Replacement Analysis

Marginal Costs on an After-Tax Basis

Minimum Cost Life Problems

Spreadsheets and Replacement Analysis

**14: INFLATION AND PRICE CHANGE**

The Athabasca Oil Sands

Meaning and Effect of Inflation

How Does Inflation Happen?

Definitions for Considering Inflation in Engineering Economy

Analysis in Constant Dollars Versus Then-Current Dollars

Price Change with Indexes

What Is a Price Index?

Composite Versus Commodity Indexes

How to Use Price Indexes in Engineering Economic Analysis

Cash Flows That Inflate at Different Rates

Different Inflation Rates per Period

Inflation Effect on After-Tax Calculations

Using Spreadsheets for Inflation Calculations

**15: SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN**

BP Goes to Russia

Sources of Capital

Money Generated from the Firm's Operation

External Sources of Money

Choice of Source of Funds

Cost of Funds

Cost of Borrowed Money

Cost of Capital

Inflation and the Cost of Borrowed Money

Investment Opportunities

Opportunity Cost

Selecting a Minimum Attractive Rate of Return

Adjusting MARR to Account for Risk and Uncertainty

Representative Values of MARR Used in Industry

Capital Budgeting or Selecting the Best Projects

Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital

**16: ECONOMIC ANALYSIS IN THE PUBLIC SECTOR**

From Waste to Power and Money

Investment Objective

Viewpoint for Analysis

Selecting an Interest Rate

No Time-Value-of-Money Concept

Cost of Capital Concept

Opportunity Cost Concept

Recommended Concept

The Benefit-Cost Ratio

Incremental Benefit-Cost Analysis

Elements of the Incremental Benefit-Cost Ratio Method

Other Effects of Public Projects

Project Financing

Project Duration

Quantifying and Valuing Benefits and Disbenefits

Project Politics

**17: ACCOUNTING AND ENGINEERING ECONOMY**

The Two Faces of ABB

The Role of Accounting

Accounting for Business Transactions

The Balance Sheet

Assets

Liabilities

Equity

Financial Ratios Derived from Balance Sheet Data

The Income Statement

Financial Ratios Derived from Income Statement Data

Linking the Balance Sheet, Income Statement, and Capital Transactions

Traditional Cost Accounting

Direct and Indirect Costs

Indirect Cost Allocation

Problems with Traditional Cost Accounting

Other Problems to Watch For

*Appendix A: Introduction to Spreadsheets*

The Elements of a Spreadsheet

Defining Variables in a Data Block

Copy Command

*Appendix B: Time Value of Money (TVM) Calculators*

Notation for TVM Calculators

Examples with TVM Calculators and Tabulated Factors

Problems

*Appendix C: Compound Interest Tables*

Appendix D: Fundamentals of Engineering (FE) Examination Problems

References

Index