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Engineering Economy

by E. Paul Degarmo; E. Paul Degarmo; James A. Bontadelli

Edition:

10th

ISBN13:

9780133821932

ISBN10:

0133821935

Format:

Hardcover

Pub. Date:

7/1/1996

Publisher(s):

Prentice Hall Professional Technical Reference

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Questions About This Book?

What version or edition is this?

This is the 10th edition with a publication date of 7/1/1996.

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The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any CDs, lab manuals, study guides, etc.

Summary

This best-selling book provides a sound understanding of the principles, basic concepts, and methodology of engineering economy. Built upon the rich and time-tested teaching materials of earlier editions, it is extensively revised and updated to reflect current trends and issues, with an emphasis on the economics of engineering design throughout. It provides one of the most complete and up-to-date studies of this vitally important field.

Preface	p. xv
Background and Tools of Engineering Economy	p. 1
Introduction to Engineering Economy	p. 2
Introduction	p. 2
Origins of Engineering Economy	p. 4
What Are the Principles of Engineering Economy?	p. 4
Engineering Economy and the Design Process	p. 8
Accounting and Engineering Economy Studies	p. 16
Overview of the Book	p. 17
Summary	p. 19
Problems	p. 19
Cost Concepts and the Economic Environment	p. 21
Introduction	p. 22
Cost Terminology	p. 22
The General Economic Environment	p. 33
Cost-Driven Design Optimization	p. 43
Present Economy Studies	p. 50
Summary	p. 56
References	p. 56
Problems	p. 56
Principles of Money-Time Relationships	p. 63
Introduction	p. 63
Why Consider Return to Capital?	p. 64
The Origins of Interest	p. 65
Simple Interest	p. 65
Compound Interest	p. 66
The Concept of Equivalence	p. 67
Notation and Cash Flow Diagrams/Tables	p. 70
Interest Formulas Relating Present and Future Equivalent Values of Single Cash Flows	p. 73
Interest Formulas Relating a Uniform Series (Annuity) to Its Present and Future Equivalent Values	p. 78
Interest Formulas for Discrete Compounding and Discrete Cash Flows	p. 85
Deferred Annuities (Uniform Series)	p. 85
Equivalence Calculations Involving Multiple Interest Formulas	p. 87
Interest Formulas Relating a Uniform Gradient of Cash Flows to Its Annual and Present Equivalents	p. 91
Interest Formulas Relating a Geometric Sequence of Cash Flows to Its Present and Annual Equivalents	p. 97
Interest Rates That Vary with Time	p. 101
Nominal and Effective Interest Rates	p. 102
Interest Problems with Compounding More Often Than Once per Year	p. 104
Interest Problems with Cash Flows Less Often Than Compounding Periods	p. 106
Interest Formulas for Continuous Compounding and Discrete Cash Flows	p. 110
Interest Formulas for Continuous Compounding and Continuous Cash Flows	p. 112
Additional Solved Problems	p. 115
Spreadsheet Applications	p. 120
Summary	p. 121
References	p. 122
Problems	p. 122
Applications of Engineering Economy	p. 139
Applications of Money-Time Relationships	p. 140
Introduction	p. 140
Determining the Minimum Attractive Rate of Return	p. 141
The Present Worth Method	p. 144
The Future Worth Method	p. 149
The Annual Worth Method	p. 150
The Internal Rate of Return Method	p. 153
The External Rate of Return Method	p. 162
The Payback (Payout) Period Method	p. 164
Investment Balance Diagrams	p. 166
An Example of a Proposed Capital Investment to Reduce Costs	p. 168
An Example of a Large Industrial Investment Opportunity	p. 169
Spreadsheet Applications	p. 175
Summary	p. 177
References	p. 177
Problems	p. 177
The Multiple Rate of Return Problem with the IRR Method	p. 185
Comparing Alternatives	p. 188
Introduction	p. 188
Basic Concepts for Comparing Alternatives	p. 189
The Study (Analysis) Period	p. 191
Case 1: Useful Lives Are Equal to the Study Period	p. 193
Case 2: Useful Lives Are Different Among the Alternatives	p. 208
Comparison of Alternatives Using the Capitalized Worth Method	p. 217
Defining Mutually Exclusive Investment Alternatives in Terms of Combinations of Projects	p. 219
Spreadsheet Applications	p. 225
Summary	p. 228
References	p. 228
Problems	p. 229
Evaluating Projects with the Benefit/Cost Ratio Method	p. 239
Introduction	p. 239
Perspective and Terminology for Analyzing Public Projects	p. 241
Self-Liquidating Projects	p. 242
Multiple-Purpose Projects	p. 242
Difficulties in Evaluating Public Sector Projects	p. 244
What Interest Rate Should Be Used for Public Projects?	p. 246
The Benefit/Cost Ratio Method	p. 248
Evaluating Independent Projects by B/C Ratios	p. 254
Comparison of Mutually Exclusive Projects by B/C Ratios	p. 256
Criticisms and Shortcomings of the Benefit/Cost Ratio Method	p. 261
Spreadsheet Applications	p. 263
Summary	p. 265
References	p. 265
Problems	p. 266
Depreciation and Income Taxes	p. 271
Introduction	p. 272
Depreciation Concepts and Terminology	p. 272
The Classical (Historical) Depreciation Methods	p. 275
The Modified Accelerated Cost Recovery System	p. 281
A Comprehensive Depreciation Example	p. 287
Depletion	p. 291
Introduction to Income Taxes	p. 294
The Effective (Marginal) Corporate Income Tax Rate	p. 296
Gain (Loss) on the Disposal of an Asset	p. 300
General Procedure for Making After-Tax Economic Analyses	p. 300
Illustration of Computations of ATCFs	p. 305
After-Tax Analyses That Include Specific Financing Arrangements	p. 313
The After-Tax Effect of Depletion Allowances	p. 316
Summary	p. 319
References	p. 319
Problems	p. 320
Estimating Cash Flows	p. 328
Introduction	p. 328
An Integrated Approach	p. 329
Selected Estimating Techniques (Models)	p. 340
Estimating Total Product Costs and Selling Price	p. 348
Estimating Cash Flows for a Typical Small Project	p. 353
Developing Cash Flows (A Case Study)	p. 356
Summary	p. 362
References	p. 362
Problems	p. 363
Inflation and Price Changes	p. 368
General Price Inflation	p. 368
Terminology and Basic Concepts	p. 370
Differential Price Inflation or Deflation	p. 381
Application Strategy	p. 386
A Comprehensive Example	p. 386
Foreign Exchange Rates and Purchasing Power Concepts	p. 390
Spreadsheet Applications	p. 392
Summary	p. 394
References	p. 395
Problems	p. 395
Dealing with Uncertainty	p. 402
Introduction	p. 402
What Are Risk, Uncertainty, and Sensitivity?	p. 403
Sources of Uncertainty	p. 404
Common Nonprobabilistic Methods for Dealing with Uncertainty	p. 405
Breakeven Analysis	p. 406
Sensitivity Analysis	p. 412
Analyzing a Proposed Business Venture	p. 414
Optimistic-Pessimistic Estimates	p. 417
Risk-Adjusted Minimum Attractive Rates of Return	p. 421
Reduction of Useful Life	p. 423
Spreadsheet Applications	p. 425
Summary	p. 427
References	p. 428
Problems	p. 428
Special Topics in Engineering Economy	p. 435
Replacement Analysis	p. 436
Introduction	p. 436
Reasons for Replacement Analysis	p. 437
Factors That Must Be Considered in Replacement Studies	p. 438
A Typical Replacement Problem	p. 441
A Decision Roadmap for Replacement Analysis	p. 445
Determining the Economic Life of a New Asset (Challenger)	p. 447
Determining the Economic Life of a Defender	p. 452
Comparisons in Which the Defender's Useful Life Differs from That of the Challenger	p. 455
Retirement Without Replacement (Abandonment)	p. 459
A Comprehensive Example	p. 460
Spreadsheet Applications	p. 463
Summary	p. 465
References	p. 467
Problems	p. 468
Capital Financing and Allocation	p. 475
Introduction	p. 475
Capital Financing	p. 476
Financing with Debt Capital	p. 478
Financing with Equity Capital	p. 481
Leasing as a Source of Capital	p. 484
Capital Allocation	p. 488
Allocating Capital Among Independent Projects	p. 490
Linear Programming Formulations of Capital Allocation Problems	p. 493
An Overview of Corporate Capital Allocation Policy and Procedures	p. 497
Summary	p. 500
References	p. 501
Problems	p. 501
Engineering Economy Studies in Investor-Owned Utilities	p. 504
Background	p. 504
General Characteristics of Investor-Owned Utilities	p. 506
General Concepts of Utility Economy Studies	p. 507
Methods of Engineering Economy for Investor-Owned Utility Projects	p. 508
Development of the Revenue Requirement Method	p. 509
Assumptions of the Revenue Requirement Method	p. 510
Utility Rate Regulation	p. 510
Flow-Through and Normalized Accounting	p. 512
Illustration of the Revenue Requirement Method: A Tabular Procedure	p. 512
Immediate Versus Deferred Investment	p. 515
Revenue Requirement Analysis Under Conditions of Inflation	p. 518
Summary	p. 525
References	p. 525
Problems	p. 525
Probabilistic Risk Analysis	p. 529
Introduction	p. 529
The Distribution of Random Variables	p. 530
Evaluation of Projects with Discrete Random Variables	p. 534
Evaluation of Projects with Continuous Random Variables	p. 541
Evaluation of Uncertainty Using Monte Carlo Simulation	p. 546
Performing Monte Carlo Simulation with a Computer	p. 550
Decision Trees	p. 555
Spreadsheet Applications	p. 563
Summary	p. 565
References	p. 566
Problems	p. 566
Appendixes	p. 575
Appendix
Accounting and Its Relationship to Engineering Economy	p. 576
Abbreviations and Notation	p. 597
Interest and Annuity Tables for Discrete Compounding	p. 602
Interest and Annuity Tables for Continuous Compounding	p. 621
Standardized Normal Distribution Function	p. 628
Selected References	p. 631
Answers to Selected Even-Numbered Problems	p. 634
Index	p. 639
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