Preface 

xi  

PART I FUNDAMENTALS OF ENGINEERING ECONOMY 


1  (198) 

Introduction to Engineering Economy 


3  (20) 


3  (2) 

Origins of Engineering Economy 


5  (1) 

What are the Principles of Engineering Economy? 


5  (3) 

Engineering Economy and the Design Process 


8  (9) 

Using Spreadsheets in Engineering Economic Analysis 


17  (2) 


19  (4) 


20  (3) 

Cost Concepts and Design Economics 


23  (56) 


24  (1) 


24  (10) 

The General Economic Environment 


34  (11) 

CostDriven Design Optimization 


45  (5) 


50  (10) 

Case StudyThe Economics of Daytime Running Lights 


60  (1) 


61  (1) 


62  (17) 


62  (9) 

Appendix 2A Accounting Fundamentals 


71  (8) 

Cost Estimation Techniques 


79  (49) 


79  (3) 


82  (9) 

Selected Estimating Techniques (Models) 


91  (5) 

Parametric Cost Estimating 


96  (12) 

Cost Estimation in the Design Process 


108  (8) 

Case StudyDemanufacturing of Computers 


116  (2) 


118  (1) 


119  (9) 


119  (9) 

MoneyTime Relationships and Equivalence 


128  (71) 


128  (1) 

Why Consider Return to Capital? 


129  (1) 


130  (1) 


130  (1) 


131  (1) 

The Concept of Equivalence 


132  (1) 

Notation and CashFlow Diagrams and Tables 


133  (4) 

Interest Formulas Relating Present and Future Equivalent Values of Single Cash Flows 


137  (5) 

Interest Formulas Relating a Uniform Series (Annuity) to its Present and Future Equivalent Values 


142  (7) 

Interest Formulas for Discrete Compounding and Discrete Cash Flows 


149  (1) 

Deferred Annuities (Uniform Series) 


149  (3) 

Equivalence Calculations Involving Multiple Interest Formulas 


152  (5) 

Interest Formulas for a Uniform (Arithmetic) Gradient of Cash Flows 


157  (6) 

Interest Formulas Relating a Geometric Sequence of Cash Flows to its Present and Annual Equivalents 


163  (4) 

Interest Rates that Vary with Time 


167  (1) 

Nominal and Effective Interest Rates 


168  (2) 

Interest Problems with Compounding More Often than Once per Year 


170  (2) 

Interest Formulas for Continuous Compounding and Discrete Cash Flows 


172  (3) 

Additional Solved Problems 


175  (4) 

Case StudyUnderstanding Economic ``Equivalence'' 


179  (3) 


182  (1) 


182  (17) 


183  (16) 

PART II ENGINEERING ECONOMY IN ACTION 


199  (264) 

Applications of MoneyTime Relationships 


201  (46) 


201  (1) 

Determining the Minimum Attractive Rate of Return (MARR) 


202  (3) 


205  (7) 


212  (1) 


213  (4) 

The Internal Rate of Return Method 


217  (10) 

The External Rate of Return Method 


227  (2) 

The Payback (Payout) Period Method 


229  (2) 

Case StudyA Proposed Capital Investment to Improve Process Yield 


231  (2) 


233  (1) 


233  (14) 


233  (11) 

Appendix 5A The Multiple Rate of Return Problem with the IRR Method 


244  (3) 


247  (54) 


247  (1) 

Basic Concepts for Comparing Alternatives 


248  (4) 

The Study (Analysis) Period 


252  (1) 

Case 1: Useful Lives are Equal to the Study Period 


253  (21) 

Case 2: Useful Lives are Different among the Alternatives 


274  (11) 

Case StudyNed and Larry's Ice Cream Company 


285  (2) 


287  (1) 


288  (13) 


288  (13) 

Depreciation and Income Taxes 


301  (51) 


301  (1) 

Depreciation Concepts and Terminology 


302  (3) 

The Classical (Historical) Depreciation Methods 


305  (5) 

The Modified Accelerated Cost Recovery System 


310  (7) 

A Comprehensive Depreciation Example 


317  (4) 

Introduction to Income Taxes 


321  (2) 

The Effective (Marginal) Corporate Income Tax Rate 


323  (4) 

Gain (Loss) on the Disposal of an Asset 


327  (1) 

General Procedure for Making AfterTax Economic Analyses 


327  (4) 

Illustration of Computations of ATCFs 


331  (10) 


341  (2) 


343  (1) 


344  (8) 


344  (8) 

Price Changes and Exchange Rates 


352  (30) 


352  (2) 

Terminology and Basic Concepts 


354  (6) 

Fixed and Responsive Annuities 


360  (4) 


364  (2) 

Foreign Exchange Rates and Purchasing Power Concepts 


366  (5) 

Case StudySelecting Electric Motors to Power an Assembly Line 


371  (3) 


374  (1) 


375  (7) 


375  (7) 


382  (42) 


382  (1) 

Reasons for Replacement Analysis 


383  (1) 

Factors that must be Considered in Replacement Studies 


384  (3) 

Typical Replacement Problems 


387  (3) 

Determining the Economic Life of a New Asset (Challenger) 


390  (3) 

Determining the Economic Life of a Defender 


393  (3) 

Comparisons in which the Defender's Useful Life Differs from that of the Challenger 


396  (3) 

Retirement without Replacement (Abandonment) 


399  (1) 

AfterTax Replacement Studies 


400  (10) 

Case StudyReplacement of a Hospital's Emergency Electrical Supply System 


410  (2) 


412  (3) 


415  (9) 


416  (8) 


424  (39) 


424  (1) 

What are Risk, Uncertainty, and Sensitivity? 


425  (1) 


425  (1) 


426  (19) 

RiskAdjusted Minimum Attractive Rates of Return 


445  (2) 


447  (3) 

Case StudyAnalyzing a Proposed Business Venture 


450  (4) 


454  (1) 


455  (8) 


455  (8) 

PART III ADDITIONAL TOPICS IN ENGINEERING ECONOMY 


463  (144) 

Evaluating Projects with the BenefitCost Ratio Method 


465  (34) 


465  (2) 

Perspective and Terminology for Analyzing Public Projects 


467  (1) 

SelfLiquidating Projects 


468  (1) 

MultiplePurpose Projects 


468  (2) 

Difficulties in Evaluating PublicSector Projects 


470  (2) 

What Interest Rate Should be Used for Public Projects? 


472  (1) 

The BenefitCost Ratio Method 


473  (7) 

Evaluating Independent Projects by BC Ratios 


480  (2) 

Comparison of Mutually Exclusive Projects by BC Ratios 


482  (5) 

Criticisms and Shortcomings of the BenefitCost Ratio Method 


487  (2) 

Case StudyImproving a Railroad Crossing 


489  (2) 


491  (1) 


492  (1) 


492  (7) 

Probabilistic Risk Analysis 


499  (49) 


499  (1) 

The Distribution of Random Variables 


500  (3) 

Evaluation of Projects with Discrete Random Variables 


503  (9) 

Evaluation of Projects with Continuous Random Variables 


512  (6) 

Evaluation of Uncertainty by Monte Carlo Simulation 


518  (4) 

Performing Monte Carlo Simulation with a Computer 


522  (4) 


526  (9) 

Case StudyThe Oils Well That Ends Well Company 


535  (4) 


539  (1) 


539  (9) 


540  (8) 

Capital Financing and Allocation 


548  (34) 


548  (3) 


551  (1) 


552  (3) 

The Weighted Average Cost of Capital (WACC) 


555  (4) 


559  (4) 


563  (1) 

Budgeting of Capital Investments and Management Perspective 


564  (1) 


564  (3) 


567  (8) 

Case StudyFinancing an Automobile 


575  (3) 


578  (1) 


578  (4) 


579  (3) 

Dealing with Multiattributed Decisions 


582  (25) 


582  (1) 

Examples of Multiattributed Decisions 


583  (1) 


584  (1) 

Selection of a Measurement Scale 


585  (1) 

Dimensionality of the Problem 


585  (1) 


586  (5) 


591  (8) 


599  (1) 


600  (7) 


601  (6) 


607  (58) 

A Using Excel to Solve Engineering Economy Problems 


609  (17) 

B Abbreviations and Notation 


626  (5) 

C Interest and Annuity Tables for Discrete Compounding 


631  (19) 

D Interest and Annuity Tables for Continuous Compounding 


650  (4) 

E Standard Normal Distribution 


654  (3) 


657  (3) 

G Answers to Selected Problems 


660  (5) 
Index 

665  