Engineering Economy

by Sullivan, William G.; Wicks, Elin M.; Koelling, C. Patrick

• ISBN13: 9780131486492
• ISBN10: 0131486497
• Edition: 13th
• Format: Hardcover
• Copyright: 2009-01-01
• Publisher: Prentice Hall

Summary

For undergraduate, introductory courses in Engineering Economics. Used by engineering students worldwide, this best-selling text 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.

Table of Contents

Preface	xi
PART I FUNDAMENTALS OF ENGINEERING ECONOMY	1	(198)
Introduction to Engineering Economy	3	(20)
Introduction	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)
Summary	19	(4)
Problems	20	(3)
Cost Concepts and Design Economics	23	(56)
Introduction	24	(1)
Cost Terminology	24	(10)
The General Economic Environment	34	(11)
Cost-Driven Design Optimization	45	(5)
Present Economy Studies	50	(10)
Case Study---The Economics of Daytime Running Lights	60	(1)
Summary	61	(1)
References	62	(17)
Problems	62	(9)
Appendix 2-A Accounting Fundamentals	71	(8)
Cost Estimation Techniques	79	(49)
Introduction	79	(3)
An Integrated Approach	82	(9)
Selected Estimating Techniques (Models)	91	(5)
Parametric Cost Estimating	96	(12)
Cost Estimation in the Design Process	108	(8)
Case Study---Demanufacturing of Computers	116	(2)
Summary	118	(1)
References	119	(9)
Problems	119	(9)
Money--Time Relationships and Equivalence	128	(71)
Introduction	128	(1)
Why Consider Return to Capital?	129	(1)
The Origins of Interest	130	(1)
Simple Interest	130	(1)
Compound Interest	131	(1)
The Concept of Equivalence	132	(1)
Notation and Cash-Flow 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 Study---Understanding Economic ``Equivalence''	179	(3)
Summary	182	(1)
References	182	(17)
Problems	183	(16)
PART II ENGINEERING ECONOMY IN ACTION	199	(264)
Applications of Money--Time Relationships	201	(46)
Introduction	201	(1)
Determining the Minimum Attractive Rate of Return (MARR)	202	(3)
The Present Worth Method	205	(7)
The Future Worth Method	212	(1)
The Annual Worth Method	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 Study---A Proposed Capital Investment to Improve Process Yield	231	(2)
Summary	233	(1)
References	233	(14)
Problems	233	(11)
Appendix 5-A The Multiple Rate of Return Problem with the IRR Method	244	(3)
Comparing Alternatives	247	(54)
Introduction	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 Study---Ned and Larry's Ice Cream Company	285	(2)
Summary	287	(1)
References	288	(13)
Problems	288	(13)
Depreciation and Income Taxes	301	(51)
Introduction	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 After-Tax Economic Analyses	327	(4)
Illustration of Computations of ATCFs	331	(10)
Economic Value Added	341	(2)
Summary	343	(1)
References	344	(8)
Problems	344	(8)
Price Changes and Exchange Rates	352	(30)
Introduction	352	(2)
Terminology and Basic Concepts	354	(6)
Fixed and Responsive Annuities	360	(4)
Spreadsheet Application	364	(2)
Foreign Exchange Rates and Purchasing Power Concepts	366	(5)
Case Study---Selecting Electric Motors to Power an Assembly Line	371	(3)
Summary	374	(1)
References	375	(7)
Problems	375	(7)
Replacement Analysis	382	(42)
Introduction	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)
After-Tax Replacement Studies	400	(10)
Case Study---Replacement of a Hospital's Emergency Electrical Supply System	410	(2)
Summary	412	(3)
References	415	(9)
Problems	416	(8)
Dealing with Uncertainty	424	(39)
Introduction	424	(1)
What are Risk, Uncertainty, and Sensitivity?	425	(1)
Sources of Uncertainty	425	(1)
Sensitivity Analysis	426	(19)
Risk-Adjusted Minimum Attractive Rates of Return	445	(2)
Reduction of Useful Life	447	(3)
Case Study---Analyzing a Proposed Business Venture	450	(4)
Summary	454	(1)
References	455	(8)
Problems	455	(8)
PART III ADDITIONAL TOPICS IN ENGINEERING ECONOMY	463	(144)
Evaluating Projects with the Benefit--Cost Ratio Method	465	(34)
Introduction	465	(2)
Perspective and Terminology for Analyzing Public Projects	467	(1)
Self-Liquidating Projects	468	(1)
Multiple-Purpose Projects	468	(2)
Difficulties in Evaluating Public-Sector Projects	470	(2)
What Interest Rate Should be Used for Public Projects?	472	(1)
The Benefit---Cost Ratio Method	473	(7)
Evaluating Independent Projects by B--C Ratios	480	(2)
Comparison of Mutually Exclusive Projects by B--C Ratios	482	(5)
Criticisms and Shortcomings of the Benefit--Cost Ratio Method	487	(2)
Case Study---Improving a Railroad Crossing	489	(2)
Summary	491	(1)
References	492	(1)
Problems	492	(7)
Probabilistic Risk Analysis	499	(49)
Introduction	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)
Decision Trees	526	(9)
Case Study---The Oils Well That Ends Well Company	535	(4)
Summary	539	(1)
References	539	(9)
Problems	540	(8)
Capital Financing and Allocation	548	(34)
Introduction	548	(3)
Debt Capital	551	(1)
Equity Capital	552	(3)
The Weighted Average Cost of Capital (WACC)	555	(4)
Project Selection	559	(4)
Postmortem Review	563	(1)
Budgeting of Capital Investments and Management Perspective	564	(1)
Leasing Decisions	564	(3)
Capital Allocation	567	(8)
Case Study---Financing an Automobile	575	(3)
Summary	578	(1)
References	578	(4)
Problems	579	(3)
Dealing with Multiattributed Decisions	582	(25)
Introduction	582	(1)
Examples of Multiattributed Decisions	583	(1)
Choice of Attributes	584	(1)
Selection of a Measurement Scale	585	(1)
Dimensionality of the Problem	585	(1)
Noncompensatory Models	586	(5)
Compensatory Models	591	(8)
Summary	599	(1)
References	600	(7)
Problems	601	(6)
PART IV APPENDIXES	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)
F Selected References	657	(3)
G Answers to Selected Problems	660	(5)
Index	665

Excerpts

ABOUT ENGINEERING ECONOMY A succinct job description for an engineer consists of two words:problem solver.Engineering design solutions do not exist in a vacuum, but within the context of a business opportunity. Thus, design solutions put forth by engineers must be both technically, as well as financially, sound in view of a firm's business plan. But every problem has multiple design solutions, so the issue is,How does one rationally select the design with the most favorable economic result?The answer to this question can also be put forth in two words:engineering economy.Engineering economy provides a systematic framework for evaluating the economic aspects of competing design solutions. The foundation for such analyses is enumerated in the seven principles of engineering economy. These principles provide the basis for building predictive models of financial impact. Just as engineers model the stress on a support column, or the thermodynamic response of a steam turbine, they must also model the economic impact of their decisions. Engineering economy--what is it, and why is it important? The initial reaction of many engineering students to these questions is, "Money matters will be handled by someone else. It is not something I need to worry about." In reality, any engineering project must be not only physically realizable, but also economically affordable. For example; a child's tricycle could be built with an aluminum frame or a composite frame. Some may argue that, because the composite frame will be stronger and lighter, it is a better choice. However, there is not much of _ market for thousand-dollar tricycles! One might suggest that this argument is ridiculously simplistic and that common sense would dictate choosing aluminum for the framing material. Although the scenario is an exaggeration, it reinforces the idea that the economic factors of a design weigh heavily in the design process, and that engineering economy is an integral part of that process, regardless of the engineering discipline.Engineering, without economy, usually makes no sense at all. Understanding and applying economic principles to engineering has never been more important. Engineering is more than a problem-solving activity focusing on the development of products, systems, and processes to satisfy a need or demand. Beyond function and performance, solutions must also be viable economically_ Design decisions affect limited resources such a5 time. material. labor. capital, natural resources, etc., not only initially (during conceptual design), but also through the remaining phases of the life-cycle (e.g., detailed design, manufacture and distribution, service, retirement and disposal). A great solution can die a certain death if it is not profitable. HISTORY OF THE BOOK The originalIntroduction to Engineering Economy,authored by Woods and DeGarmo, appeared in 1942. The extensive use of this text for over 60 years has encouraged the authors to continue building on the original purpose of the book--to teach lucidly the principles of engineering economy. In this spirit, the thirteenth edition ofEngineering Economyhas built upon the rich and time-tested teaching materials of earlier editions, and its publication makes it the oldest. revised book on the market that deals exclusively with engineering economy. THIRTEENTH EDITION OFENGINEERING ECONOMYHIGHLIGHTS New or enhanced features to this edition include the following: Spreadsheet models are integrated throughout the text. A Student's CD containing additional solved problems, spreadsheet models, and reference materials is included in the back cover of the text. An Instructor's CD containing full solutions to all problems in the book, as well as supplemental examination and test questions and additional resource material is available to professors who adopt the book