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Preface xi
Green Content xviii
CHAPTER 1 Introduction to Engineering Economy 1
1.1 Introduction 2
1.2 The Principles of Engineering Economy 3
1.3 Engineering Economy and the Design Process 7
1.4 Using Spreadsheets in Engineering Economic Analysis 15
1.5 Summary 15
CHAPTER 2 Cost Concepts and Design Economics 20
2.1 Cost Terminology 21
2.2 The General Economic Environment 28
2.3 Cost-Driven Design Optimization 38
2.4 Present Economy Studies 43
2.5 Case Study–The Economics of Daytime Running Lights 49
2.6 Summary 51 Appendix 2-A Accounting Fundamentals 59
CHAPTER 3 Cost-Estimation Techniques 67
3.1 Introduction 68
3.2 An Integrated Approach 70
3.3 Selected Estimating Techniques (Models) 78
3.4 Parametric Cost Estimating 83
3.5 Case Study–Demanufacturing of Computers 94
3.6 Summary 96
CHAPTER 4 The Time Value of Money 103
4.1 Introduction 104
4.2 Simple Interest 105
4.3 Compound Interest 106
4.4 The Concept of Equivalence 106
4.5 Notation and Cash-Flow Diagrams and Tables 109
4.6 Relating Present and Future Equivalent Values of Single Cash Flows 113
4.7 Relating a Uniform Series (Annuity) to Its Present and Future Equivalent Values 119
4.8 Summary of Interest Formulas and Relationships for Discrete Compounding 129
4.9 Deferred Annuities (Uniform Series) 131
4.10 Equivalence Calculations Involving Multiple Interest Formulas 133
4.11 Uniform (Arithmetic) Gradient of Cash Flows 139
4.12 Geometric Sequences of Cash Flows 144
4.13 Interest Rates that Vary with Time 149
4.14 Nominal and Effective Interest Rates 151
4.15 Compounding More Often than Once per Year 153
4.16 Interest Formulas for Continuous Compounding and Discrete Cash Flows 156
4.17 Case Study–Understanding Economic “Equivalence” 159
4.18 Summary 162
CHAPTER 5 Evaluating a Single Project 178
5.1 Introduction 179
5.2 Determining the Minimum Attractive Rate of Return (MARR) 180
5.3 The Present Worth Method 181
5.4 The Future Worth Method 188
5.5 The Annual Worth Method 189
5.6 The Internal Rate of Return Method 194
5.7 The External Rate of Return Method 205
5.8 The Payback (Payout) Period Method 207
5.9 Case Study–A Proposed Capital Investment to Improve Process Yield 209
5.10 Summary 211 Appendix 5-A The Multiple Rate of Return Problem with the IRR Method 222
CHAPTER 6 Comparison and Selection among Alternatives 226
6.1 Introduction 227
6.2 Basic Concepts for Comparing Alternatives 227
6.3 The Study (Analysis) Period 231
6.4 Useful Lives Are Equal to the Study Period 233
6.5 Useful Lives Are Unequal among the Alternatives 250
6.6 Personal Finances 263
6.7 ; Case Study–Ned and Larry’s Ice Cream Company 267
6.8 Post evaluation of Results 270
6.9 Summary 270
CHAPTER 7 Depreciation and Income Taxes 288
7.1 Introduction 289
7.2 Depreciation Concepts and Terminology 289
7.3 The Classical (Historical) Depreciation Methods 292
7.4 The Modified Accelerated Cost Recovery System 297
7.5 A Comprehensive Depreciation Example 304
7.6 Introduction to Income Taxes 308
7.7 The Effective (Marginal) Corporate Income TaxRate 311
7.8 Gain (Loss) on the Disposal of an Asset 314
7.9 General Procedure for Making After-Tax Economic Analyses 315
7.10 Illustration of Computations of ATCFs 319
7.11 Economic Value Added 331
7.12 Summary 333
CHAPTER 8 Price Changes and Exchange Rates 344
8.1 Introduction 345
8.2 Terminology and Basic Concepts 346
8.3 Fixed and Responsive Annuities 352
8.4 Differential Price Changes 357
8.5 Spreadsheet Application 359
8.6 Foreign Exchange Rates and Purchasing Power Concepts 361
8.7 Case Study–Selecting Electric Motors to Power an Assembly Line 366
8.8 Summary 369
CHAPTER 9 Replacement Analysis 379
9.1 Introduction 380
9.2 Reasons for Replacement Analysis 380
9.3 Factors that Must Be Considered in Replacement Studies 381
9.4 Typical Replacement Problems 384
9.5 Determining the Economic Life of a New Asset (Challenger) 387
9.6 Determining the Economic Life of a Defender 391
9.7 Comparisons in Which the Defender’s Useful Life Differs from that of the Challenger 394
9.8 Retirement without Replacement (Abandonment) 397
9.9 After-Tax Replacement Studies 398
9.10 Case Study–Replacement of a Hospital’s Emergency Electrical Supply System 406
9.11 Summary 409
CHAPTER 10 Evaluating Projects with the Benefit−Cost Ratio Method 419
10.1 Introduction 420
10.2 Perspective and Terminology for Analyzing Public Projects 421
10.3 Self-Liquidating Projects 422
10.4 Multiple-Purpose Projects 422
10.5 Difficulties in Evaluating Public-Sector Projects 425
10.6 What Interest Rate Should Be Used for Public Projects? 426
10.7 The Benefit−Cost Ratio Method 428
10.8 Evaluating Independent Projects by B−C Ratios 434
10.9 Comparison of Mutually Exclusive Projects by B−C Ratios 436
10.10 Case Study–Improving a Railroad Crossing 441
10.11Summary 443
CHAPTER 11 Breakeven and Sensitivity Analysis 451
11.1 Introduction 452
11.2 Breakeven Analysis 452
11.3 Sensitivity Analysis 459
11.4 Multiple Factor Sensitivity Analysis 465
11.5 Summary 469
CHAPTER 12 Probabilistic Risk Analysis 478
12.1 Introduction 479
12.2 Sources of Uncertainty 480
12.3 The Distribution of Random Variables 480
12.4 Evaluation of Projects with Discrete Random Variables 484
12.5 Evaluation of Projects with Continuous Random Variables 493
12.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation 498
12.7 Performing Monte Carlo Simulation with a Computer 502
12.8 Decision Trees 506
12.9 Real Options Analysis 511
12.10 Summary 514
CHAPTER 13 The Capital Budgeting Process 522
13.1 Introduction 523
13.2 Debt Capital 525
13.3 Equity Capital 526
13.4 The Weighted Average Cost of Capital (WACC) 529
13.5 Project Selection 533
13.6 Postmortem Review 537
13.7 Budgeting of Capital Investments and Management Perspective 538
13.8 Leasing Decisions 539
13.9 Capital Allocation 541
13.10 Summary 547
CHAPTER 14 Decision Making Considering Multiattributes 551
14.1 Introduction 552
14.2 Examples of Multiattribute Decisions 552
14.3 Choice of Attributes 554
14.4 Selection of a Measurement Scale 554
14.5 Dimensionality of the Problem 555
14.6 Noncompensatory Models 555
14.7 Compensatory Models 560
14.8 Summary 568
Appendix A Using Excel to Solve Engineering Economy Problems 574
Appendix B Abbreviations and Notation 591
Appendix C Interest and Annuity Tables for Discrete Compounding 595
Appendix D Interest and Annuity Tables for Continuous Compounding 614
Appendix E Standard Normal Distribution 618
Appendix F Selected References 621
Appendix G Answers to Selected Problems 624
Index 628