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Engineering Economy

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Pub. Date:
Prentice Hall
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Engineering Economy is intended to serve as a text for classroom instruction in undergraduate, introductory courses in Engineering Economics. It also serves as a basic reference for use by practicing engineers in all specialty areas (e.g., chemical, civil, computer, electrical, industrial, and mechanical engineering). The book is also useful to persons engaged in the management of technical activities.

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.

MyEngineeringLab for Engineering Economy is a total learning package that is designed to improve results through personalized learning. MyEngineeringLab is an online homework, tutorial, and assessment program that truly engages students in learning. It helps students better prepare for class, quizzes, and exams—resulting in better performance in the course—and provides educators a dynamic set of tools for gauging individual and class progress.┐


Teaching and Learning Experience

This program will provide a better teaching and learning experience—for you and your students. It will help:

  • Personalize Learning: MyEngineeringLab provides students with a personalized interactive learning environment, where they can learn at their own pace and measure their progress.
  • Provide a Solid Foundation in the Principles, Concepts, and Methodology of Engineering Economy: Students will learn to understand and apply economic principles to engineering.
  • Prepare Students for Professional Practice:┐ Students will develop proficiency with the process for making rational decisions that they are likely to encounter in professional practice.
  • Support Learning: The TestGen testbank allows instructors to regenerate algorithmically-generated variables within each problem to offer students a virtually unlimited number of paper or online assessments.

Note: You are purchasing a standalone product; MyEngineeringLab does not come packaged with this content. If you would like to purchase both the physical text and MyEngineeringLab ┐search for ISBN-10: 0133750213/ISBN-13: 9780133750218. That package includes ISBN-10: 0133439275/ISBN-13: 9780133439274 and ISBN-10: 0133455343 /ISBN-13: 9780133455342.

MyEngineeringLab is not a self-paced technology and should only be purchased when required by an instructor.

Table of Contents

Preface xi

Green Content xviii


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 Try Your Skills 15

1.6 Summary 16


Cost Concepts and Design Economics 20

2.1 Cost Terminology 21

2.2 The General Economic Environment 27

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 Try Your Skills 51

2.7 Summary 52

Appendix 2-A Accounting Fundamentals 60


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 Electronic Spreadsheet Modeling: Learning Curve 96

3.7 Try Your Skills 98

3.8 Summary 100


The Time Value of Money 107

4.1 Introduction 108

4.2 Simple Interest 109

4.3 Compound Interest 110

4.4 The Concept of Equivalence 110

4.5 Notation and Cash-Flow Diagrams and Tables 113

4.6 Relating Present and Future Equivalent Values 123

4.7 Relating a Uniform Series (Annuity) to Its Present and Future Equivalent

4.8 Summary of Interest Formulas and Relationships for Discrete Compounding 133

4.9 Deferred Annuities (Uniform Series) 135

4.10 Equivalence Calculations Involving Multiple Interest Formulas 137

4.11 Uniform (Arithmetic) Gradient of Cash Flows 143

4.12 Geometric Sequences of Cash Flows 148

4.13 Interest Rates that Vary with Time 153

4.14 Nominal and Effective Interest Rates 155

4.15 Compounding More Often than Once per Year 157

4.16 Interest Formulas for Continuous Compounding and Discrete Cash Flows 160

4.17 Case Study–Understanding Economic “Equivalence” 163

4.18 Try Your Skills 166

4.19 Summary 169


Evaluating a Single Project 186

5.1 Introduction 187

5.2 Determining the Minimum Attractive Rate of Return (MARR) 188

5.3 The PresentWorth Method 189

5.4 The Future Worth Method 196

5.5 The Annual Worth Method 197

5.6 The Internal Rate of Return Method 202

5.7 The External Rate of Return Method 213

5.8 The Payback (Payout) Period Method 215

5.9 Case Study–A Proposed Capital Investment to Improve Process Yield 218

5.10 Electronic Spreadsheet Modeling: Payback Period Method 220

5.11 Try Your Skills 222

5.12 Summary 224

Appendix 5-A The Multiple Rate of Return Problem with the IRR Method 236


Comparison and Selection among Alternatives 240

6.1 Introduction 241

6.2 Basic Concepts for Comparing Alternatives 241

6.3 The Study (Analysis) Period 245

6.4 Useful Lives Are Equal to the Study Period 247

6.5 Useful Lives Are Unequal among the Alternatives 264

6.6 Personal Finances 277

6.7 Case Study–Ned and Larry’s Ice Cream Company 281

6.8 Postevaluation of Results 284

6.9 Project Postevaluation Spreadsheet Approach 284

6.10 Try Your Skills 287

6.11 Summary 291


Depreciation and Income Taxes 308

7.1 Introduction 309

7.2 Depreciation Concepts and Terminology 309

7.3 The Classical (Historical) Depreciation Methods 312

7.4 The Modified Accelerated Cost Recovery System 317

7.5 A Comprehensive Depreciation Example 326

7.6 Introduction to Income Taxes 330

7.7 The Effective (Marginal) Corporate Income Tax Rate 333

7.8 Gain (Loss) on the Disposal of an Asset 336

7.9 General Procedure for Making After-Tax Economic Analyses 337

7.10 Illustration of Computations of ATCFs 341

7.11 Economic Value Added 353

7.12 Try Your Skills 355

7.13 Summary 356


Price Changes and Exchange Rates 368

8.1 Introduction 369

8.2 Terminology and Basic Concepts 370

8.3 Fixed and Responsive Annuities 376

8.4 Differential Price Changes 381

8.5 Spreadsheet Application 383

8.6 Foreign Exchange Rates and Purchasing Power Concepts 385

8.7 Case Study–Selecting Electric Motors to Power an Assembly Line 390

8.8 Try Your Skills 393

8.9 Summary 394of Single Cash Flows 117


Replacement Analysis 403

9.1 Introduction 404

9.2 Reasons for Replacement Analysis 404

9.3 Factors that Must Be Considered in Replacement Studies 405

9.4 Typical Replacement Problems 408

9.5 Determining the Economic Life of a New Asset (Challenger) 411

9.6 Determining the Economic Life of a Defender 415

9.7 Comparisons in Which the Defender’s Useful Life Differs from that of the Challenger 418

9.8 Retirement without Replacement (Abandonment) 421

9.9 After-Tax Replacement Studies 422

9.10 Case Study–Replacement of a Hospital’s Emergency Electrical Supply System 430

9.11 Summary 433


Evaluating Projects with the Benefit−Cost Ratio Method 443

10.1 Introduction 444

10.2 Perspective and Terminology for Analyzing Public Projects 445

10.3 Self-Liquidating Projects 446

10.4 Multiple-Purpose Projects 446

10.5 Difficulties in Evaluating Public-Sector Projects 449

10.6 What Interest Rate Should Be Used for Public Projects? 450

10.7 The Benefit−Cost Ratio Method 452

10.8 Evaluating Independent Projects by B−C Ratios 458

10.9 Comparison of Mutually Exclusive Projects by B−C Ratios 460

10.10 Case Study–Improving a Railroad Crossing 465

10.11 Summary 467


Breakeven and Sensitivity Analysis 475

11.1 Introduction 476

11.2 Breakeven Analysis 476

11.3 Sensitivity Analysis 483

11.4 Multiple Factor Sensitivity Analysis 489

11.5 Summary 493


Probabilistic Risk Analysis 502

12.1 Introduction 503

12.2 Sources of Uncertainty 504

12.3 The Distribution of Random Variables 504

12.4 Evaluation of Projects with Discrete Random Variables 508

12.5 Evaluation of Projects with Continuous Random Variables 517

12.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation 522

12.7 Performing Monte Carlo Simulation with a Computer 526

12.8 Decision Trees 530

12.9 Real Options Analysis 535

12.10 Summary 538


The Capital Budgeting Process 546

13.1 Introduction 547

13.2 Debt Capital 549

13.3 Equity Capital 550

13.4 TheWeighted Average Cost of Capital (WACC) 553

13.5 Project Selection 557

13.6 Postmortem Review 561

13.7 Budgeting of Capital Investments and Management Perspective 562

13.8 Leasing Decisions 563

13.9 Capital Allocation 565

13.10 Summary 571


Decision Making Considering Multiattributes 575

14.1 Introduction 576

14.2 Examples of Multiattribute Decisions 576

14.3 Choice of Attributes 578

14.4 Selection of a Measurement Scale 578

14.5 Dimensionality of the Problem 579

14.6 Noncompensatory Models 579

14.7 Compensatory Models 584

14.8 Summary 592

Appendix A Using Excel to Solve Engineering Economy Problems 598

Appendix B Abbreviations and Notation 615

Appendix C Interest and Annuity Tables for Discrete Compounding 619

Appendix D Interest and Annuity Tables for Continuous Compounding 638

Appendix E Standard Normal Distribution 642

Appendix F Selected References 645

Appendix G Solutions to Try Your Skills 648

Appendix H Answers to Selected Problems 660

Index 664

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