Engineering Economy

by Sullivan, William G.; Bontadelli, James A.; Wicks, Elin M.; Degarmo, E. Paul

• ISBN13: 9780130115706
• ISBN10: 0130115703
• Edition: 11th
• Format: Hardcover
• Copyright: 1999-09-01
• Publisher: Prentice Hall

Summary

For undergraduate, introductory courses in Engineering Economics. Used by over 500,000 students, 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

Foreword	xiii	(2)
Preface	xv
PART I Fundamentals of Engineering Economy	1	(142)
CHAPTER 1 Introduction to Engineering Economy	2	(21)
1.1 Introduction	2	(2)
1.2 Origins of Engineering Economy	4	(1)
1.3 What Are the Principles of Engineering Economy?	4	(4)
1.4 Engineering Economy and the Design Process	8	(9)
1.5 Accounting and Engineering Economy Studies	17	(1)
1.6 Overview of the Book	18	(2)
1.7 Summary	20	(1)
1.8 Problems	20	(3)
CHAPTER 2 Cost Concepts and Design Economics	23	(44)
2.1 Introduction	24	(1)
2.2 Cost Estimating and Cost Terminology	24	(13)
2.3 The General Economic Environment	37	(9)
2.4 Cost-Driven Design Optimization	46	(6)
2.5 Present Economy Studies	52	(7)
2.6 Summary	59	(1)
2.7 References	59	(1)
2.8 Problems	59	(8)
CHAPTER 3 Money-Time Relationships and Equivalence	67	(76)
3.1 Introduction	67	(1)
3.2 Why Consider Return to Capital?	68	(1)
3.3 The Origins of Interest	69	(1)
3.4 Simple Interest	69	(1)
3.5 Compound Interest	70	(1)
3.6 The Concept of Equivalence	71	(3)
3.7 Notation and Cash Flow Diagrams/Tables	74	(3)
3.8 Interest Formulas Relating Present and Future Equivalent Values of Single Cash Flows	77	(5)
3.9 Interest Formulas Relating a Uniform Series (Annuity) to Its Present and Future Equivalent Values	82	(7)
3.10 Interest Formulas for Discrete Compounding and Discrete Cash Flows	89	(1)
3.11 Deferred Annuities (Uniform Series)	89	(2)
3.12 Equivalence Calculations Involving Multiple Interest Formulas	91	(4)
3.13 Interest Formulas Relating a Uniform Gradient of Cash Flows to Its Annual and Present Equivalents	95	(6)
3.14 Interest Formulas Relating a Geometric Sequence of Cash Flows to Its Present and Annual Equivalents	101	(4)
3.15 Interest Rates That Vary with Time	105	(1)
3.16 Nominal and Effective Interest Rates	106	(2)
3.17 Interest Problems with Compounding More Often Than Once per Year	108	(2)
3.18 Interest Problems with Cash Flows Less Often Than Compounding Periods	110	(4)
3.19 Interest Formulas for Continuous Compounding and Discrete Cash Flows	114	(2)
3.20 Interest Formulas for Continuous Compounding and Continuous Cash Flows	116	(3)
3.21 Additional Solved Problems	119	(5)
3.22 Spreadsheet Applications	124	(1)
3.23 Summary	125	(1)
3.24 References	126	(1)
3.25 Problems	126	(17)
PART II Basic Topics in Engineering Economy	143	(316)
CHAPTER 4 Applications of Money-Time Relationships	144	(44)
4.1 Introduction	144	(1)
4.2 Determining the Minimum Attractive Rate of Return	145	(3)
4.3 The Present Worth Method	148	(5)
4.4 The Future Worth Method	153	(1)
4.5 The Annual Worth Method	154	(3)
4.6 The Internal Rate of Return Method	157	(11)
4.7 The External Rate of Return Method	168	(2)
4.8 The Payback (Payout) Period Method	170	(1)
4.9 Investment Balance Diagrams	171	(3)
4.10 An Example of a Proposed Capital Investment to Improve Process Yield	174	(1)
4.11 Spreadsheet Applications	175	(2)
4.12 Summary	177	(1)
4.13 References	178	(1)
4.14 Problems	178	(8)
Appendix 4-A The Multiple Rate of Return Problem with the IRR Method	186	(2)
CHAPTER 5 Comparing Alternatives	188	(54)
5.1 Introduction	188	(1)
5.2 Basic Concepts for Comparing Alternatives	189	(4)
5.3 The Study (Analysis) Period	193	(1)
5.4 Case 1: Useful Lives Are Equal to the Study Period	194	(17)
5.5 Case 2: Useful Lives Are Different Among the Alternatives	211	(9)
5.6 Comparison of Alternatives Using the Capitalized Worth Method	220	(2)
5.7 Defining Mutually Exclusive Investment Alternatives in Terms of Combinations of Projects	222	(6)
5.8 Spreadsheet Applications	228	(3)
5.9 Summary	231	(1)
5.10 References	231	(1)
5.11 Problems	232	(10)
CHAPTER 6 Depreciation and Income Taxes	242	(54)
6.1 Introduction	243	(1)
6.2 Depreciation Concepts and Terminology	243	(3)
6.3 The Classical (Historical) Depreciation Methods	246	(6)
6.4 The Modified Accelerated Cost Recovery System	252	(7)
6.5 A Comprehensive Depreciation Example	259	(3)
6.6 Depletion	262	(3)
6.7 Introduction to Income Taxes	265	(2)
6.8 The Effective (Marginal) Corporate Income Tax Rate	267	(4)
6.9 Gain (Loss) on the Disposal of an Asset	271	(1)
6.10 General Procedure for Making After-Tax Economic Analyses	271	(5)
6.11 Illustration of Computations of ATCFs	276	(8)
6.12 Economic Value Added	284	(2)
6.13 The After-Tax Effect of Depletion Allowances	286	(2)
6.14 Summary	288	(1)
6.15 References	288	(1)
6.16 Problems	289	(7)
CHAPTER 7 Cost Estimation Techniques	296	(53)
7.1 Introduction	296	(1)
7.2 An Integrated Approach	297	(10)
7.3 Selected Estimating Techniques (Models)	307	(5)
7.4 Parametric Cost Estimating	312	(10)
7.5 Cost Estimation in the Design Process	322	(10)
7.6 Estimating Cash Flows for a Typical Small Project	332	(3)
7.7 Summary	335	(1)
7.8 References	335	(1)
7.9 Problems	336	(5)
Appendix 7-A	341	(8)
CHAPTER 8 Price Changes and Exchange Rates	349	(39)
8.1 Price Changes	350	(2)
8.2 Terminology and Basic Concepts	352	(10)
8.3 Differential Price Inflation or Deflation	362	(6)
8.4 Application Strategy	368	(1)
8.5 A Comprehensive Example	369	(3)
8.6 Foreign Exchange Rates and Purchasing Power Concepts	372	(5)
8.7 Spreadsheet Applications	377	(2)
8.8 Summary	379	(1)
8.9 References	380	(1)
8.10 Problems	380	(8)
CHAPTER 9 Replacement Analysis	388	(36)
9.1 Introduction	388	(1)
9.2 Reasons for Replacement Analysis	389	(1)
9.3 Factors That Must Be Considered in Replacement Studies	390	(4)
9.4 A Typical Replacement Problem	394	(4)
9.5 Determining the Economic Life of a New Asset (Challenger)	398	(5)
9.6 Determining the Economic Life of a Defender	403	(3)
9.7 Comparisons in Which the Defender's Useful Life Differs from That of the Challenger	406	(4)
9.8 Retirement without Replacement (Abandonment)	410	(2)
9.9 A Comprehensive Example	412	(2)
9.10 Spreadsheet Applications	414	(1)
9.11 Summary	415	(1)
9.12 References	416	(1)
9.13 Problems	417	(7)
CHAPTER 10 Dealing with Uncertainty	424	(35)
10.1 Introduction	424	(1)
10.2 What Are Risk, Uncertainty, and Sensitivity?	425	(1)
10.3 Sources of Uncertainty	426	(1)
10.4 Sensitivity Analysis	427	(14)
10.5 Analyzing a Proposed Business Venture	441	(4)
10.6 Risk-Adjusted Minimum Attractive Rates of Return	445	(1)
10.7 Reduction of Useful Life	446	(3)
10.8 Spreadsheet Applications	449	(2)
10.9 Summary	451	(1)
10.10 References	451	(1)
10.11 Problems	452	(7)
PART III Additional Topics in Engineering Economy	459	(138)
CHAPTER 11 Evaluating Projects with the Benefit/Cost Ratio Method	460	(32)
11.1 Introduction	460	(2)
11.2 Perspective and Terminology for Analyzing Public Projects	462	(1)
11.3 Self-Liquidating Projects	463	(1)
11.4 Multiple-Purpose Projects	463	(2)
11.5 Difficulties in Evaluating Public Sector Projects	465	(2)
11.6 What Interest Rate Should Be Used for Public Projects?	467	(2)
11.7 The Benefit/Cost Ratio Method	469	(6)
11.8 Evaluating Independent Projects by B/C Ratios	475	(2)
11.9 Comparison of Mutually Exclusive Projects by B/C Ratios	477	(5)
11.10 Criticisms and Shortcomings of the Benefit/Cost Ratio Method	482	(2)
11.11 Spreadsheet Applications	484	(2)
11.12 Summary	486	(1)
11.13 References	486	(1)
11.14 Problems	486	(6)
CHAPTER 12 Engineering Economy Studies in Investor-Owned Utilities	492	(22)
12.1 Background	492	(1)
12.2 General Characteristics of Investor-Owned Utilities	493	(2)
12.3 General Concepts of Utility Economy Studies	495	(1)
12.4 Methods of Engineering Economy for Investor-Owned Utility Projects	495	(2)
12.5 Development of the Revenue Requirement Method	497	(1)
12.6 Assumptions of the Revenue Requirement Method	498	(1)
12.7 Utility Rate Regulation	499	(1)
12.8 Flow-Through and Normalized Accounting	500	(5)
12.9 Illustration of the Revenue Requirement Method: A Tabular Procedure	505	(1)
12.10 Immediate versus Deferred Investment	505	(1)
12.11 Revenue Requirement Analysis under Conditions of Inflation	505	(4)
12.12 Summary	509	(1)
12.13 References	510	(1)
12.14 Problems	510	(4)
CHAPTER 13 Probabilistic Risk Analysis	514	(45)
13.1 Introduction	514	(1)
13.2 The Distribution of Random Variables	515	(4)
13.3 Evaluation of Projects with Discrete Random Variables	519	(7)
13.4 Evaluation of Projects with Continuous Random Variables	526	(5)
13.5 Evaluation of Uncertainty Using Monte Carlo Simulation	531	(4)
13.6 Performing Monte Carlo Simulation with a Computer	535	(5)
13.7 Decision Trees	540	(8)
13.8 Spreadsheet Applications	548	(2)
13.9 Summary	550	(1)
13.10 References	551	(1)
13.11 Problems	551	(8)
CHAPTER 14 Capital Financing and Allocation	559	(32)
14.1 Introduction	559	(2)
14.2 Differences between Sources of Capital	561	(2)
14.3 Cost of Debt Capital	563	(4)
14.4 Cost of Equity Capital	567	(4)
14.5 Weighted Average Cost of Capital	571	(1)
14.6 Leasing as a Source of Capital	572	(3)
14.7 Capital Allocation	575	(8)
14.8 An Overview of a Typical Corporate Capital Budgeting Process	583	(4)
14.9 Summary	587	(1)
14.10 References	587	(1)
14.11 Problems	587	(4)
CHAPTER 15 Communicating Engineering Economy Study Results	591	(6)
15.1 Introduction	591	(1)
15.2 Top Managers' Roles and Responsibilities	592	(1)
15.3 Management's Perspectives	592	(2)
15.4 Communication Strategies	594	(2)
15.5 Summary	596	(1)
PART IV Appendixes	597	(57)
APPENDIX	598	(58)
A Accounting and Its Relationship to Engineering Economy	598	(18)
B Abbreviations and Notation	616	(5)
C Interest and Annuity Tables for Discrete Compounding	621	(19)
D Interest and Annuity Tables for Continuous Compounding	640	(4)
E Standardized Normal Distribution Function	644	(3)
F Selected References	647	(3)
G Answers to Selected Even-Numbered Problems	650	(6)
Index	656