Engineering Economy

by Blank, Leland T.; Tarquin, Anthony J.

• ISBN13: 9780072432343
• ISBN10: 0072432349
• Edition: 5th
• Format: Hardcover
• Copyright: 2002-08-20
• Publisher: McGraw-Hill Science/Engineering/Math

Summary

This student-friendly text on the current economic issues particular to engineering covers the topics needed to analyze engineering alternatives. Students use both hand-worked and spreadsheet solutions of examples, problems and case studies. In this edition the options have been increased, with an expanded spreadsheet analysis component, twice the number of case studies, and virtually all new end-of-chapter problems. The chapters on factor derivation and usage, cost estimation, replacement studies, and after-tax evaluation have been heavily revised. New material is included on public sector projects and cost estimation. A reordering of chapters puts the fundamental topics up front in the text. Many chapters include a special set of problems that prepare the students for the Fundamentals of Engineering (FE) exam.This college-level text provides students and practicing professionals with a solid preparation in the financial understanding of engineering problems and projects, as well as the techniques needed for evaluating and making sound economic decisions. Distinguishing characteristics include learning objectives for each chapter, an easy-to-read writing style, many solved examples, integrated spreadsheets, and case studies throughout the text. Graphical cross-referencing between topics and quick-solve spreadsheet solutions are indicated in the margins throughout the text. While the chapters are progressive, over three-quarters can stand alone, allowing instructors flexibility for meeting course needs. A complete online learning center (OLC) offers supplemental practice problems, spreadsheet exercises, and review questions for the Fundamentals of Engineering (FE) exam.

Table of Contents

Preface	xiii
LEVEL ONE THIS IS HOW IT ALL STARTS
Foundations of Engineering Economy	4	(44)
Why Engineering Economy Is Important to Engineers (and Other Professionals)	6	(1)
Role of Engineering Economy in Decision Making	7	(2)
Performing an Engineering Economy Study	9	(3)
Interest Rate and Rate of Return	12	(3)
Equivalence	15	(2)
Simple and Compound Interest	17	(6)
Terminology and Symbols	23	(3)
Introduction to Solution by Computer	26	(2)
Minimum Attractive Rate of Return	28	(2)
Cash Flows: Their Estimation and Diagramming	30	(5)
Rule of 72: Estimating Doubling Time and Interest Rate	35	(1)
Spreadsheet Application-Simple and Compound Interest, and Changing Cash Flow Estimates	36	(12)
Additional Examples	39	(2)
Chapter Summary	41	(1)
Problems	42	(3)
FE Review Problems	45	(1)
Extended Exercise-Effects of Compound Interest	45	(1)
Case Study-Describing Alternatives for Producing Refrigerator Shells	46	(2)
Factors: How Time and Interest Affect Money	48	(42)
Single-Payment Factors (F/P and P/F)	50	(6)
Uniform-Series Present Worth Factor and Capital Recovery Factor (P/A and A/P)	56	(4)
Sinking Fund Factor and Uniform-Series Compound Amount Factor (A/F and F/A)	60	(3)
Interpolation in Interest Tables	63	(2)
Arithmetic Gradient Factors (P/G and A/G)	65	(6)
Geometric Gradient Series Factors	71	(3)
Determination of an Unknown Interest Rate	74	(3)
Determination of Unknown Number of Years	77	(1)
Spreadsheet Application-Basic Sensitivity Analysis	78	(12)
Additional Example	80	(1)
Chapter Summary	81	(1)
Problems	81	(6)
FE Review Problems	87	(1)
Case Study-What a Difference the Years and Compound Interest Can Make	88	(2)
Combining Factors	90	(32)
Calculations for Uniform Series That Are Shifted	92	(4)
Calculations Involving Uniform-Series and Randomly Placed Single Amounts	96	(5)
Calculations for Shifted Gradients	101	(5)
Shifted Decreasing Arithmetic Gradients	106	(2)
Spreadsheet Application-Using Different Functions	108	(14)
Additional Example	112	(1)
Chapter Summary	113	(1)
Problems	113	(6)
FE Review Problems	119	(1)
Extended Exercise-Preserving Land for Public Use	120	(2)
Nominal and Effective Interest Rates	122	(40)
Nominal and Effective Interest Rate Statements	124	(4)
Effective Annual Interest Rates	128	(6)
Effective Interest Rates for Any Time Period	134	(2)
Equivalence Relations: Comparing Payment Period and Compounding Period Lengths (PP versus CP)	136	(1)
Equivalence Relations: Single Amounts with PP ≥ CP	137	(3)
Equivalence Relations: Series with PP ≥ CP	140	(5)
Equivalence Relations: Single Amounts and Series with PP < CP	145	(2)
Effective Interest Rate for Continuous Compounding	147	(2)
Interest Rates That Vary over Time	149	(13)
Chapter Summary	151	(1)
Problems	152	(3)
FE Review Problems	155	(1)
Case Study-Financing a House	156	(6)
LEVEL TWO TOOLS FOR EVALUATING ALTERNATIVES
Present Worth Analysis	162	(46)
Formulating Mutually Exclusive Alternatives	164	(2)
Present Worth Analysis of Equal-Life Alternatives	166	(2)
Present Worth Analysis of Different-Life Alternatives	168	(3)
Future Worth Analysis	171	(2)
Capitalized Cost Calculation and Analysis	173	(6)
Payback Period Analysis	179	(5)
Life-Cycle Cost	184	(4)
Present Worth of Bonds	188	(3)
Spreadsheet Applications-PW Analysis and Payback Period	191	(17)
Chapter Summary	196	(1)
Problems	196	(7)
FE Review Problems	203	(1)
Extended Exercise-Evaluation of Social Security Retirement Estimates	204	(1)
Case Study-Payback Evaluation of Ultralow-Flush Toilet Program	205	(3)
Annual Worth Analysis	208	(22)
Advantages and Uses of Annual Worth Analysis	210	(2)
Calculation of Capital Recovery and AW Values	212	(3)
Evaluating Alternatives by Annual Worth Analysis	215	(5)
AW of a Permanent Investment	220	(10)
Chapter Summary	223	(1)
Problems	224	(3)
FE Review Problems	227	(1)
Case Study-The Changing Scene of an Annual Worth Analysis	228	(2)
Rate of Return Analysis: Single Alternative	230	(36)
Interpretation of a Rate of Return Value	232	(2)
Rate of Return Calculation Using a PW or AW Equation	234	(6)
Cautions When Using the ROR Method	240	(1)
Multiple Rate of Return Values	241	(6)
Composite Rate of Return: Removing Multiple i* Values	247	(6)
Rate of Return of a Bond Investment	253	(13)
Chapter Summary	255	(1)
Problems	256	(5)
FE Review Problems	261	(1)
Extended Exercise 1-The Cost of a Poor Credit Rating	262	(1)
Extended Exercise 2-When Is It Best to Sell a Business?	263	(1)
Case Study-Bob Learns About Multiple Rates of Return	264	(2)
Rate of Return Analysis: Multiple Alternatives	266	(36)
Why Incremental Analysis is Necessary	268	(1)
Calculation of Incremental Cash Flows for ROR Analysis	269	(3)
Interpretation of Rate of Return on the Extra Investment	272	(1)
Rate of Return Evaluation Using PW: Incremental and Breakeven	273	(8)
Rate of Return Evaluation Using AW	281	(1)
Incremental ROR Analysis of Multiple, Mutually Exclusive Alternatives	282	(5)
Spreadsheet Application-PW, AW, and ROR Analysis All in One	287	(15)
Chapter Summary	290	(1)
Problems	290	(6)
FE Review Problems	296	(1)
Extended Exercise-Incremental ROR Analysis When Estimated Alternative Lives are Uncertain	297	(1)
Case Study 1-So Many Options. Can a New Engineering Graduate Help His Father?	298	(2)
Case Study 2-PW Analysis When Multiple Interest Rates Are Present	300	(2)
Benefit/Cost Analysis and Public Sector Economics	302	(30)
Public Sector Projects	304	(4)
Benefit/Cost Analysis of a Single Project	308	(5)
Alternative Selection Using Incremental B/C Analysis	313	(3)
Incremental B/C Analysis of Multiple, Mutually Exclusive Alternatives	316	(16)
Chapter Summary	322	(1)
Problems	322	(6)
FE Review Problems	328	(1)
Extended Exercise-Costs to Provide Ladder Truck Service for Fire Protection	328	(2)
Case Study-Freeway Lighting	330	(2)
Making Choices: The Method, MARR, and Multiple Attributes	332	(38)
Comparing Mutually Exclusive Alternatives by Different Evaluation Methods	334	(3)
MARR Relative to the Cost of Capital	337	(3)
Debt-Equity Mix and Weighted Average Cost of Capital	340	(3)
Determination of the Cost of Debt Capital	343	(2)
Determination of the Cost of Equity Capital and the MARR	345	(3)
Effect of Debt-Equity Mix on Investment Risk	348	(2)
Multiple Attribute Analysis: Identification and Importance of Each Attribute	350	(5)
Evaluation Measure for Multiple Attributes	355	(15)
Chapter Summary	357	(1)
Problems	358	(7)
Extended Exercise-Emphasizing the Right Things	365	(2)
Case Study-Which Way to Go-Debt or Equity Financing?	367	(3)
LEVEL THREE MAKING DECISIONS ON REAL-WORLD PROJECTS
Replacement and Retention Decisions	370	(32)
Basics of the Replacement Study	372	(3)
Economic Service Life	375	(6)
Performing a Replacement Study	381	(6)
Additional Considerations in a Replacement Study	387	(1)
Replacement Study over a Specified Study Period	388	(14)
Chapter Summary	394	(1)
Problems	394	(5)
FE Review Problems	399	(1)
Extended Exercise-Economic Service Life Under Varying Conditions	400	(1)
Case Study-Replacement Analysis for Quarry Equipment	401	(1)
Selection from Independent Projects Under Budget Limitation	402	(20)
An Overview of Capital Rationing Among Projects	404	(2)
Capital Rationing Using PW Analysis of Equal-Life Projects	406	(2)
Capital Rationing Using PW Analysis of Unequal-Life Projects	408	(4)
Capital Budgeting Problem Formulation Using Linear Programming	412	(10)
Chapter Summary	416	(1)
Problems	417	(3)
Case Study-Lifelong Engineering Education in a Web Environment	420	(2)
Breakeven Analysis	422	(28)
Breakeven Analysis for a Single Project	424	(7)
Breakeven Analysis Between Two Alternatives	431	(4)
Spreadsheet Application-Using Excel's SOLVER for Breakeven Analysis	435	(15)
Chapter Summary	438	(1)
Problems	439	(5)
Case Study-Water Treatment Plant Process Costs	444	(6)
LEVEL FOUR ROUNDING OUT THE STUDY
Effects of Inflation	450	(22)
Understanding the Impact of Inflation	452	(1)
Present Worth Calculations Adjusted for Inflation	453	(6)
Future Worth Calculations Adjusted for Inflation	459	(5)
Capital Recovery Calculations Adjusted for Inflation	464	(8)
Chapter Summary	465	(1)
Problems	466	(3)
FE Review Problems	469	(1)
Extended Exercise-Fixed-Income Investments versus the Forces of Inflation	470	(2)
Cost Estimation and Indirect Cost Allocation	472	(34)
Understanding How Cost Estimation Is Accomplished	474	(3)
Cost Indexes	477	(4)
Cost Estimating Relationships: Cost-Capacity Equations	481	(1)
Cost Estimating Relationships: Factor Method	482	(3)
Traditional Indirect Cost Rates and Allocation	485	(5)
Activity-Based Costing (ABC) for Indirect Costs	490	(16)
Chapter Summary	493	(1)
Problems	494	(7)
FE Review Problems	501	(1)
Case Study-Total Cost Estimates for Optimizing Coagulant Dosage	501	(3)
Case Study-Indirect Cost Comparison of Medical Equipment Sterilization Unit	504	(2)
Depreciation Methods	506	(36)
Depreciation Terminology	508	(3)
Straight Line (SL) Depreciation	511	(1)
Declining Balance (DB) and Double Declining Balance (DDB) Depreciation	512	(5)
Modified Accelerated Cost Recovery System (MACRS)	517	(4)
Determining the MACRS Recovery Period	521	(1)
Depletion Methods	522	(20)
Chapter Summary	524	(2)
Problems	526	(3)
FE Review Problems	529	(1)
Sum-of-Year Digits (SYD) Depreciation	530	(2)
Switching Between Depreciation Methods	532	(5)
Determination of MACRS Rates	537	(3)
Appendix Problems	540	(2)
After-Tax Economic Analysis	542	(48)
Income Tax Terminology and Relations for Corporations (and Individuals)	544	(4)
Before-Tax and After-Tax Cash Flow	548	(4)
Effect on Taxes of Different Depreciation Methods and Recovery Periods	552	(3)
Depreciation Recapture and Capital Gains (Losses): for Corporations	555	(5)
After-Tax PW, AW, and ROR Evaluation	560	(6)
Spreadsheet Applications-After-Tax Incremental ROR Analysis	566	(3)
After-Tax Replacement Study	569	(4)
After-Tax Value-Added Analysis	573	(17)
Chapter Summary	577	(1)
Problems	578	(9)
Case Study-After-Tax Evaluation of Debt and Equity Financing	587	(3)
Formalized Sensitivity Analysis and Expected Value Decisions	590	(34)
Determining Sensitivity to Parameter Variation	592	(7)
Formalized Sensitivity Analysis Using Three Estimates	599	(3)
Economic Variability and the Expected Value	602	(1)
Expected Value Computations for Alternatives	603	(2)
Staged Evaluation of Alternatives using a Decision Tree	605	(19)
Chapter Summary	610	(1)
Problems	611	(8)
Extended Exercise-Looking at Alternatives from Different Angles	619	(1)
Case Study-Sensitivity Analysis of Public Sector Projects-Water Supply Plans	619	(5)
More on Variation and Decision Making Under Risk	624	(43)
Interpretation of Certainty, Risk, and Uncertainty	626	(4)
Elements Important to Decision Making Under Risk	630	(6)
Random Samples	636	(5)
Expected Value and Standard Deviation	641	(6)
Monte Carlo Sampling and Simulation Analysis	647	(20)
Additional Examples	656	(5)
Chapter Summary	661	(1)
Problems	661	(5)
Extended Exercise-Using Simulation and the Excel RNG for Sensitivity Analysis	666	(1)
Appendix A Using Spreadsheets and Microsoft Excel©	667	(19)
A.1 Introduction to Using Excel	667	(4)
A.2 Organization (Layout) of the Spreadsheet	671	(2)
A.3 Excel Functions Important to Engineering Economy (alphabetical order)	673	(9)
A.4 SOLVER-An Excel Tool for Breakeven and ``What If?'' Analysis	682	(1)
A.5 List of Excel Financial Functions	683	(2)
A.6 Error Messages	685	(1)
Appendix B Basics of Accounting Reports and Business Ratios	686	(9)
B.1 The Balance Sheet	686	(2)
B.2 Income Statement and Cost of Goods Sold Statement	688	(1)
B.3 Business Ratios	689	(6)
Problems	693	(2)
Appendix C Final Answers to Selected End-of-Chapter Problems	695	(5)
Bibliography	700	(2)
Compound Interest Factor Tables	702	(29)
Index	731