## Table of Contents

** **

** **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 6

1.4 Using Spreadsheets in Engineering

Economic Analysis 15

1.5 Summary 15

** **CHAPTER 2

Cost Concepts and Design Economics 19

2.1 Cost Terminology 20

2.2 The General Economic Environment 27

2.3 Cost-Driven Design Optimization 37

2.4 Present Economy Studies 42

2.5 Case Study–The Economics of Daytime

Running Lights 51

2.6 Summary 53

2-A-1 Accounting Fundamentals 62

** **CHAPTER 3

Cost-Estimation Techniques 71

3.1 Introduction 72

3.2 An Integrated Approach 74

3.3 Selected Estimating Techniques (Models) 82

3.4 Parametric Cost Estimating 87

3.5 Cost Estimation in the Design Process 98

3.6 Case Study–Demanufacturing of Computers 106

3.7 Summary 108

** **

** **CHAPTER 4

The Time Value of Money 114

4.1 Introduction 115

4.2 Simple Interest 116

4.3 Compound Interest 117

4.4 The Concept of Equivalence 117

4.5 Notation and Cash-Flow Diagrams and Tables 120

4.6 Relating Present and Future Equivalent Values

of Single Cash Flows 124

4.7 Relating a Uniform Series (Annuity) to its Present

and Future Equivalent Values 130

4.8 Summary of Interest Formulas and Relationships

for Discrete Compounding 141

4.9 Deferred Annuities (Uniform Series) 142

4.10 Equivalence Calculations Involving Multiple

Interest Formulas 144

4.11 Uniform (Arithmetic) Gradient of Cash Flows 150

4.12 Geometric Sequences of Cash Flows 156

4.13 Interest Rates that Vary with Time 161

4.14 Nominal and Effective Interest Rates 163

4.15 Compounding More Often than Once

per Year 165

4.16 Interest Formulas for Continuous Compounding

and Discrete Cash Flows 168

4.17 Case Study–Understanding Economic

“Equivalence” 171

4.18 Summary 174

** **CHAPTER 5

Evaluating a Single Project 190

5.1 Introduction 191

5.2 Determining the Minimum Attractive Rate

of Return (MARR) 192

5.3 The Present Worth Method 192

5.4 The Future Worth Method 201

5.5 The AnnualWorth Method 202

5.6 The Internal Rate of Return Method 206

5.7 The External Rate of Return Method 217

5.8 The Payback (Payout) Period Method 220

5.9 Case Study–A Proposed Capital Investment

to Improve Process Yield 222

5.10 Summary 223

5-A-1 The Multiple Rate of Return Problem

with the IRR Method 234

** **

CHAPTER 6

Comparison and Selection among Alternatives 238

6.1 Introduction 239

6.2 Basic Concepts for Comparing Alternatives 239

6.3 The Study (Analysis) Period 243

6.4 Useful Lives are Equal to the Study Period 245

6.5 Useful Lives are Unequal among

the Alternatives 264

6.6 Personal Finances 276

6.7 Case Study–Ned and Larry’s Ice

Cream Company 280

6.8 Postevaluation of Results 283

6.9 Summary 283

** **CHAPTER 7

Depreciation and Income Taxes 300

7.1 Introduction 301

7.2 Depreciation Concepts and Terminology 301

7.3 The Classical (Historical) Depreciation Methods 304

7.4 The Modified Accelerated Cost Recovery System 309

7.5 A Comprehensive Depreciation Example 316

7.6 Introduction to Income Taxes 320

7.7 The Effective (Marginal) Corporate

Income Tax Rate 323

7.8 Gain (Loss) on the Disposal of an Asset 326

7.9 General Procedure for Making

After-Tax Economic Analyses 327

7.10 Illustration of Computations

of ATCFS 331

7.11 Economic Value Added 343

7.12 Summary 345

** **CHAPTER 8

Price Changes and Exchange Rates 356

8.1 Introduction 357

8.2 Terminology and Basic Concepts 358

8.3 Fixed and Responsive Annuities 364

8.4 Spreadsheet Application 369

8.5 Foreign Exchange Rates and Purchasing

Power Concepts 371

8.6 Case Study–Selecting Electric Motors to Power

an Assembly Line 376

8.7 Summary 379

** **CHAPTER 9

Replacement Analysis 389

9.1 Introduction 390

9.2 Reasons for Replacement Analysis 390

9.3 Factors that Must be Considered

in Replacement Studies 391

9.4 Typical Replacement Problems 394

9.5 Determining the Economic Life of a New

Asset (Challenger) 397

9.6 Determining the Economic Life of a Defender 401

9.7 Comparisons in which the Defender’s Useful Life

Differs from that of the Challenger 404

9.8 Retirement without Replacement (Abandonment) 407

9.9 After-Tax Replacement Studies 408

9.10 Case Study–Replacement of a Hospital’s Emergency

Electrical Supply System 418

9.11 Summary 421

** **CHAPTER 10

Evaluating Projects with the Benefit—Cost Ratio Method 431

10.1 Introduction 432

10.2 Perspective and Terminology for Analyzing

Public Projects 433

10.3 Self-Liquidating Projects 434

10.4 Multiple-Purpose Projects 434

10.5 Difficulties in Evaluating Public-Sector Projects 437

10.6 What Interest Rate Should Be Used

for Public Projects? 438

10.7 The Benefit—Cost Ratio Method 440

10.8 Evaluating Independent Projects by B—C Ratios 446

10.9 Comparison of Mutually Exclusive Projects

by B—C Ratios 448

10.10 Criticisms and Shortcomings

of the Benefit—Cost Ratio Method 453

10.11 Case Study–Improving a Railroad Crossing 455

10.12 Summary 457

** **CHAPTER 11

Breakeven and Sensitivity Analysis 465

11.1 Introduction 466

11.2 Breakeven Analysis 466

11.3 Sensitivity Analysis 473

11.4 Multiple Factor Sensitivity Analysis 479

11.5 Case Study–Analysis of a Business Venture 483

11.6 Summary 486

** **CHAPTER 12

Probabilistic Risk Analysis 495

12.1 Introduction 496

12.2 Sources of Uncertainty 497

12.3 The Distribution of Random Variables 497

12.4 Evaluation of Projects with Discrete Random Variables 501

12.5 Evaluation of Projects with Continuous

Random Variables 510

12.6 Evaluation of Uncertainty By

Monte Carlo Simulation 515

12.7 Performing Monte Carlo Simulation

with a Computer 519

12.8 Decision Trees 523

12.9 Real Options Analysis 532

12.10 Case Study–The Oils Well That Ends Well Company 535

12.11 Summary 539

** **CHAPTER 13

The Capital Budgeting Process 548

13.1 Introduction 549

13.2 Debt Capital 551

13.3 Equity Capital 552

13.4 TheWeighted Average Cost of Capital (WACC) 555

13.5 Project Selection 559

13.6 Postmortem Review 563

13.7 Budgeting of Capital Investments

and Management Perspective 564

13.8 Leasing Decisions 565

13.9 Capital Allocation 567

13.10 Case Study–Financing an Automobile 575

13.11 Summary 578

** **CHAPTER 14

Decision Making Considering Multiattributes 581

14.1 Introduction 582

14.2 Examples of Multiattribute Decisions 582

14.3 Choice of Attributes 584

14.4 Selection of a Measurement Scale 584

14.5 Dimensionality of the Problem 585

14.6 Noncompensatory Models 585

14.7 Compensatory Models 590

14.8 Summary 598

** **Appendices

A Using Excel to Solve Engineering Economy

Problems 000

B Abbreviations and Notation 000

C Interest and Annuity Tables for Discrete

Compounding 000

D Interest and Annuity Tables for Continuous

Compounding 000

E Standard Normal Distribution 000

F Selected References 000

G Answers to Selected Problems 000

** **Index 000