Engineering Economy

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

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ISBN: 9780130115706 | 0130115703
Cover: Hardcover
Copyright: 9/1/1999

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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.

Foreword

xiii

(2)

Preface

PART I Fundamentals of Engineering Economy

(142)

CHAPTER 1 Introduction to Engineering Economy

(21)

1.1 Introduction

(2)

1.2 Origins of Engineering Economy

(1)

1.3 What Are the Principles of Engineering Economy?

(4)

1.4 Engineering Economy and the Design Process

(9)

1.5 Accounting and Engineering Economy Studies

(1)

1.6 Overview of the Book

(2)

1.7 Summary

(1)

1.8 Problems

(3)

CHAPTER 2 Cost Concepts and Design Economics

(44)

2.1 Introduction

(1)

2.2 Cost Estimating and Cost Terminology

(13)

2.3 The General Economic Environment

(9)

2.4 Cost-Driven Design Optimization

(6)

2.5 Present Economy Studies

(7)

2.6 Summary

(1)

2.7 References

(1)

2.8 Problems

(8)

CHAPTER 3 Money-Time Relationships and Equivalence

(76)

3.1 Introduction

(1)

3.2 Why Consider Return to Capital?

(1)

3.3 The Origins of Interest

(1)

3.4 Simple Interest

(1)

3.5 Compound Interest

(1)

3.6 The Concept of Equivalence

(3)

3.7 Notation and Cash Flow Diagrams/Tables

(3)

3.8 Interest Formulas Relating Present and Future Equivalent Values of Single Cash Flows

(5)

3.9 Interest Formulas Relating a Uniform Series (Annuity) to Its Present and Future Equivalent Values

(7)

3.10 Interest Formulas for Discrete Compounding and Discrete Cash Flows

(1)

3.11 Deferred Annuities (Uniform Series)

(2)

3.12 Equivalence Calculations Involving Multiple Interest Formulas

(4)

3.13 Interest Formulas Relating a Uniform Gradient of Cash Flows to Its Annual and Present Equivalents

(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

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Engineering Economy

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Table of Contents

Supplemental Materials