Engineering Economy

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Understand the importance of engineering economics principles and how to make smart economic choices

Used by engineering students worldwide, this bestselling text provides a sound understanding of the principles, basic concepts, and methodology of engineering economy. Explanations and examples that are student-centered and practical in real-life situations help students develop prociency in the methods and processes for making rational decisions. Built upon the rich and time-tested teaching materials of earlier editions, the text is extensively revised and updated to reflect current trends and issues. The new edition captures the spirit of environmental sustainability with more than 160 “green” problems, as well as new end-of-chapter problems and group exercises, and includes updates to the new 2017 Federal Tax code revisions.

About our authors

Dr. William G. Sullivan earned his PhD from the Georgia Institute of Technology in Industrial and Systems Engineering. He has made enduring contributions to the field of engineering economy education in his more than 40 years of service to industry and the academy. A tireless lecturer, he has taught engineering economy to more than 10,000 students at five major universities (Georgia Tech, University of Tennessee, North Carolina State University, Arizona State University and Virginia Tech). Dr. Sullivan’s textbooks in the field (five in total), including “Engineering Economy“ (17th edition) continue to contribute to the education of thousands of students. He also has extensive consulting experience with 25 firms in the US.

Elin M. Wicks is the owner of Abacus Accounting LLC, an accounting and bookkeeping company focused on empowering small business owners to achieve financial success. She earned a BS and MS in Industrial Engineering from Rutgers University, where her masters research focused on a method of quantifying non-economic factors in monetary terms. During this time, she also developed software tools to assist Cosmair Inc. in improving scheduling and labor recording practices. She went on to earn her PhD in Industrial and Systems Engineering from Virginia Tech, focusing on the design of cellular manufacturing systems. She then joined the faculty of the University of Missouri, Columbia in the Industrial and Manufacturing Systems Department. After taking some time off to raise her children, she supplemented her education in the field of accounting and became the Senior Accountant of Glenn B. Cohen, CPA, an accounting and financial management firm. She has been an author of Engineering Economy since the publication of the 10th edition.

Patrick Koelling has served on the faculty in industrial and systems engineering at Virginia Tech since 1987. Dr. Koelling received his PhD in Industrial and Management Systems Engineering in 1982 from Arizona State University, an MBA in 1978, M.S.I.E. in 1977 and B.S.I.E. in 1976, all from the University of Missouri. He conducts research and teaches in operations research and management systems engineering. Prior to joining Virginia Tech, he spent two years at Hallmark Cards as a senior analyst and three years as an assistant professor at Oklahoma State University. Dr. Koelling has also served as department head of industrial engineering and management at Oklahoma State. Dr. Koelling has consulted with several private and government organizations, including the establishment of new industrial and systems engineering programs. He is a Fellow of the Institute of Industrial and Systems Engineers, Executive Director of Alpha Pi Mu, the industrial engineering honor society and Director of Accreditation Affairs for the Institute of Industrial and Systems Engineers.

Green Content

CHAPTER 1

Introduction to Engineering Economy

1.1 Introduction

1.2 The Principles of Engineering Economy

1.3 Engineering Economy and the Design Process

1.4 Using Spreadsheets in Engineering Economic Analysis  

1.5 Try Your Skills

1.6 Summary

CHAPTER 2

Cost Concepts and Design Economics

2.1 Cost Terminology

2.2 The General Economic Environment

2.3 Cost-Driven Design Optimization

2.4 Present Economy Studies

2.5 Case Study–The Economics of Daytime Running Lights  

2.6 In Class Exercise

2.7 Try Your Skills

2.8 Summary

Appendix 2-A Accounting Fundamentals

CHAPTER 3

Cost-Estimation Techniques

3.1 Introduction

3.2 An Integrated Approach

3.3 Selected Estimating Techniques (Models)

3.4 Parametric Cost Estimating

3.5 Case Study–Demanufacturing of Computers

3.6 Electronic Spreadsheet Modeling: Learning Curve

3.7 In-Class Exercise

3.8 Try Your Skills

3.9 Summary

CHAPTER 4

The Time Value of Money

4.1 Introduction

4.2 Simple Interest  

4.3 Compound Interest

4.4 The Concept of Equivalence

4.5 Notation and Cash-Flow Diagrams and Tables

4.6 Relating Present and Future Equivalent Values

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

4.8 Summary of Interest Formulas and Relationships for Discrete Compounding

4.9 Deferred Annuities (Uniform Series)

4.10 Equivalence Calculations Involving Multiple Interest Formulas

4.11 Uniform (Arithmetic) Gradient of Cash Flows

4.12 Geometric Sequences of Cash Flows

4.13 Interest Rates that Vary with Time

4.14 Nominal and Effective Interest Rates

4.15 Compounding More Often than Once per Year

4.16 Interest Formulas for Continuous Compounding and Discrete Cash Flows

4.17 Case Study–Understanding Economic “Equivalence”

4.18 In-Class Exercise

4.19 Try Your Skills

4.20 Summary

CHAPTER 5

Evaluating a Single Project

5.1 Introduction

5.2 Determining the Minimum Attractive Rate of Return (MARR)

5.3 The Present Worth Method

5.4 The Future Worth Method

5.5 The Annual Worth Method

5.6 The Internal Rate of Return Method

5.7 The External Rate of Return Method

5.8 The Payback (Payout) Period Method

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

5.10 Electronic Spreadsheet Modeling: Payback Period Method

5.11 In-Class Exercise

5.12 Try Your Skills

5.13 Summary

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

CHAPTER 6

Comparison and Selection among Alternatives

6.1 Introduction

6.2 Basic Concepts for Comparing Alternatives

6.3 The Study (Analysis) Period

6.4 Useful Lives Are Equal to the Study Period

6.5 Useful Lives Are Unequal among the Alternatives

6.6 Personal Finances

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

6.8 Postevaluation of Results

6.9 Project Postevaluation Spreadsheet Approach

6.10 In-Class Exercise

6.11Try Your Skills

6.12 Summary

CHAPTER 7

Depreciation and Income Taxes

7.1 Introduction

7.2 Depreciation Concepts and Terminology

7.3 The Classical (Historical) Depreciation Methods

7.4 The Modified Accelerated Cost Recovery System

7.5 A Comprehensive Depreciation Example

7.6 Introduction to Income Taxes

7.7 The Effective (Marginal) Corporate Income Tax Rate

7.8 Gain (Loss) on the Disposal of an Asset

7.9 General Procedure for Making After-Tax Economic Analyses

7.10 Illustration of Computations of ATCFs

7.11 Economic Value Added

7.12 In-Class Exercise

7.13 Try Your Skills

7.14 Summary

CHAPTER 8

Price Changes and Exchange Rates

8.1 Introduction

8.2 Terminology and Basic Concepts

8.3 Fixed and Responsive Annuities

8.4 Differential Price Changes

8.5 Spreadsheet Application

8.6 Foreign Exchange Rates and Purchasing Power Concepts

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

8.8 In-Class Exercise

8.9 Try Your Skills

8.10 Summary 394of Single Cash Flows

CHAPTER 9

Replacement Analysis

9.1 Introduction

9.2 Reasons for Replacement Analysis

9.3 Factors that Must Be Considered in Replacement Studies

9.4 Typical Replacement Problems

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

9.6 Determining the Economic Life of a Defender

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

9.8 Retirement without Replacement (Abandonment)

9.9 After-Tax Replacement Studies

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

9.11 Try Your Skills

9.12 Summary

CHAPTER 10

Evaluating Projects with the Benefit−Cost Ratio Method

10.1 Introduction

10.2 Perspective and Terminology for Analyzing Public Projects

10.3 Self-Liquidating Projects

10.4 Multiple-Purpose Projects

10.5 Difficulties in Evaluating Public-Sector Projects

10.6 What Interest Rate Should Be Used for Public Projects?

10.7 The Benefit−Cost Ratio Method

10.8 Evaluating Independent Projects by B−C Ratios

10.9 Comparison of Mutually Exclusive Projects by B−C Ratios

10.10 Case Study–Improving a Railroad Crossing

10.11 Try Your Skills

10.12 Summary

CHAPTER 11

Breakeven and Sensitivity Analysis

11.1 Introduction

11.2 Breakeven Analysis

11.3 Sensitivity Analysis

11.4 Multiple Factor Sensitivity Analysis

11.5 Try Your Skills

11.6 Summary

CHAPTER 12

Probabilistic Risk Analysis

12.1 Introduction

12.2 Sources of Uncertainty

12.3 The Distribution of Random Variables

12.4 Evaluation of Projects with Discrete Random Variables

12.5 Evaluation of Projects with Continuous Random Variables

12.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation

12.7 Performing Monte Carlo Simulation with a Computer

12.8 Decision Trees

12.9 Real Options Analysis

12.10 Summary

CHAPTER 13

The Capital Budgeting Process

13.1 Introduction

13.2 Debt Capital

13.3 Equity Capital

13.4 The Weighted Average Cost of Capital (WACC)

13.5 Project Selection

13.6 Postmortem Review

13.7 Budgeting of Capital Investments and Management Perspective

13.8 Leasing Decisions

13.9 Capital Allocation

13.10 Summary

CHAPTER 14

Decision Making Considering Multiattributes

14.1 Introduction

14.2 Examples of Multiattribute Decisions

14.3 Choice of Attributes

14.4 Selection of a Measurement Scale

14.5 Dimensionality of the Problem

14.6 Noncompensatory Models

14.7 Compensatory Models

14.8 Summary

Appendix A Using Excel to Solve Engineering Economy Problems

Appendix B Abbreviations and Notation

Appendix C Interest and Annuity Tables for Discrete Compounding

Appendix D Interest and Annuity Tables for Continuous Compounding

Appendix E Standard Normal Distribution

Appendix F Selected References

Appendix G Solutions to Try Your Skills

Appendix H Answers to Selected Problems

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