Engineering Economic Analysis

The twelfth edition of the market-leading Engineering Economic Analysis offers comprehensive coverage of financial and economic decision making for engineers, with an emphasis on problem solving, life-cycle costs, and the time value of money. The authors' concise, accessible writing, practical emphasis, and contemporary examples linked to students' everyday lives make this text the most popular among students. In addition, with its extensive support package and logical progression of topics, this is the easiest book to teach from.

New to the Twelfth Edition

* 500 new or revised problems--answers to most even problems now in Appendix E
* Six new and nine updated chapter-opening vignettes provide extended real-world examples
* Twenty new Excel tutorial videos added to the updated set of thirty-six from the eleventh edition
* New visual five-button solutions help simplify the use of spreadsheets and calculators

Donald G. Newnan is Professor Emeritus of Industrial and Systems Engineering at San Jose State University.

Ted G. Eschenbach is a consultant and Professor Emeritus of Engineering Management at the University of Alaska Anchorage.

Jerome P. Lavelle is Associate Dean in the College of Engineering at North Carolina State University.

1: MAKING ECONOMIC DECISIONS
A Sea of Problems
Simple Problems
Intermediate Problems
Complex Problems
The Role of Engineering Economic Analysis
Examples of Engineering Economic Analysis
The Decision-Making Process
Rational Decision Making
Engineering Decision Making for Current Costs

2: ENGINEERING COSTS AND COST ESTIMATING
Engineering Costs
Fixed, Variable, Marginal, and Average Costs
Sunk Costs
Opportunity Costs
Recurring and Nonrecurring Costs
Incremental Costs
Cash Costs Versus Book Costs
Life-Cycle Costs
Cost Estimating
Types of Estimate
Difficulties in Estimation
Estimating Models
Per-Unit Model
Segmenting Model
Cost Indexes
Power-Sizing Model
Triangulation
Improvement and the Learning Curve
Estimating Benefits
Cash Flow Diagrams
Categories of Cash Flows
Drawing a Cash Flow Diagram
Drawing Cash Flow Diagrams with a Spreadsheet

3: INTEREST AND EQUIVALENCE
A Prescription for Success
Computing Cash Flows
Time Value of Money
Simple Interest
Compound Interest
Repaying a Debt
Equivalence
Difference in Repayment Plans
Equivalence Is Dependent on Interest Rate
Single Payment Compound Interest Formulas
Nominal and Effective Interest
Continuous Compounding
Single Payment Interest Factors: Continuous Compounding

4. EQUIVALENCE FOR REPEATED CASH FLOWS
Uniform Series Compound Interest Formulas
Expanded Factors as Calculator Functions
Cash Flows that Do Not Match Basic Patterns
Economic Equivalence Viewed as a Moment Diagram
Relationships Between Compound Interest Factors
Single Payment
Uniform Series
Arithmetic Gradient
Derivation of Arithmetic Gradient Factors
Reality and the Assumed Uniformity of A, G, and g.
Geometric Gradient
Compounding Period and Payment Period Differ
Spreadsheets for Economic Analysis
Spreadsheet Annuity Functions for Cash Flow Tables
Spreadsheet Block Functions
Using Spreadsheets for Basic Graphing

5: PRESENT WORTH ANALYSIS
Assumptions in Solving Economic Analysis Problems
End-of-Year Convention
Viewpoint of Economic Analysis Studies
Sunk Costs
Borrowed Money Viewpoint
Effect of Inflation and Deflation
Income Taxes
Economic Criteria
Applying Present Worth Techniques
Useful Lives Equal the Analysis Period
Useful Lives Different from the Analysis Period
Infinite Analysis Period: Capitalized Cost
Multiple Alternatives
Bond Pricing
Spreadsheets and Present Worth

6: ANNUAL CASH FLOW ANALYSIS
Lowest Prices on the Net! Buy Now!
Annual Cash Flow Calculations
Resolving a Present Cost to an Annual Cost
Treatment of Salvage Value
Annual Cash Flow Analysis
Analysis Period
Analysis Period Equal to Alternative Lives
Analysis Period a Common Multiple of Alternative Lives
Analysis Period for a Continuing Requirement
Infinite Analysis Period: Capitalized Cost
Multiple Alternatives
Using Spreadsheets to Analyze Loans
Building an Amortization Schedule
How Much to Interest? How Much to Principal?
Finding the Balance Due on a Loan
Pay off Debt Sooner by Increasing Payments

7: RATE OF RETURN ANALYSIS
Bar Codes Give a Number; RFID Codes Tell A Story
Internal Rate of Return
Calculating Rate of Return
Plot of NPW versus Interest Rate
Interest Rates When There are Fees or Discounts
Loans and Investments are Everywhere
Incremental Analysis
Present Worth Analysis
Analysis Period
Spreadsheets and Rate of Return Analysis
Summary
Problems
Appendix 7A: Difficulties in Solving for an Interest Rate
Why Multiple Solutions Can Occur
Modified Internal Rate of Return (MIRR)

8: Choosing the Best Alternative
Tapping Into Geometry
Incremental Analysis
Graphical Solutions
Elements in Comparing Mutually Exclusive Alternatives
Doing a Set of Incremental Challenger-Defender Comparisons
Choosing an Analysis Method
Spreadsheets and Goal Seek

9: OTHER ANALYSIS TECHNIQUES
Clean, Green, and Far Between
Future Worth Analysis
Benefit-Cost Ratio Analysis
Variations on the Theme of Benefit-Cost Ratio
Payback Period
Sensitivity and Breakeven Analysis
Graphing with Spreadsheets for Sensitivity and Breakeven Analysis
Doing What-If Analysis with Spreadsheets

10: UNCERTAINTY IN FUTURE EVENTS
They Only Thought They Were Done
Estimates and Their Use in Economic Analysis
A Range of Estimates
Probability
Joint Probability Distributions
Expected Value
Economic Decision Trees
Risk
Risk Versus Return
Simulation
Real Options

11: DEPRECIATION
Depreciation and Competitiveness
Basic Aspects of Depreciation
Deterioration and Obsolescence
Depreciation and Expenses
Types of Property
Depreciation Calculation Fundamentals
Historical Depreciation Methods
Straight-Line Depreciation
Sum-of-Years'-Digits Depreciation
Declining Balance Depreciation
Modified Accelerated Cost Recovery System (MACRS)
Cost Basis and Placed-in-Service Date
Property Class and Recovery Period
Percentage Tables
Where MACRS Percentage Rates (rt ) Come From
MACRS Method Examples
Comparing MACRS and Historical Methods
Depreciation and Asset Disposal
Unit-of-Production Depreciation
Depletion
Cost Depletion
Percentage Depletion
Spreadsheets and Depreciation
Using VDB for MACRS

12: INCOME TAXES
On With the Wind
A Partner in the Business.
Calculation of Taxable Income
Taxable Income of Individuals
Classification of Business Expenditures
Taxable Income of Business Firms
Income Tax Rates
Individual Tax Rates
Corporate Tax Rates
Combined Federal and State Income Taxes
Selecting an Income Tax Rate for Economy Studies
Economic Analysis Taking Income Taxes into Account
Capital Gains and Losses for Nondepreciated Assets
Investment Tax Credit
Estimating the After-Tax Rate of Return
After-Tax Cash Flows and Spreadsheets
Appendix 12A: Personal Finance

13: REPLACEMENT ANALYSIS
The Replacement Problem
Replacement Analysis Decision Map
Minimum Cost Life of a New Asset --- the Challenger
Do We Have Marginal Cost Data For the Defender?
Are These Marginal Costs Increasing?
Replacement Analysis Technique 1: Defender Marginal Costs Can Be Computed and
Are Increasing
Replacement Repeatability Assumptions
Replacement Analysis Technique 2: Defender Marginal Costs Can Be Computed and Are Not Increasing
Replacement Analysis Technique 3: When Defender Marginal Cost Data Are Not Available
Complications in Replacement Analysis
Defining Defender and Challenger First Costs
Repeatability Assumptions Not Acceptable
A Closer Look at Future Challengers
After-Tax Replacement Analysis
Marginal Costs on an After-Tax Basis
Minimum Cost Life Problems
Spreadsheets and Replacement Analysis

14: INFLATION AND PRICE CHANGE
The Athabasca Oil Sands
Meaning and Effect of Inflation
How Does Inflation Happen?
Definitions for Considering Inflation in Engineering Economy
Analysis in Constant Dollars Versus Then-Current Dollars
Price Change with Indexes
What Is a Price Index?
Composite Versus Commodity Indexes
How to Use Price Indexes in Engineering Economic Analysis
Cash Flows That Inflate at Different Rates
Different Inflation Rates per Period
Inflation Effect on After-Tax Calculations
Using Spreadsheets for Inflation Calculations

15: SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN
BP Goes to Russia
Sources of Capital
Money Generated from the Firm's Operation
External Sources of Money
Choice of Source of Funds
Cost of Funds
Cost of Borrowed Money
Cost of Capital
Inflation and the Cost of Borrowed Money
Investment Opportunities
Opportunity Cost
Selecting a Minimum Attractive Rate of Return
Adjusting MARR to Account for Risk and Uncertainty
Representative Values of MARR Used in Industry
Capital Budgeting or Selecting the Best Projects
Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital

16: ECONOMIC ANALYSIS IN THE PUBLIC SECTOR
From Waste to Power and Money
Investment Objective
Viewpoint for Analysis
Selecting an Interest Rate
No Time-Value-of-Money Concept
Cost of Capital Concept
Opportunity Cost Concept
Recommended Concept
The Benefit-Cost Ratio
Incremental Benefit-Cost Analysis
Elements of the Incremental Benefit-Cost Ratio Method
Other Effects of Public Projects
Project Financing
Project Duration
Quantifying and Valuing Benefits and Disbenefits
Project Politics

17: ACCOUNTING AND ENGINEERING ECONOMY
The Two Faces of ABB
The Role of Accounting
Accounting for Business Transactions
The Balance Sheet
Assets
Liabilities
Equity
Financial Ratios Derived from Balance Sheet Data
The Income Statement
Financial Ratios Derived from Income Statement Data
Linking the Balance Sheet, Income Statement, and Capital Transactions
Traditional Cost Accounting
Direct and Indirect Costs
Indirect Cost Allocation
Problems with Traditional Cost Accounting
Other Problems to Watch For

Appendix A: Introduction to Spreadsheets
The Elements of a Spreadsheet
Defining Variables in a Data Block
Copy Command
Appendix B: Time Value of Money (TVM) Calculators
Notation for TVM Calculators
Examples with TVM Calculators and Tabulated Factors
Problems
Appendix C: Compound Interest Tables
Appendix D: Fundamentals of Engineering (FE) Examination Problems
References
Index