CONTENTS Preface to Seventh Edition
LEARNING STAGE 1 Chapter 1
xiii
THE FUNDAMENTALS Foundations of Engineering Economy 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10
Chapter 2
Factors: How Time and Interest Affect Money PE
2.1 2.2 2.3 2.4 2.5 2.6 2.7
Chapter 3
Calculations for Uniform Series That Are Shifted Calculations Involving Uniform Series and Randomly Placed Single Amounts Calculations for Shifted Gradients Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Preserving Land for Public Use
Nominal and Effective Interest Rates PE
4.1 4.2 4.3 4.4 4.5
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Progressive Example—The Cement Factory Case Single-Amount Factors (F P and P F ) Uniform Series Present Worth Factor and Capital Recovery Factor (P A and A P) Sinking Fund Factor and Uniform Series Compound Amount Factor (A F and F A) Factor Values for Untabulated i or n Values Arithmetic Gradient Factors (P G and A G) Geometric Gradient Series Factors Determining i or n for Known Cash Flow Values Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Time Marches On; So Does the Interest Rate
Combining Factors and Spreadsheet Functions 3.1 3.2 3.3
Chapter 4
Engineering Economics: Description and Role in Decision Making Performing an Engineering Economy Study Professional Ethics and Economic Decisions Interest Rate and Rate of Return Terminology and Symbols Cash Flows: Estimation and Diagramming Economic Equivalence Simple and Compound Interest Minimum Attractive Rate of Return Introduction to Spreadsheet Use Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Renewable Energy Sources for Electricity Generation Case Study—Refrigerator Shells
Progressive Example—The Credit Card Offer Case Nominal and Effective Interest Rate Statements Effective Annual Interest Rates Effective Interest Rates for Any Time Period Equivalence Relations: Payment Period and Compounding Period Equivalence Relations: Single Amounts with PP CP
2 3 4 7 10 13 15 19 21 25 27 31 31 35 36 37
38 39 39 43 46 48 50 58 61 64 64 69 70
72 73 76 80 86 86 92 93
94 95 96 99 105 106 107
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Contents 4.6 4.7 4.8 4.9
LEARNING STAGE 2 Chapter 5
Present Worth Analysis 5.1 5.2 5.3 5.4 5.5
128 129 129 131 133 137 138 142 142 147 149
150 151 153 155 157 160 164 164 169 171
172
Interpretation of a Rate of Return Value Rate of Return Calculation Using a PW or AW Relation Special Considerations When Using the ROR Method Multiple Rate of Return Values Techniques to Remove Multiple Rates of Return Rate of Return of a Bond Investment Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Developing and Selling an Innovative Idea
173 175 179 180 184 190 193 193 198 200
Rate of Return Analysis: Multiple Alternatives
202
8.1 8.2 8.3 8.4 8.5 8.6
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Advantages and Uses of Annual Worth Analysis Calculation of Capital Recovery and AW Values Evaluating Alternatives by Annual Worth Analysis AW of a Permanent Investment Life-Cycle Cost Analysis Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—The Changing Scene of an Annual Worth Analysis
Rate of Return Analysis: One Project 7.1 7.2 7.3 7.4 7.5 7.6
Chapter 8
Progressive Example—Water for Semiconductor Manufacturing Case Formulating Alternatives Present Worth Analysis of Equal-Life Alternatives Present Worth Analysis of Different-Life Alternatives Future Worth Analysis Capitalized Cost Analysis Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Comparing Social Security Benefits
Annual Worth Analysis 6.1 6.2 6.3 6.4 6.5
Chapter 7
109 112 114 116 117 118 122 124
BASIC ANALYSIS TOOLS
PE
Chapter 6
Equivalence Relations: Series with PP CP Equivalence Relations: Single Amounts and Series with PP CP Effective Interest Rate for Continuous Compounding Interest Rates That Vary over Time Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Is Owning a Home a Net Gain or Net Loss over Time?
Why Incremental Analysis Is Necessary Calculation of Incremental Cash Flows for ROR Analysis Interpretation of Rate of Return on the Extra Investment Rate of Return Evaluation Using PW: Incremental and Breakeven Rate of Return Evaluation Using AW Incremental ROR Analysis of Multiple Alternatives
203 203 206 207 213 214
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Contents 8.7
Chapter 9
Benefit/Cost Analysis and Public Sector Economics PE
9.1 9.2 9.3 9.4 9.5 9.6
Progressive Example—Water Treatment Facility #3 Case Public Sector Projects Benefit/Cost Analysis of a Single Project Alternative Selection Using Incremental B/C Analysis Incremental B/C Analysis of Multiple, Mutually Exclusive Alternatives Service Sector Projects and Cost-Effectiveness Analysis Ethical Considerations in the Public Sector Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Comparing B/C Analysis and CEA of Traffic Accident Reduction
LEARNING STAGE 2
EPILOGUE: SELECTING THE BASIC ANALYSIS TOOL
LEARNING STAGE 3
MAKING BETTER DECISIONS
Chapter 10
Project Financing and Noneconomic Attributes 10.1 10.2 10.3 10.4 10.5 10.6 10.7
Chapter 11
MARR Relative to the Cost of Capital Debt-Equity Mix and Weighted Average Cost of Capital Determination of the Cost of Debt Capital Determination of the Cost of Equity Capital and the MARR Effect of Debt-Equity Mix on Investment Risk Multiple Attribute Analysis: Identification and Importance of Each Attribute Evaluation Measure for Multiple Attributes Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Which Is Better—Debt or Equity Financing?
Replacement and Retention Decisions PE
11.1 11.2 11.3 11.4 11.5 11.6
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All-in-One Spreadsheet Analysis (Optional) Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—ROR Analysis with Estimated Lives That Vary Case Study—How a New Engineering Graduate Can Help His Father
Progressive Example—Keep or Replace the Kiln Case Basics of a Replacement Study Economic Service Life Performing a Replacement Study Additional Considerations in a Replacement Study Replacement Study over a Specified Study Period Replacement Value Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Will the Correct ESL Please Stand?
ix 218 219 220 225 226 227
228 229 230 235 238 242 246 250 251 252 258 259
266 267 269 271 273 275 278 282 283 284 289 290
292 293 294 296 302 306 307 312 312 313 319 321
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Contents
Chapter 12
Independent Projects with Budget Limitation 12.1 12.2 12.3 12.4 12.5
Chapter 13
Breakeven and Payback Analysis 13.1 13.2 13.3 13.4
LEARNING STAGE 4 Chapter 14
Effects of Inflation
Understanding How Cost Estimation Is Accomplished Unit Method Cost Indexes Cost-Estimating Relationships: Cost-Capacity Equations Cost-Estimating Relationships: Factor Method Traditional Indirect Cost Rates and Allocation Activity-Based Costing (ABC) for Indirect Costs Making Estimates and Maintaining Ethical Practices Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Indirect Cost Analysis of Medical Equipment Manufacturing Costs Case Study—Deceptive Acts Can Get You in Trouble
Depreciation Methods 16.1 16.2 16.3 16.4 16.5
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Understanding the Impact of Inflation Present Worth Calculations Adjusted for Inflation Future Worth Calculations Adjusted for Inflation Capital Recovery Calculations Adjusted for Inflation Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Inflation versus Stock and Bond Investments
Cost Estimation and Indirect Cost Allocation 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8
Chapter 16
Breakeven Analysis for a Single Project Breakeven Analysis Between Two Alternatives Payback Analysis More Breakeven and Payback Analysis on Spreadsheets Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Water Treatment Plant Process Costs
322 323 325 327 329 332 334 334 338
340 341 345 348 352 355 355 361 363
ROUNDING OUT THE STUDY
14.1 14.2 14.3 14.4
Chapter 15
An Overview of Capital Rationing among Projects Capital Rationing Using PW Analysis of Equal-Life Projects Capital Rationing Using PW Analysis of Unequal-Life Projects Capital Budgeting Problem Formulation Using Linear Programming Additional Project Ranking Measures Chapter Summary Problems Additional Problems and FE Exam Review Questions
Depreciation Terminology Straight Line (SL) Depreciation Declining Balance (DB) and Double Declining Balance (DDB) Depreciation Modified Accelerated Cost Recovery System (MACRS) Determining the MACRS Recovery Period
366 367 369 374 377 378 379 384 385
386 387 390 391 394 395 397 401 403 404 404 410 411 412
414 415 418 419 422 426
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Contents 16.6
Depletion Methods Chapter Summary Appendix 16A.1 Sum-of-Years-Digits (SYD) and Unit-of-Production (UOP) Depreciation 16A.2 Switching between Depreciation Methods 16A.3 Determination of MACRS Rates Problems Additional Problems and FE Exam Review Questions Appendix Problems
Chapter 17
After-Tax Economic Analysis 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9
Chapter 18
Sensitivity Analysis and Staged Decisions 18.1 18.2 18.3 18.4 18.5 18.6
Chapter 19
Interpretation of Certainty, Risk, and Uncertainty Elements Important to Decision Making under Risk Random Samples Expected Value and Standard Deviation Monte Carlo Sampling and Simulation Analysis Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Using Simulation and Three-Estimate Sensitivity Analysis
Using Spreadsheets and Microsoft Excel© A.1 A.2 A.3 A.4 A.5 A.6
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Determining Sensitivity to Parameter Variation Sensitivity Analysis Using Three Estimates Estimate Variability and the Expected Value Expected Value Computations for Alternatives Staged Evaluation of Alternatives Using a Decision Tree Real Options in Engineering Economics Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—Sensitivity to the Economic Environment Case Study—Sensitivity Analysis of Public Sector Projects—Water Supply Plans
More on Variation and Decision Making under Risk 19.1 19.2 19.3 19.4 19.5
Appendix A
Income Tax Terminology and Basic Relations Calculation of Cash Flow after Taxes Effect on Taxes of Different Depreciation Methods and Recovery Periods Depreciation Recapture and Capital Gains (Losses) After-Tax Evaluation After-Tax Replacement Study After-Tax Value-Added Analysis After-Tax Analysis for International Projects Value-Added Tax Chapter Summary Problems Additional Problems and FE Exam Review Questions Case Study—After-Tax Analysis for Business Expansion
Introduction to Using Excel Organization (Layout) of the Spreadsheet Excel Functions Important to Engineering Economy Goal Seek—A Tool for Breakeven and Sensitivity Analysis Solver—An Optimizing Tool for Capital Budgeting, Breakeven, and Sensitivity Analysis Error Messages
xi 427 429 430 430 432 435 438 442 443
444 445 448 450 453 456 462 465 468 470 472 473 481 482
484 485 490 491 492 494 498 503 503 509 510 511
514 515 518 523 526 533 540 540 543 544
547 547 549 550 558 559 560
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Contents
Appendix B
Basics of Accounting Reports and Business Ratios B.1 B.2 B.3
561 561 562 563
Appendix C
Code of Ethics for Engineers
566
Appendix D
Alternate Methods for Equivalence Calculations
569
D.1 D.2
Appendix E
Reference Materials Factor Tables Photo Credits Index
Using Programmable Calculators Using the Summation of a Geometric Series
Glossary of Concepts and Terms E.1 E.2
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The Balance Sheet Income Statement and Cost of Goods Sold Statement Business Ratios
Important Concepts and Guidelines Symbols and Terms
569 570
573 573 576
579 581 610 611
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