Engineering economy / Leland Blank, Anthony Tarquin.

Includes bibliographical references (p. [725]-726) and index.

CONTENTS
Preface xiii
THIS IS HOW IT ALL STARTS
Chapter 1 Foundations of Engineering Economy 4
1.1 Why Engineering Economy Is Important to Engineers (and Other
Professionals) 6
1.2 Role of Engineering Economy in Decision Making 7
1.3 Performing an Engineering Economy Study 9
1.4 Interest Rate and Rate of Return 12
1.5 Equivalence 15
1.6 Simple and Compound Interest 17
1.7 Terminology and Symbols 23
1.8 Introduction to Solution by Computer 26
1.9 Minimum Attractive Rate of Return 28
1.10 Cash Flows: Their Estimation and Diagramming 30
1.11 Rule of 72: Estimating Doubling Time and Interest Rate 35
1.12 Spreadsheet Application-Simple and Compound Interest, and Changing Cash
Flow Estimates 36
Additional Examples 39
Chapter Summary 41
Problems 42
FE Review Problems 45
Extended Exercise-Effects of Compound Interest 45
Case Study-Describing Alternatives for Producing Refrigerator Shells 46
Chapter 2 Factors: How Time and Interest Affect Money 48
2.1 Single-Payment Factors (FyP and PyF) 50
2.2 Uniform-Series Present Worth Factor and Capital RecoveryFactor (PyA and
AyP) 56
2.3 Sinking Fund Factor and Uniform-Series Compound AmountFactor (AyF and FyA)
60
2.4 Interpolation in Interest Tables 63
2.5 Arithmetic Gradient Factors (PyG and AyG) 65
2.6 Geometric Gradient Series Factors 71
2.7 Determination of an Unknown Interest Rate 74
2.8 Determination of Unknown Number of Years 77
2.9 Spreadsheet Application-Basic Sensitivity Analysis 78
Additional Example 80
Chapter Summary 81
Problems 81
FE Review Problems 87
Case Study-What a Difference the Years and Compound Interest Can Make 88
Chapter 3 Combining Factors 90
3.1 Calculations for Uniform Series That Are Shifted 92
3.2 Calculations Involving Uniform-Series and Randomly Placed Single Amounts
96
3.3 Calculations for Shifted Gradients 101
3.4 Shifted Decreasing Arithmetic Gradients 106
3.5 Spreadsheet Application-Using Different Functions 108
Additional Example 112
Chapter Summary 113
Problems 113
FE Review Problems 119
Extended Exercise-Preserving Land for Public Use 120
Chapter 4 Nominal and Effective Interest Rates 122
4.1 Nominal and Effective Interest Rate Statements 124
4.2 Effective Annual Interest Rates 128
4.3 Effective Interest Rates for Any Time Period 134
4.4 Equivalence Relations: Comparing Payment Period and Compounding
Period Lengths (PP versus CP) 136
4.5 Equivalence Relations: Single Amounts with PP $ CP 137
4.6 Equivalence Relations: Series with PP $ CP 140
4.7 Equivalence Relations: Single Amounts and Series with PP , CP 145
4.8 Effective Interest Rate for Continuous Compounding 147
4.9 Interest Rates That Vary over Time 149
Chapter Summary 151
Problems 152
FE Review Problems 155
Case Study-Financing a House 156
TOOLS FOR EVALUATING ALTERNATIVES
Chapter 5 Present Worth Analysis 162
5.1 Formulating Mutually Exclusive Alternatives 164
5.2 Present Worth Analysis of Equal-Life Alternatives 166
5.3 Present Worth Analysis of Different-Life Alternatives 168
5.4 Future Worth Analysis 171
5.5 Capitalized Cost Calculation and Analysis 173
5.6 Payback Period Analysis 179
5.7 Life-Cycle Cost 184
5.8 Present Worth of Bonds 188
5.9 Spreadsheet Applications-PW Analysis and Payback Period 191
Chapter Summary 196
Problems 196
FE Review Problems 203
Extended Exercise-Evaluation of Social Security Retirement Estimates 204
Case Study-Payback Evaluation of Ultralow-Flush Toilet Program 205
Chapter 6 Annual Worth Analysis 208
6.1 Advantages and Uses of Annual Worth Analysis 210
6.2 Calculation of Capital Recovery and AW Values 212
6.3 Evaluating Alternatives by Annual Worth Analysis 215
6.4 AW of a Permanent Investment 220
Chapter Summary 223
Problems 224
FE Review Problems 227
Case Study-The Changing Scene of an Annual Worth Analysis 228
Chapter 7 Rate of Return Analysis: Single Alternative 230
7.1 Interpretation of a Rate of Return Value 232
7.2 Rate of Return Calculation Using a PW or AW Equation 234
7.3 Cautions When Using the ROR Method 240
7.4 Multiple Rate of Return Values 241
7.5 Composite Rate of Return: Removing Multiple i* Values 247
7.6 Rate of Return of a Bond Investment 253
Chapter Summary 255
Problems 256
FE Review Problems 261
Extended Exercise 1-The Cost of a Poor Credit Rating 262
Extended Exercise 2-When Is It Best to Sell a Business? 263
Case Study-Bob Learns About Multiple Rates of Return 264
Chapter 8 Rate of Return Analysis: Multiple Alternatives 266
8.1 Why Incremental Analysis is Necessary 268
8.2 Calculation of Incremental Cash Flows for ROR Analysis 269
8.3 Interpretation of Rate of Return on the Extra Investment 272
8.4 Rate of Return Evaluation Using PW: Incremental and Breakeven 273
8.5 Rate of Return Evaluation Using AW 281
8.6 Incremental ROR Analysis of Multiple, Mutually Exclusive Alternatives
282
8.7 Spreadsheet Application-PW, AW, and ROR Analyses All in One 287
Chapter Summary 290
Problems 290
FE Review Problems 296
Extended Exercise-Incremental ROR Analysis When Estimated Alternative
Lives are Uncertain 297
Case Study 1-So Many Options. Can a New Engineering Graduate Help His
Father? 298
Case Study 2-PW Analysis When Multiple Interest Rates Are Present 300
Chapter 9 Benefit/Cost Analysis and Public Sector Economics 302
9.1 Public Sector Projects 304
9.2 Benefit/Cost Analysis of a Single Project 308
9.3 Alternative Selection Using Incremental B/C Analysis 313
9.4 Incremental B/C Analysis of Multiple, Mutually Exclusive Alternatives
316
Chapter Summary 322
Problems 322
FE Review Problems 328
Extended Exercise-Costs to Provide Ladder Truck Service for Fire Protection
328
Case Study-Freeway Lighting 330
Chapter 10 Making Choices: The Method, MARR, and Multiple Attributes
332
10.1 Comparing Mutually Exclusive Alternatives by Different Evaluation Methods
334
10.2 MARR Relative to the Cost of Capital 337
10.3 Debt-Equity Mix and Weighted Average Cost of Capital 340
10.4 Determination of the Cost of Debt Capital 343
10.5 Determination of the Cost of Equity Capital and the MARR 345
10.6 Effect of Debt-Equity Mix on Investment Risk 348
10.7 Multiple Attribute Analysis: Identification and Importance of Each
Attribute 350
10.8 Evaluation Measure for Multiple Attributes 355
Chapter Summary 357
Problems 358
Extended Exercise-Emphasizing the Right Things 365
Case Study-Which Way to Go-Debt or Equity Financing? 367
MAKING DECISIONS ON REAL-WORLD PROJECTS
Chapter 11 Replacement and Retention Decisions 370
11.1 Basics of the Replacement Study 372
11.2 Economic Service Life 375
11.3 Performing a Replacement Study 381
11.4 Additional Considerations in a Replacement Study 387
11.5 Replacement Study over a Specified Study Period 388
Chapter Summary 394
Problems 394
FE Review Problems 399
Extended Exercise-Economic Service Life Under Varying Conditions 400
Case Study-Replacement Analysis for Quarry Equipment 401
Chapter 12 Selection from Independent Projects Under Budget Limitation
402
12.1 An Overview of Capital Rationing Among Projects 404
12.2 Capital Rationing Using PW Analysis of Equal-Life Projects 406
12.3 Capital Rationing Using PW Analysis of Unequal-Life Projects 408
12.4 Capital Budgeting Problem Formulation Using Linear Programming 412
Chapter Summary 416
Problems 417
Case Study-Lifelong Engineering Education in a Web Environment 420
Chapter 13 Breakeven Analysis 422
13.1 Breakeven Analysis for a Single Project 424
13.2 Breakeven Analysis Between Two Alternatives 431
13.3 Spreadsheet Application-Using Excel's SOLVER for Breakeven Analysis
435
Chapter Summary 438
Problems 439
Case Study-Water Treatment Plant Process Costs 444
ROUNDING OUT THE STUDY
Chapter 14 Effects of Inflation 450
14.1 Understanding the Impact of Inflation 452
14.2 Present Worth Calculations Adjusted for Inflation 453
14.3 Future Worth Calculations Adjusted for Inflation 459
14.4 Capital Recovery Calculations Adjusted for Inflation 464
Chapter Summary 465
Problems 466
FE Review Problems 469
Extended Exercise-Fixed-Income Investments versus the Forces of Inflation
470
Chapter 15 Cost Estimation and Indirect Cost Allocation 472
15.1 Understanding How Cost Estimation Is Accomplished 474
15.2 Cost Indexes 477
15.3 Cost Estimating Relationships: Cost-Capacity Equations 481
15.4 Cost Estimating Relationships: Factor Method 482
15.5 Traditional Indirect Cost Rates and Allocation 485
15.6 Activity-Based Costing (ABC) for Indirect Costs 490
Chapter Summary 493
Problems 494
FE Review Problems 501
Case Study-Total Cost Estimates for Optimizing Coagulant Dosage 501
Case Study-Indirect Cost Comparison of Medical Equipment Sterilization Unit
504
Chapter 16 Depreciation Methods 506
16.1 Depreciation Terminology 508
16.2 Straight Line (SL) Depreciation 511
16.3 Declining Balance (DB) and Double Declining Balance (DDB) Depreciation
512
16.4 Modified Accelerated Cost Recovery System (MACRS) 517
16.5 Determining the MACRS Recovery Period 521
16.6 Depletion Methods 522
Chapter Summary 524
Problems 526
FE Review Problems 529
16A.1 Sum-of-Year Digits (SYD) Depreciation 530
16A.2 Switching Between Depreciation Methods 532
16A.3 Determination of MACRS Rates 537
Appendix Problems 540
Chapter 17 After-Tax Economic Analysis 542
17.1 Income Tax Terminology and Relations for Corporations (and Individuals)
544
17.2 Before-Tax and After-Tax Cash Flow 548
17.3 Effect on Taxes of Different Depreciation Methods and Recovery Periods
552
17.4 Depreciation Recapture and Capital Gains (Losses): for Corporations
555
17.5 After-Tax PW, AW, and ROR Evaluation 560
17.6 Spreadsheet Applications-After-Tax Incremental ROR Analysis 566
17.7 After-Tax Replacement Study 569
17.8 After-Tax Value-Added Analysis 573
Chapter Summary 577
Problems 578
Case Study-After-Tax Evaluation of Debt and Equity Financing 587
Chapter 18 Formalized Sensitivity Analysis and Expected Value Decisions
590
18.1 Determining Sensitivity to Parameter Variation 592
18.2 Formalized Sensitivity Analysis Using Three Estimates 599
18.3 Economic Variability and the Expected Value 602
18.4 Expected Value Computations for Alternatives 603
18.5 Staged Evaluation of Alternatives Using a Decision Tree 605
Chapter Summary 610
Problems 611
Extended Exercise-Looking at Alternatives from Different Angles 619
Case Study-Sensitivity Analysis of Public Sector Projects-Water Supply
Plans 619
Chapter 19 More on Variation and Decision Making Under Risk 624
19.1 Interpretation of Certainty, Risk, and Uncertainty 626
19.2 Elements Important to Decision Making Under Risk 630
19.3 Random Samples 636
19.4 Expected Value and Standard Deviation 641
19.5 Monte Carlo Sampling and Simulation Analysis 647
Additional Examples 656
Chapter Summary 661
Problems 661
Extended Exercise-Using Simulation and the Excel RNG for Sensitivity
Analysis 666
Appendix A Using Spreadsheets and Microsoft Excel c 667
A.1 Introduction to Using Excel 667
A.2 Organization (Layout) of the Spreadsheet 671
A.3 Excel Functions Important to Engineering Economy (alphabetical order)
673
A.4 SOLVER-An Excel Tool for Breakeven and "What If?" Analysis 682
A.5 List of Excel Financial Functions 683
A.6 Error Messages 685
Appendix B Basics of Accounting Reports and Business Ratios 686
B.1 The Balance Sheet 686
B.2 Income Statement and Cost of Goods Sold Statement 688
B.3 Business Ratios 689
Problems 693
Appendix C Final Answers to Selected End-of-Chapter Problems 695
Bibliography 700
Compound Interest
Factor Tables 702
INDEX 731