Resources for Success MyLab Engineering for Engineering Economy, 17e (access code required) MyLab™ Engineering is the teaching and learning platform that empowers you to reach every student. By combining trusted author content with digital tools and a flexible platform, MyLab Engineering personalizes the learning experience and improves results for each student. Book-Specific Exercises MyLab Engineering’s varied homework and practice questions are correlated to the textbook and many regenerate algorithmically to give students unlimited opportunity for practice and mastery. Exercises are automatically graded so students get immediate feedback on whether they’ve mastered the concept. Student Videos Video solutions are available to help explain chapter concepts or walk students through example exercises. These are available to students at all times in the Multimedia Library. For more information, visit www.pearson.com/mylab/engineering
Transcript
Resources for SuccessMyLab Engineering for Engineering Economy, 17e (access code required)
MyLab™ Engineering is the teaching and learning platform that empowers you to reach every student. By combining trusted author content with digital tools and a flexible platform, MyLab Engineering personalizes the learning experience and improves results for each student.
Book-Specific Exercises
MyLab Engineering’s varied homework and practice questions are correlated to the textbook and many regenerate algorithmically to give students unlimited opportunity for practice and mastery.
Exercises are automatically graded so students get immediate feedback on whether they’ve mastered the concept.
Student Videos
Video solutions are available to help explain chapter concepts or walk students through example exercises. These are available to students at all times in the Multimedia Library.
For more information, visit www.pearson.com/mylab/engineering
Auto-Graded Excel Projects
Using proven, field-tested technology, Auto-Graded Excel Projects let you seamlessly integrate Microsoft® Excel® content into your course. Students can practice important skills in Excel, helping them master key concepts and gain proficiency with Excel.
Study Plan
The Study Plan gives students personalized recommendations, practice, and Quiz Me opportunities to help them stay on track.
eText
The Pearson eText gives students access to their textbook anytime, anywhere. In addition to note taking, highlighting, and bookmarking, instructors can share their comments or highlights, and students can add their own, creating a tight community of learners in the class.
For more information, visit wwww.pearson.com/mylab/engineering
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ENGINEERINGECONOMY
Seventeenth Edition
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ENGINEERING ECONOMYSEVENTEENTH EDITION
WILLIAM G. SULLIVAN ELIN M. WICKS C. PATRICK KOELLINGVirginia Polytechnic Institute Abacus Accounting, LLC Virginia Polytechnic Institute
and State University and State University
330 Hudson Street, NY, NY 10013
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Senior Vice President Courseware Portfolio Management: Cover Designer: Black Horse DesignsMarcia J. Horton Cover Photos: Tower: hxdyl; Graph: Shutterstock/bluebay; Airliner: CarlosDirector, Portfolio Management: Engineering, Computer Enrique Santa MariaScience & Global Editions: Julian Partridge Inventory Manager: Ann LamExecutive Portfolio Manager: Holly Stark Manufacturing Buyer, Higher Ed, Lake Side Communications, Inc. (LSC):Portfolio Management Assistant: Emily Egan Maura Zaldivar-GarciaField Marketing Manager: Demetrius Hall Rights and Permissions Manager: Ben FerriniProduct Marketing Manager: Yvonne Vannatta Full Service Vendor: Integra Software Services Pvt. Ltd.Marketing Assistant: Jon Bryant Full-Service Project Management: Ashwina RagunathManaging Producer: Scott Disanno Printer/Binder: LSC Communications, Inc.Content Producer: Amanda Brands
Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriatepage within text.
Many of the designations by manufacturers and seller to distinguish their products are claimed as trademarks. Where thosedesignations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial capsor all caps.
The author and publisher of this book have used their best efforts in preparing this book. These efforts include the development,research, and testing of theories and programs to determine their effectiveness. The author and publisher make no warranty of anykind, expressed or implied, with regard to these programs or the documentation contained in this book. The author and publishershall not be liable in any event for incidental or consequential damages with, or arising out of, the furnishing, performance, or use ofthese programs.
Library of Congress Cataloging-in-Publication Data
Names: Sullivan, William G., 1942– author. | Wicks, Elin M., author. | Koelling, C. Patrick, 1953– author.Title: Engineering economy / William G. Sullivan, Virginia Polytechnic Institute and State University,
Elin M. Wicks, Abacus Accounting, LLC, Patrick C. Koelling, Virginia PolytechnicInstitute and State University.
Identifiers: LCCN 2017039940 | ISBN 9780134870069 | ISBN 0134870069Subjects: LCSH: Engineering economy.Classification: LCC TA177.4 .S85 2018 | DDC 658.15—dc23LC record available at https://lccn.loc.gov/2017039940
1 18
ISBN-13: 978-0-13-487006-9ISBN-10: 0-13-487006-9
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CONTENTS
Preface xiGreen Content xix
CHAPTER 1Introduction to Engineering Economy 1
1.1 Introduction 21.2 The Principles of Engineering Economy 31.3 Engineering Economy and the Design Process 61.4 Using Spreadsheets in Engineering Economic Analysis 151.5 Try Your Skills 151.6 Summary 16
CHAPTER 2Cost Concepts and Design Economics 20
2.1 Cost Terminology 212.2 The General Economic Environment 272.3 Cost-Driven Design Optimization 372.4 Present Economy Studies 422.5 Case Study—The Economics of Daytime Running Lights 492.6 In-Class Exercise 502.7 Try Your Skills 502.8 Summary 52
CHAPTER 3Cost-Estimation Techniques 62
3.1 Introduction 633.2 An Integrated Approach 653.3 Selected Estimating Techniques (Models) 733.4 Parametric Cost Estimating 783.5 Case Study—Demanufacturing of Computers 893.6 Electronic Spreadsheet Modeling: Learning Curve 913.7 In-Class Exercise 93
v
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vi CONTENTS
3.8 Try Your Skills 933.9 Summary 96
CHAPTER 4The Time Value of Money 104
4.1 Introduction 1054.2 Simple Interest 1064.3 Compound Interest 1074.4 The Concept of Equivalence 1074.5 Notation and Cash-Flow Diagrams and Tables 1104.6 Relating Present and Future Equivalent Values of Single Cash
Flows 1144.7 Relating a Uniform Series (Annuity) to Its Present and Future
Equivalent Values 1204.8 Summary of Interest Formulas and Relationships for Discrete
Formulas 1334.11 Uniform (Arithmetic) Gradient of Cash Flows 1394.12 Geometric Sequences of Cash Flows 1444.13 Interest Rates that Vary with Time 1494.14 Nominal and Effective Interest Rates 1514.15 Compounding More Often than Once per Year 1534.16 Interest Formulas for Continuous Compounding and Discrete
Cash Flows 1564.17 Case Study—Understanding Economic “Equivalence” 1594.18 In-Class Exercise 1624.19 Try Your Skills 1624.20 Summary 171
CHAPTER 5Evaluating a Single Project 188
5.1 Introduction 1895.2 Determining the Minimum Attractive Rate of Return
(MARR) 1905.3 The Present Worth Method 1915.4 The Future Worth Method 1985.5 The Annual Worth Method 1995.6 The Internal Rate of Return Method 2045.7 The External Rate of Return Method 2155.8 The Payback (Payout) Period Method 2175.9 Case Study—A Proposed Capital Investment to Improve
Process Yield 220
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CONTENTS vii
5.10 Electronic Spreadsheet Modeling: Payback Period Method 2225.11 In-Class Exercise 2245.12 Try Your Skills 2245.13 Summary 230Appendix 5-A The Multiple Rate of Return Problem with the IRR
Method 241
CHAPTER 6Comparison and Selection among Alternatives 246
6.1 Introduction 2476.2 Basic Concepts for Comparing Alternatives 2476.3 The Study (Analysis) Period 2516.4 Useful Lives Are Equal to the Study Period 2536.5 Useful Lives Are Unequal among the Alternatives 2706.6 Personal Finances 2836.7 Case Study—Ned and Larry’s Ice Cream Company 2876.8 Postevaluation of Results 2906.9 Project Postevaluation Spreadsheet Approach 2906.10 In-Class Exercise 2936.11 Try Your Skills 2946.12 Summary 304
CHAPTER 7Depreciation and Income Taxes 322
7.1 Introduction 3237.2 Depreciation Concepts and Terminology 3237.3 The Classical (Historical) Depreciation Methods 3267.4 The Modified Accelerated Cost Recovery System 3317.5 A Comprehensive Depreciation Example 3407.6 Introduction to Income Taxes 3447.7 The Effective (Marginal) Corporate
Income Tax Rate 3477.8 Gain (Loss) on the Disposal of an Asset 3507.9 General Procedure for Making After-Tax Economic Analyses 3517.10 Illustration of Computations of ATCFs 3557.11 Economic Value Added 3677.12 In-Class Exercise 3697.13 Try Your Skills 3697.14 Summary 372
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viii CONTENTS
CHAPTER 8Price Changes and Exchange Rates 385
8.1 Introduction 3868.2 Terminology and Basic Concepts 3878.3 Fixed and Responsive Annuities 3938.4 Differential Price Changes 3988.5 Spreadsheet Application 4008.6 Foreign Exchange Rates and Purchasing Power Concepts 4028.7 Case Study—Selecting Electric Motors to Power an Assembly
Line 4078.8 In-Class Exercise 4108.9 Try Your Skills 4108.10 Summary 412
CHAPTER 9Replacement Analysis 422
9.1 Introduction 4239.2 Reasons for Replacement Analysis 4239.3 Factors that Must Be Considered in Replacement Studies 4249.4 Typical Replacement Problems 4279.5 Determining the Economic Life of a New Asset (Challenger) 4309.6 Determining the Economic Life of a Defender 4349.7 Comparisons in Which the Defender’s Useful Life Differs from
that of the Challenger 4379.8 Retirement without Replacement (Abandonment) 4409.9 After-Tax Replacement Studies 4419.10 Case Study—Replacement of a Hospital’s Emergency Electrical
Supply System 4499.11 In-Class Exercise 4539.12 Try Your Skills 4539.13 Summary 454
CHAPTER 10Evaluating Projects with the Benefit−Cost Ratio Method 463
10.1 Introduction 46410.2 Perspective and Terminology for Analyzing Public
Projects 46510.3 Self-Liquidating Projects 46610.4 Multiple-Purpose Projects 46610.5 Difficulties in Evaluating Public-Sector Projects 46910.6 What Interest Rate Should Be Used for Public Projects? 47010.7 The Benefit−Cost Ratio Method 472
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CONTENTS ix
10.8 Evaluating Independent Projects by B−C Ratios 47810.9 Comparison of Mutually Exclusive Projects by B−C Ratios 48010.10 Case Study—Improving a Railroad Crossing 48510.11 Try Your Skills 48710.12 Summary 488
12.1 Introduction 52412.2 Sources of Uncertainty 52512.3 The Distribution of Random Variables 52512.4 Evaluation of Projects with Discrete Random Variables 52912.5 Evaluation of Projects with Continuous Random Variables 53812.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation 54312.7 Performing Monte Carlo Simulation with a Computer 54712.8 Decision Trees 55112.9 Real Options Analysis 55612.10 Summary 559
CHAPTER 13The Capital Budgeting Process 567
13.1 Introduction 56813.2 Debt Capital 57013.3 Equity Capital 57113.4 The Weighted Average Cost of Capital (WACC) 57413.5 Project Selection 57813.6 Postmortem Review 58213.7 Budgeting of Capital Investments and Management
Perspective 58313.8 Leasing Decisions 58413.9 Capital Allocation 58613.10 Summary 592
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x CONTENTS
CHAPTER 14Decision Making Considering Multiattributes 596
14.1 Introduction 59714.2 Examples of Multiattribute Decisions 59714.3 Choice of Attributes 59914.4 Selection of a Measurement Scale 59914.5 Dimensionality of the Problem 60014.6 Noncompensatory Models 60014.7 Compensatory Models 60514.8 Summary 613
Appendix A Accounting Fundamentals 619Appendix B Abbreviations and Notation 629Appendix C Interest and Annuity Tables for Discrete Compounding 633Appendix D Interest and Annuity Tables for Continuous Compounding 652Appendix E Standard Normal Distribution 656Appendix F Selected References 659Appendix G Solutions to Try Your Skills 662Appendix H Answers to Selected Problems 703
Index 707
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PREFACE
We live in a sea of economic decisions.
—Anonymous
Proudly serving engineering educators and students for over 75 years
About Engineering EconomyA succinct job description for an engineer consists of two words: problem solver.Broadly speaking, engineers use knowledge to find new ways of doing thingseconomically. Engineering design solutions do not exist in a vacuum but within thecontext of a business opportunity. Given that every problem has multiple solutions, theissue is, How does one rationally select the design with the most favorable economicresult? The answer to this question can also be put forth in two words: engineeringeconomy. Engineering economy provides a systematic framework for evaluating theeconomic aspects of competing design solutions. Just as engineers model the stress ona support column, or the thermodynamic response of a steam turbine, they must alsomodel the economic impact of their recommendations.
Engineering economy—what is it, and why is it important? The initial reactionof many engineering students to these questions is, “Money matters will be handledby someone else. They are not something I need to worry about.” In reality, anyengineering project must be not only physically realizable but also economicallyaffordable. This book is about how to make smart economic choices.
Understanding and applying economic principles to engineering have never beenmore important. Engineering is more than a problem-solving activity focusing onthe development of products, systems, and processes to satisfy a need or demand.Beyond function and performance, solutions must also be viable economically. Designdecisions affect limited resources such as time, material, labor, capital, and naturalresources, not only initially (during conceptual design) but also through the remainingphases of the life cycle (e.g., detailed design, manufacture and distribution, service,retirement, and disposal). A great solution can die a certain death if it is not profitable.
• MyLab Engineering is available with Engineering Economy, 17/e and provides apowerful homework and test manager which lets instructors create, import, andmanage online homework assignments, quizzes, and tests that are automatically
xi
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xii PREFACE
graded. You can choose from a wide range of assignment options, including timelimits, proctoring, and maximum number of attempts allowed. The bottom line:MyLab Engineering means less time grading and more time teaching.
• Automatically graded and algorithmic-generated homework assignments,quizzes, and tests that directly correlate to the textbook.
• Automatic grading that tracks students’ results.
• Assignable Auto-Graded Excel Projects let students master key Excel skills withinthe application and receive immediate feedback on their work.
• Interactive “Help Me Solve This” tutorials provide opportunity for point-of-usehelp and more practice.
• Learning Objectives mapped to ABET outcomes provide comprehensivereporting tools.
• Video Solutions are available to help explain concepts or walk students throughexample exercises from the book.
What’s New to This Edition?Our intent in revising the text is to continue integrating computer technology andrealistic examples to facilitate learning engineering economy. Here are the highlightsof changes made in the publication of the seventeenth edition:
• Approximately half of all end-of-chapter problems have been replaced with fresh,new problems.
• The “Try Your Skills” problem sets at the end of Chapters 1 through 8 have beendoubled in problem count. “Try Your Skills” problem sets have also been addedfor Chapters 9 through 11.
• Appendix A, a description of accounting fundamentals, has been rewritten andadded to the book.
• Group in-class problem exercises have been added to the majority of chapters inthe seventeenth edition. These exercises are ideal for in-class, team-based problemsolving with three to four students in each group.
• Appendix H, which features answers to selected end-of-chapter problems, hasbeen added to this new edition.
• In Chapter 7 we provide an Excel template that allows students to change theeffective income rate in problems affected by Congressional updates to the federalincome tax law (most likely enacted in late 2017).
• Problem-solution videos have been updated and expanded. These videos providestudents with step-by-step solution methods and demonstrate both by-hand andspreadsheet solutions. These complement the MyLab Engineering software thathas been a popular feature of previous editions.
Strategies of This BookThis book has two primary objectives: (1) to provide students with a soundunderstanding of the principles, basic concepts, and methodology of engineering
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PREFACE xiii
economy; and (2) to help students develop proficiency with these methods and withthe process for making rational decisions they are likely to encounter in professionalpractice. Interestingly, an engineering economy course may be a student’s only collegeexposure to the systematic evaluation of alternative investment opportunities. In thisregard, Engineering Economy is intended to serve as a text for classroom instructionand as a basic reference for use by practicing engineers in all specialty areas (e.g.,chemical, civil, computer, electrical, industrial, and mechanical engineering). Thebook is also useful to persons engaged in the management of technical activities.
This book is written to appeal to engineering students with a wide variety ofpersonal interests and majors. Our students are like most college students, varied intheir educational and career interests and eager for challenging work that will inspirethem. The explanations and examples in the book are student-centered and eminentlypractical in real-life situations. In addition, multimedia resources are available onlinein MyLab Engineering for students and instructors looking to supplement the printbook’s contents.
As a textbook, the seventeenth edition is written principally for the first formalcourse in engineering economy. A three-credit-hour semester course should be able tocover the majority of topics in this edition, and there is sufficient depth and breadth toenable an instructor to arrange course content to suit individual needs. Representativesyllabi for a three-credit and a two-credit semester course in engineering economy areprovided in Table P-1. Moreover, because several advanced topics are included, thisbook can also be used for a second course in engineering economy.
All chapters and appendices have been revised and updated to reflect currenttrends and issues. Also, numerous exercises that involve open-ended problemstatements and iterative problem-solving skills are included throughout the book.A large number of the 750-plus end-of-chapter exercises are new, and many solvedexamples representing realistic problems that arise in various engineering disciplinesare presented.
In the 21st century, America is turning over a new leaf for environmentalsustainability. We have worked hard to capture this spirit in many of our examplesand end-of-chapter problems. In fact, more than 160 “green” problems and exampleshave been integrated throughout this edition. They are listed in the Green Contentsection following the Preface.
Fundamentals of Engineering (FE) exam–style questions are included to helpprepare engineering students for this milestone examination, leading to professionalregistration. Passing the FE exam is a first step in getting licensed as a professionalengineer (PE). Engineering students should seriously consider becoming a PE becauseit opens many employment opportunities and increases lifetime earning potential.
It is generally advisable to teach engineering economy at the upper divisionlevel. Here, an engineering economy course incorporates the accumulated knowledgestudents have acquired in other areas of the curriculum and also deals with iterativeproblem solving, open-ended exercises, creativity in formulating and evaluatingfeasible solutions to problems, and consideration of realistic constraints (economic,aesthetic, safety, etc.) in problem solving.
Also available to adopters of this edition is an instructor’s Solutions Manual andother classroom resources. In addition, PowerPoint visual aids are readily available toinstructors. Visit www.pearson.com for more information.
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TABLE
P-1
Typical
Sylla
biforCourses
inEn
ginee
ringEconomy
SemesterCourse(ThreeCreditHours)
SemesterCourse(TwoCreditHours)
Wee
kofthe
No.o
fClass
Chap
ter
Semester
Topic(s)
Chap
ter(s)
Periods
Topic(s)
11
Intr
oduc
tion
toE
ngin
eeri
ngE
cono
my
11
Intr
oduc
tion
toE
ngin
eeri
ngE
cono
my
22
Cos
tC
once
pts
and
Des
ign
24
Cos
tC
once
pts,
Sing
leV
aria
ble
Eco
nom
ics
Tra
de-O
ffA
naly
sis,
and
33
Cos
t-E
stim
atio
nT
echn
ique
sP
rese
ntE
cono
my
44–
5T
heT
ime
Val
ueof
Mon
ey4
5T
heT
ime
Val
ueof
Mon
ey5
6E
valu
atin
ga
Sing
leP
roje
ct1,
2,4
1Te
st#
16
7C
ompa
riso
nan
dSe
lect
ion
33
Dev
elop
ing
Cas
hF
low
san
dam
ong
Alt
erna
tive
sC
ost-
Est
imat
ion
Tec
hniq
ues
8M
idte
rmE
xam
inat
ion
52
Eva
luat
ing
aSi
ngle
Pro
ject
79
Dep
reci
atio
nan
dIn
com
eT
axes
64
Com
pari
son
and
Sele
ctio
n10
10E
valu
atin
gP
roje
cts
wit
hth
eam
ong
Alt
erna
tive
sB
enefi
t–C
ost
Rat
ioM
etho
d3,
5,6
1Te
st#
28
11P
rice
Cha
nges
and
Exc
hang
eR
ates
112
Bre
akev
enan
dSe
nsit
ivit
yA
naly
sis
1112
Bre
akev
enan
dSe
nsit
ivit
yA
naly
sis
75
Dep
reci
atio
nan
dIn
com
eT
axes
913
Rep
lace
men
tA
naly
sis
141
Dec
isio
nM
akin
gC
onsi
deri
ng12
14P
roba
bilis
tic
Ris
kA
naly
sis
Mul
tiat
trib
utes
13–1
415
The
Cap
ital
Bud
geti
ngP
roce
ss,
All
the
abov
e1
Fin
alE
xam
inat
ion
Dec
isio
nM
akin
gC
onsi
deri
ngM
ulti
attr
ibut
es15
Fin
alE
xam
inat
ion
Num
ber
ofcl
ass
peri
ods:
45N
umbe
rof
clas
spe
riod
s:30
xiv
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PREFACE xv
Engineering Economy PortfolioIn many engineering economy courses, students are required to design, develop,and maintain an engineering economy portfolio. The purpose of the portfoliois to demonstrate and integrate knowledge of engineering economy beyond therequired assignments and tests. This is usually an individual assignment. Professionalpresentation, clarity, brevity, and creativity are important criteria to be used toevaluate portfolios. Students are asked to keep the audience (i.e., the grader) in mindwhen constructing their portfolios.
The portfolio should contain a variety of content. To get credit for content,students must display their knowledge. Simply collecting articles in a folderdemonstrates very little. To get credit for collected articles, students should read themand write a brief summary of each one. The summary could explain how the articleis relevant to engineering economy, it could critique the article, or it could check orextend any economic calculations in the article. The portfolio should include boththe summary and the article itself. Annotating the article by writing comments in themargin is also a good idea. Other suggestions for portfolio content follow (note thatstudents are encouraged to be creative):
• Describe and set up or solve an engineering economy problem from your owndiscipline (e.g., electrical engineering or building construction).
• Choose a project or problem in society or at your university and apply engineeringeconomic analysis to one or more proposed solutions.
• Develop proposed homework or test problems for engineering economy. Includethe complete solution. Additionally, state which course objective(s) this problemdemonstrates (include text section).
• Reflect upon and write about your progress in the class. You might include aself-evaluation against the course objectives.
• Include a photo or graphic that illustrates some aspects of engineering economy.Include a caption that explains the relevance of the photo or graphic.
• Include completely worked out practice problems. Use a different color pen toshow these were checked against the provided answers.
• Rework missed test problems, including an explanation of each mistake.
(The preceding list could reflect the relative value of the suggested items; that is,items at the top of the list are more important than items at the bottom of thelist.)
Students should develop an introductory section that explains the purpose andorganization of the portfolio. A table of contents and clearly marked sections orheadings are highly recommended. Cite the source (i.e., a complete bibliographicentry) of all outside material. Remember, portfolios provide evidence that studentsknow more about engineering economy than what is reflected in the assignments andexams. The focus should be on quality of evidence, not quantity.
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xvi PREFACE
Icon Used in This Book
Throughout this book, one icon will appear in connection with numerous chapteropening materials, examples, and problems.
This icon identifies environmental (green) elements of the book. These elementspertain to engineering economy problems involving energy conservation, materialssubstitution, recycling, and other green situations.
Assumptions, Precision, and Perspective
Engineering economy studies necessitate various assumptions (educated guesses)about the future. For example, we deal with predicted cash flows and interest ratesover extended future periods of time. Most of the numerical examples in this book aregenerally rounded to the nearest dollar mainly because there is a lack of precision inour estimates involving future circumstances facing an organization.
Interest factors tabled in Appendixes C and D have been computed to foursignificant digits and may imply precision in engineering economy problems that isnot, in fact, realistic. Students are reminded that rounding answers to problems in thisbook is entirely appropriate (for instance, to the nearest dollar, year, or any other valuebeing solved for). We also strongly recommend solving problems from the viewpointof the profit seeking owners of an organization (the shareholders and bondholders).Consequently, we assume that managers who act on economic analysis results arerational persons making decisions objectively to take advantage of feasible investmentopportunities available to them.
Overview of the Book
This book is about making choices among competing engineering alternatives. Mostof the cash-flow consequences of the alternatives lie in the future, so our attention isdirected toward the future and not the past. In Chapter 2, we examine alternativeswhen the time value of money is not a complicating factor in the analysis. Wethen turn our attention in Chapter 3 to how future cash flows are estimated. InChapter 4 and subsequent chapters, we deal with alternatives where the time valueof money is a deciding factor in choosing among competing capital investmentopportunities.
Students can appreciate Chapters 2 and 3 and later chapters when they consideralternatives in their personal lives, such as which job to accept upon graduation, whichautomobile or truck to purchase, whether to buy a home or rent a residence, and manyother choices they will face. To be student friendly, we have included many problemsthroughout this book that deal with personal finance. These problems are timelyand relevant to a student’s personal and professional success, and these situationsincorporate the structured problem-solving process that students will learn from thisbook.
Chapter 4 concentrates on the concepts of money–time relationships andeconomic equivalence. Specifically, we consider the time value of money in evaluatingthe future revenues and costs associated with alternative uses of money. Then, in
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PREFACE xvii
Chapter 5, the methods commonly used to analyze the economic consequences andprofitability of an alternative are demonstrated. These methods, and their properuse in the comparison of alternatives, are primary subjects of Chapter 6, whichalso includes a discussion of the appropriate time period for an analysis. Thus,Chapters 4, 5, and 6 together develop an essential part of the methodology needed forunderstanding the remainder of the book and for performing engineering economystudies on a before-tax basis.
In Chapter 7, the additional details required to accomplish engineering economystudies on an after-tax basis are explained. In the private sector, most engineeringeconomy studies are done on an after-tax basis. Therefore, Chapter 7 adds to the basicmethodology developed in Chapters 4, 5, and 6.
The effects of inflation (or deflation), price changes, and international exchangerates are the topics of Chapter 8. The concepts for handling price changes andexchange rates in an engineering economy study are discussed both comprehensivelyand pragmatically from an application viewpoint.
Often, an organization must analyze whether existing assets should be continuedin service or replaced with new assets to meet current and future operating needs.In Chapter 9, techniques for addressing this question are developed and presented.Because the replacement of assets requires significant capital, decisions made in thisarea are important and demand special attention.
Chapter 10 is dedicated to the analysis of public projects with the benefit–costratio method of comparison. The development of this widely used method ofevaluating alternatives was motivated by the Flood Control Act passed by theU.S. Congress in 1936.
Concern over uncertainty and risk is a reality in engineering practice. In Chapter11, the impact of potential variation between the estimated economic outcomes ofan alternative and the results that may occur is considered. Breakeven and sensitivitytechniques for analyzing the consequences of risk and uncertainty in future estimatesof revenues and costs are discussed and illustrated.
In Chapter 12, probabilistic techniques for analyzing the consequences of risk anduncertainty in future cash-flow estimates and other factors are explained. Discrete andcontinuous probability concepts, as well as Monte Carlo simulation techniques, areincluded in Chapter 12.
Chapter 13 is concerned with the proper identification and analysis of all projectsand other needs for capital within an organization. Accordingly, the capital financingand capital allocation process to meet these needs is addressed. This process is crucialto the welfare of an organization, because it affects most operating outcomes, whetherin terms of current product quality and service effectiveness or long-term capabilityto compete in the world market. Finally, Chapter 14 discusses many time-testedmethods for including nonmonetary attributes (intangibles) in engineering economystudies.
We would like to extend a heartfelt “thank you” to our colleagues and studentsfor their many helpful suggestions (and critiques!) for this seventeenth editionof Engineering Economy. We owe an enormous debt of gratitude to numerousindividuals who have contributed to this edition: Kathryn Abel (Stevens Instituteof Technology), Farhad Azadivar (University of Massachusetts Dartmouth), PatrickA. Brunese (Purdue University), Tom Cassel (University of Pennsylvania), JeyaChandra (Pennsylvania State University), Xin Chen (Southern Illinois University
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xviii PREFACE
Edwardsville), Hossein Hemati (San Diego State University), Bruce Janson(University of Colorado Denver), Solomon Leung (Idaho State University), andChristian M. Salmon (Western New England University). Also, we truly appreciatethe invaluable assistance of folks at Pearson: Holly Stark, Erin Ault, and AmandaBrands, who have made invaluable improvements to this effort.
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Chapter 5Pg 188 Chapter 5 OpenerPg 194 Example 5-2Pg 199 Example 5-7Pg 202 Example 5-10Pg 219 Example 5-19Pg 225 Try Your Skills 5-DPg 228 Try Your Skills 5-WPg 228 Try Your Skills 5-Y
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