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 focussing 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.

C. Patrick Koelling has served on the faculty in industrial and systems engineering at Virginia Tech since 1987. Dr. Koelling received his Ph.D. 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 xviii

CHAPTER 1

Introduction to Engineering Economy 1

1.1 Introduction 2

1.2 The Principles of Engineering Economy 3

1.3 Engineering Economy and the Design Process 7

1.4 Using Spreadsheets in Engineering Economic Analysis 15

1.5 Try Your Skills 15

1.6 Summary 16

CHAPTER 2

Cost Concepts and Design Economics 20

2.1 Cost Terminology 21

2.2 The General Economic Environment 27

2.3 Cost-Driven Design Optimization 38

2.4 Present Economy Studies 43

2.5 Case Study–The Economics of Daytime Running Lights 49

2.6 Try Your Skills 51

2.7 Summary 52

Appendix 2-A Accounting Fundamentals 60

CHAPTER 3

Cost-Estimation Techniques 67

3.1 Introduction 68

3.2 An Integrated Approach 70

3.3 Selected Estimating Techniques (Models) 78

3.4 Parametric Cost Estimating 83

3.5 Case Study–Demanufacturing of Computers 94

3.6 Electronic Spreadsheet Modeling: Learning Curve 96

3.7 Try Your Skills 98

3.8 Summary 100

CHAPTER 4

The Time Value of Money 107

4.1 Introduction 108

4.2 Simple Interest 109

4.3 Compound Interest 110

4.4 The Concept of Equivalence 110

4.5 Notation and Cash-Flow Diagrams and Tables 113

4.6 Relating Present and Future Equivalent Values 123

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

4.8 Summary of Interest Formulas and Relationships for Discrete Compounding 133

4.9 Deferred Annuities (Uniform Series) 135

4.10 Equivalence Calculations Involving Multiple Interest Formulas 137

4.11 Uniform (Arithmetic) Gradient of Cash Flows 143

4.12 Geometric Sequences of Cash Flows 148

4.13 Interest Rates that Vary with Time 153

4.14 Nominal and Effective Interest Rates 155

4.15 Compounding More Often than Once per Year 157

4.16 Interest Formulas for Continuous Compounding and Discrete Cash Flows 160

4.17 Case Study–Understanding Economic “Equivalence” 163

4.18 Try Your Skills 166

4.19 Summary 169

CHAPTER 5

Evaluating a Single Project 186

5.1 Introduction 187

5.2 Determining the Minimum Attractive Rate of Return (MARR) 188

5.3 The PresentWorth Method 189

5.4 The Future Worth Method 196

5.5 The Annual Worth Method 197

5.6 The Internal Rate of Return Method 202

5.7 The External Rate of Return Method 213

5.8 The Payback (Payout) Period Method 215

5.9 Case Study–A Proposed Capital Investment to Improve Process Yield 218

5.10 Electronic Spreadsheet Modeling: Payback Period Method 220

5.11 Try Your Skills 222

5.12 Summary 224

Appendix 5-A The Multiple Rate of Return Problem with the IRR Method 236

CHAPTER 6

Comparison and Selection among Alternatives 240

6.1 Introduction 241

6.2 Basic Concepts for Comparing Alternatives 241

6.3 The Study (Analysis) Period 245

6.4 Useful Lives Are Equal to the Study Period 247

6.5 Useful Lives Are Unequal among the Alternatives 264

6.6 Personal Finances 277

6.7 Case Study–Ned and Larry’s Ice Cream Company 281

6.8 Postevaluation of Results 284

6.9 Project Postevaluation Spreadsheet Approach 284

6.10 Try Your Skills 287

6.11 Summary 291

CHAPTER 7

Depreciation and Income Taxes 308

7.1 Introduction 309

7.2 Depreciation Concepts and Terminology 309

7.3 The Classical (Historical) Depreciation Methods 312

7.4 The Modified Accelerated Cost Recovery System 317

7.5 A Comprehensive Depreciation Example 326

7.6 Introduction to Income Taxes 330

7.7 The Effective (Marginal) Corporate Income Tax Rate 333

7.8 Gain (Loss) on the Disposal of an Asset 336

7.9 General Procedure for Making After-Tax Economic Analyses 337

7.10 Illustration of Computations of ATCFs 341

7.11 Economic Value Added 353

7.12 Try Your Skills 355

7.13 Summary 356

CHAPTER 8

Price Changes and Exchange Rates 368

8.1 Introduction 369

8.2 Terminology and Basic Concepts 370

8.3 Fixed and Responsive Annuities 376

8.4 Differential Price Changes 381

8.5 Spreadsheet Application 383

8.6 Foreign Exchange Rates and Purchasing Power Concepts 385

8.7 Case Study–Selecting Electric Motors to Power an Assembly Line 390

8.8 Try Your Skills 393

8.9 Summary 394of Single Cash Flows 117

CHAPTER 9

Replacement Analysis 403

9.1 Introduction 404

9.2 Reasons for Replacement Analysis 404

9.3 Factors that Must Be Considered in Replacement Studies 405

9.4 Typical Replacement Problems 408

9.5 Determining the Economic Life of a New Asset (Challenger) 411

9.6 Determining the Economic Life of a Defender 415

9.7 Comparisons in Which the Defender’s Useful Life Differs from that of the Challenger 418

9.8 Retirement without Replacement (Abandonment) 421

9.9 After-Tax Replacement Studies 422

9.10 Case Study–Replacement of a Hospital’s Emergency Electrical Supply System 430

9.11 Summary 433

CHAPTER 10

Evaluating Projects with the Benefit−Cost Ratio Method 443

10.1 Introduction 444

10.2 Perspective and Terminology for Analyzing Public Projects 445

10.3 Self-Liquidating Projects 446

10.4 Multiple-Purpose Projects 446

10.5 Difficulties in Evaluating Public-Sector Projects 449

10.6 What Interest Rate Should Be Used for Public Projects? 450

10.7 The Benefit−Cost Ratio Method 452

10.8 Evaluating Independent Projects by B−C Ratios 458

10.9 Comparison of Mutually Exclusive Projects by B−C Ratios 460

10.10 Case Study–Improving a Railroad Crossing 465

10.11 Summary 467

CHAPTER 11

Breakeven and Sensitivity Analysis 475

11.1 Introduction 476

11.2 Breakeven Analysis 476

11.3 Sensitivity Analysis 483

11.4 Multiple Factor Sensitivity Analysis 489

11.5 Summary 493

CHAPTER 12

Probabilistic Risk Analysis 502

12.1 Introduction 503

12.2 Sources of Uncertainty 504

12.3 The Distribution of Random Variables 504

12.4 Evaluation of Projects with Discrete Random Variables 508

12.5 Evaluation of Projects with Continuous Random Variables 517

12.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation 522

12.7 Performing Monte Carlo Simulation with a Computer 526

12.8 Decision Trees 530

12.9 Real Options Analysis 535

12.10 Summary 538

CHAPTER 13

The Capital Budgeting Process 546

13.1 Introduction 547

13.2 Debt Capital 549

13.3 Equity Capital 550

13.4 TheWeighted Average Cost of Capital (WACC) 553

13.5 Project Selection 557

13.6 Postmortem Review 561

13.7 Budgeting of Capital Investments and Management Perspective 562

13.8 Leasing Decisions 563

13.9 Capital Allocation 565

13.10 Summary 571

CHAPTER 14

Decision Making Considering Multiattributes 575

14.1 Introduction 576

14.2 Examples of Multiattribute Decisions 576

14.3 Choice of Attributes 578

14.4 Selection of a Measurement Scale 578

14.5 Dimensionality of the Problem 579

14.6 Noncompensatory Models 579

14.7 Compensatory Models 584

14.8 Summary 592

Appendix A Using Excel to Solve Engineering Economy Problems 598

Appendix B Abbreviations and Notation 615

Appendix C Interest and Annuity Tables for Discrete Compounding 619

Appendix D Interest and Annuity Tables for Continuous Compounding 638

Appendix E Standard Normal Distribution 642

Appendix F Selected References 645

Appendix G Solutions to Try Your Skills 648

Appendix H Answers to Selected Problems 660

Index 664

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