Basics of Engineering Economy

Cover......Page 1
Title......Page 4
Copyright......Page 5
Contents......Page 8
Preface......Page 12
Chapter 1 Foundations of Engineering Economy......Page 16
Purpose and Learning Outcomes......Page 17
1.2 Performing an Engineering Economy Study......Page 18
1.3 Interest Rate, Rate of Return, and MARR......Page 20
1.4 Equivalence......Page 23
1.5 Simple and Compound Interest......Page 24
1.6 Terminology and Symbols......Page 29
1.7 Cash Flows: Their Estimation and Diagramming......Page 31
1.8 Introduction to Spreadsheet and Calculator Functions......Page 35
1.9 Ethics and Economic Decisions......Page 38
Problems......Page 43
Additional Problems and FE Exam Review Questions......Page 47
Chapter 2 Factors: How Time and Interest Affect Money......Page 48
Purpose and Learning Outcomes......Page 49
2.1 Single-Payment Formulas (F/P and P/F)......Page 50
2.2 Uniform Series Formulas (P/A, A/P, A/F, F/A)......Page 55
2.3 Gradient Formulas......Page 59
2.4 Calculations for Cash Flows That are Shifted......Page 62
2.5 Using Spreadsheets and Calculators......Page 67
Problems......Page 73
Additional Problems and FE Exam Review Questions......Page 83
Chapter 3 Nominal and Effective Interest Rates......Page 86
Purpose and Learning Outcomes......Page 87
3.1 Nominal and Effective Interest Rate Statements......Page 88
3.2 Effective Interest Rate Formulation......Page 90
3.3 Reconciling Compounding Periods and Payment Periods......Page 92
3.4 Equivalence Calculations Involving Only Single-Amount Factors......Page 93
3.5 Equivalence Calculations Involving Series with PP ≥ CP......Page 95
3.6 Equivalence Calculations Involving Series with PP < CP......Page 97
3.7 Using Spreadsheets for Effective Interest Rate Computations......Page 99
Summary......Page 101
Problems......Page 102
Additional Problems and FE Exam Review Questions......Page 107
Chapter 4 Present Worth Analysis......Page 109
Purpose and Learning Outcomes......Page 110
4.1 Formulating Alternatives......Page 111
4.2 Present Worth Analysis of Equal-Life Alternatives......Page 113
4.3 Present Worth Analysis of Different-Life Alternatives......Page 115
4.4 Capitalized Cost Analysis......Page 119
4.5 Evaluation of Independent Projects......Page 123
4.6 Using Spreadsheets for PW Analysis......Page 125
Summary......Page 127
Problems......Page 128
Additional Problems and FE Exam Review Questions......Page 136
Chapter 5 Annual Worth Analysis......Page 138
Purpose and Learning Outcomes......Page 139
5.1 AW Value Calculations......Page 140
5.2 Evaluating Alternatives Based on Annual Worth......Page 142
5.3 AW of a Long-Life or Infinite-Life Investment......Page 145
5.4 Using Spreadsheets for AW Analysis......Page 147
Summary......Page 149
Problems......Page 150
Additional Problems and FE Exam Review Questions......Page 154
Chapter 6 Rate of Return Analysis......Page 156
Purpose and Learning Outcomes......Page 157
6.1 Interpretation of ROR Values......Page 158
6.2 ROR Calculation......Page 160
6.4 Understanding Incremental ROR Analysis......Page 163
6.5 ROR Evaluation of Two or More Mutually Exclusive Alternatives......Page 167
6.6 Multiple ROR Values......Page 171
6.7 Techniques to Remove Multiple ROR Values......Page 175
6.8 Using Spreadsheets and Calculators to Determine ROR Values......Page 181
Problems......Page 185
Additional Problems and FE Exam Review Questions......Page 193
Chapter 7 Benefit/Cost Analysis and Public Sector Projects......Page 196
Purpose and Learning Outcomes......Page 197
7.1 Public Sector Projects: Description and Ethics......Page 198
7.2 Benefit/Cost Analysis of a Single Project......Page 203
7.3 Incremental B/C Evaluation of Two or More Alternatives......Page 206
7.4 Using Spreadsheets for B/C Analysis......Page 212
Problems......Page 214
Additional Problems and FE Exam Review Questions......Page 219
Chapter 8 Breakeven, Sensitivity, and Payback Analysis......Page 221
Purpose and Learning Outcomes......Page 222
8.1 Breakeven Analysis for a Single Project......Page 223
8.2 Breakeven Analysis between Two Alternatives......Page 228
8.3 Sensitivity Analysis for Variation in Estimates......Page 231
8.4 Sensitivity Analysis of Multiple Parameters for Multiple Alternatives......Page 236
8.5 Payback Period Analysis......Page 238
8.6 Using Spreadsheets for Sensitivity or Breakeven Analysis......Page 240
Summary......Page 245
Problems......Page 246
Additional Problems and FE Exam Review Questions......Page 253
Chapter 9 Replacement and Retention Decisions......Page 256
Purpose and Learning Outcomes......Page 257
9.1 Basics of a Replacement Study......Page 258
9.2 Economic Service Life......Page 259
9.3 Performing a Replacement Study......Page 261
9.5 Replacement Study Over a Specified Study Period......Page 265
9.6 Using Spreadsheets for a Replacement Study......Page 269
Problems......Page 272
Additional Problems and FE Exam Review Questions......Page 277
Chapter 10 Effects of Inflation......Page 279
Purpose and Learning Outcomes......Page 280
10.1 Understanding the Impact of Inflation......Page 281
10.2 PW Calculations Adjusted for Inflation......Page 284
10.3 FW Calculations Adjusted for Inflation......Page 289
10.4 AW Calculations Adjusted for Inflation......Page 293
10.5 Using Spreadsheets to Adjust for Inflation......Page 294
Summary......Page 297
Problems......Page 298
Additional Problems and FE Exam Review Questions......Page 302
Chapter 11 Estimating Costs......Page 304
Purpose and Learning Outcomes......Page 305
11.1 How Cost Estimates are Made......Page 306
11.2 Unit Method......Page 309
11.3 Cost Indexes......Page 311
11.4 Cost-Estimating Relationships: Cost-Capacity Equations......Page 314
11.5 Cost-Estimating Relationships: Factor Method......Page 316
11.6 Cost-Estimating Relationships: Learning Curve......Page 318
11.7 Indirect Cost Estimation and Allocation......Page 320
Summary......Page 326
Problems......Page 327
Additional Problems and FE Exam Review Questions......Page 330
Chapter 12 Depreciation Methods......Page 332
Purpose and Learning Outcomes......Page 333
12.1 Depreciation Terminology......Page 334
12.2 Straight Line (SL) Depreciation......Page 336
12.3 Declining Balance Depreciation......Page 338
12.4 Modified Accelerated Cost Recovery System (MACRS)......Page 340
12.5 Tax Depreciation System in Canada......Page 344
12.6 Switching Between Classical Methods; Relation to MACRS Rates......Page 345
12.7 Depletion Methods......Page 347
12.8 Using Spreadsheets for Depreciation Computations......Page 349
Summary......Page 352
Problems......Page 353
Additional Problems and FE Exam Review Questions......Page 357
Chapter 13 After-Tax Economic Analysis......Page 359
Purpose and Learning Outcomes......Page 360
13.1 Income Tax Terminology and Relations......Page 361
13.2 Before-Tax and After-Tax Alternative Evaluation......Page 364
13.3 How Depreciation Can Affect an After-Tax Study......Page 367
13.4 After-Tax Replacement Study......Page 373
13.5 Capital Funds and the Cost of Capital......Page 375
13.6 Using Spreadsheets for After-Tax Evaluation......Page 379
13.7 After-Tax Value-Added Analysis......Page 382
Problems......Page 385
Additional Problems and FE Exam Review Questions......Page 391
Chapter 14 Alternative Evaluation Considering Multiple Attributes and Risk......Page 393
Purpose and Learning Outcomes......Page 394
14.1 Multiple Attribute Analysis......Page 395
14.2 Economic Evaluation with Risk Considered......Page 400
14.3 Alternative Evaluation Using Sampling and Simulation......Page 409
Problems......Page 413
Additional Problems......Page 416
A.1 Introduction to Using Excel......Page 418
A.2 Organization (Layout) of the Spreadsheet......Page 421
A.3 Excel Functions Useful in Engineering Economy (alphabetical order)......Page 422
A.4 Goal Seek—A Spreadsheet Tool for Breakeven and Sensitivity Analyses......Page 431
A.5 Error Messages......Page 432
B.1 The Balance Sheet......Page 433
B.2 Income Statement and Cost of Goods Sold Statement......Page 434
B.3 Business Ratios......Page 436
Appendix C: Final Answers to Selected Problems......Page 440
Reference Materials......Page 452
Interest Factor Tables......Page 454
A......Page 480
C......Page 481
E......Page 483
F......Page 484
I......Page 485
M......Page 486
Q......Page 487
R......Page 488
S......Page 489
U......Page 490
Y......Page 491