Fundamentals of Engineering Economics (e-book)

Resources for Success......Page 3
Fundamentals of Engineering Economics......Page 8
Fundamentals of Engineering Economics......Page 9
Goals of the Text......Page 14
New to This Edition......Page 15
Features of the Book......Page 18
To Student: How to Prepare for the Fundamentals of Engineering (FE) Exam......Page 20
MyLab Engineering......Page 21
Contents......Page 24
Part 1 Understanding Money and Its Management......Page 38
Chapter One Engineering Economic Decisions......Page 39
Uber: The Transportation Service Has Become a Global Brand1......Page 41
1.1.1 How Do We Make Typical Personal Decisions?......Page 45
Evaluation of Financing Alternatives......Page 46
Review of Maria’s Decision-Making Process......Page 49
Getting an Idea: Necessity Is the Mother of Invention......Page 52
Evaluating Design Alternatives......Page 53
Gauging Product Cost and Price......Page 56
What Is the Next Step?......Page 57
1.1.3 What Makes Economic Decisions Different from Other Design Decisions?......Page 58
1.2.1 Making Capital-Expenditure Decisions......Page 59
1.2.2 Large-Scale Engineering Economic Decisions......Page 61
Are Tesla’s Plans for a Gigafactory7 Realistic?......Page 62
How Economical Is Tesla’s Plan?......Page 63
How Much Would It Cost?......Page 64
What Is the Business Risk?......Page 65
1.2.3 Impact of Engineering Projects on Financial Statements......Page 66
1.3 Types of Strategic Engineering Economic Decisions......Page 69
1.3.1 New Products or Product Expansion......Page 70
1.3.2 Equipment and Process Selection......Page 71
1.3.5 Service or Quality Improvement......Page 73
1.4 Fundamental Principles in Engineering Economics......Page 76
Summary......Page 78
Self-Test Questions......Page 79
Problems......Page 81
Chapter Two Time Value of Money......Page 82
Biggest Lottery Jackpots in U.S. History – $1.58 Billion Powerball......Page 84
2.1.1 The Time Value of Money......Page 88
2.1.2 Elements of Transactions Involving Interest......Page 92
Example of an Interest Transaction......Page 93
Cash Flow Diagrams......Page 95
End-of-Period Convention......Page 97
Compound Interest......Page 98
2.2 Economic Equivalence......Page 102
2.2.1 Definition and Simple Calculations......Page 103
Equivalence Calculations: A Simple Example......Page 105
2.2.2 Equivalence Calculations Require a Common Time Basis for Comparison......Page 108
2.3.1 Compound-Amount Factor......Page 111
Interest Tables......Page 112
Factor Notation......Page 113
2.3.2 Present-Worth Factor......Page 118
2.3.3 Solving for Time and Interest Rates......Page 120
2.4 Uneven-Payment Series......Page 127
2.5 Equal-Payment Series......Page 130
2.5.1 Compound-Amount Factor: Find F, Given A, i, and N......Page 131
2.5.2 Sinking-Fund Factor: Find A, Given F, i, and N......Page 138
2.5.3 Capital-Recovery Factor (Annuity Factor): Find A, Given P, i, and N......Page 142
2.5.4 Present-Worth Factor: Find P, Given A, i, and N......Page 148
2.5.5 Present Value of Perpetuities......Page 159
2.6.1 Handling Linear Gradient Series......Page 162
Present-Worth Factor: Linear Gradient: Find P, Given G, N, and i......Page 163
Linear Gradient Series as Composite Series......Page 165
2.6.2 Handling Geometric Gradient Series......Page 175
Present-Worth Factor: Find P, Given Ai, g, i, and N......Page 176
2.7 More on Equivalence Calculations......Page 182
Summary......Page 191
Self-Test Questions......Page 195
Problems......Page 207
Chapter Three Understanding Money Management......Page 229
Refinance Your Student Loans—More Options and Better Fit......Page 231
3.1.1 Nominal Interest Rates......Page 234
3.1.2 Effective Annual Interest Rates......Page 235
3.2.1 Discrete Compounding......Page 244
3.2.2 Continuous Compounding......Page 247
3.3.1 Compounding Period Equal to Payment Period......Page 250
3.3.2 Compounding Occurs at a Different Rate than That at Which Payments Are Made......Page 254
3.4.1 Borrowing with Credit Cards......Page 260
3.4.2 Commercial Loans—Calculating Principal and Interest Payments......Page 263
3.4.3 Comparing Different Financing Options......Page 271
Which Interest Rate Do We Use in Comparing Different Financing Options?......Page 272
Summary......Page 278
Self-Test Questions......Page 281
Market Interest Rates (Nominal versus Effective Interest Rates)......Page 288
Calculating an Effective Interest Rate Based on a Payment Period......Page 289
Equivalence Calculations Using Effective Interest Rates......Page 290
Borrowing with Credit Cards......Page 296
Commercial Loans......Page 299
Comparing Different Financing Options......Page 304
Short Case Studies with Excel......Page 306
Chapter Four Equivalence Calculations under Inflation......Page 310
How Much Will It Cost to Buy Baseball Tickets in 2018?......Page 312
4.1.1 Consumer Price Index......Page 315
4.1.2 Producer Price Index......Page 318
4.1.3 Average Inflation Rate......Page 323
4.1.4 General Inflation Rate (f) versus Specific Inflation Rate (fj)......Page 327
4.2 Actual Versus Constant Dollars......Page 332
4.2.1 Conversion from Constant to Actual Dollars......Page 333
4.2.2 Conversion from Actual to Constant Dollars......Page 335
4.3.1 Market and Inflation-Free Interest Rates......Page 343
4.3.3 Actual-Dollar Analysis......Page 345
4.3.4 Mixed-Dollar Analysis......Page 348
Summary......Page 355
Self-Test Questions......Page 358
Problems......Page 363
Part 2 Evaluating Business and Engineering Assets......Page 374
“Coolness Factor” Draws Developers to East Austin, Texas1......Page 375
5.1 Loan versus Project Cash Flows......Page 380
5.2 Initial Project Screening Methods......Page 383
5.2.1 Benefits and Flaws of Payback Screening......Page 387
5.2.2 Discounted-Payback Period......Page 389
5.3.1 Net-Present-Worth Criterion......Page 391
5.3.2 Guidelines for Selecting a MARR......Page 399
Investment-Pool Concept......Page 401
Borrowed-Funds Concept......Page 404
5.3.4 Net Future Worth and Project Balance Diagram......Page 407
Perpetual Service Life......Page 410
5.4 Methods to Compare Mutually Exclusive Alternatives......Page 413
5.4.1 Doing Nothing Is a Decision Option......Page 414
5.4.2 Service Projects versus Revenue Projects......Page 415
Revenue Projects......Page 416
5.4.3 Analysis Period Equals Project Lives......Page 417
Case I: Project’s Life Is Longer than Analysis Period......Page 421
Case II: Project’s Life Is Shorter than Analysis Period......Page 426
Summary......Page 431
Self-Test Questions......Page 433
Problems......Page 443
Chapter Six Annual-Equivalence Analysis......Page 482
Owning and Operating a Dump Truck......Page 484
6.1 Annual-Equivalent Worth Criterion......Page 487
6.1.1 Benefits of AE Analysis......Page 492
Capital (Ownership) Costs......Page 493
Equivalent Annual Operating Costs......Page 495
6.2.1 Unit-Profit or Unit-Cost Calculation......Page 499
6.2.2 Make-or-Buy Decision......Page 504
6.3.1 Analysis Period Equals Project Lives......Page 508
6.3.2 Analysis Period Differs from Project Lives......Page 511
Summary......Page 515
Self-Test Questions......Page 517
Problems......Page 525
Chapter Seven Rate-of-Return Analysis......Page 556
Is College Worth It?1......Page 557
7.1.1 Return on Investment......Page 563
7.1.2 Return on Invested Capital......Page 566
7.2.1 Simple versus Nonsimple Investments......Page 569
Direct-Solution Method......Page 572
Trial-and-Error Method......Page 575
Rate-of-Return Calculation with Excel......Page 579
7.3.1 Relationship to the PW Analysis......Page 584
7.3.2 Decision Rule for Simple Investments......Page 585
7.3.3 Decision Rule for Nonsimple Investments......Page 589
Modified Internal Rate of Return......Page 590
Return on Invested Capital......Page 597
7.4.1 Flaws in Project Ranking by IRR......Page 598
7.4.2 Incremental-Investment Analysis......Page 599
7.4.3 Handling Unequal Service Lives......Page 610
Summary......Page 613
Self-Test Questions......Page 615
Problems......Page 626
Chapter 7A Resolution of Multiple Rates of Return......Page 657
7A-1 Net-Investment Test......Page 658
7A-2 The Need for an External Interest Rate......Page 664
7A-3 Calculation of Return on Invested Capital for Mixed Investments......Page 666
Chapter Eight Benefit–Cost Analysis......Page 675
Robot Cargo Handling at Port1......Page 677
8.1 Evaluation of Public Projects......Page 681
8.1.2 Users’ Benefits......Page 682
8.1.3 Sponsor’s Costs......Page 683
8.1.4 Social Discount Rate......Page 684
8.2.1 Definition of Benefit–Cost Ratio......Page 688
8.2.2 Incremental B/C-Ratio Analysis......Page 692
8.3.1 Definition of Profitability Index......Page 701
8.3.2 Incremental PI Ratio Analysis for Mutually Exclusive Alternatives......Page 706
8.4.1 Define the Base Case and the Proposed Alternatives......Page 709
8.4.2 Highway User Benefits......Page 710
8.4.3 Sponsors’ Costs......Page 711
8.4.4 Illustrating Case Example......Page 715
Summary......Page 721
Self-Test Questions......Page 723
Problems......Page 730
Part 3 Development of Project Cash Flows......Page 746
Alcoa Invests $60 Million in 3D Printing Technology1......Page 747
9.1.1 Depreciable Property......Page 753
9.1.2 Cost Basis......Page 755
9.1.3 Useful Life and Salvage Value......Page 756
9.1.4 Depreciation Methods: Book and Tax Depreciation......Page 759
9.2.1 Straight-Line Method......Page 763
9.2.2 Declining-Balance Method......Page 766
Depreciation Rate......Page 767
Switching Policy......Page 770
9.2.3 Units-of-Production Method......Page 773
9.3 Tax Depreciation Methods......Page 775
9.3.1 MACRS Recovery Periods......Page 777
9.3.2 MACRS Depreciation: Personal Property......Page 779
9.3.3 MACRS Depreciation: Real Property......Page 785
9.4.1 How to Determine “Accounting Profit”......Page 789
Calculation of Net Income......Page 790
9.4.2 U.S. Corporate Income Tax System......Page 792
Corporate Tax Rates......Page 793
Cost Recovery Full Expensing for Certain Business Assets – Bonus Depreciation......Page 794
Book Value Calculation......Page 800
Taxable Gains (or Losses)......Page 801
Summary......Page 806
Self-Test Questions......Page 809
Depreciation Concept......Page 815
Cost Basis......Page 816
Book Depreciation Methods......Page 817
Units-of-Production Method......Page 821
Tax Depreciation......Page 824
Gains or Losses......Page 829
Short Case Studies with Excel......Page 832
Chapter Ten Project Cash-Flow Analysis......Page 836
California Valley Solar Ranch project1......Page 838
Manufacturing Costs......Page 841
10.1.2 Classifying Costs for Financial Statements......Page 845
Period Costs......Page 846
Cost Flows in a Manufacturing Company......Page 847
10.1.3 Classifying Costs for Predicting Cost Behavior......Page 849
Fixed and Variable Costs......Page 850
Break-Even Sales Volume......Page 853
10.2 Why Do We Need to Use Cash Flows in Economic Analysis?......Page 858
10.3 Income-Tax Rate to Be Used in Project Evaluation......Page 860
10.4 Incremental Cash Flows from Undertaking a Project......Page 865
10.4.1 Operating Activities......Page 866
10.4.2 Investing Activities......Page 872
10.4.3 Financing Activities......Page 873
10.5.1 When Projects Require Only Operating and Investing Activities......Page 874
10.5.2 When Projects Are Financed with Borrowed Funds......Page 879
10.6.1 Depreciation Allowance under Inflation......Page 882
10.6.2 Handling Multiple Inflation Rates......Page 888
Summary......Page 891
Self-Test Questions......Page 893
Problems......Page 900
Chapter Eleven Handling Project Uncertainty......Page 939
Eagle Mountain Pumped Storage Development Project1......Page 940
11.1 Origins of Project Risk......Page 944
11.2.1 Sensitivity Analysis......Page 946
11.2.2 Sensitivity Analysis for Mutually Exclusive Alternatives......Page 952
11.2.3 Break-Even Analysis......Page 956
11.2.4 Scenario Analysis......Page 957
11.3.1 Including Risk in Investment Evaluation......Page 962
11.3.2 Aggregating Risk over Time......Page 965
11.3.3 Estimating Risky Cash Flows......Page 972
11.4.1 Determining the Company Cost of Capital......Page 977
Cost of Equity Capital......Page 978
Cost of Debt Capital......Page 982
Calculating the Company Cost of Capital......Page 985
11.4.2 Project Cost of Capital: Risk-Adjusted Discount Rate Approach......Page 988
11.5 Value at Risk......Page 992
11.5.1 Calculation of VaR......Page 993
11.5.2 Conversion of VaR Parameters......Page 997
Summary......Page 1003
Self-Test Questions......Page 1005
Problems......Page 1011
Part 4 Special Topics in Engineering Economics......Page 1042
Chapter Twelve Replacement Decisions......Page 1043
As Milorganite factory ages, repair costs mount1......Page 1045
12.1.1 Basic Concepts and Terminology......Page 1048
Current Market Value......Page 1049
Sunk Costs......Page 1051
Operating Costs......Page 1052
Cash-Flow Approach......Page 1053
Opportunity-Cost Approach......Page 1055
12.2 Economic Service Life......Page 1058
Planning Horizon (Study Period)......Page 1066
Relevant Cash-Flow Information......Page 1067
12.3.2 Handling Unequal Service Life Problems in Replacement Analysis......Page 1068
12.3.3 Replacement Strategies under the Infinite Planning Horizon......Page 1071
12.4 Replacement Analysis with Tax Considerations......Page 1079
Summary......Page 1084
Self-Test Questions......Page 1086
Problems......Page 1091
Chapter Thirteen Understanding Financial Statements......Page 1115
Broadcom Agrees to Acquire Brocade Communications for $5.9 billion1......Page 1116
13.1 Accounting: The Basis of Decision Making......Page 1121
13.2 Financial Status for Businesses......Page 1124
13.2.1 The Balance Sheet......Page 1128
Assets......Page 1131
Liabilities and Stockholders’ Equity (Owners’ Net Worth)......Page 1133
What to Read from J&M’s Balance Sheet......Page 1135
13.2.2 The Income Statement......Page 1136
Net Income......Page 1138
Dividends and Retained Earnings......Page 1139
What to Read from J&M’s Income Statement......Page 1140
Sources and Uses of Cash......Page 1142
Reporting Format......Page 1147
What to Read from J&M’s Cash Flow Statement......Page 1149
13.3 Using Ratios to Make Business Decisions......Page 1154
13.3.1 Debt Management Analysis......Page 1157
Debt Ratio......Page 1158
13.3.2 Liquidity Analysis......Page 1160
Quick (Acid Test) Ratio......Page 1161
13.3.3 Asset Management Analysis......Page 1162
Days-Sales-Outstanding (Accounts Receivable Turnover) Ratio......Page 1163
13.3.4 Profitability Analysis......Page 1164
Return on Total Assets......Page 1165
Return on Common Equity......Page 1166
13.3.5 Market-Value Analysis......Page 1168
Book Value per Share......Page 1169
13.3.6 Limitations of Financial Ratios in Business Decisions......Page 1174
13.3.7 Where We Get the Most Up-to-Date Financial Information......Page 1175
13.4.1 Trade-Off between Risk and Reward......Page 1176
13.4.2 Broader Diversification Reduces Risk......Page 1177
13.4.3 Broader Diversification Increases Expected Return......Page 1181
Summary......Page 1185
Self-Test Questions......Page 1187
Problems......Page 1194
Chapter 1......Page 1211
Chapter 2......Page 1212
Chapter 3......Page 1216
Chapter 4......Page 1219
Chapter 5......Page 1221
Chapter 6......Page 1229
Chapter 7......Page 1233
Chapter 8......Page 1237
Chapter 9......Page 1242
Chapter 10......Page 1248
Chapter 11......Page 1267
Chapter 12......Page 1271
Chapter 13......Page 1277
Appendix B Interest Factors for Discrete Compounding......Page 1282
Appendix C How to Read the Cumulative Standardized Normal Distribution Function......Page 1340
Part A: The Cumulative Standardized Normal Distribution Function......Page 1342
Part B: The Cumulative Standardized Normal Distribution Function......Page 1344
Appendix D Summary of Essential Interest Formulas, Decision Rules, and Excel Functions......Page 1346
Index......Page 1352
A......Page 1353
B......Page 1356
C......Page 1358
D......Page 1364
E......Page 1368
F......Page 1373
G......Page 1375
H......Page 1376
I......Page 1377
K......Page 1381
L......Page 1382
M......Page 1383
N......Page 1386
O......Page 1388
P......Page 1389
Q......Page 1393
R......Page 1394
S......Page 1398
T......Page 1401
U......Page 1402
V......Page 1403
W......Page 1404
Y......Page 1405