Basics of Engineering Economy

491 Pages·2014·13.39 MB·English

by  Leland Blank

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Basics of Engineering
Economy
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Basics of Engineering
Economy
Second Edition
Leland Blank, P. E.
Industrial and Systems Engineering
Texas A&M University
and
Dean Emeritus
American University of Sharjah, UAE
Anthony Tarquin, P. E.
Civil Engineering
University of Texas—EI Paso
TM
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TM
BASICS OF ENGINEERING ECONOMY, SECOND EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue
ofthe Americas, New York, NY 10020. Copyright ©2014 by The McGraw-Hill Companies, Inc.
All rights reserved. Printed in the United States of America. Previous edition ©2008. No part of
this publication may be reproduced or distributed in any form or by any means, or stored in a
database or retrieval system, without the prior written consent of The McGraw-Hill Companies,
Inc., including, but not limited to, in any network or other electronic storage or transmission, or
broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers
outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 DOC/DOC 1 0 9 8 7 6 5 4 3
ISBN 978-0-07-337635-6
MHID 0-07-337635-3
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Dedication
To our grandchildren Abigail, Benjamin, Grace, Taryn, and Tyler
May they lead us in successfully meeting the challenges of tomorrow
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Brief Contents
Chapters
1 Foundations of Engineering Economy 1
2 Factors: How Time and Interest Affect
Money 33
3 Nominal and Effective Interest Rates 71
4 Present Worth Analysis 94
5 Annual Worth Analysis 123
6 Rate of Return Analysis 141
7 Benefit/Cost Analysis and Public Sector Projects 181
8 Breakeven,Sensitivity,and Payback
Analysis 206
9 Replacement and Retention Decisions 241
10 Effects of Inflation 264
11 Estimating Costs 289
12 Depreciation Methods 317
13 After-Tax Economic Analysis 344
14 Alternative Evaluation Considering Multiple Attributes and Risk 378
Appendices
A Using Spreadsheets and Microsoft Excel© 403
B Accounting Reports and Business Ratios 418
C Final Answers to Selected Problems 425
Reference Materials 437
Interest Factor Tables 439
Index 465
vi
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Contents
Preface xi Problems 58
Additional Problems and FEExam
Review Questions 68
1
Chapter
3
Foundations of Engineering Economy 1 Chapter
Purposeand Learning Outcomes 2 Nominal and Effective Interest Rates 71
1.1 What is Engineering Economy? 3
Purposeand Learning Outcomes 72
1.2 Performing an Engineering Economy
3.1 Nominal and Effective Interest
Study 3
RateStatements 73
1.3 Interest Rate, Rate of Return, and MARR 5
3.2 Effective Interest Rate Formulation 75
1.4 Equivalence 8
3.3 Reconciling Compounding Periods and
1.5 Simple and Compound Interest 9
Payment Periods 77
1.6 Terminology and Symbols 14 3.4 Equivalence Calculations Involving Only
1.7 Cash Flows: Their Estimation Single-Amount Factors 78
and Diagramming 16 3.5 Equivalence Calculations Involving Series
1.8 Introduction to Spreadsheet and with PP (cid:2)CP 80
Calculator Functions 20 3.6 Equivalence Calculations Involving Series
1.9 Ethics and Economic Decisions 23 withPP (cid:3)CP 82
Summary 28 3.7 Using Spreadsheets for Effective Interest
Problems 28 Rate Computations 84
Additional Problems and FEExam Summary 86
Review Questions 32 Problems 87
Additional Problems and FEExam
2 Review Questions 92
Chapter
Factors: How Time and Interest 4
Chapter
Affect Money 33
Purposeand Learning Outcomes 34 Present Worth Analysis 94
2.1 Single-Payment Formulas (F/Pand P/F) 35 Purposeand Learning Outcomes 95
2.2 Uniform Series Formulas (P/A, A/P, 4.1 Formulating Alternatives 96
A/F, F/A) 40
4.2 Present Worth Analysis of Equal-Life
2.3 Gradient Formulas 44 Alternatives 98
2.4 Calculations for Cash Flows That 4.3 Present Worth Analysis of Different-Life
are Shifted 47 Alternatives 100
2.5 Using Spreadsheets and Calculators 52 4.4 Capitalized Cost Analysis 104
Summary 58 4.5 Evaluation of Independent Projects 108
vii
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viii Contents
4.6 Using Spreadsheets for PW Analysis 110 7
Chapter
Summary 112
Problems 113 Benefit/Cost Analysis and Public
Additional Problems and FEExam Sector Projects 181
Review Questions 121
Purposeand Learning Outcomes 182
7.1 Public Sector Projects: Description
and Ethics 183
5
Chapter 7.2 Benefit/Cost Analysis of a Single Project 188
7.3 Incremental B/C Evaluation of Two or
Annual Worth Analysis 123
More Alternatives 191
Purposeand Learning Outcomes 124 7.4 Using Spreadsheets for B/C Analysis 197
5.1 AW Value Calculations 125 Summary 199
5.2 Evaluating Alternatives Based Problems 199
on Annual Worth 127
Additional Problems and FE Exam
5.3 AW of a Long-Life or Infinite- Review Questions 204
Life Investment 130
5.4 Using Spreadsheets for AW Analysis 132 8
Chapter
Summary 134
Problems 135
Breakeven,Sensitivity,and
Additional Problems and FEExam Payback Analysis 206
Review Questions 139
Purposeand Learning Outcomes 207
8.1 Breakeven Analysis for a Single Project 208
6 8.2 Breakeven Analysis between
Chapter
Two Alternatives 213
Rate of Return Analysis 141 8.3 Sensitivity Analysis for Variation
in Estimates 216
Purposeand Learning Outcomes 142
8.4 Sensitivity Analysis of Multiple Parameters
6.1 Interpretation of ROR Values 143 for Multiple Alternatives 221
6.2 ROR Calculation 145 8.5 Payback Period Analysis 223
6.3 Cautions when Using the RORMethod 148 8.6 Using Spreadsheets for Sensitivity
6.4 Understanding Incremental or Breakeven Analysis 225
ROR Analysis 148
Summary 230
6.5 ROR Evaluation of Two or More Mutually
Problems 231
Exclusive Alternatives 152
Additional Problems and FEExam
6.6 Multiple ROR Values 156
Review Questions 238
6.7 Techniques to Remove Multiple
ROR Values 160
9
6.8 Using Spreadsheets and Calculators to Chapter
Determine RORValues 166
Replacement and Retention Decisions 241
Summary 170
Problems 170 Purposeand Learning Outcomes 242
Additional Problems and FEExam 9.1 Basics of a Replacement Study 243
Review Questions 178 9.2 Economic Service Life 244
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Contents ix
9.3 Performing a Replacement Study 246 Problems 312
9.4 Defender Replacement Value 250 Additional Problems and FE Exam
9.5 Replacement Study Over a Specified Review Questions 315
Study Period 250
9.6 Using Spreadsheets for a Replacement 12
Study 254 Chapter
Summary 257
Depreciation Methods 317
Problems 257
Purposeand Learning Outcomes 318
Additional Problems and FE Exam
12.1 Depreciation Terminology 319
Review Questions 262
12.2 Straight Line (SL) Depreciation 321
12.3 Declining Balance Depreciation 323
10
12.4 Modified Accelerated Cost Recovery
Chapter
System (MACRS) 325
Effects of Inflation 264 12.5 Tax Depreciation System in Canada 329
12.6 Switching Between Classical Methods;
Purposeand Learning Outcomes 265
Relation to MACRS Rates 330
10.1 Understanding the Impact of Inflation 266
12.7 Depletion Methods 332
10.2 PW Calculations Adjusted for Inflation 269
12.8 Using Spreadsheets for Depreciation
10.3 FW Calculations Adjusted for Inflation 274
Computations 334
10.4 AW Calculations Adjusted for Inflation 278
Summary 337
10.5 Using Spreadsheets to Adjust
Problems 338
for Inflation 279
Additional Problems and FE Exam
Summary 282
Review Questions 342
Problems 283
Additional Problems and FE Exam
13
Review Questions 287 Chapter
After-Tax Economic Analysis 344
11
Chapter Purposeand Learning Outcomes 345
13.1 Income Tax Terminology and Relations 346
Estimating Costs 289
13.2 Before-Tax and After-Tax Alternative
Purposeand Learning Outcomes 290 Evaluation 349
11.1 How Cost Estimates are Made 291 13.3 How Depreciation Can Affect an
11.2 Unit Method 294 After-Tax Study 352
11.3 Cost Indexes 296 13.4 After-Tax Replacement Study 358
11.4 Cost-Estimating Relationships: 13.5 Capital Funds and the Cost of Capital 360
Cost-Capacity Equations 299 13.6 Using Spreadsheets for After-Tax
11.5 Cost-Estimating Relationships: Evaluation 364
Factor Method 301 13.7 After-Tax Value-Added Analysis 367
11.6 Cost-Estimating Relationships: Summary 370
Learning Curve 303
Problems 370
11.7 Indirect Cost Estimation and Allocation 305
Additional Problems and FE Exam
Summary 311 Review Questions 376