Fundamentals of Engineering Economics. Chan S. Park

691 Pages·2012·25.33 MB·English

by  Chan S. Park

Fundamentals of
Engineering Economics
THIRD EDITION
Chan S. Park
-
Summ:tr) or lntcrc!'>t faclors and Or her Useful Formulas
Flem T) pc Factor Notation Gou) Formulu F:quhulenl Cash Flow Diagnun"
Future worth Find: I
(Fil~ i, N) Given: I' F P( I + i) ,. ~
Single I-" /'(I + 1)' I
I
payment Present \\orrb Find: I' 0 I
I N
(Pl!·: i. V) Given: I P F(I + i) ,. I
0I ::.:7
Futun; worth Fiml: F
(FIA. i, \I) Given: A
0 •
A-[-
Sinking fund Find: A II \ H I \
1 I I I ---
Equal (All·, i, N) Given: /· - (1 + i)I '' -l] T T T T Y
I I I I ·I
payment
series Present worth Find: P p = r( I -t i)'' ~]
(PIA. i. V) Gi,en: A • i( I + i)' tI tI LI _,\L ,i\
lo
Capital recovery Find: A A -[~(~)'_] I , l ,. - I \'
®
(Ami, N) Given: I' - (I t i)' I
Present worth Find: P I l]
(
(PG,i. V) Given: G p r + i)' iN - \. '(; ......0 ,, - ! '·
G f(l+i)'
Linear ,,, . ..... 1
....
gradient - -·
Equal paynu.:nt Finu: A 0 I 1 1 ,\ I \
series ( I -r i)" - iN - ~] ~ "'""
(A/G, i, N) Given: (i A G [ i( I 1- i}.\ i ®
Geometric
Pres<.:nt worth Find: P
gradient
(P A1. g. 1. \'} Gi\'<.:n:g
series
Continuous Ca'ic
Effect ivc interest rate per
payment period
~larkct interest rate j = i' I f 1 i'f i = i' + 1
Net present worth \
PW(i) - LA,,( I + i) "
"
()
Capitalized equivalent worth A
CE(i)
Capital recovery with return CR(i) (/ - S}(A/I~ i. N) + iS
Internal rate of return PW(t) = oA o n + A, n + ... + ANn = 0
+ <1 + <1 +
=I:
Benefit-cost ratio
BC(i) C'
Profitability index =
Pl(i) B - C'
I
Summary of Project Analysis Methods
Payback period A method for determining the length Select the one with
pp of time required to recover the cost shortest PP
PP< pp"
of an investment. Management
sets the benchmark PP".
Discounted A variation of payback period when Select the one with
payback period factors in the time value of money. PP(i) <pp• shortest PP(i)
PP(i) Management sets the benchmark pp•.
Present worth A method that translates a project's Select the one with Select the one with
PW(i) cash flows into an equivalent net PW(i) >0 the largest PW the least negative
present value. PW
Future worth A variation of the PW: A project's Select the one with Select the one with
FW(i) cash flows are translated into an FW(i) >0 the largest FW the least negative
equivalent net future value. FW
Capitalized A variation of the PW: A perpetual Select the one with Select the one with
· equivalent or very long-lived project that the largest CE the least negative
CE(i) > 0
CE(i) generates a constant stream of CE
annual net cash flow.
Annual A variation of the PW: A project's Select the one with Select the one with
equivalence cash flows are translated into an AE(i) > 0 the largest AE the least negative
AE(i) annual equivalent sum. AE
Internal rate of A relative percentage method that Incremental analysis:
return measures the yield as a percentage If IRRA2·AI >MARR,
IRR of investment over the life of a select the higher cost
IRR>MARR
project: The IRR must exceed the investment project, A2.
minimum required rate of return
(MARR).
Benefit-cost ratio A relative measure to evaluate Incremental analysis:
BC(i) public projects by finding the ratio If BC(i)A2·At > 1, select
BC(i) > 1
of the equivalent benefits over the the higher cost
equivalent costs. investment project, A2.
Profitability A relative measure to evaluate Incremental analysis:
index projects by calculating the ratio of Pl(i) > 1 If PI(i)A2-A1 > 1, select
PI(i) the equivalent net benefits over the the higher cost
equivalent net investment. investment project, A2.
fundamentals of
Enginee~ing
Economics
THIRD lDITION
Chan S. Park
Department of Industrial and Systems Engineering
Auburn University
International Edition contributions by
Pravin Kumar
Department of Mechanical Engineering
Delhi Technological University
Nand Kumar
of
Department Humanities
Delhi Technological University
PEARSON
Vice President and Editorial Director, ECS: Marcia J. Horron Acquisitions Editor, International Edition: Somnatlr Basu
Executive Editor: A11drcw Gilfillan Publishing Administra1or, lnlerna1ional Edition: Hema Meh111
Vice-President, Production: Vince O'Brien Print and Media Edilor, lnlernational Edition: Ashwithu J11yak11111t1r
Executive Marketing Manager: Tim Galligan Project Editor, lnlcrnalional Edition: Jayasliree Arunachal1m1
Marketing Assistant: Jan Bryalll Senior Manu£acturing Controller, Production,
Permissions Project Manager: TK lnlcmational Editions: Trudy Kimber
Senior Managing Editor: Scoll Disanno Cover Designer: TK
Production Project Manager/Editorial Production Manager: Greg Dulles Cover Photo: TK
Publisher, lntemational Edition: Angsh11ma11 Chakraborty Full-Service Project Management:Jom•e 1111/ia Private Limitetl
Peanon Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at: www.pcarsoninlema1ionaledi1ions.com
©Pearson Education Limited 2013
The right of Chan S. Park to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988.
Authori:etl adaptation from the United States editio11, entitled Fundamentals of Engineering Economics, 3rd edition, ISBN 978-0-13-277542-7 by Cl1t111 S Park
published by Pearson Education 11:> 2013.
All rights reserved. No part of this publication may be reproduced, stored in a retrie\·al s)-stem, or transmitted in any form or by any means. electronic. mechanical.
photocopying. recording or otherwise, without either lhe prior wrillen permission of lhe publisher or a licence pcrmilling restricted copying in the United Kingdom
issued by the Copyright Licensing Agency Ltd, Saffron House,6-10 Kirby Street, London ECIN 8TS.
All lrademarks used herein are the property of their respective owners. The use of any trademark in this lexl docs not vest in lhc author or publisher any
trademark ownership rights in such lrademarks. nor does the use of such trademarks imply any affilialion with or endorsement of this book by such owners.
Microsoft andlor its respective suppliers make no representations aboul the suitability of the information contained in the documents and related graphics
published as part of the services for any purpose. All such documents and relaled graphics are provided "as is" wilhoul warranty of any kind. Microsoft andlor
ils respective suppliers hereby disclaim all warranties and conditions with regard lo this information, including all warranties and conditions of merchantability,
whether express, implied or s1a1u1ory, fitness for a particular purpose, title and non-infringement. In no event shall Microsofl and/or its respective suppliers be
liable for any special, indirect or consequenlial damages or any damages whatsoever resulting from loss of use, data or profits. whether in an action of contract,
negligence or other tortious action, arising out of or in connection wilh the use or performance of information available from the services.
The documents and relaled graphics contained herein could include technical inaccuracies or typographical errors. Changes arc periodically added lo the
information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein
at any time. Partial screen shols may be viewed in full within the software version specified.
Microsoft"' and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. This book is nol sponsored or endorsed by
or affiliated with the Microsoft Corporation.
ISBN 10: 0-273-77291-0
ISBN 13:978-0-273-TI291-0
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
10911765432
1413
'l)'Jlesel in limes Ten 10/12 by Jouve India Private Limited.
Printed and bound by Courier Kendallville in The United Stales of America
The publisher's policy is lo use paper manufactured from sustainable forests.
PEARSON
ISBN 13: 978-0-273-77291-0
ISBN 10: 0-273-77291-0
To my mentors: James R. Buck (late),
Gerald j. Thuesen, and
Vernon E. Unger
PREFACE
Why Fundamentals of Engineering Economics?
Engineering economic'> i!, one of the most practical subject mailers in the engineer
ing curriculum. but it is an always challenging. ever-changing discipline. Contemporary
Engineering Economics ( C £ £). now in its fifth edition. was first published in 1993.
and since then. we have tried to renect changes in the business world in each new
edition along with the latest innovations in education and publishing. These changes
have resulted in a belier. more complete textbook, but one that is much longer than ii
was originally inwndcd. This may present a problem: Today, covering the textbook in
n single term is increasingly difficult. Therefore, we decided to create F1111rla111entals of
Engineering J::co110111ic.1· (FEE) for those who like co11te111porary but think a smaller,
more concise textbook would better serve tbeir needs.
Goals of the Text
This text aims not only to provide sound and comprehensive coverage of the concepts
of engineering economics but also to address the practical concerns of engineering
economics. More specifically. this text has the following goals:
I. To build n thorough understanding of the theoretical and conceptual basis upon
which the practice of financial project analysis is built.
2. To satisfy the very practical needs of the engineer toward making informed
finnncial decisions when acting as a ream member or project manager for an
t!ngineering project.
3. To incorporate nil critical decision-n1aking tools-including the most contcn1po
rary. computer-oriented ones that engineers bring to the task of making informed
financial decisions.
4. To appeal to the rull range of engineering disciplines for which this course is
orten required: industrial. civil, mechanical, electrical, computer, aerospace,
chemical. n11d manufacturing engineering as well ns engineering lcch11ology.
Intended Market and Use
This tl:Xt is intended for use in introductory engineering economics courses. Unlike the
larger textbook (CEH). it is possible to cover FEE in a single term and perhaps even to
supplement it with a few outside readings or case studies. Although the chapters in FEE
are arrangl:d logically, they arc written in a flexible, modular format. allowing instructors
to cover the material inn different sequence.
5
6 PREFACE
New to This Edition
Much of rhe content has been streamlined lo provide materials in depth and to reflect
the challenges in contemporary engineering economics. Some of the highlighted
changes are as follows:
• All chapter opening vignettes- a trademark of F1111damentnls of E11gi11eeri11g
Eco110111ics-bave been revised or completely replaced with more current and
thought-provoking examples from both service and manufacturing sectors.
Chapter Opening
Chapters Vignettes Company Sector Industry
1 • Social networking Face book Technology Internet
st!rvices software/Services
2 • Powerball lollery Personal Consumer Gaming
3 • Credit cards Personal Financial Banklng
4 • Dallas Cowboys Dallas Cowboys Entertainment Sports
5 • LCD glass Corning Glass Manufacwring Electronic
manufacturing components
6 • Owning Hawker Electronic Aerospace/
a corporate jet Beech craft technology Defense
Corporation
7 • What's a degree Personal Consumer Education
reaUy worth?
8 • High-speed Australian Public Computer
Tmernet Government communication
9 • Obama lo propose U.S. Public Taxation
tax write-off for Government
business
:IO • Coke leveraging its Coca Cola Consumer Beverages/
investment in plant- nondurables Packaging
based packaging
11 • Japanese oil Solar Frontier Energy Integrated oil
company looks KK's
to the rising sun
12 • Finding a fix for State of New Public Construction
the Tappan Zee York
Bridge
13 • Warren BuCfett Berkshire Finance Property/
Hathaway Insurance
• Self-Test Ques1ions have been added al the end of each chapter (131 problems
in total), and worked-out solutions to the questions are provided in Appendix A.
These questions are formatted in a style suitable for Fundamentals Engineering
Exam review and were created to help students prepare for a typical class exam
common to introductory engineering economic courses.
PREFACE 7
• The Benefit-Cost Analysis section has been moved to Chapter 8 as a part of mea
sure of investment chapters. The profitability index is included in this chapter.
• Most of the end-of-chapter problems are revised to reflect the changes in the main
text. There are 708 problems, including 131 self-test questions, 43% of which are
new or updated.
• Various Excel® spreadsheet modeling techniques are introduced throughout
the chapters, and the original Excel files are provided online at the Companion
Website. Most worksheets have been redesigned with graphical outputs.
• Some other specific content changes made in the third edition are as follows:
• In Chapter 1, a cost reduction (Apple's iPad®) project is introduced.
• In Chapter 2, a new retirement planning example is introduced.
• In Chapter 4, all CPI-and inflation-related data have been updated.
• In Chapter 5, an example of comparing mutually exclusive revenue projects is
provided.
• In Chapter 6, a section on capital cost has been expanded with an automobile
ownership example.
• In Chapter 8, benefit-cost contents have been streamlined, and a new section on
the profitability index has been created.
• In Chapter 11, the section on risk-adjusted discount rate approach is expanded
in which the risk element is incorporated through the cost of capital.
• In Chapter 13, all financial statements for Lam Research Corporation have
been updated, and a new set of financial ratio analysis is provided. Investment
strategics have been added as a part of managing personal financial asset under
uncertainty.
Features of the Book
FEE is significantly different from CEE, but most of the chapters will be familiar to
users of CEE. Although we pruned some material and clarified, updated, and other
wise improved all of the chapters, FEE should still be considered an alternative and
streamlined version of CEE.
We did retain all of the pedagogical elements and supporting materials that helped
make CEE so successful. For example:
• Each chapter opens with a real economic vignette describing how an individual deci
sion maker or actual corporation has wrestled with the issues discussed in the chapter.
These opening cases heighten students' interest by pointing out the real-world rel
evance and applicability of what might otherwise seem to be dry technical material.
• In working out each individual chapters example problems, students are encour
aged to highlight the critical data provided by each question, isolate the question
being asked, and outline the correct approach in the solution under the headings
Given, Find, Approach, and Comments, respectively. This convention is employed
throughout the text. This guidance is intended to stimulate student curiosity to look
beyond the mechanics of problem solving to explore "what-if' issues, alternative
solution methods, and the interpretation of the solutions.
• There are a large number of end-of-chapter problems and exam-type questions vary
ing in level of difficulty; these problems thoroughly cover the book's various topics.
8 PREFACE
• Most chapters contain a section titled "Short Case Studies with Excel," enabling
students to use Excel to answer a set of questions. These problems reinforce the
concepts covered in the chapter and provide students an opportunity to become
more proficient with the use of an electronic spreadsheet.
• All Excel spreadsheets now contain easy-to-follow call-out formulas. The integra
tion of Excel is another important feature of FEE. Students have increased ac
cess to and familiarity with Excel, and instructors have more inclination either to
treat these topics explicitly in the course or to encourage students to experiment
independently. One could argue that the use of Excel will undermine true under
standing of course concepts. This text does not promote the trivial or mindless
use of Excel as a replacement for genuine understanding of and skill in applying
traditional solution methods. Rather, it focuses on Excel's productivity-enhancing
benefits for complex project cash flow development and analysis.
To Student: How to Prepare for the Fundamentals
of Engineering (FE) Exam
The set of self-study questions at the end of each chapter is designed primarily to help
you develop a working knowledge of the concepts and principles of engineering eco
nomics. However, the questions are also perfect resource to help you prepare the Fun
damentals of Engineering (FE) exam. All questions are structured in multiple-choice
format because these types of exam questions are used in the FE exam and, increas
ingly, in introductory engineering economics courses.
The FE exam typically consists of 180 multiple-choice questions. During the morn
ing session (120 questions), all examinees take a general exam common to all disci
plines. During the afternoon session (60 questions), examinees can opt to take a general
exam or a discipline-specific (Chemical, Civil, Electrical, Environmental, Industrial, or
Mechanical) exam.
The general exam includes four questions related to engineering economics in the
morning session and five in the afternoon session. The specific engineering economics
topics covered in the FE exam are
• Discounted cash flow (e.g., equivalence, PW, equivalent annual, FW, and rate of return)
• Cost (e.g., incremental, average, sunk, estimating)
• Analyses (e.g., breakeven, benefit-cost)
• Uncertainty (e.g., expected value and risk)
• Valuation and depreciation
Some sample questions are also provided by the National Council of Examiners for
Engineering and Surveying (www.ncees.org/exams).
Companion Book Website
A Companion Website (www.pearsoninternationaleditions.com/park) has been
created and maintained by the publisher. This text takes advantage of the Internet
as a tool that has become increasingly important in accessing a variety of informa
tion. The website contains a variety of resources for both instructors and students,