Leland Blank, P. E. Texas A & M University American University of Sharjah, United Arab Emirates
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1 Eighth Edition ENGINEERING ECONOMY Leland Blank, P. E. Texas A & M University American University of Sharjah, United Arab Emirates Anthony Tarquin, P. E. University of Texas at El Paso Mc Graw Hill Education
2 CONTENTS Preface to Eighth Edition xiv THE FUNDAMENTALS Chapter 1 Foundations of Engineering Economy Why Engineering Economy and the Time Value of Money are Important Performing an Engineering Economy Study Professional Ethics and Economic Decisions Interest Rate and Rate of Return Terminology and Symbols Cash Flows: Estimation and Diagramming Economic Equivalence Simple and Compound Interest Minimum Attractive Rate of Return Introduction to Spreadsheet Use Exercises for Spreadsheets 35 Additional and FE Exam Review Questions 36 Case Study Cost of Electricity with Renewable Sources Added 37 Chapter 2 Factors: How Time and Interest Affect Money 38 0 Progressive Example The Steel Plant Case Single-Amount Factors (F/P and P/F) Uniform Series Present Worth Factor and Capital Recovery Factor (P/A and A/P) Sinking Fund Factor and Uniform Series Compound Amount Factor (A/F and F/A) Factor Values for Untabulated i or n Values Arithmetic Gradient Factors (P/G and A/G) Geometrie Gradient Series Factors Determining i or n for Known Cash Flow Values Exercises for Spreadsheets 68 Additional and FE Exam Review Questions 69 Case Study The Amazing Impact of Compound Interest 71 Chapter 3 Combining Factors and Spreadsheet Functions Calculations for Uniform Series That Are Shifted Calculations Involving Uniform Series and Randomly Placed Single Amounts Calculations for Shifted Gradients Exercises for Spreadsheets 92 Additional and FE Exam Review Questions 93 Case Study Preserving Land for Public Use 94 Chapter 4 Nominal and Effective Interest Rates 96 (ß Progressive Example The Credit Card Offer Case Nominal and Effective Interest Rate Statements 98
3 ix 4.2 Effective Annual Interest Rates Effective Interest Rates for Any Time Period Equivalence Relations: Payment Period and Compounding Period Equivalence Relations: Single Amounts with PP > CP Equivalence Relations: Series with PP > CP Equivalence Relations: Single Amounts and Series with PP < CP Effective Interest Rate for Continuous Compounding Interest Rates That Vary Over Time Exercises for Spreadsheets 125 Additional and FE Exam Review Questions 125 Case Study Is Owning a Home a Net Gain or Net Loss Over Time? 127 LEARN1NG STAGE 2 BASIC ANALYSIS TOOLS Chapter 5 Present Worth Analysis (ß Progressive Example Water for Semiconductor Manufacturing Case 5.1 Formulating Alternatives 5.2 Present Worth Analysis of Equal-Life Alternatives 5.3 Present Worth Analysis of DifFerent-Life Alternatives 5.4 Future Worth Analysis 5.5 Capitalized Cost Analysis Exercises for Spreadsheets Additional and FE Exam Review Questions Case Study Comparing Social Security Benefits Chapter 6 Annual Worth Analysis 6.1 Advantages and Uses of Annual Worth Analysis 6.2 Calculation of Capital Recovery and AW Values 6.3 Evaluating Alternatives by Annual Worth Analysis 6.4 AW of a Permanent Investment 6.5 Life-Cycle Cost Analysis Exercises for Spreadsheets Additional and FE Exam Review Questions Case Study Annual Worth Analysis Then and Now Chapter 7 Rate of Return Analysis: One Project 7.1 Interpretation of a Rate of Return Value 7.2 Rate of Return Calculation Using a PW or AW Relation 7.3 Special Considerations When Using the ROR Method 7.4 Multiple Rate of Return Values 7.5 Techniques to Remove Multiple Rates of Return 7.6 Rate of Return of a Bond Investment
4 Exercises for Spreadsheets 205 Additional and FE Exam Review Questions 207 Case Study Developing and Selling an Innovative Idea 209 Chapter 8 Rate of Return Analysis: Multiple Alternatives Why Incremental Analysis Is Necessary Calculation of Incremental Cash Flows for ROR Analysis Interpretation of Rate of Return on the Extra Investment Rate of Return Evaluation Using PW: Incremental and Breakeven (Two Alternatives) Rate of Return Evaluation Using AW Incremental ROR Analysis of Multiple (More than Two) Alternatives All-in-One Spreadsheet Analysis Exercises for Spreadsheets 233 Additional and FE Exam Review Questions 234 Case Study Peforming ROR Analysis for 3D Printer and IIoT Technology 235 Case Study How a New Engineering Graduate Can Help His Father 236 Chapter 9 Benefit/Cost Analysis and Public Sector Economics (ß Progressive Example Water Treatment Facility #3 Case 9.1 Public Sector Projects 9.2 Benefit/Cost Analysis of a Single Project 9.3 Incremental B/C Analysis (Two Alternatives) 9.4 Incremental B/C Analysis of Multiple (More than Two) Alternatives 9.5 Service Sector Projects and Cost-Effectiveness Analysis 9.6 Ethical Considerations in the Public Sector Exercises for Spreadsheets Additional and FE Exam Review Questions Case Study Highway Lighting Options to Reduce Traffic Accidents LEARNING STAGE 2 EPILOGUE: SELECTING THE BASIC ANALYSIS TOOL LEARNING STAGE 3 MARING BETTER DECISIONS Chapter 10 Project Financing and Noneconomic Attributes MARR Relation to the Cost of Capital Debt-Equity Mix and Weighted Average Cost of Capital Determination of the Cost of Debt Capital Determination of the Cost of Equity Capital and the MARR Effect of Debt-Equity Mix on Investment Risk Multiple Attribute Analysis: An Introduction Evaluation Measure for Multiple Attributes Exercises for Spreadsheets 301 Additional and FE Exam Review Questions 302 Case Study Expanding a Business Debt vs. Equity Financing? 303
5 xi Chapter 11 Replacement and Retention Decisions 304 Progressive Example Keep or Replace the Kiln Case Basics of a Replacement Study Economic Service Life Performing a Replacement Study Additional Considerations in a Replacement Study Replacement Study over a Specified Study Period Replacement Value Exercises for Spreadsheets 331 Additional and FE Exam Review Questions 331 Case Study A Pumper System with an ESL Problem 333 Chapter 12 Independent Projects with Budget Limitation An Overview of Capital Rationing among Projects Capital Rationing Using PW Analysis of Equal-Life Projects Capital Rationing Using PW Analysis of Unequal-Life Projects Capital Budgeting Problem Formulation Using Linear Programming Additional Project Ranking Measures Additional and FE Exam Review Questions 351 Chapter 13 Breakeven and Payback Analysis Breakeven Analysis for a Single Project Breakeven Analysis Between Two Alternatives Payback Analysis More Breakeven and Payback Analysis on Spreadsheets Exercises for Spreadsheets 374 Additional and FE Exam Review Questions 375 Case Study Water Treatment Plant Process Costs 376 LEARNfNG STAGE 4 Chapter 14 ROUNDING OUT THE STUDY Effects of Inflation 14.1 Understanding the Impact of Inflation 14.2 Present Worth Calculations Adjusted for Inflation 14.3 Future Worth Calculations Adjusted for Inflation 14.4 Capital Recovery Calculations Adjusted for Inflation Additional and FE Exam Review Questions Case Study Inflation Considerations for Stock and Bond Investments Chapter 15 Cost Estimation and Indirect Cost Allocation 15.1 Understanding How Cost Estimation Is Accomplished 15.2 Unit Method 15.3 Cost Indexes
6 xii Contents 15.4 Cost-Estimating Relationships: Cost-Capacity Equations Cost-Estimating Relationships: Factor Method Indirect Cost Rates and Allocation: The Traditional Method Activity-Based Costing (ABC) for Indirect Costs Making Estimates and Maintaining Ethical Practices Additional and FE Exam Review Questions 424 Case Study Indirect Cost Analysis of Medical Equipment Manufacturing Costs 425 Case Study Deceptive Acts Can Get You in Trouble 427 Chapter 16 Depreciation Methods Depreciation Terminology Straight Line (SL) Depreciation Declining Balance (DB) and Double Declining Balance (DDB) Depreciation Modified Accelerated Cost Recovery System (MACRS) Determining the MACRS Recovery Period Depletion Methods Appendix A.1 Sum-of-Years-Digits (SYD) and Unit-of-Production (UOP) Depreciation A.2 Switching between Depreciation Methods A.3 Determination of MACRS Rates Additional and FE Exam Review Questions 455 Appendix 456 Chapter 17 After-Tax Economic Analysis Income Tax Terminology and Basic Relations Calculation of Cash Flow after Taxes Effect on Taxes of Different Depreciation Methods and Recovery Periods Depreciation Recapture and Capital Gains (Losses) After-Tax Economic Evaluation After-Tax Replacement Study After-Tax Value-Added Analysis After-Tax Analysis for International Projects Value-Added Tax Additional and FE Exam Review Questions 496 Case Study After-Tax Analysis for Business Expansion 497 Chapter 18 Sensitivity Analysis and Staged Decisions Determining Sensitivity to Parameter Variation Sensitivity Analysis Using Three Estimates Estimate Variability and the Expected Value Expected Value Computations for Alternatives Staged Evaluation of Alternatives Using a Decision Tree Real Options in Engineering Economics Additional and FE Exam Review Questions 524 Case Study Sensitivity to the Economic Environment 525 Case Study Sensitivity Analysis of Public Sector Projects Water Supply Plans 525
7 xiii Chapter 19 More on Variation and Decision Making under Risk Interpretation of Certainty, Risk, and Uncertainty Elements Important to Decision Making under Risk Random Samples Sample Estimates: Mean and Standard Deviation Monte Carlo Sampling and Simulation Analysis Additional and FE Exam Review Questions 558 Case Study Using Simulation and Three-Estimate Sensit!vity Analysis 559 Appendix A Using Spreadsheets and Microsoft Excel 561 A.l Introduction to Using Excel 561 A.2 Organization (Layout) of the Spreadsheet 563 A.3 Spreadsheet Functions Important to Engineering Economy (Alphabetical Order) 564 A.4 Goal Seek A Tool for Breakeven and Sensitivity Analysis 572 A.5 Solver An Optimizing Tool for Capital Budgeting, Breakeven, and Sensitivity Analysis 573 A.6 Error Messages 574 Appendix B Basics of Accounting Reports and Business Ratios 575 B.l The Balance Sheet 575 B.2 Income Statement and Cost of Goods Sold Statement 576 B.3 Business Ratios 577 Appendix C Code of Ethics for Engineers 580 Appendix D Alternate Methods for Equivalence Calculations 583 D.l Using Programmable Calculators 583 D.2 Using the Summation of a Geometrie Series 584 Appendix E Glossary of Concepts and Terms 587 E.l Important Concepts and Guidelines 587 E.2 Symbols and Terms 590 Reference Materials Factor Tables Index 624
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