Level 1 It All Starts Here
1 Fundamentals of Engineering Economics31.1 The Importance of Engineering Economics to Engineers (and Other Professionals)4
1.2 The Role of Engineering Economics in Decision-Making6
1.3 Methods and Steps in the Study of Engineering Economics7
1.4 Interest Rates and Rates of Return9
1.5 Equivalence12
1.6 Simple vs. Compound Interest13
1.7 Terminology and Symbols18
1.8 Introduction to Computerized Solutions20
1.9 The Minimum Expected Rate of Return22
1.10 Cash Flows: Estimation and Graphical Representation24
1.11 The Rule of 72: Estimation of Value Added at a Time of Two Times the Time and Interest Rate27
1.12 Spreadsheet Applications - Simple Interest, Compound Interest, and Changing Cash Flow Estimates27
Additional Examples30
Summary31
Exercise 32
FE Reflection Question 35
Extended Exercise - Effects of Compound Interest36
Case Study - Describing Options for Manufacturing Refrigerator housing options36
2 Coefficients: how time and interest rates affect the value of money38
2.1 Compound interest coefficients for lump-sum payments (?F/P and P/F?)39
2.2 Present value coefficients and capital recovery coefficients for an equal series (?P/A and A/P?)44
2.3 Sinking fund coefficients and terminal value of equal series Coefficients (?A/F and F/A?)47
2.4 Interpolation of Compound Interest Tables49
2.5 Compound Interest Coefficients for Equivalent Series (?P/G and A/G?)51
2.6 Coefficients for Equivalent Series56
2.7 Calculation of Unknown Interest Rates58
2.8 Calculation of Unknown Number of Years61
2.9 Spreadsheet Application - Basic Sensitivity Analysis62
Appendix Examples63
Summary63
Exercises64
FE Reflections70
Case Study - Difference Due to Differences in the Number of Years and Compound Interest Rate72
Table of ContentsEngineering Economics (6th Edition) 3 Combination Factors74
3.1 Calculation of Offset Equivalent Sequences75
3.2 Calculations Involving Equivalent Sequences and Single Amounts in Random Positions79
3.3 Calculation of Offset Equivalent Difference or Equivalent Ratio Sequences83
3.4 Offset Decreasing Equivalent Difference Sequences86
3.5 Spreadsheet Applications - Use of Different Functions88
Additional Examples91
Summary92
Exercise 92
FE Reflection Question 101
Extended Exercise - Maintaining Public **** Sites 102
4 Nominal and Real Interest Rates104
4.1 Expressions of Nominal and Real Interest Rates105
4.2 Real Annual Interest Rates108
4.3 Real interest rate at any time period113
4.4 Equivalence: comparing the length of the repayment period and the compounding period115
4.5 Equivalence: single-valued and PP ≥ CP116
4.6 Equivalence: PP ≥ CP series118
4.7 Equivalence: PP<CP when a single sum of amounts and Series122
4.8 Effective Interest Rate Calculated by Successive Compounding123
4.9 Interest Rate Over Time125
Summary126
Exercise 127
FE Reflection Questions132
Case Study - Financing the Purchase of a Home134 Level 2 Tools to Evaluate the Options Available
5 Present Value Analysis1415.1 Developing Mutually Exclusive Options142
5.2 Present Value Analysis of Equal Life Cycle Options144
5.3 Present Value Analysis of Unequal Life Cycle Options145
5.4 Terminal Value Analysis148
5.5 Calculation and Analysis of Capitalization Costs149
5.6 Analysis of Payback Period154
5.7 Life Cycle Costs158
5.8 Present Value of Bonds161
5.9 Spreadsheet Application - PW Analysis and Payback Period164
Summary167
Exercise 168
FE Thinking Questions176
Extended Exercise - Calculating Valuation of Social Pension Insurance 178
Case Study - Recovery Evaluation of an Ultra-Low Flush Toilet Project178
6 Annual Value Analysis181
6.1 Advantages and Application of Annual Value Analysis182
6.2 Calculation of Capital Recovery and Annual Value184
6.3 Evaluation of Alternative Options Using Annual Value Analysis186
6.4 AW191
Summary193
Exercise 193
FE Reflection Questions 198
Case Study - Changing Annual Value Analysis Scenarios 199
7 Rate of Return Analysis: Individual Options 201
7.1 Interpretation of Rate of Return 202
7.2 Calculation of Rate of Return 204 using PW or AW formulas to calculate the rate of return204
7.3 Considerations for using the ROR method209
7.4 Multiple rates of return209
7.5 Combined rate of return: removing the multiple ?i values214
7.6 Rate of return on bond investments219
Summary221
Exercise questions221
FE Reflection Questions 228
Extended Exercise 1 - The Cost of a Bad Credit Rating 230
Extended Exercise 2 - The Best Time to Sell a Business 231
Case Study - Bob Studies Multiple Rates of Return 231
8 Rate-of-return Analysis: Multiple Options 234
8.1 Need for Incremental Analysis 235
8.2 ROR Analysis with Incremental Cash Flow Calculations236
8.3 Interpretation of Additional Return on Investment239
8.4 Evaluating Returns Using PW: Incremental and Breakeven Methods240
8.5 Evaluating Returns Using AW246
8.6 Incremental ROR for Multiple Mutually Exclusive Options Analysis 247
8.7 Spreadsheet Application - PW, AW, and Rate of Return Analysis 252
Summary 254
Exercise 254
FE Reflection Question 261
Extended Exercise - Incremental ROR Analysis of Evaluated Scenarios with Life Cycle Uncertainty 262
Case Study 1 - Choosing a Variety of Options : Can a Recent Engineering Graduate Help His Father263
Case Study 2 - PW Analysis in the Presence of Multiple Interest Rates264
9 Benefit/Cost Analysis and Economic Analysis of the Public **** Sector266
9.1 Public **** Sector Programs267
9.2 Benefit/Cost Analysis of Individual Programs271
9.3 Scenario Selection Using Incremental ?B/C? Analysis275
9.4 Incremental ?B/C? Analysis of Multiple Mutually Exclusive Scenarios277
Summary282
Exercise 282
FE Reflection Question 289
Extended Exercise - Costs of Providing Ladder Truck Services to a Fire Department290
Case Study - Highway Lighting 292
10 Making Program Choices: Methods, MARR, and Multiple Attributes 294
10.1 Comparison of Mutually Exclusive Alternatives Using Different Evaluation Methods 295
10.2 MARR and the Cost of Funds 298
10.3 Liability-Asset Portfolios and the WACC 301
10.4 Determining the Cost of Funds for Liabilities302
10.5 Determining the Cost of Funds for Assets and MARR304
10.6 The Impact of the Liability-Asset Portfolio on Investment Risk306
10.7 Multi-Attribute Analysis: Attribute Identification and Attribute Importance308
10.8 Evaluation of Multi-Attribute Metrics 312
Summary 314
Exercise 314
Extended Exercise - Emphasizing the Right Thing 324
Case Study: Which Approach Should Be Chosen - Debt Financing or Equity Financing 325
Level 3 Decision-Making in Real-World Cases
11 Reset vs. Retention Decisions 32911.1 Foundations of Replacement Analysis330
11.2 Economic Lifespan332
11.3 Performing a Replacement Study338
11.4 Other Considerations for Replacement Analysis343
11.5 Replacement Analysis for a Specific Period of Analysis344
Summary349
Exercise Questions349
FE Reflection Questions 357
Extended Exercise - Economic Service Life under Changing Conditions 358
Case Study - Replacement Analysis of Quarry Equipment 359
12 Selection of Independent Scenarios under Budgetary Constraints 360
12.1 Overview of Capital Allocation Among Scenarios 361
12.2 Equal Life Cycle Scenarios Using PW Analysis for Capital Allocation 363
12.3 Use of PW Analysis for Capital Allocation under Unequal Life Cycle Scenarios 365
12.4 Solving Capital Budgeting Problems with Linear Programming 368
Summary 371
Exercises 371
Case Study - Lifelong Engineering Education in an Online Environment 375
Case Study Exercise 376
13 Breakeven Analysis 377
13.1 Breakeven Analysis of a Single Project 378
13.2 Breakeven Analysis of Two Alternative Scenarios 383
13.3 Spreadsheet Application - Breakeven Analysis Using Excel's SOLVER 386
Summary389
Exercises390
Case Study - Process Costs of a Water Treatment Plant395
Level 4 A More Thorough Analysis
14 The Effects of Inflation40114.1 Understanding the Effects of Inflation402
14.2 Calculating Present Values of Inflation Modifications404
14.3 Final Value Calculation of Inflation Modification409
14.4 Capital Recovery Calculation of Inflation Modification412
Summary413
Exercise 414
FE Reflection Question 419
Extended Exercise - Fixed Income Investments and the Power of Inflation419
15 Cost Estimation and Indirect Cost Allocation421
15.1 Understanding How to Complete a Cost Estimate422
15.2 Cost Indices425
15.3 Cost Estimating Relationships: the Cost-Capacity Equation428
15.4 Cost Estimating Relationships: the Cost Factor Approach430
15.5 Traditional Indirect Cost Ratios vs. Indirect Cost Allocation 432
15.6 Indirect Cost Allocation Using the Assignment-Based Costing (ABC) Approach 436
Summary 439
Exercise 439
FE Reflection Questions 449
Case Study 1 - Estimation of the Total Cost of Coagulant Dose Optimization 450
Case Study 2 - Medical Equipment Comparison of Indirect Costs of Sterilization Devices452
16 Methods of Depreciation455
16.1 Terminology Related to Depreciation456
16.2 Straight-Line (SL) Depreciation Methods459
16.3 Declining Balance and Double Declining Balance Methods460
16.4 Modified Accelerated Cost Recovery System464
16.5 Determining Depreciation Recovery Periods for the MACRS Method468
16.6 Depletion Methods469
Summary471
Exercises472
FE Reflection Questions477
Appendices478
16A.1 Depreciation Amounts by the Sum-of-the-Years Method478
16A.2 Conversion Between Depreciation Methods 479
16A.3 Determination of Depreciation Rates for the MACRS Method 483
Appendix Exercises 486
17 Post-Tax Economic Analysis 488
17.1 Income Tax Terminology and Its Relationship to the Firm (Individual) 489
17.2 Pre- and Post-Tax Cash Flows 493
17.1 Income Tax Terminology and Its Relationship to the Firm (Individual) 489
17.2 Cash Flows Before and After Taxes 493
p>17.3 Impact of Different Depreciation Methods and Depreciation Periods on Taxes495
17.4 Depreciation Recovery and Capital Gains (Losses) of a Firm498
17.5 After-Tax PW, AW, and ROR Valuation502
17.6 Spreadsheet Application - Incremental After-Tax ROR Analysis506
17.7 After-Tax Replacement Analysis 509
17.8 After-Tax Incremental ROR Analysis 513
17.9 After-Tax Analysis of International Projects 515
Summary 517
Exercise 518
Case Study - After-Tax Valuation of Liabilities and Financing 529
18 Formal Sensitivity Analysis and Expected Value Decision Making 533
18.1 Determining Sensitivity to Parameter Changes534
18.2 Formalized Sensitivity Analysis Based on Three Estimation Methods540
18.3 Economic Variability and Expected Values541
18.4 Calculating Expected Values of Alternative Options542
18.5 Decision Tree-Based Phased Evaluation of Alternatives544
p>Summary 547
Exercise 548
Extended Exercise - Examining Alternative Options from Different Perspectives 556
Case Study - Sensitivity Analysis of Water Supply Options for a Public **** Sector: Water Supply Plans 556
19 More Variation and Risky Decision Making 560
19.1 Certainty, Risk, and the Explanation of Uncertainty 561
19.2 Important Factors in Risky Decisions 564
19.3 Random Samples 569
19.4 Expected Values and Standard Deviations 573
19.5 Monte Carlo Sampling and Simulation Analyses 577
Additional Example Problems 584
Summary 588
Exercise 588
Extended Exercise - Sensitivity Analysis Using Simulation Methods and Functions Generated by Excel Random Number Generator (RNG)
593
Appendix A Using Microsoft Excel Spreadsheets 594A.1 Introduction to Using Excel 594
A.2 Spreadsheet Organization (Layout )598
A.3 Important Engineering Economic Analysis Functions in Excel (Alphabetical)600
A.4 SOLVER - Performs Breakeven Analysis and "What if ...... How... ...
Excel Tools for Analysis607
A.5 List of Excel Financial Functions608
A.6 Error Messages610
Appendix B Basis for Accounting Statements and Operating Ratios611
B.1 Asset-Balance Sheet611
B.2 Income Statement and Cost of Products Sold Statement 612
B.3 Operating Ratios 613
Exercises 616
Appendix C Compound Interest Factor Table 618
Reference 666