Engineering Economy

About our authors Dr. William G. Sullivan earned his PhD from the Georgia Institute of Technology in Industrial and Systems Engineering. He has made enduring contributions to the field of engineering economy education in his more than 40 years of service to industry and the academy. A tireless lecturer, he has taught engineering economy to more than 10,000 students at five major universities (Georgia Tech, University of Tennessee, North Carolina State University, Arizona State University and Virginia Tech). Dr. Sullivan's textbooks in the field (five in total), including “Engineering Economy“ (17th edition) continue to contribute to the education of thousands of students. He also has extensive consulting experience with 25 firms in the US.Elin M. Wicks is the owner of Abacus Accounting LLC, an accounting and bookkeeping company focused on empowering small business owners to achieve financial success. She earned a BS and MS in Industrial Engineering from Rutgers University, where her masters research focused on a method of quantifying non-economic factors in monetary terms. During this time, she also developed software tools to assist Cosmair Inc. in improving scheduling and labor recording practices. She went on to earn her PhD in Industrial and Systems Engineering from Virginia Tech, focusing on the design of cellular manufacturing systems. She then joined the faculty of the University of Missouri, Columbia in the Industrial and Manufacturing Systems Department. After taking some time off to raise her children, she supplemented her education in the field of accounting and became the Senior Accountant of Glenn B. Cohen, CPA, an accounting and financial management firm. She has been an author of Engineering Economy since the publication of the 10th edition.Patrick Koelling has served on the faculty in industrial and systems engineering at Virginia Tech since 1987. Dr. Koelling received his PhD in Industrial and Management Systems Engineering in 1982 from Arizona State University, an MBA in 1978, M.S.I.E. in 1977 and B.S.I.E. in 1976, all from the University of Missouri. He conducts research and teaches in operations research and management systems engineering. Prior to joining Virginia Tech, he spent two years at Hallmark Cards as a senior analyst and three years as an assistant professor at Oklahoma State University. Dr. Koelling has also served as department head of industrial engineering and management at Oklahoma State. Dr. Koelling has consulted with several private and government organizations, including the establishment of new industrial and systems engineering programs. He is a Fellow of the Institute of Industrial and Systems Engineers, Executive Director of Alpha Pi Mu, the industrial engineering honor society and Director of Accreditation Affairs for the Institute of Industrial and Systems Engineers.

• Green Content CHAPTER 1 Introduction to Engineering Economy1.1 Introduction1.2 The Principles of Engineering Economy1.3 Engineering Economy and the Design Process1.4 Using Spreadsheets in Engineering Economic Analysis 1.5 Try Your Skills1.6 SummaryCHAPTER 2 Cost Concepts and Design Economics2.1 Cost Terminology2.2 The General Economic Environment2.3 Cost-Driven Design Optimization2.4 Present Economy Studies2.5 Case Study–The Economics of Daytime Running Lights 2.6 In Class Exercise2.7 Try Your Skills2.8 Summary Appendix 2-A Accounting FundamentalsCHAPTER 3 Cost-Estimation Techniques3.1 Introduction3.2 An Integrated Approach3.3 Selected Estimating Techniques (Models)3.4 Parametric Cost Estimating3.5 Case Study–Demanufacturing of Computers3.6 Electronic Spreadsheet Modeling: Learning Curve3.7 In-Class Exercise3.8 Try Your Skills3.9 SummaryCHAPTER 4 The Time Value of Money4.1 Introduction4.2 Simple Interest 4.3 Compound Interest4.4 The Concept of Equivalence4.5 Notation and Cash-Flow Diagrams and Tables4.6 Relating Present and Future Equivalent Values4.7 Relating a Uniform Series (Annuity) to Its Present and Future Equivalent4.8 Summary of Interest Formulas and Relationships for Discrete Compounding4.9 Deferred Annuities (Uniform Series)4.10 Equivalence Calculations Involving Multiple Interest Formulas4.11 Uniform (Arithmetic) Gradient of Cash Flows4.12 Geometric Sequences of Cash Flows4.13 Interest Rates that Vary with Time4.14 Nominal and Effective Interest Rates4.15 Compounding More Often than Once per Year4.16 Interest Formulas for Continuous Compounding and Discrete Cash Flows4.17 Case Study–Understanding Economic “Equivalence”4.18 In-Class Exercise4.19 Try Your Skills4.20 SummaryCHAPTER 5 Evaluating a Single Project5.1 Introduction5.2 Determining the Minimum Attractive Rate of Return (MARR)5.3 The Present Worth Method5.4 The Future Worth Method5.5 The Annual Worth Method5.6 The Internal Rate of Return Method5.7 The External Rate of Return Method5.8 The Payback (Payout) Period Method5.9 Case Study–A Proposed Capital Investment to Improve Process Yield5.10 Electronic Spreadsheet Modeling: Payback Period Method5.11 In-Class Exercise5.12 Try Your Skills5.13 Summary Appendix 5-A The Multiple Rate of Return Problem with the IRR MethodCHAPTER 6 Comparison and Selection among Alternatives6.1 Introduction6.2 Basic Concepts for Comparing Alternatives6.3 The Study (Analysis) Period6.4 Useful Lives Are Equal to the Study Period6.5 Useful Lives Are Unequal among the Alternatives6.6 Personal Finances6.7 Case Study–Ned and Larry’s Ice Cream Company6.8 Postevaluation of Results6.9 Project Postevaluation Spreadsheet Approach6.10 In-Class Exercise6.11 Try Your Skills6.12 SummaryCHAPTER 7 Depreciation and Income Taxes7.1 Introduction7.2 Depreciation Concepts and Terminology7.3 The Classical (Historical) Depreciation Methods7.4 The Modified Accelerated Cost Recovery System7.5 A Comprehensive Depreciation Example7.6 Introduction to Income Taxes7.7 The Effective Corporate Income Tax Rate7.8 Gain (Loss) on the Disposal of an Asset7.9 General Procedure for Making After-Tax Economic Analyses7.10 Illustration of Computations of ATCFs7.11 Economic Value Added7.12 In-Class Exercise7.13 Try Your Skills7.14 SummaryCHAPTER 8 Price Changes and Exchange Rates8.1 Introduction8.2 Terminology and Basic Concepts8.3 Fixed and Responsive Annuities8.4 Differential Price Changes8.5 Spreadsheet Application8.6 Foreign Exchange Rates and Purchasing Power Concepts8.7 Case Study–Selecting Electric Motors to Power an Assembly Line8.8 In-Class Exercise8.9 Try Your Skills8.10 Summary 394of Single Cash FlowsCHAPTER 9 Replacement Analysis9.1 Introduction9.2 Reasons for Replacement Analysis9.3 Factors that Must Be Considered in Replacement Studies9.4 Typical Replacement Problems9.5 Determining the Economic Life of a New Asset (Challenger)9.6 Determining the Economic Life of a Defender9.7 Comparisons in Which the Defender’s Useful Life Differs from that of the Challenger9.8 Retirement without Replacement (Abandonment)9.9 After-Tax Replacement Studies9.10 Case Study–Replacement of a Hospital’s Emergency Electrical Supply System9.11 Try Your Skills9.12 SummaryCHAPTER 10 Evaluating Projects with the Benefit−Cost Ratio Method10.1 Introduction10.2 Perspective and Terminology for Analyzing Public Projects10.3 Self-Liquidating Projects10.4 Multiple-Purpose Projects10.5 Difficulties in Evaluating Public-Sector Projects10.6 What Interest Rate Should Be Used for Public Projects?10.7 The Benefit−Cost Ratio Method10.8 Evaluating Independent Projects by B−C Ratios10.9 Comparison of Mutually Exclusive Projects by B−C Ratios10.10 Case Study–Improving a Railroad Crossing10.11 Try Your Skills10.12 SummaryCHAPTER 11 Breakeven and Sensitivity Analysis11.1 Introduction11.2 Breakeven Analysis11.3 Sensitivity Analysis11.4 Multiple Factor Sensitivity Analysis11.5 Try Your Skills11.6 SummaryCHAPTER 12 Probabilistic Risk Analysis12.1 Introduction12.2 Sources of Uncertainty12.3 The Distribution of Random Variables12.4 Evaluation of Projects with Discrete Random Variables12.5 Evaluation of Projects with Continuous Random Variables12.6 Evaluation of Risk and Uncertainty by Monte Carlo Simulation12.7 Performing Monte Carlo Simulation with a Computer12.8 Decision Trees12.9 Real Options Analysis12.10 SummaryCHAPTER 13 The Capital Budgeting Process13.1 Introduction13.2 Debt Capital13.3 Equity Capital13.4 The Weighted Average Cost of Capital (WACC)13.5 Project Selection13.6 Postmortem Review13.7 Budgeting of Capital Investments and Management Perspective13.8 Leasing Decisions13.9 Capital Allocation13.10 SummaryCHAPTER 14 Decision Making Considering Multiattributes14.1 Introduction14.2 Examples of Multiattribute Decisions14.3 Choice of Attributes14.4 Selection of a Measurement Scale14.5 Dimensionality of the Problem14.6 Noncompensatory Models14.7 Compensatory Models14.8 SummaryAPPENDICES A. Using Excel to Solve Engineering Economy ProblemsB. Abbreviations and NotationC. Interest and Annuity Tables for Discrete CompoundingD. Interest and Annuity Tables for Continuous CompoundingE. Standard Normal DistributionF. Selected ReferencesG. Solutions to Try Your SkillsH. Answers to Selected Problems