Engineering Economy 2012

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ACKNOWLEDGMENT OF CONTRIBUTORS It takes the input and efforts of many individuals to make significant improvements in a textbook. We wish to give special thanks to the following persons for their contributions to this edition. Paul Askenasy, Texas Commission on Environmental Quality Jack Beltran, Bristol-Myers Squibb Robert Lundquist, Ohio State University William Peet, Infrastructure Coordination, Government of Niue Sallie Sheppard, Texas A&M University We thank the following individuals for their comments, feedback, and review of material to assist in making this edition a real success. Ahmed Alim, University of Houston Alan Atalah, Bowling Green State University Fola Michael Ayokanmbi, Alabama A&M University William Brown, West Virginia University at Parkersburg Hector Carrasco, Colorado State University–Pueblo Robert Chiang, California State University, Pomona Ronald Cutwright, Florida State University John F. Dacquisto, Gonzaga University Houshang Darabi, University of Illinois at Chicago Freddie Davis, West Texas A&M University Edward Lester Dollar, Southern Polytechnic State University Ted Eschenbach, University of Alaska Clara Fang, University of Hartford Abel Fernandez, University of the Pacific Daniel A. Franchi, California Polytechnic State University, San Luis Obispo Mark Frascatore, Clarkson University Benjamin M. Fries, University of Central Florida Nathan Gartner, University of Massachusetts–Lowell Johnny R. Graham, University of North Carolina–Charlotte Liling Huang, Northern Virginia Community College David Jacobs, University of Hartford Adam Jannik, Northwestern State University Peter E. Johnson, Valparaiso University Justin W. Kile, University of Wisconsin–Platteville John Kushner, Lawrence Technological University Clifford D. Madrid, New Mexico State University Saeed Manafzadeh, University of Illinois at Chicago Quamrul Mazumder, University of Michigan–Flint Deb McAvoy, Ohio University Gene McGinnis, Christian Brothers University Bruce V. Mutter, Bluefield State College Hong Sioe Oey, University of Texas at El Paso Richard Palmer, University of Massachusetts Michael J. Rider, Ohio Northern University John Ristroph, University of Louisiana at Lafayette Saeid L. Sadri, Georgia Institute of Technology Scott Schultz, Mercer University Kyo D. Song, Norfolk State University James Stevens, University of Colorado at Colorado Springs John A. Stratton, Rochester Institute of Technology Mathias J. Sutton, Purdue University Pete Weiss, Valparaiso University
xx Acknowledgment of Contributors Greg Wiles, Southern Polytechnic State University Richard Youchak, University of Pittsburgh at Johnstown William A. Young, II, Ohio University If you discover errors that require correction in the next printing of the textbook or in updates of the online resources, please contact us. We hope you find the contents of this edition helpful in your academic and professional activities. Leland Blank Anthony Tarquin lelandblank@yahoo.com atarquin@utep.edu
Page 2: Seventh Edition ENGINEERING ECONOMY
Page 5 and 6: TM ENGINEERING ECONOMY: SEVENTH EDI
Page 7 and 8: MCGRAW-HILL DIGITAL OFFERINGS McGra
Page 9 and 10: viii Contents 4.6 Equivalence Relat
Page 11 and 12: x Contents Chapter 12 Independent P
Page 13 and 14: xii Contents Appendix B Basics of A
Page 15 and 16: xiv Preface to Seventh Edition CHAP
Page 17 and 18: SAMPLE OF RESOURCES FOR LEARNING OU
Page 19: CASE STUDY RENEWABLE ENERGY SOURCES
Page 23 and 24: CHAPTER 1 Foundations of Engineerin
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Page 31 and 32: 10 Chapter 1 Foundations of Enginee
Page 59 and 60: CHAPTER 2 Factors: How Time and Int
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50 Chapter 2 Factors: How Time and
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CHAPTER 3 Combining Factors and Spr
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74 Chapter 3 Combining Factors and
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CHAPTER 4 Nominal and Effective Int
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96 Chapter 4 Nominal and Effective
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LEARNING STAGE 2 Basic Analysis Too
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A future amount of money converted
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5.2 Present Worth Analysis of Equal
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5.3 Present Worth Analysis of Diffe
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5.3 Present Worth Analysis of Diffe
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5.4 Future Worth Analysis 137 If th
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5.5 Capitalized Cost Analysis 139 c
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5.5 Capitalized Cost Analysis 141 S
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Problems 143 5.5 What is meant by t
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Life n , years First cost, $ Seawat
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Additional Problems and FE Exam Rev
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Case Study 149 5.51 The capitalized
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I n this chapter, we add to our rep
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6.2 Calculation of Capital Recovery
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6.3 Evaluating Alternatives by Annu
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6.4 AW of a Permanent Investment 15
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6.4 AW of a Permanent Investment 15
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6.5 Life-Cycle Cost Analysis 161 fo
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6.5 Life-Cycle Cost Analysis 163 Co
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Problems 165 6.8 Eight years ago, O
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Problems 167 increase for a time pe
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Case Study 171 6.47 All the followi
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T he most commonly quoted measure o
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7.2 Rate of Return Calculation Usin
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7.2 Rate of Return Calculation Usin
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7.3 Special Considerations When Usi
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7.4 Multiple Rate of Return Values
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7.4 Multiple Rate of Return Values
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7.5 Techniques to Remove Multiple R
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7.6 Rate of Return of a Bond Invest
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Problems 193 CHAPTER SUMMARY The ra
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Problems 195 lasts only 3 years ver
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Problems 197 return using the modif
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Case Study 201 end of the first yea
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T his chapter presents the methods
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8.2 Calculation of Incremental Cash
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8.4 Rate of Return Evaluation Using
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8.6 Incremental ROR Analysis of Mul
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8.6 Incremental ROR Analysis of Mul
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Chapter Summary 219 Solution by Spr
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Problems 221 Year Incremental Cash
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Problems 223 (b) Determine which ma
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Case Study 227 CASE STUDY HOW A NEW
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T he evaluation methods of previous
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9.1 Public Sector Projects 231 Poli
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9.1 Public Sector Projects 233 Some
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9.2 Benefit/Cost Analysis of a Sing
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9.2 Benefit/Cost Analysis of a Sing
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9.3 Alternative Selection Using Inc
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9.3 Alternative Selection Using Inc
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9.4 Incremental B/C Analysis of Mul
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9.4 Incremental B/C Analysis of Mul
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9.5 Service Sector Projects and Cos
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9.5 Service Sector Projects and Cos
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Chapter Summary 251 TABLE 9-5 Some
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Problems 253 cancer of the bladder,
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Problems 255 Year 0 1 2 3 4 5 6 Inv
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Problems 257 9.44 Four mutually exc
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Case Study 259 ( a) The B/C ratio o
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LEARNING STAGE 2: EPILOGUE Selectin
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Learning Stage 2: Epilogue 263 elem
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LEARNING STAGE 3 Making Better Deci
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T his chapter discusses the differe
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10.2 Debt-Equity Mix and Weighted A
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10.3 Determination of the Cost of D
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10.4 Determination of the Cost of E
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10.5 Effect of Debt-Equity Mix on I
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10.5 Effect of Debt-Equity Mix on I
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10.6 Multiple Attribute Analysis: I
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10.6 Multiple Attribute Analysis: I
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Chapter Summary 283 EXAMPLE 10.9 Th
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Problems 285 credit union loan. Thi
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Problems 287 linear stepper motors.
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Case Study 291 2. The engineer must
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O ne of the most common and importa
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11.1 Basics of a Replacement Study
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11.2 Economic Service Life 297 Larg
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11.2 Economic Service Life 299 Curr
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11.2 Economic Service Life 301 ESL
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11.3 Performing a Replacement Study
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11.3 Performing a Replacement Study
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11.5 Replacement Study over a Speci
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for each year of ownership can be m
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Problems 315 11.15 A piece of equip
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Problems 317 replaced next year or
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Case Study 321 CASE STUDY WILL THE
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I n most of the previous economic c
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12.2 Capital Rationing Using PW Ana
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12.3 Capital Rationing Using PW Ana
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12.4 Capital Budgeting Problem Form
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12.4 Capital Budgeting Problem Form
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12.5 Additional Project Ranking Mea
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Problems 335 other contaminants off
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Problems 337 Project Investment, $
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B reakeven analysis is performed to
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13.1 Breakeven Analysis for a Singl
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13.2 Breakeven Analysis Between Two
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13.2 Breakeven Analysis Between Two
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13.3 Payback Analysis 349 The payba
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13.3 Payback Analysis 351 $3000 per
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13.4 More Breakeven and Payback Ana
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Problems 355 CHAPTER SUMMARY The br
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Problems 357 13.15 For the last 2 y
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Problems 359 tomato and lettuce gre
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Case Study 363 CASE STUDY WATER TRE
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LEARNING STAGE 4 Rounding Out the S
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T his chapter concentrates upon und
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14.2 Present Worth Calculations Adj
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14.3 Future Worth Calculations Adju
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14.4 Capital Recovery Calculations
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Problems 379 PROBLEMS Interest Rate
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Problems 381 14.29 A doctor is on c
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Problems 383 equivalent cost in 3 y
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Case Study 385 CASE STUDY INFLATION
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U p to this point, cost and revenue
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15.1 Understanding How Cost Estimat
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15.3 Cost Indexes 391 TABLE 15-1 To
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15.3 Cost Indexes 393 Solution The
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15.5 Cost-Estimating Relationships:
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15.6 Traditional Indirect Cost Rate
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15.6 Traditional Indirect Cost Rate
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15.7 Activity-Based Costing (ABC) f
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15.8 Making Estimates and Maintaini
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Problems 405 evaluate proposals, di
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Problems 407 15.32 The on-site mana
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Problems 409 ABC Method 15.51 The m
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Case Study 411 drivers for the ABC
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Case Study 413 Information Yucatan
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T he capital investments of a corpo
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16.1 Depreciation Terminology 417 F
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16.3 Declining Balance (DB) and Dou
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16.3 Declining Balance (DB) and Dou
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16.4 Modified Accelerated Cost Reco
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16.4 Modified Accelerated Cost Reco
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16.6 Depletion Methods 427 recovery
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For example, assume a medium-sized
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16A.1 Sum-of-Years-Digits (SYD) and
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16A.2 Switching between Depreciatio
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16A.3 Determination of MACRS Rates
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16A.3 Determination of MACRS Rates
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Problems 439 MARR is 11% per year.
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Problems 441 the sport on the Web o
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Appendix Problems 443 APPENDIX PROB
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T his chapter provides an overview
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17.1 Income Tax Terminology and Bas
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17.2 Calculation of Cash Flow after
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17.3 Effect on Taxes of Different D
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17.4 Depreciation Recapture and Cap
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17.4 Depreciation Recapture and Cap
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17.5 After-Tax Evaluation 457 One p
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17.5 After-Tax Evaluation 459 Sprea
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17.5 After-Tax Evaluation 461 Break
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17.6 After-Tax Replacement Study 46
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17.7 After-Tax Value-Added Analysis
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17.7 After-Tax Value-Added Analysis
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17.8 After-Tax Analysis for Interna
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17.9 Value-Added Tax 471 time is wh
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CFAT calculations. Accordingly, key
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Problems 475 The following informat
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Problems 477 17.37 Freeman Engineer
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Problems 479 (Assume that the asset
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Case Study 483 Case Study Exercises
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T his chapter includes several rela
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18.1 Determining Sensitivity to Par
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18.1 Determining Sensitivity to Par
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18.3 Estimate Variability and the E
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18.4 Expected Value Computations fo
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18.5 Staged Evaluation of Alternati
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18.5 Staged Evaluation of Alternati
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18.6 Real Options in Engineering Ec
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18.6 Real Options in Engineering Ec
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There are many other examples and d
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Problems 505 18.11 Sensitivity to f
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Problems 507 integer. For the accep
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Case Study 511 CASE STUDY SENSITIVI
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Case Study 513 (b) (pessimistic) or
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T his chapter further expands our a
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19.1 Interpretation of Certainty, R
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19.2 Elements Important to Decision
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19.2 Elements Important to Decision
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19.3 Random Samples 523 19.3 Random
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19.3 Random Samples 525 Cumulative
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19.4 Expected Value and Standard De
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19.5 Monte Carlo Sampling and Simul
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Problems 541 19.6 A survey of house
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Case Study 545 TABLE 19-6 Parameter
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548 Appendix A Using Spreadsheets a
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562 Appendix B Basics of Accounting
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564 Appendix B Basics of Accounting
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APPENDIX C CODE OF ETHICS FOR ENGIN
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568 Appendix C Code of Ethics for E
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570 Appendix D Alternate Methods fo
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572 Appendix D Alternate Methods fo
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574 Appendix E Glossary of Concepts
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580 Reference Materials Websites Co
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582 Compound Interest Factor Tables
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PHOTO CREDITS Chapter 1 Opener: Roy
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612 Index Book value (continued) MA
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614 Index Depreciation (continued)
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616 Index Indirect costs (continued
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618 Index Perspective for public se
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620 Index Spreadsheet (continued) p
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