Fundamentals of Engineering Economics (e-book) 4th Edition

Resources for Success......Page 3 Fundamentals of Engineering Economics......Page 8 Fundamentals of Engineering Economics......Page 9 Goals of the Text......Page 14 New to This Edition......Page 15 Features of the Book......Page 18 To Student: How to Prepare for the Fundamentals of Engineering (FE) Exam......Page 20 MyLab Engineering......Page 21 Contents......Page 24 Part 1 Understanding Money and Its Management......Page 38 Chapter One Engineering Economic Decisions......Page 39 Uber: The Transportation Service Has Become a Global Brand1......Page 41 1.1.1 How Do We Make Typical Personal Decisions?......Page 45 Evaluation of Financing Alternatives......Page 46 Review of Maria’s Decision-Making Process......Page 49 Getting an Idea: Necessity Is the Mother of Invention......Page 52 Evaluating Design Alternatives......Page 53 Gauging Product Cost and Price......Page 56 What Is the Next Step?......Page 57 1.1.3 What Makes Economic Decisions Different from Other Design Decisions?......Page 58 1.2.1 Making Capital-Expenditure Decisions......Page 59 1.2.2 Large-Scale Engineering Economic Decisions......Page 61 Are Tesla’s Plans for a Gigafactory7 Realistic?......Page 62 How Economical Is Tesla’s Plan?......Page 63 How Much Would It Cost?......Page 64 What Is the Business Risk?......Page 65 1.2.3 Impact of Engineering Projects on Financial Statements......Page 66 1.3 Types of Strategic Engineering Economic Decisions......Page 69 1.3.1 New Products or Product Expansion......Page 70 1.3.2 Equipment and Process Selection......Page 71 1.3.5 Service or Quality Improvement......Page 73 1.4 Fundamental Principles in Engineering Economics......Page 76 Summary......Page 78 Self-Test Questions......Page 79 Problems......Page 81 Chapter Two Time Value of Money......Page 82 Biggest Lottery Jackpots in U.S. History – $1.58 Billion Powerball......Page 84 2.1.1 The Time Value of Money......Page 88 2.1.2 Elements of Transactions Involving Interest......Page 92 Example of an Interest Transaction......Page 93 Cash Flow Diagrams......Page 95 End-of-Period Convention......Page 97 Compound Interest......Page 98 2.2 Economic Equivalence......Page 102 2.2.1 Definition and Simple Calculations......Page 103 Equivalence Calculations: A Simple Example......Page 105 2.2.2 Equivalence Calculations Require a Common Time Basis for Comparison......Page 108 2.3.1 Compound-Amount Factor......Page 111 Interest Tables......Page 112 Factor Notation......Page 113 2.3.2 Present-Worth Factor......Page 118 2.3.3 Solving for Time and Interest Rates......Page 120 2.4 Uneven-Payment Series......Page 127 2.5 Equal-Payment Series......Page 130 2.5.1 Compound-Amount Factor: Find F, Given A, i, and N......Page 131 2.5.2 Sinking-Fund Factor: Find A, Given F, i, and N......Page 138 2.5.3 Capital-Recovery Factor (Annuity Factor): Find A, Given P, i, and N......Page 142 2.5.4 Present-Worth Factor: Find P, Given A, i, and N......Page 148 2.5.5 Present Value of Perpetuities......Page 159 2.6.1 Handling Linear Gradient Series......Page 162 Present-Worth Factor: Linear Gradient: Find P, Given G, N, and i......Page 163 Linear Gradient Series as Composite Series......Page 165 2.6.2 Handling Geometric Gradient Series......Page 175 Present-Worth Factor: Find P, Given Ai, g, i, and N......Page 176 2.7 More on Equivalence Calculations......Page 182 Summary......Page 191 Self-Test Questions......Page 195 Problems......Page 207 Chapter Three Understanding Money Management......Page 229 Refinance Your Student Loans—More Options and Better Fit......Page 231 3.1.1 Nominal Interest Rates......Page 234 3.1.2 Effective Annual Interest Rates......Page 235 3.2.1 Discrete Compounding......Page 244 3.2.2 Continuous Compounding......Page 247 3.3.1 Compounding Period Equal to Payment Period......Page 250 3.3.2 Compounding Occurs at a Different Rate than That at Which Payments Are Made......Page 254 3.4.1 Borrowing with Credit Cards......Page 260 3.4.2 Commercial Loans—Calculating Principal and Interest Payments......Page 263 3.4.3 Comparing Different Financing Options......Page 271 Which Interest Rate Do We Use in Comparing Different Financing Options?......Page 272 Summary......Page 278 Self-Test Questions......Page 281 Market Interest Rates (Nominal versus Effective Interest Rates)......Page 288 Calculating an Effective Interest Rate Based on a Payment Period......Page 289 Equivalence Calculations Using Effective Interest Rates......Page 290 Borrowing with Credit Cards......Page 296 Commercial Loans......Page 299 Comparing Different Financing Options......Page 304 Short Case Studies with Excel......Page 306 Chapter Four Equivalence Calculations under Inflation......Page 310 How Much Will It Cost to Buy Baseball Tickets in 2018?......Page 312 4.1.1 Consumer Price Index......Page 315 4.1.2 Producer Price Index......Page 318 4.1.3 Average Inflation Rate......Page 323 4.1.4 General Inflation Rate (f) versus Specific Inflation Rate (fj)......Page 327 4.2 Actual Versus Constant Dollars......Page 332 4.2.1 Conversion from Constant to Actual Dollars......Page 333 4.2.2 Conversion from Actual to Constant Dollars......Page 335 4.3.1 Market and Inflation-Free Interest Rates......Page 343 4.3.3 Actual-Dollar Analysis......Page 345 4.3.4 Mixed-Dollar Analysis......Page 348 Summary......Page 355 Self-Test Questions......Page 358 Problems......Page 363 Part 2 Evaluating Business and Engineering Assets......Page 374 “Coolness Factor” Draws Developers to East Austin, Texas1......Page 375 5.1 Loan versus Project Cash Flows......Page 380 5.2 Initial Project Screening Methods......Page 383 5.2.1 Benefits and Flaws of Payback Screening......Page 387 5.2.2 Discounted-Payback Period......Page 389 5.3.1 Net-Present-Worth Criterion......Page 391 5.3.2 Guidelines for Selecting a MARR......Page 399 Investment-Pool Concept......Page 401 Borrowed-Funds Concept......Page 404 5.3.4 Net Future Worth and Project Balance Diagram......Page 407 Perpetual Service Life......Page 410 5.4 Methods to Compare Mutually Exclusive Alternatives......Page 413 5.4.1 Doing Nothing Is a Decision Option......Page 414 5.4.2 Service Projects versus Revenue Projects......Page 415 Revenue Projects......Page 416 5.4.3 Analysis Period Equals Project Lives......Page 417 Case I: Project’s Life Is Longer than Analysis Period......Page 421 Case II: Project’s Life Is Shorter than Analysis Period......Page 426 Summary......Page 431 Self-Test Questions......Page 433 Problems......Page 443 Chapter Six Annual-Equivalence Analysis......Page 482 Owning and Operating a Dump Truck......Page 484 6.1 Annual-Equivalent Worth Criterion......Page 487 6.1.1 Benefits of AE Analysis......Page 492 Capital (Ownership) Costs......Page 493 Equivalent Annual Operating Costs......Page 495 6.2.1 Unit-Profit or Unit-Cost Calculation......Page 499 6.2.2 Make-or-Buy Decision......Page 504 6.3.1 Analysis Period Equals Project Lives......Page 508 6.3.2 Analysis Period Differs from Project Lives......Page 511 Summary......Page 515 Self-Test Questions......Page 517 Problems......Page 525 Chapter Seven Rate-of-Return Analysis......Page 556 Is College Worth It?1......Page 557 7.1.1 Return on Investment......Page 563 7.1.2 Return on Invested Capital......Page 566 7.2.1 Simple versus Nonsimple Investments......Page 569 Direct-Solution Method......Page 572 Trial-and-Error Method......Page 575 Rate-of-Return Calculation with Excel......Page 579 7.3.1 Relationship to the PW Analysis......Page 584 7.3.2 Decision Rule for Simple Investments......Page 585 7.3.3 Decision Rule for Nonsimple Investments......Page 589 Modified Internal Rate of Return......Page 590 Return on Invested Capital......Page 597 7.4.1 Flaws in Project Ranking by IRR......Page 598 7.4.2 Incremental-Investment Analysis......Page 599 7.4.3 Handling Unequal Service Lives......Page 610 Summary......Page 613 Self-Test Questions......Page 615 Problems......Page 626 Chapter 7A Resolution of Multiple Rates of Return......Page 657 7A-1 Net-Investment Test......Page 658 7A-2 The Need for an External Interest Rate......Page 664 7A-3 Calculation of Return on Invested Capital for Mixed Investments......Page 666 Chapter Eight Benefit–Cost Analysis......Page 675 Robot Cargo Handling at Port1......Page 677 8.1 Evaluation of Public Projects......Page 681 8.1.2 Users’ Benefits......Page 682 8.1.3 Sponsor’s Costs......Page 683 8.1.4 Social Discount Rate......Page 684 8.2.1 Definition of Benefit–Cost Ratio......Page 688 8.2.2 Incremental B/C-Ratio Analysis......Page 692 8.3.1 Definition of Profitability Index......Page 701 8.3.2 Incremental PI Ratio Analysis for Mutually Exclusive Alternatives......Page 706 8.4.1 Define the Base Case and the Proposed Alternatives......Page 709 8.4.2 Highway User Benefits......Page 710 8.4.3 Sponsors’ Costs......Page 711 8.4.4 Illustrating Case Example......Page 715 Summary......Page 721 Self-Test Questions......Page 723 Problems......Page 730 Part 3 Development of Project Cash Flows......Page 746 Alcoa Invests $60 Million in 3D Printing Technology1......Page 747 9.1.1 Depreciable Property......Page 753 9.1.2 Cost Basis......Page 755 9.1.3 Useful Life and Salvage Value......Page 756 9.1.4 Depreciation Methods: Book and Tax Depreciation......Page 759 9.2.1 Straight-Line Method......Page 763 9.2.2 Declining-Balance Method......Page 766 Depreciation Rate......Page 767 Switching Policy......Page 770 9.2.3 Units-of-Production Method......Page 773 9.3 Tax Depreciation Methods......Page 775 9.3.1 MACRS Recovery Periods......Page 777 9.3.2 MACRS Depreciation: Personal Property......Page 779 9.3.3 MACRS Depreciation: Real Property......Page 785 9.4.1 How to Determine “Accounting Profit”......Page 789 Calculation of Net Income......Page 790 9.4.2 U.S. Corporate Income Tax System......Page 792 Corporate Tax Rates......Page 793 Cost Recovery Full Expensing for Certain Business Assets – Bonus Depreciation......Page 794 Book Value Calculation......Page 800 Taxable Gains (or Losses)......Page 801 Summary......Page 806 Self-Test Questions......Page 809 Depreciation Concept......Page 815 Cost Basis......Page 816 Book Depreciation Methods......Page 817 Units-of-Production Method......Page 821 Tax Depreciation......Page 824 Gains or Losses......Page 829 Short Case Studies with Excel......Page 832 Chapter Ten Project Cash-Flow Analysis......Page 836 California Valley Solar Ranch project1......Page 838 Manufacturing Costs......Page 841 10.1.2 Classifying Costs for Financial Statements......Page 845 Period Costs......Page 846 Cost Flows in a Manufacturing Company......Page 847 10.1.3 Classifying Costs for Predicting Cost Behavior......Page 849 Fixed and Variable Costs......Page 850 Break-Even Sales Volume......Page 853 10.2 Why Do We Need to Use Cash Flows in Economic Analysis?......Page 858 10.3 Income-Tax Rate to Be Used in Project Evaluation......Page 860 10.4 Incremental Cash Flows from Undertaking a Project......Page 865 10.4.1 Operating Activities......Page 866 10.4.2 Investing Activities......Page 872 10.4.3 Financing Activities......Page 873 10.5.1 When Projects Require Only Operating and Investing Activities......Page 874 10.5.2 When Projects Are Financed with Borrowed Funds......Page 879 10.6.1 Depreciation Allowance under Inflation......Page 882 10.6.2 Handling Multiple Inflation Rates......Page 888 Summary......Page 891 Self-Test Questions......Page 893 Problems......Page 900 Chapter Eleven Handling Project Uncertainty......Page 939 Eagle Mountain Pumped Storage Development Project1......Page 940 11.1 Origins of Project Risk......Page 944 11.2.1 Sensitivity Analysis......Page 946 11.2.2 Sensitivity Analysis for Mutually Exclusive Alternatives......Page 952 11.2.3 Break-Even Analysis......Page 956 11.2.4 Scenario Analysis......Page 957 11.3.1 Including Risk in Investment Evaluation......Page 962 11.3.2 Aggregating Risk over Time......Page 965 11.3.3 Estimating Risky Cash Flows......Page 972 11.4.1 Determining the Company Cost of Capital......Page 977 Cost of Equity Capital......Page 978 Cost of Debt Capital......Page 982 Calculating the Company Cost of Capital......Page 985 11.4.2 Project Cost of Capital: Risk-Adjusted Discount Rate Approach......Page 988 11.5 Value at Risk......Page 992 11.5.1 Calculation of VaR......Page 993 11.5.2 Conversion of VaR Parameters......Page 997 Summary......Page 1003 Self-Test Questions......Page 1005 Problems......Page 1011 Part 4 Special Topics in Engineering Economics......Page 1042 Chapter Twelve Replacement Decisions......Page 1043 As Milorganite factory ages, repair costs mount1......Page 1045 12.1.1 Basic Concepts and Terminology......Page 1048 Current Market Value......Page 1049 Sunk Costs......Page 1051 Operating Costs......Page 1052 Cash-Flow Approach......Page 1053 Opportunity-Cost Approach......Page 1055 12.2 Economic Service Life......Page 1058 Planning Horizon (Study Period)......Page 1066 Relevant Cash-Flow Information......Page 1067 12.3.2 Handling Unequal Service Life Problems in Replacement Analysis......Page 1068 12.3.3 Replacement Strategies under the Infinite Planning Horizon......Page 1071 12.4 Replacement Analysis with Tax Considerations......Page 1079 Summary......Page 1084 Self-Test Questions......Page 1086 Problems......Page 1091 Chapter Thirteen Understanding Financial Statements......Page 1115 Broadcom Agrees to Acquire Brocade Communications for $5.9 billion1......Page 1116 13.1 Accounting: The Basis of Decision Making......Page 1121 13.2 Financial Status for Businesses......Page 1124 13.2.1 The Balance Sheet......Page 1128 Assets......Page 1131 Liabilities and Stockholders’ Equity (Owners’ Net Worth)......Page 1133 What to Read from J&M’s Balance Sheet......Page 1135 13.2.2 The Income Statement......Page 1136 Net Income......Page 1138 Dividends and Retained Earnings......Page 1139 What to Read from J&M’s Income Statement......Page 1140 Sources and Uses of Cash......Page 1142 Reporting Format......Page 1147 What to Read from J&M’s Cash Flow Statement......Page 1149 13.3 Using Ratios to Make Business Decisions......Page 1154 13.3.1 Debt Management Analysis......Page 1157 Debt Ratio......Page 1158 13.3.2 Liquidity Analysis......Page 1160 Quick (Acid Test) Ratio......Page 1161 13.3.3 Asset Management Analysis......Page 1162 Days-Sales-Outstanding (Accounts Receivable Turnover) Ratio......Page 1163 13.3.4 Profitability Analysis......Page 1164 Return on Total Assets......Page 1165 Return on Common Equity......Page 1166 13.3.5 Market-Value Analysis......Page 1168 Book Value per Share......Page 1169 13.3.6 Limitations of Financial Ratios in Business Decisions......Page 1174 13.3.7 Where We Get the Most Up-to-Date Financial Information......Page 1175 13.4.1 Trade-Off between Risk and Reward......Page 1176 13.4.2 Broader Diversification Reduces Risk......Page 1177 13.4.3 Broader Diversification Increases Expected Return......Page 1181 Summary......Page 1185 Self-Test Questions......Page 1187 Problems......Page 1194 Chapter 1......Page 1211 Chapter 2......Page 1212 Chapter 3......Page 1216 Chapter 4......Page 1219 Chapter 5......Page 1221 Chapter 6......Page 1229 Chapter 7......Page 1233 Chapter 8......Page 1237 Chapter 9......Page 1242 Chapter 10......Page 1248 Chapter 11......Page 1267 Chapter 12......Page 1271 Chapter 13......Page 1277 Appendix B Interest Factors for Discrete Compounding......Page 1282 Appendix C How to Read the Cumulative Standardized Normal Distribution Function......Page 1340 Part A: The Cumulative Standardized Normal Distribution Function......Page 1342 Part B: The Cumulative Standardized Normal Distribution Function......Page 1344 Appendix D Summary of Essential Interest Formulas, Decision Rules, and Excel Functions......Page 1346 Index......Page 1352 A......Page 1353 B......Page 1356 C......Page 1358 D......Page 1364 E......Page 1368 F......Page 1373 G......Page 1375 H......Page 1376 I......Page 1377 K......Page 1381 L......Page 1382 M......Page 1383 N......Page 1386 O......Page 1388 P......Page 1389 Q......Page 1393 R......Page 1394 S......Page 1398 T......Page 1401 U......Page 1402 V......Page 1403 W......Page 1404 Y......Page 1405