Fundamentals of Engineering Economics

Fundamentals of Engineering Economics : International Edition

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For Engineering Economics courses, found in departments of Industrial, Civil, Mechanical, and Electrical Engineering. From the author of the best-selling Contemporary Engineering Economics text, Fundamentals of Engineering Economics offers a concise, but in-depth coverage of all fundamental topics of Engineering Economics.show more

Product details

  • Paperback | 629 pages
  • 203 x 230 x 23mm | 1,034g
  • Pearson Education (US)
  • Pearson
  • United States
  • English
  • 2nd edition
  • 0131354574
  • 9780131354579

About Chan S. Park

Chan S. Park is currently a Professor of Industrial and Systems Engineering at Auburn University. He received the M.S. and Ph.D. degrees in industrial engineering from Purdue University and the Georgia Institute of Technology, respectively. Over his 25-year academic career, he has been actively involved in a variety of areas of research, teaching, and professional consulting. His work has been recognized internationally in the fields of engineering economics, strategic and economic decisions within service sectors, financial engineering (real options valuation), risk analysis, and capital budgeting. He also authored or coauthored leading textbooks on the related subjects, including Contemporary Engineering Economics (Prentice Hall), and Advanced Engineering Economics (John Wiley & Sons). He is the Editor-in-Chief of the journal The Engineering Economist and is a licensed Professional Engineer.show more

Table of contents

PART 1 UNDERSTANDING MONEY AND ITSMANAGEMENT 1Chapter 1 Engineering Economic Decisions 21.1 The Rational-Decision-Making Process 41.1.1 How Do We Make Typical Personal Decisions? 41.1.2 How Do We Approach an Engineering Design Problem? 71.1.3 What Makes Economic Decisions Different from Other DesignDecisions? 101.2 The Engineer's Role in Business 101.2.1 Making Capital-Expenditure Decisions 101.2.2 Large-Scale Engineering Economic Decisions 111.2.3 Impact of Engineering Projects on Financial Statements 131.3 Types of Strategic Engineering Economic Decisions 141.4 Fundamental Principles in Engineering Economics 18Summary 19 Chapter 2 Time Value of Money 202.1 Interest: The Cost of Money 222.1.1 The Time Value of Money 222.1.2 Elements of Transactions Involving Interest 242.1.3 Methods of Calculating Interest 262.2 Economic Equivalence 282.2.1 Definition and Simple Calculations 282.2.2 Equivalence Calculations Require a Common TimeBasis for Comparison 312.3 Interest Formulas for Single Cash Flows 332.3.1 Compound-Amount Factor 332.3.2 Present-Worth Factor 352.3.3 Solving for Time and Interest Rates 382.4 Uneven-Payment Series 402.5 Equal-Payment Series 422.5.1 Compound-Amount Factor: Find F, Given A, i, and N 432.5.2 Sinking-Fund Factor: Find A, Given F, i, and N 472.5.3 Capital-Recovery Factor (Annuity Factor): Find A, Given P, i and N 492.5.4 Present-Worth Factor: Find P, Given A, i, and N 522.5.5 Present Value of Perpetuities 572.6 Dealing with Gradient Series 572.6.1 Handling Linear Gradient Series 582.6.2 Handling Geometric Gradient Series 642.7 Composite Cash Flows 68Summary 72Problems 73 Chapter 3 Understanding Money Management 863.1 Market Interest Rates 873.1.1 Nominal Interest Rates 883.1.2 Annual Effective Yields 883.2 Calculating Effective Interest Rates Based on Payment Periods 913.2.1 Discrete Compounding 913.2.2 Continuous Compounding 923.3 Equivalence Calculations with Effective Interest Rates 943.3.1 Compounding Period Equal to Payment Period 943.3.2 Compounding Occurs at a Different Rate than That at Which PaymentsAre Made 973.4 Debt Management 1003.4.1 Borrowing with Credit Cards 1003.4.2 Commercial Loans-Calculating Principal and Interest Payments 1023.4.3 Comparing Different Financing Options 106Summary 111Problems 111 Chapter 4 Equivalence Calculations under Inflation 1264.1 Measure of Inflation 1274.1.1 Consumer Price Index 1284.1.2 Producer Price Index 1294.1.3 Average Inflation Rate (f) 1304.1.4 General Inflation Rate (f) versus Specific Inflation (fj) 1324.2 Actual versus Constant Dollars 1344.2.1 Conversion from Constant to Actual Dollars 1354.2.2 Conversion from Actual to Constant Dollars 1364.3 Equivalence Calculations under Inflation 1404.3.1 Market and Inflation-Free Interest Rates 141 4.3.2 Constant-Dollar Analysis 1414.3.3 Actual-Dollar Analysis 1414.3.4 Mixed-Dollar Analysis 146Summary 149Problems 150PART 2 EVALUATIING BUSIINESS AND ENGIINEERIINGASSETS 159 Chapter 5 Present-Worth Analysis 1605.1 Loan versus Project Cash Flows 1625.2 Initial Project Screening Methods 1635.2.1 Benefits and Flaws of Payback Screening 1665.2.2 Discounted-Payback Period 1675.3 Present-Worth Analysis 1685.3.1 Net-Present-Worth Criterion 1685.3.2 Guidelines for Selecting a MARR 1725.3.3 Meaning of Net Present Worth 1755.3.4 Net Future Worth and Project Balance Diagram 1775.3.5 Capitalized-Equivalent Method 1805.4 Methods to Compare Mutually Exclusive Alternatives 1825.4.1 Doing Nothing Is a Decision Option 1825.4.2 Service Projects versus Revenue Projects 1835.4.3 Analysis Period Equals Project Lives 1845.4.4 Analysis Period Differs from Project Lives 186Summary 192Problems 192 Chapter 6 Annual Equivalence Analysis 2086.1 Annual Equivalent Worth Criterion 2106.1.1 Benefits of AE Analysis 2146.1.2 Capital (Ownership) Costs versus Operating Costs 2146.2 Applying Annual-Worth Analysis 2186.2.1 Unit-Profit or Unit-Cost Calculation 2186.2.2 Make-or-Buy Decision 2216.3 Comparing Mutually Exclusive Projects 2246.3.1 Analysis Period Equals Project Lives 2246.3.2 Analysis Period Differs from Project Lives 229Summary 232Problems 232 Chapter 7 Rate-of-Return Analysis 2487.1 Rate of Return 2507.1.1 Return on Investment 2507.1.2 Return on Invested Capital 2517.2 Methods for Finding Rate of Return 2527.2.1 Simple versus Nonsimple Investments 2527.2.2 Computational Methods 2547.3 Internal-Rate-of-Return Criterion 2607.3.1 Relationship to the PW Analysis 2607.3.2 Decision Rule for Simple Investments 2617.3.3 Decision Rule for Nonsimple Investments 2657.4 Incremental Analysis for Comparing Mutually Exclusive Alternatives 2677.4.1 Flaws in Project Ranking by IRR 2677.4.2 Incremental-Investment Analysis 2687.4.3 Handling Unequal Service Lives 274Summary 276Problems 277Chapter 7A Resolution of Multiple Rates of Return 2927A-1 Net-Investment Test 2927A-2 The Need for an External Interest Rate 2947A-3 Calculation of Return on Invested Capital for Mixed Investments 295PART 3 DEVELOPMENT OF PROJECT CASH FLOWS 301 Chapter 8 Accounting for Depreciation and Income Taxes 3028.1 Accounting Depreciation 3048.1.1 Depreciable Property 3048.1.2 Cost Basis 3048.1.3 Useful Life and Salvage Value 3058.1.4 Depreciation Methods: Book and Tax Depreciation 307 8.2 Book Depreciation Methods 3078.2.1 Straight-Line Method 3088.2.2 Declining-Balance Method 3098.2.3 Units-of-Production Method 3148.3 Tax Depreciation Methods 3158.3.1 MACRS Recovery Periods 3168.3.2 MACRS Depreciation: Personal Property 3178.3.3 MACRS Depreciation: Real Property 3218.4 How to Determine "Accounting Profit" 3238.4.1 Treatment of Depreciation Expenses 3238.4.2 Calculation of Net Income 3238.4.3 Operating Cash Flow versus Net Income 3268.5 Corporate Taxes 3298.5.1 Income Taxes on Operating Income 3298.5.2 Gain Taxes on Asset Disposals 331Summary 334Problems 336 Chapter 9 Project Cash-Flow Analysis 3469.1 Understanding Project Cost Elements 3489.1.1 Classifying Costs for Manufacturing Environments 3489.1.2 Classifying Costs for Financial Statements 3499.1.3 Classifying Costs for Predicting Cost Behavior 3519.2 Why Do We Need to Use Cash Flows in Economic Analysis? 3559.3 Income-Tax Rate to Be Used in Project Evaluation 3569.4 Incremental Cash Flows from Undertaking a Project 3589.4.1 Operating Activities 3589.4.2 Investing Activities 3589.4.3 Financing Activities 3599.5 Developing Project Cash Flow Statements 3599.5.1 When Projects Require Only Operating and Investing Activities 3609.5.2 When Projects Are Financed with Borrowed Funds 3649.6 Effects of Inflation on Project Cash Flows 3669.6.1 Depreciation Allowance under Inflation 3669.6.2 Handling Multiple Inflation Rates 3709.7 Discount Rate to Be Used in After-Tax Economic Analysis: Cost of Capital 3719.7.1 Cost of Equity 3729.7.2 Cost of Debt 3749.7.3 Calculating the Cost of Capital 3759.7.4 Choice of a MARR in After-Tax Cash Flow Analysis 377Summary 378Problems 379 Chapter 10 Handling Project Uncertainty 39810.1 Origins of Project Risk 40010.2 Methods of Describing Project Risk 40110.2.1 Sensitivity Analysis 40110.2.2 Sensitivity Analysis for Mutually Exclusive Alternatives 40510.2.3 Break-Even Analysis 40810.2.4 Scenario Analysis 41010.3 Including Risk in Investment Evaluation 41210.3.1 Probabilistic Approach 41310.3.2 Risk-Adjusted Discount Rate Approach 42210.4 Investment Strategies under Uncertainty 42310.4.1 Trade-Off between Risk and Reward 42310.4.2 Broader Diversification Reduces Risk 42410.4.3 Broader Diversification Increases Expected Return 424Summary 427Problems 428PART 4 SPECIIAL TOPIICS IIN ENGIINEERIINGECONOMIICS 443 Chapter 11 Replacement Decisions 44411.1 Replacement-Analysis Fundamentals 44611.1.1 Basic Concepts and Terminology 44611.1.2 Approaches for Comparing Defender and Challenger 44911.2 Economic Service Life 45311.3 Replacement Analysis when the Required Service Period Is Long 45811.3.1 Required Assumptions and Decision Frameworks 45811.3.2 Handling Unequal Service Life Problems in Replacement Analysis 45911.3.2 Replacement Strategies under the Infinite Planning Horizon 46011.4 Replacement Analysis with Tax Considerations 466Summary 473Problems 474 Chapter 12 Benefit-Cost Analysis 48812.1 Evaluation of Public Projects 49012.1.1 Valuation of Benefits and Costs 49112.1.2 Users' Benefits 49112.1.3 Sponsor's Costs 49212.1.4 Social Discount Rate 49212.2 Benefit-Cost Analysis 49412.2.1 Definition of Benefit-Cost Ratio 49412.2.2 Incremental B/C-Ratio Analysis 49612.3 Case Study-Highway Benefit-Cost Analysis by the State of Minnesota 50012.3.1 Define the Base Case and the Proposed Alternatives 50112.3.2 Highway User Benefits 50112.3.3 Sponsors' Costs 50212.3.4 Illustrating Case Example 502Summary 508Problems 509 Chapter 13 Understanding Financial Statements 51613.1 Accounting: The Basis of Decision Making 51813.2 Financial Status for Businesses 51913.2.1 The Balance Sheet 52113.2.2 The Income Statement 52513.2.3 The Cash-Flow Statement 52813.3 Using Ratios to Make Business Decisions 53213.3.1 Debt Management Analysis 53313.3.2 Liquidity Analysis 53413.3.3 Asset Management Analysis 53513.3.4 Profitability Analysis 53713.3.5 Market-Value Analysis 53813.3.6 Limitations of Financial Ratios in Business Decisions 54013.3.7 Where We Get the Most Up-to-Date Financial Information 540Summary 540Problemsshow more

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