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What's Contemporary about Engineering Economics?
Decisions made during the engineering design phase of a product's development determine the majority (some say 85%) of the costs of manufacturing that product. And, as design and manufacturing processes become more complex, the engineer, increasingly, will be called upon to make decisions that involve money. In the twenty-first century, the competent and successful engineer will need an improved understanding of the principles of science, engineering, and economics, coupled with relevant design experience. This is because, in the new world economy, successful businesses will rely on engineers with this type of expertise more and more.
In the product/service life cycle, economic and design issues are inextricably linked. One of my strongest motivations in writing this text was, therefore, to bring the realities of economics and engineering design into the classroom and to help students integrate these issues when contemplating an engineering problem or making an engineering decision.
Another compelling motivation for me was, once students had mastered fundamental concepts, to introduce the computer as a productivity-enhancing tool for modeling and analyzing engineering decision problems. Spreadsheets are currently the undisputed standard for automating complex engineering economic problems in industry, and they are used extensively in the classroom. At the ends of many chapters, this text introduces the topic of spreadsheets (Microsoft Excel) in sections dedicated to spreadsheet use.
In addition, I have created a World Wide Web site for this edition of Contemporary Engineering Economics. From this site the student can download, at no cost, the software, EzCash. EzCash was developed by me, the author, with a grant from the National Science Foundation, to open visually the economic computing environment to the student's understanding. EzCash is an integrated package that includes the most frequently used methods of economic analysis. EzCash organizes information via graphically-based structures that can be explored independently by students. EzCash runs with either Microsoft Windows 3.1 or with Microsoft Windows 95.
My underlying motivation for writing this book was not only to simply address contemporary needs, but also to address the timeless goal of all educators: To help students learn. Thus, thoroughness, clarity, and accuracy of presentation of essential engineering economics were my aims at every step in the development of the text.
Changes in This Second Edition
We are living in the age of information, within the complex and changing world of a global economy. The practice of engineering economics is therefore dynamic, and new developments as they occur, should be incorporated into a text such as this. Along with my publisher, as a teacher, I am constantly seeking for ways to improve Contemporary Engineering Economics in terms of its clarity and provision of understanding. As a result, several important changes were made to this second edition.
Overview of the Text
Although containing little advanced math and few truly difficult concepts, the introductory engineering economics course is often curiously challenging for sophomores, juniors, and seniors alike. I offer several likely explanations for this difficulty.
Goal of the Text
This text aims not only to build a sound and comprehensive coverage of the concepts of engineering economics, but also to address the basic difficulties experienced by the types of students that I have described above*all of which have their basis in a lack of appreciation of the practical concerns of engineering economics. More specifically, this text has the following major goals:
The text is intended for undergraduate engineering students at the sophomore level or above. The only mathematical background required is elementary calculus. For Chapter 12, a first course in probability or statistics would be helpful, but not necessary, because the treatment of basic topics in this chapter is essentially self-contained.
Content and Approach
Educators generally agree upon the proper content and organization of an engineering economics text. A glance at the table of contents demonstrates that this text addresses the standard embraced by most instructors and that is reflected in competing texts. However, one of my driving motivations in this text was to supersede the standard in terms of the depth of coverage and the care with which difficult concepts were presented. Accordingly, the content and approach of this second edition of Contemporary Engineering Economics was designed to provide the following:
Thorough Development of the Concept of the Time Value of Money
The notion of the time value of money and the interest formulas that model it form the foundation upon which all other topics in engineering economics are built. Because of their great importance, and because many students are being exposed to an analytical approach to money for the first time, interest topics are carefully and thoroughly developed in Chapters 2 and 3.
Thorough Coverage of Major Analysis Methods
The equivalence methods*present worth, annual worth, and future worth*and rate of return analysis are the bedrock of project evaluation and comparison. This text carefully develops these topics in Chapters 4, 5, and 6, where they are paced for maximum student comprehension of the subtleties, strengths, and weaknesses of each method.
Increased Emphasis on Developing After-Tax Cash Flows
For most practicing engineers, estimating and developing project cash flows are the first critical steps they must take in conducting an engineering economic analysis. A particularly important goal of this text is to build confidence in developing after-tax cash flows. Further analysis, comparison of projects, and decision making all depend on intelligently developed project cash flows. This text provides more emphasis on this topic than does any competitive text.
Complete Coverage of Special Topics
A number of special topics are important to a comprehensive understanding of introductory engineering economics. Chapters 10 through 14 cover topics such as (1) replacement analysis, (2) inflation, (3) project risk and uncertainty, (4) capital budgeting, and (5) public sector analysis.
Recognizing that availability of time and priorities vary from course to course, and from instructor to instructor, each one of these chapters is sufficiently self-contained so that it may be skipped or covered out of sequence, as needed.
Addressing Educational Challenges
The features of Contemporary Engineering Economics were selected and shaped to address key educational challenges. It is my observation and that of the publisher*based on many conversations with engineering educators*that, across the engineering curriculum, certain challenges consistently frustrate both instructors and students alike. Low student motivation and enthusiasm, student difficulty in developing problem-solving skills and intuition, challenges to integrate technology without short changing fundamental concepts and traditional methods, and student difficulty in prioritizing and remembering enormous amounts of information are among the key educational challenges that drove the features of this second edition of Contemporary Engineering Economics.
Building Problem-Solving Skills and Confidence
The examples in the text are formatted to maximize their usefulness as guides to problem solving. Further, they are intended to stimulate student curiosity to look beyond the mechanics of problem solving to *what if* issues, alternative solutions, and interpretation of solutions. Each example in the text is formatted as follows:
Capturing the Student's Imagination
Students want to know how the conceptual and theoretical knowledge they are acquiring will be put to use. To stimulate student enthusiasm and imagination, Contemporary Engineering Economics incorporates real-world applications and contexts in a number of ways.
Harnessing the Power of the Computer
The integration of the computer into the course and text is another important features of Contemporary Engineering Economics. As a consequence, students will have greater access to, and familiarity with, various spreadsheet tools, and instructors will have a greater inclination either to treat these topics explicitly in the course or to encourage students to experiment independently.
A concern may be that the computer will undermine true understanding of course concepts. However, this text does not promote the trivial or mindless use of computers as a replacement for genuine understanding of, and skill in, applying traditional solution methods. Rather, it focuses on the computer's productivity-enhancing benefits for complex project cash flow development and analysis. Specifically, Contemporary Engineering Economics includes a robust introduction to computer automation in the form of the Computer Notes sections, which appear at the end of most chapters.
Spreadsheets are introduced via Microsoft Excel examples. In terms of spreadsheet coverage, the emphasis is on demonstrating that the more complex chapter concepts can be much more efficiently resolved by a computer than by traditional long hand methods. In Appendix A, conversion tables are included so that the built-in financial functions of both Lotus and Quattro Pro can be compared to Excel for ease in *translating* examples to other software programs.
Also, EzCash, an interactive analysis tool, is available to students free of charge. Students can download the software by visiting the web site of Contemporary Engineering Economics. The HomePage is described in Appendix B.
The Internet Tool, the Contemporary Engineering Economics web site has been created and will be maintained by the author. This text takes advantage of the Internet, which will become increasingly important as a resource to access a variety of information published in cyberspace. As illustrated in Appendix B, the web site contains avariety of ancillary materials, such as a test bank, supplemental problems, EzCash software, case study materials, and an opportunity for readers to give feedback to the author.
Flexibility of Coverage
For a typical three-credit-hour, one-semester course, the majority of topics in this text can be covered by taking advantage of the depth and breadth in which they are presented. For other arrangements*quarter terms or fewer credit-hours*chapters 1 through 9 present the essential topics, and subsequent chapters present optional coverage. By varying the depth of coverage, and supplementing the reading with case studies, enough materials are provided for a continuing, two-term engineering economics course.
Because the topics of the time value of money and interest relationships are so basic to the overall subject of engineering economics, these are treated in depth in Chapters 2 and 3. For those wishing a briefer coverage of these topics, I suggest covering Chapter 2 in its entirety, and Sections 3.1 and 3.2 of Chapter 3. The remaining topics in Chapter 3 may be omitted entirely or assigned as additional readings.
This book reflects the efforts of a great many individuals who reviewed and contributed to the first edition. First, I would like to thank each of them once again:
Kamran Abedini, California Polytechnic * Pomona; James Alloway, Syracuse University; Mehar Arora, U. Wisconsin * Stout; Joel Arthur, California State University * Chico; Robert Baker, University of Arizona; Robert Barrett, Cooper Union and Pratt Institute; Tom Barta, Iowa State University; Charles Bartholomew, Widener University; Richard Bernhard, North Carolina State University; Bopaya Bidanda, University of Pittsburgh; James Buck, University of Iowa; Philip Cady, The Pennsylvania State University; Tom Carmichal, Southern College of Technology; Jeya Chandra, The Pennsylvania State University; Max C. Deibert, Montana State University; Stuart E. Dreyfus, University of California * Berkeley; W.J. Foley, RPI; Jane Fraser, Ohio State; Bruce Hartsough, University of California * Davis; Carl Hass, University of Texas * Austin; John Held, Kansas State University; T. Allen Henry, University of Alabama; R.C. Hodgson, University of Notre Dame; Philip Johnson, University of Minnesota; Harold Josephs, Lawrence Tech; Henry Kallsen, University of Alabama; W.J. Kennedy, Clemson University; Oh Keytack, University of Toledo; Wayne Knabach, South Dakota State University; Stephen Kreta, California Maritime Academy; John Krogman, University of Wisconsin * Platteville; Dennis Kroll, Bradley University; Michael Kyte, University of Idaho; William Lesso, University of Texas * Austin; Martin Lipinski, Memphis State University; Robert Lundquist, Ohio State University; Richard Lyles, Michigan State University; Abu S. Masud, The Wichita State University; James Milligan, University of Idaho; Richard Minesinger, University of Massachusetts * Lowell; James S. Noble, University of Missouri, Columbia; Wayne Parker, Mississippi State University; Elizabeth Pate-Cornell, Stanford University; Cecil Peterson, GMI; George Prueitt, U.S. Naval Postgraduate School; J.K. Rao, California State University * Long Beach; Susan Richards, GMI; Mark Roberts, Michigan Tech; John Roth, Vanderbilt University; Bill Shaner, Colorado State University; Fred Sheets, California Polytechnic* Pomona; Dean Shup, University of Cincinnati; Milton Smith, Texas Tech; Charles Stavridge, FAMU/FSU; Junius Storry, South Dakota State University; Frank E. Stratton, San Diego State University; George Stukhart, Texas A & M University; Donna Summers, University of Dayton; Joe Tanchoco, Purdue University; Deborah Thurston, University of Illinois * UC; L. Jackson Turaville, Tennessee Technological University; Thomas Ward, University of Louisville; Theo De Winter, Boston University.
In addition, the following individuals reviewed the first edition or the revised manuscript and provided detailed comments and suggestions for improving the second edition:
Kamran Abedini, California State Polytechnic University, Pomona Bopaya Bidanda, University of Pittsburgh Stuart Dreyfus, University of California, Berkeley William J. Foley, Renesselaer Polytechnic Institute Anil K. Goyal, Renesselaer Polytechnic Institute Bruce Hartsough, University of California, Davis Scott Iverson, University of Washington Peter Jackson, Cornell University William J. Kennedy, Clemson University Sue McNeil, Carnegie * Mellon University Gary Moynihan, The University of Alabama Bruce A. Reichert, Kansas State University Susan E. Richards, GMI Engineering & Management Institute Mark C. Roberts, Michigan Technological University Paul L. Schillings, Montana State University David C. Slaughter, University of California, Davis Donna C. S. Summers, University of Dayton
Personally, I would like to thank Barbara Brown, who served as copy editor and editorial coordinator during the preparation of this second edition of Contemporary Engineering Economics. Her writing skills and precise knowledge of the English language were of immense value for helping ensure that the written component of the text is as clear, accurate, and relevant as possible. The Addison Wesley book team, especially, Melanie van Rensburg, Rob Merino, Nancy Smith, and Dan Joranstaad helped greatly with all phases of the revision. Thanks are also due to James Treharne, who worked closely with me at every stage of reviewing the galley proofs, and Venkat Narayanan who helped me in preparing earlier drafts of the manuscript.
Finally, I would like to thank Ed Unger, Head of Industrial & Systems Engineering at Auburn University, who provided me with the resources and the constant encouragement that allowed me to revise this second edition of the book.
Chan S. Park
1. Engineering Economic Decisions.
Role of Engineers in Business.
Large-Scale Engineering Projects.
Types of Engineering Economic Decisions.
Short-Term Operational Economic Decisions.
2. Equivalence and Interest Formulas.
Interest: The Cost of Money.
Development of Interest Formulas.
Unconventional Equivalence Calculations.
3. Extending Equivalence to Real World Transactions.
Nominal and Effective Interest Rates.
Equivalence Calculations When Payment Periods and Compounding.
Equivalence Calculations When Payments Periods Differ from Compounding Periods.
Equivalence Calculations with Continuous Payments.
Changing Interest Rates.
Commercial Loan Transactions.
Investment in Bonds.
4. Present Worth Analysis.
Describing Project Cash Flows.
Initial Project Screening Method.
Present Worth Analysis.
Variations to PW Analysis.
Comparing Mutually Exclusive Projects.
5. Annual Equivalent Worth Analysis.
Annual Equivalent Criterion.
Applying Annual Worth Analysis.
Mutually Exclusive Projects.
6. Rate of Return Analysis.
Rate of Return.
Computational Methods for Determining i.
Internal Rate of Return Criterion.
Mutually Exclusive Alternatives.
Computing IRR for Nonsimple Investments.
Predicting Multiple i's.
Net Investment Test.
External Interest Rate for Mixed Investments.
Calculation of Return on Invested Capital.
Some Factors of Asset Depreciation.
Book Depreciation Methods.
Tax Depreciation Methods.
Additions or Improvements to Depreciable Assets.
8. Income Taxes.
Corporate Income Taxes.
Tax Treatment of Gains or Losses for Depreciable Assets.
Income Tax Rate for Economic Analysis.
9. Developing Project Cash Flows.
Project Proposals and Classifications.
Incremental Cash Flows.
Developing Cash Flow Statements.
Generalized Cash Flow Approach.
Appendix 9A: Lease Versus Buy Decisions.
General Elements of Leases.
Lease-or-Buy Decision by the Lessee.
The Lessor's Point of View.
10. Replacement Decisions.
Comparison Between Defender and Challenger.
Economic Service Life.
Replacement Analysis When Required Service is Long.
11. Inflation and Economic Analysis.
The Meaning and Measure of Inflation.
Equivalence Calculation Under Inflation.
Effects of Inflation on Project Cash Flows.
Rate of Return Analysis Under Inflation.
12. Project Risk and Uncertainty.
Origins of Project Risk.
Methods of Describing Project Risk.
Probability Concepts for Investment Decisions.
Probability Distribution of NPW.
Appendix 12A: Risk Simulation.
Monte Carlo Sampling.
Simulation Output Analysis.
Dependent Random Variables.
13. Capital Budgeting Decisions.
Methods of Financing.
Cost of Capital.
Choice of Minimum Attractive Rate of Return.
14. Economic Analyses in the Public Sector.
The Framework of Benefit-Cost Analysis.
Valuation of Benefits and Costs.
Analysis of Public Projects Based on Cost-Effectiveness.
Appendix A: Interest Factors for Discrete Compounding.
Appendix B: Internet Tool - World Wide Web Site for Contemporary Engineering Economics.
Answers to Self-Test Questions and Selected Problems.
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