FUNDAMENTALS

OF ENGINEERING

ECONOMIC ANALYSIS

First Edition

JOHN A. WHITE
University of Arkansas

KELLIE S. GRASMAN
Missouri University of Science and Technology

KENNETH E. CASE
Oklahoma State University

KIM LaSCOLA NEEDY

University of Arkansas

DAVID B. PRATT
Oklahoma State University

WILEY
 CONTENTS

CHAPTER 1
An Overview of Engineering Economic Analysis 3

Leaming Objectives 4
Introduction 4
1-1 TimeValue of Money 4
1-2 Engineering Economy Principies 7
1-3 Economic Justification of Capital Investments 10
1.3.1 SEAT Step 1 of 7: Identify the Investment Alternatives 11
1.3.2 SEAT Step 2 of 7: Defining the Planning Horizon 11
1.3.3 SEAT Step 3 of 7: Specifying the Minimum Attractive Rate
of Return 13
1.3.4 SEAT Step 4 of 7: Estimate the Cash Flows 14
1.3.5 SEAT Step 5 of 7: Comparing Alternatives 14
1.3.6 SEAT Step 6 of 7: Performing Supplementary Analyses 14
1.3.7 SEAT Step 7 of 7: Select the Preferred Investment 15
Summary 15
Key Terms 16
FE-Like Problems 17
Problems 18

CHAPTER 2
TimeValue of Money Calculations 23

Leaming Objectives 23
Introduction 23
2-1 Cash Flow Diagrams 24
2-2 Single Cash Flows 26
2.2.1 Future Worth Calculations (F\P) 26
2.2.2 Present Worth Calculations (P|F) 33
2-3 Multiple Cash Flows 35
2.3.1 Irregulär Cash Flows 35
2.3.2 Uniform Series of Cash Flows 39
2.3.3 Gradient Series of Cash Flows 46
2.3.4 Geometrie Series of Cash Flows 51

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2-4 Compounding Frequency 55

2.4.1 Period Interest Rate Approach 56
2.4.2 Effective Annual Interest Rate 58
2.4.3 When Compounding and Cash Flow Frequencies Differ 61
Summary 62
Key Terms 66
FE-Like Problems 67
Problems 69

CHAPTER 3
Equivalence, Loans, and Bonds 93

Learning Objectives 93
Introduction 93
3-1 Equivalence 94
3-2 Interest Payments and Principal Payments 100
3.2.1 Immediate Payment Loans 101
3.2.2 Deferred Payment Loans 104
3-3 Bond Investments 106
3-4 Variable Interest Rates 110
3-5 Annual Percentage Rate 111
Summary 113
Key Terms 114
FE-Like Problems 114
Problems 116

CHAPTER 4
Present Worth 125

Learning Objectives 125

Introduction 126
4-1 Comparing Alternatives 126
4.1.1 Methods of Comparing Economic Worth 127
4.1.2 Ranking and Incremental Methods of Economic Worth 127
4.1.3 Equivalence of Methods 128
4.1.4 Before-Tax versus After-Tax Analysis 128
4.1.5 Equal versus Unequal Lives 129
4.1.6 A Single Alternative 129
4-2 Present Worth Calculations 130
4.2.1 Present Worth ofa Single Alternative 130
4.2.2 Present Worth of Multiple Alternatives 132
4.2.3 Present Worth of One-Shot Investments 135
 Contents v

4-3 Benefit-Cost Analysis 137

4.3.1 Benefit-Cost Calculations for a Single Alternative 137
4.3.2 Benefit-Cost Calculations for Multiple Alternatives 139
4-4 Discounted Payback Period 144
4.4.1 Discounted Payback Period for a Single
Alternative 144
4.4.2 Discounted Payback Period for Multiple
Alternatives 149
4-5 Capitalized Worth 152
4.5.1 Capitalized Worth for a Single Alternative 153
4.5.2 Capitalized Worth for Multiple Alternatives 156
Summary 157
Key Terms 159
FE-Like Problems 159
Problems 162

CHAPTER 5
Annual Worth and Future Worth 179

Leaming Objectives 179

Introduction 179
5-1 Annual Worth 180
5.1.1 Annual Worth of a Single Alternative 180
5.1.2 Annual Worth of Multiple Alternatives 183
5-2 Future Worth 185
5.2.1 Future Worth of a Single Alternative 185
5.2.2 Future Worth of a Multiple Alternatives 189
5.2.3 Portfolio Analysis 192
Summary 194
Key Terms 194
FE-Like Problems 195
Problems 196

CHAPTER 6
Rate of Retum 213

Leaming Objectives 213

Introduction 214
6-1 Internal Rate of Retum Calculations 215
6.1.1 Single Alternative 215
6.1.2 Multiple Roots 217
6.1.3 Multiple Alternatives 220
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6-2 External Rate of Return Calculations 224

6.2.1 Single Alternative 224
6.2.2 Multiple Alternatives 228
Summary 231
Key Terms 232
FE-Like Problems 232
Problems 235

CHAPTER 7
Replacement Analysis 257

Learning Objectives 258

Introduction 258
7-1 Fundamentals of Replacement Analysis 258
7-2 Cash Flow and Opportunity Cost Approaches 261
7-3 Optimum Replacement Interval 264
Summary 268
Key Terms 269
FE-Like Problems 269
Problems 271

CHAPTER 8
Depreciation 285

Learning Objectives 286

Introduction 286
8-1 The Role of Depreciation in Economic Analysis 287
8-2 Language of Depreciation 288
8-3 Straight-Line and Declining Balance Depreciation
Methods 289
8.3.1 Straight-Line Depreciation (SLN) 289
8.3.2 Declining Balance and Double Declining Balance
Depreciation (DB and DDB) 291
8.3.3 Switching from DDB to SLN with the Excel® VDB
Function 294
8-4 Modified Accelerated Cost Recovery System (MACRS) 296
8.4.1 MACRS-GDS 297
8.4.2 MACRS-ADS 301
Summary 301
Key Terms 303
FE-Like Problems 303
Problems 305
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CHAPTER 9
IncomeTaxes 317

Leaming Objectives 317

Introduction 317
9-1 Corporate Income Tax Rates 319
9-2 After-Tax Analysis Using Retained Eamings (No Borrowing) 322
9.2.1 Single Alternative 323
9.2.2 Multiple Alternatives 328
9-3 After-Tax Analysis Using Borrowed Capital 330
9-4 Leasing versus Purchasing Equipment 336
Summary 338
Key Terms 340
FE-Like Problems 340
Problems 342

CHAPTER 10
Inflation 359

Leaming Objectives 359

Introduction 360
10-1 The Meaning and Measure of Inflation 360
10-2 Before-Tax Analysis 364
10-3 After-Tax Analysis 367
10-4 After-Tax Analysis with Borrowed Capital 369
Summary 373
Key Terms 375
FE-Like Problems 375
Problems 377

CHAPTER 11
Break-Even, Sensitivity, and Risk Analysis 391

Leaming Objectives 391

Introduction 392
11-1 Break-Even Analysis 393
11-2 Sensitivity Analysis 398
11-3 Risk Analysis 405
11.3.1 Analytical Solutions 407
11.3.2 Simulation Solutions 412
Summary 418
Key Terms 419
FE-Like Problems 419
Problems 421