Blank L., Tarquin A. Engineering Economy (McGraw-Hill Series in Industrial Engineering and Management)

xviii

PRE

F

AC

E

OPTIONS FOR PROGRESSION THROUGH

CHAPTERS

Topi

cs

may be introduced at

th

e point indicated

or

any point

th

erea

ft

er

(Alternative entry points are indicated by

-+

- - - )

Nume

ri

ca

l prog

re

ssion

through chapters

Cost

Estimation

Taxes and Additional Sensitivity

Infla

ti

on Depreciation Analysis a

nd

Ri

sk

I. Foundations

2. Factors

3.

More

fa

ctors

4. Effec

ti

ve i

5. Present Worth

6.

Annual Worth

7. Rate

of

Return

S.

Mor

e ROR

9. Benefit/Cost

10. M

ak

in

g Cho

ic

es

I

I.

Re

pl

acement

~

......

--

...

......

-----

12. Capital Budgeting

1

3.

Breakeven

~

....

--

--------

---------

,.

----

-------

--------

----------,

11

4. Infla

ti

on I

115

. Estimation I

11

6.

Depreciation I

1

17

. After-Tax

I

li

S. Sens

iti

vity Analysis I

11

9.

Ri

sk and Simula

ti

on I

APPRECIATION TO CONTRIBUTORS

Throughout this and previous editions, many individuals at universIties, in

industry, and in private practice have helped in the development

of

this text.

We

thank all

of

them for their contributions and the privilege to work with the

m.

Some

of

these individuals are

Roza Abubaker, American University

of

Sharjah

Robyn Adams,

12th

Man Foundation, Texas A&M University

Jeffrey Adler, MindBox, Inc., and formerly

of

Rensselaer

Polytechnic Institute

Richard

H.

Bernhard, North Carolina State University

Stanley

F.

Bullington, Mississippi State University

Peter Chan, CSA Engineering, Inc.

Ronald

T.

Cutwright, Florida A&M University

John

F.

Dacquisto, Gonzaga University

John Yancey Easley, Mississippi State University

Nader D. Ebrahimi, University

of

New Mexico

Charles Edmonson, University

of

Dayton, Ohio

Sebastian Fixson, University

of

Michigan

Louis Gennaro, Rochester Institute

of

Technology

Joseph Hartman, Lehigh University

John Hunsucker, University

of

Houston

Cengiz Kahraman, Istanbul Technical University, Turkey

Walter E. LeFevre, University

of

Arkansas

Kim LaScola Needy, University

of

Pittsburgh

Robert Lundquist, Ohio State University

Gerald

T.

Mackulak, Arizona State University

Mike Momot, University

of

Wisconsin, Platteville

James S. Noble, University

of

Missouri-Columbia

Richard

Patterson, University

of

Florida

Antonio

Pertence

Jr.

, Faculdade de Sabara, Minas Gerais, Brazil

William

R.

Peterson, Old Dominion University

Stephen M. Robinson, University

of

Wisconsin-Madison

David Salladay, San Jose State University

Mathew Sanders, Kettering University

Tep Sastri, formerly

of

Texas

A&M

University

Michael

1.

Schwandt, Tennessee Technological University

Frank Sheppard, III, The Trust for

Public Land

Sallie Sheppard, American University

of

Sharjah

Don Smith, Texas

A&M

University

Alan Stewart, Accenture

LLP

Mathias Sutton, Purdue University

Ghassan Tarakji, San Francisco State University

Ciriaco Valdez-Flores, Sielken and Associates Consulting

Richard West,

CPA, Sanders and West

PREFACE

We would also like to thank Jack Beltran for his accuracy check

of

this and pre-

vious editions. His work will help make this text a success.

Finally, we welcome any comments or suggestions you may have to help

improve the textbook or the Online Learning Center.

You

can reach us at

lblank@ausharjah.edu or lblank@tamu.edu and atarquin@utep.edu. We look

forward to hearing from you.

Lee Blank

Tony Tarquin

.xix

GUIDED TOUR

CHAPTER EXAMPLES

AND

EXERCISES Users

of

this book have numerous ways to reinforce

the concepts they've learned. The end-

of

-chapter problems, in-chapter examples, extended exercises,

case studi

es,

and FE (Fundamentals

of

Engineering) review problems offer students the opportunity

to learn economic analysis in a variety

of

ways. The various exercises range from working relatively

simple, one-step review problems to answering a series

of

comprehensive, in-depth questions based

on real-world cases. In-chapter examples are also helpful

in

reinforcing concepts learned.

PROBLEMS

Types or l'rojt.'Cls

5.1

Whlll

i

~

meant

by

fl'n'i('t"

,,1ft'mufII't'" arc

(a)

independe

nt

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ua

ll

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exclusive'!

5.2

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en you arc cva

lu

illing

pr

o

jc c

l

~

by

the pr

o.:sc

nl

wOl'

lh methlld.

how

do you

knQw

whi

c

h o

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c(~)!O

,ciCCI

iflhcprujCCIS

5.3 RcaJ the

S

I~lcmcnt

in

Ihe

fo

ll

owing prab-

I

cm~n

ndd

clcr

min

cif

lhc

cas

hn

o

w

sdc

nnc

EXTENDED EXERCISES

The extended exercises are

designed

to

require spreadsheet

analysis with a general emphasis

on

sensitivity ana

ly

sis.

//

END-OF-CHAPTER PROBLEMS

As in previous edition

s,

each chapter contains

many homework problems representative

of real-world situations.

80%

of

the end-of-

chapter problems have been revised or are

new

to

this edition.

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100

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550,000

650,000

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REVIEW PROBLEMS

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EXAM

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The FE exam review problems cover the same

topics

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the

FE

exam and are written in the same

multiple-choice format as the exam.

All

of

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problems are new to this edition.

CASE

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USE

OF

SPREADSHEETS

The text integrates spreadsheets and shows how easy they are

to

use in solving virtually any type

of

engineering economic

analysis problem and how powerful they can be for altering

estimates to achieve a better understanding

of

sensitivity and

economic consequences of the uncertainties inherent

in

all

forecasts. Beginning in Chapter 1, Blank and Tarquin illustrate

their spreadsheet discussions with screenshots from Microsoft

ExceITM*

.

When a single-cell, built-in Excel function may be

used

to

solve a problem, a checkered flag icon

fI1

labeled

Q-Solv (for quick solution) appears in the margin.

The thunderbolt

E-Solve icon

~

indicates that a more

~

complex, sophisticated spreadsheet

is

developed

to

solve

the problem. The spreadsheet will contain data and several

functions and possibly an Excel chart or graph

to

illustrate the

answer and sensitivity analysis

of

the solution

to

changing data.

For both Q-Solv and E-Solve examples, the authors have included

cells that show the exact Excel function needed to obtain the value

in

a specific cell. The E-Solve icon is also used throughout chapters

to

point out descriptions of how

to

best use the computer

to

address the

engineering economy topic under discussion.

CROSS-REFERENCING

Blank and Tarquin re

in

force

th

e

engineer

in

g concepts presented

throughout the book by making

th

em

ea

si

ly

accessible from

ot

her

sections

of

th

e book. Cross-

reference icons

in

th

e margins

r

ef

er

th

e reader to additional

sec

ti

on number

s,

spec

ifi

c

examples, or entire chapters that

cont

ai

n either founda

ti

onal

(backward) or more advanced

(forwa

rd

) info

rm

ation that is

rele

va

nt

to

that in

th

e paragra

ph

next to the icon.

INTERNATIONAL APPEAL

The international dimensions

of

this

book are more a

pp

arent throughout

the six

th

edition. Examples and new

sections on inte

rn

a

ti

onal corporate

deprecia

ti

on and taxation

considera

ti

ons a

nd

in

te

rn

a

ti

onal

forms

of

contracts, such as the

BOT me

th

od

of

subcontracting, are

include

d.

The impact

of

hyperinflation a

nd

de

fl

ationary

cycles are discussed from an

international perspec

ti

ve.

274

CHAPTER 8 Rate of Return Ann

ly

si

s:

Mul

ti

p

le

Alte

rn

at

ives

4.

Cou

nt

th

e

num

ber of sign changes in the

in

cremental

cas

h

fl

ow

se

ri

es

to det

er-

mi

ne

if

mu

hiple

rat

es

of

re

t

urn

m

ay

be

pr

ese

nt

Ir necessary, u

sc

No

rs

tr

om's

criterion on the cumula

ti

ve incremental cash now series to determine if a

single pos

iti

ve root exists.

5.

Set up the PW equa

ti

on for the incremental cash

fl

ows

in

the

fo

rm

of

Eq

u

a-

ti

on [

7.1

]. and

de

te

rmin

e a4 _A using t

rial

and e

rr

or by hand or s

pr

ea

dsh

ee

t

functions.

6. Select the econo

mi

cally be

tt

er a

lt

ernative

as

follows:

If

~i

~ _

A

<

MARR

, select

alterna

tive

A.

If

di~

_ A

;::

MARR, the e

xtr

a investment is

ju

stified; select alterna-

tive

B.

If the

in

cremental i* is exactly equal to

or

very near the MARR.

no

neco-

no

mi

c cons

id

erations wi

ll

most likely be used to help in the selec

ti

on of

th

e

"bes

t" alte

rn

a

ti

ve.

In

step 5.

if

trial and error

1S

used to calculate the rate of return,

ti

me may be

saved

if

the

.!l;

l _A value is bracketed, rather than approximated by a

poi

nt

va

lue

us

in

g l

in

e

ar

interpolation, pr

ov

id

ed th

ai

a single ROR value

is

not needed. For

example,

if

the MA

RR

is

15

% p

er

year a

nd

you have established

th

at

.6.

it

_A is in

the

IS

to

20% range. an exact

va

lue is nm necessary to accept 8 sin

ce

you al-

re

ad

y know that

6.i

~

_ A

~

MARR.

The IRR f

un

ction on a spreadsheet w

ill

no

nn

a

l1

y deter

mi

ne one 6.;* va

lu

e.

Multiple guess

va

lues can be input to

fi

nd

multiple roots in the range - 1

00

%

to

00

for a nonconve

nti

onal

se

ri

es. as

ill

ustrated in Examples 7.4 a

nd

7.S. If t

hi

s

is not the case, to be correct, the indication

of

multiple roots

in

step 4 requires

that the net

-i

nvestment procedure, Equation

[7

.6

J.

be applied in step 5 to make

.6.

;'

=

6.i

*. If one

of

the.

..

e multi

pl

e roolS is the

sa

me as the expected reinvest-

me

nt

rate c, this rool can be used as

th

e ROR value, a

nd

the net-inves

tm

ent pro·

cedure

is

not necessary.

In

this case o

nl

y

tli

' =

tl

i·,

as

concl

ud

ed at the e

nd

of

Sec

ti

on 7.S.

....

17

.9 AFTER-TAX ANALYSIS FOR

INTERNATIONAL

PROJECTS

Primary qu

es

ti

ons to be answered prior to pe

lf

orming a corpo

ra

te-based after-

tax analysis for

in

te

rn

at

ional

se

ttings revolve on tax-deductible a

ll

owa

n

ces-

depreciation. busin

ess

expenses, capital a

sse

t

eva

l

uat

ion- and the effective tax

rate n

ee

ded for Equation [17.6]. taxes = T I(Te)' As discussed in Chapter 16. m

os

t

gove

rnments of the world r

ecog

nize and u

se

tbe straight l

in

e (

SL

) and declining

balan

ce

(

08

) methods of depr

ec

iation with

so

me va

ri

a

ti

ons to dete

nnin

e the a

n-

nual tax-de

du

ctible a

ll

owa

nce. E

xpe

nse deductions vary widely from

co

untry to

co

unt

ry.

By way of ex

amp

le,

so

me of these are summarized here.

Ca

n

ada

De

pr

eciatio

ll:

Thi

s is deductible and is

norm

a

ll

y based on DB

ca

lculations,

alth ough

SL may be use

d.

An equivale

nt

of the half-

yea

r

co

nvention is

applied in the

fi

rst year of ownership. The annual tax-deductible al-

lo

wa

n

ce

is termed capital cost allowance (CCA

).

As

in the U.S. system,

ADDITIONAL

RESOURCES

The sixth edition

of

Blank and Tarquin features an Online Learning Center (OLC)

available to students and professors who use the text.

The

URL

for the site is

http://www.mhhe.comlblank6.

The

OLC

will house the solutions to end-of-chapter problems,

FE

(Fundamentals

of

Engineering) exam prep quiz, spreadsheet exercises, matching and true/false quizzes,

links to important websites, chapter objectives, lecture slides, end-of chapter summaries

and more!

~~

ENGINEERING ECONOMY

",'h

c:a

ImJmJ

"~.

BLlnk

and

TarqUin

edition

Sample

Cfu,ptOI"C

Table.of Contents

About

the Authl>rS

Book Pr.tac:e

Wbat's

New

Engineering Economy,

6/e

Leland

Blan

k,

Americlln

Univ.

of

Sh

arjah

li

nd

Texas

A&M

Univ

.

Anthony

Tarquin,

Univ

ers

ity

of

Texas

- EI Pa

so

~~.u,

ISBN

,0072918632

1ii..

....

;;;:.;.;;;:.;.

................ .....J CoPVriOht

year:

2005

EnQineerinQ Economy,

6th

edrtion , provides

undergraduate

students

and practicing PfQfessionals with a solid

preparation

in

the

financial

understanding

of

engineering problems

and

projects, as well as

the

techniques

needed

for

evaluating

and

making sound

economic

decisions.

Information

on

cost

estimation,

depredation,

and

taxes

has

been

updated

to

conf

om,

to

new

tax

laws

and

a

majority

of

the

end-of-<hapter problems are revised

or

new

to

this

edition.

Distinguishing pedagogical charactensbcs

of

thiS market-leading

text

indude

rts easy-to-f'ead

writing

style,

chapter

objectives,

worked

examples,

integrated

spreadsheets,

case studies, Fundamentals

of

EnOtneenng (FE) exam Questions, and

numerous

end-of-chapter

sttJJtMt

Et1rt!on

~~f~~etQ:s~~)Pah~C:~c~~.ss~~:\~~~~!)

~g~sa~~~n~o

I~:::

t~~

!,b~~~~~t~~=~fla~~~~:~~:;~~Z~

o~~~~~s~~::ext

.

QuK*-

l

~

I~.~:"~~ctv~~E:ID:0M:'

__

..J

While

the

chapters

are

progressive,

over

three-Quarters

can

stand

alone, allOWing

instructors

flexiblhty

for

meeting

course

needs

. A

<omplete Onhne

learning

Center

(O

lC

) offers supplemental pracbce problems,

spreadsheet

exercises, review Questions

for

the

Fundamentals

of

EOQlneeriOQ

(

FE

) exam,

and

morel

To

obtain

an

Instructor

login

for

thiS Online

learning

Center,

ask

y

our

local sales

representative.

If

you

're

an

Instructor thinklno

about

adopting

this

textbook,

~

~fo

rrevlew_

®200S

Mo:Graw-Hili

Hl;he~

tducatiol'l

Any

us

..

is • ..,bj..::t

to

the

Imrm"

of

liB

and

Etl!i~l$:(.

McGra"""Hil]

High",

Educatipn

Is

on.

of

th.

maoy

f,o",

:'..,,,;ne

,,,,,.,,

0'

Tb.

McGraw

-HiI! C..ompard"u:,

New to thjs edition is

McGraw-llill's

new database management tool. Complete Online

Solutions Manual Organization System (C.O.S.M.O.S.). C.O.S.M.O.S. is delivered via

CD-ROM and helps instructors to organize solutions and distribute and track problem

sets as they are assigned to students in the course. This helps instructors to quickly find

solutions and keep a record

of

problems assigned, to avoid duplication

of

tests and

quizzes

in

subsequent semesters. The ISBN for the Engineering Economy C.O.S.M.O.S.

CD-ROM

is

0-

07

- 298450-3. Contact your McGraw-Hill representative to get a copy.

ENGINEERING

ECONOMY

J

:J

" \

1

'

~\

,

J

"

I

\.

/.

,

..

I

LEVEL

ONE

This

Is

How

It

All

Starts

Chapter

1

Foundations

of

Engineering

Economy

Chapter

2

Factors:

How

Time and

Interest

Affect

Money

Chapter

3

Combining

Factors

Chapter

4

Nominal and

Effective

Interest Rates

""v

LEVEL

TWO

Tools

for

Evaluating

Alternatives

Chapter

5

Present Worth

Analysis

Chapter

6

Annual Worth

Analysis

Chapter

7

Rate

of

Return

Analysis:

Single

Alternative

Chapter

8

Rate

of

Return

Analysis:

Multiple

Alternatives

Chapter

9

Benefit/Cost

Analysis and

Public Sector

Economics

Chapter

10

Making

Choices:

Th~

Method, MARR,

and

Multiple

Attributes

LEVEL

THREE

Making

Deci-

sions

on

Real-

World

Projects

Chapter

11

Replacement

and Retention

Decisions

Chapter

12

Selection from

Independent

Projects

under

Budget

Limitation

Chapter

13

Breakeven

Analysis

LEVEL

FOUR

Rounding

Out

the

Study

Chapter

14

Effects

of

Inflation

Chapter

15

Cost Estimation

and Indirect

Cost Allocation

Chapter

16

Depreciation

Methods

Chapter

17

After-Tax

Economic

Analysis

Chapter

18

Formalized

Sensitivity

Analysis and

Expected

V lue

Decisions

Variation and

Decision Making

under

Risk

The

foundations

of

engineering

economy

are

introduced

in

these

four

chap-

ters.

When

you

have

completed

level one,

you

will

be

able

to

understand

and

work

problems

that

account

for

the

time

value

of

money, cash flows

occurring

at

different

times

with

different

amounts,

and equivalence

at

dif-

ferent

interest

rates.

The

techniques

you

master

here

form

the

basis

of

how

an

engineer

in any

discipline

can

take

economic

value

into

account

in

virtu-

ally any

project

environment

.

The

eight

factors

commonly

used in all

engineering

economy

computa-

tions

are

introduced

and

applied

in this level.

Combinations

of

these

fac-

tors

assist in

moving

monetary

values

forward

and backward

through

time

and

at

different

interest rates. Also,

after

these

four

chapters,

you

should

be

comfortable

with using

many

of

the

Excel

spreadsheet

functions

to

solve

problems.

..

,

..

1

w

u

Foundations

of

Engineering Economy

The

need

for

engineering

economy

is

primarily

motivated

by

the

work

that

engineers

do

in

performing

analysis, synthesizing,

and

coming

to

a

conclu-

sion

as

they

work

on

projects

of

all sizes. In

other

words,

engineering

econ-

omy

is

at

the

heart

of

making

decisions. These decisions

involve

the

funda-

mental

elements

of

cash flows

of

money, time, and

interest

rates. This

chapter

introduces

the

basic

concepts

and

terminology

necessary

for

an en-

gineer

to

combine

these

three

essential

elements

in

organized,

mathemati-

cally

correct

ways

to

solve

problems

that

will lead

to

better

decisions.

Many

of

the

terms

common

to

economic

decision

making

are

introduced

here

and

used in

later

chapters

of

the

text

. Icons in

the

margins serve

as

back

and

for-

ward

cross-references

to

more

fundamental

and

additional

material

through-

out

the

book

.

The case studies

included

after

the

end-of-chapter

problems

focus

on

the

development

of

engineering

economy

alternatives.

Blank L., Tarquin A. Engineering Economy (McGraw-Hill Series in Industrial Engineering and Management)

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