Contemporary engineering economics

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Contemporary

Engineering
Economics


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Contemporary

Engineering
Economics
Fourth Edition

Chan S. Park
Depar tment of Industr ial
and Systems Engineer ing
Aubur n Univer sity

Upper Saddle River, NJ 07458


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Library of Congress Cataloging-in-Publication Data on File

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© 2007 by Pearson Education, Inc.
Pearson Prentice Hall
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without permission in writing from the publisher.
The author and publisher of this book have used their best efforts in preparing this book. These
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their effectiveness. The author and publisher make no warranty of any kind, expressed or
implied, with regard to these programs or the documentation contained in this book. The author
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Printed in the United States of America
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ISBN 0-13-187628-7
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To my wife, Kim (Inkyung); and my children, Michael and Edward


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CONTENTS
Preface

xix

PART 1 B ASICS OF FINANCIAL DECISIONS

Chapter 1

Engineering Economic Decisions

1

2

1.1

Role of Engineers in Business
1.1.1 Types of Business Organization
1.1.2 Engineering Economic Decisions
1.1.3 Personal Economic Decisions

4
5
6
6

1.2

What Makes the Engineering Economic Decision Difficult?

7

1.3

Economic Decisions versus Design Decisions

8

1.4

Large-Scale Engineering Projects
1.4.1 How a Typical Project Idea Evolves
1.4.2 Impact of Engineering Projects on Financial Statements
1.4.3 A Look Back in 2005: Did Toyota Make the Right Decision?

9
9
12
13

1.5

Common Types of Strategic Engineering Economic Decisions

13

1.6

Fundamental Principles of Engineering Economics

15

Summary

17

Chapter 2

Understanding Financial Statements

18

2.1

Accounting: The Basis of Decision Making

21

2.2

Financial Status for Businesses
2.2.1 The Balance Sheet
2.2.2 The Income Statement
2.2.3 The Cash Flow Statement

22
24
27
30

2.3

Using Ratios to Make Business Decisions
2.3.1 Debt Management Analysis
2.3.2 Liquidity Analysis
2.3.3 Asset Management Analysis
2.3.4 Profitability Analysis
2.3.5 Market Value Analysis
2.3.6 Limitations of Financial Ratios in Business Decisions

33
34
37
38
39
41
42

Summary

43

Problems

44

Short Case Studies

50

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Chapter 3

Interest Rate and Economic Equivalence

52

3.1

Interest: The Cost of Money
3.1.1 The Time Value of Money
3.1.2 Elements of Transactions Involving Interest
3.1.3 Methods of Calculating Interest
3.1.4 Simple Interest versus Compound Interest

54
55
56
59
62

3.2

Economic Equivalence
3.2.1 Definition and Simple Calculations
3.2.2 Equivalence Calculations: General Principles
3.2.3 Looking Ahead

63
63
66
71

3.3

Development of Interest Formulas
3.3.1 The Five Types of Cash Flows
3.3.2 Single-Cash-Flow Formulas
3.3.3 Uneven Payment Series
3.3.4 Equal Payment Series
3.3.5 Linear Gradient Series
3.3.6 Geometric Gradient Series

71
72
73
80
84
96
102

3.4

Unconventional Equivalence Calculations
3.4.1 Composite Cash Flows
3.4.2 Determining an Interest Rate to Establish Economic Equivalence

107
107
114

Summary

119

Problems

119

Short Case Studies

129

Chapter 4

Understanding Money and Its Management

134

4.1

Nominal and Effective Interest Rates
4.1.1 Nominal Interest Rates
4.1.2 Effective Annual Interest Rates
4.1.3 Effective Interest Rates per Payment Period
4.1.4 Continuous Compounding

136
136
137
140
141

4.2

Equivalence Calculations with Effective Interest Rates
4.2.1 When Payment Period Is Equal to Compounding Period
4.2.2 Compounding Occurs at a Different Rate than that at
Which Payments Are Made

143
144

Equivalence Calculations with Continuous Payments
4.3.1 Single-Payment Transactions
4.3.2 Continuous-Funds Flow

152
152
152

4.3

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4.4

Changing Interest Rates
4.4.1 Single Sums of Money
4.4.2 Series of Cash Flows

156
156
158

4.5

Debt Management
4.5.1 Commercial Loans
4.5.2 Loan versus Lease Financing
4.5.3 Home Mortgage

159
159
167
171

4.6

Investing in Financial Assets
4.6.1 Investment Basics
4.6.2 How to Determine Your Expected Return
4.6.3 Investing in Bonds

175
175
176
179

Summary

187

Problems

188

Short Case Studies

199

PART 2 EVALUATION OF BUSINESS
AND ENGINEERING ASSETS

Chapter 5
5.1

Present-Worth Analysis

203

204

Describing Project Cash Flows
5.1.1 Loan versus Project Cash Flows
5.1.2 Independent versus Mutually Exclusive
Investment Projects

207
207

5.2

Initial Project Screening Method
5.2.1 Payback Period: The Time It Takes to Pay Back
5.2.2 Benefits and Flaws of Payback Screening
5.2.3 Discounted Payback Period
5.2.4 Where Do We Go from Here?

210
210
213
214
215

5.3

Discounted Cash Flow Analysis
5.3.1 Net-Present-Worth Criterion
5.3.2 Meaning of Net Present Worth
5.3.3 Basis for Selecting the MARR

215
216
220
222

5.4

Variations of Present-Worth Analysis
5.4.1 Future-Worth Analysis
5.4.2 Capitalized Equivalent Method

223
223
227

5.5

Comparing Mutually Exclusive Alternatives
5.5.1 Meaning of Mutually Exclusive and “Do Nothing”
5.5.2 Analysis Period

232
232
235

209


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5.5.3 Analysis Period Equals Project Lives
5.5.4 Analysis Period Differs from Project Lives
5.5.5 Analysis Period Is Not Specified

236
238
246

Summary

249

Problems

249

Short Case Studies

265

Chapter 6

Annual Equivalent-Worth Analysis

268

6.1

Annual Equivalent-Worth Criterion
6.1.1 Fundamental Decision Rule
6.1.2 Annual-Worth Calculation with Repeating Cash Flow Cycles
6.1.3 Comparing Mutually Exclusive Alternatives

270
270
273
275

6.2

Capital Costs versus Operating Costs

277

6.3

Applying Annual-Worth Analysis
6.3.1 Benefits of AE Analysis
6.3.2 Unit Profit or Cost Calculation
6.3.3 Make-or-Buy Decision
6.3.4 Pricing the Use of an Asset

280
281
281
283
286

6.4

Life-Cycle Cost Analysis

287

6.5

Design Economics

294

Summary

303

Problems

304

Short Case Studies

318

Chapter 7

Rate-of-Return Analysis

322

7.1

Rate of Return
7.1.1 Return on Investment
7.1.2 Return on Invested Capital

324
324
326

7.2

Methods for Finding the Rate of Return
7.2.1 Simple versus Nonsimple Investments
7.2.2 Predicting Multiple i*’s
7.2.3 Computational Methods

327

327
329
331

7.3

Internal-Rate-of-Return Criterion
7.3.1 Relationship to PW Analysis
7.3.2 Net-Investment Test: Pure versus Mixed Investments
7.3.3 Decision Rule for Pure Investments
7.3.4 Decision Rule for Mixed Investments

338
338
339
341
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7.4

Mutually Exclusive Alternatives
7.4.1 Flaws in Project Ranking by IRR
7.4.2 Incremental Investment Analysis
7.4.3 Handling Unequal Service Lives

352
352
353
360

Summary

363

Problems

364

Short Case Studies

381

PART 3 ANALY SIS OF PROJECT C ASH FLOWS

Chapter 8

Cost Concepts Relevant to Decision Making

385

386

8.1

General Cost Terms
8.1.1 Manufacturing Costs
8.1.2 Nonmanufacturing Costs

388
388
390

8.2

Classifying Costs for Financial Statements
8.2.1 Period Costs
8.2.2 Product Costs

390
391
391

8.3

Cost Classification for Predicting Cost Behavior
8.3.1 Volume Index
8.3.2 Cost Behaviors

394

394
395

8.4

Future Costs for Business Decisions
8.4.1 Differential Cost and Revenue
8.4.2 Opportunity Cost
8.4.3 Sunk Costs
8.4.4 Marginal Cost

400
400
404
406
406

8.5

Estimating Profit from Production
8.5.1 Calculation of Operating Income
8.5.2 Sales Budget for a Manufacturing Business
8.5.3 Preparing the Production Budget
8.5.4 Preparing the Cost-of-Goods-Sold Budget
8.5.5 Preparing the Nonmanufacturing Cost Budget
8.5.6 Putting It All Together: The Budgeted Income Statement
8.5.7 Looking Ahead

411
412

412
413
415
416
418
419

Summary

420

Problems

421

Short Case Study

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Chapter 9

Depreciation and Corporate Taxes

428

9.1

Asset Depreciation
9.1.1 Economic Depreciation
9.1.2 Accounting Depreciation

431
432
432

9.2

Factors Inherent in Asset Depreciation
9.2.1 Depreciable Property
9.2.2 Cost Basis
9.2.3 Useful Life and Salvage Value
9.2.4 Depreciation Methods: Book and Tax Depreciation

433
433
434
435
436

9.3

Book Depreciation Methods
9.3.1 Straight-Line Method
9.3.2 Accelerated Methods
9.3.3 Units-of-Production Method

437
437
439
445

9.4

Tax Depreciation Methods
9.4.1 MACRS Depreciation
9.4.2 MACRS Depreciation Rules

446
446
447

9.5

Depletion
9.5.1 Cost Depletion
9.5.2 Percentage Depletion

453
453

454

9.6

Repairs or Improvements Made to Depreciable Assets
9.6.1 Revision of Book Depreciation
9.6.2 Revision of Tax Depreciation

456
456
457

9.7

Corporate Taxes
9.7.1 Income Taxes on Operating Income

459
459

9.8

Tax Treatment of Gains or Losses on Depreciable Assets
9.8.1 Disposal of a MACRS Property
9.8.2 Calculations of Gains and Losses on MACRS Property

462
462
464

9.9

Income Tax Rate to Be Used in Economic Analysis
9.9.1 Incremental Income Tax Rate
9.9.2 Consideration of State Income Taxes

467
467
470

9.10

The Need for Cash Flow in Engineering Economic Analysis
9.10.1 Net Income versus Net Cash Flow
9.10.2 Treatment of Noncash Expenses

472
472
473

Summary

476

Problems

478

Short Case Studies

487


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Chapter 10

Developing Project Cash Flows

490

10.1

Cost–Benefit Estimation for Engineering Projects
10.1.1 Simple Projects
10.1.2 Complex Projects

492
493
493

10.2

Incremental Cash Flows
10.2.1 Elements of Cash Outflows
10.2.2 Elements of Cash Inflows
10.2.3 Classification of Cash Flow Elements

494
494
495
497

10.3

Developing Cash Flow Statements
10.3.1 When Projects Require Only Operating and Investing Activities
10.3.2 When Projects Require Working-Capital Investments
10.3.3 When Projects Are Financed with Borrowed Funds
10.3.4 When Projects Result in Negative Taxable Income
10.3.5 When Projects Require Multiple Assets

498
498
502
507
509
513

10.4

Generalized Cash Flow Approach

10.4.1 Setting up Net Cash Flow Equations
10.4.2 Presenting Cash Flows in Compact Tabular Formats
10.4.3 Lease-or-Buy Decision

516
517
518
520

Summary

524

Problems

525

Short Case Studies

537

PART 4 HANDLING RISK AND UNCERTAINTY

Chapter 11

541

Inflation and Its Impact on Project Cash Flows

542

11.1

Meaning and Measure of Inflation
11.1.1 Measuring Inflation
11.1.2 Actual versus Constant Dollars

544
544
550

11.2

Equivalence Calculations under Inflation
11.2.1 Market and Inflation-Free Interest Rates
11.2.2 Constant-Dollar Analysis
11.2.3 Actual-Dollar Analysis
11.2.4 Mixed-Dollar Analysis

553
553
553
554
558

11.3

Effects of Inflation on Project Cash Flows
11.3.1 Multiple Inflation Rates
11.3.2 Effects of Borrowed Funds under Inflation

558
562
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11.4

Rate-of-Return Analysis under Inflation
11.4.1 Effects of Inflation on Return on Investment
11.4.2 Effects of Inflation on Working Capital

566
566
569

Summary

572

Problems

574

Short Case Studies

582

Chapter 12

Project Risk and Uncertainty

584

12.1

Origins of Project Risk

586

12.2

Methods of Describing Project Risk
12.2.1 Sensitivity Analysis
12.2.2 Break-Even Analysis
12.2.3 Scenario Analysis

587
587
591

594

12.3

Probability Concepts for Investment Decisions
12.3.1 Assessment of Probabilities
12.3.2 Summary of Probabilistic Information
12.3.3 Joint and Conditional Probabilities
12.3.4 Covariance and Coefficient of Correlation

596
596
601
603
605

12.4

Probability Distribution of NPW
12.4.1 Procedure for Developing an NPW Distribution
12.4.2 Aggregating Risk over Time
12.4.3 Decision Rules for Comparing Mutually Exclusive
Risky Alternatives

605
605
611

12.5

Risk Simulation
12.5.1 Computer Simulation
12.5.2 Model Building
12.5.3 Monte Carlo Sampling
12.5.4 Simulation Output Analysis
12.5.5 Risk Simulation with @RISK

618
619
620
623
628
630

12.6

Decision Trees and Sequential Investment Decisions
12.6.1 Structuring a Decision-Tree Diagram
12.6.2 Worth of Obtaining Additional Information
12.6.3 Decision Making after Having Imperfect
Information

633
634
639

Summary

647

Problems

648

Short Case Studies

658

616

642


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Chapter 13

Real-Options Analysis

664

13.1

Risk Management: Financial Options
13.1.1 Buy Call Options when You Expect the Price to Go Up
13.1.2 Buy Put Options when You Expect the Price to Go Down

666
669
669

13.2

Option Strategies
13.2.1 Buying Calls to Reduce Capital That Is at Risk
13.2.2 Protective Puts as a Hedge

670
670
673

13.3

Option Pricing
13.3.1 Replicating-Portfolio Approach with a Call Option
13.3.2 Risk-Free Financing Approach
13.3.3 Risk-Neutral Probability Approach
13.3.4 Put-Option Valuation
13.3.5 Two-Period Binomial Lattice Option Valuation
13.3.6 Multiperiod Binomial Lattice Model
13.3.7 Black–Scholes Option Model

675
675
677
679
680
681
683
684

13.4

Real-Options Analysis
13.4.1 A Conceptual Framework for Real Options
in Engineering Economics
13.4.2 Types of Real-Option Models

686

13.5

13.6

687
688

Estimating Volatility at the Project Level
13.5.1 Estimating a Project’s Volatility through a
Simple Deferral Option
13.5.2 Use the Existing Model of a Financial Option to Estimate σ2

697
699

Compound Options

703

Summary

708

Problems

709

Short Case Studies

713

697

PART 5 SPECIAL TOPICS IN ENGINEERING
ECONOMICS 715

Chapter 14
14.1

Replacement Decisions

716

Replacement Analysis Fundamentals
14.1.1 Basic Concepts and Terminology
14.1.2 Opportunity Cost Approach to Comparing
Defender and Challenger

718
718
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14.2

Economic Service Life

723

14.3

Replacement Analysis when the Required Service Is Long

14.3.1 Required Assumptions and Decision Frameworks
14.3.2 Replacement Strategies under the Infinite Planning Horizon
14.3.3 Replacement Strategies under the Finite Planning Horizon
14.3.4 Consideration of Technological Change

728
729
730
735
738

14.4

Replacement Analysis with Tax Considerations

739

Summary

755

Problems

756

Short Case Studies

768

Chapter 15

Capital-Budgeting Decisions

776

15.1

Methods of Financing
15.1.1 Equity Financing
15.1.2 Debt Financing
15.1.3 Capital Structure

778
779
780
782

15.2

Cost of Capital
15.2.1 Cost of Equity
15.2.2 Cost of Debt
15.2.3 Calculating the Cost of Capital

787
787
792
794

15.3

Choice of Minimum Attractive Rate of Return
15.3.1 Choice of MARR when Project Financing Is Known
15.3.2 Choice of MARR when Project Financing Is Unknown
15.3.3 Choice of MARR under Capital Rationing

795
795
797
799

15.4

Capital Budgeting
15.4.1 Evaluation of Multiple Investment Alternatives
15.4.2 Formulation of Mutually Exclusive Alternatives
15.4.3 Capital-Budgeting Decisions with Limited Budgets

803
803
803
805

Summary

809

Problems

810

Short Case Studies

816

Chapter 16
16.1

Economic Analysis in the Service Sector

What Is the Service Sector?
16.1.1 Characteristics of the Service Sector
16.1.2 How to Price Service

822

824
825
825


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16.2

Economic Analysis in Health-Care Service
16.2.1 Economic Evaluation Tools
16.2.2 Cost-Effectiveness Analysis
16.2.3 How to Use a CEA

826
827
828
829

16.3 Economic Analysis in the Public Sector
16.3.1 What Is Benefit–Cost Analysis?
16.3.2 Framework of Benefit–Cost Analysis
16.3.3 Valuation of Benefits and Costs
16.3.4 Quantifying Benefits and Costs
16.3.5 Difficulties Inherent in Public-Project Analysis

832
833
833
834
836
840

16.4 Benefit–Cost Ratios
16.4.1 Definition of Benefit–Cost Ratio
16.4.2 Relationship between B/C Ratio and NPW

16.4.3 Comparing Mutually Exclusive Alternatives:
Incremental Analysis

840
840
843

16.5 Analysis of Public Projects Based on Cost-Effectiveness
16.5.1 Cost-Effectiveness Studies in the Public Sector
16.5.2 A Cost-Effectiveness Case Study

846
847
847

843

Summary

856

Problems

857

Short Case Studies

862

Appendix A

Index

899

Interest Factors for Discrete Compounding

869


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PREFACE
What is “Contemporary” About Engineering Economics?
Decisions made during the engineering design phase of product development determine
the majority of the costs associated with the manufacturing of that product (some say that

this value may be as high as 85%). As design and manufacturing processes become more
complex, engineers are making decisions that involve money more than ever before. With
more than 80% of the total GDP (Gross Domestic Product) in the United States provided
by the service sector, engineers work on various economic decision problems in the service sector as well. Thus, the competent and successful engineer in the twenty-first century
must have an improved understanding of the principles of science, engineering, and economics, coupled with relevant design experience. Increasingly, in the new world economy,
successful businesses will rely on engineers with such expertise.
Economic and design issues are inextricably linked in the product/service life cycle.
Therefore, one of my strongest motivations for writing this text was to bring the realities
of economics and engineering design into the classroom and to help students integrate
these issues when contemplating many engineering decisions. Of course my underlying
motivation for writing this book was not simply to address contemporary needs, but to
address as well the ageless goal of all educators: to help students to learn. Thus, thoroughness, clarity, and accuracy of presentation of essential engineering economics were
my aim at every stage in the development of the text.

Changes in the Fourth Edition
Much of the content has been streamlined to provide materials in depth and to reflect the
challenges in contemporary engineering economics. Some of the highlighted changes are
as follows:
• Chapter 13 “Real Options Analysis” is new and provides a new perspective on how
engineers should manage risk in their strategic economic decision problems.
Traditionally, risk is avoided in project analysis, which is a passive way of handling
the matter. The goal of the real options approach is to provide a contemporary tool
that will assist engineers so that they can actively manage the risk involved in longterm projects.
• Chapter 12 has been significantly revised to provide more probabilistic materials for
the analytical treatment of risk and uncertainty. Risk simulation has been introduced
by way of using @RISK.
• Three chapters have been merged with various materials from other chapters.
Chapter 3 on cost concepts and behaviors has been moved to Part III and now
appears as Chapter 8 “Cost Concepts Relevant to Decision Making”; it is now part
of project cash flow analysis. Chapter 6 on principles of investing is now part of

Chapter 4 “Understanding Money and Its Management.” Materials from various
chapters have been merged into a single chapter and now appear as Chapter 9
“Depreciation and Corporate Income Taxes”.
• The chapter on the economic analysis in the public sector has been expanded and now
appears as Chapter 16 “Economic Analysis in the Service Sector”; this revised chapter now provides economic analysis unique to service sectors beyond the government
xix


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xx PREFACE

•
•

•

•

sector. Increasingly, engineers seek their career in the service sector, such as healthcare, financial institutions, transportation, and logistics. In this chapter, we present
some unique features that must be considered when evaluating investment projects in
the service sector.
All the end-of-chapter problems are revised to reflect the materials changes in the
main text.

All the chapter opening vignettes—a trademark of Contemporary Engineering
Economics—have been completely replaced with more current and thought-provoking
case studies.
Self-study problems and FE practice questions are available as interactive quizzes
with instant feedback as part of the book’s new OneKey CourseCompass site.
OneKey is an online resource for instructors and students; more detailed information
about OneKey can be found in the OneKey section of this Preface. OneKey can be
accessed via www.prenhall.com/onekey.
Various Excel spreadsheet modeling techniques are introduced throughout the chapters and the original Excel files are provided online at the OneKey site .

Overview of the Text
Although it contains little advanced math and few truly difficult concepts, the introductory engineering economics course is often a curiously challenging one for the
sophomores, juniors, and seniors who take it. There are several likely explanations for
this difficulty.
1. The course is the student’s first analytical consideration of money (a resource with
which he or she may have had little direct contact beyond paying for tuition, housing, food, and textbooks).
2. The emphasis on theory may obscure for the student the fact that the course aims,
among other things, to develop a very practical set of analytical tools for measuring project worth. This is unfortunate since, at one time or another, virtually every
engineer—not to mention every individual—is responsible for the wise allocation
of limited financial resources.
3. The mixture of industrial, civil, mechanical, electrical, and manufacturing engineering, and other undergraduates who take the course often fail to “see themselves” in the skills the course and text are intended to foster. This is perhaps less
true for industrial engineering students, whom many texts take as their primary
audience, but other disciplines are often motivationally shortchanged by a text’s
lack of applications that appeal directly to them.

Goal of the Text
This text aims not only to provide sound and comprehensive coverage of the concepts of
engineering economics but also to address the difficulties of students outlined above, all
of which have their basis in inattentiveness to the practical concerns of engineering economics. More specifically, this text has the following chief goals:
1. To build a thorough understanding of the theoretical and conceptual basis upon

which the practice of financial project analysis is built.


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Preface

2. To satisfy the very practical needs of the engineer toward making informed financial decisions when acting as a team member or project manager for an engineering
project.
3. To incorporate all critical decision-making tools—including the most contemporary, computer-oriented ones that engineers bring to the task of making informed
financial decisions.
4. To appeal to the full range of engineering disciplines for which this course is often
required: industrial, civil, mechanical, electrical, computer, aerospace, chemical,
and manufacturing engineering, as well as engineering technology.

Prerequisites
The text is intended for undergraduate engineering students at the sophomore level or
above. The only mathematical background required is elementary calculus. For Chapters
12 and 13, a first course in probability or statistics is helpful but not necessary, since the
treatment of basic topics there is essentially self-contained.

Taking Advantage of the Internet
The integration of computer use is another important feature of Contemporary Engineering
Economics. Students have greater access to and familiarity with the various spreadsheet

tools, and instructors have greater inclination either to treat these topics explicitly in the
course or to encourage students to experiment independently.
A remaining concern is that the use of computers will undermine true understanding of course concepts. This text does not promote the use of trivial spreadsheet applications 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 Computer Notes, which are included in the optional OneKey course
(www.prenhall.com/onekey).
Additionally, spreadsheets are introduced via Microsoft Excel examples. For spreadsheet coverage, the emphasis is on demonstrating a chapter concept that embodies some
complexity that can be much more efficiently resolved on a computer than by traditional
longhand solutions.

OneKey
Available as a special package, OneKey is Prentice Hall’s exclusive new resource for
instructors and students. Instructors have access online to all available course supplements
and can create and assign tests, quizzes, or graded homework assignments. Students have
access to interactive exercises, quizzes, and more. The following resources are available
when an instructor adopts the text plus OneKey package:
• Interactive self-study quizzes organized by chapter with instant feedback, plus interactive FE Exam practice questions
• Computer notes with Excel files of selected example problems from the text.
• Case Studies: A collection of actual cases, two personal-finance and six industrybased, is now available. The investment projects detailed in the cases relate to a

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variety of engineering disciplines. Each case is based on multiple text concepts, thus
encouraging students to synthesize their understanding in the context of complex,
real-world investments. Each case begins with a list of engineering economic concepts utilized in the case and concludes with discussion questions to test students’
conceptual understanding.
• Analysis Tools: A collection of various financial calculators is available. Cash Flow
Analyzer is an integrated online Java program that is menu driven for convenience
and flexibility; it provides (1) a flexible and easy-to-use cash flow editor for data
input and modifications, and (2) an extensive array of computational modules and
user-selected graphic outputs.
• Instructor Resources: Instructors Solutions Manual, PowerPoint Lecture Notes,
Case Studies and more.
Please contact your Prentice Hall representative for details and ordering information
for OneKey packages. Detailed instructions about how to access and use this content can
be found at the site, which can be accessed at: www.prenhall.com/onekey.

The Financial Times
We are please to announce a special partnership with The Financial Times. For a small
additional charge, Prentice Hall offers students a 15-week subscription to The Financial
Times. Upon adoption of a special package containing the book and the subscription
booklet, professors will receive a free one-year subscription. Please contact your Prentice
Hall representative for details and ordering information.

Acknowledgments
This book reflects the efforts of a great many individuals over a number of years. In particular, I would like to recognize the following individuals, whose reviews and comments
on prior editions have contributed to this edition. Once again, I would like to thank each

of them:
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


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Max C. Deibert, Montana State University
Stuart E. Dreyfus, University of California, Berkeley
Philip A. Farrington, University of Alabama at Huntsville

W. J. Foley, RPI
Jane Fraser, University of Southern Colorado
Terry L Friesz, Penn State University
Anil K. Goyal, RPI
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
Scott Iverson, University of Washington
Peter Jackson, Cornell University
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
Gene Lee, University of Central Florida
William Lesso, University of Texas–Austin
Martin Lipinski, Memphis State University
Robert Lundquist, Ohio State University
Richard Lyles, Michigan State University
Gerald T. Mackulak, Arizona State University
Abu S. Masud, The Wichita State University
Sue McNeil, Carnegie-Mellon University
James Milligan, University of Idaho

Richard Minesinger, University of Massachusetts, Lowell
Gary Moynihan, The University of Alabama
James S. Noble, University of Missouri, Columbia
Michael L. Nobs, Washington University, St. Louis
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
Bruce A. Reichert, Kansas State University
Mark Roberts, Michigan Tech
John Roth, Vanderbilt University
Paul L. Schillings, Montana State University

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Bill Shaner, Colorado State University
Fred Sheets, California Polytechnic, Pomona

Dean Shup, University of Cincinnati
Milton Smith, Texas Tech
David C. Slaughter, University of California, Davis
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 at Urbana-Champaign
Lt. Col. James Treharne, U.S. Army
L. Jackson Turaville, Tennessee Technological University
Thomas Ward, University of Louisville
Theo De Winter, Boston University
Yoo Yang, Cal Poly State University

Special Acknowledgement
Personally, I wish to thank the following individuals for their additional inputs to the
fourth edition: Michael L. Nobs, Washington University, St. Louis, Terry L. Friesz, Penn
State University, Gene Lee, University of Central Florida, Gerald T. Mackulak, Arizona
State University, and Phillip A. Farrington, University of Alabama, Huntsville. Major
Hyun Jin Han who helped me in developing the Instructor Manual; Holly Stark, my editor at Prentice Hall, who assumed responsibility for the overall project; Scott Disanno,
my production editor at Prentice Hall, who oversaw the entire book production. I also
acknowledge that many of the financial terminologies found in the marginal notes are
based on the online glossary defined by Investopedia and Investorwords.com. Finally, I
would like to thank Dr. Alice E. Smith, Chair of Industrial & Systems Engineering at
Auburn University, who provided me with the resources.
CHAN S. PARK
AUBURN, ALABAMA

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1
Basics of Financial
Decisions