Engineering economy, 7th ed

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Se v e nth
n th Ed ition

ENGINEERING
ECONOMY

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Se v e n th Ed ition

ENGINEERING
ECONOMY

Leland Blank, P. E.
Texas A & M University

American University of Sharjah, United Arab Emirates

Anthony Tarquin, P. E.
University of Texas at El Paso

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TM


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TM

ENGINEERING ECONOMY: SEVENTH EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New
York, NY 10020. Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Previous editions
© 2005, 2002, and 1998. No part of this publication may be reproduced or distributed in any form or by any means, or
stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc.,
including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance
learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United
States.
This book is printed on recycled, acid-free paper containing 10% postconsumer waste.
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All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Blank, Leland T.
Engineering economy / Leland Blank, Anthony Tarquin. — 7th ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-07-337630-1 (alk. paper)
ISBN-10: 0-07-337630-2
1. Engineering economy. I. Tarquin, Anthony J. II. Title.
TA177.4.B58 2012
658.15—dc22
2010052297

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This book is dedicated to Dr. Frank W. Sheppard, Jr. His lifelong
commitment to education, fair financial practices, international
outreach, and family values has been an inspiration to many—one
person at a time.

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CONTENTS
Preface to Seventh Edition

xiii

THE FUNDAMENTALS

LEARNING
STAGE 1
Chapter 1

Foundations of Engineering Economy

1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10

Chapter 2

Engineering Economics: Description and
Role in Decision Making
Performing an Engineering Economy Study
Professional Ethics and Economic Decisions
Interest Rate and Rate of Return
Terminology and Symbols
Cash Flows: Estimation and Diagramming
Economic Equivalence
Simple and Compound Interest
Minimum Attractive Rate of Return
Introduction to Spreadsheet Use
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Renewable Energy Sources for Electricity Generation
Case Study—Refrigerator Shells

Factors: How Time and Interest Affect Money

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PE

2.1
2.2
2.3
2.4
2.5
2.6
2.7

Chapter 3

Combining Factors and Spreadsheet Functions
3.1
3.2
3.3

Chapter 4

Progressive Example—The Cement Factory Case
Single-Amount Factors (F͞P and P͞F )
Uniform Series Present Worth Factor and Capital Recovery Factor (P͞A and A͞P)
Sinking Fund Factor and Uniform Series Compound Amount Factor (A͞F and F͞A)
Factor Values for Untabulated i or n Values
Arithmetic Gradient Factors (P͞G and A͞G)
Geometric Gradient Series Factors
Determining i or n for Known Cash Flow Values

Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Time Marches On; So Does the Interest Rate

Calculations for Uniform Series That Are Shifted
Calculations Involving Uniform Series and Randomly Placed Single Amounts
Calculations for Shifted Gradients
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Preserving Land for Public Use

Nominal and Effective Interest Rates
PE

4.1
4.2
4.3
4.4
4.5

Progressive Example—The Credit Card Offer Case
Nominal and Effective Interest Rate Statements
Effective Annual Interest Rates
Effective Interest Rates for Any Time Period
Equivalence Relations: Payment Period and Compounding Period
Equivalence Relations: Single Amounts with PP Ն CP

2

3
4
7
10
13
15
19
21
25
27
31
31
35
36
37

38
39
39
43
46
48
50
58
61
64
64
69
70

72
73
76
80
86
86
92
93

94
95
96
99
105
106
107


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viii

Contents
4.6
4.7
4.8
4.9

LEARNING
STAGE 2
Chapter 5

Present Worth Analysis
5.1
5.2
5.3
5.4
5.5

Progressive Example—Water for Semiconductor Manufacturing Case
Formulating Alternatives
Present Worth Analysis of Equal-Life Alternatives
Present Worth Analysis of Different-Life Alternatives
Future Worth Analysis
Capitalized Cost Analysis
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Comparing Social Security Benefits

Annual Worth Analysis
6.1
6.2
6.3
6.4
6.5

Advantages and Uses of Annual Worth Analysis
Calculation of Capital Recovery and AW Values
Evaluating Alternatives by Annual Worth Analysis
AW of a Permanent Investment

Life-Cycle Cost Analysis
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—The Changing Scene of an Annual Worth Analysis

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Chapter 7

Rate of Return Analysis: One Project
7.1
7.2
7.3
7.4
7.5
7.6

Chapter 8

109
112
114
116
117
118
122
124

BASIC ANALYSIS TOOLS

PE

Chapter 6

Equivalence Relations: Series with PP Ն CP
Equivalence Relations: Single Amounts and Series with PP Ͻ CP
Effective Interest Rate for Continuous Compounding
Interest Rates That Vary over Time
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Is Owning a Home a Net Gain or Net Loss over Time?

128
129
129
131
133
137
138
142
142
147
149

150
151
153
155

157
160
164
164
169
171

172

Interpretation of a Rate of Return Value
Rate of Return Calculation Using a PW or AW Relation
Special Considerations When Using the ROR Method
Multiple Rate of Return Values
Techniques to Remove Multiple Rates of Return
Rate of Return of a Bond Investment
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Developing and Selling an Innovative Idea

173
175
179
180
184
190
193
193
198
200

Rate of Return Analysis: Multiple Alternatives

202

8.1
8.2
8.3
8.4
8.5
8.6

Why Incremental Analysis Is Necessary
Calculation of Incremental Cash Flows for ROR Analysis
Interpretation of Rate of Return on the Extra Investment
Rate of Return Evaluation Using PW: Incremental and Breakeven
Rate of Return Evaluation Using AW
Incremental ROR Analysis of Multiple Alternatives

203
203
206
207
213
214


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Contents
8.7

Chapter 9

Benefit/Cost Analysis and Public Sector Economics
PE

9.1
9.2
9.3
9.4
9.5
9.6

Progressive Example—Water Treatment Facility #3 Case
Public Sector Projects
Benefit/Cost Analysis of a Single Project
Alternative Selection Using Incremental B/C Analysis
Incremental B/C Analysis of Multiple, Mutually Exclusive Alternatives
Service Sector Projects and Cost-Effectiveness Analysis
Ethical Considerations in the Public Sector
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Comparing B/C Analysis and CEA of Traffic Accident Reduction

218
219
220
225
226

227

228
229
230
235
238
242
246
250
251
252
258
259

EPILOGUE: SELECTING THE BASIC ANALYSIS TOOL

LEARNING
STAGE 2

LEARNING
STAGE 3

All-in-One Spreadsheet Analysis (Optional)
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—ROR Analysis with Estimated Lives That Vary
Case Study—How a New Engineering Graduate Can Help His Father

ix

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Chapter 10

MAKING BETTER DECISIONS

Project Financing and Noneconomic Attributes
10.1
10.2
10.3
10.4
10.5
10.6
10.7

Chapter 11

MARR Relative to the Cost of Capital
Debt-Equity Mix and Weighted Average Cost of Capital
Determination of the Cost of Debt Capital
Determination of the Cost of Equity Capital and the MARR
Effect of Debt-Equity Mix on Investment Risk
Multiple Attribute Analysis: Identification and Importance of Each Attribute
Evaluation Measure for Multiple Attributes
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Which Is Better—Debt or Equity Financing?

Replacement and Retention Decisions
PE

11.1
11.2
11.3
11.4
11.5
11.6

Progressive Example—Keep or Replace the Kiln Case
Basics of a Replacement Study
Economic Service Life
Performing a Replacement Study
Additional Considerations in a Replacement Study
Replacement Study over a Specified Study Period
Replacement Value
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Will the Correct ESL Please Stand?

266
267
269
271
273
275
278

282
283
284
289
290

292
293
294
296
302
306
307
312
312
313
319
321


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x

Contents

Chapter 12

Independent Projects with Budget Limitation
12.1
12.2

12.3
12.4
12.5

Chapter 13

Breakeven and Payback Analysis
13.1
13.2
13.3
13.4

LEARNING
STAGE 4
Chapter 14

An Overview of Capital Rationing among Projects
Capital Rationing Using PW Analysis of Equal-Life Projects
Capital Rationing Using PW Analysis of Unequal-Life Projects
Capital Budgeting Problem Formulation Using Linear Programming
Additional Project Ranking Measures
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions

Breakeven Analysis for a Single Project
Breakeven Analysis Between Two Alternatives
Payback Analysis
More Breakeven and Payback Analysis on Spreadsheets
Chapter Summary

Problems
Additional Problems and FE Exam Review Questions
Case Study—Water Treatment Plant Process Costs

Effects of Inflation
Understanding the Impact of Inflation
Present Worth Calculations Adjusted for Inflation
Future Worth Calculations Adjusted for Inflation
Capital Recovery Calculations Adjusted for Inflation
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Inflation versus Stock and Bond Investments

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Cost Estimation and Indirect Cost Allocation
15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8

Chapter 16

323
325

327
329
332
334
334
338

340
341
345
348
352
355
355
361
363

ROUNDING OUT THE STUDY

14.1
14.2
14.3
14.4

Chapter 15

322

Understanding How Cost Estimation Is Accomplished
Unit Method

Cost Indexes
Cost-Estimating Relationships: Cost-Capacity Equations
Cost-Estimating Relationships: Factor Method
Traditional Indirect Cost Rates and Allocation
Activity-Based Costing (ABC) for Indirect Costs
Making Estimates and Maintaining Ethical Practices
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Indirect Cost Analysis of Medical Equipment Manufacturing Costs
Case Study—Deceptive Acts Can Get You in Trouble

Depreciation Methods
16.1
16.2
16.3
16.4
16.5

Depreciation Terminology
Straight Line (SL) Depreciation
Declining Balance (DB) and Double Declining Balance (DDB) Depreciation
Modified Accelerated Cost Recovery System (MACRS)
Determining the MACRS Recovery Period

366
367
369
374
377

378
379
384
385

386
387
390
391
394
395
397
401
403
404
404
410
411
412

414
415
418
419
422
426


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Contents

16.6

Depletion Methods
Chapter Summary
Appendix
16A.1 Sum-of-Years-Digits (SYD) and Unit-of-Production (UOP) Depreciation
16A.2 Switching between Depreciation Methods
16A.3 Determination of MACRS Rates
Problems
Additional Problems and FE Exam Review Questions
Appendix Problems

Chapter 17

After-Tax Economic Analysis
17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9

Chapter 18

Income Tax Terminology and Basic Relations
Calculation of Cash Flow after Taxes
Effect on Taxes of Different Depreciation Methods and Recovery Periods

Depreciation Recapture and Capital Gains (Losses)
After-Tax Evaluation
After-Tax Replacement Study
After-Tax Value-Added Analysis
After-Tax Analysis for International Projects
Value-Added Tax
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—After-Tax Analysis for Business Expansion

Sensitivity Analysis and Staged Decisions
18.1
18.2
18.3
18.4
18.5
18.6

Determining Sensitivity to Parameter Variation
Sensitivity Analysis Using Three Estimates
Estimate Variability and the Expected Value
Expected Value Computations for Alternatives
Staged Evaluation of Alternatives Using a Decision Tree
Real Options in Engineering Economics
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Sensitivity to the Economic Environment
Case Study—Sensitivity Analysis of Public Sector Projects—Water Supply Plans

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Chapter 19

More on Variation and Decision Making under Risk
19.1
19.2
19.3
19.4
19.5

Appendix A

Interpretation of Certainty, Risk, and Uncertainty
Elements Important to Decision Making under Risk
Random Samples
Expected Value and Standard Deviation
Monte Carlo Sampling and Simulation Analysis
Chapter Summary
Problems
Additional Problems and FE Exam Review Questions
Case Study—Using Simulation and Three-Estimate Sensitivity Analysis

Using Spreadsheets and Microsoft Excel©
A.1
A.2
A.3
A.4
A.5

A.6

Introduction to Using Excel
Organization (Layout) of the Spreadsheet
Excel Functions Important to Engineering Economy
Goal Seek—A Tool for Breakeven and Sensitivity Analysis
Solver—An Optimizing Tool for Capital Budgeting, Breakeven, and Sensitivity Analysis
Error Messages

xi
427
429
430
430
432
435
438
442
443

444
445
448
450
453
456
462
465
468
470

472
473
481
482

484
485
490
491
492
494
498
503
503
509
510
511

514
515
518
523
526
533
540
540
543
544

547

547
549
550
558
559
560


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xii

Contents

Appendix B

Basics of Accounting Reports and Business Ratios
B.1
B.2
B.3

The Balance Sheet
Income Statement and Cost of Goods Sold Statement
Business Ratios

561
561
562
563

Appendix C

Code of Ethics for Engineers

566

Appendix D

Alternate Methods for Equivalence Calculations

569

D.1
D.2

Appendix E

Glossary of Concepts and Terms
E.1
E.2

Reference Materials
Factor Tables
Photo Credits
Index

Using Programmable Calculators
Using the Summation of a Geometric Series

Important Concepts and Guidelines
Symbols and Terms

579
581
610
611

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569
570

573
573
576


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PREFACE TO SEVENTH EDITION
This edition includes the time-tested approach and topics of previous editions and introduces significantly new print and electronic features useful to learning about and successfully applying the exciting field of engineering economics. Money makes a huge difference in the life of a corporation, an
individual, and a government. Learning to understand, analyze, and manage the money side of any
project is vital to its success. To be professionally successful, every engineer must be able to deal with
the time value of money, economic facts, inflation, cost estimation, tax considerations, as well as
spreadsheet and calculator use. This book is a great help to the learner and the instructor in accomplishing these goals by using easy-to-understand language, simple graphics, and online features.

What's New and What's Best
This seventh edition is full of new information and features. Plus the supporting online materials
are new and updated to enhance the teaching and learning experience.
New topics:
• Ethics and the economics of engineering

• Service sector projects and their evaluation
• Real options development and analysis
• Value-added taxes and how they work
• Multiple rates of return and ways to eliminate them using spreadsheets
• No tabulated factors needed for equivalence computations (Appendix D)
New features in print and online:
• Totally new design to highlight important terms, concepts, and decision guidelines
• Progressive examples that continue throughout a chapter
• Downloadable online presentations featuring voice-over slides and animation
• Vital concepts and guidelines identified in margins; brief descriptions available (Appendix E)
• Fresh spreadsheet displays with on-image comments and function details
• Case studies (21 of them) ranging in topics from ethics to energy to simulation

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Retained features:
• Many end-of-chapter problems (over 90% are new or revised)
• Easy-to-read language to enhance understanding in a variety of course environments
• Fundamentals of Engineering (FE) Exam review questions that double as additional or
review problems for quizzes and tests
• Hand and spreadsheet solutions presented for many examples
• Flexible chapter ordering after fundamental topics are understood
• Complete solutions manual available online (with access approval for instructors)

How to Use This Text
This textbook is best suited for a one-semester or one-quarter undergraduate course. Students
should be at the sophomore level or above with a basic understanding of engineering concepts
and terminology. A course in calculus is not necessary; however, knowledge of the concepts in
advanced mathematics and elementary probability will make the topics more meaningful.
Practitioners and professional engineers who need a refresher in economic analysis and cost

estimation will find this book very useful as a reference document as well as a learning medium.

Chapter Organization and Coverage Options
The textbook contains 19 chapters arranged into four learning stages, as indicated in the flowchart
on the next page, and five appendices. Each chapter starts with a statement of purpose and a specific learning outcome (ABET style) for each section. Chapters include a summary, numerous


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xiv

Preface to Seventh Edition

CHAPTERS IN EACH LEARNING STAGE
Composition by level
Chapter 1
Foundations of
Engineering Economy
Chapter 2
Factors: How Time and
Interest Affect Money

Learning
Stage 1:
The
Fundamentals

Chapter 3
Combining Factors and
Spreadsheet Functions
Chapter 4

Nominal and Effective
Interest Rates

Learning
Stage 2:
Basic
Analysis
Tools

Chapter 5
Present Worth
Analysis

Chapter 6
Annual Worth
Analysis

Chapter 7
Rate of Return
Analysis:
One Project
Chapter 8
Rate of Return
Analysis: Multiple
Alternatives

Chapter 9
Benefit/Cost Analysis
and Public Sector
Economics

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Learning Stage 2 Epilogue
Selecting the Basic
Analysis Tool

Learning
Stage 3:
Making
Better
Decisions

Learning
Stage 4:
Rounding
Out the
Study

Chapter 10
Project Financing and
Noneconomic Attributes

Chapter 14
Effects of
Inflation

Chapter 11
Replacement and
Retention Decisions

Chapter 15
Cost Estimation and
Indirect Cost Allocation

Chapter 12
Independent Projects
with Budget Limitation

Chapter 13
Breakeven and
Payback Analysis

Chapter 16
Depreciation
Methods

Chapter 18
Sensitivity Analysis
and Staged Decisions

Chapter 17
After-Tax Economic
Analysis

Chapter 19
More on Variation
and Decision Making
under Risk

end-of-chapter problems (essay and numerical), multiple-choice problems useful for course review and FE Exam preparation, and a case study.

The appendices are important elements of learning for this text:
Appendix A
Appendix B
Appendix C
Appendix D
Appendix E

Spreadsheet layout and functions (Excel is featured)
Accounting reports and business ratios
Code of Ethics for Engineers (from NSPE)
Equivalence computations using calculators and geometric series; no tables
Concepts, guidelines, terms, and symbols for engineering economics

There is considerable flexibility in the sequencing of topics and chapters once the first six
chapters are covered, as shown in the progression graphic on the next page. If the course is designed to emphasize sensitivity and risk analysis, Chapters 18 and 19 can be covered immediately


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Chapter Organization and Coverage Options

CHAPTER AND TOPIC PROGRESSION OPTIONS
Topics may be introduced at the point indicated or any point thereafter
(Alternative entry points are indicated by
)

Numerical progression
through chapters

Inflation

Cost
Estimation

Taxes and
Depreciation

Sensitivity, Staged
Decisions, and Risk

1. Foundations
2. Factors
3. More Factors
4. Effective i
5. Present Worth
6. Annual Worth

7. Rate of Return
8. More ROR
9. Benefit/Cost

10. Financing and
Noneconomic Attributes
11. Replacement
12. Capital Budgeting
13. Breakeven and
Payback
14. Inflation
15. Estimation

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16. Depreciation
17. After-Tax

18. Sensitivity, Decision
Trees, and Real Options
19. Risk and Simulation

after Learning Stage 2 (Chapter 9) is completed. If depreciation and tax emphasis are vitally
important to the goals of the course, Chapters 16 and 17 can be covered once Chapter 6 (annual
worth) is completed. The progression graphic can help in the design of the course content and
topic ordering.

xv


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SAMPLE OF RESOURCES FOR
LEARNING OUTCOMES
L E A R N I N G

Each chapter begins with a purpose, list
of topics, and learning outcomes
(ABET style) for each corresponding
section. This behavioral-based
approach sensitizes the reader to what
is ahead, leading to improved
understanding and learning.

O U T C O M E S

Purpose: Use multiple factors and spreadsheet functions to find equivalent amounts for cash flows that have nonstandard placement.

SECTION

TOPIC

LEARNING OUTCOME

3.1

Shifted series

• Determine the P, F or A values of a series
starting at a time other than period 1.

3.2

Shifted series and single cash
flows

• Determine the P, F, or A values of a shifted series
and randomly placed single cash flows.

3.3

Shifted gradients

• Make equivalence calculations for shifted
arithmetic or geometric gradient series that

increase or decrease in size of cash flows.

CONCEPTS AND GUIDELINES
Time value of money

It is a well-known fact that money makes money. The time value of money explains the change
in the amount of money over time for funds that are owned (invested) or owed (borrowed).
This is the most important concept in engineering economy.

IN-CHAPTER EXAMPLES

To highlight the fundamental building
blocks of the course, a checkmark and title
in the margin call attention to particularly
important concepts and decision-making
guidelines. Appendix E includes a brief
description of each fundamental concept.

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EXAMPLE 4.6

Numerous in-chapter examples
throughout the book reinforce the
basic concepts and make
understanding easier. Where
appropriate, the example is solved
using separately marked hand and
spreadsheet solutions.

A dot-com company plans to place money in a new venture capital fund that currently returns

18% per year, compounded daily. What effective rate is this (a) yearly and (b) semiannually?

Solution

(a) Use Equation [4.7], with r ϭ 0.18 and m ϭ 365.
0.18 365 Ϫ 1 ϭ 19.716%
Effective i% per year ϭ 1 ϩ ——
365
(b) Here r ϭ 0.09 per 6 months and m ϭ 182 days.
0.09 182 Ϫ 1 ϭ 9.415%
Effective i% per 6 months ϭ 1 ϩ ——
182

(

)

(

)

PROGRESSIVE EXAMPLES
PE
Water for Semiconductor Manufacturing Case: The worldwide contribution of
semiconductor sales is about $250 billion
per year, or about 10% of the world’s
GDP (gross domestic product). This industry produces the microchips used in many
of the communication, entertainment,
transportation, and computing devices
we use every day. Depending upon the

type and size of fabrication plant (fab),
the need for ultrapure water (UPW) to
manufacture these tiny integrated circuits
is high, ranging from 500 to 2000 gpm
(gallons per minute). Ultrapure water is
obtained by special processes that commonly include reverse osmosis͞deionizing
resin bed technologies. Potable water
obtained from purifying seawater or
brackish groundwater may cost from
$2 to $3 per 1000 gallons, but to obtain
UPW on-site for semiconductor manufacturing may cost an additional $1 to $3 per
1000 gallons.
A fab costs upward of $2.5 billion to
construct, with approximately 1% of this
total, or $25 million, required to provide
the ultrapure water needed, including
the necessary wastewater and recycling
equipment.
A newcomer to the industry, Angular
Enterprises, has estimated the cost profiles for two options to supply its anticipated fab with water. It is fortunate to

Several chapters include a progressive
example—a more detailed problem statement
introduced at the beginning of the chapter and
expanded upon throughout the chapter in
specially marked examples. This approach
illustrates different techniques and some
increasingly complex aspects of a real-world
problem.

have the option of desalinated seawater
or purified groundwater sources in the
location chosen for its new fab. The initial cost estimates for the UPW system are
given below.
Source
Equipment first
cost, $M

Seawater
(S)
Ϫ20

Groundwater
(G)
Ϫ22

Ϫ0.5

Ϫ0.3

Salvage value, % of
first cost

5

10

Cost of UPW, $ per
1000 gallons

4

5

AOC, $M per year

Angular has made some initial estimates
for the UPW system.
Life of UPW equipment 10 years
UPW needs

1500 gpm

Operating time

16 hours per
day for 250 days
per year

This case is used in the following topics
(Sections) and problems of this chapter:
PW analysis of equal-life alternatives
(Section 5.2)
PW analysis of different-life alternatives (Section 5.3)
Capitalized cost analysis (Section 5.5)
Problems 5.20 and 5.34

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INSTRUCTORS AND STUDENTS

xvii

Contents

ONLINE PRESENTATIONS

bla76302_ch08_202-227.indd 212

An icon in the margin indicates the
availability of an animated voice-over slide
presentation that summarizes the material in
the section and provides a brief example for
learners who need a review or prefer videobased materials. Presentations are keyed to
the sections of the text.

3.1 Calculations for Uniform Series That Are Shifted
When a uniform series begins at a time other than at the end of period 1, it is called a shifted
series. In this case several methods can be used to find the equivalent present worth P. For
example, P of the uniform series shown in Figure 3–1 could be determined by any of the
following methods:
• Use the P͞F factor to find the present worth of each disbursement at year 0 and add them.
• Use the F͞P factor to find the future worth of each disbursement in year 13, add them, and
then find the present worth of the total, using P ϭ F(P͞F,i,13).
• Use the F͞A factor to find the future amount F ϭ A(F͞A,i,10), and then compute the present

worth, using P ϭ F(P͞F,i,13).
• Use the P͞A factor to compute the “present worth” P3 ϭ A(P͞A,i,10) (which will be located
in year 3, not year 0), and then find the present worth in year 0 by using the (P͞F,i,3) factor.

MARR
Filter 1 ROR Ϸ 25%

Filter 2 ROR Ϸ 23%

MARR

Breakeven ROR Ϸ 17%

EXAMPLE 13.8
Breakeven

Chris and her father just purchased
smallϷoffi
ce building for $160,000 that is in need of a lot
Incrementala ROR
17%
of repairs, but is located in a prime commercial area of the city. The estimated costs each year
for repairs, insurance, etc. are $18,000 the first year, increasing by $1000 per year thereafter.
At an 8–6
expected 8% per year return, use spreadsheet analysis to determine the payback period
Figure
if versus
the building
is (a)
forincremental

2 years and
sold for
$290,000
PW
i graph and
PWkept
versus
i graph,
Example
8.4. sometime beyond year 2 or (b) kept
for 3 years and sold for $370,000 sometime beyond 3 years.

Solution

SPREADSHEETS

12/11/10 6:52 PM

The text integrates spreadsheets to show
how easy they are to use in solving virtually
any type of engineering economic analysis
problem. Cell tags or full cells detail
built-in functions and relations developed
to solve a specific problem.

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Figure 13–11 shows the annual costs (column B) and the sales prices if the building is kept 2
or 3 years (columns C and E, respectively). The NPV function is applied (columns D and F) to
determine when the PW changes sign from plus to minus. These results bracket the payback

period for each retention
period 7–12
and sales price. When PW Ͼ 0, the 8% return is exceeded.
Figure

Spreadsheet
of 4ROIC
Goal
Seek, isExample
7.6.
(a) The 8% return payback
period isapplication
between 3 and
years method
(column using
D). If the
building
sold
after exactly 3 years for $290,000, the payback period was not exceeded; but after 4 years
it is exceeded.
(b) At a sales price of $370,000, the 8% return payback period is between 5 and 6 years (column F). If the building is sold after 4 or 5 years, the payback is not exceeded; however, a
sale after 6 years is beyond the 8%-return payback period.

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12/11/10 4:32 PM
If kept 2 years and
sold, payback is
between 3 and 4
If kept 3 years and

sold, payback is
between 5 and 6

ϭ NPV(8%,$B$4:B7)+$B$3 Ϫ PV(8%,A7,,290000)

Figure 13–11
Payback period analysis, Example 13.8

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FE EXAM AND COURSE
REVIEWS
Each chapter concludes with several
multiple-choice, FE Exam–style
problems that provide a simplified
review of chapter material. Additionally,
these problems cover topics for test
reviews and homework assignments.

12/7/10 7:26 AM

ADDITIONAL PROBLEMS AND FE EXAM REVIEW QUESTIONS
8.38 When conducting a rate of return (ROR) analysis
involving multiple mutually exclusive alternatives, the first step is to:
(a) Rank the alternatives according to decreasing initial investment cost
(b) Rank the alternatives according to increasing

initial investment cost
(c) Calculate the present worth of each alternative using the MARR
(d) Find the LCM between all of the alternatives
8.39 In comparing mutually exclusive alternatives by
the ROR method, you should:
(a) Find the ROR of each alternative and pick
the one with the highest ROR
(b) S l
h
l
i
h
i
l

8.43 For these alternatives, the sum of the incremental
cash flows is:
Year

A

B

0
1
2
3
4
5

Ϫ10,000
ϩ2,500
ϩ2,500
ϩ2,500
ϩ2,500
ϩ2,500

Ϫ14,000
ϩ4,000
ϩ4,000
ϩ4,000
ϩ4,000
ϩ4,000

(a)
(b)
(c)
(d)

$2500
$3500
$6000
$8000


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CASE STUDIES

CASE STUDY

RENEWABLE ENERGY SOURCES FOR ELECTRICITY GENERATION
Background
Pedernales Electric Cooperative (PEC) is the largest
member-owned electric co-op in the United States with over
232,000 meters in 12 Central Texas counties. PEC has a capacity of approximately 1300 MW (megawatts) of power, of
which 277 MW, or about 21%, is from renewable sources.
The latest addition is 60 MW of power from a wind farm in
south Texas close to the city of Corpus Christi. A constant
question is how much of PEC’s generation capacity should be
from renewable sources, especially given the environmental
issues with coal-generated electricity and the rising costs of
hydrocarbon fuels.
Wind and nuclear sources are the current consideration for
the PEC leadership as Texas is increasing its generation by
nuclear power and the state is the national leader in wind
farm–produced electricity.
Consider yourself a member of the board of directors of
PEC. You are an engineer who has been newly elected by the
PEC membership to serve a 3-year term as a director-at-large.
As such, you do not represent a specific district within the
entire service area; all other directors do represent a specific
district. You have many questions about the operations of
PEC, plus you are interested in the economic and societal
benefits of pursuing more renewable source generation
capacity.

Information
Here are some data that you have obtained. The information
is sketchy, as this point, and the numbers are very approximate. Electricity generation cost estimates are national
in scope, not PEC-specific, and are provided in cents per

kilowatt-hour (¢/kWh).
Generation Cost, ¢/kWh
Fuel Source
Coal
Natural gas
Wind
Solar

Likely Range
4 to 9
4 to 10.5
4.8 to 9.1
4.5 to 15.5

Reasonable Average
7.4
8.6
8.2
8.8

PEC average cost to residential customers: 10.27 ¢/kWh
(from primary sources) and 10.92 ¢/kWh (renewable sources)
Expected life of a generation facility: 20 to 40 years (it is
likely closer to 20 than 40)
Time to construct a facility: 2 to 5 years
Capital cost to build a generation facility: $900 to $1500
per kW
You have also learned that the PEC staff uses the wellrecognized levelized energy cost (LEC) method to determine
the price of electricity that must be charged to customers to
break even. The formula takes into account the capital cost of

the generation facilities, the cost of capital of borrowed
money, annual maintenance and operation (M&O) costs, and
the expected life of the facility. The LEC formula, expressed
in dollars per kWh for (t ϭ 1, 2, . . . , n), is

New and updated case studies at the
end of most chapters present realworld, in-depth treatments and
exercises in the engineering
profession. Each case includes a
background, relevant information,
and an exercise section.

tϭn

P ϩA ϩC
⌺ ——————
(1 ϩ i)
t

t

t

t

tϭ1
LEC ϭ ———————
tϭn
Et
———

t
tϭ1 (1 ϩ i)

⌺

where Pt ϭ capital investments made in year t
At ϭ annual maintenance and operating (M&O) costs
for year t
Ct ϭ fuel costs for year t
Et ϭ amount of electricity generated in year t
n ϭ expected life of facility
i ϭ discount rate (cost of capital)

Case Study Exercises
1. If you wanted to know more about the new arrangement with the wind farm in south Texas for the additional 60 MW per year, what types of questions would
you ask of a staff member in your first meeting with
him or her?
2. Much of the current generation capacity of PEC facilities
utilizes coal and natural gas as the primary fuel source.
What about the ethical aspects of the government’s allowance for these plants to continue polluting the atmosphere
with the emissions that may cause health problems for
citizens and further the effects of global warming? What
types of regulations, if any, should be developed for PEC
(and other generators) to follow in the future?

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National average cost of electricity to residential customers: 11¢/kWh

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ACKNOWLEDGMENT OF CONTRIBUTORS
It takes the input and efforts of many individuals to make significant improvements in a textbook.
We wish to give special thanks to the following persons for their contributions to this edition.
Paul Askenasy, Texas Commission on Environmental Quality
Jack Beltran, Bristol-Myers Squibb
Robert Lundquist, Ohio State University
William Peet, Infrastructure Coordination, Government of Niue
Sallie Sheppard, Texas A&M University
We thank the following individuals for their comments, feedback, and review of material to assist
in making this edition a real success.
Ahmed Alim, University of Houston
Alan Atalah, Bowling Green State University
Fola Michael Ayokanmbi, Alabama A&M University
William Brown, West Virginia University at Parkersburg
Hector Carrasco, Colorado State University–Pueblo
Robert Chiang, California State University, Pomona
Ronald Cutwright, Florida State University
John F. Dacquisto, Gonzaga University
Houshang Darabi, University of Illinois at Chicago
Freddie Davis, West Texas A&M University
Edward Lester Dollar, Southern Polytechnic State University
Ted Eschenbach, University of Alaska
Clara Fang, University of Hartford
Abel Fernandez, University of the Pacific
Daniel A. Franchi, California Polytechnic State University, San Luis Obispo
Mark Frascatore, Clarkson University
Benjamin M. Fries, University of Central Florida
Nathan Gartner, University of Massachusetts–Lowell

Johnny R. Graham, University of North Carolina–Charlotte
Liling Huang, Northern Virginia Community College
David Jacobs, University of Hartford
Adam Jannik, Northwestern State University
Peter E. Johnson, Valparaiso University
Justin W. Kile, University of Wisconsin–Platteville
John Kushner, Lawrence Technological University
Clifford D. Madrid, New Mexico State University
Saeed Manafzadeh, University of Illinois at Chicago
Quamrul Mazumder, University of Michigan–Flint
Deb McAvoy, Ohio University
Gene McGinnis, Christian Brothers University
Bruce V. Mutter, Bluefield State College
Hong Sioe Oey, University of Texas at El Paso
Richard Palmer, University of Massachusetts
Michael J. Rider, Ohio Northern University
John Ristroph, University of Louisiana at Lafayette
Saeid L. Sadri, Georgia Institute of Technology
Scott Schultz, Mercer University
Kyo D. Song, Norfolk State University
James Stevens, University of Colorado at Colorado Springs
John A. Stratton, Rochester Institute of Technology
Mathias J. Sutton, Purdue University
Pete Weiss, Valparaiso University

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xx

Acknowledgment of Contributors

Greg Wiles, Southern Polytechnic State University
Richard Youchak, University of Pittsburgh at Johnstown
William A. Young, II, Ohio University
If you discover errors that require correction in the next printing of the textbook or in updates of
the online resources, please contact us. We hope you find the contents of this edition helpful in
your academic and professional activities.
Leland Blank
Anthony Tarquin




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L E A R N I N G S TA G E 1
The Fundamentals

LEARNING STAGE 1

The Fundamentals
CHAPTER

1

Foundations of
Engineering Economy
CHAPTER

2

Factors: How Time
and Interest Affect
Money
CHAPTER

3

Combining Factors
and Spreadsheet
Functions
CHAPTER

4

T

he fundamentals of engineering economy are introduced in
these chapters. When you have completed stage 1, 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 different interest rates. The
techniques you master here form the basis of how an engineer in
any discipline can take economic value into account in virtually any
project environment.

The factors commonly used in all engineering economy computations are introduced and applied here. Combinations of these factors assist in moving monetary values forward and backward through
time and at different interest rates. Also, after these chapters, you
should be comfortable using many of the spreadsheet functions.
Many of the terms common to economic decision making are
introduced in learning stage 1 and used in later chapters. A checkmark icon in the margin indicates that a new concept or guideline
is introduced at this point.

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Nominal and Effective
Interest Rates


CHAPTER 1

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Foundations
of Engineering
Economy
L E A R N I N G

O U T C O M E S

Purpose: Understand and apply fundamental concepts and use the terminology of engineering economics.

SECTION

TOPIC

LEARNING OUTCOME

Description and role

• Define engineering economics and describe its
role in decision making.

Engineering economy study
approach

• Understand and identify the steps in an
engineering economy study.

1.3

Ethics and economics

• Identify areas in which economic decisions can
present questionable ethics.

1.4

Interest rate

• Perform calculations for interest rates and rates
of return.

1.5

Terms and symbols

• Identify and use engineering economic
terminology and symbols.

1.6

Cash flows

• Understand cash flows and how to graphically
represent them.

1.7

Economic equivalence

• Describe and calculate economic equivalence.

1.8

Simple and compound interest

• Calculate simple and compound interest
amounts for one or more time periods.

1.9

MARR and opportunity cost

• State the meaning and role of Minimum
Attractive Rate of Return (MARR) and

opportunity costs.

1.10

Spreadsheet functions

• Identify and use some Excel functions
commonly applied in engineering economics.

1.1
1.2

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T

he need for engineering economy is primarily motivated by the work that engineers
do in performing analyses, synthesizing, and coming to a conclusion as they work on
projects of all sizes. In other words, engineering economy is at the heart of making
decisions. These decisions involve the fundamental elements of cash flows of money, time,
and interest rates. This chapter introduces the basic concepts and terminology necessary for
an engineer to combine these three essential elements in organized, mathematically correct
ways to solve problems that will lead to better decisions.

1.1 Engineering Economics: Description and
Role in Decision Making
Decisions are made routinely to choose one alternative over another by individuals in everyday

life; by engineers on the job; by managers who supervise the activities of others; by corporate
presidents who operate a business; and by government officials who work for the public good.
Most decisions involve money, called capital or capital funds, which is usually limited in
amount. The decision of where and how to invest this limited capital is motivated by a primary
goal of adding value as future, anticipated results of the selected alternative are realized.
Engineers play a vital role in capital investment decisions based upon their ability and experience
to design, analyze, and synthesize. The factors upon which a decision is based are commonly a
combination of economic and noneconomic elements. Engineering economy deals with the
economic factors. By definition,
Engineering economy involves formulating, estimating, and evaluating the expected economic
outcomes of alternatives designed to accomplish a defined purpose. Mathematical techniques
simplify the economic evaluation of alternatives.
Because the formulas and techniques used in engineering economics are applicable to all
types of money matters, they are equally useful in business and government, as well as for
individuals. Therefore, besides applications to projects in your future jobs, what you learn
from this book and in this course may well offer you an economic analysis tool for making
personal decisions such as car purchases, house purchases, major purchases on credit, e.g.,
furniture, appliances, and electronics.
Other terms that mean the same as engineering economy are engineering economic analysis,
capital allocation study, economic analysis, and similar descriptors.
People make decisions; computers, mathematics, concepts, and guidelines assist people in
their decision-making process. Since most decisions affect what will be done, the time frame of
engineering economy is primarily the future. Therefore, the numbers used in engineering economy are best estimates of what is expected to occur. The estimates and the decision usually
involve four essential elements:

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Cash flows
Times of occurrence of cash flows
Interest rates for time value of money

Measure of economic worth for selecting an alternative
Since the estimates of cash flow amounts and timing are about the future, they will be somewhat different than what is actually observed, due to changing circumstances and unplanned
events. In short, the variation between an amount or time estimated now and that observed
in the future is caused by the stochastic (random) nature of all economic events. Sensitivity
analysis is utilized to determine how a decision might change according to varying estimates, especially those expected to vary widely. Example 1.1 illustrates the fundamental
nature of variation in estimates and how this variation may be included in the analysis at a
very basic level.

EXAMPLE 1.1
An engineer is performing an analysis of warranty costs for drive train repairs within the first
year of ownership of luxury cars purchased in the United States. He found the average cost (to
the nearest dollar) to be $570 per repair from data taken over a 5-year period.