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The following topics are discussed in this chapter: The importance of this subject in engineering practice
Origins of engineering economy
The principles of engineering economy
Engineering economy and the design process
Accounting and engineering economy studies
Overview of the book
The technological and social environments in which we live continue to change at a rapid rate. In recent decades, advances in science and engineering have made space travel possible, transformed our transportation systems, revolutionized the practice of medicine, and miniaturized electronic circuits so that a computer can be placed on a semiconductor chip. The list of such achievements seems almost endless. In your science and engineering courses you will learn about some of the physical laws that underlie these accomplishments.
The utilization of scientific and engineering knowledge for our benefit is achieved through the design of things we use, such as machines, structures, products, and services. However, these achievements don't occur without a price, monetary or otherwise. Therefore, the purpose of this book is to develop and illustrate the principles and methodology required to answer the basic economic question of any design: Do its benefits exceed its costs?
The Accreditation Board for Engineering and Technology states that engineering "isthe profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind." In this definition the economic aspects of engineering are emphasized as well as the physical aspects. Clearly, it is essential that the economic part of engineering practice be accomplished well.
Engineering Economy involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable (i.e., affordable), solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term costs, and they must also
A few more of the myriad situations in which engineering economy plays a crucial role come to mind:
1. Choosing the best design for a high-efficiency gas furnace.
2. Selecting the most suitable robot for a welding operation on an automotive assembly line.
3. Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased.
4. Determining the optimal staffing plan for a computer help desk.
From these illustrations it should be obvious that engineering economy includes significant technical considerations. Thus, engineering economy involves technical analysis, with emphasis on the economic aspects, and has the objective of assisting as they progress through this book. However, in engineering economic analysis, experience has shown that most errors can be traced to some violation or lack of adherence to the basic principles. Once a problem/need has been clearly defined, the foundation of the discipline can be discussed in terms of seven principles.
Principle 1 -Develop The Alternatives: The choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.
A decision situation involves making a choice among two or more alternatives. Developing and defining the alternatives for detailed evaluation is important because of the resulting impact on the quality of the decision. Engineers and managers should place a high priority on this responsibility. Creativity and innovation are essential to the process.
One alternative that may be feasible in a decision situation is making no change to the current operation or set of conditions (i.e., doing nothing). If you judge this option feasible, make sure it is considered in the analysis. However, do not focus on the status quo to the detriment of innovative or necessary change.
Priniciple 2 -Focus On The Differences: Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.
If all prospective outcomes of the feasible alternatives were exactly the same, there would be no basis or need for comparison. We would be indifferent among the alternatives and could make a decision using a random selection.
Obviously, only the differences in the future outcomes of the alternatives are important. Outcomes that are common to all alternatives can be disregarded in the comparison and decision. For example, if your feasible housing alternatives were two residences with the same purchase (or rental) price, price would be inconsequential to your final choice. Instead, the decision would depend on other factors such as location and annual operating and maintenance expenses. This example illustrates, in a simple way, Principle 2, which emphasizes the basic purpose of an engineering economic analysis: to recommend a future course of action based on the differences among feasible alternatives.
Principle 3 -Use A Consistent Viewpoint: The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective)....
|Pt. I||Fundamentals of Engineering Economy||1|
|Ch. 1||Introduction to Engineering Economy||2|
|Ch. 2||Cost Concepts and Design Economics||23|
|Ch. 3||Money-Time Relationships and Equivalence||70|
|Pt. II||Basic Topics in Engineering Economy||149|
|Ch. 4||Applications of Money-Time Relationships||150|
|Ch. 5||Comparing Alternatives||197|
|Ch. 6||Depreciation and Income Taxes||253|
|Ch. 7||Cost Estimation Techniques||313|
|Ch. 8||Price Changes and Exchange Rates||368|
|Ch. 9||Replacement Analysis||406|
|Ch. 10||Dealing with Uncertainty||447|
|Pt. III||Additional Topics in Engineering Economy||483|
|Ch. 11||Evaluating Projects with the Benefit-Cost-Ratio Method||484|
|Ch. 12||Engineering Economy Studies in Investor-Owned Utilities||519|
|Ch. 13||Probabilistic Risk Analysis||540|
|Ch. 14||Capital Financing and Allocation||586|
|Ch. 15||Dealing with Multiattributed Decisions||618|
|A||Accounting and Its Relationship to Engineering Economy||642|
|B||Abbreviations and Notation||660|
|C||Interest and Annuity Tables for Discrete Compounding||665|
|D||Interest and Annuity Tables for Continuous Compounding||684|
|E||Standardized Normal Distribution Function||688|
|F: Selected References||691|
|G: Answers to Problems||695|
Engineering economy—what is it, and why is it important? The initial reaction of many engineering students to these questions is "Money matters will be handled by someone else. It is not something I need to worry about." In reality, any engineering project must be not only physically realizable, but also economically affordable. For example, a child's tricycle could be built with an aluminum frame or a composite frame. Some may argue that because the composite frame will be stronger and lighter, it is a better choice. However, there is not much of a market for thousand dollar tricycles! One might suggest that this argument is ridiculously simplistic and that common sense would dictate choosing aluminum for the framing material. Although the scenario is an exaggeration, it reinforces the idea that the economic factors of a design weigh heavily in the design process, and that engineering economy is an integral part of that process, regardless of the engineering discipline. Engineering, without economy, makes no sense at all.
In broad terms, for an engineering design to be successful, it must be technically sound and produce benefits. These benefits must exceed the costs associated with the design in order for the design to enhance net value. The field of engineering economy is concerned with the systematic evaluation of the benefits and costs of projects involving engineering design and analysis. In other words, engineering economy quantifies the benefits and costs associated with engineering projects to determine whether they make (or save) enough money to warrant their capital investments. Thus, engineering economy requires theapplication of engineering design and analysis principles to provide goods and services that satisfy the consumer at an affordable cost. As we shall see, engineering economy is as relevant to the design engineer who considers material selection as it is to the chief executive officer who approves capital expenditures for new ventures.
The original Introduction to Engineering Economy, authored by Woods and DeGarmo, appeared in 1942. The extensive use of this text for the past 60 years has encouraged the authors to continue building on the original purpose of the boo—kto teach lucidly the principles of engineering economy. In this spirit, the twelfth edition of Engineering Economy has built upon the rich and time-tested teaching materials of earlier editions, and its publication makes it the second-oldest book on the market that deals exclusively with engineering economy.
New or Enhanced Features to This Edition
This book has two primary purposes: (1) to provide students with a sound understanding of the principles, basic concepts, and methodology of engineering economy; and (2) to help them develop proficiency with these methods and with the process for making rational decisions regarding situations they are likely to encounter in professional practice. Consequently, Engineering Economy is intended to serve as a text for classroom instruction and as a basic reference for use by practicing engineers in all specialty areas (e.g., chemical, civil, computer, electrical, industrial, and mechanical engineering). The book is also useful to persons engaged in the management of technical activities.
As a textbook, the twelfth edition is written principally for the first formal course in engineering economy. The contents of the book and the accompanying Instructor's Manual and Electronic Spreadsheets Supplement (both available from Prentice Hall) are organized for effective presentation and teaching of the subject matter. A three-credit-hour semester course should be able to cover the majority of topics in this edition, and there is sufficient depth and breadth to enable an instructor to arrange course content to suit individual needs. Representative syllabi for a three-credit and a two-credit semester course in engineering economy are provided in Table P-1. Moreover, because several advanced topics are included, this book can also be used for a second course in engineering economy.
Every chapter and the appendices have been revised and updated to reflect current trends and issues. Also, numerous exercises that involve open-ended problem statements and iterative problem-solving skills are included throughout the book. A large number of the 500+ end-of-chapter exercises are new, and many solved examples representing realistic problems that arise in various engineering disciplines are presented.
An engineering economy course may be classified, for Accreditation Board for Engineering and Technology (ABET) purposes, as part engineering science and part engineering design. It is generally advisable to develop and teach such a course at the upper division level. Here, an engineering economy course incorporates the accumulated knowledge students have acquired in other areas of the curriculum also dealing with iterative problem solving, open-ended exercises, creativity in formulating and evaluating feasible solutions to problems, and consideration of realistic constraints (economic, aesthetic, safety, etc.) in problem solving.
The Instructor's Manual is designed as a comprehensive aid in teaching the text material. Full solutions of all problems at the end of each chapter are presented. Several comprehensive examples (case studies) have been included in the twelfth edition. These fairly complex examples and problems provide the instructor with essential material for teaching both the first formal course and a second, more advanced course in engineering economy. They also integrate the principles, basic concepts, and methodologies that are needed by engineers in typical real-world situations, and also serve as a bridge from the classroom to professional practice.
A second supplement entitled Spreadsheet Modeling to Accompany Engineering Economy, Twelfth Edition is authored by James A. Alloway, Jr. Electronic spreadsheets are a mainstay in many undergraduate engineering economy courses; the spreadsheet supplement ensures that the twelfth edition of Engineering Economy will maintain its leadership position by providing basic templates for all major topics in the text. In addition, it provides a concise summary of formulas and key concepts, which students will find invaluable for review and quick reference.
The greatest advantage is that it is no longer necessary to enter the spreadsheets by hand. The templates can be downloaded and opened directly in Excel for Windows. Most other spreadsheet software packages provide conversion utilities to convert these files into their respective native formats. Users can then modify the basic templates for the specific problem at hand. As a bonus, advanced templates have also been developed for such techniques as Monte Carlo simulation, three-factor simultaneous sensitivity analysis, and integer linear programming.
In many engineering economy courses, students are required to design, develop, and maintain an "Engineering Economy Portfolio." The purpose of the portfolio is to demonstrate and integrate knowledge of engineering economy beyond the required assignments and tests. This is usually an individual assignment. Professional presentation, clarity, brevity, and creativity are important criteria that will be used to evaluate portfolios. Students are asked to keep the audience (i.e., the grader) in mind when constructing their portfolios.
The portfolio should contain a variety of content. To get credit for content, students must display their knowledge. Simply collecting articles in a folder demonstrates very little. To get credit for collected articles, students should read them and write a brief summary. The summary could explain how the article is relevant to engineering economy, it could critique the article, or it could check or extend any economic calculations in the article. The portfolio should include both the summary and the article itself. Annotating the article by writing comments in the margin is also a good idea. Other suggestions for portfolio content follows (note that students are encouraged to be creative):
(The preceding list could reflect the relative value of the suggested items; that is, items at the top of the list are worth more than items at the bottom of the list.)
Develop an introductory section that explains the purpose and organization of the portfolio. A table of contents and clearly marked sections or headings are highly recommended. Cite the source (i.e., a complete bibliographic entry) of all material other than your own work. Remember, portfolios provide evidence that students know more about engineering economy than what is reflected in the assignments and exams. Focus on quality of evidence, not quantity.
WILLIAM G. SULLIVAN
ELM M. WICKS
JAMES T. LUXHOJ