Contemporary Engineering Economics

Contemporary Engineering Economics

by Chan S. Park

Paperback(Older Edition)

$99.00

Overview


This book is intended for undergraduate engineering students taking the introductory engineering economics course at the university level.
The fourth edition of Contemporary Engineering Economics has been thoroughly revised and updated while continuing to adopt a contemporary approach to the subject, and teaching, of engineering economics. This text aims not only to build a sound and comprehensive coverage of engineering economics, but also to address key educational challenges, such as student difficulty in developing the analytical skills required to make informed financial decisions.

Product Details

ISBN-13: 9780201835984
Publisher: Prentice Hall Professional Technical Reference
Publication date: 12/20/1996
Edition description: Older Edition
Pages: 840
Product dimensions: 7.51(w) x 9.45(h) x 1.44(d)

Read an Excerpt

PREFACE:

PREFACE

What's *Contemporary* about Engineering Economics?

Decisions made during the engineering design phase of a product's development determine the majority (some say 85%) of the costs of manufacturing that product. And, as design and manufacturing processes become more complex, the engineer, increasingly, will be called upon to make decisions that involve money. In the twentyfirst century, the competent and successful engineer will need an improved understanding of the principles of science, engineering, and economics, coupled with relevant design experience. This is because, in the new world economy, successful businesses will rely on engineers with this type of expertise more and more.

In the product/service life cycle, economic and design issues are inextricably linked. One of my strongest motivations in writing this text was, therefore, to bring the realities of economics and engineering design into the classroom and to help students integrate these issues when contemplating an engineering problem or making an engineering decision.

Another compelling motivation for me was, once students had mastered fundamental concepts, to introduce the computer as a productivityenhancing tool for modeling and analyzing engineering decision problems. Spreadsheets are currently the undisputed standard for automating complex engineering economic problems in industry, and they are used extensively in the classroom. At the ends of many chapters, this text introduces the topic of spreadsheets (Microsoft Excel) in sections dedicated to spreadsheet use.

In addition, I have created a World Wide Web site for this edition of ContemporaryEngineering Economics. From this site the student can download, at no cost, the software, EzCash. EzCash was developed by me, the author, with a grant from the National Science Foundation, to open visually the economic computing environment to the student's understanding. EzCash is an integrated package that includes the most frequently used methods of economic analysis. EzCash organizes information via graphicallybased structures that can be explored independently by students. EzCash runs with either Microsoft Windows 3.1 or with Microsoft Windows 95.

My underlying motivation for writing this book was not only to simply address contemporary needs, but also to address the timeless goal of all educators: To help students learn. Thus, thoroughness, clarity, and accuracy of presentation of essential engineering economics were my aims at every step in the development of the text.

Changes in This Second Edition

We are living in the age of information, within the complex and changing world of a global economy. The practice of engineering economics is therefore dynamic, and new developments as they occur, should be incorporated into a text such as this. Along with my publisher, as a teacher, I am constantly seeking for ways to improve Contemporary Engineering Economics in terms of its clarity and provision of understanding. As a result, several important changes were made to this second edition.

  1. We changed the design by adding a second color. Equations, tables, figures, and examples are now set in two colors to enhance the overall pedagogy. Highlighting important information, and separating examples from the main text, creates an effective study and review tool for students.
  2. We created a set of selftest questions for each chapter. These cover, in a comprehensive manner, the major concepts discussed in each chapter. These problems can be used as the basis for objective tests in a larger class environment or they can be used by students individually as comprehensive review for the Fundamentals of Engineering (FE) test, commonly known as the E.I.T. (EngineerinTraining) examination.
  3. The text was completely updated to reflect the latest tax laws, interest rates, and other financial developments.
  4. All spreadsheet examples are now in Microsoft Excel, the market leader for Windowsbased environments.
  5. A new Windowsbased integrated software, EzCash, replaces the CASH software of earlier editions. A discussion of EzCash is consolidated into the book's web site. This allowed us to remove CASH discussions from the main text.
  6. The number of endofchapter problems was increased and categorized by concept. Also, a separate section, Short Case Studies, was added to most chapters. The case studies can be used by students as sets of comprehensive study problems.
  7. Approximately one third of the examples in the main chapter are either new, or revised, and reflect the contemporary nature of economic decision problems.
  8. In Chapter 1, most of the realworld engineering economic decision problems have been replaced with more timely examples from The New York Times. At the suggestion of reviewers, a section on shortterm operational economic decisions (commonly known as present economic studies) was added to this chapter.
  9. A new section on design economics was added to Chapter 5. Special attention was given to linking design issues with economics throughout the book.
  10. In Chapters 6, 9, and 12 some of the advanced topics (or optional materials), such as multiple rate of return problems, lease versus buy decisions (generalized cash flow format), and risk simulation, have been removed from the main text and placed in chapter appendices. This separation allows instructors to budget their lecture hours more effectively, according to both their audience and the curriculum.
  11. At the suggestion of reviewers, project financing is no longer covered as a separate chapter. Chapter 11 and Chapter 13 of the first edition were combined to give a unified treatment to project financing and capital budgeting topics.

Overview of the Text

Although containing little advanced math and few truly difficult concepts, the introductory engineering economics course is often curiously challenging for sophomores, juniors, and seniors alike. I offer several likely explanations for this difficulty.

  1. The course may be the first time a student is asked to make an 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. An emphasis on theory*while critically important to forming the foundation of a student's understanding*may obscure for the student the fact that the aim of the introductory engineering economics course, among other things, is to develop a very practical set of analytical tools for measuring a project's worth. This is unfortunate since at one time or another virtually every engineer*not to mention every individual*is responsible for allocating limited financial resources wisely.
  3. The mixture of industrial, civil, mechanical, electrical, manufacturing, and other engineering undergraduates who take the course often fail to *see themselves* as needing to use, or develop, the skills the course and text are intended to foster. This is perhaps less true for industrial engineering students, a group many texts take as their primary audience, but students in other disciplines are often motivationally shortchanged by a text's lack of applications that have direct appeal.

Goal of the Text

This text aims not only to build a sound and comprehensive coverage of the concepts of engineering economics, but also to address the basic difficulties experienced by the types of students that I have described above*all of which have their basis in a lack of appreciation of the practical concerns of engineering economics. More specifically, this text has the following major goals:

  1. To build a thorough understanding of the theoretical and conceptual basis on which the practice of financial project analysis is built.
  2. To satisfy the very practical need that engineers will be called upon to make informed financial decisions when acting as team members or as project managers of engineering projects.
  3. To incorporate all critical decisionmaking tools*including the most contemporary, computeroriented 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 Chapter 12, a first course in probability or statistics would be helpful, but not necessary, because the treatment of basic topics in this chapter is essentially selfcontained.

Content and Approach

Educators generally agree upon the proper content and organization of an engineering economics text. A glance at the table of contents demonstrates that this text addresses the standard embraced by most instructors and that is reflected in competing texts. However, one of my driving motivations in this text was to supersede the standard in terms of the depth of coverage and the care with which difficult concepts were presented. Accordingly, the content and approach of this second edition of Contemporary Engineering Economics was designed to provide the following:

Thorough Development of the Concept of the Time Value of Money

The notion of the time value of money and the interest formulas that model it form the foundation upon which all other topics in engineering economics are built. Because of their great importance, and because many students are being exposed to an analytical approach to money for the first time, interest topics are carefully and thoroughly developed in Chapters 2 and 3.

  1. Chapter 2 carefully examines the conceptual understanding of interest*the time value of money*more *what if* and more graphical explorations are provided than in any other current text.
  2. Chapter 3 extends an understanding of the time value of money via its real world complexities*effective interest, noncomparable payment, and compounding periods, etc.

Thorough Coverage of Major Analysis Methods

The equivalence methods*present worth, annual worth, and future worth*and rate of return analysis are the bedrock of project evaluation and comparison. This text carefully develops these topics in Chapters 4, 5, and 6, where they are paced for maximum student comprehension of the subtleties, strengths, and weaknesses of each method.

  1. A separate chapter (Chapter 5) is dedicated to annual worth in order to emphasize the circumstances under which this particular method of project analysis is preferred over other methods. Topics related to design economics are also explored in detail in this chapter.
  2. The difficulties and exceptions associated with rate of return analysis are thoroughly covered in Chapter 6. Coverage of internal rate of return for nonsimple projects, which is located in Appendix 6A, is optional for those who wish to avoid teaching this topic in an introductory course. The appendix can be omitted without disrupting the flow of topics.

Increased Emphasis on Developing AfterTax Cash Flows

For most practicing engineers, estimating and developing project cash flows are the first critical steps they must take in conducting an engineering economic analysis. A particularly important goal of this text is to build confidence in developing aftertax cash flows. Further analysis, comparison of projects, and decision making all depend on intelligently developed project cash flows. This text provides more emphasis on this topic than does any competitive text.

  1. Chapter 9 provides a synthesis of previously developed topics (analysis methods, depreciation, and income taxes) and is dedicated to building skill and confidence in developing aftertax cash flows for a series of fairly complex projects.
  2. To account for the everchanging nature of tax systems, the Contemporary Engineering Economics web site was created. It will be maintained by the author so that any new changes in depreciation and tax rates can be posted on this increasingly popular Internet tool.

Complete Coverage of Special Topics

A number of special topics are important to a comprehensive understanding of introductory engineering economics. Chapters 10 through 14 cover topics such as (1) replacement analysis, (2) inflation, (3) project risk and uncertainty, (4) capital budgeting, and (5) public sector analysis.

Recognizing that availability of time and priorities vary from course to course, and from instructor to instructor, each one of these chapters is sufficiently selfcontained so that it may be skipped or covered out of sequence, as needed.

Addressing Educational Challenges

The features of Contemporary Engineering Economics were selected and shaped to address key educational challenges. It is my observation and that of the publisher*based on many conversations with engineering educators*that, across the engineering curriculum, certain challenges consistently frustrate both instructors and students alike. Low student motivation and enthusiasm, student difficulty in developing problemsolving skills and intuition, challenges to integrate technology without short changing fundamental concepts and traditional methods, and student difficulty in prioritizing and remembering enormous amounts of information are among the key educational challenges that drove the features of this second edition of Contemporary Engineering Economics.

Building ProblemSolving Skills and Confidence

The examples in the text are formatted to maximize their usefulness as guides to problem solving. Further, they are intended to stimulate student curiosity to look beyond the mechanics of problem solving to *what if* issues, alternative solutions, and interpretation of solutions. Each example in the text is formatted as follows:

  • Example titles promote ease of student reference and review
  • Discussion sections at the beginning of complex examples help students begin organizing a problemsolving approach.
  • Given and Find heads in Solution sections of Examples help students identify critical data. This convention is employed in Chapters 2 through 9, and then omitted in Chapters 10 through 14, after student confidence in setting up solution procedures has been established.
  • Comments sections at the ends of examples add additional insights*these could take the form of an alternative solution method, a shortcut, or an interpretation of the numerical solution, thereby extending the educational value of the example.

Capturing the Student's Imagination

Students want to know how the conceptual and theoretical knowledge they are acquiring will be put to use. To stimulate student enthusiasm and imagination, Contemporary Engineering Economics incorporates realworld applications and contexts in a number of ways.

  1. The realworld, conceptual overview of engineering economics established in Chapter 1: This provides an engaging introduction to engineering economics via examples of its practical use.
  2. The chapteropening scenarios: These establish an interest in the needtoknow chapter concepts within the context of a practical application.
  3. The selftest questions: The endofchapter problem set is designed to help students selfdiagnose their understanding of important concepts developed in the chapter. As they are already in multiple choice format, these selftest questions can be used as a comprehensive review for the FE (or E.I.T.) exam.
  4. The many homework problems involving real engineering projects: These stimulate student interest and motivation with actual engineering investment projects, many taken from today's headlines.
  5. The full range of engineering disciplines represented in problems, examples, chapter openers, and case studies: The diversity of these elements illustrates that many disciplines require engineering economics. Industrial, chemical, civil, electrical, mechanical, manufacturing, and other areas are all represented.

Harnessing the Power of the Computer

The integration of the computer into the course and text is another important features of Contemporary Engineering Economics. As a consequence, students will have greater access to, and familiarity with, various spreadsheet tools, and instructors will have a greater inclination either to treat these topics explicitly in the course or to encourage students to experiment independently.

A concern may be that the computer will undermine true understanding of course concepts. However, this text does not promote the trivial or mindless use of computers as a replacement for genuine understanding of, and skill in, applying traditional solution methods. Rather, it focuses on the computer's productivityenhancing benefits for complex project cash flow development and analysis. Specifically, Contemporary Engineering Economics includes a robust introduction to computer automation in the form of the Computer Notes sections, which appear at the end of most chapters.

Spreadsheets are introduced via Microsoft Excel examples. In terms of spreadsheet coverage, the emphasis is on demonstrating that the more complex chapter concepts can be much more efficiently resolved by a computer than by traditional long hand methods. In Appendix A, conversion tables are included so that the builtin financial functions of both Lotus and Quattro Pro can be compared to Excel for ease in *translating* examples to other software programs.

Also, EzCash, an interactive analysis tool, is available to students free of charge. Students can download the software by visiting the web site of Contemporary Engineering Economics. The HomePage is described in Appendix B.

The Internet Tool, the Contemporary Engineering Economics web site has been created and will be maintained by the author. This text takes advantage of the Internet, which will become increasingly important as a resource to access a variety of information published in cyberspace. As illustrated in Appendix B, the web site contains avariety of ancillary materials, such as a test bank, supplemental problems, EzCash software, case study materials, and an opportunity for readers to give feedback to the author.

Flexibility of Coverage

For a typical threecredithour, onesemester course, the majority of topics in this text can be covered by taking advantage of the depth and breadth in which they are presented. For other arrangements*quarter terms or fewer credithours*chapters 1 through 9 present the essential topics, and subsequent chapters present optional coverage. By varying the depth of coverage, and supplementing the reading with case studies, enough materials are provided for a continuing, twoterm engineering economics course.

Because the topics of the time value of money and interest relationships are so basic to the overall subject of engineering economics, these are treated in depth in Chapters 2 and 3. For those wishing a briefer coverage of these topics, I suggest covering Chapter 2 in its entirety, and Sections 3.1 and 3.2 of Chapter 3. The remaining topics in Chapter 3 may be omitted entirely or assigned as additional readings.

Supplements

Much of the ancillary materials are supplied via the book's web site for this second edition of Contemporary Engineering Economics. Other materials are available free of charge to instructors who choose to adopt this text.

  1. Instructor's Manual (ISBN #14509): A comprehensive manual is available to instructors who adopt the book. The manual contains answers to all endofchapter problems, short case studies and suggested course outlines.
  2. Contemporary Engineering Economics Case Studies (ISBN #53277): This is a collection of two, personalfinance, and six, industrybased, actual cases. The investment projects detailed in these cases relate to a variety of engineering disciplines. Each case thus encourages students to synthesize their understanding in the context of complex, realworld investments. Each case begins with a list of engineering economic concepts utilized in the case and concludes with discussion questions to test the conceptual understanding of students.

This book reflects the efforts of a great many individuals who reviewed and contributed to the first edition. First, I would like to thank each of them once again:

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; Max C. Deibert, Montana State University; Stuart E. Dreyfus, University of California * Berkeley; W.J. Foley, RPI; Jane Fraser, Ohio State; 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; 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; William Lesso, University of Texas * Austin; Martin Lipinski, Memphis State University; Robert Lundquist, Ohio State University; Richard Lyles, Michigan State University; Abu S. Masud, The Wichita State University; James Milligan, University of Idaho; Richard Minesinger, University of Massachusetts * Lowell; James S. Noble, University of Missouri, Columbia; Wayne Parker, Mississippi State University; Elizabeth PateCornell, Stanford University; Cecil Peterson, GMI; George Prueitt, U.S. Naval Postgraduate School; J.K. Rao, California State University * Long Beach; Susan Richards, GMI; Mark Roberts, Michigan Tech; John Roth, Vanderbilt University; Bill Shaner, Colorado State University; Fred Sheets, California Polytechnic* Pomona; Dean Shup, University of Cincinnati; Milton Smith, Texas Tech; 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 * UC; L. Jackson Turaville, Tennessee Technological University; Thomas Ward, University of Louisville; Theo De Winter, Boston University.

In addition, the following individuals reviewed the first edition or the revised manuscript and provided detailed comments and suggestions for improving the second edition:

Kamran Abedini, California State Polytechnic University, Pomona Bopaya Bidanda, University of Pittsburgh Stuart Dreyfus, University of California, Berkeley William J. Foley, Renesselaer Polytechnic Institute Anil K. Goyal, Renesselaer Polytechnic Institute Bruce Hartsough, University of California, Davis Scott Iverson, University of Washington Peter Jackson, Cornell University William J. Kennedy, Clemson University Sue McNeil, Carnegie * Mellon University Gary Moynihan, The University of Alabama Bruce A. Reichert, Kansas State University Susan E. Richards, GMI Engineering & Management Institute Mark C. Roberts, Michigan Technological University Paul L. Schillings, Montana State University David C. Slaughter, University of California, Davis Donna C. S. Summers, University of Dayton

Personally, I would like to thank Barbara Brown, who served as copy editor and editorial coordinator during the preparation of this second edition of Contemporary Engineering Economics. Her writing skills and precise knowledge of the English language were of immense value for helping ensure that the written component of the text is as clear, accurate, and relevant as possible. The Addison Wesley book team, especially, Melanie van Rensburg, Rob Merino, Nancy Smith, and Dan Joranstaad helped greatly with all phases of the revision. Thanks are also due to James Treharne, who worked closely with me at every stage of reviewing the galley proofs, and Venkat Narayanan who helped me in preparing earlier drafts of the manuscript.

Finally, I would like to thank Ed Unger, Head of Industrial & Systems Engineering at Auburn University, who provided me with the resources and the constant encouragement that allowed me to revise this second edition of the book.

Chan S. Park
Auburn, Alabama

Table of Contents

Table of Contents

Part I: Basics of Financial Decisions

Chapter 1: Engineering Economic Decisions

Chapter 2: Understanding Financial Statement

Chapter 3: Interest Rate and Economic Equivalence

Chapter 4: Understanding Money and Its Management

Part II: Evaluation of Business and Engineering Assets

Chapter 5: Present worth Analysis

Chapter 6: Annual worth Analysis

Chapter 7: Rate of Return Analysis

Part III: Analysis of Project Cash Flows

Chapter 8: Estimating Project Cost Elements

Chapter 9: Depreciation and Corporate Taxes

Chapter 10: Developing Project Cash Flows

Part IV: Handling Risk and Uncertainty in Economic Analysis

Chapter 11: Inflation and Its Impact on Project Cash Flows

Chapter 12: Sensitivity and Risk Analysis

Chapter 13: Real Options Analysis

Part V Special Topics in Engineering Economic Analysis

Chapter 14: Replacement Analysis

Chapter 15: Capital Budgeting Decisions

Chapter 16: Economic Analysis in Service Sector

Preface

Preface

What is "Contemporary" About Engineering Economics?

Decisions made during the engineering design phase of product development determine the majority of the costs of manufacturing that product (some say 85%). As design and manufacturing processes become more complex, the engineer is making decisions that involve money more than ever before. 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.

With the advent of information technology, the Internet becomes an indispensable tool in exchanging information. Accordingly, we have developed a comprehensive companion website to the book to provide numerous teaching and learning aids. I believe that our website is a critical resource for transitioning the teaching of engineering economy into the twenty-first century.

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 was my aimat every stage in the development of the text.

Changes in the Third Edition

In the complex and changing world of a global economy in an age of information, the practice of engineering economics is dynamic and as new developments occur, they should be incorporated into a textbook such as this one. In addition, the author and publisher are constantly seeking ways of improving the book in terms of clarity and understanding. As a result, we have made several important changes in this edition, including the following:

  • The overall book design style has been changed. The new design format allows us to use a second color more effectively to highlight the most important information and separate examples from the main text reading, providing an effective study and review tool for students.
  • There are 17 chapters, including three new chapters. Each chapter is classified into one of five parts:
    • Part I: Financial and Cost Information;
    • Part II: Money and Investing;
    • Part III: Evaluating Business and Engineering Assets;
    • Part IV: Development of Project Cash Flows; and
    • Part V: Special Topics in Engineering Economics.
  • All sections were updated to reflect the latest tax laws, interest rates, and other financial developments.
  • A discussion on end-of-chapter "Computer Notes" is consolidated into the website for Contemporary Engineering Economics:

    http://www.prenhall.com/park or http://www.eng.auburn.edu/~Park/cee.html

    This allows us to remove all Microsoft Excel spreadsheet discussions from the main text. Now students can download various spreadsheet templates from the website and open directly in Excel for Windows. The obvious benefit is that it is no longer necessary to enter the spreadsheets by hand. Users can then modify the basic templates for the specific problem at hand.
  • About one third of examples and self-test questions in the main chapters are either new or revised ones to reflect the contemporary nature of economic decision problems.
  • In Chapters 9 and 14, some of the advanced topics (or optional materials) such as the multiple-rates of return problems and risk simulation have been removed from the main text and placed in the Appendix. This separation will allow the instructors to budget their lecture hours more effectively according to their audience and curriculum.
  • Chapter 1 (Engineering Economic Decisions) is completely revised to reflect the ever-expanding role of engineers in the new economy. The main purpose of the opening chapter is to provide students with the general scope of their respective roles in making a variety of engineering as well as business decisions.
  • Chapter 2 (Understanding Financial Statements) is a new chapter for the third edition. The main purpose of this chapter is to introduce the basics of business language, known as financial accounting, so that engineers can understand and speak in a common language when it comes to making a variety of business decisions. Engineers should understand some of the basics of accounting, as they are constantly involved in a variety of business decisions.
  • Chapter 3 (Cost Concepts and Behaviors), also a new chapter, covers the various cost definitions as well as their behaviors in decision making. In particular, it discusses the marginal concept, which is the basis for any economic decision. The section on short-term operational economic decisions (commonly known as Present Economic Studies) is detailed in this chapter.
  • Chapter 4 (Time is Money) retains most of examples as well as the presentations in Chapter 2 of the second edition. Several new examples are introduced and the topics involving equivalence concepts are streamlined.
  • Chapter 5 (Understanding Money and Its Management) retains much of the materials in Chapter 3 of the second edition, but contains new sections on personal finance such as credit cards, commercial loans, and home mortgages.
  • Chapter 6 (Principles of Investing) is a new chapter geared toward unraveling the mysteries of the financial markets—the language, the players, the strategies, and above all, the risks and rewards of investments, as well as their ups and downs. Even though all the examples are drawn from the financial markets related to personal investments, the same principles should govern general corporate investment decisions.
  • Chapter 7 (Present Worth Analysis) is much the same as Chapter 4 of the second edition, except that the principles of comparing mutually exclusive projects have been covered in greater detail.
  • Chapter 12 (Developing of Project Cash Flows) is equivalent to Chapter 9 of the second edition, except that the subjects of working capital investment and the generalized cash flow approach have been streamlined in terms of presentation.
  • Chapter 14 (Project Risk and Uncertainty) has been expanded to include decision tree analysis.
  • Chapter 15 (Replacement Decisions) has been divided into two parts: The first part introduces the basic replacement decision problems without considering the effects of income taxes, whereas the second part revisits the same decision problems with income tax consideration. This treatment allows students to learn this important concept without the additional complications of income taxes.

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. An emphasis on theory—while critically important to forming the foundation of a student's understanding 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 an 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.
  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 Chapter 14, a first course in probability or statistics is helpful but not necessary, since the treatment of basic topics there is essentially self-contained.

Content and Approach

Educators generally agree upon what comprises the proper contents and organization of an engineering economics text. A glance at the table of contents will demonstrate that this text matches the standard embraced by most instructors and that reflected in competing texts. However, one of my driving motivations was to supersede the standard in terms of the depth of coverage and care with which difficult concepts are presented. Accordingly, the content and approach of Contemporary Engineering Economics reflect the following goals.

Understanding the Role of Engineers in Business

Explaining early in the book how business operates, and how engineering project decisions are made within business, helps students see how engineering decisions can affect the bottom line (profit) of the firm (Chapters 1-3). Most students—even those who do not plan to run their own businesses—are generally interested in personal finance and investment in general. Since people's ability to learn a subject is a function of their interest and motivation, this text begins by showing how a typical project idea evolves, how we measure the success of a typical engineering decision, and how to communicate the results in common business language (accounting).

Thorough Development of the Concept of the Time Value of Money

The notion of the time value of money and the interest formula that model it form the foundation upon which all other topics in engineering economics aye built. Because of their great importance, and because many students are being exposed to an analytical approach to money for the first time, interest topics are carefully and thoroughly developed in Chapters 4-6.

Thorough, Reasonably Paced Coverage of the Major Analysis Methods

The equivalence methods—present worth, annual worth, and future worth-and rate of return analysis are the bedrock methods of project evaluation and comparison. This text carefully develops these topics in Chapters 7-9, pacing them for maximum student comprehension of the subtleties, strengths, and weaknesses of each method.

  1. A separate, dedicated chapter (Chapter 8) on annual worth is presented to emphasize the circumstances in which that method of project analysis is preferred over other methods. In particular, topics related to design economics are explored in detail.
  2. The difficulties and exceptions associated with rate of return analysis are thoroughly covered in Chapter 9. Coverage of internal rate of return for non-simple projects is placed in Appendix A as optional for those who wish to avoid this complication in an introductory course.

Increased Emphasis on Developing After-Tax Cash Flows

Estimating and developing project cash flows is the first critical step in conducting an engineering economic analysis for most practicing engineers—further analysis, comparison of projects, and decision making all depend on intelligently developed project cash flows. A particularly important goal of this text is to instill confidence in developing after-tax cash flows.

  1. Chapter 12 is a unique synthesis of previously developed topics (analysis methods, depreciation, and income taxes) and is dedicated to building skill and confidence in developing after-tax cash flows for a series of fairly complex projects.
  2. To account for the ever-changing nature of tax systems, the website for Contemporary Engineering Economics is created and maintained by the author so that any new changes in depreciation and tax rates are posted in this increasingly popular Internet tool.

Complete Coverage of the Special Topics that Round Out a Comprehensive Introduction to Engineering Economics

A number of special topics are important to a comprehensive understanding of introductory engineering economies. Chapters 14-17 cover the topics such as (1) project risk and uncertainty, (2) replacement analysis, (3) capital budgeting, and (4) public sector analysis.

Recognizing that time availability and priorities vary from course to course and instructor to instructor, each one of these chapters is sufficiently self-contained that it may be skipped or covered out of sequence, as needed.

Addressing Educational Challenges

The features of Contemporary Engineering Economics were selected and shaped to address key educational challenges. It is the observation of both the author and the publisher—based on many conversations with engineering educators—that certain challenges consistently frustrate both instructors and students across the engineering curriculum. Low student motivation and enthusiasm, difficulties on to part of students in developing problem-solving skills and intuition, challenges in integrating technology without shortchanging fundamental concepts and traditional methods, and difficulties students experience in prioritizing and retaining enormous amounts of information were among the key educational challenges that drove the care with which the features in Contemporary Engineering Economics were designed.

Building Problem-Solving Skills and Confidence

The examples in the text are formatted to maximize their usefulness as guides to problem solving. Further, they are intended to stimulate student curiosity and inspire students jo look beyond the mechanics of problem solving to "what if" issues, alternative solution methods, and interpretation of solutions. Each example in the text is formatted as follows.

  • Example titles promote ease of student reference and review.
  • Discussion sections at the beginning of complex examples help students begin organizing a problem-solving approach.
  • Given and Find heads in the Solutions sections help students identify critical data. This convention is employed in Chapters 4-10, and then omitted in Chapters 11-14 after student confidence in setting up solution procedures has been established.
  • Comments sections at the ends of examples add additional insights: an alternative solution method, a short cut, an interpretation of the numerical solution, and extend the educational value of the example.

Capturing the Student's Imagination

Students want to know how the conceptual and theoretical knowledge they are acquiring will be put to use. Contemporary Engineering Economics incorporates real-world applications and contexts in a number of ways to stimulate student enthusiasm and imagination.

  1. A real-world, conceptual overview of engineering economics is established in Chapter 1: This is geared toward providing an engaging introduction to engineering economics via examples of its practical use.
  2. Chapter-opening scenarios: These are included with the hope of establishing interest and "need-to-know" chapter concepts within the context of a practical application.
  3. Self-test questions: These end-of-chapter problem sets should help students affirm their understanding of important concepts presented in the chapter. These self-test questions can be used as a comprehensive FE exam review, as they are already in multiple-choice format.
  4. An abundance of homework problems involving real engineering projects: This feature is aimed toward stimulating student interest and motivation with actual engineering investment projects, many taken from today's headlines.
  5. A full range of engineering disciplines represented in problems, examples, chapter openers, and case studies: This diverse approach illustrates the many disciplines that require engineering economics. Industrial, chemical, civil, electrical, mechanical, and manufacturing engineering and other areas are all represented.

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 trivial or mindless use of computers 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 appear on the book's website:

http://www.prenhall.com/park or http://www.eng.auburn.edu/~park/cee.html

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 long-hand solutions.

Internet Tool: The Contemporary Engineering Economics Website
(http://www.prenhall.com/park)

The companion website has been created and maintained by the author. This Text takes advantage of the Internet as a tool that becomes an increasingly important resource medium to access a variety of information on the web. This website contains a variety of resources for both instructors and students, including sample test questions, supplemental problems, EzCash software, a Case Study Library, and lecture notes. As you type the address and click the, open button, you will see the Contemporary Engineering Economics Home Page, as shown in Fig. P.1. As you will note from the figure, several menus are available. Each menu item is explained as follows:

  • Study Guide: Click this menu to find out what typical resource materials are available on the website. This site includes (1) sample text questions, (2) solutions to chapter problems, (3) interest tables, and (4) computer notes with Excel files of selected example problems in the text.
  • Analysis Tools: This site includes (1) EzCash software and (2) a collection of various financial calculators available on the Internet. EzCash is an integrated computer software package that was developed under the auspices of a grant from the National Science Foundation. This software can be downloaded from the website free of charge. The software includes the most frequently used methods of economic analysis. It is menu driven for convenience and flexibility, and it provides (1) a flexible and easy-to-use cash flow editor for data input and modifications, (2) an electronic spreadsheet-like data entry facility for after-tax cash flow analysis, and (3) an extensive array of computational modules and user selected graphic outputs.
  • Instructor Resources: Any information useful to instructors who teach an engineering economic course with the Contemporary Engineering Economics text is found in this location. Typically, course outlines based on a quarterly as well as a semester system are provided as an aid to instructors who adopt this text for the first time. A collection of well-designed engineering economic case studies is listed at this location. Initially, only a few case problems will be provided, but as new ones are developed or found, the case library will expanded in volume as well as in variety. You will also find lecture notes developed by the author.
  • Tax Information: This section will serve as a clearinghouse in terms of disseminating ever-changing tax information, including personal as well as corporate income taxes. Links are provided to various tax sites on the web, so you will find the most up-to-date information on depreciation schedules as well as capital gains taxes.
  • Financial News: You can access various financial news outlets on the web by visiting this location. The site divided news outlets into on-line news, and daily, weekly, and monthly publications.
  • Economic Tracks: Any cost and price information as well as most recent interest rate trends are found here. In particular, the consumer price indices, productivity figures, and employment cost indices are some of representative economic data provided.
  • Money & Investing: Click this menu to find a gateway to a variety of information useful to conducting engineering economic analysis. For example, a direct link is provided to the most up-to-date stock prices, options, and mutual funds performances.

Flexibility of Coverage

For a typical three-credit-hour, one-semester course, the majority of topics in the text can be covered in the depth and breadth in which they are presented. For other arrangements—quarter terms or fewer credit hours—Chapters 1-12 present the essential topics; with subsequent chapters presenting optional coverage. By varying the depth of coverage and supplementing the reading with Contemporary Engineering Economics Case Studies, there are enough materials for a continuing, two-term engineering economics course. Sample syllabi for a three-credit and a two-credit semester (or three-credit quarter system) course in engineering economy are provided in Table P.1.

Supplements

Much of the ancillary materials are supplied free of charge via the companion website. Other items are available free of charge to adopting instructors.

  1. Instructor's Manual: A comprehensive manual is available to instructors who adopt the book. The manual contains answers to all end-of-chapter problems.
  2. Contemporary Engineering Economics Case Studies: A collection of actual cases, two personal-finance and six industry-based, is now available on the companion website. The investment projects detailed in the cases relate to a 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.
  3. Microsoft PowerPoint Slides on CD-ROM: A comprehensive set of lecture notes in PowerPoint format is available on CD-ROM to instructors who adopt the text.

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