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 aim at 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.
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).
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.
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:
To build a thorough understanding of the theoretical and conceptual basis upon which the practice of financial
project analysis is built.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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,
Summary
Thoroughly revised and updated while continuing to adopt a contemporary approach to the subject of engineering
economics, this book aims not only to build a sound and comprehensive coverage of engineering economics, but also
to address key challenges, such as difficulty in developing the analytical skills required to make informed financial
decisions. Discusses related topics dealing with business profit loss and business related communications. Each
of the 17 chapters 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. For engineering economists.
Table of Contents
1. Engineering Economics Decisions.
2. Understanding Financial Statements.
3. Cost Concepts and Behavior.
4. Time Is Money.
5. Understanding Money and Its Management.
6. Principles of Investing.
7. Present Worth Analysis.
8. Annual Worth Analysis.
9. Rate of Return Analysis.
10. Depreciation.
11. Income Taxes.
12. Developing Project Cash Flows.
13. Inflation and Its Impact on Project Cash Flows.
14. Project Risk and Uncertainty.
15. Replacement Decisions.
16. Capital Budgeting Decisions.
17. Economic Analyses in the Public Sector.
