Engineering Economy 8th Edition

Leland Blank
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 Format for Spreadsheet Functions on Excel®

Present worth: Contents of ( )

= PV(i%, n, A, F) for constant A series; single F value

= NPV(i%,second_cell:last_cell) + first_cell for varying cash flow series

Future worth:

= FV(i%, n, A, P) for constant A series; single P value

Annual worth:

= PMT(i%,  n, P,  F ) for single amounts with no A series

= PMT(i%, n, NPV) to find AW from NPV; embed NPV function

Number of periods (years):

= NPER(i%,  A, P, F) for constant A series; single P and F

(Note: The PV, FV, and PMT functions change the sense of the sign. Place a minus in front of the
function to retain the same sign.)

Rate of return:
= RATE(n, A, P, F) for constant A series; single P and F

= IRR(first_cell:last_cell) for varying cash flow series

Interest rate:

= EFFECT(r%,  m) for nominal r, compounded m times per period

= NOMINAL(i%,  m) 
for effective annual i, compounded m times
per year

Depreciation:

= SLN(P, S, n) straight line depreciation for each period

= DDB(P, S, n, t, d) 
double declining balance depreciation for
period t at rate d (optional)

= DB(P,S,n,t) declining balance, rate determined by the

function
= VBD(P,0, n,MAX(0, t−1.5), MACRS depreciation for year t at rate d for
MIN(n, t−0.5), d) DDB or DB method

Logical IF function:

= IF(logical_test,value_if_true,value_if_false) for logical two-branch operations

Relations for Discrete Cash Flows with End-of-Period Compounding

Factor Notation Sample Cash Flow

Type Find/Given and Formula Relation Diagram
F⧸P (F⧸P,i,n) = (1 + i)n F = P(F⧸P,i,n)
F
Compound
amount 1 2 n–1
Single 0
…
Amount P⧸F 1  ​
(P⧸F,i,n) = ​ ——— P = F(P⧸F,i,n) n
(1+i)n
Present
worth (Sec. 2.1) P

(1 + i)n −1
P⧸A (P⧸A,i,n) = —————
​   ​ P = A(P⧸A,i,n) A A … A A
i(1 + i)n
Present
worth 0
…
i(1 + i)n
A⧸P (A⧸P,i,n) = ​ —————  ​ A = P(A⧸P,i,n) 1 2 n–1 n
(1 + i)n −1
Capital
recovery (Sec. 2.2) P
Uniform
Series (1 + i)n −1
F⧸A (F⧸A,i,n) = —————
​   ​ F = A(F⧸A,i,n) F
i
Compound
amount 0 1 2 n–1 n
…
A⧸F (A⧸F,i,n) = —————
​  i  ​ A = F(A⧸F,i,n)
(1 + i)n − 1
Sinking
fund A A…A A
(Sec. 2.3)

(1 + i)n − in − 1
PG⧸G ———————
(P⧸G,i,n) =   
​   ​ PG = G(P⧸G,i,n) PG
i2(1 + i)n AG AG AG … AG AG
Present
Arithmetic worth
…
Gradient 0 1 2 3 n
AG⧸G 1 ​ − ———————
(A⧸G,i,n) = ​ — ​  n  ​ AG = G(A⧸G,i,n) …
i (1 + i)n − 1 G 2G
Uniform
(n–1) G

{
series (Gradient only) (Sec. 2.5)

Pg⧸A1 and g
[ ( )]
———————
  
​ 
1+g n
A1​ 1 − ​​  ​ ——— ​  ​ ​  ​
1+i
 ​ g≠i A1 A1(1+g)
…
A1(1+g)
n–1

Geometric Pg = i−g
Present …
Gradient
worth ​  n  ​
A1 ——— g=i 0
1 2 n–1 n
1+i
(Gradient and base A1) (Sec. 2.6) Pg
E ig h t h E d itio n

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
ENGINEERING ECONOMY, EIGHTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions © 2012, 2005, and 2002. No
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Library of Congress Cataloging-in-Publication Data

Blank, Leland T. | Tarquin, Anthony J.

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.
Eighth edition. | New York : McGraw-Hill Education, [2017] | Includes index.
 LCCN 2016044149| ISBN 9780073523439 (acid-free paper) | ISBN 0073523437
(acid-free paper)
LCSH: Engineering economy—Textbooks. | Economics—Textbooks.
LCC TA177.4 .B58 2017 | DDC 658.15—dc23
LC record available at https://lccn.loc.gov/2016044149

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not
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 CONTENTS

Preface to Eighth Edition   xiv

LEARNING THE FUNDAMENTALS

STAGE 1
Chapter 1 Foundations of Engineering Economy 2
1.1 Why Engineering Economy and the Time Value of Money are Important  3
1.2 Performing an Engineering Economy Study  5
1.3 Professional Ethics and Economic Decisions  7
1.4 Interest Rate and Rate of Return  10
1.5 Terminology and Symbols  14
1.6 Cash Flows: Estimation and Diagramming  15
1.7 Economic Equivalence  19
1.8 Simple and Compound Interest  22
1.9 Minimum Attractive Rate of Return  26
1.10 Introduction to Spreadsheet Use  27
Chapter Summary 31
Problems31
Exercises for Spreadsheets 35
Additional Problems and FE Exam Review Questions 36
Case Study—Cost of Electricity with Renewable Sources Added 37

Chapter 2 Factors: How Time and Interest Affect Money 38

PE Progressive Example—The Steel Plant Case 39
2.1 Single-Amount Factors (F∕P and P∕F )  39
2.2 Uniform Series Present Worth Factor and Capital Recovery
Factor (P∕A and A∕P)43
2.3 Sinking Fund Factor and Uniform Series Compound Amount
Factor (A∕F and F∕A)46
2.4 Factor Values for Untabulated i or n Values  48
2.5 Arithmetic Gradient Factors (P∕G and A∕G)  50
2.6 Geometric Gradient Series Factors  58
2.7 Determining i or n for Known Cash Flow Values 61
Chapter Summary 64
Problems64
Exercises for Spreadsheets 68
Additional Problems and FE Exam Review Questions 69
Case Study—The Amazing Impact of Compound Interest 71

Chapter 3 Combining Factors and Spreadsheet Functions72

3.1 Calculations for Uniform Series That Are Shifted  73
3.2 Calculations Involving Uniform Series and Randomly Placed Single Amounts  76
3.3 Calculations for Shifted Gradients 80
Chapter Summary 86
Problems86
Exercises for Spreadsheets 92
Additional Problems and FE Exam Review Questions 93
Case Study—Preserving Land for Public Use 94

Chapter 4 Nominal and Effective Interest Rates96

PE Progressive Example—The Credit Card Offer Case 97
4.1 Nominal and Effective Interest Rate Statements  98
 Contents ix

4.2 Effective Annual Interest Rates  101

4.3 Effective Interest Rates for Any Time Period  107
4.4 Equivalence Relations: Payment Period
and Compounding Period  108
4.5 Equivalence Relations: Single Amounts with PP ≥ CP  109
4.6 Equivalence Relations: Series with PP ≥ CP  111
4.7 Equivalence Relations: Single Amounts and Series
with PP < CP  115
4.8 Effective Interest Rate for Continuous Compounding  116
4.9 Interest Rates That Vary Over Time  118
Chapter Summary 120
Problems120
Exercises for Spreadsheets 125
Additional Problems and FE Exam Review Questions 125
Case Study—Is Owning a Home a Net Gain or Net Loss Over Time? 127

LEARNING BASIC ANALYSIS TOOLS

STAGE 2
Chapter 5 Present Worth Analysis 130
PE Progressive Example—Water for Semiconductor
Manufacturing Case 131
5.1 Formulating Alternatives  131
5.2 Present Worth Analysis of Equal-Life Alternatives 133
5.3 Present Worth Analysis of Different-Life Alternatives  135
5.4 Future Worth Analysis  139
5.5 Capitalized Cost Analysis  140
Chapter Summary 144
Problems144
Exercises for Spreadsheets 149
Additional Problems and FE Exam Review Questions 150
Case Study—Comparing Social Security Benefits 152

Chapter 6 Annual Worth Analysis 154

6.1 Advantages and Uses of Annual Worth Analysis  155
6.2 Calculation of Capital Recovery and AW Values  157
6.3 Evaluating Alternatives by Annual Worth Analysis  159
6.4 AW of a Permanent Investment  161
6.5 Life-Cycle Cost Analysis  164
Chapter Summary 168
Problems168
Exercises for Spreadsheets 173
Additional Problems and FE Exam Review Questions 175
Case Study—Annual Worth Analysis—Then and Now 176

Chapter 7 Rate of Return Analysis: One Project 178

7.1 Interpretation of a Rate of Return Value  179
7.2 Rate of Return Calculation Using a PW or AW Relation  181
7.3 Special Considerations When Using the ROR Method  185
7.4 Multiple Rate of Return Values  186
7.5 Techniques to Remove Multiple Rates of Return  191
7.6 Rate of Return of a Bond Investment  197
Chapter Summary 200
Problems200
x Contents

Exercises for Spreadsheets 205

Additional Problems and FE Exam Review Questions 207
Case Study—Developing and Selling an Innovative Idea 209

Chapter 8 Rate of Return Analysis: Multiple Alternatives 210

8.1 Why Incremental Analysis Is Necessary  211
8.2 Calculation of Incremental Cash Flows for ROR Analysis  211
8.3 Interpretation of Rate of Return on the Extra Investment  214
8.4 Rate of Return Evaluation Using PW: Incremental and Breakeven (Two Alternatives)  215
8.5 Rate of Return Evaluation Using AW  221
8.6 Incremental ROR Analysis of Multiple (More than Two) Alternatives  222
8.7 All-in-One Spreadsheet Analysis  226
Chapter Summary 228
Problems228
Exercises for Spreadsheets 233
Additional Problems and FE Exam Review Questions 234
Case Study—Peforming ROR Analysis for 3D Printer and IIoT Technology 235
Case Study—How a New Engineering Graduate Can Help His Father 236

Chapter 9 Benefit/Cost Analysis and Public Sector Economics 238

PE Progressive Example—Water Treatment Facility #3 Case 239
9.1 Public Sector Projects  240
9.2 Benefit/Cost Analysis of a Single Project  245
9.3 Incremental B/C Analysis (Two Alternatives)  248
9.4 Incremental B/C Analysis of Multiple (More than Two) Alternatives  252
9.5 Service Sector Projects and Cost-Effectiveness Analysis  256
9.6 Ethical Considerations in the Public Sector  260
Chapter Summary 261
Problems262
Exercises for Spreadsheets 269
Additional Problems and FE Exam Review Questions 270
Case Study—Highway Lighting Options to Reduce Traffic Accidents 272

LEARNING EPILOGUE: SELECTING THE BASIC ANALYSIS TOOL

STAGE 2

LEARNING MAKING BETTER DECISIONS

STAGE 3
Chapter 10 Project Financing and Noneconomic Attributes 278
10.1 MARR Relation to the Cost of Capital  279
10.2 Debt-Equity Mix and Weighted Average Cost of Capital  281
10.3 Determination of the Cost of Debt Capital  283
10.4 Determination of the Cost of Equity Capital and the MARR  285
10.5 Effect of Debt-Equity Mix on Investment Risk  287
10.6 Multiple Attribute Analysis: An Introduction  290
10.7 Evaluation Measure for Multiple Attributes  294
Chapter Summary 295
Problems296
Exercises for Spreadsheets 301
Additional Problems and FE Exam Review Questions 302
Case Study—Expanding a Business—Debt vs. Equity Financing? 303
 Contents xi

Chapter 11 Replacement and Retention Decisions 304

PE Progressive Example—Keep or Replace the Kiln Case 305
11.1 Basics of a Replacement Study  306
11.2 Economic Service Life  308
11.3 Performing a Replacement Study  314
11.4 Additional Considerations in a Replacement Study  318
11.5 Replacement Study over a Specified Study Period  319
11.6 Replacement Value  324
Chapter Summary 324
Problems325
Exercises for Spreadsheets 331
Additional Problems and FE Exam Review Questions 331
Case Study—A Pumper System with an ESL Problem 333

Chapter 12 Independent Projects with Budget Limitation 334

12.1 An Overview of Capital Rationing among Projects  335
12.2 Capital Rationing Using PW Analysis of Equal-Life Projects  337
12.3 Capital Rationing Using PW Analysis of Unequal-Life Projects  339
12.4 Capital Budgeting Problem Formulation Using Linear Programming  341
12.5 Additional Project Ranking Measures  344
Chapter Summary 346
Problems346
Additional Problems and FE Exam Review Questions 351

Chapter 13 Breakeven and Payback Analysis 354

13.1 Breakeven Analysis for a Single Project  355
13.2 Breakeven Analysis Between Two Alternatives  359
13.3 Payback Analysis  362
13.4 More Breakeven and Payback Analysis on Spreadsheets  366
Chapter Summary 369
Problems369
Exercises for Spreadsheets 374
Additional Problems and FE Exam Review Questions 375
Case Study—Water Treatment Plant Process Costs 376

LEARNING ROUNDING OUT THE STUDY

STAGE 4
Chapter 14 Effects of Inflation 380
14.1 Understanding the Impact of Inflation  381
14.2 Present Worth Calculations Adjusted for Inflation  383
14.3 Future Worth Calculations Adjusted for Inflation  388
14.4 Capital Recovery Calculations Adjusted for Inflation  391
Chapter Summary 392
Problems392
Additional Problems and FE Exam Review Questions 398
Case Study—Inflation Considerations for Stock
and Bond Investments 399

Chapter 15 Cost Estimation and Indirect Cost Allocation 400

15.1 Understanding How Cost Estimation Is Accomplished  401
15.2 Unit Method  404
15.3 Cost Indexes  405
xii Contents

15.4 Cost-Estimating Relationships: Cost-Capacity Equations  408

15.5 Cost-Estimating Relationships: Factor Method  409
15.6 Indirect Cost Rates and Allocation: The Traditional Method  411
15.7 Activity-Based Costing (ABC) for Indirect Costs  415
15.8 Making Estimates and Maintaining Ethical Practices  417
Chapter Summary 418
Problems418
Additional Problems and FE Exam Review Questions 424
Case Study—Indirect Cost Analysis of Medical Equipment Manufacturing Costs 425
Case Study—Deceptive Acts Can Get You in Trouble 427

Chapter 16 Depreciation Methods 428

16.1 Depreciation Terminology 429
16.2 Straight Line (SL) Depreciation 432
16.3 Declining Balance (DB) and Double Declining Balance (DDB) Depreciation  433
16.4 Modified Accelerated Cost Recovery System (MACRS)  436
16.5 Determining the MACRS Recovery Period  440
16.6 Depletion Methods 441
Chapter Summary 443
Appendix444
16A.1 Sum-of-Years-Digits (SYD) and Unit-of-Production (UOP) Depreciation 444
16A.2 Switching between Depreciation Methods  446
16A.3 Determination of MACRS Rates 449
Problems452
Additional Problems and FE Exam Review Questions 455
Appendix Problems 456

Chapter 17 After-Tax Economic Analysis 458

17.1 Income Tax Terminology and Basic Relations  459
17.2 Calculation of Cash Flow after Taxes  462
17.3 Effect on Taxes of Different Depreciation Methods and
Recovery Periods  464
17.4 Depreciation Recapture and Capital Gains (Losses)  467
17.5 After-Tax Economic Evaluation  470
17.6 After-Tax Replacement Study  476
17.7 After-Tax Value-Added Analysis  479
17.8 After-Tax Analysis for International Projects  482
17.9 Value-Added Tax  484
Chapter Summary 486
Problems487
Additional Problems and FE Exam Review Questions 496
Case Study—After-Tax Analysis for Business Expansion 497

Chapter 18 Sensitivity Analysis and Staged Decisions 498

18.1 Determining Sensitivity to Parameter Variation  499
18.2 Sensitivity Analysis Using Three Estimates  504
18.3 Estimate Variability and the Expected Value  505
18.4 Expected Value Computations for Alternatives  506
18.5 Staged Evaluation of Alternatives Using a Decision Tree  508
18.6 Real Options in Engineering Economics  512
Chapter Summary 517
Problems517
Additional Problems and FE Exam Review Questions 524
Case Study—Sensitivity to the Economic Environment 525
Case Study—Sensitivity Analysis of Public Sector Projects—Water Supply Plans  525
 Contents xiii

Chapter 19 More on Variation and Decision Making under Risk 528

19.1 Interpretation of Certainty, Risk, and Uncertainty 529
19.2 Elements Important to Decision Making under Risk 532
19.3 Random Samples 537
19.4 Sample Estimates: Mean and Standard Deviation 540
19.5 Monte Carlo Sampling and Simulation Analysis 547
Chapter Summary 554
Problems554
Additional Problems and FE Exam Review Questions 558
Case Study—Using Simulation and Three-Estimate Sensitivity Analysis 559

Appendix A Using Spreadsheets and Microsoft Excel® 561

A.1 Introduction to Using Excel  561
A.2 Organization (Layout) of the Spreadsheet 563
A.3 Spreadsheet Functions Important to Engineering
Economy (Alphabetical Order)  564
A.4 Goal Seek—A Tool for Breakeven and Sensitivity Analysis  572
A.5 Solver—An Optimizing Tool for Capital Budgeting, Breakeven,
and Sensitivity Analysis  573
A.6 Error Messages  574

Appendix B Basics of Accounting Reports and Business Ratios 575

B.1 The Balance Sheet  575
B.2 Income Statement and Cost of Goods Sold Statement 576
B.3 Business Ratios  577

Appendix C Code of Ethics for Engineers 580

Appendix D Alternate Methods for Equivalence Calculations 583

D.1 Using Programmable Calculators  583
D.2 Using the Summation of a Geometric Series  584

Appendix E Glossary of Concepts and Terms 587

E.1 Important Concepts and Guidelines  587
E.2 Symbols and Terms 590

Reference Materials 593

Factor Tables 595
Index 624
PREFACE TO EIGHTH EDITION
This new 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 cor-
poration, 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 eighth edition has new digital features and retains the time-tested features that make the
book reliable and easy to use. Plus the supporting online materials are updated to enhance the
teaching and learning experience.

Exciting new features in print:

• All new end-of-chapter problems
• Expanded questions for either review or preparation for the Fundamentals of Engineering
(FE) Exam

Valuable new features in digital content:

• McGraw-Hill Connect
  • Online video presentations with closed captioning to serve as learning support tools
  • Algorithmic end-of chapter problems that present a new set of parameters and estimates
every time the problem is opened
  • SmartBook, an adaptive reading experience

Familiar features retained in this edition:

• Easy-to-read language
• End-of-chapter case studies
• Ethical considerations in economic analyses
• Progressive examples for improved understanding of concepts
• Hand and spreadsheet example solutions
• Spreadsheet solutions with on-image comments and Excel® functions
• Vital concepts and guidelines located in margins and appendix
• Flexible chapter ordering

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 fl­ owchart
on the next page, and five appendices. Each chapter starts with a statement of purpose and spe-
cific learning outcomes for each section. Chapters include a summary, ­numerous end-of-chapter
 Preface to Eighth Edition xv

CHAPTERS IN EACH LEARNING STAGE

Composition by level
Chapter 1
Foundations of
Engineering Economy

Chapter 2
Factors: How Time and
Learning Interest Affect Money
Stage 1:
The Chapter 3
Fundamentals Combining Factors and
Spreadsheet Functions

Chapter 4
Nominal and Effective
Interest Rates

Chapter 7
Rate of Return
Analysis:
One Project Chapter 9
Chapter 5 Chapter 6
Benefit/Cost Analysis
Present Worth Annual Worth
Learning and Public Sector
Analysis Analysis Chapter 8
Stage 2: Economics
Rate of Return
Basic Analysis: Multiple
Analysis Alternatives
Tools

Learning Stage 2 Epilogue

Selecting the Basic
Analysis Tool

Learning
Stage 3: Chapter 10 Chapter 11 Chapter 12 Chapter 13
Making Project Financing and Replacement and Independent Projects Breakeven and
Better Noneconomic Attributes Retention Decisions with Budget Limitation Payback Analysis
Decisions

Chapter 14 Chapter 15 Chapter 16 Chapter 18

Effects of Cost Estimation and Depreciation Sensitivity Analysis
Learning Inflation Indirect Cost Allocation Methods and Staged Decisions
Stage 4:
Rounding Chapter 17 Chapter 19
Out the After-Tax Economic More on Variation
Study Analysis and Decision Making
under Risk

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 Using Spreadsheets and Microsoft Excel®
Appendix B Basics of Accounting reports and business ratios
Appendix C Code of Ethics for Engineers (from NSPE)
Appendix D Alternate methods for equivalence calculations
Appendix E Glossary of concepts and terms
There is considerable flexibility in the sequencing of topics and chapters once the first six chap-
ters 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 after
xvi 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 Cost Taxes and Sensitivity, Staged

through chapters Inflation Estimation Depreciation Decisions, and Risk

1. Foundations
2. Factors
3. More Factors
4. Nominal and 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

16. Depreciation
17. After-Tax

18. Sensitivity, Decision

Trees, and Real Options
19. Risk and Simulation

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.

Resources for Instructors and Students

LEARNING OUTCOMES:
• 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.

CONCEPTS AND GUIDELINES:

• T
 o highlight the fundamental building blocks of the course, a checkmark and title in the mar-
gin call attention to particularly important concepts and decision-making guidelines. Appen-
dix E includes a brief description of each fundamental concept.

IN-CHAPTER EXAMPLES:
• Numerous in-chapter examples throughout the book reinforce the basic concepts and make
understanding easier. In many cases, the example is solved using separately marked hand and
spreadsheet solutions.
 Digital Resources xvii

PE PROGRESSIVE EXAMPLES:
• S
 everal chapters include a progressive example—a more detailed problem statement intro-
duced at the beginning of the chapter and expanded upon throughout the chapter in specially
marked examples. This approach illustrates different techniques and some increasingly com-
plex aspects of a real-world problem.

ONLINE PRESENTATIONS:
• A
 n 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 video-based materials. Presentations are keyed to the sections of the text.

SPREADSHEETS:
• 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.

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 re-
views and homework assignments.

Digital Resources
ALGORITHMIC END-OF-CHAPTER PROBLEMS:
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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.
Jack Beltran, Beltran and Associates
Neal McCollom, University of Texas at Arlington
Sallie Sheppard, Texas A&M 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        lelandblank@yahoo.com

Anthony Tarquin atarquin@utep.edu
LEARNING STAGE 1

The Fundamentals

T
he fundamentals of engineering economy are introduced in
LEARNING STAGE 1
these chapters. When you have completed stage 1, you will
The Fundamentals
be able to understand and work problems that account for
cha pter 1 the time value of money, cash flows occurring at different times
Foundations of with different amounts, and equivalence at different interest rates.
Engineering Economy The techniques you master here form the basis of how an engineer
in any discipline can take economic value into account in virtually
cha pter 2 any project environment.
The factors commonly used in all engineering economy com-
Factors: How Time
putations are introduced and applied here. Combinations of these
and Interest Affect
factors assist in moving monetary values forward and backward
Money
through time and at different interest rates. Also, after these
chapters, you should be comfortable using many of the spread-
cha pter 3
sheet functions.
Combining Factors Many of the terms common to economic decision making are
and Spreadsheet introduced in learning stage 1 and used in later chapters. A check-
Functions mark icon in the margin indicates that a new concept or guideline
is introduced at this point.
cha pter 4
Nominal and Effective
Interest Rates
 Foundations
CHAPTER 1

of Engineering
Economy
Malcolm Fife/age fotostock

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

1.1 Description and role • Define engineering economics and the time value
of money; identify areas of application.
1.2 Engineering economy study • Understand and identify the steps in an
approach 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.
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 Emergency Camp Stoves Quickly Made

Boys at a Summer Camp Kept Themselves Busy during a Cold Spell by

Making These Stoves

While conducting a boys’ camp in summer we experienced a

severe sleet storm. Our tents were not equipped with stoves and I
faced a double problem: to keep the boys warm and to keep them
contented. The difficulty was solved by having them construct
emergency camp stoves, as shown, using iron stovepipe, and other
material at hand. One length of pipe is laid under the side of the tent
about 4 in. in the ground, as in Fig. 1. An elbow mounted in sod
connects with the chimney. A stone at the front of the stove regulates
the draft, and stones placed upon the pipe hold the heat. The
arrangement diagrammed in Fig. 2 is built with one length of pipe or
a stone conduit. A hole is dug into the ground, about 10 in. deep.
Over this is placed a pan, and an opening is made at the front for the
fuel. The chimney is made of stones and sticks picked up around the
camp, and plastered with mud. Coffee may be boiled or small
cooking done on this stove.—William H. Leach, Alden, N. Y.
 Pruning and Brush-Cutting Knife

With the blade of an old beef cutter and a stout wood handle, I
fashioned a brush knife that is superior to a sickle for cutting down
heavy weeds. The blade was secured in a slotted handle by a screw
and rivet, and the top of the handle wired as an additional security. A
blade of this sort is handy, also, for pruning purposes.—J. M. Kane,
Doylestown, Pa.
 Plier Drives Nails in Backing Picture Frame

The fastening of a picture into a frame by the use of brads, or

tacks, driven into the frame behind the backing is often done
carelessly, because it is difficult to do a neat job with an ordinary
hammer. A much better way of driving in these nails is to use a plier,
as shown. Protect the edge of the frame with a layer or two of
cardboard, and start the nail carefully, forcing it in by steady pressure
on the plier handles.
 Clip Holds Flash Lamp on Handlebar as
Headlight

An ordinary pocket flash light makes a satisfactory headlight for a

bicycle if fitted to the handlebar with a suitable clip. The arrangement
shown makes it possible to remove the light quickly for use in the
usual manner. The clip, as detailed, is of spring brass and is
clamped over the post of the handlebar.—P. P. Avery, Garfield, N. J.
 A Backwoodsman’s Nutcracker

Most persons know what a difficult job it is to crack hickory nuts,

unless provided with a suitable hammer, or other tool, for the
purpose. When nut hunting, such tools are usually not at hand, and a
method used by an old backwoodsman will be of interest. First he
cut a hickory limb, about 2 in. thick and 3 ft. long. In the center of the
limb, he cut a square notch, about halfway through, and just large
enough to admit a nut. Then placing one end of the limb on the
ground, the other end held in the left hand, he placed a nut in the
notch, and bent the limb slightly. This brought the edges of the notch
closer together, and cracked the nut neatly.—C. M. Vaiden, Portland,
Ore.
Handy Tool for Tightening Wire Spokes in Wheels

The wire spokes in bicycle and similar wheels often become loose,
and a small pocket device for tightening them on the road is handy.
A satisfactory one can be made quickly from a washer, 2 in. in
diameter, cut as shown. A tapering slot is cut to the center of the
washer to engage the nipples of various-sized spokes. The outer
circumference of the washer is filed with a triangular file to provide a
good finger grip.—H. E. Randell, Boston, Mass.
 Bottle Economizes Spray Liquid in Atomizer

Atomizers are sometimes provided with delivery tubes the lower

ends of which are ¹⁄₄ in. or more above the bottom of the reservoir,
thus rendering useless considerable of the spraying liquid. To
overcome this waste, in the case of expensive sprays, a small
homeopathic vial was filled with the liquid from the bottom of the
reservoir, and lowered into the bottle, as shown. The delivery tube of
the atomizer was set into the vial, and the cap screwed on. By this
means almost every drop of the spraying fluid was utilized.—Carl L.
Hartshorn, West Haven, Conn.
 A Small Rotary Pump Easily Made

The Rotating Spools Press against the Water Hose and Force the Water from
It at Increased Pressure

This small power pump is made from a block of wood, a piece of

rubber hose, and a 5-arm rotor of brass, with small spools attached
to it. The base of the casing is 6 in. square, and of ⁷⁄₈-in. wood. A ³⁄₄-
in. triangular block is set at each corner, and a ¹⁄₈-in. cover of wood,
fastened at the four corners with screws. A large nail is used as a
shaft for the rotor, which is cut from brass, ¹⁄₃₂ to ¹⁄₁₆ in. thick. Small
spools are mounted on the arms of the rotor, and the small pulley
wheel is fixed on the end of the axle. The action is simple: As the
rollers on the arms revolve against the hose, the force of the stream
at the discharge end is increased, the device acting as a pump. Such
an arrangement was used for moving targets in a rifle range, and
can be built on a larger scale if desired. A small water, or electric,
motor is used to drive the pump.—S. A. Hardy, St. Paul, Minn.
 Cleaning Type Cases with Bicycle Pump
Type cases can be cleaned easily by using a bicycle pump, which
will blow the dust out. Typewriters and other small machinery can
also be cleaned this way. A long hose used with a foot pump is often
preferable to the hand pump.
 Weighted Rope Holds Flag Upright

This Weighted Rope Permits the Flag to Fly in Its Natural Position

A householder devised a simple and effective method of keeping

the flag upright when displayed from a nearly horizontal flagstaff.
The cord which held the flag was run through pulleys, as indicated,
and weighted with a pulley weight.—M. T. Kanary, Chicago, Illinois.
 Homemade Gate Sign with Metal Letters

The Metal Letters were Quickly Made and Are Durable as Well as Neat

Needing a permanent sign to be mounted on an iron gate, I made

one of metal, which is more durable and better-looking than most
wooden or other common signs that the home mechanic can make. I
used sheet metal and marked out the letters to cut them from the
smallest possible strip, by reversing some of them. They were cut
out with snips and chisels, and the edges filed smooth. The letters
were then soldered to heavy wires, which were bolted to the gate by
means of sheet-metal straps and bolts, as shown. The letters should
be polished from time to time, especially if made from brass or
copper.—Hugo Kretschmar, Brooklyn, N. Y.
Reinforcing the Ends of Rubber Handlebar Grips
The flexible rubber grips used on bicycles and motorcycles have
good shock-absorbing qualities, but they have a tendency to break
off at the end of the handlebar. They may be reinforced by a small
stick projecting from the end of the handlebar tubing. One end of the
stick is cut to fit tightly in the opening, and the other to fit the flexible
end of the grip.—George M. Zimmerman, Fort Sumner, N. M.
 Film Holder for Photographic Developing

The amateur photographer who uses roll film and who does his
developing by the tray method, will find this device a simple and
reliable means for holding the film spool while removing the film,
duplex paper, autographic carbon paper, gummed labels, etc. Once
the spool is properly placed in the holder, there is little danger of its
dropping. The holder takes various sizes of film spools. The side
fingers are ³⁄₁₆ by ³⁄₄ by 23 in. long. A small peg is set in each finger,
1¹⁄₈ in. from the end, to engage the spool. The upper ends of the
fingers are nailed to a tapered block of wood, ⁷⁄₈ by 3¹⁄₄ and 2¹⁄₂ in.
wide, and 8 in. long. The holder can be conveniently fastened to a
wall, door casing, or to the under side of a shelf in the dark room.—
John Hoeck, Alameda, Calif.
 Old Sink Installed as Dish-Draining Basin

The Extra Sink Replaces the Drain Board and Does Its Work More Effectively

An added convenience for the housewife is the installation, in the

place of the drain board customarily attached to the kitchen sink, of a
second sink, with waste connections. Light wooden slats in the sink
bottom give it all the utility of a drain board, without the danger of
dishes slipping off onto the floor. A sink, of the old-fashioned kind
used, can be purchased about as cheaply as a good drain board.—
E. C. Blomeyer, Waco, Tex.
 Desk-Light Arm Folds into Pigeonhole

This Desk Lamp and Holder Folds Up into a Pigeonhole When Not in Use

The extension arm for an electric lamp shown in the illustration

was made of strips from steel building toys. I installed it in my writing
desk, and fastened it with one screw to the back of the desk inside
the pigeonhole. When collapsed the arm measures 7¹⁄₂ in. from the
fastened end to the front end of the socket, leaving only the globe
protruding. Extended, it measures 16¹⁄₂ in. The lamp cord is taken
through a hole in the back of the desk. If a very rigid arm is wanted,
the strips can be doubled. I used screws with two nuts, but rivets can
be used also, leaving the joints to move freely. The sliding feature at
the inner end adds about 2 in. to the length of the arm when
extended.—A. J. Viken, Waterloo, Ia.
 A Soldier’s or Traveler’s Kit for Sundries and
Toilet Articles

The Soldier Appreciates a Handy Folding Kit, Especially If the Girl He Left
Behind Made It

A soldier’s kit approved by a colonel of the national guard because

of its compactness, can be made easily of a band of khaki cloth. The
kit, including the “housewife,” requires cloth, 27 in. wide. Cut 12 in.
from one end for the housewife, which is 12 by 5 in. wide. To make
the housewife, fold under the edges ¹⁄₄ in., and fold one end over 2¹⁄₂
in. and the other 1¹⁄₂ in. for pockets. In the larger center pocket can
be placed court plaster, adhesive tape, photographs, letters, etc.
Bind the edges ¹⁄₄ in., and form other pockets, as shown. The entire
kit weighs 1¹⁄₄ lb. and can be carried by the soldier in his army
blanket. The housewife, if necessary, can be removed and taken to
the firing line. Handy articles to be fitted in the kit are mirror that can
be hung up, comb, box of talcum powder, cold cream, tooth paste,
pencil, wash cloth, soaps, shaving brush, toothbrush, and scissors.
Three safety pins at the top of the bag enable it to be hung up in the
tent. Strong binding tapes are sewed to the bag, and it can be folded
handily in three sections.—Kate Thomen, Topeka, Kans.