Fundamentals of Engineering Economics: International EditionDescription 
For Engineering Economics courses, found in departments of Industrial, Civil, Mechanical, and Electrical Engineering. From the author of the bestselling Contemporary Engineering Economics text, Fundamentals of Engineering Economics offers a concise, but indepth coverage of all fundamental topics of Engineering Economics. 

Features 
 Interior design: Enhances usability and includes annotated Excel spreadsheets.
 Chapteropening vignettes: Each chapter opens with a real economic vignette describing how an individual decision maker or actual corporation has wrestled with the issues discussed in the chapter. These opening cases heighten students’ interest by pointing out the realworld relevance and applicability of what might otherwise seem to be dry technical material.
 Realworld examples that are relevant to all engineering disciplines: Applications show relevance of the material to student's everyday lives.
 Chan Park's renowned authoring style: Chan Park tells the story of engineering economics through engaging scenarios and his hallmark studentfriendly writing style.
 Concise yet detailed coverage of all fundamental topics of engineering economics. A large number of endofchapter problems and examtype questions varying in level of difficulty help students understand the topics.
 Focus on Excel’s productivity enhancing benefits for complex project cash flow development and analysis: All Excel spreadsheets contain easytofollow callout formulas. Most chapters contain a section titled “Short Case Studies with Excel,” enabling students to use Excel to answer a set of questions.
 Student companion website: The companion website www.pearsoninternationaleditions.com includes selfstudy quizzes, FE review quizzes, Excel templates, Case Studies and more.



New to this Edition 
Much of the content has been streamlined to provide materials in depth and to reflect the challenges in contemporary engineering economics. Some of the highlighted changes are as follows:
 All the chapter opening vignettes – a trademark of Fundamentals of Engineering Economics – have been revised or completely replaced with more current and thoughtprovoking examples from both service and manufacturing sectors.
 SelfTest Questions have been added at the end of each chapter (131 problems in total), and workedout solutions to the questions are provided in Appendix A. These questions are formatted in a style suitable for Fundamental Engineering Exam review and created to help students prepare for a typical class exam common to introductory engineering economic courses.
 The Benefit—Cost Analysis has been moved to Chapter 8 , as a part of measure of investment chapters. The profitability index is included in this chapter.
 Most of the endofchapter problems are revised to reflect the changes in the main text. There are 708 problems, including 131 selftest questions, 43% of which are new or updated.
 Various Excel® spreadsheet modeling techniques are introduced throughout the chapters, and the original Excel files are provided online at the Companion Website. Most worksheets have been redesigned with graphical outputs.
 Some other specific content changes made in the third edition are as follows:
 In Chapter 1, a cost reduction (Apple’s iPad ® ) project is introduced.
 In Chapter 2, a new retirement planning example is introduced.
 In Chapter 4, all CPI and inflationrelated data have been updated.
 In Chapter 5, an example of comparing mutually exclusive revenue projects is provided.
 In Chapter 6, a section on capital cost has been expanded with an automobile ownership example.
 In Chapter 8, benefit—cost contents have been streamlined, and a new section on profitability index has been created.
 In Chapter 11, a section on riskadjusted discount rate approach is expanded in which the risk element is incorporated through the cost of capital.
 In Chapter 13 , all financial statements for Lam Research Corporation have been updated, and a new set of financial ratio analysis is provided. Investment strategies have been added as a part of managing personal financial asset under uncertainty.



Table of Contents 
PART 1 UNDERSTANDING MONEY AND ITS MANAGEMENT 1 Chapter 1 Engineering Economic Decisions 2 1.1 The Rational DecisionMaking Process 4 1.1.1 How Do We Make Typical Personal Decisions? 4 1.1.2 How Do We Approach an Engineering Design Problem? 7 1.1.3 What Makes Economic Decisions Different from Other Design Decisions? 9 1.2 The Engineer’s Role in Business 10 1.2.1 Making CapitalExpenditure Decisions 10 1.2.2 LargeScale Engineering Economic Decisions 10 1.2.3 Impact of Engineering Projects on Financial Statements 12 1.3 Types of Strategic Engineering Economic Decisions 13 1.3.1 New Products or Product Expansion 14 1.3.2 Equipment and Process Selection 14 1.3.3 Cost Reduction 15 1.3.4 Equipment Replacement 16 1.3.5 Service or Quality Improvement 16 1.4 Fundamental Principles in Engineering Economics 17 Summary 18 SelfTest Questions 19 Problems 19
Chapter 2 Time Value of Money 20 2.1 Interest: The Cost of Money 22 2.1.1 The Time Value of Money 22 2.1.2 Elements of Transactions Involving Interest 24 2.1.3 Methods of Calculating Interest 26 2.2 Economic Equivalence 28 2.2.1 Definition and Simple Calculations 29 2.2.2 Equivalence Calculations Require a Common Time Basis for Comparison 32 2.3 Interest Formulas for Single Cash Flows 33 2.3.1 CompoundAmount Factor 33 2.3.2 PresentWorth Factor 35 2.3.3 Solving for Time and Interest Rates 38 2.4 UnevenPayment Series 40 2.5 EqualPayment Series 42 2.5.1 CompoundAmount Factor: Find F , Given A , i , and N 42 2.5.2 SinkingFund Factor: Find A , Given F , i , and N 46 2.5.3 CapitalRecovery Factor (Annuity Factor): Find A , Given P , i and N 48 2.5.4 PresentWorth Factor: Find P , Given A , i , and N 51 2.5.5 Present Value of Perpetuities 56 2.6 Dealing with Gradient Series 58 2.6.1 Handling Linear Gradient Series 58 2.6.2 Handling Geometric Gradient Series 64 2.7 More on Equivalence Calculations 68 Summary 74 SelfTest Questions 75 Problems 79
Chapter 3 Understanding Money Management 94 3.1 Market Interest Rates 96 3.1.1 Nominal Interest Rates 96 3.1.2 Annual Effective Yields 97 3.2 Calculating Effective Interest Rates Based on Payment Periods 100 3.2.1 Discrete Compounding 100 3.2.2 Continuous Compounding 101 3.3 Equivalence Calculations with Effective Interest Rates 103 3.3.1 Compounding Period Equal to Payment Period 103 3.3.2 Compounding Occurs at a Different Rate than That at Which Payments are Made 106 3.4 Debt Management 110 3.4.1 Borrowing with Credit Cards 110 3.4.2 Commercial Loans–Calculating Principal and Interest Payments 113 3.4.3 Comparing Different Financing Options 116 Summary 121 SelfTest Questions 123 Problems 126
Chapter 4 Equivalence Calculations under Inflation 140 4.1 Measure of Inflation 141 4.1.1 Consumer Price Index 142 4.1.2 Producer Price Index 143 4.1.3 Average Inflation Rate 145 4.1.4 General Inflation Rate ( f ) versus Specific Inflation ( f j ) 146 4.2 Actual versus Constant Dollars 148 4.2.1 Conversion from Constant to Actual Dollars 149 4.2.2 Conversion from Actual to Constant Dollars 150 4.3 Equivalence Calculations under Inflation 154 4.3.1 Market and InflationFree Interest Rates 155 4.3.2 ConstantDollar Analysis 155 4.3.3 ActualDollar Analysis 156 4.3.4 MixedDollar Analysis 160 Summary 163 SelfTest Questions 164 Problems 166
PART 2 EVALUATING BUSINESS AND ENGINEERING ASSETS 173 Chapter 5 PresentWorth Analysis 174 5.1 Loan versus Project Cash Flows 176 5.2 Initial Project Screening Methods 177 5.2.1 Benefits and Flaws of Payback Screening 179 5.2.2 DiscountedPayback Period 180 5.3 PresentWorth Analysis 182 5.3.1 NetPresentWorth Criterion 182 5.3.2 Guidelines for Selecting a MARR 187 5.3.3 Meaning of Net Present Worth 188 5.3.4 Net Future Worth and Project Balance Diagram 192 5.3.5 CapitalizedEquivalent Method 193 5.4 Methods to Compare Mutually Exclusive Alternatives 195 5.4.1 Doing Nothing Is a Decision Option 196 5.4.2 Service Projects versus Revenue Projects 196 5.4.3 Analysis Period Equals Project Lives 197 5.4.4 Analysis Period Differs from Project Lives 201 Summary 207 SelfTest Questions 207 Problems 210
Chapter 6 AnnualEquivalence Analysis 230 6.1 AnnualEquivalent Worth Criterion 232 6.1.1 Benefits of AE Analysis 236 6.1.2 Capital (Ownership) Costs versus Operating Costs 236 6.2 Applying AnnualWorth Analysis 241 6.2.1 UnitProfit or UnitCost Calculation 241 6.2.2 MakeorBuy Decision 245 6.3 Comparing Mutually Exclusive Projects 248 6.3.1 Analysis Period Equals Project Lives 248 6.3.2 Analysis Period Differs from Project Lives 253 Summary 256 SelfTest Questions 256 Problems 259
Chapter 7 RateofReturn Analysis 276 7.1 Rate of Return 278 7.1.1 Return on Investment 278 7.1.2 Return on Invested Capital 279 7.2 Methods for Finding Rate of Return 280 7.2.1 Simple versus Nonsimple Investments 280 7.2.2 Computational Methods 282 7.3 InternalRateofReturn Criterion 289 7.3.1 Relationship to the PW Analysis 289 7.3.2 Decision Rule for Simple Investments 289 7.3.3 Decision Rule for Nonsimple Investments 293 7.4 Incremental Analysis for Comparing Mutually Exclusive Alternatives 295 7.4.1 Flaws in Project Ranking by IRR 295 7.4.2 IncrementalInvestment Analysis 296 7.4.3 Handling Unequal Service Lives 302 Summary 304 SelfTest Questions 304 Problems 308 Chapter 7A Resolution of Multiple Rates of Return 324 7A1 NetInvestment Test 324 7A2 The Need for an External Interest Rate 326 7A3 Calculation of Return on Invested Capital for Mixed Investments 327
Chapter 8 Benefit—Cost Analysis 332 8.1 Evaluation of Public Projects 334 8.1.1 Valuation of Benefits and Costs 335 8.1.2 Users’ Benefits 335 8.1.3 Sponsor’s Costs 335 8.1.4 Social Discount Rate 336 8.2 Benefit—Cost Analysis 337 8.2.1 Definition of Benefit—Cost Ratio 337 8.2.2 Incremental B/CRatio Analysis 340 8.3 Profitability Index 344 8.3.1 Definition of Profitability Index 344 8.3.2 Incremental PI Ratio for Mutually Exclusive Alternatives 346 8.4 Highway Benefit—Cost Analysis 348 8.4.1 Define the Base Case and the Proposed Alternatives 348 8.4.2 Highway User Benefits 349 8.4.3 Sponsors’ Costs 349 8.4.4 Illustrating Case Example 350 Summary 354 SelfTest Questions 354 Problems 357
PART 3 DEVELOPMENT OF PROJECT CASH FLOWS 365 Chapter 9 Accounting for Depreciation and Income Taxes 366 9.1 Accounting Depreciation 368 9.1.1 Depreciable Property 368 9.1.2 Cost as Basis 369 9.1.3 Useful Life and Salvage Value 370 9.1.4 Depreciation Methods: Book and Tax Depreciation 370 9.2 Book Depreciation Methods 372 9.2.1 StraightLine Method 372 9.2.2 DecliningBalance Method 374 9.2.3 UnitsofProduction Method 378 9.3 Tax Depreciation Methods 379 9.3.1 MACRS Recovery Periods 379 9.3.2 MACRS Depreciation: Personal Property 380 9.3.3 MACRS Depreciation: Real Property 383 9.4 Corporate Taxes 385 9.4.1 How to Determine “Accounting Profit” 385 9.4.2 U.S. Corporate Income Tax Rates 387 9.4.3 Gain Taxes on Asset Disposals 389 Summary 393 SelfTest Questions 394 Problems 396
Chapter 10 Project CashFlow Analysis 408 10.1 Understanding Project Cost Elements 410 10.1.1 Classifying Costs for Manufacturing Environments 410 10.1.2 Classifying Costs for Financial Statements 412 10.1.3 Classifying Costs for Predicting Cost Behavior 413 10.2 Why Do We Need to Use Cash Flows in Economic Analysis? 417 10. 10.4 Incremental Cash Flows from Undertaking a Project 421 10.4.1 Operating Activities 421 10.4.2 Investing Activities 424 10.4.3 Financing Activities 425 10.5 Developing Project Cash Flow Statements 425 10.5.1 When Projects Require Only Operating and Investing Activities 425 10.5.2 When Projects Are Financed with Borrowed Funds 428 10.6 Effects of Inflation on Project Cash Flows 431 10.6.1 Depreciation Allowance under Inflation 431 10.6.2 Handling Multiple Inflation Rates 435 Summary 437 SelfTest Questions 438 Problems 441
Chapter 11 Handling Project Uncertainty 462 11.1 Origins of Project Risk 465 11.2 Methods of Describing Project Risk 465 11.2.1 Sensitivity Analysis 465 11.2.2 Sensitivity Analysis for Mutually Exclusive Alternatives 470 11.2.3 BreakEven Analysis 473 11.2.4 Scenario Analysis 474 11.3 Probabilistic Cash Flow Analysis 477 11.3.1 Including Risk in Investment Evaluation 478 11.3.2 Aggregating Risk over Time 479 11.3.3 Estimating Risky Cash Flows 481 11.4 Considering the Project Risk by Discount Rate 486 11.4.1 Determining the Company Cost of Capital 486 11.4.2 Project Cost of Capital: RiskAdjusted Discount Rate Approach 491 Summary 493 SelfTest Questions 494 Problems 496
PART 4 SPECIAL TOPICS IN ENGINEERING ECONOMIC 511 Chapter 12 Replacement Decisions 512 12.1 ReplacementAnalysis Fundamentals 514 12.1.1 Basic Concepts and Terminology 515 12.1.2 Approaches for Comparing Defender and Challenger 517 12.2 Economic Service Life 521 12.3 Replacement Analysis when the Required Service Period is Long 527 12.3.1 Required Assumptions and Decision Frameworks 527 12.3.2 Handling Unequal Service Life Problems in Replacement Analysis 528 12.3.3 Replacement Strategies under the Infinite Planning Horizon 528 12.4 Replacement Analysis with Tax Considerations 534 Summary 541 SelfTest Questions 542 Problems 543
Chapter 13 Understanding Financial Statements 556 13.1 Accounting: The Basis of Decision Making 558 13.2 Financial Status for Businesses 559 13.2.1 The Balance Sheet 561 13.2.2 The Income Statement 566 13.2.3 The CashFlow Statement 568 13.3 Using Ratios to Make Business Decisions 574 13.3.1 Debt Management Analysis 574 13.3.2 Liquidity Analysis 577 13.3.3 Asset Management Analysis 578 13.3.4 Profitability Analysis 579 13.3.5 MarketValue 581 13.3.6 Limitations of Financial Ratios in Business Decisions 583 13.3.7 Where We Get the Most UptoDate Financial Information 585 13.4 Principle of Investing in Financial Assets 585 13.4.1 TradeOff between Risk and Reward 585 13.4.2 Broader Diversification Reduces Risk 585 13.4.3 Broader Diversification Increases Expected Return 587 Summary 589 SelfTest Questions 590 Problems 594
Appendix A SelfTest Questions with Answers 603 Appendix B Interest Factors for Discrete Compounding 631 Appendix C How to Read the Cumulative Standardized Normal Distribution Function 661 Index 664



