ll
xv 1-23
Preface
Preface to the First Edition
1. INTRODUCTION
1.1 Economics 1
1.1.1 Flow in an Economy 1
1.1.2 Law of Supply and Demand
1.2 Concept of Engineering Economics
1.2.1 Types of Efficiency 4
1.2.2 Definition and Scope of Engineering Economics
1.3 Elements of Costs 7
1.5
1.4.1 Other Costs and Revenues 7 .
1.4.2 Marginal Cost 8 .
1.4.3 Marginal Revenue 8
1.4.5 Average Cost 8
1.4.6 Sunk Cost 9
1.4.7 Opportunity Cost 9
1.4.8 Recurring Cost 9
1.4.9 Non-recurring Cost 9
1.4.10 Incremental Cost 10
1.4.11Cash Cost 10
1.4.10 Book Costs 10
1.4.11 Life Cycle Cost 10
Cost Estimating Models 11
1..5.1 Per-Unit Model 11 .
1.5.2 Segmenting Model 11
1..5.3 Cost Indexes 12
1.5.4 Power Size Model 12
1..5.5 Learning Curve Model 12
1.6 Index Number 13
1.6.1 Paasche Price Index Formula 14
1.6.2 Laspeyres Price Index Formula 14
1.6.3 Consumer Price Index 75
1.6.4 Wholesale Price Index (WPI) 15
1.7 Inflation 16
1.7.1 Causes of Inflation 16
1.7.2 Types of Inflation 17
1.8 Break-Even Analysis 18
1.9 Profit/Volume Ratio (P/V Ratio) 20 Questions 22
2. ELEMENTARY ECONOMIC ANALYSIS 24-34
2.1 Introduction 24
2.2 Examples for Simple Economic Analysis 25
2.2.1 Material Selection for a Product/Substitution of Raw Material 25
2.2.2 Design Selection for a Product 27 tux 2.2.3 Building Material Selection 30
2.2.4 Process Planning/Process Modification 31 Questions 33
3. INTEREST FORMULAS AND THEIR APPLICATIONS 35-50
3.1 Introduction 35
3.2 Time Value of Money 35
3.3 Interest Formulas 37
3.3.1 Single-Payment Compound Amount 37
3.3.2 Single-Payment Present Worth Amount 38
3.3.3 Equal-Payment Series Compound Amount 39
3.3.4 Equal-Payment Series Sinking Fund 40
3.3.5 Equal-Payment Series Present Worth Amount 41
3.3.6 Equal-Payment Series Capital Recovery Amount 43
3.3.7 Uniform Gradient Series Annual Equivalent Amount 44
3.3.8 Effective Interest Rate 46
3.4 Bases for Comparison of Alternatives 47 Questions 48
4. PRESENT WORTH METHOD OF COMPARISON 51-63
4.1 Introduction 51
4.2 Revenue-dominated Cash Flow Diagram 57
4.3 Cost-dominated Cash Row Diagram 52
4.4 Examples 53 Questions 61
5. FUTURE WORTH METHOD 64-76
5.1 Introduction 64
5.2 Revenue-dominated Cash Flow Diagram 64
5.3 Cost-dominated Cash Flow Diagram 65
5.4 Examples 65 Questions 75
6. ANNUAL EQUIVALENT METHOD 77-96
6.1 Introduction 77
6.2 Revenue-dominated Cash Flow Diagram 77
6.3 Cost-dominated Cash Flow Diagram 78
6.4 Alternate Approach 79
6.5 Examples 79 Questions 94
7. RATE OF RETURN METHOD 97-108
7.1 Introduction 97
7.2 Examples 98 Questions 106
8. REPLACEMENT AND MAINTENANCE ANALYSIS 109-134
8.1 Introduction 709
8.2 Types of Maintenance 110
8.3 Types of Replacement Problem 110
8.4 Determination of Economic Life of an Asset 777
8.5 Replacement of Existing Asset with a New Asset 777
8.5.1 Capital Recovery with Return 777
8.5.2 Concept of Challenger and Defender 118
8.6 Simple Probabilistic Model for Items Which Fail Completely 727 Questions 132
9. DEPRECIATION 135-146
9.1 Introduction 135
9.2 Methods of Depreciation 135
9.2.1 Straight Line Method of Depreciation 135
9.2.2 Declining Balance Method of Depreciation 737
9.2.3 Sum-of-the-Years-Digits Method of Depreciation 739
9.2.4 Sinking Fund Method of Depreciation 140
9.2.5 Service Output Method of Depreciation 143
9.3 Capital Allowance 143 Questions 145
10. EVALUATION OF PUBLIC ALTERNATIVES 147-156
10.1 Introduction 147
10.2 Examples 148 Questions 154
11. INFLATION ADJUSTED DECISIONS 157-167
11.1 Introduction 157
11.2 Procedure to Adjust Inflation 157
11.3 Inflation Adjusted Economic Life of Machine 159
11.3.1 Limitation of Existing Model 160
11.3.2 Economic Life Determination without Inflationary Effect 76.3 Economic Life Determination with Inflationary Effect 161
Questions 167
12. NON-DETERMINISTIC DECISION MAKING 168-180
12.1 Uncertainty in Future Events 168
12.2 Probability and Probability Distributions 169
12.2.1 Probability 169
12.2.2 Classical Approach to Probability 170
12.2.3 Conditional Probability 777
12.2.4 Probability Distributions 777
12.3 Risk and Uncertainty 773
12.3.1 Decision under Certainty (Deterministic decision) 773
12.3.2 Decision under Risk 774 *£* 12.3.3 Decision under Uncertainty 176 12A Decision Tree 777 Questions 179
13. CASH FLOWS WITH PROBABILITY DISTRIBUTIONS 181-185
13.1 Introduction 181
13.2 Present Worth Method 182 Questions 184
14. SELECTION OF ALTERNATIVES USING SIMULATION 186-194
14.1 Introduction 186
14.2 Steps of Simulation to Check Feasibility of a Project 186
14.3 Random Variate 188
14.3.1 Random Variate of Uniform Distribution 188 Questions 194
15. INVENTORY CONTROL 195-204
15.1 Introduction 795
15.2 Purchase Model with Instantaneous Replenishment and without Shortages 796
15.3 Manufacturing Model without Shortages 198
15.4 Purchase Model with Shortages (Instantaneous Supply) 200
15.5 Manufacturing Model with Shortages 207 Questions 204
16. MAKE OR BUY DECISION 205-212
16.1 Introduction 205
16.2 Criteria for Make or Buy 205
16.3 Approaches for Make or Buy Decision 206
16.3.1 Simple Cost Analysis 206
16.3.2 Economic Analysis 207
16.3.3 Break-even Analysis 209
Questions 211
17. PROJECT MANAGEMENT 213-228
v 17.1 Introduction 213
17.2 Phases of Project Management 277
17.3 Guidelines for Network Construction 277
17.4 Critical Path Method (CPM) 278
17.5 Gantt Chart/Time Chart 222
17.6 PERT (Project Evaluation and Review Technique) 224 Questions 227
18. VALUE ANALYSIS/VALUE ENGINEERING 229-235
18.1 Introduction 229
18.2 When to Apply Value Analysis 229
18.2.1 Value Analysis vs. Value Engineering 229
18.3 Function 237
18.4 Aims 232
18.5 Value Engineering Procedure 233
18.6 Advantages and Application Areas 235 Questions 235
19. LINEAR PROGRAMMING 236-248
19.1 Introduction 236
19.2 Development of LP Models 236
19.3 Graphical Method 238
19.4 Simplex Method 247 Questions 247
20. BASIC ACCOUNTING CONCEPTS 249-269
20.1 Introduction 249
20.2 Functions of Accounting 249
20.3 Balance Sheet 250
20.4 Income Statement 253
20.5 Ratio Analysis 254
20.5.1 Liquidity Ratios 255
20.5.2 Asset Management Ratios 256
20.5.3 Debt Management Ratios 258
20.5.4 Profitability Ratios 259
20.5.5 Market Ratios 267
20.6 Capital Transactions 262
20.7 Cost Accounting 262
20.7.1 Stages of Calculation of Selling Price 265
20.7.2 Indirect Cost Allocation 264 Questions 268
Appendix—Interest Tables 271-341
References 343
Index 345-348