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C o n t e m p o r a r y
Engineering
Economics
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C o n t e m p o r a r y
Engineering
Economics
F o u r t h E d i t i o n
Chan S. Park
Depar tment of Industr ial
and Systems Engineer ing
Aubur n Univer sity
Upper Saddle River, NJ 07458
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Library of Congress Cataloging-in-Publication Data on File
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© 2007 by Pearson Education, Inc.
Pearson Prentice Hall
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All rights reserved. No part of this book may be reproduced, in any form or by any means
without permission in writing from the publisher.
The author and publisher of this book have used their best efforts in preparing this book. These
efforts include the development, research, and testing of the theories and programs to determine
their effectiveness. The author and publisher make no warranty of any kind, expressed or
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Printed in the United States of America
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ISBN 0-13-187628-7
Pearson Education Ltd., London
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Pearson Education, Inc., Upper Saddle River, New Jersey
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To my wife, Kim (Inkyung); and my children, Michael and Edward
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CONTENTS
Preface xix
PPARART T 1 BBASICS OF FINANCIAL DECISIONS
ASICS OF FINANCIAL DECISIONS
1
Chapter 1 Engineering Economic Decisions
1.1
Role of Engineers in Business
1.1.1 Types of Business Organization
1.1.2 Engineering Economic Decisions
1.1.3 Personal Economic Decisions
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1.2 What Makes the Engineering Economic Decision Difficult?
1.3
1.4
Economic Decisions versus Design Decisions
Large-Scale Engineering Projects
1.4.1 How a Typical Project Idea Evolves
1.4.2 Impact of Engineering Projects on Financial Statements
1.4.3 A Look Back in 2005: Did Toyota Make the Right Decision?
Common Types of Strategic Engineering Economic Decisions
Fundamental Principles of Engineering Economics
Summary
1.5
1.6
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2.3
Chapter 2 Understanding Financial Statements
2.1
2.2
Accounting: The Basis of Decision Making
Financial Status for Businesses
2.2.1 The Balance Sheet
2.2.2 The Income Statement
2.2.3 The Cash Flow Statement
Using Ratios to Make Business Decisions
2.3.1 Debt Management Analysis
2.3.2 Liquidity Analysis
2.3.3 Asset Management Analysis
2.3.4 Profitability Analysis
2.3.5 Market Value Analysis
2.3.6 Limitations of Financial Ratios in Business Decisions
Summary
Problems
Short Case Studies
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viii CONTENTS
Chapter 3
3.1
3.2
3.3
3.4
4.2
4.3
Interest Rate and Economic Equivalence
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Interest: The Cost of Money
3.1.1 The Time Value of Money
3.1.2 Elements of Transactions Involving Interest
3.1.3 Methods of Calculating Interest
3.1.4 Simple Interest versus Compound Interest
Economic Equivalence
3.2.1 Definition and Simple Calculations
3.2.2 Equivalence Calculations: General Principles
3.2.3 Looking Ahead
Development of Interest Formulas
3.3.1 The Five Types of Cash Flows
3.3.2 Single-Cash-Flow Formulas
3.3.3 Uneven Payment Series
3.3.4 Equal Payment Series
3.3.5 Linear Gradient Series
3.3.6 Geometric Gradient Series
Unconventional Equivalence Calculations
3.4.1 Composite Cash Flows
3.4.2 Determining an Interest Rate to Establish Economic Equivalence
Summary
Problems
Short Case Studies
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Chapter 4 Understanding Money and Its Management
4.1
Nominal and Effective Interest Rates
4.1.1 Nominal Interest Rates
4.1.2 Effective Annual Interest Rates
4.1.3 Effective Interest Rates per Payment Period
4.1.4 Continuous Compounding
Equivalence Calculations with Effective Interest Rates
4.2.1 When Payment Period Is Equal to Compounding Period
4.2.2 Compounding Occurs at a Different Rate than that at
Which Payments Are Made
Equivalence Calculations with Continuous Payments
4.3.1 Single-Payment Transactions
4.3.2 Continuous-Funds Flow
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