An Introduction to Engineering Economics Kal Renganathan Sharma An Introduction to Engineering Economics By Kal Renganathan Sharma Prairie View A&M University sha07094_fm.indd 1 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. i K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services An Introduction to Engineering Economics Copyright © Cognella Academic Publishing 2015 www.cognella.com All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher. ISBN-13: 978-1-60650-709-4 (e-book) www.momentumpress.net Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. A publication in the Momentum Press Engineering Management collection Cover and interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India sha07094_fm.indd 2 12/12/14 1:13 PM # 156051 Cust: MP Au: sharma Pg. No. ii K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services Contents Dedication ...........................................................................................vii About the Author ...................................................................................ix Preface ..................................................................................................xi Chapter 1 Fundamentals of Engineering Economy ............................1 1.1 What Is Engineering, What Is Economy, and What Is Engineering Economy? ..............................1 Example 1.0 Start of Technocrats of Texas ........................6 1.2 Seven Principles of Engineering Economy ...................7 1.3 Summary ....................................................................8 1.4 References ...................................................................9 Chapter 2 Variable and Fixed Costs .................................................11 2.1 One-Time and Recurring Costs ................................11 2.2 The Life Cycle of an Enterprise .................................13 2.3 Total Revenue, Total Cost, and Profitable Region ......14 Example 2.1 Garlic Bread Nibbler Snack Factory ..........16 2.4 Giffen and Veblen Goods ..........................................19 Example 2.2 Japanese Robots ........................................20 Example 2.3 Lawn Mowers from China ........................22 2.5 Dualistic Relations ....................................................27 2.6 Summary ..................................................................31 2. 7 References ................................................................32 Chapter 3 Time Value of Money ......................................................33 3.1 Simple and Compound Interest ................................33 Example 3.1 Compound Interest Calculated on an Everyday Basis ................................................36 3.1.1 Effective Interest Rate .......................................37 3.2 Uniform Series of Payments ......................................38 3.2.1 Given A, I, and N Find F ..................................38 Example 3.2 Doubling Time of Investment ....................40 3.2.2 Given A, I, and N, Find P .................................42 sha07094_fm.indd 3 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. iii K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services iv CoNTENTS Example 3.3 Perpetual Payment and Father’s Day Prize ....................................................43 Example 3.4 0% Interest Rate ......................................44 Example 3.5 Nest Egg of Alice Smith .............................44 Example 3.6 Diversified Portfolio ................................45 Example 3.7 George Tataseo’s Royalty Payments and Investment .........................................................46 3.2.3 Given F, I, and A, Find N ..................................46 3.2.4 Given P, I, and A, Find N ..................................47 3.2.5 Given F, A, and N, Find I ..................................48 3.2.6 Given P, A, and N, Find I ..................................49 Example 3.8 U-Pay-Now & I-Pay-Later .......................50 Example 3.8 When Does a Micro-Power Plant Become More Attractive Investment? ..........................51 3.3 Uniform Gradient Series of Payments .......................52 3.4 Continuous Compounding .......................................54 3.4.1 F/P, F/A, P/A, A/F, and A/P for Continuous Compounding .....................................55 Example 3.10 Continuous Compounding ......................55 3.4.2 Given F, A, and I′, Find N During Continuous Compounding .....................................56 Example 3.11 Time Taken to Achieve Investment Goal .......................................................57 Example 3.12 Biodiesel Production from Waste Cooking Oil ....................................................58 Example 3.13 Credit Card Debt of U.S. Households ......60 Example 3.14 Time Taken to Pay Off Credit Card Debt .....................................................60 Example 3.14 Deferred Annuity ...................................60 3.5 Summary ..................................................................61 3.6 References .................................................................63 Chapter 4 Methods for Evaluation of Capital Projects .....................65 4.1 Overview ..................................................................65 4.2 Present Worth Analysis (PW) ....................................66 Example 4.1 Hydrogen from Fast Pyrolysis and Steam Re-Forming .............................................67 sha07094_fm.indd 4 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. iv K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services CoNTENTS v Example 4.2 Replacement for the World Trade Center (WTC) .........................................................69 Example 4.3 Capitalized Worth of Stone’s Replacement for the WTC .........................................69 4.3 Future Worth Analysis (FW) .....................................70 Example 4.4 University Apartments ..............................70 Example 4.5 Present Worth of a Sugar Mill ...................71 Example 4.6 Invest in Gold or Stock Market ..................72 Example 4.7 Electric/Gas Hybrid Vehicle .......................73 Example 4.8 Effect of Inflation on PW ..........................75 Example 4.9 Life-Cycle Cost Analysis of HVAC Systems ......................................................76 Example 4.10 Municipal Garbage Collection Truck .......78 Example 4.11 Hexane Extraction of Rice-Bran Oil ........79 4.4 Annual Worth Analysis (AW) ....................................80 Example 4.12 Annual Worth (AW) of a Biodiesel Plant in Taiwan ...........................................................81 Example 4.13 Debt Consolidation ................................83 Example 4.14 Solar Panel ............................................84 4.5 IRR (Internal Rate of Return) ...................................84 Example 4.15 Profitability of Liquefaction Plants ..........86 Example 4.16 Ethanol Production by Fermentation .......87 4.6 ERR (External Rate of Return) .................................89 4.7 Payback Period ..........................................................90 Example 4.17 Copper-Chlorine Thermochemical Cycles for Hydrogen Production .................................91 4.6 Summary ..................................................................92 4.7 References .................................................................94 Chapter 5 Decision Analysis and Comparison of Alternates .............95 5.1 Overview ..................................................................95 Example 5.1 Best Process to Manufacture CNTs (Carbon Nanotubes) .................................................98 Example 5.2 Cost Savings by Using Microfiltration Pretreatment During SWRO (Sea Water Reverse Osmosis) .....................................................101 Cost of Water (Conventional) ...................................101 sha07094_fm.indd 5 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. v K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services vi CoNTENTS Cost of Water (MF Pretreated) .................................102 Example 5.3 Bioethanol from Sugarcane Bagasse .........103 Dilute Acid Hydrolysis Process .................................104 Power Plant Option ..................................................105 Example 5.4 Sequestration by Dimethyl Carbonate Formation .............................................105 5.2 Study Period—Don’t Compare an Apple and an Orange ............................................106 Example 5.5 Life-Cycle Cost of Photocopier .................108 Example 5.6 ED Lighting .........................................110 5.3 Equivalent Worth Method ......................................111 Example 5.7 Anti-Allergic Cream ...............................112 Plan A—Manual Cartoning .....................................113 Plan B—Automatic Cartoning .................................113 5.4 Optimization ..........................................................113 Example 5.8 Optimal Number of Effects in Multiple Effect Evaporator ..................................115 5.5 Household Finances ................................................117 Example 5.8 Refinancing o.f Steve Gandhi ..................121 Example 5.9 Toyota National Clearance ......................122 5.6 Summary ................................................................126 5.7 References ...............................................................128 sha07094_fm.indd 6 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. vi K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services Dedication This book is dedicated to my eldest son R Hari Subrahmanyan Sharma (alias Ramkishan) who turned nine on Aug-13-2010. sha07094_fm.indd 7 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. vii K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services sha07094_fm.indd 8 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. viii K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services About the Author Kal Renganathan Sharma serves as Adjunct Professor of Chemical Engineering at the Roy G. Perry College of Engineering at Prairie View A & M University, Prairie View, TX. He instructs CHEG 2003 E conomic Analysis and Technical Applications. He received his B.Tech. from Indian Institute of Technology, Chennai, India, in 1985, MS and Ph.D degrees in 1987 and 1990 from West Virginia University; Morgantown, WV, all three degrees in chemical engineering. He received the once in a school time prize from nursery to higher secondary school for the Best All Round Student of the Penultimate year from the Rev. Brothers of St. Gabriel at RSK Higher Secondary School, Trichy; India. He has held a number of high level academic positions in India and USA. Dr. Sharma, KR, is the author of 10 books, 4 Book-Chapters, 19 journal articles, 503 conference papers and 108 other presentations. He has instructed over 2500 students in 83 semesterwise courses in India and USA over the past 15 years. Honors received include Honorary Fellowship, Australian Insti- tute of High Energetic Materials, Melbourne, Australia, 2010, Fellow, Indian Chemical Society; Kolkata, India, 2007, Who’s Who in America, 2009–2010, Marquis Who’s Who, Upper Saddle River, NJ, International Biographical Center, Cambridge, UK, 2007, member, New York Acad- emy of Sciences, New York, NY, 1996, Phi Kappa Phi, 1990, Sigma Xi, 1995, cash award, SASTRA University, Thanjavur, India, 2005, cash award, Monsanto, Indian Orchad, MA, 1990, Who’s Who in Plastics and Polymers, CRC Press, Baco Raton, FL, 2000. He is a naturalized citizen of USA. sha07094_fm.indd 9 21/11/14 2:34 PM # 156051 Cust: MP Au: sharma Pg. No. ix K S4DcESIGaN SrERVlICiESS OlF e Title:  An Introduction to Engineering Economics Short / Normal Publishing Services