Principles of Engineering Economics with Applications, 2nd Edition PDF by Zahid A. Khan, Arshad Noor Siddiquee, Brajesh Kumar and Mustufa H. Abidi

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Principles of Engineering Economics with Applications, 2nd Edition
By Zahid A. Khan, Arshad Noor Siddiquee, Brajesh Kumar and Mustufa H. Abidi
Principles of Engineering Economics with Applications, 2nd Edition
Contents
Foreword xv
Preface xix
Acknowledgments xxi
1 Engineering Economics: A Prologue 1
1.1 Introduction 1
1.2 Introduction to Economics 1
1.3 Need to Study Economics 1
1.4 Circular Flow of Economic Activities 2
1.5 Circular Flow of Income in Different Sectors 6
1.6 Demand Theory 7
1.6.1 Law of Demand 8
1.6.2 Assumptions Used in Defining Demand 8
1.6.3 Demand Schedule 8
1.6.4 Demand Curve 9
1.6.5 Determinants of Demand 9
1.7 Elasticity of Demand 10
1.7.1 Price Elasticity of Demand 10
1.7.2 Income Elasticity of Demand 15
1.7.3 Cross Elasticity 17
1.8 Supply 20
1.8.1 Factors Affecting Supply: The Determinants of Supply 20
1.8.2 Law of Supply 21
1.8.3 Supply Schedule 21
1.8.4 Supply Curve 22
1.9 Definition and Scope of Engineering Economics 22
1.9.1 Meaning of Engineering Economics 22
1.9.2 Definition of Engineering Economics 22
1.9.3 Concepts of Engineering Economics 23
1.9.4 The Scope of Engineering Economics 23
1.9.5 Engineering Economics Environment 23
1.9.6 Types of Efficiency 24
1.10 Consumer and Producer Goods and Services 25
1.11 Necessities, Luxuries and Relation between Price and Demand 25
1.12 Relation between Total Revenue and Demand 27
1.13 Cost Concepts 28
1.14 Relation between Cost and Volume 29
1.15 The Law of Supply and Demand 33
1.16 The Law of Diminishing Marginal Returns 34
1.17 Break-Even Analysis 34
1.18 Profit-Volume (P/V) Chart and P/V Ratio 38
1.19 Competition or Market Structure 41
2. Fundamentals of Mathematics and Engineering Economics 45
2.1 Introduction 45
2.2 Theory of Consumer Behavior 46
2.3 Meaning of Utility 47
2.3.1 Nature of the Utility Function 47
2.3.2 Existence of Utility Function 48
2.3.3 The Cardinal Marginal Utility Theory 49
2.3.4 Equilibrium of the Consumer 50
2.4 Meaning of Demand 51
2.4.1 Demand Function 51
2.4.2 Quantity Demanded 51
2.4.3 Change in Demand 52
2.4.4 Law of Demand 52
2.4.5 Ordinary Demand Function 54
2.4.6 Compensated Demand Function 55
2.4.7 Reasons for Downward Slope of Demand Curve 55
2.5 Concept of Elasticity 56
2.5.1 Own Price Elasticity 56
2.5.2 Determinants of Price Elasticity 58
2.5.3 Income Elasticity of Demand 59
2.5.4 Cross-Price Elasticity of Demand 60
2.5.5 Engel Curve and Income Elasticity 61
2.5.6 Relationship between Price Elasticity and Marginal Revenue 63
2.6 Law of Diminishing Marginal Utility 63
2.7 Principle of Equi-marginal Utility 65
2.8 Indifference Curves Theory and Ordinal Utility Theory 67
2.8.1 Indifference Curves 67
2.8.2 Nature of Consumer Preferences 68
2.8.3 Indifference Map 69
2.8.4 Rate of Commodity Substitution 69
2.8.5 Properties of ICs 70
2.8.6 Budget Line 72
2.8.7 Consumer’s Equilibrium or Maximization of Utility 72
2.8.8 Alternative Method of Utility Maximization 74
2.9 Application and Uses of Indifference Curves 76
2.9.1 Income and Leisure Choice 76
2.9.2 Revealed Preference Hypothesis 77
2.9.3 Consumer’s Surplus 80
3. Elementary Economic Analysis 83
3.1 Introduction: Theory of the Firm 83
3.2 Law of Supply 83
3.3 Concept of Elasticity of Supply 86
3.4 Meaning of Production 88
3.5 Production Function and its Types 90
3.5.1 General Production Function 90
3.5.2 Cobb-Douglas Production Function 91
3.5.3 Properties of Cobb-Douglas Production Function 93
3.5.4 CES Production Function 94
3.6 Producer’s Equilibrium 94
3.7 Concept of Isoquants 96
3.8 Marginal Rate of Technical Substitution 99
3.9 The Elasticity of Substitution 100
3.10 Iso-cost Line 101
3.11 Producer’s Surplus 102
3.12 Cost Minimization 102
3.13 Returns to Scale and Returns to Factor 107
3.14 Cost Theory and Estimation 108
3.15 Concept of Costs and their Types 108
3.16 Profits 110
3.16.1 Normal Profits 111
3.16.2 Economic Profits 111
3.17 Profit maximization 112
3.18 Market Structure and Degree of Competition 112
3.18.1 Perfect Competition 113
3.18.2 Monopoly 115
3.18.3 Monopolistic Competition 117
3.18.4 Oligopoly Models 118
3.18.5 Monopsony 120
4. Interest Formulae and their Applications 123
4.1 Introduction 123
4.2 Why Return to Capital is Considered? 123
4.3 Interest, Interest Rate and Rate of Return 123
4.4 Simple Interest 125
4.5 Compound Interest 126
4.6 The Concept of Equivalence 126
4.7 Cash Flow Diagrams 127
4.8 Terminology and Notations/Symbols 129
4.9 Interest Formula for Discrete Cash Flow and Discrete Compounding 132
4.9.1 Interest Formulae Relating Present and Future Equivalent Values
of Single Cash Flows 132
4.9.2 Interest Formulae Relating a Uniform Series (Annuity) to
its Present and Future Worth 135
4.10 Interest Formulae Relating an Arithmetic Gradient Series to its Present
and Annual Worth 142
4.10.1 Finding P when given G 143
4.10.2 Finding A when given G 144
4.11 Interest Formulae Relating a Geometric Gradient Series to its Present
and Annual Worth 148
4.12 Uniform Series with Beginning-of-Period Cash Flows 154
4.13 Deferred Annuities or Shifted Uniform Series 156
4.14 Calculations Involving Uniform Series and Randomly Placed Single Amounts 159
4.15 Calculations of Equivalent Present Worth and Equivalent Annual
Worth for Shifted Gradients 161
4.16 Calculations of Equivalent Present Worth and Equivalent Annual
Worth for Shifted Decreasing Arithmetic Gradients 165
4.17 Nominal and Effective Interest Rates 168
4.18 Interest Problems with Compounding More-Often-Than-Once Per Year 173
4.18.1 Single Amounts 173
4.18.2 Uniform Series and Gradient Series 175
4.18.3 Interest Problems with Uniform Cash Flows Less-Often-Than
Compounding Periods 176
4.18.4 Interest Problems with Uniform Cash Flows More-Often-Than
Compounding Periods 178
5. Methods for Making Economy Studies 185
5.1 Introduction 185
5.2 Basic Methods 185
5.3 Present Worth (P.W.) Method 186
5.4 Future Worth (F.W.) Method 188
5.5 Annual Worth (A.W.) Method 190
5.6 Internal Rate of Return (I.R.R.) Method 196
5.7 External Rate of Return (E.R.R.) Method 199
5.8 Explicit Reinvestment Rate of Return (E.R.R.R.) Method 203
5.9 Capitalized Cost Calculation and Analysis 204
5.10 Payback (Payout) Method 207
6. Selection among Alternatives 212
6.1 Introduction 212
6.2 Alternatives having Identical Disbursements and Lives 212
6.3 Alternatives having Identical Revenues and Different Lives 221
6.3.1 Comparisons using the Repeatability Assumption 221
6.3.2 Comparisons using the Coterminated Assumption 225
6.4 Alternatives Having Different Revenues and Identical Lives 228
6.5 Alternatives Having Different Revenues and Different Lives 231
6.6 Comparison of Alternatives by the Capitalized Worth Method 234
6.7 Selection among Independent Alternatives 235
7. Replacement and Retention Decisions 241
7.1 Introduction 241
7.2 Reasons for Replacement 241
7.3 Terminologies used in Replacement Study 242
7.4 Economic Service Life 242
7.5 Procedure for Performing Replacement Study 245
7.6 Replacement Study over a Specified Study Period 247
8. Depreciation 254
8.1 Introduction 254
8.2 Depreciation Terminology 254
8.3 Methods of Depreciation 255
8.3.1 Straight Line (SL) Method 255
8.3.2 The Declining Balance (DB) Method 257
8.3.3 Sum-of-the-Years’-Digits (SYD) Method 260
8.3.4 The Sinking Fund Method 262
8.3.5 The Service Output Method 264
9. Economic Evaluation of Public Sector Projects 266
9.1 Introduction 266
9.2 Benefit/Cost Analysis of a Single Project 267
9.3 Selection between Two Mutually Exclusive Alternatives using
Incremental B/C Analysis 269
9.4 Selection Among Multiple Mutually Exclusive Alternatives using
Incremental B/C Analysis 271
10. Economics Study Considering Inflation 276
10.1 Introduction 276
10.2 Effects of Inflation 276
10.3 Present Worth Calculations Adjusted for Inflation 278
10.4 Future Worth Calculations Adjusted for Inflation 281
10.5 Capital Recovery Calculations Adjusted for Inflation 284
11. Make or Buy Decision 286
11.1 Introduction 286
11.2 Feasible Alternatives for Launching New Products 286
11.3 Decisive Factors for Make or Buy Decision 287
11.3.1 Criteria for Make Decision 287
11.3.2 Criteria for Buy Decision 288
11.4 Techniques used to Arrive at Make or Buy Decision 288
11.4.1 Simple Cost Analysis 288
11.4.2 Economic Analysis 290
11.4.3 Break-Even Analysis 292
12. Project Management 297
12.1 Introduction 297
12.2 Phases of Project Management 297
12.2.1 Planning 297
12.2.2 Scheduling 298
12.2.3 Monitoring and Control 298
12.3 Bar or Gantt Charts 298
12.4 Network Analysis Technique 300
12.5 Critical Path Method (CPM) 301
12.5.1 Arrow Diagrams 301
12.5.2 Activity Description 304
12.5.3 Understanding Logic of Arrow Diagrams 305
12.5.4 Dummy Activities 307
12.6 Guidelines for Drawing Network Diagrams or Arrow Diagrams 308
12.7 CPM Calculations 311
12.7.1 Critical Path 312
12.7.2 Critical Activities 312
12.7.3 Non-critical Activities 312
12.7.4 Earliest Event Time 313
12.7.5 Latest Event Time 313
12.8 Calculation of the Earliest Occurrence Time of Events 313
12.9 Calculation of the Latest Occurrence Time of Events 318
12.10 Activity Times 324
12.10.1 Earliest Start Time 325
12.10.2 Earliest Finish Time 325
12.10.3 Latest Finish Time 325
12.10.4 Latest Start Time 326
12.11 Float 330
12.11.1 Types of Float 331
12.11.2 Negative Float 340
12.12 Identification of Critical Path 341
12.13 Program Evaluation and Review Technique (PERT) 343
12.13.1 PERT Activity Time Estimates 343
12.13.2 PERT Computations 344
12.13.3 Computation of Probabilities of Completion by a Specified Date 352
12.14 Project Crashing 358
12.14.1 Cost Slope 359
12.14.2 Cost of Crashing 359
13. Value Engineering 375
13.1 Introduction 375
13.2 Concept of Value Engineering 375
13.3 Nature and Measurement of Value 378
13.3.1 The VE process 378
13.4 Origination Phase 379
13.4.1 Organization 379
13.4.2 Project Selection 379
13.4.3 The VE Team 380
13.5 Project or Study Mission 380
13.5.1 Product Definition and Documentation 380
13.6 Information Phase 380
13.6.1 Qualitative Analysis of Value: Function Analysis 380
13.6.2 Function Analysis Systems Technique (FAST) 381
13.6.3 Constraints Analysis 384
13.7 Quantitative Analysis of Value – State 1 Value Measurement 384
13.7.1 Cost Derivation 384
13.7.2 Worth or Importance Derivation 384
13.7.3 The Value Index 385
13.7.4 Value Measurement Techniques 385
13.8 Innovation Phase 386
13.8.1 Improvement of Value 386
13.9 Evaluation Phase 386
13.9.1 Pre-screening: Qualitative Analysis of Value 386
13.9.2 Quantitative Analysis of Value 386
13.10 Implementation Phase 387
14. Forecasting 388
14.1 Introduction 388
14.2 Basic Categories of Forecasting Methods 388
14.3 Extrapolative Methods 389
14.3.1 Components of Demand 389
14.3.2 Moving Average Method 390
14.3.3 Weighted Moving Average Method 391
14.3.4 Exponential Smoothing Methods 392
14.3.5 Adaptive Methods 403
14.4 Causal or Explanatory Methods 403
14.4.1 Regression Analysis 403
14.4.2 Simple Regression Analysis 404
14.4.3 Multiple Regression Analysis 413
14.5 Qualitative or Judgmental Methods 413
14.5.1 Build-up Method 414
14.5.2 Survey Method 414
14.5.3 Test Markets 414
14.5.4 Panel of Experts 414
14.6 Forecast Errors 415
15. Cost Estimation 422
15.1 Introduction 422
15.2 How Does an Organization Estimate Cost? 422
15.2.1 Cost Estimates 423
15.2.2 Cost Estimation Approach 423
15.2.3 Accuracy of Estimates 424
15.2.4 Cost Estimation Methods 424
15.3 Unit Method 424
15.4 Cost Indexes 426
15.5 Cost Estimation Relationships 427
15.5.1 Cost-Capacity Equation 427
15.5.2 Factor Method 428
15.5.3 Learning Curve 429
15.6 Estimation and Allocation of Indirect Cost 432
16. Decision Making 439
16.1 Introduction 439
16.2 Terminologies used in Decision Making 439
16.3 Steps in Decision Making 439
16.4 Decision Making Environment 442
16.5 Decision Making under Uncertainty 442
16.5.1 The Maximax Criterion 442
16.5.2 The Maximin Criterion 443
16.5.3 The Minimax Regret Criterion 443
16.5.4 The Realism Criterion (Hurwicz’s Rule) 444
16.5.5 Criterion of Insufficient Reason (Laplace’s Rule) 444
16.6 Decision Making under Risk 445
16.6.1 Expected Monetary Value (EMV) 445
16.6.2 Expected Opportunity Loss (EOL) 447
16.6.3 Expected Value of Perfect Information (EVPI) 449
16.7 Marginal Analysis 449
16.8 Decision Trees 451
Appendix A 457
Appendix B 505
Appendix C 508
Bibliography 511
Index 514 
 
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