Since there are more than a dozen current texts on engineering economics, why did I choose to write one? It is because current expositions differ little from that presented by Eugene L. Grant et al. in 1982 except for additional topics from the realm of managerial economics. Hence, the practice of engineering economics is still constrained by the following limitations of past and present engineering economics texts:
- Universal reliance on limited tabulations of eight of the 12 factors of engineering economics.
- Limited use of the non tabulated geometric gradient series.
- The need to use factor equations when tabulated factors are not available.
- The tedious practice of manually preparing some common least-cost studies.
- Defining the IRR in Chapter 5 or 6 as “the interest rate earned on the unrecovered balance of an investment so that the balance is zero at the end of the investment’s life.” But the meaning of “balance” is rarely referenced in the Index of the book!
- Not discussing the existence of quasi-simple investments and, therefore, not providing the method for finding their IRRs.
- Not discussing the existence of four classes of non-simple investments and, therefore, not providing methods for finding their IRRs.
The overarching goals and the corresponding results of this text are the elimination of these seven deficiencies in the contemporary body of knowledge of engineering economics. The 12 page Preface explains how this is accomplished, and the following is a synopsis of it:
- Limitations 1, 2, and 3 are eliminated by using the 12-Factor Calculator, a simple easy-to-use Excel spreadsheet that provides the values of the 12 Factors for arbitrary values of i, g (g≠i), and six (6) values N.
- Limitation 4 is eliminated by using the ANNUAL WORTH COMPARISON Calculator with Component Replacement and the PRESENT WORTH COMPARISON Calculator with Component Replacement in Chapters 4 and 5, respectively.
- Limitation 5 is eliminated in Chapter 2 by defining the Balance Equation and using it to derive the General Polynomial Equation (GPE). The solution of the GPE leads naturally and logically to the IRR of a loan or simple investment. Introducing Excel’s IRR function in Chapter 2, makes it available in all subsequent chapters for finding the IRR of various investments. For example, it is used in Chapter 3 to find the IRR of a “spec” house (a house that is initially built without a buyer).
- Limitation 6, not recognizing the existenceof quasi-simple investments is covered in Chapter 6. Step-by-Step 6.1 is a simple procedure for finding the IRR of a quasi-simple investment. Two examples illustrate its use.
- Limitation 7, not recognizing the existence of the four practical non-simple investments is covered in Chapter 7.
This chapter provides three (3) Step-by-Steps for finding the IRRs of these four (4) types of non-simple investments and seven (7) numerical examples that illustrate the calculations.
Paul Marnell, Eng.Sc.D. (Columbia University) is an Associate Professor of Chemical Engineering at Manhattan College with 25 years of teaching engineering economics and chemical plant design. His doctoral thesis was “The Lubrication Mechanism of the Hip joint”, which was partially funded by the Easter Seal Foundation. Dr. Marnell attended the Oak Ridge School of (Nuclear) Reactor Technology (ORSORT) under the sponsorship of the Foster Wheeler Corporation. He has 15 years of multi-industry experience that includes: (1) Nuclear engineering positions at Foster Wheeler, Nuclear Development Associates, and Stone and Webster Engineering Corporation. (2) Interim U.S. representative for Lurgi’s coal gasification process. (3) Manager of Lurgi’s U.S. Environmental Projects, the first of which was the Lurgi Sulfacid plant built for the United States Steel Corporation at Neville Island, PA. (4) Consultant to and summer employee of Brookhaven National Laboratory (BNL) where he initiated their coal-water fuel program and wrote several reports and presented papers describing it.
