Fundamentals of Engineering Economics, 4th edition

Published by Pearson (March 2, 2018) © 2019

  • Chan S Park Auburn University


per month

  • Anytime, anywhere learning with the Pearson+ app
  • Easy-to-use search, navigation and notebook
  • Simpler studying with flashcards

  • Hardcover, paperback or looseleaf edition
  • Affordable rental option for select titles
  • Free shipping on looseleafs and traditional textbooks



  • Reach every student with personalized support
  • Customize courses with ease
  • Optimize learning with dynamic study tools

For introductory engineering economics courses.

Relate engineering economics to students' everyday lives for theoretical and conceptual understanding

Chan Park, author of the best-selling Contemporary Engineering Economics, tells the story of engineering economy with the more concise Fundamentals of Engineering Economics by relating concepts from class to students' everyday lives.

Written to appeal to a wide range of engineering disciplines, the 4th Edition will help students make informed financial decisions and incorporates all critical decision-making tools, including the most contemporary, computer-oriented ones.

Hallmark features of this title

  • Appeals to the full range of engineering disciplines, including industrial, civil, mechanical, electrical, computer, aerospace, chemical and manufacturing engineering, by providing real-world examples students can relate to their everyday lives.
  • Students are guided to outline the correct approach to example problems through a Given, Find, Approach and Comments process. This guidance is intended to stimulate curiosity and to look beyond the mechanics of problem-solving to explore “what-if” issues, alternative solutions methods and the interpretation of solutions.
  • Incorporates all critical decision-making tools, including computer-oriented ones.

New and updated features of this title

  • UPDATED: All chapter-opening vignettes have been updated and provide students with a real economic story describing how an individual decision maker or actual corporation has wrestled with the issues discussed in the chapter. These opening cases heighten students' interest by pointing out the real-world relevance and applicability of what might otherwise seem to be dry technical material.
  • UPDATED: Self-test questions, formatted in a style suitable for FE Exam review, are available for each chapter. Their worked-out solutions are provided in Appendix A.
  • UPDATED: 75% of the questions are new or updated.

Chapter 1 Engineering Economic Decisions

1.1 The Rational Decision-Making Process
1.1.1 How Do We Make Typical Personal Decisions?
1.1.2 How Do We Approach an Engineering Design Problem?
1.1.3 What Makes Economic Decisions Different from Other Design Decisions?
1.2 The Engineer’s Role in Business
1.2.1 Making Capital-Expenditure Decisions
1.2.2 Large-Scale Engineering Economic Decisions
1.2.3 Impact of Engineering Projects on Financial Statements
1.3 Types of Strategic Engineering Economic Decisions
1.3.1 New Products or Product Expansion
1.3.2 Equipment and Process Selection
1.3.3 Cost Reduction
1.3.4 Equipment Replacement
1.3.5 Service or Quality Improvement
1.4 Fundamental Principles in Engineering Economics
Self-Test Questions

Chapter 2 Time Value of Money
2.1 Interest: The Cost of Money
2.1.1 The Time Value of Money
2.1.2 Elements of Transactions Involving Interest
2.1.3 Methods of Calculating Interest
2.2 Economic Equivalence
2.2.1 Definition and Simple Calculations
2.2.2 Equivalence Calculations Require a Common Time Basis for Comparison
2.3 Interest Formulas for Single Cash Flows
2.3.1 Compound-Amount Factor
2.3.2 Present-Worth Factor
2.3.3 Solving for Time and Interest Rates
2.4 Uneven-Payment Series
2.5 Equal-Payment Series
2.5.1 Compound-Amount Factor: Find F , Given A , i , and N
2.5.2 Sinking-Fund Factor: Find A , Given F , i , and N
2.5.3 Capital-Recovery Factor (Annuity Factor): Find A , Given P , i and N
2.5.4 Present-Worth Factor: Find P , Given A , i , and N
2.5.5 Present Value of Perpetuities
2.6 Dealing with Gradient Series
2.6.1 Handling Linear Gradient Series
2.6.2 Handling Geometric Gradient Series
2.7 More on Equivalence Calculations
Self-Test Questions

Chapter 3 Understanding Money Management
3.1 Market Interest Rates
3.1.1 Nominal Interest Rates
3.1.2 Annual Effective Interest Rates
3.2 Calculating Effective Interest Rates Based on Payment Periods
3.2.1 Discrete Compounding
3.2.2 Continuous Compounding
3.3 Equivalence Calculations with Effective Interest Rates
3.3.1 Compounding Period Equal to Payment Period
3.3.2 Compounding Occurs at a Different Rate than That at Which Payments are Made
3.4 Debt Management
3.4.1 Borrowing with Credit Cards
3.4.2 Commercial Loans—Calculating Principal and Interest Payments
3.4.3 Comparing Different Financing Options
Self-Test Questions

Chapter 4 Equivalence Calculations under Inflation
4.1 Measure of Inflation
4.1.1 Consumer Price Index
4.1.2 Producer Price Index
4.1.3 Average Inflation Rate
4.1.4 General Inflation Rate ( f ) versus Specific Inflation Rate ( fj )
4.2 Actual versus Constant Dollars
4.2.1 Conversion from Constant to Actual Dollars
4.2.2 Conversion from Actual to Constant Dollars
4.3 Equivalence Calculations under Inflation
4.3.1 Market and Inflation-Free Interest Rates
4.3.2 Constant-Dollar Analysis
4.3.3 Actual-Dollar Analysis
4.3.4 Mixed-Dollar Analysis
Self-Test Questions

Chapter 5 Present-Worth Analysis

5.1 Loan versus Project Cash Flows
5.2 Initial Project Screening Methods
5.2.1 Benefits and Flaws of Payback Screening
5.2.2 Discounted-Payback Period
5.3 Present-Worth Analysis
5.3.1 Net-Present-Worth Criterion
5.3.2 Guidelines for Selecting a MARR
5.3.3 Meaning of Net Present Worth
5.3.4 Net Future Worth and Project Balance Diagram
5.3.5 Capitalized-Equivalent Method
5.4 Methods to Compare Mutually Exclusive Alternatives
5.4.1 Doing Nothing Is a Decision Option
5.4.2 Service Projects versus Revenue Projects
5.4.3 Analysis Period Equals Project Lives
5.4.4 Analysis Period Differs from Project Lives
Self-Test Questions

Chapter 6 Annual-Equivalence Analysis
6.1 Annual-Equivalent Worth Criterion
6.1.1 Benefits of AE Analysis
6.1.2 Capital (Ownership) Costs versus Operating Costs
6.2 Applying Annual-Worth Analysis
6.2.1 Unit-Profit or Unit-Cost Calculation
6.2.2 Make-or-Buy Decision
6.3 Comparing Mutually Exclusive Projects
6.3.1 Analysis Period Equals Project Lives
6.3.2 Analysis Period Differs from Project Lives
Self-Test Questions

Chapter 7 Rate-of-Return Analysis
7.1 Rate of Return
7.1.1 Return on Investment
7.1.2 Return on Invested Capital
7.2 Methods for Finding Rate of Return
7.2.1 Simple versus Nonsimple Investments
7.2.2 Computational Methods
7.3 Internal-Rate-of-Return Criterion
7.3.1 Relationship to the PW Analysis
7.3.2 Decision Rule for Simple Investments
7.3.3 Decision Rule for Nonsimple Investments
7.4 Incremental Analysis for Comparing Mutually Exclusive Alternatives
7.4.1 Flaws in Project Ranking by IRR
7.4.2 Incremental-Investment Analysis
7.4.3 Handling Unequal Service Lives
Self-Test Questions

Chapter 8 Benefit–Cost Analysis
8.1 Evaluation of Public Projects
8.1.1 Valuation of Benefits and Costs
8.1.2 Users’ Benefits
8.1.3 Sponsor’s Costs
8.1.4 Social Discount Rate
8.2 Benefit–Cost Analysis
8.2.1 Definition of Benefit–Cost Ratio
8.2.2 Incremental B/C-Ratio Analysis
8.3 Profitability Index
8.3.1 Definition of Profitability Index
8.3.2 Incremental PI Ratio for Mutually Exclusive Alternatives
8.4 Highway Benefit–Cost Analysis
8.4.1 Define the Base Case and the Proposed Alternatives
8.4.2 Highway User Benefits
8.4.3 Sponsors’ Costs
8.4.4 Illustrating Case Example
Self-Test Questions

Chapter 9 Accounting for Depreciation and Income Taxes

9.1 Accounting Depreciation
9.1.1 Depreciable Property
9.1.2 Cost as Basis
9.1.3 Useful Life and Salvage Value
9.1.4 Depreciation Methods: Book and Tax Depreciation
9.2 Book Depreciation Methods
9.2.1 Straight-Line Method
9.2.2 Declining-Balance Method
9.2.3 Units-of-Production Method
9.3 Tax Depreciation Methods
9.3.1 MACRS Recovery Periods
9.3.2 MACRS Depreciation: Personal Property
9.3.3 MACRS Depreciation: Real Property
9.4 Corporate Taxes
9.4.1 How to Determine “Accounting Profit”
9.4.2 U.S. Corporate Income Tax Rates
9.4.3 Gain Taxes on Asset Disposals
Self-Test Questions

Chapter 10 Project Cash-Flow Analysis
10.1 Understanding Project Cost Elements
10.1.1 Classifying Costs for Manufacturing Environments
10.1.2 Classifying Costs for Financial Statements
10.1.3 Classifying Costs for Predicting Cost Behavior
10.2 Why Do We Need to Use Cash Flows in Economic Analysis?
10.3 Income-Tax Rate to Be Used in Project Evaluation
10.4 Incremental Cash Flows from Undertaking a Project
10.4.1 Operating Activities
10.4.2 Investing Activities
10.4.3 Financing Activities
10.5 Developing Project Cash Flow Statements
10.5.1 When Projects Require Only Operating and Investing Activities
10.5.2 When Projects Are Financed with Borrowed Funds
10.6 Effects of Inflation on Project Cash Flows
10.6.1 Depreciation Allowance under Inflation
10.6.2 Handling Multiple Inflation Rates
Self-Test Questions

Chapter 11 Handling Project Uncertainty
11.1 Origins of Project Risk
11.2 Methods of Describing Project Risk
11.2.1 Sensitivity Analysis
11.2.2 Sensitivity Analysis for Mutually Exclusive Alternatives
11.2.3 Break-Even Analysis
11.2.4 Scenario Analysis
11.3 Probabilistic Cash Flow Analysis
11.3.1 Including Risk in Investment Evaluation
11.3.2 Aggregating Risk over Time
11.3.3 Estimating Risky Cash Flows
11.4 Considering the Project Risk by Discount Rate
11.4.1 Determining the Company Cost of Capital
11.4.2 Project Cost of Capital: Risk-Adjusted Discount Rate Approach
Self-Test Questions

Chapter 12 Replacement Decisions

12.1 Replacement-Analysis Fundamentals
12.1.1 Basic Concepts and Terminology
12.1.2 Approaches for Comparing Defender and Challenger
12.2 Economic Service Life
12.3 Replacement Analysis when the Required Service Period is Long
12.3.1 Required Assumptions and Decision Frameworks
12.3.2 Handling Unequal Service Life Problems in Replacement Analysis
12.3.3 Replacement Strategies under the Infinite Planning Horizon
12.4 Replacement Analysis with Tax Considerations
Self-Test Questions

Chapter 13 Understanding Financial Statements
13.1 Accounting: The Basis of Decision Making
13.2 Financial Status for Businesses
13.2.1 The Balance Sheet
13.2.2 The Income Statement
13.2.3 The Cash-Flow Statement
13.3 Using Ratios to Make Business Decisions
13.3.1 Debt Management Analysis
13.3.2 Liquidity Analysis
13.3.3 Asset Management Analysis
13.3.4 Profitability Analysis
13.3.5 Market-Value Analysis
13.3.6 Limitations of Financial Ratios in Business Decisions
13.3.7 Where We Get the Most Up-to-Date Financial Information
13.4 Principle of Investing in Financial Assets
13.4.1 Trade-Off between Risk and Reward
13.4.2 Broader Diversification Reduces Risk
13.4.3 Broader Diversification Increases Expected Return
Self-Test Questions

Appendix A Self-Test Questions with Answers
Appendix B Interest Factors for Discrete Compounding
Appendix C How to Read the Cumulative Standardized Normal Distribution Function

Appendix D Summary of Essential Interest Formulas, Decision Rules, and Excel Functions

About our author

Chan S. Park is currently a Professor of Industrial and Systems Engineering at Auburn University. He received the MS and PhD degrees in industrial engineering from Purdue University and the Georgia Institute of Technology, respectively. Over his 25-year academic career, he has been actively involved in a variety of areas of research, teaching and professional consulting. His work has been recognized internationally in the fields of engineering economics, strategic and economic decisions within service sectors, financial engineering (real options valuation), risk analysis and capital budgeting. He also authored or coauthored leading textbooks on the related subjects, including Contemporary Engineering Economics (Prentice Hall) and Advanced Engineering Economics (John Wiley & Sons). He is the Editor-in-Chief of the journal The Engineering Economist and is a licensed professional engineer.

Need help? Get in touch


Customize your course to teach your way. MyLab® is a flexible platform merging world-class content with dynamic study tools. It takes a personalized approach designed to ignite each student's unique potential. And, with the freedom it affords to adapt your pedagogy, you can reinforce select concepts and guide students to real results.


All in one place. Pearson+ offers instant access to eTextbooks, videos and study tools in one intuitive interface. Students choose how they learn best with enhanced search, audio and flashcards. The Pearson+ app lets them read where life takes them, no wi-fi needed. Students can access Pearson+ through a subscription or their MyLab or Mastering course.

Privacy and cookies
By watching, you agree Pearson can share your viewership data for marketing and analytics for one year, revocable by deleting your cookies.

Empower your students, in class and beyond

Meet students where they are with MyLab®, and capture their attention in every lecture, activity, and assignment using immersive content, customized tools, and interactive learning experiences in your discipline.