Fundamentals of Engineering Economics [United States ed] 9780130307910, 0130307912

Table of contents :
Cover......Page 1
Summary of Discrete Compounding Formulas with Discrete Payments......Page 2
Summary of Formulas......Page 3
Table of Contents (p. XII & XIII are missing)......Page 5
Preface......Page 11
I Understanding Money and Its Management ......Page 16
1 Engineering Economic Decisions......Page 17
How Do We Make Typical Personal Decisions?......Page 19
How Do We Approach an Engineering Design Problem?......Page 21
1.2 The Engineer's Role in Business......Page 24
Making Capital-Expenditure Decisions......Page 25
Impact of Engineering Projects on Financial Statements......Page 26
1.3 Types of Strategic Engineering Economic Decisions......Page 28
1.4 Fundamental Principles in Engineering Economics......Page 32
Summary......Page 34
2 Time Value of Money......Page 35
The Time Value of Money......Page 37
Elements of Transactions Involving Interest......Page 39
Methods of Calculating Interest......Page 41
Definition and Simple Calculations......Page 44
Equivalence Calculations Require a Common Time Basis for Comparison......Page 47
Compound-Amount Factor......Page 48
Present-Worth Factor......Page 51
Solving for Time and lnterest Rates......Page 52
2.4 Uneven-Payment Series......Page 55
Compound-Amount Factor: Find F, Given A, i, and W......Page 57
Sinking-Fund Factor: Find A, Given F, i, and N......Page 61
Capital-Recovery Factor (Annuity Factor): Find A, Given P, if and N......Page 62
Present-Worth Factor: Find P, Given A, i, and N......Page 65
Present Value of Perpetuities......Page 70
Handling Linear Gradient Series......Page 71
Handling Geometric Gradient Series......Page 76
2.7 Composite Cash Flows......Page 80
Summary......Page 82
Problems......Page 83
3 Understanding Money Management......Page 93
Nominal Interest Rates......Page 95
Annual Effective Yields......Page 96
Discrete Compounding......Page 98
Continuous Compounding......Page 100
Compounding Period Equal to Payment Period......Page 102
Compounding Occurs at a Different Rate than That at Which Payments Are Made......Page 104
Borrowing with Credit Cards......Page 106
Commercial Loans-Calculating Principal and Interest Payments......Page 109
Comparing Different Financing Options......Page 113
Summary......Page 117
Problems......Page 118
4 Equivalence Calculations under Inflation......Page 127
Consumer Price Index......Page 129
Producer Price Index......Page 130
Average Inflation Rate (f)......Page 131
General Inflation Rate (f) versus Specific Inflation Rate (fi)......Page 133
4.2 Actual versus Constant Dollars......Page 134
Conversion from Constant to Actual Dollars......Page 135
4.3 Equivalence Calculations under Inflation......Page 137
Constant-Dollar Analysis......Page 138
Actual-Dollar Analysis......Page 139
Mixed-Dollar Analysis......Page 144
Summary......Page 149
Problems......Page 150
II Evaluating Business and Engineering Assets......Page 155
5 Present-Worth Analysis......Page 156
5.1 Loan versus Project Cash Flows......Page 158
5.2 Initial Project Screening Methods......Page 159
Benefits and Flaws of Payback Screening......Page 161
Discounted-Payback Period......Page 162
5.4 Methods to Compare Mutually Exclusive Alternatives......Page 7
Net-Present-Worth Criterion......Page 164
Guidelines for Selecting a MARR......Page 167
Meaning of Net Present Worth......Page 169
Capitalized-Equivalent Method......Page 172
Doing Nothing Is a Decision Option......Page 174
Service Projects versus Revenue Projects......Page 175
Analysis Period Equals Project Lives......Page 176
Analysis Period Differs from Project Lives......Page 178
Summary......Page 183
Problems......Page 184
6 Annual Equivalence Analysis......Page 198
6.1 Annual Equivalent Worth Criterion......Page 200
Benefits of AE Analysis......Page 202
Capital Costs versus Operating Costs......Page 203
Unit-Profit or Unit-Cost Calculation......Page 206
Make-or-Buy Decision......Page 209
Analysis Period Equals Project Lives......Page 212
Analysis Period Differs from Projects' Lives......Page 217
Summary......Page 220
Problems......Page 221
7 Rate-of-Return Analysis......Page 232
Return on Investment......Page 234
Return on Invested Capital......Page 236
Simple versus Nonsimple Investments......Page 237
Computational Methods......Page 239
Decision Rule for Simple Investments......Page 246
Decision Rule for Nonsimple Investments......Page 249
7.4 Incremental Analysis for Comparing Mutually Exclusive Alternatives......Page 251
Incremental-Investment Analysis......Page 252
Handling Unequal Service Lives......Page 259
Summary......Page 260
Problems......Page 261
7A Resolution of Multiple Rates of Return......Page 271
7A.1 Net-Investment Test......Page 272
7A.2 The Need for an External Interest Rate......Page 274
7A.3 Calculation of Return on Invested Capital for Mixed Investments......Page 275
III Development of Project Cash Flows......Page 280
8 Accounting for Depreciation and Income Taxes......Page 281
8.1 Accounting Depreciation......Page 283
Cost Basis......Page 284
Useful Life and Salvage Value......Page 285
Depreciation Methods: Book and Tax Depreciation......Page 286
Straight-Line Method......Page 287
Declining-Balance Method......Page 289
Units-of-Production Method......Page 292
MACRS Recovery Periods......Page 293
MACRS Depreciation: Personal Property......Page 294
MACRS Depreciation: Real Property......Page 297
8.4 How to Determine "Accounting Profit"......Page 298
Calculation of Net Income......Page 299
Operating Cash Flow versus Net Income......Page 301
Income Taxes on Operating Income......Page 304
Gain Taxes on Asset Disposals......Page 306
Summary......Page 309
Problems......Page 311
9 Project Cash Flow Analysis......Page 319
9.1 Understanding Project Cost Elements......Page 9
Classifying Costs for Manufacturing Environments......Page 321
Classifying Costs for Financial Statements......Page 323
Classifying Costs for Predicting Cost Behavior......Page 325
9.2 Why Do We Need to Use Cash Flow in Economic Analysis?......Page 327
9.3 Income-Tax Rate to Be Used in Economic Analysis......Page 328
Investing Activities......Page 330
9.5 Developing Project Cash Flow Statements......Page 331
When Projects Require Only Operating and Investing Activities......Page 332
When Projects Are Financed with Borrowed Funds......Page 335
Depreciation Allowance under Inflation......Page 338
Handling Multiple Inflation Rates......Page 342
Cost of Equity......Page 344
Cost of Debt......Page 346
Calculating the Cost of Capital......Page 347
Choice of a MARR in After-Tax Cash Flow Analysis......Page 349
Summary......Page 350
Problems......Page 351
10 Handling Project Uncertainty......Page 371
10.1......Page 373
Sensitivity Analysis......Page 374
Sensitivity Analysis for Mutually Exclusive Alternatives......Page 378
Break-Even Analysis......Page 381
Scenario Analysis......Page 383
Probabilistic Approach......Page 384
Risk-Adjusted Discount Rate Approach......Page 388
Trade-Off between Risk and Reward......Page 389
Broader Diversification Increases Expected Return......Page 390
Summary......Page 393
Problems......Page 394
11 Replacement Decisions......Page 406
Basic Concepts and Terminology......Page 408
Approaches for Comparing Defender and Challenger......Page 411
11.2 Economic Service Life......Page 414
11.3 Replacement Analysis When the Required Service Period Is Long......Page 419
Required Assumptions and Decision Frameworks......Page 420
Replacement Strategies under the Infinite Planning Horizon......Page 421
11.4 Replacement Analysis with Tax Considerations......Page 425
Summary......Page 434
Problems......Page 435
12 Benefit-Cost Analysis......Page 446
12.1 Evaluation of Public Projects......Page 448
Users' Benefits......Page 449
Social Discount Rate......Page 450
Definition of Benefit-Cost Ratio......Page 451
Incremental B/C-Ratio Analysis......Page 454
Summary......Page 457
Problems......Page 458
13 Understanding Financial Statements......Page 466
13.1......Page 468
13.2 Financial Status for Businesses......Page 469
The Balance Sheet......Page 472
The Income Statement......Page 476
The Cash Flow Statement......Page 479
13.3 Using Ratios to Make Business Decisions......Page 483
Debt Management Analysis......Page 484
Liquidity Analysis......Page 486
Asset Management Analysis......Page 487
Profitability Analysis......Page 489
Market-Value Analysis......Page 490
Limitations of Financial Ratios in Business Decisions......Page 491
Summary......Page 492
Problems......Page 493
Appendix A - Electronic Spreadsheets: A Summary of Built-In Financial Functions......Page 498
APPENDIX B - Interest Factors for Discrete Compounding......Page 504
Answers to Selected Problems......Page 534
Index......Page 537
Categorization by Engineering Disciplines......Page 550
Summary of Project Analysis Method......Page 551
Backcover......Page 552