Fundamentals of Engineering Economics, Global Edition

Front Cover
Title Page
Copyright Page
Preface
New to This Edition
Acknowledgments
Contents
Part 1 Understanding Money and Its Management
	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
		Summary
		Self-Test Questions
		Problems
	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
		Summary
		Self-Test Questions
		Problems
	Chapter 3 Understanding Money Management
		3.1 Market Interest Rates
			3.1.1 Nominal Interest Rates
			3.1.2 Effective Annual 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
		Summary
		Self-Test Questions
		Problems
	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
		Summary
		Self-Test Questions
		Problems
Part 2 Evaluating Business and Engineering Assets
	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
		Summary
		Self-Test Questions
		Problems
	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
		Summary
		Self-Test Questions
		Problems
	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
		Summary
		Self-Test Questions
		Problems
	Chapter 7A Resolution of Multiple Rates of Return
		7A-1 Net-Investment Test
		7A-2 The Need for an External Interest Rate
		7A-3 Calculation of Return on Invested Capital for Mixed Investments
	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 Analysis for Mutually Exclusive Alternatives
		8.4 Highway Benefit–Cost Analysis4
			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
		Summary
		Self-Test Questions
		Problems
Part 3 Developmentof Project Cash Flows
	Chapter 9 Accounting for Depreciation and Income Taxes
		9.1 Accounting Depreciation
			9.1.1 Depreciable Property
			9.1.2 Cost 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-Blance 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 System
			9.4.3 Gain Taxes on Asset Disposals
		Summary
		Self-Test Questions
		Problems
	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
		Summary
		Self-Test Questions
		Problems
	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
		11.5 Value at Risk
			11.5.1 Calculation of VaR
			11.5.2 Conversion of Var Parameters
		Summary
		Self-Test Questions
		Problems
Part 4 Special Topicsin Engineering Economics
	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
		Summary
		Self-Test Questions
		Problems
	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
		Summary
		Self-Test Questions
		Problems
Appendix A Answers to the Self-Test Questions
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
Index
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