Principles of engineering economic analysis

Cover Page
Title Page
Copyright Page
Contents
Preface
Abouth the Authors
Chapter 1: ENGINEERING ECONOMIC ANALYSIS
	1.1 Introduction
	1.2 Time Value of Money (TVOM)
	1.3 Ten Principles of Engineering Economic Analysis
	1.4 Systematic Economic Analysis Technique (SEAT)
		1.4.1 Identify the Investment Alternatives
		1.4.2 Define the Planning Horizon
		1.4.3 Specify the Discount Rate
		1.4.4 Estimate the Cash Flows
		1.4.5 Compare the Alternatives
		1.4.6 Perform Supplementary Analyses
		1.4.7 Select the Preferred Investment
	1.5 When the Time Value of Money Need Not Be Considered
	1.6 Summary
	FE-Like Problems
	Problems
Chapter 2: TIME VALUE OF MONEY
	2.1 Introduction
	2.2 Cash Flow Diagrams
	2.3 Simple Interest Calculations
	2.4 Compound Interest Calculations
		2.4.1 Single Cash Flows
		2.4.2 Multiple Cash Flows
			2.4.2.1 Uniform Series of Cash Flows
			2.4.2.2 Gradient Series of Cash Flows
			2.4.2.3 Geometric Series of Cash Flows
	2.5 Multiple Compounding Periods in a Year
	2.6 When Compounding and Cash Flow Frequencies Differ
	2.7 Special and Limiting Cases of Time Value of Money Factors
		2.7.1 Mathematical Relationships
		2.7.2 Limiting Cases
		2.7.3 Special Cases for n = 1
	2.8 Summary
	2.A Continuous Compound Interest Calculations
		2.A-1 DISCRETE FLOWS
		2.A-2 CONTINUOUS FLOW
	FE-Like Problems
	Problems
Chapter 3: BORROWING, LENDING, AND INVESTING
	3.1 Introduction
	3.2 Four Methods of Repaying Loans
	3.3 Which Payment Plan is Best for the Borrower?
	3.4 Real Estate Investment
	3.5 Interest Payments and Principal Payments
		3.5.1 Immediate Payment Loans
		3.5.2 Deferred Payment Loans
	3.6 Retirement Planning
	3.7 Equivalence and Indifference
		3.7.1 Equivalence
		3.7.2 Indifference
		3.7.3 Applying the Concepts of Equivalence and Indifference
	3.8 Purchasing and Selling Bonds
	3.9 Variable Interest Rates
	3.10 Summary
	FE-Like Problems
	Problems
Chapter 4: ESTABLISHING THE PLANNING HORIZON AND THE MINIMUM ATTRACTIVE RATE OF RETURN
	4.1 Introduction
	4.2 Choosing the Planning Horizon
	4.3 Specifying the Minimum Attractive Rate of Return
		4.3.1 Weighted Average Cost of Capital
		4.3.2 Eastman Chemical Company’s Hurdle Rate Calculator
	4.4 Summary
	4.A Capital Asset Pricing Model
	FE-Like Problems
	Problems
Chapter 5: PRESENT WORTH ANALYSIS
	5.1 Introduction
	5.2 Comparing Alternatives
		5.2.1 Measures of Economic Worth
		5.2.2 Ranking and Incremental Methods of Economic Worth
		5.2.3 Before-Tax or After-Tax Analysis?
		5.2.4 Equal or Unequal Lives?
		5.2.5 A Single Alternative
	5.3 Present Worth: Single Alternative
	5.4 Present Worth: Multiple Alternatives
	5.5 Present Worth: One-Shot Investments
	5.6 Discounted Payback Period: Single Alternative
	5.7 Discounted Payback Period: Multiple Alternatives
	5.8 Capitalized Worth: Single Alternative
	5.9 Capitalized Worth: Multiple Alternatives
	5.10 Summary
	FE-Like Problems
	Problems
Chapter 6: FUTURE WORTH
	6.1 Introduction
	6.2 Future Worth: Single Alternative
	6.3 Future Worth: Multiple Alternatives
	6.4 Maximizing the Investment Portfolio
	6.5 More on Unequal Lives
	6.6 Summary
	FE-Like Problems
	Problems
Chapter 7: ANNUAL WORTH
	7.1 Introduction
	7.2 Annual Worth: Single Alternative
	7.3 Annual Worth: Multiple Alternatives
	7.4 Least Common Multiple of Lives Assumption
	7.5 Unequal Lives Revisited
	7.6 Capital Recovery Cost
	7.7 Summary
	FE-Like Problems
	Problems
Chapter 8: RATE OF RETURN ANALYSIS
	8.1 Introduction
	8.2 Internal Rate of Return: Single Alternative
	8.3 Internal Rate of Return: Multiple Alternatives
	8.4 External Rate of Return: Single Alternative
	8.5 External Rate of Return: Multiple Alternatives
	8.6 Analyzing Alternatives with No Positive Cash Flows
	8.7 Summary
	8.A Modified Internal Rate of Return
		8.A-1 SINGLE ALTERNATIVE
		8.A-2 MULTIPLE ALTERNATIVES
	FE-Like Problems
	Problems
Chapter 9: DEPRECIATION METHODS
	9.1 Introduction
	9.2 Background on Depreciation Accounting
	9.3 Straight-Line Depreciation (SLN)
	9.4 Declining Balance and Double Declining Balance Depreciation (DB and DDB)
	9.5 Switching from DDB to SLN with the Excel VDB Function
	9.6 Modified Accelerated Cost Recovery System (MACRS)
		9.6.1 MACRS-ADS
		9.6.2 MACRS-GDS
	9.7 Comparison of Depreciation Methods
	9.8 Summary
	9.A Sum-of-Years’-Digits Depreciation (SYD)
	9.B Other Depreciation Methods
		9.B.1 Units of Production Method
		9.B.2 Operating Day (Hour) Method
		9.B.3 Income Forecast Method
	9.C Depletion
	FE-Like Problems
	Problems
Chapter 10: AFTER-TAX ECONOMIC ANALYSIS
	10.1 Introduction
	10.2 Tax Concepts
	10.3 Corporate Income Taxes
	10.4 After-Tax Cash Flow Without Borrowing
	10.5 After-Tax Comparison of Alternatives
	10.6 After-Tax Cash Flows with Borrowing
	10.7 How Much Money Should a Company Borrow?
	10.8 Additional Tax Considerations
		10.8.1 Investment Tax Credit
		10.8.2 Section 179 Expense Deduction
		10.8.3 Bonus Depreciation
	10.9 Timing of Investment versus First Year’s Depreciation Charge
	10.10 Summary
	FE-Like Problems
	Problems
Chapter 11: REPLACEMENT ANALYSIS
	11.1 Introduction
	11.2 Cash Flow Approach
		11.2.1 Before-Tax Analysis
		11.2.2 After-Tax Analysis
	11.3 Opportunity Cost Approach
		11.3.1 Before-Tax Analysis
		11.3.2 After-Tax Analysis
	11.4 Section 1031 Exchanges
	11.5 Optimum Replacement Interval
	11.6 Summary
	FE-Like Problems
	Problems
Chapter 12: INFLATION EFFECTS
	12.1 Introduction
	12.2 Using Indexes to Measure Inflation
	12.3 Before-Tax Analysis in Inflationary Conditions
	12.4 After-Tax Analysis in Inflationary Conditions
	12.5 After-Tax Analysis with Inflation and Borrowed Capital
	12.6 Summary
	FE-Like Problems
	Problems
Chapter 13: SUPPLEMENTARY ANALYSIS
	13.1 Introduction
	13.2 Break-Even Analysis
	13.3 Sensitivity Analysis
	13.4 Risk Analysis
		13.4.1 Distributions
		13.4.2 Risk Aggregation
			13.4.2.1 Analytical Solutions
			13.4.2.2 Simulation Solutions
	13.5 Summary
	13.A Decision Tree Analysis
	FE-Like Problems
	Problems
Chapter 14: ECONOMIC ANALYSIS IN THE PUBLIC AND REGULATED SECTORS
	14.1 Introduction: The Nature of Public Projects
	14.2 Build-Operate-Transfer
	14.3 Objectives in Public Project Evaluation
	14.4 Guidelines in Public-Sector Evaluation
	14.5 U.S. Federal Government Guidelines
	14.6 Using SEAT in Public Sector Evaluations
	14.7 Benefit-Cost and Cost-Effectiveness Calculations
	14.8 Important Considerations in Evaluating Public Projects
		14.8.1 Point of View
		14.8.2 Selection of the Interest Rate
		14.8.3 Assessing Benefit-Cost Factors
		14.8.4 Overcounting
		14.8.5 Unequal Lives
		14.8.6 Tolls, Fees, and User Charges
		14.8.7 Multiple-Use Projects
		14.8.8 Problems with the B/C Ratio
	14.9 Introduction: The Revenue Requirements Method
	14.10 Definition of Terms
	14.11 Determining the Minimum Revenue Requirement
	14.12 Showing Equivalence between Revenue Requirement and ATCF Methods
	14.13 Summary
	14.A OMB Circular No. A-94, Revised, Table of Contents
	FE-Like Problems
	Problems
Chapter 15: CAPITAL BUDGETING
	15.1 Introduction
	15.2 The Classical Capital Budgeting Problem
		15.2.1 Mathematical Formulation of the Classical Capital Budgeting Problem
		15.2.2 Adding Constraints to the Mathematical Formulation
		15.2.3 Analyzing the Sensitivity of the Investment Portfolio
	15.3 Unequal Investment Durations
	15.4 Capital Budgeting with Divisible Investments
	15.5 Using Excel to Solve the Capital Budgeting Problem with Divisible Investments
	15.6 Practical Considerations in Capital Budgeting
	15.7 Summary
	FE-Like Problems
	Problems
Chapter 16: OBTAINING AND ESTIMATING CASH FLOWS
	16.1 Introduction
	16.2 Cost Terminology
		16.2.1 Life Cycle Viewpoint
		16.2.2 Past/Future Viewpoint
		16.2.3 Manufacturing Cost Structure Viewpoint
		16.2.4 Fixed and Variable Viewpoint
		16.2.5 Average and Marginal Viewpoint
	16.3 Cost Estimation
		16.3.1 Project Estimation
		16.3.2 Estimating Methodologies
		16.3.3 General Sources of Data
	16.4 General Accounting Principles
		16.4.1 Balance Sheet
		16.4.2 Income Statement
		16.4.3 Ratio Analysis
	16.5 Cost Accounting Principles
		16.5.1 Traditional Cost Allocation Methods
		16.5.2 Activity Based Costing
		16.5.3 Standard Costs
		16.5.4 Economic Value Added
	16.6 Summary
	FE-Like Problems
	Problems
APPENDIXES
	Appendix A: Discrete Compound Interest Tables
		A-a-1 Single Sums, Uniform Series, and Gradient Series Interest Factors
		A-b-1 Geometric Series Present Worth Interest Factors
		A-c-1 Geometric Series Future Worth Interest Factors
	B Continuous Compound Interest Tables
		B-a-1 Single Sums, Uniform Series, and Gradient Series Interest Factors
		B-b-1 Continuous Flow Interest Factors
ANSWERS TO EVEN NUMBERED PROBLEMS
INDEX