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Cover......Page 1
Contents......Page 12
Preface......Page 6
PART 1 UNDERSTANDING MONEY AND ITS MANAGEMENT......Page 20
 Chapter 1 Engineering Economic Decisions......Page 21
   1.1.1 How Do We Make Typical Personal Decisions?......Page 23
   1.1.2 How Do We Approach an Engineering Design Problem?......Page 26
   1.1.3 What Makes Economic Decisions Different from Other Design Decisions?......Page 28
   1.2.2 Large-Scale Engineering Economic Decisions......Page 29
   1.2.3 Impact of Engineering Projects on Financial Statements......Page 31
  1.3 Types of Strategic Engineering Economic Decisions......Page 32
   1.3.2 Equipment and Process Selection......Page 33
   1.3.3 Cost Reduction......Page 34
   1.3.5 Service or Quality Improvement......Page 35
  1.4 Fundamental Principles in Engineering Economics......Page 36
  Summary......Page 37
  Problems......Page 38
 Chapter 2 Time Value of Money......Page 39
   2.1.1 The Time Value of Money......Page 41
   2.1.2 Elements of Transactions Involving Interest......Page 43
   2.1.3 Methods of Calculating Interest......Page 45
  2.2 Economic Equivalence......Page 47
   2.2.1 Definition and Simple Calculations......Page 48
   2.2.2 Equivalence Calculations Require a Common Time Basis for Comparison......Page 51
   2.3.1 Compound-Amount Factor......Page 52
   2.3.2 Present-Worth Factor......Page 54
   2.3.3 Solving for Time and Interest Rates......Page 57
  2.4 Uneven-Payment Series......Page 59
   2.5.1 Compound-Amount Factor: Find F, Given A, i, and N......Page 61
   2.5.2 Sinking-Fund Factor: Find A, Given F, i, and N......Page 65
   2.5.3 Capital-Recovery Factor (Annuity Factor): Find A, Given P, i, and N......Page 67
   2.5.4 Present-Worth Factor: Find P, Given A, i, and N......Page 70
   2.5.5 Present Value of Perpetuities......Page 75
   2.6.1 Handling Linear Gradient Series......Page 77
   2.6.2 Handling Geometric Gradient Series......Page 83
  2.7 More on Equivalence Calculations......Page 87
  Summary......Page 93
  Self-Test Questions......Page 94
  Problems......Page 98
 Chapter 3 Understanding Money Management......Page 113
   3.1.1 Nominal Interest Rates......Page 115
   3.1.2 Annual Effective Yields......Page 116
   3.2.1 Discrete Compounding......Page 119
   3.2.2 Continuous Compounding......Page 120
   3.3.1 Compounding Period Equal to Payment Period......Page 122
   3.3.2 Compounding Occurs at a Different Rate than That at Which Payments Are Made......Page 125
   3.4.1 Borrowing with Credit Cards......Page 129
   3.4.2 Commercial Loans—Calculating Principal and Interest Payments......Page 132
   3.4.3 Comparing Different Financing Options......Page 135
  Summary......Page 140
  Self-Test Questions......Page 142
  Problems......Page 145
 Chapter 4 Equivalence Calculations under Inflation......Page 159
  4.1 Measure of Inflation......Page 160
   4.1.1 Consumer Price Index......Page 161
   4.1.2 Producer Price Index......Page 162
   4.1.3 Average Inflation Rate......Page 164
   4.1.4 General Inflation Rate (f) versus Specific Inflation Rate (f[sub(j)])......Page 165
  4.2 Actual Versus Constant Dollars......Page 167
   4.2.1 Conversion from Constant to Actual Dollars......Page 168
   4.2.2 Conversion from Actual to Constant Dollars......Page 169
  4.3 Equivalence Calculations under Inflation......Page 173
   4.3.2 Constant-Dollar Analysis......Page 174
   4.3.3 Actual-Dollar Analysis......Page 175
   4.3.4 Mixed-Dollar Analysis......Page 179
  Summary......Page 182
  Self-Test Questions......Page 183
  Problems......Page 185
PART 2 EVALUATING BUSINESS AND ENGINEERING ASSETS......Page 192
 Chapter 5 Present-Worth Analysis......Page 193
  5.1 Loan versus Project Cash Flows......Page 195
  5.2 Initial Project Screening Methods......Page 196
   5.2.1 Benefits and Flaws of Payback Screening......Page 198
   5.2.2 Discounted-Payback Period......Page 199
   5.3.1 Net-Present-Worth Criterion......Page 201
   5.3.2 Guidelines for Selecting a MARR......Page 206
   5.3.3 Meaning of Net Present Worth......Page 207
   5.3.4 Net Future Worth and Project Balance Diagram......Page 211
   5.3.5 Capitalized-Equivalent Method......Page 212
  5.4 Methods to Compare Mutually Exclusive Alternatives......Page 214
   5.4.2 Service Projects versus Revenue Projects......Page 215
   5.4.3 Analysis Period Equals Project Lives......Page 216
   5.4.4 Analysis Period Differs from Project Lives......Page 220
  Self-Test Questions......Page 226
  Problems......Page 229
 Chapter 6 Annual Equivalence Analysis......Page 249
  6.1 Annual-Equivalent Worth Criterion......Page 251
   6.1.2 Capital (Ownership) Costs versus Operating Costs......Page 255
   6.2.1 Unit-Profit or Unit-Cost Calculation......Page 260
   6.2.2 Make-or-Buy Decision......Page 264
   6.3.1 Analysis Period Equals Project Lives......Page 267
   6.3.2 Analysis Period Differs from Project Lives......Page 272
  Self-Test Questions......Page 275
  Problems......Page 278
 Chapter 7 Rate-of-Return Analysis......Page 295
   7.1.1 Return on Investment......Page 297
   7.1.2 Return on Invested Capital......Page 298
   7.2.1 Simple versus Nonsimple Investments......Page 299
   7.2.2 Computational Methods......Page 301
   7.3.2 Decision Rule for Simple Investments......Page 308
   7.3.3 Decision Rule for Nonsimple Investments......Page 312
   7.4.1 Flaws in Project Ranking by IRR......Page 314
   7.4.2 Incremental-Investment Analysis......Page 315
   7.4.3 Handling Unequal Service Lives......Page 321
  Self-Test Questions......Page 323
  Problems......Page 327
  7A-1 Net-Investment Test......Page 343
  7A-2 The Need for an External Interest Rate......Page 345
  7A-3 Calculation of Return on Invested Capital for Mixed Investments......Page 346
 Chapter 8 Benefit–Cost Analysis......Page 351
  8.1 Evaluation of Public Projects......Page 353
   8.1.3 Sponsor’s Costs......Page 354
   8.1.4 Social Discount Rate......Page 355
   8.2.1 Definition of Benefit–Cost Ratio......Page 356
   8.2.2 Incremental B/C-Ratio Analysis......Page 359
   8.3.1 Definition of Profitability Index......Page 363
   8.3.2 Incremental PI Ratio for Mutually Exclusive Alternatives......Page 365
   8.4.1 Define the Base Case and the Proposed Alternatives......Page 367
   8.4.3 Sponsors’ Costs......Page 368
   8.4.4 Illustrating Case Example......Page 369
  Self-Test Questions......Page 373
  Problems......Page 376
PART 3 DEVELOPMENT OF PROJECT CASH FLOWS......Page 384
 Chapter 9 Accounting for Depreciation and Income Taxes......Page 385
   9.1.1 Depreciable Property......Page 387
   9.1.2 Cost Basis......Page 388
   9.1.4 Depreciation Methods: Book and Tax Depreciation......Page 389
   9.2.1 Straight-Line Method......Page 391
   9.2.2 Declining-Balance Method......Page 393
   9.2.3 Units-of-Production Method......Page 397
   9.3.1 MACRS Recovery Periods......Page 398
   9.3.2 MACRS Depreciation: Personal Property......Page 399
   9.3.3 MACRS Depreciation: Real Property......Page 402
   9.4.1 How to Determine “Accounting Profit”......Page 404
   9.4.2 U.S. Corporate Income Tax Rates......Page 406
   9.4.3 Gain Taxes on Asset Disposals......Page 408
  Summary......Page 412
  Self-Test Questions......Page 413
  Problems......Page 415
 Chapter 10 Project Cash-Flow Analysis......Page 427
   10.1.1 Classifying Costs for Manufacturing Environments......Page 429
   10.1.2 Classifying Costs for Financial Statements......Page 431
   10.1.3 Classifying Costs for Predicting Cost Behavior......Page 432
  10.2 Why Do We Need to Use Cash Flows in Economic Analysis?......Page 436
  10.3 Income-Tax Rate to Be Used in Project Evaluation......Page 437
   10.4.1 Operating Activities......Page 440
   10.4.2 Investing Activities......Page 443
   10.5.1 When Projects Require Only Operating and Investing Activities......Page 444
   10.5.2 When Projects Are Financed with Borrowed Funds......Page 448
   10.6.1 Depreciation Allowance under Inflation......Page 450
   10.6.2 Handling Multiple Inflation Rates......Page 454
  Summary......Page 456
  Self-Test Questions......Page 457
  Problems......Page 460
 Chapter 11 Handling Project Uncertainty......Page 481
   11.2.1 Sensitivity Analysis......Page 484
   11.2.2 Sensitivity Analysis for Mutually Exclusive Alternatives......Page 489
   11.2.3 Break-Even Analysis......Page 492
   11.2.4 Scenario Analysis......Page 493
  11.3 Probabilistic Cash Flow Analysis......Page 496
   11.3.1 Including Risk in Investment Evaluation......Page 497
   11.3.2 Aggregating Risk over Time......Page 498
   11.3.3 Estimating Risky Cash Flows......Page 501
   11.4.1 Determining the Company Cost of Capital......Page 505
   11.4.2 Project Cost of Capital: Risk-Adjusted Discount Rate Approach......Page 510
  Summary......Page 512
  Self-Test Questions......Page 513
  Problems......Page 515
PART 4 SPECIAL TOPICS IN ENGINEERING ECONOMICS......Page 530
 Chapter 12 Replacement Decisions......Page 531
  12.1 Replacement-Analysis Fundamentals......Page 533
   12.1.1 Basic Concepts and Terminology......Page 534
   12.1.2 Approaches for Comparing Defender and Challenger......Page 536
  12.2 Economic Service Life......Page 540
   12.3.1 Required Assumptions and Decision Frameworks......Page 546
   12.3.3 Replacement Strategies under the Infinite Planning Horizon......Page 547
  12.4 Replacement Analysis with Tax Considerations......Page 553
  Summary......Page 560
  Self-Test Questions......Page 561
  Problems......Page 562
 Chapter 13 Understanding Financial Statements......Page 575
  13.1 Accounting: The Basis of Decision Making......Page 577
  13.2 Financial Status for Businesses......Page 578
   13.2.1 The Balance Sheet......Page 580
   13.2.2 The Income Statement......Page 585
   13.2.3 The Cash-Flow Statement......Page 587
   13.3.1 Debt Management Analysis......Page 593
   13.3.2 Liquidity Analysis......Page 596
   13.3.3 Asset Management Analysis......Page 597
   13.3.4 Profitability Analysis......Page 598
   13.3.5 Market-Value Analysis......Page 600
   13.3.6 Limitations of Financial Ratios in Business Decisions......Page 602
   13.4.2 Broader Diversification Reduces Risk......Page 604
   13.4.3 Broader Diversification Increases Expected Return......Page 606
  Summary......Page 608
  Self-Test Questions......Page 609
  Problems......Page 613
Appendix A: Answers to the Self-Test Questions......Page 622
Appendix B: Interest Factors for Discrete Compounding......Page 650
Appendix C: How to Read the Cumulative Standardized Normal Distribution Function......Page 680
 B......Page 684
 C......Page 685
 E......Page 686
 I......Page 688
 M......Page 689
 P......Page 690
 R......Page 691
 T......Page 692
 Z......Page 693