Preface | p. xv |
Background and Tools of Engineering Economy | p. 1 |
Introduction to Engineering Economy | p. 2 |
Introduction | p. 2 |
Origins of Engineering Economy | p. 4 |
What Are the Principles of Engineering Economy? | p. 4 |
Engineering Economy and the Design Process | p. 8 |
Accounting and Engineering Economy Studies | p. 16 |
Overview of the Book | p. 17 |
Summary | p. 19 |
Problems | p. 19 |
Cost Concepts and the Economic Environment | p. 21 |
Introduction | p. 22 |
Cost Terminology | p. 22 |
The General Economic Environment | p. 33 |
Cost-Driven Design Optimization | p. 43 |
Present Economy Studies | p. 50 |
Summary | p. 56 |
References | p. 56 |
Problems | p. 56 |
Principles of Money-Time Relationships | p. 63 |
Introduction | p. 63 |
Why Consider Return to Capital? | p. 64 |
The Origins of Interest | p. 65 |
Simple Interest | p. 65 |
Compound Interest | p. 66 |
The Concept of Equivalence | p. 67 |
Notation and Cash Flow Diagrams/Tables | p. 70 |
Interest Formulas Relating Present and Future Equivalent Values of Single Cash Flows | p. 73 |
Interest Formulas Relating a Uniform Series (Annuity) to Its Present and Future Equivalent Values | p. 78 |
Interest Formulas for Discrete Compounding and Discrete Cash Flows | p. 85 |
Deferred Annuities (Uniform Series) | p. 85 |
Equivalence Calculations Involving Multiple Interest Formulas | p. 87 |
Interest Formulas Relating a Uniform Gradient of Cash Flows to Its Annual and Present Equivalents | p. 91 |
Interest Formulas Relating a Geometric Sequence of Cash Flows to Its Present and Annual Equivalents | p. 97 |
Interest Rates That Vary with Time | p. 101 |
Nominal and Effective Interest Rates | p. 102 |
Interest Problems with Compounding More Often Than Once per Year | p. 104 |
Interest Problems with Cash Flows Less Often Than Compounding Periods | p. 106 |
Interest Formulas for Continuous Compounding and Discrete Cash Flows | p. 110 |
Interest Formulas for Continuous Compounding and Continuous Cash Flows | p. 112 |
Additional Solved Problems | p. 115 |
Spreadsheet Applications | p. 120 |
Summary | p. 121 |
References | p. 122 |
Problems | p. 122 |
Applications of Engineering Economy | p. 139 |
Applications of Money-Time Relationships | p. 140 |
Introduction | p. 140 |
Determining the Minimum Attractive Rate of Return | p. 141 |
The Present Worth Method | p. 144 |
The Future Worth Method | p. 149 |
The Annual Worth Method | p. 150 |
The Internal Rate of Return Method | p. 153 |
The External Rate of Return Method | p. 162 |
The Payback (Payout) Period Method | p. 164 |
Investment Balance Diagrams | p. 166 |
An Example of a Proposed Capital Investment to Reduce Costs | p. 168 |
An Example of a Large Industrial Investment Opportunity | p. 169 |
Spreadsheet Applications | p. 175 |
Summary | p. 177 |
References | p. 177 |
Problems | p. 177 |
The Multiple Rate of Return Problem with the IRR Method | p. 185 |
Comparing Alternatives | p. 188 |
Introduction | p. 188 |
Basic Concepts for Comparing Alternatives | p. 189 |
The Study (Analysis) Period | p. 191 |
Case 1: Useful Lives Are Equal to the Study Period | p. 193 |
Case 2: Useful Lives Are Different Among the Alternatives | p. 208 |
Comparison of Alternatives Using the Capitalized Worth Method | p. 217 |
Defining Mutually Exclusive Investment Alternatives in Terms of Combinations of Projects | p. 219 |
Spreadsheet Applications | p. 225 |
Summary | p. 228 |
References | p. 228 |
Problems | p. 229 |
Evaluating Projects with the Benefit/Cost Ratio Method | p. 239 |
Introduction | p. 239 |
Perspective and Terminology for Analyzing Public Projects | p. 241 |
Self-Liquidating Projects | p. 242 |
Multiple-Purpose Projects | p. 242 |
Difficulties in Evaluating Public Sector Projects | p. 244 |
What Interest Rate Should Be Used for Public Projects? | p. 246 |
The Benefit/Cost Ratio Method | p. 248 |
Evaluating Independent Projects by B/C Ratios | p. 254 |
Comparison of Mutually Exclusive Projects by B/C Ratios | p. 256 |
Criticisms and Shortcomings of the Benefit/Cost Ratio Method | p. 261 |
Spreadsheet Applications | p. 263 |
Summary | p. 265 |
References | p. 265 |
Problems | p. 266 |
Depreciation and Income Taxes | p. 271 |
Introduction | p. 272 |
Depreciation Concepts and Terminology | p. 272 |
The Classical (Historical) Depreciation Methods | p. 275 |
The Modified Accelerated Cost Recovery System | p. 281 |
A Comprehensive Depreciation Example | p. 287 |
Depletion | p. 291 |
Introduction to Income Taxes | p. 294 |
The Effective (Marginal) Corporate Income Tax Rate | p. 296 |
Gain (Loss) on the Disposal of an Asset | p. 300 |
General Procedure for Making After-Tax Economic Analyses | p. 300 |
Illustration of Computations of ATCFs | p. 305 |
After-Tax Analyses That Include Specific Financing Arrangements | p. 313 |
The After-Tax Effect of Depletion Allowances | p. 316 |
Summary | p. 319 |
References | p. 319 |
Problems | p. 320 |
Estimating Cash Flows | p. 328 |
Introduction | p. 328 |
An Integrated Approach | p. 329 |
Selected Estimating Techniques (Models) | p. 340 |
Estimating Total Product Costs and Selling Price | p. 348 |
Estimating Cash Flows for a Typical Small Project | p. 353 |
Developing Cash Flows (A Case Study) | p. 356 |
Summary | p. 362 |
References | p. 362 |
Problems | p. 363 |
Inflation and Price Changes | p. 368 |
General Price Inflation | p. 368 |
Terminology and Basic Concepts | p. 370 |
Differential Price Inflation or Deflation | p. 381 |
Application Strategy | p. 386 |
A Comprehensive Example | p. 386 |
Foreign Exchange Rates and Purchasing Power Concepts | p. 390 |
Spreadsheet Applications | p. 392 |
Summary | p. 394 |
References | p. 395 |
Problems | p. 395 |
Dealing with Uncertainty | p. 402 |
Introduction | p. 402 |
What Are Risk, Uncertainty, and Sensitivity? | p. 403 |
Sources of Uncertainty | p. 404 |
Common Nonprobabilistic Methods for Dealing with Uncertainty | p. 405 |
Breakeven Analysis | p. 406 |
Sensitivity Analysis | p. 412 |
Analyzing a Proposed Business Venture | p. 414 |
Optimistic-Pessimistic Estimates | p. 417 |
Risk-Adjusted Minimum Attractive Rates of Return | p. 421 |
Reduction of Useful Life | p. 423 |
Spreadsheet Applications | p. 425 |
Summary | p. 427 |
References | p. 428 |
Problems | p. 428 |
Special Topics in Engineering Economy | p. 435 |
Replacement Analysis | p. 436 |
Introduction | p. 436 |
Reasons for Replacement Analysis | p. 437 |
Factors That Must Be Considered in Replacement Studies | p. 438 |
A Typical Replacement Problem | p. 441 |
A Decision Roadmap for Replacement Analysis | p. 445 |
Determining the Economic Life of a New Asset (Challenger) | p. 447 |
Determining the Economic Life of a Defender | p. 452 |
Comparisons in Which the Defender's Useful Life Differs from That of the Challenger | p. 455 |
Retirement Without Replacement (Abandonment) | p. 459 |
A Comprehensive Example | p. 460 |
Spreadsheet Applications | p. 463 |
Summary | p. 465 |
References | p. 467 |
Problems | p. 468 |
Capital Financing and Allocation | p. 475 |
Introduction | p. 475 |
Capital Financing | p. 476 |
Financing with Debt Capital | p. 478 |
Financing with Equity Capital | p. 481 |
Leasing as a Source of Capital | p. 484 |
Capital Allocation | p. 488 |
Allocating Capital Among Independent Projects | p. 490 |
Linear Programming Formulations of Capital Allocation Problems | p. 493 |
An Overview of Corporate Capital Allocation Policy and Procedures | p. 497 |
Summary | p. 500 |
References | p. 501 |
Problems | p. 501 |
Engineering Economy Studies in Investor-Owned Utilities | p. 504 |
Background | p. 504 |
General Characteristics of Investor-Owned Utilities | p. 506 |
General Concepts of Utility Economy Studies | p. 507 |
Methods of Engineering Economy for Investor-Owned Utility Projects | p. 508 |
Development of the Revenue Requirement Method | p. 509 |
Assumptions of the Revenue Requirement Method | p. 510 |
Utility Rate Regulation | p. 510 |
Flow-Through and Normalized Accounting | p. 512 |
Illustration of the Revenue Requirement Method: A Tabular Procedure | p. 512 |
Immediate Versus Deferred Investment | p. 515 |
Revenue Requirement Analysis Under Conditions of Inflation | p. 518 |
Summary | p. 525 |
References | p. 525 |
Problems | p. 525 |
Probabilistic Risk Analysis | p. 529 |
Introduction | p. 529 |
The Distribution of Random Variables | p. 530 |
Evaluation of Projects with Discrete Random Variables | p. 534 |
Evaluation of Projects with Continuous Random Variables | p. 541 |
Evaluation of Uncertainty Using Monte Carlo Simulation | p. 546 |
Performing Monte Carlo Simulation with a Computer | p. 550 |
Decision Trees | p. 555 |
Spreadsheet Applications | p. 563 |
Summary | p. 565 |
References | p. 566 |
Problems | p. 566 |
Appendixes | p. 575 |
Appendix | |
Accounting and Its Relationship to Engineering Economy | p. 576 |
Abbreviations and Notation | p. 597 |
Interest and Annuity Tables for Discrete Compounding | p. 602 |
Interest and Annuity Tables for Continuous Compounding | p. 621 |
Standardized Normal Distribution Function | p. 628 |
Selected References | p. 631 |
Answers to Selected Even-Numbered Problems | p. 634 |
Index | p. 639 |
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