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Finance for Engineers Evaluation and Funding of Capital Projects

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ISBN-10: 1848000324

ISBN-13: 9781848000322

Edition: 2008

Authors: Frank Kenneth Crundwell

List price: $129.99
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Engineering solutions and financial decisions are intimately tied together. The best engineers combine the technical and financial cases in determining new solutions to opportunities, challenges and problems. In order to get a project approved, no matter its size, the financials must be clear and compelling. To have an impact on the companya (TM)s performance, a practising engineer must learn to argue the business case as part of the technical solution. Finance for Engineers: Evaluation and Funding of Capital Projects provides a framework for engineers and scientists to undertake financial evaluations and assessments of engineering or production projects. The material covered enables the…    
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Book details

List price: $129.99
Copyright year: 2008
Publisher: Springer London, Limited
Publication date: 3/31/2008
Binding: Hardcover
Pages: 622
Size: 6.10" wide x 9.25" long x 0.43" tall
Weight: 2.244
Language: English

Dr Frank Crundwell BSc (Financial Maths), PhD (Chem. Eng.), has experience in academia (University of California, Berkeley; University of Cape Town; University of the Witwatersrand, Johannesburg), in technology development (BHP Billington) and corporate venture capital, and currently runs his own company (CM Solutions). He has been in involved in due diligence work, he has developed the business case for investment decisions, and he has patented and licensed inventions. He has also presented courses on Real Options Analysis and Finance for Professional Engineers for professionals.

List of Abbreviations
Foundations
An Overview of the Evaluation and Financing of Capital Projects
Evaluation and Funding of Projects
Project Financials
Evaluating the Project Based on Free Cash Flow
Profit (or Earnings) is Not Required for the Assessment of the Project
Investment Decision Precedes the Financing Decision
Past Expenses are Excluded from the Project Financials
Assessment of the Risk of the Project
Financing of a Capital Project
Summary
Looking Ahead
Review Questions
Exercises
The Theory and Practice of Decision-making Concerning Capital Projects
Introduction
Cost-benefit Analysis, Engineering Economics and Capital Budgeting
Perspectives for the Assessment of Projects
Enhancing Value for Investors
Business Context
Financial Stewardship Within a Business
Sources and Use of Funds
Investment and Financing Decisions Within the Business
Evaluation of Investment Opportunities
Business Decision-making
A Framework for Decision-making
Steps in the Decision-making Process
Frame: the Decision Context and Possible Alternatives
Evaluate: the Assessment of Alternatives Based on Criteria
Decide: the Act of Decision-making
The Practice of Decision-making for Capital Projects
Classification of Capital Projects
Relationship Between Projects
Decision Authority for Capital Projects
Case Study: Small Project
Case Study: Large Project
Summary
Looking Ahead
Review Questions
Exercises
Financial Statements
Introduction
Business Process and the Dual Nature of Transactions
The Dual Nature of Transactions
Business Process
Financial Records
Accounting Principles and Conventions
Business Entity
Accrual Accounting
Historical Cost
Financial Statements
Basic Transactions in a Business
Income Statement
Balance Sheet
Cash Flow Statement
Depreciation
The Interaction Between the Financial Statements
Relationship Between the Financial Statements and the Project Cash Flows
Case Study: Santa Anna Hydroelectric Power Scheme
Project Financials
Income Statement
Cash Flow Statement
Balance Sheet
Examining the Business Risks
Case Study: Apex Foods
Ratio Analysis and Financial Trees
Summary
Review Questions
Exercises
Cash Flows for a Project
Introduction
Determining the Cash Flows for a Project
Overview of the Stages of Engineering Design and Construction
Approval Procedure
Estimation of the Capital Costs
Components of Capital Cost Estimates
Classification of Capital Cost Estimates Based on their End Use
Classification of Capital Cost Estimates Based on their Level of Accuracy
Estimation Techniques for Capital Costs
Factored Estimate Techniques
Unit Costs Techniques
Estimation of the Total Operating Costs
Direct Production or Manufacturing Costs
Fixed Manufacturing Costs
Plant Overheads
General and Administrative
Royalties and Production Payment
Forecasts of the Sales or Revenue
Calculation of the Direct Taxes and Royalties
Corporate Tax
Capital Gains Tax
Royalties
Working Capital
Case Study: Order of Magnitude Estimate of the Capital Cost of a Plant
Case Study: Factored Estimate of the Capital Cost of a Plant
Summary
Looking Ahead
Review Questions
Exercises
Evaluation of Capital Projects
Time Value of Money
Introduction
Interest and Interest Rates
Effect of Timing on the Value of Money
Future Value
Multiple Periods
Types of Interest Rates
Nominal and Period Interest Rate
Effective Rate
Compounding
Single Payments: Growth
Multiple Equal Payments: Annuities
Multiple Periods: Growth Annuities
Multiple Payments of Unequal Amounts
Discounting
Single Amounts of Future Cash Flow
Multiple Equal Amounts
Uneven Cash Flows
Compound Interest Formula
Single Payment Interest Formula
Multiple Equal Payments
A Notation for Interest Rate Factors
Case Study: Zero Coupon and Coupon Bonds
Summary
Looking Ahead
Review Questions
Exercises
Evaluation Criteria for Investment Decisions
Creating Value for the Investor
Non-discounted Cash Flow Techniques
Payback Period
Return on Investment
Discounted Cash Flow Techniques
Net Present Value
Profitability Index or Benefit-cost Ratio
Internal Rate of Return
Modified Internal Rate of Return
Discounted Payback Period
Benefit-Cost Ratio
Equivalent Annual Charge
Comparison Between Discounted Cash Flow Techniques
Relative and Absolute Measures
Agreement and Conflict Between Measures
The Reinvestment Assumption in the NPV and IRR
Case Study: Decision Criteria
Survey of the Most Used Criteria
Summary
Looking Ahead
Review Questions
Exercises
Mutually Exclusive, Replacement and Independent Projects
Classification of Asset Allocation Decisions
Mutually Exclusive Alternatives
Ranking Mutually Exclusive Options with Equal Lives
Ranking Mutually Exclusive Projects with Unequal Lives
Selection of Mutually Exclusive Alternatives
Replacement Studies: Mutually Exclusive Decisions with an Incumbent
Economic Service Life
Selection of Defender or Challenger Based on Equivalent Annual Charge
Replacement for Service Required for Defined Period
Non-mutually Exclusive or Independent Projects
Effect of Starting Times Delays and Project Life
Ranking
Selection of Projects Under Capital Rationing
Summary
Review Questions
Exercises
Practical Issues in the Evaluation of Projects
Introduction
Inflation and Price Escalation
Taxation
Tax Position of the Company
Methods of Calculation of Depreciation
Comparison Between Depreciation Methods
Effect of the Depreciation Method on NPV and IRR
Disposal of a Depreciable Asset
Choice of the Discount Rate
Summary
Review Questions
Exercises
Sensitivity, Scenario and Other Decision Analysis Techniques
Introduction
Influence Diagrams
Sensitivity Analysis
Scenario Analysis
Strategy Space
Decision Analysis
Summary
Looking Ahead
Review Questions
Exercises
Case Studies on the Application of the Decision-making Criteria
Introduction
Santa Clara HEPS
Introduction
Decision Frame
Evaluation
Decide
Mobile Crusher
Introduction
Evaluation
Recommendation
Mobile Crusher Contractor
Introduction
Evaluation
Filtration Joint Venture
Introduction
Project Financials
Assessment
Sensitivity Analysis
Commercial Arrangement Between Alex and WasteTek
Financing of the Project
Recommendation
Bakersfield Water Pumps
Introduction
Project Financials
Sensitivity Analysis
Recommendation
Combine Harvester
Introduction
Project Financials
Evaluation
Sensitivity Analysis
Pricing
Recommendation
PetroGen Oil Field and Petroleum Refinery
Project Financials
Assessment
Financing of the Project
Looking Ahead
Review Questions and Exercises
Santa Clara HEPS
Mobile Crusher
Mobile Crusher Contractor
Filtration Operation
Water Pumps
Combine Harvester
Petroleum Field and Refinery
Risk Assessment
Risk and Return
Introduction
Returns
Certainty and Uncertainty
Business Risks
Financing Risks
Investment Risk
Portfolio Risk
Diversification
The Attainable Region and the Efficient Frontier
Capital Asset Pricing Model
Portfolio Selection
Critique of Finance Theory
Summary
Looking Ahead
Review Questions
Exercises
Cost of Capital
Introduction
Cost of Equity
Calculating the Cost of Equity from the CAPM
Calculating the Cost of Equity from the Growth Model
Calculating the Cost of Equity from the Historical Returns
Interest Rates and the Cost of Debt
Pooling of Funds
Weighted Average Cost of Capital
Entity Versus Equity Basis
Practices in the Calculation of WACC
Cost of Equity Capital
Risk-free Rate
Market-risk Premium
Beta
Weighting Factors in WACC
Tax Rate
Review Period
WACC, Leverage and Debt Financing
Opportunity Cost of Capital, MARR and the Hurdle Rate
Summary
Review Questions
Exercises
Risk in Engineering Projects
Introduction
Sources of Uncertainty
Company-level Risks
Project-level Risks
Probability Method
Risk-adjusted Discount Rate
Company-risk Premium
Project-risk Premium
Certainty Equivalent Method
Certainty Equivalent Coefficients
Certainty Equivalent Risk Premiums
Relationship Between the RADR and the CE Methods
Risk Adjustment Practices
Monte Carlo Simulation
Discrete and Continuous Distributions
Drawing a Random Sample
Monte Carlo Simulation of a Project with One Source of Uncertainty
Value at Risk (VaR)
Monte Carlo Simulation with Multiple Sources of Uncertainty
Review of Assumptions
Summary
Looking Ahead
Review Questions
Exercises
Decision Tree Analysis and Utility Theory
Introduction
Decision Tree Analysis
Decision, Event and Terminal Nodes
Basic Decision Trees
Events and Probabilities
Value of Terminal Nodes
Expected Value and Decision Trees
Net Present Value
Joint Probability
Short-cut Notation
Decision Analysis
Utility Theory and Risk
Utility
Utility Function
Lotteries and Certainty Equivalents
Expected Utility
Utility and Risk Premium
Exponential Utility Function
Using Utility to Account for Risk in NPV Calculations
Summary
Review Questions
Exercises
Real Options Analysis
Introduction
Financial Options
Options Contracts
Payoff from an Option
Price of an Option
Use of Options
Options on Non-financial Assets: Real Options
Examples of Real Options
Option to Invest (or Deferral Option)
Time-to-built Options
Growth Options
Abandonment Options
Switching Options
The Valuation of Financial Options
Risk-free Portfolio
Risk-neutral Probability
Binomial Lattice
Black-Scholes Option Pricing Formula
Valuation of Real Options
Option to Invest
Option to Abandon
Option to Temporarily Close Operations
Option to Expand or Contract
Option to Switch Between Alternatives
Decision-making Process
Real Options Analysis is Not Decision Tree Analysis
Strategic Thinking and Real Options
Case Study: Phased Expansion of Gas-to-Liquids Operation
Introduction
Staging the Investment Decision
Real Options Analysis
Concluding Comments
Case Study: Value of the Joint Venture Contract for Cuprum
Introduction
Market for Copper Concentrates
Revenues
Capital and Operating Costs for Cuprum and Smelters
NPV of Copper Smelting and Cuprum's Process
The Value of the Technology
Concluding Comments
Summary
Looking Ahead
Review Questions
Exercises
Financing of Capital Projects
Sources of Finance
Introduction
Lenders, Borrowers and Financial Institutions
Financial Securities
Equity Instruments
Debt Instruments
Types of Loans
Long-term Debt
Short-term Debt
Public Issue and Private Placement of Financial Securities
Financial Markets
Equity Markets
Bond Markets
Futures and Derivatives Markets
Financing Decisions Within a Company
Capital Structure
Dividend Policy
Comparison of Equity and Debt Financing
Summary
Review Questions
Exercises
Financing Engineering Projects
Introduction
Financing Engineering Construction of Capital Projects
Project Delivery Systems
Risk in Engineering Contracting
Construction Loans
Financial Guarantees
Indiantown Cogeneration Facility
Eurotunnel
Project Finance
Overview of Project Finance
Project Structure
Risks and Risk Mitigation
Assessing Debt Capacity
Application of Project Finance
Project Finance for the Pembroke Cracking Company
Project Finance for the Ras Gas Project
Public-private Partnerships and the Funding of Public Infrastructure
Risk Sharing in Public-private Partnerships
Structuring of a Public-private Partnership
The A1-M1 Link Road
Case Study: Project Finance of a Cogeneration Facility
Introduction
Legal Structure
Contractual Arrangements for the Project
Project Financials
Assessment
Financing
Concluding Remarks
Summary
Review Questions
Exercises
Equivalent US and UK Terms Used in the Financial Statements
Answers to Selected Exercises
Glossary
Bibliography
Index
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