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Engineering Economic Analysis

(Chris Devlin) #1

  • A Sea of Problems 1 'AAKINGECONOMICDECISIONS

    • Simple Problems

    • Intennediate Problems

    • Complex Problems



  • The Role of Engineering Economic Analysis

    • Examples of Engineering Economic Analysis



  • The Decision-Making Process

    • Rational Decision Making

    • Engineering Decision Making for Current Costs

    • Summary

    • Problems



  • Engineering Costs 2 ENGINEERINGCOSTS AND COST ESTIMATING

    • Fixed, Variable, Marginal, and Average Costs

    • Sunk Costs

    • Opportunity Costs

    • Recurring and Nonrecurring Costs

    • Incremental Costs

    • Cash Costs Versus Book Costs

    • Life-Cycle Costs

    • Cost Estimating viii CONTENTS

      • Types of Estimate

      • Difficulties in Estimation



    • Estimating Models

      • Per-Unit Model

      • Segmenting Model

      • Cost Indexes

      • Power-Sizing Model

      • Triangulation

      • Improvement and the Learning Curve



    • Estimating Benefits



  • Cash Flow Diagrams

    • Categories of Cash Flows

    • Drawing a Cash Flow Diagram

    • a Spreadsheet Drawing Cash Flow Diagrams with



  • Summary

  • Problems

  • Computing Eash Flows 3 INTERESTAND EQUIVALENCE

  • Time Value of Money

    • Simple Interest

    • Compound Interest

    • Repaying a Debt

    • Equivalence

      • Differencein RepaymentPlans

      • Equivalence Is Dependent on Interest Rate

      • Application of Equivalence Calculations



    • Single Payment Compound Interest Formulas



  • Summary

  • Problems

    • Uniform Series Compound Interest Formulas 4 MORE INTERESTFORMULAS

    • Relationships Between Compound Interest Factors

      • Single Payment CONTENTS ix

      • Uniform Series

      • ArithmeticGradient

        • Derivation of Arithmetic Gradient Factors



      • Geometric Gradient

      • Nominal and Effective Interest

      • Continuous Compounding

        • Single Payment Interest Factors: Continuous Compounding

        • per Period Uniform Payment Series: Continuous Compounding at Nominal Rater

          • at Nominal Interest Rater Continuous, Uniform Cash Flow (One Period) with Continuous Compounding







    • Spreadsheets for Economic Analysis

      • Spreadsheet Annuity Functions

      • Spreadsheet Block Functions

      • Using Spreadsheets for Basic Graphing

      • Summary

      • Problems





  • Assumptions in Solving Economic Analysis Problems 5 PRESENTWORTH ANALYSIS

    • End-of-Year Convention

    • Viewpoint of Economic Analysis Studies

    • Sunk Costs

    • Borrowed Money Viewpoint

    • Effect of Inflation and Deflation

    • Income Taxes



  • Economic Criteria

  • Applying Present Worth Techniques

    • Useful Lives Equal the Analysis Period

    • Useful Lives Different from the Analysis Period

    • Infinite Analysis Period: Capitalized Cost

    • Multiple Alternatives



  • Spreadsheetsand PresentWorth

  • Summary

    • Problems

      • Annual Cash Flow Calculations 6 ANNUAL CASH FLOWANALYSIS

        • Resolving a Present Cost to an Annual Cost

        • Treatment of Salvage Value..



      • Annual Cash Flow Analysis

      • Analysis Period

        • Analysis Period Equal to Alternative Lives

        • of Alternative Lives Analysis Period a Common Multiple

        • Analysis Period for a Continuing Requirement

        • Infinite Analysis Period

          • Some Other Analysis Period



        • Using Spreadsheets to Analyze Loans

          • Building an Amortization Schedule

          • How Much to Interest? How Much to Principal?

          • Finding the Balance Due on a Loan

          • Pay Off Debt Sooner by Increasing Payments







    • Summary

      • Problems

      • Internal Rate of Return 7 RATEOF RETURN ANALYSIS



    • Calculating Rate of Return

      • Plot ofNPW versus Interest Ratei



    • Rate of Return Analysis

      • Present Worth Analysis

        • Analysis Period





    • Spreadsheets and Rate of Return Analysis



  • Summary

    • Problems



  • Appendix 7A Difficulties in Solving for an Interest Rate

  • Graphical Solutions 8 INCREMENTALANALYSIS

  • IncrementalRateof ReturnAnalysis

    • Elements in Incremental Rate of Return Analysis CONTENTS xi

      • Incremental Analysis with Unlimited Alternatives



    • Present Worth Analysis with Benefit cost .Graphs

    • Choosing an Analysis Method

    • Spreadsheets and Incremental Analysis

    • Summary

    • Problems

    • Future Worth Analysis 9 OTHER ANALYSISTECHNIOUES

    • Benefit-Cost Ratio Analysis

      • Continuous Alternatives



    • Payback Period

    • Sensitivity and Breakeven Analysis

    • Graphing with Spreadsheets for Sensitivity and Breakeven Analysis

    • Summary

      • Problems

      • Estimates and Their Use in Economic Analysis 10 UNCERTAINTYIN FUTURE EVENTS



    • A Range of Estimates

    • Probability



  • Joint Probability Distributions

    • Expected Value

    • Economic Decision Trees

    • Risk

    • Risk Versus Return



  • Simulation

  • Summary

    • Problems

    • BasicAspectsof Depreciation 11 DEPRECIATION

      • Deterioration and Obsolescence

      • Depreciation and Expenses

        • Types of Property xii CONTENTS

        • Depreciation Calculation Fundamentals



      • Historical Depreciation Methods

        • Straight-Line Depreciation

        • Sum-of-Years'-Digits Depreciation

        • Declining Balance Depreciation



      • Modified Accelerated Cost Recovery System (MACRS)

        • Cost Basis and Placed-in-Service Date

        • Property Class and Recovery,Period

          • Percentage Tables



        • Where MACRS Percentage RatesCrt)Come From

        • MACRS Method Examples

        • Comparing MACRS and Historical Methods



      • Depreciation and Asset Disposal

      • Unit-of-Production Depreciation

      • Depletion

        • Cost Depletion

        • Percentage Depletion





    • Spreadsheets and Depreciation

      • Using VDB for MACRS

      • Summary

      • Problems





  • A Partner in the Business 12 INCOME TAXES

    • Calculation of Taxable Income

      • Taxable Income of Individuals

      • Classificatio~ of Business Expenditures

      • Taxable Income of Business Firms



    • Income Tax Rates

      • Individual Tax Rates

      • Corporate Tax Rates

      • Combined Federal and State Income Taxes

      • Selecting an Income Tax Rate for Economy Studies





  • Economic Analysis Taking Income Taxes into Account

    • Capital Gains and Losses for Nondepreciated Assets CONTENTS xiii

      • Investment Tax Credit

      • Estimating the After-Tax Rate of Return- -



    • After-Tax Cash Flows and Spreadsheets

      • Summary

        • Problems





    • The Replacement Problem 13 REPLACEMENTANALYSIS

      • Replacement Analysis Decision Maps



    • What Is the Basic Comparison?

      • Minimum Cost Life of the Challenger

      • Use of Marginal Cost Data

      • Lowest EUAC of the Defender

      • No Defender Marginal Cost Data Available

      • Repeatability Assumptions Not Acceptable

      • A Closer Look at Future Challengers





  • After-Tax Replacement Analysis

    • Marginal Costs on an After-Tax Basis

    • After-Tax Cash Flows for the Challenger

    • Mter- Tax Cash Flows for the Defender

    • Minimum Cost Life Problems

    • Spreadsheets and Replacement Analysis

      • Summary

      • Problems





  • Meaning and Effect of Inflation 14 INFLATIONAND PRICE CHANGE

    • How Does InflationHappen?

    • Definitions for Considering Inflation in Engineering Economy



  • Analysis in Constant Dollars Versus Then-Current Dollars

    • What Is a Price Index? Price Change with Indexes 450 --.

      • Composite Versus Commodity Indexes



    • How to Use Price Indexes in Engineering Economic Analysis

    • Cash Flows That Inflate at Different Rates xiv CONTENTS

      • Different Inflation Rates per Period

      • Inflation Effect on After-TaxCf!'.c~l(lti9.ns

      • Using Spreadsheets for Inflation Calculations



    • Summary

      • Problems



    • Sources of Capital 15 SELECTIONOF A MINIMUM ATTRACTIVERATE OF RETURN

      • Money Generated from the Operation of the Firm

      • External Sources of Money

      • Choice of Source of Funds



    • Cost of Funds

      • Cost of Borrowed Money

      • Cost of Capital



    • Investment Opportunities

      • Opportunity Cost



    • Selecting a Minimum Attractive Rate of Return

      • Inflation and the Cost of Borrowed Money Adjusting MARRto Account for Risk and Uncertainty



    • Representative Values of MARRUsed in Industry

      • Cost of Capital Spreadsheets, Cumulative Investments, and the Opportunity



    • Summary

    • Problems





    • Investment Objective 16 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR

    • Viewpoint for Analysis

    • Selecting an Interest Rate

      • No Time-Value-of-Money Concept

      • Cost of Capital Concept

      • Opportunity Cost Concept

      • Recommended Concept





  • The Benefit-Cost Ratio

    • Incremental Benefit-Cost Analysis CONTENTS xv

      • Elements of the Incremental Benefit-Cost Ratio Method



    • Other Effects of Public Projects -

      • Project Financing

      • Project Duration

      • Project Politics



    • Summary

      • Problems



    • Capital Expenditure Project Proposals 17 RATIONINGCAPITALAMONG COMPETINGPROJECTS

      • Mutually Exclusive Alternatives and Single Project Proposals

      • Identifying and Rejecting Unattractive Alternatives

      • Selecting the Best Alternative from Each Project Proposal

      • Rationing Capital by Rate of Return

        • Significance of the Cutoff Rate of Return



      • Rationing Capital by Present Worth Methods



    • Ranking Project Proposals

    • Summary

      • Problems



    • The Role of Accounting 18 ACCOUNTINGAND ENGINEERINGECONOMY

      • Accounting for Business Transactions



    • The Balance Sheet

      • Assets

      • Liabilities

      • Equity

      • Financial Ratios Derived from Balance Sheet Data





  • The Income Statement

    • Financial Ratios Derived from Income Statement Data

    • Linking the Balance Sheet, Income Statement, and Capital Transactions



  • Traditional Cost Accounting

    • Direct and Indirect Costs

    • Indirect Cost Allocation

    • Problems with Traditional Cost Accounting xvi CONTENTS

      • Other Problems to Watch For



    • Problems



  • ApPENDIXA INTRODUCTION TO SPREADSHEETS

    • The Elements of a Spreadsheet

      • Defining Variables in a Data Block

      • Copy Command



    • ApPENDIX B COMPOUND INTERESTTABLES

      • REFERENCE

      • INDEX





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