Engineering Economic Analysis538555602muc luc

<span class='text_page_counter'>(1)</span>.:'% 1 !. ENGINEERING ECONOMIC ANALYSIS. TENTH EDITION. Donald G. Newnan State University. Jerome P. Lavelle North Carolina State University. Ted G. Eschenbach University ofAlaska Anchorage. New York Oxford OXFORD UNIVERSITY PRESS 2009.

<span class='text_page_counter'>(2)</span> Contents PREFACE. xxi. 1 MAKING ECONOMIC DECISIONS Alternative Fuel Vehicles 2 A Sea of Problems 4 Simple Problems 4 Intermediate Problems 4 Complex Problems 4 The Role of Engineering Economic Analysis 5 Examples of Engineering Economic Analysis. 5. The Decision-Making Process 6 Rational Decision Making Ethics. 6. 15. Ethical Dimensions in Engineering Decision Making 15 Importance of Ethics in Engineering and Engineering Economy 18 , Engineering Decision Making for Current Costs Summary 21 Problems 23. 18.

<span class='text_page_counter'>(3)</span> CONTENTS. 2. ENGINEERING COSTS A N D COST ESTIMATING North Slope Natural Gas Pipeline. 32. Engineering Costs 34 Fixed, Variable, Marginal, and Average Costs Sunk Costs 37 Opportunity Costs 38 Recurring and Nonrecurring Costs 40 Incremental Costs 40 Cash Costs Versus Book Costs 41 Life-Cycle Costs 41 Cost Estimating 43 Types of Estimate 44 Difficulties in Estimation. 34. 45. Estimating Models 46 Per-Unit Model 46 Segmenting Model 48 Cost Indexes 49 Power-Sizing Model 51 Triangulation 52 Improvement and the Learning Curve Estimating Benefits. 52. 56. Cash Flow Diagrams. 56. Categories of Cash Flows 57 Drawing a Cash Flow Diagram 57 Drawing Cash Flow Diagrams with a Spreadsheet Summary 59 Problems 60 Trust Me, You'll Use This! 3. 68. INTEREST A N D EQUIVALENCE Going Up in Smoke. 70. Computing Cash Flows 72. 58.

<span class='text_page_counter'>(4)</span> CONTENTS. Time Value of Money 73 Simple Interest 74 Compound Interest 75 Repaying a Debt 76 Equivalence 78 Difference in Repayment Plans 78 Equivalence is Dependent on Interest Rate 81 Application of Equivalence Calculations 82 Single Payment Compound Interest Formulas. 83. Summary 90 Problems 91 4 MORE INTEREST FORMULAS Anne Scheiber's Bonanza. 94. Uniform Series Compound Interest Formulas. 96. Economic Equivalence Viewed as a Moment Diagram Relationships Between Compound Interest Factors Single Payment 109 Uniform Series 109 Arithmetic Gradient. 108. 110. Derivation of Arithmetic Gradient Factors Geometric Gradient. 106. 111. 116. Nominal and Effective Interest. , 120. Continuous Compounding 126 Single Payment Interest Factors: Continuous Compounding ' Uniform Payment Series: Continuous Compounding at Nominal Rate r per Period 129 Spreadsheets for Economic Analysis. 131. Spreadsheet Annuity Functions 131 Spreadsheet Block Functions 132 Using Spreadsheets for Basic Graphing. 133. 126. xi.

<span class='text_page_counter'>(5)</span> xii. CONTENTS. Summary Problems 5. 134 137. PRESENT WORTH ANALYSIS Boeing Versus Airbus. 150. Assumptions in Solving Economic Analysis Problems End-of-Year Convention 152 Viewpoint of Economic Analysis Studies Sunk Costs 153 Borrowed Money Viewpoint 153 Effect of Inflation and Deflation 153 Income Taxes 153 Economic Criteria. 152. 154. Applying Present Worth Techniques. 154. Useful Lives Equal the Analysis Period 155 Useful Lives Different from the Analysis Period Infinite Analysis Period: Capitalized Cost 161 Multiple Alternatives 165 Spreadsheets and Present Worth Summary Problems. 152. 158. 169. 171 172. 6 ANNUAL CASH FLOW ANALYSIS Lowest Prices on the Net! Buy Now!. 184. Annual Cash Flow Calculations 186 Resolving a Present Cost to an Annual Cost Treatment of Salvage Value 186 Annual Cash Flow Analysis Analysis Period. 186. 190. 192. Analysis Period Equal to Alternative Lives 194 Analysis Period a Common Multiple of Alternative Lives. 194.

<span class='text_page_counter'>(6)</span> CONTENTS. Analysis Period for a Continuing Requirement Infinite Analysis Period 195 Some Other Analysis Period 196 Using Spreadsheets to Analyze Loans. 194. 198. Building an Amortization Schedule 198 How Much to Interest? How Much to Principal? 199 Finding the Balance Due on a Loan 199 Pay Off Debt Sooner by Increasing Payments 200 Summary 201 Problems 202 7. RATE OF RETURN ANALYSIS Bar Codes Gives a Number; RFID Codes Tell a Story. 210. Internal Rate of Return 212 Calculating Rate of Return 213 Plot of NPW Versus Interest Rate i. 217. Interest Rates When There Are Fees or Discounts Loans and Investments Are Everywhere. 220. 222. Incremental Analysis 226 Present Worth Analysis 229 Analysis Period 231 Spreadsheets and Rate of Return Analysis. 233. Summary 233 Problems 235 Appendix 7A Difficulties in Solving for an Interest Rate 244 Why Multiple Solutions Can Occur 245 Projects with Multiple Sign Changes 246 Evaluating How Many Roots There Are 248 Modified Internal Rate of Return (MIRR) 252. xiii.

<span class='text_page_counter'>(7)</span> xiv. 8. CONTENTS. CHOOSING THE BEST ALTERNATIVE Tapping into Controversy Incremental Analysis Graphical Solutions. 258. 260 260. Elements in Comparing Mutually Exclusive Alternatives. 269. Doing a Set of Incremental Challenger-Defender Comparisons Choosing an Analysis Method. 270. 272. Spreadsheets and GOAL SEEK 272 Summary 274 Problems 274 9. OTHER ANALYSIS TECHNIQUES Clean, Green, and Far Between 282 Future Worth Analysis. 284. Benefit-Cost Ratio Analysis. 286. Variations on the Theme of the Benefit-Cost Ratio Payback Period. 291. 294. Sensitivity and Breakeven Analysis. 298. Graphing with Spreadsheets for Sensitivity and Breakeven Analysis Doing What-lf Analysis with Spreadsheets. 307. Summary 308 Problems 309 10. UNCERTAINTY I N FUTURE EVENTS They Only Thought They Were Done. 318. Estimates and Their Use in Economic Analysis A Range of Estimates 322 Probability. 324. 320. 304.

<span class='text_page_counter'>(8)</span> CONTENTS. Joint Probability Distributions Expected Value. 327. 329. Economic Decision Trees 332 Risk. 338. Risk Versus Return Simulation. 342. Real Options Summary Problems. 341. 346. 346 347. 11 DEPRECIATION Depreciation and Competitiveness Basic Aspects of Depreciation. 354. 356. Deterioration and Obsolescence 356 Depreciation and Expenses 357 Types of Property 358 Depreciation Calculation Fundamentals Historical Depreciation Methods. 358. 359. Straight-Line Depreciation 360 Sum-of-Years'-Digits Depreciation 361 Declining Balance Depreciation 363 Modified Accelerated Cost Recovery System (MACRS) 365 Cost Basis and Placed-in-Service Date 365 Property Class and Recovery Period 366 Percentage Tables 367 Where MACRS Percentage Rates (rt) Come From 369 MACRS Method Examples 370 Comparing MACRS and Historical Methods 371 Depreciation and Asset Disposal. 372. Unit-of-Production Depreciation. 376. xv.

<span class='text_page_counter'>(9)</span> xvi. CONTENTS. Depletion. 377. Cost Depletion 377 Percentage Depletion. 378. Spreadsheets and Depreciation 379 Using VDB for MACRS 380 Summary 381 Problems 382. 12. INCOME TAXES On with the Wind. 388. A Partner in the Business 390 Calculation of Taxable Income. 390. Taxable Income of Individuals 390 Classification of Business Expenditures 391 Taxable Income of Business Firms 392 Income Tax Rates 393 Individual Tax Rates 393 Corporate Tax Rates 395 Combined Federal and State Income Taxes 396 Selecting an Income Tax Rate for Economy Studies. 397. Economic Analysis Taking Income Taxes into Account. 397. Capital Gains and Losses for Nondepreciated Assets 401 Investment Tax Credit. 401. Estimating the After-Tax Rate of Return 402 After-Tax Cash Flows and Spreadsheets Summary 403 Problems 405. 403.

<span class='text_page_counter'>(10)</span> CONTENTS. 13. REPLACEMENT ANALYSIS The $2 Billion Upgrade. 416. The Replacement Problem. 418. Replacement Analysis Decision Map. 419. Minimum Cost Life of a New Asset—the Challenger. 420. Defender's Marginal Cost Data 422 Do We Have Marginal Cost Data for the Defender? Are These Marginal Costs Increasing? 424. 424. Replacement Analysis Technique 1: Defender Marginal Costs Can Be Computed and Are Increasing 425 Replacement Repeatability Assumptions. 426. Replacement Analysis Technique 2: Defender Marginal Costs Can Be Computed and Are Not Increasing 427 Replacement Analysis Technique 3: When Defender Marginal Cost Data Are Not Available 431 Complications in Replacement Analysis 432 Defining Defender and Challenger First Costs 432 Repeatability Assumptions Not Acceptable A Closer Look at Future Challengers After-Tax Replacement Analysis. 435. 436. Marginal Costs on an After-Tax Basis Minimum Cost Life Problems 438 Spreadsheets and Replacement Analysis Summary 441 Problems 442. 434. 436 439. xvii.

<span class='text_page_counter'>(11)</span> xviii. CONTENTS. 14 INFLATION AND PRICE CHANGE The Athabasca Oil Sands 450 Meaning and Effect of Inflation. 452. How Does Inflation Happen? 452 Definitions for Considering Inflation in Engineering Economy Analysis in Constant Dollars Versus Then-Current Dollars. 453. 460. Price Change with Indexes 462 What Is a Price Index? 462 Composite Versus Commodity Indexes 464 How to Use Price Indexes in Engineering Economic Analysis. 466. Cash Flows That Inflate at Different Rates 466 Different Inflation Rates per Period. 468. Inflation Effect on After-Tax Calculations. 469. Using Spreadsheets for Inflation Calculations. 472. Summary 474 Problems 475. 15 SELECTION OF A M I N I M U M ATTRACTIVE RATE OF RETURN BP Goes to Russia 482 Sources of Capital. 484. Money Generated from the Firm's Operations External Sources of Money 484 Choice of Source of Funds 484. 484. Cost of Funds 485 Cost of Borrowed Money 485 Cost of Capital 485 Inflation and the Cost of Borrowed Money Investment Opportunities Opportunity Cost. 487. 487. 486.

<span class='text_page_counter'>(12)</span> CONTENTS. Selecting a Minimum Attractive Rate of Return. 490. Adjusting MARR to Account for Risk and Uncertainty Representative Values of MARR Used in Industry Capital Budgeting or Selecting the Best Projects. 492 493. Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital 495 Summary Problems. 498 500. 16 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR From Waste to Power and Money Investment Objective Viewpoint for Analysis. 506. 508 510. Selecting an Interest Rate 511 No Time-Value-of-Money Concept Cost of Capital Concept 511 Opportunity Cost Concept 512 Recommended Concept 512 The Benefit-Cost Ratio. 511. 513. Incremental Benefit-Cost Analysis. 515. Elements of the Incremental Benefit-Cost Ratio Method 516 Other Effects of Public Projects. 520. Project Financing 521 Project Duration 521 Quantifying and Valuing Benefits and Disbenefits Project Politics 524 Summary Problems. 526 526. 523. 490.

<span class='text_page_counter'>(13)</span> xx. CONTENTS. 17 ACCOUNTING AND ENGINEERING ECONOMY The Two Faces of ABB. 534. The Role of Accounting. 536. Accounting for Business Transactions The Balance Sheet. 536. 537. Assets 537 Liabilities 538 Equity 539 Financial Ratios Derived from Balance Sheet Data The Income Statement. 539. 540. Financial Ratios Derived from Income Statement Data 542 Linking the Balance Sheet, Income Statement, and Capital Transactions Traditional Cost Accounting. 543. Direct and Indirect Costs 544 Indirect Cost Allocation 544 Problems with Traditional Cost Accounting Other Problems to Watch For 546 Problems. 545. 547. APPENDIX A. INTRODUCTION TO SPREADSHEETS. 551. The Elements of a Spreadsheet 551 Defining Variables in a Data Block 552 Copy Command 552 APPENDIX B. C O M P O U N D INTEREST TABLES. APPENDIX C. FUNDAMENTALS OF ENGINEERING (FE) EXAM PRACTICE. PROBLEMS REFERENCES INDEX. 606. 603. 587. 555. 542.

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