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Contemporary Engineering Economics

ISBN: 9780131876286 | 0131876287
Edition: 5th
Format: Hardcover
Publisher: Prentice Hall
Pub. Date: 1/1/2011

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SummaryTable of Contents
This book is intended for undergraduate engineering students taking the introductory engineering economics course at the university level. The fourth edition ofContemporary Engineering Economicshas been thoroughly revised and updated while continuing to adopt a contemporary approach to the subject, and teaching, of engineering economics. This text aims not only to build a sound and comprehensive coverage of engineering economics, but also to address key educational challenges, such as student difficulty in developing the analytical skills requi... MORE
Prefacexix
PART 1 BASICS OF FINANCIAL DECISIONS
1(202)
Engineering Economic Decisions
2(16)
... MORE
Role of Engineers in Business
4(3)
Types of Business Organization
5(1)
Engineering Economic Decisions
6(1)
Personal Economic Decisions
6(1)
What Makes the Engineering Economic Decision Difficult?
7(1)
Economic Decisions versus Design Decisions
8(1)
Large-Scale Engineering Projects
9(4)
How a Typical Project Idea Evolves
9(3)
Impact of Engineering Projects on Financial Statements
12(1)
A Look Back in 2005: Did Toyota Make the Right Decision?
13(1)
Common Types of Strategic Engineering Economic Decisions
13(2)
Fundamental Principles of Engineering Economics
15(3)
Summary
17(1)
Understanding Financial Statements
18(34)
Accounting: The Basis of Decision Making
21(1)
Financial Status for Businesses
22(11)
The Balance Sheet
24(3)
The Income Statement
27(3)
The Cash Flow Statement
30(3)
Using Ratios to Make Business Decisions
33(19)
Debt Management Analysis
34(3)
Liquidity Analysis
37(1)
Asset Management Analysis
38(1)
Profitability Analysis
39(2)
Market Value Analysis
41(1)
Limitations of Financial Ratios in Business Decisions
42(1)
Summary
43(1)
Problems
44(6)
Short Case Studies
50(2)
Interest Rate and Economic Equivalence
52(82)
Interest: The Cost of Money
54(9)
The Time Value of Money
55(1)
Elements of Transactions Involving Interest
56(3)
Methods of Calculating Interest
59(3)
Simple Interest versus Compound Interest
62(1)
Economic Equivalence
63(8)
Definition and Simple Calculations
63(3)
Equivalence Calculations: General Principles
66(5)
Looking Ahead
71(1)
Development of Interest Formulas
71(36)
The Five Types of Cash Flows
72(1)
Single-Cash-Flow Formulas
73(7)
Uneven Payment Series
80(4)
Equal Payment Series
84(12)
Linear Gradient Series
96(6)
Geometric Gradient Series
102(5)
Unconventional Equivalence Calculations
107(27)
Composite Cash Flows
107(7)
Determining an Interest Rate to Establish Economic Equivalence
114(5)
Summary
119(1)
Problems
119(10)
Short Case Studies
129(5)
Understanding Money and Its Management
134(69)
Nominal and Effective Interest Rates
136(7)
Nominal Interest Rates
136(1)
Effective Annual Interest Rates
137(3)
Effective Interest Rates per Payment Period
140(1)
Continuous Compounding
141(2)
Equivalence Calculations with Effective Interest Rates
143(9)
When Payment Period Is Equal to Compounding Period
144(1)
Compounding Occurs at a Different Rate than that at Which Payments Are Made
145(7)
Equivalence Calculations with Continuous Payments
152(4)
Single-Payment Transactions
152(1)
Continuous-Funds Flow
152(4)
Changing Interest Rates
156(3)
Single Sums of Money
156(2)
Series of Cash Flows
158(1)
Debt Management
159(16)
Commercial Loans
159(8)
Loan versus Lease Financing
167(4)
Home Mortgage
171(4)
Investing in Financial Assets
175(28)
Investment Basics
176(1)
How to Determine Your Expected Return
176(3)
Investing in Bonds
179(8)
Summary
187(1)
Problems
188(11)
Short Case Studies
199(4)
PART 2 EVALUATION OF BUSINESS AND ENGINEERING ASSETS
203(182)
Present-Worth Analysis
204(64)
Describing Project Cash Flows
207(3)
Loan versus Project Cash Flows
207(2)
Independent versus Mutually Exclusive Investment Projects
209(1)
Initial Project Screening Method
210(5)
Payback Period: The Time It Takes to Pay Back
210(3)
Benefits and Flaws of Payback Screening
213(1)
Discounted Payback Period
214(1)
Where Do We Go from Here?
215(1)
Discounted Cash Flow Analysis
215(8)
Net-Present-Worth Criterion
216(4)
Meaning of Net Present Worth
220(2)
Basis for Selecting the MARR
222(1)
Variations of Present-Worth Analysis
223(9)
Future-Worth Analysis
223(4)
Capitalized Equivalent Method
227(5)
Comparing Mutually Exclusive Alternatives
232(36)
Meaning of Mutually Exclusive and ``Do Nothing''
232(3)
Analysis Period
235(1)
Analysis Period Equals Project Lives
236(2)
Analysis Period Differs from Project Lives
238(8)
Analysis Period Is Not Specified
246(3)
Summary
249(1)
Problems
249(16)
Short Case Studies
265(3)
Annual Equivalent-Worth Analysis
268(54)
Annual Equivalent-Worth Criterion
270(7)
Fundamental Decision Rule
270(3)
Annual-Worth Calculation with Repeating Cash Flow Cycles
273(2)
Comparing Mutually Exclusive Alternatives
275(2)
Capital Costs versus Operating Costs
277(3)
Applying Annual-Worth Analysis
280(7)
Benefits of AE Analysis
281(1)
Unit Profit or Cost Calculation
281(2)
Make-or-Buy Decision
283(3)
Pricing the Use of an Asset
286(1)
Life-Cycle Cost Analysis
287(7)
Design Economics
294(28)
Summary
303(1)
Problems
304(14)
Short Case Studies
318(4)
Rate-of-Return Analysis
322(63)
Rate of Return
324(3)
Return on Investment
324(2)
Return on Invested Capital
326(1)
Methods for Finding the Rate of Return
327(11)
Simple versus Nonsimple Investments
327(2)
Predicting Multiple i*'s
329(2)
Computational Methods
331(7)
Internal-Rate-of-Return Criterion
338(14)
Relationship to PW Analysis
338(1)
Net-Investment Test: Pure versus Mixed Investments
339(2)
Decision Rule for Pure Investments
341(3)
Decision Rule for Mixed Investments
344(8)
Mutually Exclusive Alternatives
352(33)
Flaws in Project Ranking by IRR
352(1)
Incremental Investment Analysis
353(7)
Handling Unequal Service Lives
360(3)
Summary
363(1)
Problems
364(17)
Short Case Studies
381(4)
PART 3 ANALYSIS OF PROJECT CASH FLOWS
385(156)
Cost Concepts Relevant to Decision Making
386(42)
General Cost Terms
388(2)
Manufacturing Costs
388(2)
Nonmanufacturing Costs
390(1)
Classifying Costs for Financial Statements
390(4)
Period Costs
391(1)
Product Costs
391(3)
Cost Classification for Predicting Cost Behavior
394(6)
Volume Index
394(1)
Cost Behaviors
395(5)
Future Costs for Business Decisions
400(11)
Differential Cost and Revenue
400(4)
Opportunity Cost
404(2)
Sunk Costs
406(1)
Marginal Cost
406(5)
Estimating Profit from Production
411(17)
Calculation of Operating Income
412(1)
Sales Budget for a Manufacturing Business
412(1)
Preparing the Production Budget
413(2)
Preparing the Cost-of-Goods-Sold Budget
415(1)
Preparing the Nonmanufacturing Cost Budget
416(2)
Putting It All Together: The Budgeted Income Statement
418(1)
Looking Ahead
419(1)
Summary
420(1)
Problems
421(6)
Short Case Study
427(1)
Depreciation and Corporate Taxes
428(62)
Asset Depreciation
431(2)
Economic Depreciation
432(1)
Accounting Depreciation
432(1)
Factors Inherent in Asset Depreciation
433(4)
Depreciable Property
433(1)
Cost Basis
434(1)
Useful Life and Salvage Value
435(1)
Depreciation Methods: Book and Tax Depreciation
436(1)
Book Depreciation Methods
437(9)
Straight-Line Method
437(2)
Accelerated Methods
439(6)
Units-of-Production Method
445(1)
Tax Depreciation Methods
446(7)
MACRS Depreciation
446(1)
MACRS Depreciation Rules
447(6)
Depletion
453(3)
Cost Depletion
453(1)
Percentage Depletion
454(2)
Repairs or Improvements Made to Depreciable Assets
456(3)
Revision of Book Depreciation
456(1)
Revision of Tax Depreciation
457(2)
Corporate Taxes
459(3)
Income Taxes on Operating Income
459(3)
Tax Treatment of Gains or Losses on Depreciable Assets
462(5)
Disposal of a MACRS Property
462(2)
Calculations of Gains and Losses on MACRS Property
464(3)
Income Tax Rate to Be Used in Economic Analysis
467(5)
Incremental Income Tax Rate
467(3)
Consideration of State Income Taxes
470(2)
The Need for Cash Flow in Engineering Economic Analysis
472(18)
Net Income versus Net Cash Flow
472(1)
Treatment of Noncash Expenses
473(3)
Summary
476(2)
Problems
478(9)
Short Case Studies
487(3)
Developing Project Cash Flows
490(51)
Cost-Benefit Estimation for Engineering Projects
492(2)
Simple Projects
493(1)
Complex Projects
493(1)
Incremental Cash Flows
494(4)
Elements of Cash Outflows
494(1)
Elements of Cash Inflows
495(2)
Classification of Cash Flow Elements
497(1)
Developing Cash Flow Statements
498(18)
When Projects Require Only Operating and Investing Activities
498(4)
When Projects Require Working-Capital Investments
502(5)
When Projects Are Financed with Borrowed Funds
507(2)
When Projects Result in Negative Taxable Income
509(4)
When Projects Require Multiple Assets
513(3)
Generalized Cash Flow Approach
516(25)
Setting up Net Cash Flow Equations
517(1)
Presenting Cash Flows in Compact Tabular Formats
518(2)
Lease-or-Buy Decision
520(4)
Summary
524(1)
Problems
525(12)
Short Case Studies
537(4)
PART 4 HANDLING RISK AND UNCERTAINTY
541(174)
Inflation and Its Impact on Project Cash Flows
542(42)
Meaning and Measure of Inflation
544(9)
Measuring Inflation
544(6)
Actual versus Constant Dollars
550(3)
Equivalence Calculations under Inflation
553(5)
Market and Inflation-Free Interest Rates
553(1)
Constant-Dollar Analysis
553(1)
Actual-Dollar Analysis
554(4)
Mixed-Dollar Analysis
558(1)
Effects of Inflation on Project Cash Flows
558(8)
Multiple Inflation Rates
562(1)
Effects of Borrowed Funds under Inflation
563(3)
Rate-of-Return Analysis under Inflation
566(18)
Effects of Inflation on Return on Investment
566(3)
Effects of Inflation on Working Capital
569(3)
Summary
572(2)
Problems
574(8)
Short Case Studies
582(2)
Project Risk and Uncertainty
584(80)
Origins of Project Risk
586(1)
Methods of Describing Project Risk
587(9)
Sensitivity Analysis
587(4)
Break-Even Analysis
591(3)
Scenario Analysis
594(2)
Probability Concepts for Investment Decisions
596(9)
Assessment of Probabilities
596(5)
Summary of Probabilistic Information
601(2)
Joint and Conditional Probabilities
603(2)
Covariance and Coefficient of Correlation
605(1)
Probability Distribution of NPW
605(13)
Procedure for Developing an NPW Distribution
605(6)
Aggregating Risk over Time
611(5)
Decision Rules for Comparing Mutually Exclusive Risky Alternatives
616(2)
Risk Simulation
618(15)
Computer Simulation
619(1)
Model Building
620(3)
Monte Carlo Sampling
623(5)
Simulation Output Analysis
628(2)
Risk Simulation with @RISK
630(3)
Decision Trees and Sequential Investment Decisions
633(31)
Structuring a Decision-Tree Diagram
634(5)
Worth of Obtaining Additional Information
639(3)
Decision Making after Having Imperfect Information
642(5)
Summary
647(1)
Problems
648(10)
Short Case Studies
658(6)
Real-Options Analysis
664(51)
Risk Management: Financial Options
666(4)
Buy Call Options when You Expect the Price to Go Up
669(1)
Buy Put Options when You Expect the Price to Go Down
669(1)
Option Strategies
670(5)
Buying Calls to Reduce Capital That Is at Risk
670(3)
Protective Puts as a Hedge
673(2)
Option Pricing
675(11)
Replicating-Portfolio Approach with a Call Option
675(2)
Risk-Free Financing Approach
677(2)
Risk-Neutral Probability Approach
679(1)
Put-Option Valuation
680(1)
Two-Period Binomial Lattice Option Valuation
681(2)
Multiperiod Binomial Lattice Model
683(1)
Black-Scholes Option Model
684(2)
Real-Options Analysis
686(11)
A Conceptual Framework for Real Options in Engineering Economics
687(1)
Types of Real-Option Models
688(9)
Estimating Volatility at the Project Level
697(6)
Estimating a Project's Volatility through a Simple Deferral Option
697(2)
Use the Existing Model of a Financial Option to Estimate σ2
699(4)
Compound Options
703(12)
Summary
708(1)
Problems
709(4)
Short Case Studies
713(2)
PART 5 SPECIAL TOPICS IN ENGINEERING ECONOMICS
715(154)
Replacement Decisions
716(60)
Replacement Analysis Fundamentals
718(5)
Basic Concepts and Terminology
718(3)
Opportunity Cost Approach to Comparing Defender and Challenger
721(2)
Economic Service Life
723(5)
Replacement Analysis when the Required Service Is Long
728(11)
Required Assumptions and Decision Frameworks
729(1)
Replacement Strategies under the Infinite Planning Horizon
730(5)
Replacement Strategies under the Finite Planning Horizon
735(3)
Consideration of Technological Change
738(1)
Replacement Analysis with Tax Considerations
739(37)
Summary
755(1)
Problems
756(12)
Short Case Studies
768(8)
Capital-Budgeting Decisions
776(46)
Methods of Financing
778(9)
Equity Financing
779(1)
Debt Financing
780(2)
Capital Structure
782(5)
Cost of Capital
787(8)
Cost of Equity
787(5)
Cost of Debt
792(2)
Calculating the Cost of Capital
794(1)
Choice of Minimum Attractive Rate of Return
795(8)
Choice of MARR when Project Financing Is Known
795(2)
Choice of MARR when Project Financing Is Unknown
797(2)
Choice of MARR under Capital Rationing
799(4)
Capital Budgeting
803(19)
Evaluation of Multiple Investment Alternatives
803(1)
Formulation of Mutually Exclusive Alternatives
803(2)
Capital-Budgeting Decisions with Limited Budgets
805(4)
Summary
809(1)
Problems
810(6)
Short Case Studies
816(6)
Economic Analysis in the Service Sector
822(47)
What Is the Service Sector?
824(2)
Characteristics of the Service Sector
825(1)
How to Price Service
825(1)
Economic Analysis in Health-Care Service
826(6)
Economic Evaluation Tools
827(1)
Cost-Effectiveness Analysis
828(1)
How to Use a CEA
829(3)
Economic Analysis in the Public Sector
832(8)
What Is Benefit-Cost Analysis?
833(1)
Framework of Benefit-Cost Analysis
833(1)
Valuation of Benefits and Costs
834(2)
Quantifying Benefits and Costs
836(4)
Difficulties Inherent in Public-Project Analysis
840(1)
Benefit-Cost Ratios
840(6)
Definition of Benefit-Cost Ratio
840(3)
Relationship between B/C Ratio and NPW
843(1)
Comparing Mutually Exclusive Alternatives: Incremental Analysis
843(3)
Analysis of Public Projects Based on Cost-Effectiveness
846(23)
Cost-Effectiveness Studies in the Public Sector
847(1)
A Cost-Effectiveness Case Study
847(9)
Summary
856(1)
Problems
857(5)
Short Case Studies
862(7)
Appendix A Interest Factors for Discrete Compounding869(30)
Index899

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