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Management in the Field of Engineering Textbooks

by Donald G. Newnan, Ted G. Eschenback and Jerome P. Lavelle

Cover type: HardbackEdition: 9TH 04

Copyright: 2004

Publisher: Oxford University Press

Published: 2004

International: No

List price: $104.00

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Now in a ninth edition, Engineering Economic Analysis offers comprehensive coverage of financial and economic decision-making for engineering projects, with an emphasis on problem solving, life cycle costs, and the time value of money. The spreadsheet material from the previous edition has been expanded, allowing students to create and analyze more realistic cash-flow models. The authors' concise, accessible writing style and practical emphasis make this text ideal for undergraduate engineering economy courses.

Features of the Ninth Edition

- New pedagogical features include:
- Chapter-opening vignettes
- Chapter objectives
- The interior design will improve readability, generate student interest, and facilitate comprehension of the material.
- A new chapter has been added: Chapter 18, Accounting and Engineering Economy.
- Chapter 10, Probability and Uncertainty, has been completely rewritten to emphasize how to make good choices by considering the uncertainty that is part of every engineering economy application.
- Chapter 13, Replacement Analysis, has been rewritten to clarify the comparison of existing assets with newer alternatives.
- Appendix 7A, Difficulties Solving for an Interest Rate, has been thoroughly revised to use the power of spreadsheets to solve problems.
- End-of-chapter problems are reorganized and updated throughout.
- A companion website is available: http://www.oup.com/us/engineeringeconomy

**1. MAKING ECONOMIC DECISIONS **

1.1. A Sea of Problems

1.1.1. Simple Problems

1.1.2. Intermediate Problems

1.1.3. Complex Problems

1.2. The Role of Engineering Economic Analysis

1.2.1. Examples of Engineering Economic Analysis

1.3. The Decision-Making Process

1.3.1. Rational Decision Making

1.4. Engineering Decision Making for Current Costs

**2. ENGINEERING COSTS AND COST ESTIMATING **

2.1. Engineering Costs

2.1.1. Fixed, Variable, Marginal, and Average Costs

2.1.2. Sunk Costs

2.1.3. Opportunity Costs

2.1.4. Recurring and Nonrecurring Costs

2.1.5. Incremental Costs

2.1.6. Cash Costs Versus Book Costs

2.1.7. Life-Cycle Costs

2.2. Cost Estimating

2.2.1. Types of Estimate

2.2.2. Difficulties in Estimation

2.3. Estimating Models

2.3.1. Per-Unit Model

2.3.2. Segmenting Model

2.3.3. Cost Indexes

2.3.4. Power-Sizing Model

2.3.5. Triangulation

2.3.6. Improvement and the Learning Curve

2.4. Estimating Benefits

2.5. Cash Flow Diagrams

2.5.1. Categories of Cash Flows

2.5.2. Drawing a Cash Flow Diagram

2.5.3. Drawing Cash Flow Diagrams with a Spreadsheet

**3. INTEREST AND EQUIVALENCE **

3.1. Computing Cash Flows

3.2. Time Value of Money

3.2.1. Simple Interest

3.2.2. Compound Interest

3.2.3. Repaying a Debt

3.3. Equivalence

3.3.1. Difference in Repayment Plans

3.3.2. Equivalence Is Dependent on Interest Rate

3.3.3. Application of Equivalence Calculations

3.4. Single Payment Compound Interest Formulas

**4. MORE INTEREST FORMULAS **

4.1. Uniform Series Compound Interest Formulas

4.2. Relationships Between Compound Interest Factors

4.2.1. Single Payment

4.2.2. Uniform Series

4.3. Arithmetic Gradient

4.3.1. Derivation of Arithmetic Gradient Factors

4.4. Geometric Gradient

4.5. Nominal and Effective Interest

4.6. Continuous Compounding

4.6.1. Single Payment Interest Factors: Continuous Compounding

4.6.2. Uniform Payment Series: Continuous Compounding at Nominal Rate r per Period

4.6.3. Continuous, Uniform Cash Flow (One Period) with Continuous Compounding at Nominal Interest Rate r

4.7. Spreadsheets for Economic Analysis

4.7.1. Spreadsheet Annuity Functions

4.7.2. Spreadsheet Block Functions

4.7.3. Using Spreadsheets for Basic Graphing

**5. PRESENT WORTH ANALYSIS **

5.1. Assumptions in Solving Economic Analysis Problems

5.1.1. End-of-Year Convention

5.1.2. Viewpoint of Economic Analysis Studies

5.1.3. Sunk Costs

5.1.4. Borrowed Money Viewpoint

5.1.5. Effect of Inflation and Deflation

5.1.6. Income Taxes

5.2. Economic Criteria

5.3. Applying Present Worth Techniques

5.3.1. Useful Lives Equal the Analysis Period

5.3.2. Useful Lives Different from the Analysis Period

5.3.3. Infinite Analysis Period: Capitalized Cost

5.3.4. Multiple Alternatives

5.4. Spreadsheets and Present Worth

**6. ANNUAL CASH FLOW ANALYSIS **

6.1. Annual Cash Flow Calculations

6.1.1. Resolving a Present Cost to an Annual Cost

6.1.2. Treatment of Salvage Value

6.2. Annual Cash Flow Analysis

6.3. Analysis Period

6.3.1. Analysis Period Equal to Alternative Lives

6.3.2. Analysis Period a Common Multiple of Alternative Lives

6.3.3. Analysis Period for a Continuing Requirement

6.3.4. Infinite Analysis Period

6.3.5. Some Other Analysis Period

6.4. Using Spreadsheets to Analyze Loans

6.4.1. Building an Amortization Schedule

6.4.2. How Much to Interest? How Much to Principal?

6.4.3. Finding the Balance Due on a Loan

6.4.4. Pay Off Debt Sooner by Increasing Payments

**7. RATE OF RETURN ANALYSIS **

7.1. Internal Rate of Return

7.2. Calculating Rate of Return

7.2.1. Plot of NPW versus Interest Rate i

7.3. Rate of Return Analysis

7.3.1. Present Worth Analysis

7.3.2. Analysis Period

7.4. Spreadsheets and Rate of Return Analysis

Appendix 7A: Difficulties in Solving for an Interest Rate

**8. INCREMENTAL ANALYSIS **

8.1. Graphical Solutions

8.2. Incremental Rate of Return Analysis

8.3. Elements in Incremental Rate of Return Analysis

8.3.1. Incremental Analysis with Unlimited Alternatives

8.4. Present Worth Analysis with Benefit-Cost Graphs

8.5. Choosing an Analysis Method

8.6. Spreadsheets and Incremental Analysis

**9. OTHER ANALYSIS TECHNIQUES **

9.1. Future Worth Analysis

9.2. Benefit-Cost Ratio Analysis

9.2.1. Continuous Alternatives

9.3. Payback Period

9.4. Sensitivity and Breakeven Analysis

9.5. Graphing with Spreadsheets for Sensitivity and Breakeven Analysis

**10. UNCERTAINTY IN FUTURE EVENTS **

10.1. Estimates and Their Use in Economic Analysis

10.2. A Range of Estimates

10.3. Probability

10.4. Joint Probability Distributions

10.5. Expected Value

10.6. Economic Decision Trees

10.7. Risk

10.8. Risk Versus Return

10.9. Simulation

**11. DEPRECIATION **

11.1. Basic Aspects of Depreciation

11.1.1. Deterioration and Obsolescence

11.1.2. Depreciation and Expenses

11.1.3. Types of Property

11.1.4. Depreciation Calculation Fundamentals

11.2. Historical Depreciation Methods

11.2.1. Straight-Line Depreciation

11.2.2. Sum-of-Years'-Digits Depreciation

11.2.3. Declining Balance Depreciation

11.3. Modified Accelerated Cost Recovery System (MACRS)

11.3.1. Cost Basis and Placed-in-Service Date

11.3.2. Property Class and Recovery Period

11.3.3. Percentage Tables

11.3.4. Where MACRS Percentage Rates (rt) Come From

11.3.5. MACRS Method Examples

11.3.6. Comparing MACRS and Historical Methods

11.4. Depreciation and Asset Disposal

11.5. Unit-of-Production Depreciation

11.6. Depletion

11.6.1. Cost Depletion

11.6.2. Percentage Depletion

11.7. Spreadsheets and Depreciation

11.7.1. Using VDB for MACRS

**12. INCOME TAXES **

12.1. A Partner in the Business.

12.2. Calculation of Taxable Income

12.2.1. Taxable Income of Individuals

12.2.2. Classification of Business Expenditures

12.2.3. Taxable Income of Business Firms

12.3. Income Tax Rates

12.3.1. Individual Tax Rates

12.3.2. Corporate Tax Rates

12.3.3. Combined Federal and State Income Taxes

12.3.4. Selecting an Income Tax Rate for Economy Studies

12.4. Economic Analysis Taking Income Taxes into Account

12.5. Capital Gains and Losses for Nondepreciated Assets

12.5.1. Investment Tax Credit

12.6. Estimating the After-Tax Rate of Return

12.7. After-Tax Cash Flows and Spreadsheets

**13. REPLACEMENT ANALYSIS **

13.1. The Replacement Problem

13.2. Replacement Analysis Decision Maps

13.3. What Is the Basic Comparison?

13.3.1. Minimum Cost Life of the Challenger

13.3.2. Use of Marginal Cost Data

13.3.3. Lowest EUAC of the Defender

13.3.4. No Defender Marginal Cost Data Available

13.3.5. Repeatability Assumptions Not Acceptable

13.3.6. A Closer Look at Future Challengers

13.4. After-Tax Replacement Analysis

13.4.1. Marginal Costs on an After-Tax Basis

13.4.2. After-Tax Cash Flows for the Challenger

13.4.3. After-Tax Cash Flows for the Defender

13.4.4. Minimum Cost Life Problems

13.5. Spreadsheets and Replacement Analysis

**14. INFLATION AND PRICE CHANGE **

14.1. Meaning and Effect of Inflation

14.1.1. How Does Inflation Happen?

14.1.2. Definitions for Considering Inflation in Engineering Economy

14.2. Analysis in Constant Dollars Versus Then-Current Dollars

14.3. Price Change with Indexes

14.3.1. What Is a Price Index?

14.3.2. Composite Versus Commodity Indexes

14.3.3. How to Use Price Indexes in Engineering Economic Analysis

14.4. Cash Flows That Inflate at Different Rates

14.5. Different Inflation Rates per Period

14.6. Inflation Effect on After-Tax Calculations

14.7. Using Spreadsheets for Inflation Calculations

**15. SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN **

15.1. Sources of Capital

15.1.1. Money Generated from the Operation of the Firm

15.1.2. External Sources of Money

15.1.3. Choice of Source of Funds

15.2. Cost of Funds

15.2.1. Cost of Borrowed Money

15.2.2. Cost of Capital

15.3. Investment Opportunities

15.3.1. Opportunity Cost

15.4. Selecting a Minimum Attractive Rate of Return

15.5. Adjusting MARR to Account for Risk and Uncertainty

15.5.1. Inflation and the Cost of Borrowed Money

15.6. Representative Values of MARR Used in Industry

15.6.1. Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital

**16. ECONOMIC ANALYSIS IN THE PUBLIC SECTOR **

16.1. Investment Objective

16.2. Viewpoint for Analysis

16.3. Selecting an Interest Rate

16.3.1. No Time-Value-of-Money Concept

16.3.2. Cost of Capital Concept

16.3.3. Opportunity Cost Concept

16.3.4. Recommended Concept

16.4. The Benefit-Cost Ratio

16.5. Incremental Benefit-Cost Analysis

16.5.1. Elements of the Incremental Benefit-Cost Ratio Method

16.6. Other Effects of Public Projects

16.6.1. Project Financing

16.6.2. Project Duration

16.6.3. Project Politics

**17. RATIONING CAPITAL AMONG COMPETING PROJECTS **

17.1. Capital Expenditure Project Proposals

17.1.1. Mutually Exclusive Alternatives and Single Project Proposals

17.1.2. Identifying and Rejecting Unattractive Alternatives

17.1.3. Selecting the Best Alternative from Each Project Proposal

17.2. Rationing Capital by Rate of Return

17.2.1. Significance of the Cutoff Rate of Return

17.3. Rationing Capital by Present Worth Methods

17.4. Ranking Project Proposals

**18. ACCOUNTING AND ENGINEERING ECONOMY **

18.1. The Role of Accounting

18.1.1. Accounting for Business Transactions

18.2. The Balance Sheet

18.2.1. Assets

18.2.2. Liabilities

18.2.3. Equity

18.2.4. Financial Ratios Derived from Balance Sheet Data

18.3. The Income Statement

18.3.1. Financial Ratios Derived from Income Statement Data

18.3.2. Linking the Balance Sheet, Income Statement, and Capital Transactions

18.4. Traditional Cost Accounting

18.4.1. Direct and Indirect Costs

18.4.2. Indirect Cost Allocation

18.4.3. Problems with Traditional Cost Accounting

18.4.4. Other Problems to Watch For

Appendix A: Introduction to Spreadsheets

Summary

Now in a ninth edition, Engineering Economic Analysis offers comprehensive coverage of financial and economic decision-making for engineering projects, with an emphasis on problem solving, life cycle costs, and the time value of money. The spreadsheet material from the previous edition has been expanded, allowing students to create and analyze more realistic cash-flow models. The authors' concise, accessible writing style and practical emphasis make this text ideal for undergraduate engineering economy courses.

Features of the Ninth Edition

- New pedagogical features include:
- Chapter-opening vignettes
- Chapter objectives
- The interior design will improve readability, generate student interest, and facilitate comprehension of the material.
- A new chapter has been added: Chapter 18, Accounting and Engineering Economy.
- Chapter 10, Probability and Uncertainty, has been completely rewritten to emphasize how to make good choices by considering the uncertainty that is part of every engineering economy application.
- Chapter 13, Replacement Analysis, has been rewritten to clarify the comparison of existing assets with newer alternatives.
- Appendix 7A, Difficulties Solving for an Interest Rate, has been thoroughly revised to use the power of spreadsheets to solve problems.
- End-of-chapter problems are reorganized and updated throughout.
- A companion website is available: http://www.oup.com/us/engineeringeconomy

Table of Contents

**1. MAKING ECONOMIC DECISIONS **

1.1. A Sea of Problems

1.1.1. Simple Problems

1.1.2. Intermediate Problems

1.1.3. Complex Problems

1.2. The Role of Engineering Economic Analysis

1.2.1. Examples of Engineering Economic Analysis

1.3. The Decision-Making Process

1.3.1. Rational Decision Making

1.4. Engineering Decision Making for Current Costs

**2. ENGINEERING COSTS AND COST ESTIMATING **

2.1. Engineering Costs

2.1.1. Fixed, Variable, Marginal, and Average Costs

2.1.2. Sunk Costs

2.1.3. Opportunity Costs

2.1.4. Recurring and Nonrecurring Costs

2.1.5. Incremental Costs

2.1.6. Cash Costs Versus Book Costs

2.1.7. Life-Cycle Costs

2.2. Cost Estimating

2.2.1. Types of Estimate

2.2.2. Difficulties in Estimation

2.3. Estimating Models

2.3.1. Per-Unit Model

2.3.2. Segmenting Model

2.3.3. Cost Indexes

2.3.4. Power-Sizing Model

2.3.5. Triangulation

2.3.6. Improvement and the Learning Curve

2.4. Estimating Benefits

2.5. Cash Flow Diagrams

2.5.1. Categories of Cash Flows

2.5.2. Drawing a Cash Flow Diagram

2.5.3. Drawing Cash Flow Diagrams with a Spreadsheet

**3. INTEREST AND EQUIVALENCE **

3.1. Computing Cash Flows

3.2. Time Value of Money

3.2.1. Simple Interest

3.2.2. Compound Interest

3.2.3. Repaying a Debt

3.3. Equivalence

3.3.1. Difference in Repayment Plans

3.3.2. Equivalence Is Dependent on Interest Rate

3.3.3. Application of Equivalence Calculations

3.4. Single Payment Compound Interest Formulas

**4. MORE INTEREST FORMULAS **

4.1. Uniform Series Compound Interest Formulas

4.2. Relationships Between Compound Interest Factors

4.2.1. Single Payment

4.2.2. Uniform Series

4.3. Arithmetic Gradient

4.3.1. Derivation of Arithmetic Gradient Factors

4.4. Geometric Gradient

4.5. Nominal and Effective Interest

4.6. Continuous Compounding

4.6.1. Single Payment Interest Factors: Continuous Compounding

4.6.2. Uniform Payment Series: Continuous Compounding at Nominal Rate r per Period

4.6.3. Continuous, Uniform Cash Flow (One Period) with Continuous Compounding at Nominal Interest Rate r

4.7. Spreadsheets for Economic Analysis

4.7.1. Spreadsheet Annuity Functions

4.7.2. Spreadsheet Block Functions

4.7.3. Using Spreadsheets for Basic Graphing

**5. PRESENT WORTH ANALYSIS **

5.1. Assumptions in Solving Economic Analysis Problems

5.1.1. End-of-Year Convention

5.1.2. Viewpoint of Economic Analysis Studies

5.1.3. Sunk Costs

5.1.4. Borrowed Money Viewpoint

5.1.5. Effect of Inflation and Deflation

5.1.6. Income Taxes

5.2. Economic Criteria

5.3. Applying Present Worth Techniques

5.3.1. Useful Lives Equal the Analysis Period

5.3.2. Useful Lives Different from the Analysis Period

5.3.3. Infinite Analysis Period: Capitalized Cost

5.3.4. Multiple Alternatives

5.4. Spreadsheets and Present Worth

**6. ANNUAL CASH FLOW ANALYSIS **

6.1. Annual Cash Flow Calculations

6.1.1. Resolving a Present Cost to an Annual Cost

6.1.2. Treatment of Salvage Value

6.2. Annual Cash Flow Analysis

6.3. Analysis Period

6.3.1. Analysis Period Equal to Alternative Lives

6.3.2. Analysis Period a Common Multiple of Alternative Lives

6.3.3. Analysis Period for a Continuing Requirement

6.3.4. Infinite Analysis Period

6.3.5. Some Other Analysis Period

6.4. Using Spreadsheets to Analyze Loans

6.4.1. Building an Amortization Schedule

6.4.2. How Much to Interest? How Much to Principal?

6.4.3. Finding the Balance Due on a Loan

6.4.4. Pay Off Debt Sooner by Increasing Payments

**7. RATE OF RETURN ANALYSIS **

7.1. Internal Rate of Return

7.2. Calculating Rate of Return

7.2.1. Plot of NPW versus Interest Rate i

7.3. Rate of Return Analysis

7.3.1. Present Worth Analysis

7.3.2. Analysis Period

7.4. Spreadsheets and Rate of Return Analysis

Appendix 7A: Difficulties in Solving for an Interest Rate

**8. INCREMENTAL ANALYSIS **

8.1. Graphical Solutions

8.2. Incremental Rate of Return Analysis

8.3. Elements in Incremental Rate of Return Analysis

8.3.1. Incremental Analysis with Unlimited Alternatives

8.4. Present Worth Analysis with Benefit-Cost Graphs

8.5. Choosing an Analysis Method

8.6. Spreadsheets and Incremental Analysis

**9. OTHER ANALYSIS TECHNIQUES **

9.1. Future Worth Analysis

9.2. Benefit-Cost Ratio Analysis

9.2.1. Continuous Alternatives

9.3. Payback Period

9.4. Sensitivity and Breakeven Analysis

9.5. Graphing with Spreadsheets for Sensitivity and Breakeven Analysis

**10. UNCERTAINTY IN FUTURE EVENTS **

10.1. Estimates and Their Use in Economic Analysis

10.2. A Range of Estimates

10.3. Probability

10.4. Joint Probability Distributions

10.5. Expected Value

10.6. Economic Decision Trees

10.7. Risk

10.8. Risk Versus Return

10.9. Simulation

**11. DEPRECIATION **

11.1. Basic Aspects of Depreciation

11.1.1. Deterioration and Obsolescence

11.1.2. Depreciation and Expenses

11.1.3. Types of Property

11.1.4. Depreciation Calculation Fundamentals

11.2. Historical Depreciation Methods

11.2.1. Straight-Line Depreciation

11.2.2. Sum-of-Years'-Digits Depreciation

11.2.3. Declining Balance Depreciation

11.3. Modified Accelerated Cost Recovery System (MACRS)

11.3.1. Cost Basis and Placed-in-Service Date

11.3.2. Property Class and Recovery Period

11.3.3. Percentage Tables

11.3.4. Where MACRS Percentage Rates (rt) Come From

11.3.5. MACRS Method Examples

11.3.6. Comparing MACRS and Historical Methods

11.4. Depreciation and Asset Disposal

11.5. Unit-of-Production Depreciation

11.6. Depletion

11.6.1. Cost Depletion

11.6.2. Percentage Depletion

11.7. Spreadsheets and Depreciation

11.7.1. Using VDB for MACRS

**12. INCOME TAXES **

12.1. A Partner in the Business.

12.2. Calculation of Taxable Income

12.2.1. Taxable Income of Individuals

12.2.2. Classification of Business Expenditures

12.2.3. Taxable Income of Business Firms

12.3. Income Tax Rates

12.3.1. Individual Tax Rates

12.3.2. Corporate Tax Rates

12.3.3. Combined Federal and State Income Taxes

12.3.4. Selecting an Income Tax Rate for Economy Studies

12.4. Economic Analysis Taking Income Taxes into Account

12.5. Capital Gains and Losses for Nondepreciated Assets

12.5.1. Investment Tax Credit

12.6. Estimating the After-Tax Rate of Return

12.7. After-Tax Cash Flows and Spreadsheets

**13. REPLACEMENT ANALYSIS **

13.1. The Replacement Problem

13.2. Replacement Analysis Decision Maps

13.3. What Is the Basic Comparison?

13.3.1. Minimum Cost Life of the Challenger

13.3.2. Use of Marginal Cost Data

13.3.3. Lowest EUAC of the Defender

13.3.4. No Defender Marginal Cost Data Available

13.3.5. Repeatability Assumptions Not Acceptable

13.3.6. A Closer Look at Future Challengers

13.4. After-Tax Replacement Analysis

13.4.1. Marginal Costs on an After-Tax Basis

13.4.2. After-Tax Cash Flows for the Challenger

13.4.3. After-Tax Cash Flows for the Defender

13.4.4. Minimum Cost Life Problems

13.5. Spreadsheets and Replacement Analysis

**14. INFLATION AND PRICE CHANGE **

14.1. Meaning and Effect of Inflation

14.1.1. How Does Inflation Happen?

14.1.2. Definitions for Considering Inflation in Engineering Economy

14.2. Analysis in Constant Dollars Versus Then-Current Dollars

14.3. Price Change with Indexes

14.3.1. What Is a Price Index?

14.3.2. Composite Versus Commodity Indexes

14.3.3. How to Use Price Indexes in Engineering Economic Analysis

14.4. Cash Flows That Inflate at Different Rates

14.5. Different Inflation Rates per Period

14.6. Inflation Effect on After-Tax Calculations

14.7. Using Spreadsheets for Inflation Calculations

**15. SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN **

15.1. Sources of Capital

15.1.1. Money Generated from the Operation of the Firm

15.1.2. External Sources of Money

15.1.3. Choice of Source of Funds

15.2. Cost of Funds

15.2.1. Cost of Borrowed Money

15.2.2. Cost of Capital

15.3. Investment Opportunities

15.3.1. Opportunity Cost

15.4. Selecting a Minimum Attractive Rate of Return

15.5. Adjusting MARR to Account for Risk and Uncertainty

15.5.1. Inflation and the Cost of Borrowed Money

15.6. Representative Values of MARR Used in Industry

15.6.1. Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital

**16. ECONOMIC ANALYSIS IN THE PUBLIC SECTOR **

16.1. Investment Objective

16.2. Viewpoint for Analysis

16.3. Selecting an Interest Rate

16.3.1. No Time-Value-of-Money Concept

16.3.2. Cost of Capital Concept

16.3.3. Opportunity Cost Concept

16.3.4. Recommended Concept

16.4. The Benefit-Cost Ratio

16.5. Incremental Benefit-Cost Analysis

16.5.1. Elements of the Incremental Benefit-Cost Ratio Method

16.6. Other Effects of Public Projects

16.6.1. Project Financing

16.6.2. Project Duration

16.6.3. Project Politics

**17. RATIONING CAPITAL AMONG COMPETING PROJECTS **

17.1. Capital Expenditure Project Proposals

17.1.1. Mutually Exclusive Alternatives and Single Project Proposals

17.1.2. Identifying and Rejecting Unattractive Alternatives

17.1.3. Selecting the Best Alternative from Each Project Proposal

17.2. Rationing Capital by Rate of Return

17.2.1. Significance of the Cutoff Rate of Return

17.3. Rationing Capital by Present Worth Methods

17.4. Ranking Project Proposals

**18. ACCOUNTING AND ENGINEERING ECONOMY **

18.1. The Role of Accounting

18.1.1. Accounting for Business Transactions

18.2. The Balance Sheet

18.2.1. Assets

18.2.2. Liabilities

18.2.3. Equity

18.2.4. Financial Ratios Derived from Balance Sheet Data

18.3. The Income Statement

18.3.1. Financial Ratios Derived from Income Statement Data

18.3.2. Linking the Balance Sheet, Income Statement, and Capital Transactions

18.4. Traditional Cost Accounting

18.4.1. Direct and Indirect Costs

18.4.2. Indirect Cost Allocation

18.4.3. Problems with Traditional Cost Accounting

18.4.4. Other Problems to Watch For

Appendix A: Introduction to Spreadsheets

Publisher Info

Publisher: Oxford University Press

Published: 2004

International: No

Published: 2004

International: No

Now in a ninth edition, Engineering Economic Analysis offers comprehensive coverage of financial and economic decision-making for engineering projects, with an emphasis on problem solving, life cycle costs, and the time value of money. The spreadsheet material from the previous edition has been expanded, allowing students to create and analyze more realistic cash-flow models. The authors' concise, accessible writing style and practical emphasis make this text ideal for undergraduate engineering economy courses.

Features of the Ninth Edition

- New pedagogical features include:
- Chapter-opening vignettes
- Chapter objectives
- The interior design will improve readability, generate student interest, and facilitate comprehension of the material.
- A new chapter has been added: Chapter 18, Accounting and Engineering Economy.
- Chapter 10, Probability and Uncertainty, has been completely rewritten to emphasize how to make good choices by considering the uncertainty that is part of every engineering economy application.
- Chapter 13, Replacement Analysis, has been rewritten to clarify the comparison of existing assets with newer alternatives.
- Appendix 7A, Difficulties Solving for an Interest Rate, has been thoroughly revised to use the power of spreadsheets to solve problems.
- End-of-chapter problems are reorganized and updated throughout.
- A companion website is available: http://www.oup.com/us/engineeringeconomy

**1. MAKING ECONOMIC DECISIONS **

1.1. A Sea of Problems

1.1.1. Simple Problems

1.1.2. Intermediate Problems

1.1.3. Complex Problems

1.2. The Role of Engineering Economic Analysis

1.2.1. Examples of Engineering Economic Analysis

1.3. The Decision-Making Process

1.3.1. Rational Decision Making

1.4. Engineering Decision Making for Current Costs

**2. ENGINEERING COSTS AND COST ESTIMATING **

2.1. Engineering Costs

2.1.1. Fixed, Variable, Marginal, and Average Costs

2.1.2. Sunk Costs

2.1.3. Opportunity Costs

2.1.4. Recurring and Nonrecurring Costs

2.1.5. Incremental Costs

2.1.6. Cash Costs Versus Book Costs

2.1.7. Life-Cycle Costs

2.2. Cost Estimating

2.2.1. Types of Estimate

2.2.2. Difficulties in Estimation

2.3. Estimating Models

2.3.1. Per-Unit Model

2.3.2. Segmenting Model

2.3.3. Cost Indexes

2.3.4. Power-Sizing Model

2.3.5. Triangulation

2.3.6. Improvement and the Learning Curve

2.4. Estimating Benefits

2.5. Cash Flow Diagrams

2.5.1. Categories of Cash Flows

2.5.2. Drawing a Cash Flow Diagram

2.5.3. Drawing Cash Flow Diagrams with a Spreadsheet

**3. INTEREST AND EQUIVALENCE **

3.1. Computing Cash Flows

3.2. Time Value of Money

3.2.1. Simple Interest

3.2.2. Compound Interest

3.2.3. Repaying a Debt

3.3. Equivalence

3.3.1. Difference in Repayment Plans

3.3.2. Equivalence Is Dependent on Interest Rate

3.3.3. Application of Equivalence Calculations

3.4. Single Payment Compound Interest Formulas

**4. MORE INTEREST FORMULAS **

4.1. Uniform Series Compound Interest Formulas

4.2. Relationships Between Compound Interest Factors

4.2.1. Single Payment

4.2.2. Uniform Series

4.3. Arithmetic Gradient

4.3.1. Derivation of Arithmetic Gradient Factors

4.4. Geometric Gradient

4.5. Nominal and Effective Interest

4.6. Continuous Compounding

4.6.1. Single Payment Interest Factors: Continuous Compounding

4.6.2. Uniform Payment Series: Continuous Compounding at Nominal Rate r per Period

4.6.3. Continuous, Uniform Cash Flow (One Period) with Continuous Compounding at Nominal Interest Rate r

4.7. Spreadsheets for Economic Analysis

4.7.1. Spreadsheet Annuity Functions

4.7.2. Spreadsheet Block Functions

4.7.3. Using Spreadsheets for Basic Graphing

**5. PRESENT WORTH ANALYSIS **

5.1. Assumptions in Solving Economic Analysis Problems

5.1.1. End-of-Year Convention

5.1.2. Viewpoint of Economic Analysis Studies

5.1.3. Sunk Costs

5.1.4. Borrowed Money Viewpoint

5.1.5. Effect of Inflation and Deflation

5.1.6. Income Taxes

5.2. Economic Criteria

5.3. Applying Present Worth Techniques

5.3.1. Useful Lives Equal the Analysis Period

5.3.2. Useful Lives Different from the Analysis Period

5.3.3. Infinite Analysis Period: Capitalized Cost

5.3.4. Multiple Alternatives

5.4. Spreadsheets and Present Worth

**6. ANNUAL CASH FLOW ANALYSIS **

6.1. Annual Cash Flow Calculations

6.1.1. Resolving a Present Cost to an Annual Cost

6.1.2. Treatment of Salvage Value

6.2. Annual Cash Flow Analysis

6.3. Analysis Period

6.3.1. Analysis Period Equal to Alternative Lives

6.3.2. Analysis Period a Common Multiple of Alternative Lives

6.3.3. Analysis Period for a Continuing Requirement

6.3.4. Infinite Analysis Period

6.3.5. Some Other Analysis Period

6.4. Using Spreadsheets to Analyze Loans

6.4.1. Building an Amortization Schedule

6.4.2. How Much to Interest? How Much to Principal?

6.4.3. Finding the Balance Due on a Loan

6.4.4. Pay Off Debt Sooner by Increasing Payments

**7. RATE OF RETURN ANALYSIS **

7.1. Internal Rate of Return

7.2. Calculating Rate of Return

7.2.1. Plot of NPW versus Interest Rate i

7.3. Rate of Return Analysis

7.3.1. Present Worth Analysis

7.3.2. Analysis Period

7.4. Spreadsheets and Rate of Return Analysis

Appendix 7A: Difficulties in Solving for an Interest Rate

**8. INCREMENTAL ANALYSIS **

8.1. Graphical Solutions

8.2. Incremental Rate of Return Analysis

8.3. Elements in Incremental Rate of Return Analysis

8.3.1. Incremental Analysis with Unlimited Alternatives

8.4. Present Worth Analysis with Benefit-Cost Graphs

8.5. Choosing an Analysis Method

8.6. Spreadsheets and Incremental Analysis

**9. OTHER ANALYSIS TECHNIQUES **

9.1. Future Worth Analysis

9.2. Benefit-Cost Ratio Analysis

9.2.1. Continuous Alternatives

9.3. Payback Period

9.4. Sensitivity and Breakeven Analysis

9.5. Graphing with Spreadsheets for Sensitivity and Breakeven Analysis

**10. UNCERTAINTY IN FUTURE EVENTS **

10.1. Estimates and Their Use in Economic Analysis

10.2. A Range of Estimates

10.3. Probability

10.4. Joint Probability Distributions

10.5. Expected Value

10.6. Economic Decision Trees

10.7. Risk

10.8. Risk Versus Return

10.9. Simulation

**11. DEPRECIATION **

11.1. Basic Aspects of Depreciation

11.1.1. Deterioration and Obsolescence

11.1.2. Depreciation and Expenses

11.1.3. Types of Property

11.1.4. Depreciation Calculation Fundamentals

11.2. Historical Depreciation Methods

11.2.1. Straight-Line Depreciation

11.2.2. Sum-of-Years'-Digits Depreciation

11.2.3. Declining Balance Depreciation

11.3. Modified Accelerated Cost Recovery System (MACRS)

11.3.1. Cost Basis and Placed-in-Service Date

11.3.2. Property Class and Recovery Period

11.3.3. Percentage Tables

11.3.4. Where MACRS Percentage Rates (rt) Come From

11.3.5. MACRS Method Examples

11.3.6. Comparing MACRS and Historical Methods

11.4. Depreciation and Asset Disposal

11.5. Unit-of-Production Depreciation

11.6. Depletion

11.6.1. Cost Depletion

11.6.2. Percentage Depletion

11.7. Spreadsheets and Depreciation

11.7.1. Using VDB for MACRS

**12. INCOME TAXES **

12.1. A Partner in the Business.

12.2. Calculation of Taxable Income

12.2.1. Taxable Income of Individuals

12.2.2. Classification of Business Expenditures

12.2.3. Taxable Income of Business Firms

12.3. Income Tax Rates

12.3.1. Individual Tax Rates

12.3.2. Corporate Tax Rates

12.3.3. Combined Federal and State Income Taxes

12.3.4. Selecting an Income Tax Rate for Economy Studies

12.4. Economic Analysis Taking Income Taxes into Account

12.5. Capital Gains and Losses for Nondepreciated Assets

12.5.1. Investment Tax Credit

12.6. Estimating the After-Tax Rate of Return

12.7. After-Tax Cash Flows and Spreadsheets

**13. REPLACEMENT ANALYSIS **

13.1. The Replacement Problem

13.2. Replacement Analysis Decision Maps

13.3. What Is the Basic Comparison?

13.3.1. Minimum Cost Life of the Challenger

13.3.2. Use of Marginal Cost Data

13.3.3. Lowest EUAC of the Defender

13.3.4. No Defender Marginal Cost Data Available

13.3.5. Repeatability Assumptions Not Acceptable

13.3.6. A Closer Look at Future Challengers

13.4. After-Tax Replacement Analysis

13.4.1. Marginal Costs on an After-Tax Basis

13.4.2. After-Tax Cash Flows for the Challenger

13.4.3. After-Tax Cash Flows for the Defender

13.4.4. Minimum Cost Life Problems

13.5. Spreadsheets and Replacement Analysis

**14. INFLATION AND PRICE CHANGE **

14.1. Meaning and Effect of Inflation

14.1.1. How Does Inflation Happen?

14.1.2. Definitions for Considering Inflation in Engineering Economy

14.2. Analysis in Constant Dollars Versus Then-Current Dollars

14.3. Price Change with Indexes

14.3.1. What Is a Price Index?

14.3.2. Composite Versus Commodity Indexes

14.3.3. How to Use Price Indexes in Engineering Economic Analysis

14.4. Cash Flows That Inflate at Different Rates

14.5. Different Inflation Rates per Period

14.6. Inflation Effect on After-Tax Calculations

14.7. Using Spreadsheets for Inflation Calculations

**15. SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN **

15.1. Sources of Capital

15.1.1. Money Generated from the Operation of the Firm

15.1.2. External Sources of Money

15.1.3. Choice of Source of Funds

15.2. Cost of Funds

15.2.1. Cost of Borrowed Money

15.2.2. Cost of Capital

15.3. Investment Opportunities

15.3.1. Opportunity Cost

15.4. Selecting a Minimum Attractive Rate of Return

15.5. Adjusting MARR to Account for Risk and Uncertainty

15.5.1. Inflation and the Cost of Borrowed Money

15.6. Representative Values of MARR Used in Industry

15.6.1. Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital

**16. ECONOMIC ANALYSIS IN THE PUBLIC SECTOR **

16.1. Investment Objective

16.2. Viewpoint for Analysis

16.3. Selecting an Interest Rate

16.3.1. No Time-Value-of-Money Concept

16.3.2. Cost of Capital Concept

16.3.3. Opportunity Cost Concept

16.3.4. Recommended Concept

16.4. The Benefit-Cost Ratio

16.5. Incremental Benefit-Cost Analysis

16.5.1. Elements of the Incremental Benefit-Cost Ratio Method

16.6. Other Effects of Public Projects

16.6.1. Project Financing

16.6.2. Project Duration

16.6.3. Project Politics

**17. RATIONING CAPITAL AMONG COMPETING PROJECTS **

17.1. Capital Expenditure Project Proposals

17.1.1. Mutually Exclusive Alternatives and Single Project Proposals

17.1.2. Identifying and Rejecting Unattractive Alternatives

17.1.3. Selecting the Best Alternative from Each Project Proposal

17.2. Rationing Capital by Rate of Return

17.2.1. Significance of the Cutoff Rate of Return

17.3. Rationing Capital by Present Worth Methods

17.4. Ranking Project Proposals

**18. ACCOUNTING AND ENGINEERING ECONOMY **

18.1. The Role of Accounting

18.1.1. Accounting for Business Transactions

18.2. The Balance Sheet

18.2.1. Assets

18.2.2. Liabilities

18.2.3. Equity

18.2.4. Financial Ratios Derived from Balance Sheet Data

18.3. The Income Statement

18.3.1. Financial Ratios Derived from Income Statement Data

18.3.2. Linking the Balance Sheet, Income Statement, and Capital Transactions

18.4. Traditional Cost Accounting

18.4.1. Direct and Indirect Costs

18.4.2. Indirect Cost Allocation

18.4.3. Problems with Traditional Cost Accounting

18.4.4. Other Problems to Watch For

Appendix A: Introduction to Spreadsheets