Table of Contents Chapter 1: MAKING ECONOMIC DECISIONS A Sea of Problems Simple Problems Intermediate 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 Chapter 2: ENGINEERING COSTS AND COST ESTIMATING Engineering Costs 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 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 Drawing Cash Flow Diagrams with a Spreadsheet Summary Problems Chapter 3: INTEREST AND EQUIVALENCE A Prescription for Success Computing Cash Flows Time Value of Money Simple Interest Compound Interest Repaying a Debt Equivalence Difference in Repayment Plans Equivalence Is Dependent on Interest Rate Single Payment Compound Interest Formulas Nominal and Effective Interest Continuous Compounding Single Payment Interest Factors: Continuous Compounding Summary Problems Chapter 4: EQUIVALENCE FOR REPEATED CASH FLOWS Uniform Series Compound Interest Formulas Expanded Factors as Calculator Functions Cash Flows that Do Not Match Basic Patterns Economic Equivalence Viewed as a Moment Diagram Relationships Between Compound Interest Factors Single Payment Uniform Series Arithmetic Gradient Derivation of Arithmetic Gradient Factors Reality and the Assumed Uniformity of A, G, and g. Geometric Gradient Compounding Period and Payment Period Differ Spreadsheets for Economic Analysis Spreadsheet Annuity Functions for Cash Flow Tables Spreadsheet Block Functions Using Spreadsheets for Basic Graphing Summary Problems Chapter 5: PRESENT WORTH ANALYSIS Assumptions in Solving Economic Analysis Problems 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 Bond Pricing Spreadsheets and Present Worth Summary Problems Chapter 6: ANNUAL CASH FLOW ANALYSIS Lowest Prices on the Net! Buy Now! Annual Cash Flow Calculations Resolving a Present Cost to an Annual Cost Treatment of Salvage Value Annual Cash Flow Analysis Analysis Period Analysis Period Equal to Alternative Lives Analysis Period a Common Multiple of Alternative Lives Analysis Period for a Continuing Requirement Infinite Analysis Period: Capitalized Cost Multiple Alternatives 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 Chapter 7: RATE OF RETURN ANALYSIS Bar Codes Give a Number; RFID Codes Tell A Story Internal Rate of Return Calculating Rate of Return Plot of NPW versus Interest Rate Interest Rates When There are Fees or Discounts Loans and Investments are Everywhere Incremental Analysis Present Worth Analysis Analysis Period Spreadsheets and Rate of Return Analysis Summary Problems Appendix 7A: Difficulties in Solving for an Interest Rate Why Multiple Solutions Can Occur Modified Internal Rate of Return (MIRR) Summary Problems Chapter 8: Choosing the Best Alternative Tapping Into Geometry Incremental Analysis Graphical Solutions Elements in Comparing Mutually Exclusive Alternatives Doing a Set of Incremental Challenger-Defender Comparisons Choosing an Analysis Method Spreadsheets and Goal Seek Summary Problems Chapter 9: OTHER ANALYSIS TECHNIQUES Clean, Green, and Far Between Future Worth Analysis Benefit-Cost Ratio Analysis Variations on the Theme of Benefit-Cost Ratio Payback Period Sensitivity and Breakeven Analysis Graphing with Spreadsheets for Sensitivity and Breakeven Analysis Doing What-If Analysis with Spreadsheets Summary Problems Chapter 10: UNCERTAINTY IN FUTURE EVENTS They Only Thought They Were Done Estimates and Their Use in Economic Analysis A Range of Estimates Probability Joint Probability Distributions Expected Value Economic Decision Trees Risk Risk Versus Return Simulation Real Options Summary Problems Chapter 11: DEPRECIATION Depreciation and Competitiveness Basic Aspects of Depreciation Deterioration and Obsolescence Depreciation and Expenses Types of Property 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 Rates (rt ) 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 Chapter 12: INCOME TAXES On With the Wind A Partner in the Business. Calculation of Taxable Income Taxable Income of Individuals Classification 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 Investment Tax Credit Estimating the After-Tax Rate of Return After-Tax Cash Flows and Spreadsheets Summary Problems Chapter 13: REPLACEMENT ANALYSIS The Replacement Problem Replacement Analysis Decision Map Minimum Cost Life of a New Asset --- the Challenger Do We Have Marginal Cost Data For the Defender? Are These Marginal Costs Increasing? Replacement Analysis Technique 1: Defender Marginal Costs Can Be Computed and Are Increasing Replacement Repeatability Assumptions Replacement Analysis Technique 2: Defender Marginal Costs Can Be Computed and Are Not Increasing Replacement Analysis Technique 3: When Defender Marginal Cost Data Are Not Available Complications in Replacement Analysis Defining Defender and Challenger First Costs Repeatability Assumptions Not Acceptable A Closer Look at Future Challengers After-Tax Replacement Analysis Marginal Costs on an After-Tax Basis Minimum Cost Life Problems Spreadsheets and Replacement Analysis Summary Problems Chapter 14: INFLATION AND PRICE CHANGE The Athabasca Oil Sands Meaning and Effect of Inflation How Does Inflation Happen? Definitions for Considering Inflation in Engineering Economy Analysis in Constant Dollars Versus Then-Current Dollars Price Change with Indexes What Is a Price Index? Composite Versus Commodity Indexes How to Use Price Indexes in Engineering Economic Analysis Cash Flows That Inflate at Different Rates Different Inflation Rates per Period Inflation Effect on After-Tax Calculations Using Spreadsheets for Inflation Calculations Summary Problems Chapter 15: SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN BP Goes to Russia Sources of Capital Money Generated from the Firm's Operation External Sources of Money Choice of Source of Funds Cost of Funds Cost of Borrowed Money Cost of Capital Inflation and the Cost of Borrowed Money Investment Opportunities Opportunity Cost Selecting a Minimum Attractive Rate of Return Adjusting MARR to Account for Risk and Uncertainty Representative Values of MARR Used in Industry Capital Budgeting or Selecting the Best Projects Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital Summary Problems Chapter 16: ECONOMIC ANALYSIS IN THE PUBLIC SECTOR From Waste to Power and Money Investment Objective 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 Elements of the Incremental Benefit-Cost Ratio Method Other Effects of Public Projects Project Financing Project Duration Quantifying and Valuing Benefits and Disbenefits Project Politics Summary Problems Chapter 17: ACCOUNTING AND ENGINEERING ECONOMY The Two Faces of ABB The Role of Accounting 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 Other Problems to Watch For Summary Problems Appendix A: Introduction to Spreadsheets The Elements of a Spreadsheet Defining Variables in a Data Block Copy Command Appendix B: Time Value of Money (TVM) Calculators Notation for TVM Calculators Examples with TVM Calculators and Tabulated Factors Problems Appendix C: Fundamentals of Engineering (FE) Examination Problems References Index