Engineering Economy: Applying Theory to Practice

Note: Each chapter concludes with a Summary. PART I. BASIC CONCEPTS AND TOOLS CHAPTER 1. MAKING ECONOMIC DECISIONS 1.1. What Is Engineering Economy 1.2. Principles for Decision Making 1.3. The Decision Making Process 1.4. The Environment for Decisions 1.5. The Role of Engineering Economy 1.6. Operational Economics CHAPTER 2. THE TIME VALUE OF MONEY 2.1. What is Interest? 2.2. Simple vs. Compound Interest 2.3. Cash Flow Diagrams 2.4. Equivalence for 4 loans 2.5. Limits on Equivalence 2.6. Compounding Periods Shorter than a Year CHAPTER 3. EQUIVALENCE-A FACTOR APPROACH 3.1. Definitions and Assumptions 3.2. Tables of Engineering Economy Factors 3.3. Single Payment Factors (Ps and Fs) 3.4. Uniform Flows 3.5. Combining Factors 3.6. Arithmetic Gradients 3.7. Geometric Gradients Appendix 3A: Continuous Flow and Continuous Compounding CHAPTER 4. SPREADSHEETS AND ECONOMIC ANALYSIS 4.1. Using Spreadsheets for Economic Analysis 4.2. Spreadsheet Modeling 4.3. Financial Functions in Spreadsheets 4.4. Examples Show Spreadsheet Can Be More Realistic 4.5. Using Spreadsheets to Get a Project Funded PART TWO: ANALYZING A PROJECT CHAPTER 5. PRESENT WORTH 5.1. The Present Worth Measure 5.2. Examples of When to Use Present Worth 5.3 Rolling Back Irregular Cash Flows for PW Calculations 5.4. Salvage Values 5.5. Capitalized Cost and Perpetual Life 5.6. Staged Projects 5.7 Cost of Underutilized Capacity 5.8. Spreadsheets and Shorter Periods 5.9. Spreadsheets and More Exact Models CHAPTER 6. EQUIVALENT ANNUAL WORTH 6.1. The Equivalent Annual Worth Measure 6.2. Assumptions and Sign Conventions 6.3. Examples of Annual Evaluations 6.4. Finding the EAC of Irregular Cash Flows 6.5. EAC Formulas for Salvage Values and Working Capital 6.6. Perpetual Life 6.7. Repeated Renewals 6.8. Spreadsheets and Analyzing Loan Repayments CHAPTER 7. RATE OF RETURN 7.1. The Internal Rate of Return 7.2. Assumptions 7.3. Finding the IRR 7.4. Loans and Leases 7.5. Spreadsheets and the IRR 7.6. Multiple Sign Changes 7.7. Project Balances over Time 7.8. Modified Internal Rate of Return (MIRR) CHAPTER 8. BENEFIT/COST RATIOS AND OTHER MEASURES 8.1. Measures of Economic Attractiveness 8.2. Benefit/Cost Ratio 8.3. Present Worth Indexes 8.4. Future Worth 8.5. Payback Period 8.6. Discounted Payback 8.7. Breakeven Volume PART THREE: COMPARING ALTERNATIVES AND PROJECTS Introduction to mutually exclusive and constrained budget problems CHAPTER 9. MUTUALLY EXCLUSIVE ALTERNATIVES 9.1. Applying Engineering Economy to Engineering Design 9.2. Key Assumption Is the Interest Rate or Minimum 9.3. Comparing Alternatives with Lives of the Same Length 9.4. PWs and Explicitly Comparing Different-Length Lives 9.5. EAWs and EACs and Implicity Comparing Different-Length Lives 9.6. Using EAC for Different-Length Lives Is a Robust Approach 9.7. B/C and IRR Comparisons of Mutually Exclusive Alternatives Require Incremental Analysis 9.8. Defender / Challenger Analysis 9.9. PW, EAW, and IRR Have the Same Reinvestment Assumption 9.10. Using Spreadsheet GOAL SEEK Tool to Calculate CHAPTER 10. REPLACEMENT ANALYSIS 10.1. Why Is Equipment Replaced, Retired, or Augmented? 10.2. Old and New Are Mutually Exclusive 10.3. Sunk Costs, Risks, and Cost Savings vs. Profit Making 10.4. Optimal Challengers 10.5. Optimal Defenders 10.6. Optimal Capacity Problems 10.7 Estimating Future Challengers 10.8. Replacement and Repair Models CHAPTER 11. CONSTRAINED PROJECT SELECTION 11.1. The Constrained Project Selection Problem 11.2. Ranking Projects 11.3. Determining the Minimum Attractive Rate of Return 11.4. A Theoretically Optimal Approach for Determining the Capital Budget 11.5. Capital Limits in the Real World 11.6. Matching Assumptions to the Real World 11.7. Present Worth Indexes and Benefit/Cost Ratios 11.8. Using the SORT Spreadsheet Tool Appendix 11A: Mathematical Programming and Spreadsheets PART FOUR: ENHANCEMENTS FOR THE REAL WORLD CHAPTER 12. DEPRECIATION 12.1. Introduction 12.2. Basic Depreciation Methods 12.3. Accelerated Cost Recovery 12.4. Gains and Losses on Sales and Recaptured Depreciation 12.5. Optimal Depreciation Strategies 12.6. PW of a Depreciation Schedule 12.7. Depletion of Resources 12.8. Section 179 Deduction 12.9. Spreadsheet Functions for Depreciation CHAPTER 13. INCOME TAXES 13.1. Principles of Income Taxes 13.2. Progressive Marginal Tax Rates 13.3. Finding Taxable Income when Including Depreciation 13.4. Calculating After-Fax Cash Flows and EACs using Tables or Spreadsheets 13.5. Calculating After-Tax Cash Flows and EACs using Formulas 13.6. Investment Tax Credits (ITC) and Capital Gains 13.7. Interest Deductions and an After-Tax IRR Appendix 13A: Personal Income Taxes CHAPTER 14. PUBLIC SECTOR ENGINEERING ECONOMY 14.1. Defining Benefits, Disbenefits, and Costs 14.2. Why are Public-Sector Problems Difficult? 14.3. Correct Methods and Interest Rates 14.4. Whose Point of View? 14.5. Allocating Costs to Benefit Recipients 14.6. Valuing the Benefits of Public Projects 14.7. Cost Effectiveness CHAPTER 15. INFLATION 15.1. Defining and Measuring Inflation and Deflation 15.2. Consistent Assumptions for Interest Rates and Cash Flow Estimates 15.3. Solving for PW or EAC when Including Inflation 15.4. Inflation Examples with Multiple Inflation Rates 15.5. LEASES AND OTHER PREPAID EXPENSES 15.6. Depreciation and Loan Payments 15.7. Inflation Calculations Based on the Equivalent Discount Rate PART FIVE: DECISION MAKING TOOLS CHAPTER 16. ESTIMATING CASH FLOWS 16.1. Introduction Early Project Decisions 16.2. Cash Flow Estimating and Life-Cycle Stages 16.3. Cash Flow Estimating Standards 16.4. Design Criteria and Specifications 16.5. Modeling the Base Case 16.6. Using Indexes for an Order-of-Magnitude Estimate 16.7. Using Capacity Functions for Order-of-Magnitude Estimates 16.8. Using Growth Curves 16.9. Using Learning Curves 16.10. Using Factor Estimates CHAPTER 17. SENSITIVITY ANALYSIS 17.1. What Is Sensitivity Analysis? 17.2. Uncertain Data and Its Impact 17.3. Techniques for Sensitivity Analysis 17.4. Spiderplots 17.5. Constructing a Spiderplot 17.6. Multiple Alternatives 17.7. Sensitivity Analysis with Multiple Variables CHAPTER 18. UNCERTAINTY AND PROBABILITY 18.1. Probabilities 18.2. Computing Expected Values 18.3. Choosing Alternatives Using Expected Values 18.4. Economic Decision Trees 18.5. Risk 18.6. Risk/Return Tradeoffs 18.7. Probability Distributions for Economic Outcomes CHAPTER 19. MULTIPLE OBJECTIVES 19.1. Multiple Attributes 19.2. The Process of Evaluating Multiple Objectives 19.3. Identifying the Attributes 19.4. Evaluating the Attributes 19.5. Graphical Techniques 19.6. Numerical Scales for Evaluation 19.7. Additive Models 19.8. Hierarchical Attributes and Objectives APPENDIXES A. ACCOUNTING A.1. The Role of Accounting A.2. General Accounting A.3. The Balance Sheet A.4. The Income Statement A.5. Traditional Cost Accounting A.6. Activity Based Costs (ABC) B. END-OF-PERIOD COMPOUND INTEREST TABLES