Engineering Economic Analysis

by Newnan, Donald G.; Lavelle, Jerome P.; Eschenbach, Ted G.

• ISBN13: 9781576450536
• ISBN10: 1576450538
• Edition: 8th
• Format: Hardcover
• Copyright: 2000-06-08
• Publisher: Oxford University Press

Summary

Highly regarded by professors and students alike , Engineering Economic Analysis, Eighth Edition , introduces the fundamental concepts of engineering economics. Written for standard engineering economics courses, this bestselling volume by Donald G. Newnan, Jerome P. Lavelle, and Ted G. Eschenbach covers essential time value of money principles for engineering projects and isolates the problems and decisions engineers commonly face. It also examines the tools necessary to properly analyze and solve those problems. Revised in 2000, the eighth edition focuses on the use of spreadsheets, teaching students to use the enormous capabilities of modern software, rather than relying on spreadsheet templates. The majority of the chapters conclude with sections designed to help students create spreadsheets based on the material covered in each chapter. The book's organization gives professors the flexibility to omit spreadsheet instruction without loss of continuity (accommodating shorter courses) or to require that all computations be done with spreadsheets, thus preparing students to use this essential tool for real-life problems.

Table of Contents

Compound Interest Equations
Economic Criteria
Preface	ix
Making Economic Decisions	1	(30)
A Sea Of Problems	1	(1)
Simple Problems
Intermediate Problems
Complex Problems
The Role Of Engineering Economic Analysis	2	(2)
Examples of Engineering Economic Analysis
The Decision Making Process	4	(10)
Rational Decision Making: Recognize problem
Define the goals
Assemble relevant data
Identify feasible alternatives
Select the criterion
Construct a model
Predict each alternative's outcomes
Choose the best alternative
Audit the results
Engineering Decision Making	14	(4)
Summary	18	(1)
Problems	19	(12)
Engineering Costs and Cost Estimating	31	(42)
Engineering Costs
Fixed
Variable
Marginal
and Average Costs
Sunk Costs
Opportunity Costs
Recurring and Non-recurring Costs
Incremental Costs
Cash Costs versus Book Costs
Life-cycle Costs
Cost Estimating	43	(3)
Types of Estimates
Difficulties in Estimation
One-of-a-Kind Estimates
Time and effort available
Estimator expertise
Estimating Models	46	(10)
Per Unit Model
Segmenting Model
Cost Indexes
Power Sizing Model
Triangulation
Improvement and the Learning Curve
Estimating Benefits	56	(1)
Cash Flow Diagrams	57	(3)
Categories of Cash Flows
Drawing a Cash Flow Diagram
Drawing a Cash Flow Diagram with a Spreadsheet
Summary	60	(1)
Problems	61	(12)
Interest and Equivalence	73	(24)
Computing Cash Flows	73	(2)
Time Value of Money	75	(1)
Simple Interest	76	(3)
Repaying a Debt
Equivalence	79	(6)
Difference in Repayment Plans
Equivalence is Dependent on Interest Rate
Application of Equivalence Calculations
Single Payment Compound Interest	85	(8)
Summary	93	(1)
Problems	94	(3)
More Interest Formulas	97	(70)
Uniform Series Compound Interest Formulas	97	(11)
Relationships Between Compound Interest Factors	108	(2)
Single Payment
Uniform Series
Arithmetic Gradient	110	(8)
Derivation of Arithmetic Gradient Factors
Geometric Gradient	118	(4)
Nominal And Effective Interest	122	(7)
Continuous Compounding	129	(7)
Single Payment Interest Factors
Uniform Payment Series
Continuous
Uniform Cash Flow
Spreadsheets for Economic Analysis	136	(5)
Spreadsheet Annuity Functions
Spreadsheet Block Functions Basic Graphing Using Spreadsheets
Summary	141	(4)
Problems	145	(22)
Present Worth Analysis	167	(40)
Economic Criteria	167	(1)
Applying Present Worth Techniques	168	(15)
Useful Lives Equal the Analysis Period
Net Present Worth Useful Lives Different from the Analysis Period
Infinite Analysis Period-Capitalized Cost
Multiple Alternatives
Assumptions In Solving Economic Analysis Problems	183	(5)
End-of-year Convention
Viewpoint of Economic Analysis Studies
Sunk Costs
Borrowed Money Viewpoint
Effect of Inflation and Deflation
Income taxes
Spreadsheets and Present Worth
Summary	188	(1)
Problems	189	(18)
Annual Cash Flow Analysis	207	(34)
Annual Cash Flow Calculations	207	(5)
Resolving a Present Cost to an Annual Cost
Treatment of Salvage Value
Annual Cash Flow Analysis	212	(3)
Analysis Period	215	(6)
Analysis Period Equal to Alternative Lives
Analysis Period a Common Multiple of Alternative Lives
Analysis Period for a Continuing Requirement
Infinite Analysis Period
Some Other Analysis Period
Using Spreadsheets to Analyze Loans	221	(4)
Building an Amortization Schedule
How Much to Interest? How Much to Principal?
Finding the Balance Due on a Loan
Payoff Debt Sooner by Increasing Payments
Summary	225	(1)
Problems	226	(15)
Rate Of Return Analysis	241	(34)
Internal Rate Of Return	241	(2)
Calculating Rate Of Return	243	(7)
Plot of NPW vs. Interest Rate i
Rate Of Return Analysis	250	(10)
Analysis Period
Spreadsheets and Rate of Return Analysis
Summary	260	(2)
Problems	262	(13)
Difficulties Solving For An Interest Rate	275	(20)
Converting a Cash Flow to a Mathematical Equation
Cash Flow Rule Of Signs	278	(5)
Zero Sign Changes
One Sign Change
Two or More Sign Changes
What the Difficulties Mean
External Interest Rate	283	(3)
Resolving Multiple Rate of Return Problems
A Further Look at the Computation of Rate of Return
Summary	286	(1)
Problems	287	(8)
Incremental Analysis	295	(32)
Graphical Solutions	295	(9)
Incremental Rate Of Return Analysis	304	(5)
Elements In Incremental Rate Of Return Analysis	309	(3)
Incremental Analysis Where There are Unlimited Alternatives
Present Worth Analysis with Benefit-Cost Graphs	312	(1)
Choosing An Analysis Method	313	(1)
Spreadsheets and Incremental Analysis	314	(1)
Summary	315	(1)
Problems	316	(11)
Other Analysis Techniques	327	(38)
Future Worth Analysis	328	(2)
Benefit-Cost Ratio Analysis	330	(7)
Continuous Alternatives
Payback Period	337	(5)
Sensitivity And Break-even Analysis	342	(8)
Graphing with Spreadsheets for Sensitivity and Breakeven Analysis	347	(3)
Summary	350	(1)
Problems	351	(14)
Depreciation	365	(40)
Basic Aspects Of Depreciation	365	(4)
Deterioration and Obsolescence
Depreciation and Expenses
Types of Property
Depreciation Calculation Fundamentals
Historical Depreciation Methods	369	(7)
Straight Line Depreciation
Sum-Of-Years Digits Depreciation
Declining Balance Depreciation
Modified Accelerated Cost Recovery System Depreciation	376	(10)
Cost Basis and Placed in Service Date
Property Class and Recovery Period
Percentage Tables
Where MACRS Percentage Rates Come From
MACRS Method Examples
Comparing MACRS and Historical Methods
Depletion and Asset Disposal	386	(3)
Unit of Production Depreciation	389	(1)
Depletion	390	(3)
Cost Depletion
Percentage Depletion
Spreadsheets and Depreciation	393	(2)
Summary	395	(1)
Problems	396	(9)
Income Taxes	405	(34)
A Partner In The Business	405	(1)
Calculation Of Taxable Income	406	(3)
Taxable Income of Individuals
Classification of Business Expenditures
Taxable Income of Business Firms
Income Tax Rates	409	(5)
Individual Tax Rates
Corporate Tax Rates
Combined Federal and State Income Taxes
Selecting an Income Tax Rate for Economic Studies
Economic Analysis Taking Income Taxes Into Account	414	(3)
Capital Gains And Losses For Non-depreciable Assets	417	(2)
Investment Tax Credit
Estimating The After-Tax Rate Of Return	419	(1)
Summary	419	(1)
Problems	420	(19)
Replacement Analysis	439	(44)
The Replacement Problem	440	(1)
Replacement Analysis Decision Map	441	(1)
What Is The Basic Comparison	442	(21)
Minimum Cost Life of the Challenger
Use of Marginal Cost Data Replacement Analysis Technique #1
Minimum Cost Life of the Defender
Replacement Analysis Technique #2
No Defender Marginal Cost Data Available
Replacement Analysis Technique #3 Repeatability Assumptions not Acceptable
A Closer Look at Future Challengers
After-Tax Replacement Analysis	463	(8)
Marginal Costs on an After-Tax Basis
After-Tax Cash Flows for the Challenger
After-Tax Cash Flows for the Defender
Minimum Cost Life Problems
Spreadsheets and After-Tax Replacement Analysis	471	(1)
Summary	472	(2)
Problems	474	(9)
Inflation And Price Change	483	(36)
Meaning And Effect Of Inflation	483	(9)
How Does Inflation Happen?
Definitions for Considering Inflation in Engineering Economy
Constant Dollar Versus Then-Current Dollar Analysis	492	(2)
Price Change with Indexes	494	(6)
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	500	(2)
Different Inflation Rates Per Period	502	(2)
Inflation Effect On After-Tax Considerations	504	(2)
Using Spreadsheets for Inflation Calculations	506	(3)
Summary	509	(1)
Problems	510	(9)
Estimation Of Future Events	519	(38)
Precise Estimates	519	(3)
A Range Of Estimates	522	(2)
Probability And Risk	524	(2)
Expected Value	526	(5)
Distribution Of Outcomes	531	(11)
Uniform Distribution
Normal Distribution
Sampling from Any Distribution using Random Numbers
Simulation	542	(7)
Simulation with Spreadsheets
Summary	549	(1)
Problems	550	(7)
Selection Of A Minimum Attractive Rate Of Return	557	(18)
Sources Of Capital	557	(1)
Money Generated from the Operation of the Firm
External Money Sources
Choice of Source of Funds
Cost Of Funds	558	(2)
Cost of Borrowed Money
Cost of Capital
Investment Opportunities	560	(3)
Opportunity Cost
Selecting A Minimum Attractive Rate Of Return	563	(1)
Adjusting MARR To Account For Risk And Uncertainty Inflation and the Cost of Borrowed Money	564	(3)
Opportunity Cost
Representative Values Of MARR Used In Industry	567	(1)
Spreadsheets, Cumulative Investments, and the Opportunity Cost	568	(2)
Summary	570	(1)
Problems	571	(4)
Economic Analysis In The Public Sector	575	(30)
Investment Objective	576	(1)
Viewpoint For Analysis	577	(2)
Selecting An Interest Rate	579	(2)
The Benefit-Cost Ratio	581	(4)
Incremental Benefit-Cost Analysis	585	(7)
Elements of the Incremental Benefit-Cost Ratio Method
Other Effects Of Public Projects	592	(5)
Project Financing
Project Duration
Project Politics
Summary	597	(1)
Problems	598	(7)
Rationing Capital Among Competing Projects	605	(26)
Capital Expenditure Project Proposals	606	(4)
Mutually Exclusive Alternatives and Single Project Proposals
Identifying and Rejecting Unattractive Alternatives
Selecting the Best Alternative from Each Project Proposal
Rationing Capital By Rate Of Return	610	(2)
Significance of the Cutoff Rate of Return
Rationing Capital By Present Worth Methods	612	(7)
Ranking Project Proposals	619	(2)
Summary	621	(1)
Problems	622	(9)
A Further Look At Rate Of Return	631	(22)
Cash Flow Situations	632	(1)
Analysis Of A Cash Flow As An Investment Situation	633	(16)
Cash Flow Rule of Signs
Accumulated Cash Flow Sign Test
Algebraic Sum of the Cash Flow
Net Investment Conditions Application of the Four Tests of a Cash Flow
Summary	649	(1)
Problems	650	(3)
References	653	(2)
Index	655	(8)
Compound Interest Tables	663
Discrete End-Of-Period Compounding	663
Values Of Interest Factors When N Equals Infinity	663