Engineering Economic Analysis CD-ROM included containing Interactive Tutorials, Excel® Spreadsheets & Interest Tables

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

• ISBN13: 9780195168075
• ISBN10: 0195168070
• Edition: 9th
• Format: Hardcover
• Copyright: 2004-02-26
• Publisher: Oxford University Press

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. Enhanced Student Support Packaged with every copy of the text: ·Study Guide, by Edward Wheeler ·CD featuring interactive Excel® spreadsheets and tutorials Enhanced Instructor Support ·CD containing exam files by Meenakshi Sundaram, Excel® spreadsheets, and PowerPoint® slides ·Solutions Manual

Author Biography

DONALD G. NEWNAN, Ph.D., P.E., is Professor Emeritus at San Jose State University. TED G. ESCHENBACH, Ph.D., P.E., is a consultant and Professor Emeritus of Engineering Management at the University of Alaska Anchorage. He is the author of Engineering Economy: Applying Theory to Practice, 2/e (OUP, 2003). JEROME P. LAVELLE, Ph.D., is Assistant Dean in the College of Engineering and Associate Professor of Industrial Engineering at North Carolina State University.

Table of Contents

Preface	xvii
Making Economic Decisions
A Sea of Problems	4	(1)
Simple Problems	4	(1)
Intermediate Problems	4	(1)
Complex Problems	4	(1)
The Role of Engineering Economic Analysis	5	(1)
Examples of Engineering Economic Analysis	5	(1)
The Decision-Making Process	6	(9)
Rational Decision Making	6	(9)
Engineering Decision Making for Current Costs	15	(3)
Summary	18	(1)
Problems	19	(9)
Engineering Costs and Cost Estimating
Engineering Costs	28	(10)
Fixed, Variable, Marginal, and Average Costs	28	(4)
Sunk Costs	32	(1)
Opportunity Costs	32	(2)
Recurring and Nonrecurring Costs	34	(1)
Incremental Costs	34	(1)
Cash Costs Versus Book Costs	35	(1)
Life-Cycle Costs	36	(2)
Cost Estimating	38	(3)
Types of Estimate	38	(1)
Difficulties in Estimation	39	(2)
Estimating Models	41	(9)
Per-Unit Model	41	(2)
Segmenting Model	43	(1)
Cost Indexes	44	(1)
Power-Sizing Model	45	(2)
Triangulation	47	(1)
Improvement and the Learning Curve	47	(3)
Estimating Benefits	50	(1)
Cash Flow Diagrams	50	(2)
Categories of Cash Flows	51	(1)
Drawing a Cash Flow Diagram	51	(1)
Drawing Cash Flow Diagrams with a Spreadsheet	52	(1)
Summary	52	(2)
Problems	54	(8)
Interest and Equivalence
Computing Cash Flows	62	(2)
Time Value of Money	64	(4)
Simple Interest	64	(1)
Compound Interest	65	(1)
Repaying a Debt	66	(2)
Equivalence	68	(5)
Difference in Repayment Plans	69	(2)
Equivalence Is Dependent on Interest Rate	71	(1)
Application of Equivalence Calculations	72	(1)
Single Payment Compound Interest Formulas	73	(8)
Summary	81	(1)
Problems	82	(4)
More Interest Formulas
Uniform Series Compound Interest Formulas	86	(11)
Relationships Between Compound Interest Factors	97	(1)
Single Payment	97	(1)
Uniform Series	97	(1)
Arithmetic Gradient	98	(7)
Derivation of Arithmetic Gradient Factors	99	(6)
Geometric Gradient	105	(4)
Nominal and Effective Interest	109	(6)
Continuous Compounding	115	(7)
Single Payment Interest Factors: Continuous Compounding	116	(2)
Uniform Payment Series: Continuous Compounding at Nominal Rate per Period	118	(2)
Continuous Uniform Cash Flow (One Period) with Continuous Compounding at Nominal Interest Rate r	120	(2)
Spreadsheets for Economic Analysis	122	(4)
Spreadsheet Annuity Functions	122	(1)
Spreadsheet Block Functions	123	(1)
Using Spreadsheets for Basic Graphing	124	(2)
Summary	126	(3)
Problems	129	(15)
Present Worth Analysis
Assumptions in Solving Economic Analysis Problems	144	(2)
End-of-Year Convention	144	(1)
Viewpoint of Economic Analysis Studies	145	(1)
Sunk Costs	145	(1)
Borrowed Money Viewpoint	145	(1)
Effect of Inflation and Deflation	145	(1)
Income Taxes	146	(1)
Economic Criteria	146	(1)
Applying Present Worth Techniques	147	(15)
Useful Lives Equal the Analysis Period	147	(4)
Useful Lives Different from the Analysis Period	151	(3)
Infinite Analysis Period: Capitalized Cost	154	(4)
Multiple Alternatives	158	(4)
Spreadsheets and Present Worth	162	(2)
Summary	164	(1)
Problems	165	(13)
Annual Cash Flow Analysis
Annual Cash Flow Calculations	178	(4)
Resolving a Present Cost to an Annual Cost	178	(1)
Treatment of Salvage Value	178	(4)
Annual Cash Flow Analysis	182	(2)
Analysis Period	184	(6)
Analysis Period Equal to Alternative Lives	186	(1)
Analysis Period a Common Multiple of Alternative Lives	186	(1)
Analysis Period for a Continuing Requirement	186	(1)
Infinite Analysis Period	187	(1)
Some Other Analysis Period	188	(2)
Using Spreadsheets to Analyze Loans	190	(3)
Building an Amortization Schedule	190	(1)
How Much to Interest? How Much to Principal?	191	(1)
Finding the Balance Due on a Loan	191	(1)
Pay Off Debt Sooner by Increasing Payments	192	(1)
Summary	193	(1)
Problems	194	(10)
Rate of Return Analysis
Internal Rate of Return	204	(1)
Calculating Rate of Return	205	(7)
Plot of NPW versus Interest Rate i	209	(3)
Rate of Return Analysis	212	(8)
Present Worth Analysis	216	(3)
Analysis Period	219	(1)
Spreadsheets and Rate of Return Analysis	220	(1)
Summary	221	(1)
Problems	222	(7)
Appendix 7A Difficulties in Solving for an Interest Rate	229	(17)
Incremental Analysis
Graphical Solutions	246	(6)
Incremental Rate of Return Analysis	252	(5)
Elements in Incremental Rate of Return Analysis	257	(3)
Incremental Analysis with Unlimited Alternatives	258	(2)
Present Worth Analysis with Benefit--Cost Graphs	260	(1)
Choosing an Analysis Method	261	(1)
Spreadsheets and Incremental Analysis	262	(1)
Summary	263	(1)
Problems	264	(8)
Other Analysis Techniques
Future Worth Analysis	272	(2)
Benefit--Cost Ratio Analysis	274	(6)
Continuous Alternatives	279	(1)
Payback Period	280	(5)
Sensitivity and Breakeven Analysis	285	(4)
Graphing with Spreadsheets for Sensitivity and Breakeven Analysis	289	(4)
Summary	293	(1)
Problems	293	(11)
Uncertainty in Future Events
Estimates and Their Use in Economic Analysis	304	(2)
A Range of Estimates	306	(2)
Probability	308	(3)
Joint Probability Distributions	311	(2)
Expected Value	313	(3)
Economic Decision Trees	316	(6)
Risk	322	(2)
Risk Versus Return	324	(2)
Simulation	326	(4)
Summary	330	(1)
Problems	330	(8)
Depreciation
Basic Aspects of Depreciation	338	(4)
Deterioration and Obsolescence	338	(1)
Depreciation and Expenses	339	(1)
Types of Property	340	(1)
Depreciation Calculation Fundamentals	341	(1)
Historical Depreciation Methods	342	(5)
Straight-Line Depreciation	342	(2)
Sum-of-Years'-Digits Depreciation	344	(2)
Declining Balance Depreciation	346	(1)
Modified Accelerated Cost Recovery System (MACRS)	347	(9)
Cost Basis and Placed-in-Service Date	348	(1)
Property Class and Recovery Period	348	(1)
Percentage Tables	349	(2)
Where Macrs Percentage Rates (rt) Come From	351	(2)
Macrs Method Examples	353	(2)
Comparing Macrs and Historical Methods	355	(1)
Depreciation and Asset Disposal	356	(3)
Unit-of-Production Depreciation	359	(1)
Depletion	360	(2)
Cost Depletion	360	(1)
Percentage Depletion	361	(1)
Spreadsheets and Depreciation	362	(2)
Using VDB for Macrs	363	(1)
Summary	364	(1)
Problems	365	(7)
Income Taxes
A Partner in the Business	372	(1)
Calculation of Taxable Income	372	(3)
Taxable Income of Individuals	372	(1)
Classification of Business Expenditures	373	(1)
Taxable Income of Business Firms	374	(1)
Income Tax Rates	375	(5)
Individual Tax Rates	375	(2)
Corporate Tax Rates	377	(2)
Combined Federal and State Income Taxes	379	(1)
Selecting an Income Tax Rate for Economy Studies	380	(1)
Economic Analysis Taking Income Taxes into Account	380	(4)
Capital Gains and Losses for Nondepreciated Assets	384	(1)
Investment Tax Credit	384	(1)
Estimating the After-Tax Rate of Return	385	(1)
After-Tax Cash Flows and Spreadsheets	385	(1)
Summary	386	(1)
Problems	387	(13)
Replacement Analysis
The Replacement Problem	400	(1)
Replacement Analysis Decision Maps	401	(1)
What Is the Basic Comparison?	401	(19)
Minimum Cost Life of the Challenger	402	(2)
Use of Marginal Cost Data	404	(7)
Lowest EUAC of the Defender	411	(4)
No Defender Marginal Cost Data Available	415	(3)
Repeatability Assumptions Not Acceptable	418	(1)
A Closer Look at Future Challengers	419	(1)
After-Tax Replacement Analysis	420	(9)
Marginal Costs on an After-Tax Basis	420	(2)
After-Tax Cash Flows for the Challenger	422	(1)
After-Tax Cash Flows for the Defender	422	(5)
Minimum Cost Life Problems	427	(2)
Spreadsheets and Replacement Analysis	429	(1)
Summary	429	(2)
Problems	431	(9)
Inflation and Price Change
Meaning and Effect of Inflation	440	(8)
How Does Inflation Happen?	440	(1)
Definitions for Considering Inflation in Engineering Economy	441	(7)
Analysis in Constant Dollars Versus Then-Current Dollars	448	(2)
Price Change with Indexes	450	(6)
What Is a Price Index?	450	(3)
Composite Versus Commodity Indexes	453	(3)
How to Use Price Indexes in Engineering Economic Analysis	456	(1)
Cash Flows That Inflate at Different Rates	456	(2)
Different Inflation Rates per Period	458	(2)
Inflation Effect on After-Tax Calculations	460	(2)
Using Spreadsheets for Inflation Calculations	462	(2)
Summary	464	(1)
Problems	465	(9)
Selection of a Minimum Attractive Rate of Return
Sources of Capital	474	(1)
Money Generated from the Operation of the Firm	474	(1)
External Sources of Money	474	(1)
Choice of Source of Funds	474	(1)
Cost of Funds	475	(1)
Cost of Borrowed Money	475	(1)
Cost of Capital	475	(1)
Investment Opportunities	476	(3)
Opportunity Cost	476	(3)
Selecting a Minimum Attractive Rate of Return	479	(1)
Adjusting MARR to Account for Risk and Uncertainty	479	(3)
Inflation and the Cost of Borrowed Money	481	(1)
Representative Values of MARR Used in Industry	482	(3)
Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital	483	(2)
Summary	485	(1)
Problems	485	(5)
Economic Analysis in the Public Sector
Investment Objective	490	(2)
Viewpoint for Analysis	492	(1)
Selecting an Interest Rate	493	(3)
No Time-Value-of-Money Concept	494	(1)
Cost of Capital Concept	494	(1)
Opportunity Cost Concept	494	(1)
Recommended Concept	495	(1)
The Benefit--Cost Ratio	496	(2)
Incremental Benefit--Cost Analysis	498	(7)
Elements of the Incremental Benefit--Cost Ratio Method	499	(6)
Other Effects of Public Projects	505	(4)
Project Financing	505	(1)
Project Duration	506	(1)
Project Politics	507	(2)
Summary	509	(1)
Problems	510	(8)
Rationing Capital Among Competing Projects
Capital Expenditure Project Proposals	518	(3)
Mutually Exclusive Alternatives and Single Project Proposals	519	(1)
Identifying and Rejecting Unattractive Alternatives	520	(1)
Selecting the Best Alternative from Each Project Proposal	521	(1)
Rationing Capital by Rate of Return	521	(3)
Significance of the Cutoff Rate of Return	523	(1)
Rationing Capital by Present Worth Methods	524	(6)
Ranking Project Proposals	530	(2)
Summary	532	(1)
Problems	533	(7)
Accounting and Engineering Economy
The Role of Accounting	540	(1)
Accounting for Business Transactions	540	(1)
The Balance Sheet	541	(3)
Assets	541	(1)
Liabilities	542	(1)
Equity	543	(1)
Financial Ratios Derived from Balance Sheet Data	543	(1)
The Income Statement	544	(3)
Financial Ratios Derived from Income Statement Data	546	(1)
Linking the Balance Sheet, Income Statement, and Capital Transactions	546	(1)
Traditional Cost Accounting	547	(4)
Direct and Indirect Costs	548	(1)
Indirect Cost Allocation	548	(1)
Problems with Traditional Cost Accounting	549	(1)
Other Problems to Watch For	550	(1)
Problems	551	(3)
Appendix A Introduction to Spreadsheets	554	(5)
The Elements of a Spreadsheet	554	(1)
Defining Variables in a Data Block	555	(1)
Copy Command	555	(4)
Appendix B Compound Interest Tables	559	(32)
Reference	591	(2)
Index	593