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• Half Title Page
• Title Page
• Copyright Page
• Contents
• Preface
• Half Title Page
• Part 1 Basics of Financial Decisions
• Chapter 1 Engineering Economic Decisions
• 1.1 Role of Engineers in Business
• 1.1.1 Types of Business Organization
• 1.1.2 Engineering Economic Decisions
• 1.1.3 Personal Economic Decisions
• 1.1.4 Economic Decisions Versus Design Decisions
• 1.2 What Makes the Engineering Economic Decision Difficult?
• 1.3 Large-Scale Engineering Projects
• 1.3.1 Are Tesla’s plans for a Giant Battery Factory Realistic?
• 1.3.2 Impact of Engineering Projects on Financial Statements
• 1.4 Common Types of Strategic Engineering Economic Decisions
• 1.4.1 Equipment or Process Selection
• 1.4.2 Equipment Replacement
• 1.4.3 New Product or Product Expansion
• 1.4.4 Cost Reduction
• 1.4.5 Improvement in Service or Quality
• 1.5 Fundamental Principles of Engineering Economics
• Summary
• Short Case Studies
• Chapter 2 Accounting and Financial Decision Making
• 2.1 Accounting: The Basis of Decision Making
• 2.2 Financial Status for Businesses
• 2.2.1 The Balance Sheet
• 2.2.2 The Income Statement
• 2.2.3 The Cash Flow Statement
• 2.3 Using Ratios to Make Business Decisions
• 2.3.1 Debt Management Analysis
• 2.3.2 Liquidity Analysis
• 2.3.3 Asset Management Analysis
• 2.3.4 Profitability Analysis
• 2.3.5 Market Value Analysis
• 2.3.6 Limitations of Financial Ratios in Business Decisions
• Summary
• Problems
• Short Case Studies
• Chapter 3 Interest Rate and Economic Equivalence
• 3.1 Interest: The Cost of Money
• 3.1.1 The Time Value of Money
• 3.1.2 Elements of Transactions Involving Interest
• 3.1.3 Methods of Calculating Interest
• 3.2 Economic Equivalence
• 3.2.1 Definition and Simple Calculations
• 3.2.2 Equivalence Calculations: General Principles
• 3.3 Development of Formulas for Equivalence Calculations
• 3.3.1 The Five Types of Cash Flows
• 3.3.2 Single-Cash Flow Formulas
• 3.3.3 Equal-Payment Series
• 3.3.4 Linear-Gradient Series
• 3.3.5 Geometric Gradient Series
• 3.3.6 Irregular (Mixed) Payment Series
• 3.4 Unconventional Equivalence Calculations
• 3.4.1 Composite Cash Flows
• 3.4.2 Determining an Interest Rate to Establish Economic Equivalence
• 3.4.3 Unconventional Regularity in Cash Flow Pattern
• Summary
• Problems
• Short Case Studies
• Chapter 4 Understanding Money and Its Management
• 4.1 Nominal and Effective Interest Rates
• 4.1.1 Nominal Interest Rates
• 4.1.2 Effective Annual Interest Rates
• 4.1.3 Effective Interest Rates per Payment Period
• 4.1.4 Continuous Compounding
• 4.2 Equivalence Calculations with Effective Interest Rates
• 4.2.1 When Payment Period is Equal to Compounding Period
• 4.2.2 Compounding Occurs at a Different Rate than That at Which Payments are Made
• 4.2.4 Compounding is Less Frequent than Payments
• 4.3 Equivalence Calculations with Continuous Compounding
• 4.3.1 Discrete-Payment Transactions with Continuous Compounding
• 4.3.2 Continuous-Funds Flow with Continuous Compounding
• 4.4 Changing Interest Rates
• 4.4.1 Single Sums of Money
• 4.4.2 Series of Cash Flows
• 4.5 Debt Management
• 4.5.1 Commercial Loans
• 4.5.2 Loan versus Lease Financing
• 4.5.3 Home Mortgage
• 4.6 Investing in Financial Assets
• 4.6.1 Investment Basics
• 4.6.2 How to Determine Your Expected Return
• 4.6.3 Investing in Bonds
• Summary
• Problems
• Short Case Studies
• Part 2 Evaluation of Business and Engineering Assets
• Chapter 5 Present-Worth Analysis
• 5.1 Describing Project Cash Flows
• 5.1.1 Loan versus Project Cash Flows
• 5.1.2 Independent versus Mutually Exclusive Investment Projects
• 5.2 Initial Project Screening Method
• 5.2.1 Payback Period The Time It Takes to Pay Back
• 5.2.2 Benefits and Flaws of Payback Screening
• 5.2.3 Discounted Payback Period
• 5.2.4 Where Do We Go From Here?
• 5.3 Discounted Cash Flow Analysis
• 5.3.1 Net-Present-Worth Criterion
• 5.3.2 Meaning of Net Present Worth
• 5.3.3 Basis for Selecting the MARR
• 5.4 Variations of Present-Worth Analysis
• 5.4.1 Future-Worth Analysis
• 5.4.2 Capitalized Equivalent Method
• 5.5 Comparing Mutually Exclusive Alternatives
• 5.5.1 Meaning of Mutually Exclusive and “Do Nothing”
• 5.5.2 Service Projects versus Revenue Projects
• 5.5.3 Application of Investment Criteria
• 5.5.4 Scale of Investment
• 5.5.5 Analysis Period
• 5.5.6 Analysis Period Matches Project Lives
• 5.5.7 Analysis Period Differs from Project Lives
• 5.5.8 Analysis Period is Not Specified
• Summary
• Problems
• Short Case Studies
• Chapter 6 Annual Equivalent Worth Analysis
• 6.1 Annual Equivalent-Worth Criterion
• 6.1.1 Fundamental Decision Rule
• 6.1.2 Annual-Worth Calculation with Repeating Cash Flow Cycles
• 6.1.3 Comparing Mutually Exclusive Alternatives
• 6.2 Capital Costs Versus Operating Costs
• 6.3 Applying Annual-Worth Analysis
• 6.3.1 Benefits of AE Analysis
• 6.3.2 Unit Profit or Cost Calculation
• 6.3.3 Make or Buy Decision-Outsourcing Decisions
• 6.3.4 Pricing the Use of an Asset
• 6.4 Life-Cycle Cost Analysis
• 6.5 Design Economics
• Summary
• Problems
• Short Case Studies
• Chapter 7 Rate-of-Return Analysis
• 7.1 Rate of Return
• 7.1.1 Return on Investment
• 7.1.2 Return on Invested Capital
• 7.2 Methods for Finding the Rate of Return
• 7.2.1 Simple versus Nonsimple Investments
• 7.2.2 Predicting Multiple i*s
• 7.2.3 Computational Methods
• 7.3 Internal-Rate-of-Return Criterion
• 7.3.1 Relationship to PW Analysis
• 7.3.2 Net Investment Test: Pure versus Mixed Investments
• 7.3.3 Decision Rule for Pure Investments
• 7.3.4 Decision Rule for Mixed Investments
• 7.3.5 Modified Internal Rate of Return (MIRR)
• 7.4 Mutually Exclusive Alternatives
• 7.4.1 Flaws in Project Ranking by IRR
• 7.4.2 Incremental Investment Analysis
• 7.4.3 Handling Unequal Service Lives
• Summary
• Problems
• Short Case Studies
• Part 3 Analysis of Project Cash Flows
• Chapter 8 Cost Concepts Relevant to Decision Making
• 8.1 General Cost Terms
• 8.1.1 Manufacturing Costs
• 8.1.2 Nonmanufacturing Costs
• 8.2 Classifying Costs for Financial Statements
• 8.2.1 Period Costs
• 8.2.2 Product Costs
• 8.3 Cost Classification for Predicting Cost Behavior
• 8.3.1 Volume Index
• 8.3.2 Cost Behaviors
• 8.3.3 Cost–Volume–Profit Analysis
• 8.4 Future Costs for Business Decisions
• 8.4.1 Differential Cost and Revenue
• 8.4.2 Opportunity Cost
• 8.4.3 Sunk Costs
• 8.4.4 Marginal Cost
• 8.5 Estimating Profit from Operation
• 8.5.1 Calculation of Operating Income
• 8.5.2 Annual Sales Budget for a Manufacturing Business
• 8.5.3 Preparing the Annual Production Budget
• 8.5.4 Preparing the Cost-of-Goods-Sold Budget
• 8.5.5 Preparing the Nonmanufacturing Cost Budget
• 8.5.6 Putting It All Together: The Budgeted Income Statement
• 8.5.7 Looking Ahead
• Summary
• Problems
• Short Case Studies
• Chapter 9 Depreciation and Corporate Taxes
• 9.1 Asset Depreciation
• 9.1.1 Economic Depreciation
• 9.1.2 Accounting Depreciation
• 9.2 Factors Inherent in Asset Depreciation
• 9.2.1 Depreciable Property
• 9.2.2 Cost Basis
• 9.2.3 Useful Life and Salvage Value
• 9.2.4 Depreciation Methods: Book and Tax Depreciation
• 9.3 Book Depreciation Methods
• 9.3.1 Straight-Line Method
• 9.3.2 Declining Balance Method
• 9.3.3 Units of Production Method
• 9.4 Tax Depreciation Methods
• 9.4.1 MACRS Depreciation
• 9.4.2 MACRS Depreciation Rules
• 9.5 Depletion
• 9.5.1 Cost Depletion
• 9.5.2 Percentage Depletion
• 9.6 Repairs or Improvements Made to Depreciable Assets
• 9.6.1 Revision of Book Depreciation
• 9.6.2 Revision of Tax Depreciation
• 9.7 Corporate Taxes
• 9.7.1 Income Taxes on Operating Income
• 9.8 Tax Treatment of Gains or Losses on Depreciable Assets
• 9.8.1 Disposal of a MACRS Property
• 9.8.2 Calculations of Gains and Losses on MACRS Property
• 9.9 Income Tax Rate to Be Used in Economic Analysis
• 9.9.1 Incremental Income Tax Rate
• 9.9.2 Consideration of State Income Taxes
• 9.10 The Need For Cash Flow in Engineering Economic Analysis
• 9.10.1 Net Income versus Net Cash Flow
• 9.10.2 Treatment of Noncash Expenses
• Summary
• Problems
• Short Case Studies
• Chapter 10 Developing Project Cash Flows
• 10.1 Cost-Benefit Estimation for Engineering Projects
• 10.1.1 Simple Projects
• 10.1.2 Complex Projects
• 10.2 Incremental Cash Flows
• 10.2.1 Elements of Cash Outflows
• 10.2.2 Elements of Cash Inflows
• 10.2.3 Classification of Cash Flow Elements
• 10.3 Developing Cash Flow Statements
• 10.3.1 When Projects Require Only Operating and Investing Activities
• 10.3.2 When Projects Require Working-Capital Investments
• 10.3.3 When Projects are Financed with Borrowed Funds
• 10.3.4 When Projects Result in Negative Taxable Income
• 10.3.5 When Projects require Multiple Assets
• 10.4 Generalized Cash-Flow Approach
• 10.4.1 Setting up Net Cash-Flow Equations
• 10.4.2 Presenting Cash Flows in Compact Tabular Formats
• 10.4.3 Lease-or-Buy Decision
• Summary
• Problems
• Short Case Studies
• Part 4 Handling Risk and Uncertainty
• Chapter 11 Inflation and Its Impact on Project Cash Flows
• 11.1 Meaning and Measure of Inflation
• 11.1.1 Measuring Inflation
• 11.1.2 Actual versus Constant Dollars
• 11.2 Equivalence Calculations Under Inflation
• 11.2.1 Market and Inflation-Free Interest Rates
• 11.2.2 Constant-Dollar Analysis
• 11.2.3 Actual Dollar Analysis
• 11.2.4 Mixed-Dollar Analysis
• 11.3 Effects of Inflation on Project Cash Flows
• 11.3.1 Multiple Inflation Rates
• 11.3.2 Effects of Borrowed Funds Under Inflation
• 11.4 Rate-of-Return Analysis under Inflation
• 11.4.1 Effects of Inflation on Return on Investment
• 11.4.2 Effects of Inflation on Working Capital
• Summary
• Problems
• Short Case Studies
• Chapter 12 Project Risk and Uncertainty
• 12.1 Origins of Project Risk
• 12.2 Methods of Describing Project Risk
• 12.2.1 Sensitivity (What-if) Analysis
• 12.2.2 Break-Even Analysis
• 12.2.3 Scenario Analysis
• 12.3 Probability Concepts for Investment Decisions
• 12.3.1 Assessment of Probabilities
• 12.3.2 Summary of Probabilistic Information
• 12.3.3 Joint and Conditional Probabilities
• 12.3.4 Covariance and Coefficient of Correlation
• 12.4 Probability Distribution of NPW
• 12.4.1 Procedure for Developing an NPW Distribution
• 12.4.2 Aggregating Risk over Time
• 12.4.3 Decision Rules for Comparing Mutually Exclusive Risky Alternatives
• 12.5 Risk Simulation
• 12.5.1 Computer Simulation
• 12.5.2 Model Building
• 12.5.3 Monte Carlo Sampling
• 12.5.4 Simulation Output Analysis
• 12.5.5 Risk Simulation with Oracle Crystal Ball
• 12.6 Decision Trees and Sequential Investment Decisions
• 12.6.1 Structuring a Decision-Tree Diagram
• 12.6.2 Worth of Obtaining Additional Information
• 12.6.3 Decision Making after Having Imperfect Information
• Summary
• Problems
• Short Case Studies
• Chapter 13 Real-Options Analysis
• 13.1 Risk Management: Financial Options
• 13.1.1 Features of Financial Options
• 13.1.2 Buy Call Options When You Expect the Price to Go Up
• 13.1.3 Buy Put Options When You Expect the Price to Go Down
• 13.2 Option Strategies
• 13.2.1 Buying Calls to Reduce Capital That is at Risk
• 13.2.2 Protective Puts as a Hedge
• 13.3 Option Pricing
• 13.3.1 Replicating-Portfolio Approach with a Call Option
• 13.3.2 Risk-Free Financing Approach
• 13.3.3 Risk-Neutral Probability Approach
• 13.3.4 Put-Option Valuation
• 13.3.5 Two-Period Binomial Lattice Option Valuation
• 13.3.6 Multiperiod Binomial Lattice Model
• 13.3.7 Black-Scholes Option Model
• 13.4 Real-Options Analysis
• 13.4.1 How is Real Options Analysis Different?
• 13.4.2 A Conceptual Framework for Real Options in Engineering Economics
• 13.5 Simple Real-Option Models
• 13.5.1 Option to Defer Investment
• 13.5.2 Patent and License Valuation
• 13.5.3 Growth Option—Option to Expand
• 13.5.4 Scale-Up Option
• 13.5.5 Compound Options
• 13.6 Estimating Volatility at the Project Level
• 13.6.1 Mathematical Relationship between s and sT
• 13.6.2 Estimating VT Distribution
• Summary
• Problems
• Short Case Studies
• Part 5 Special Topics in Engineering Economics
• Chapter 14 Replacement Decisions
• 14.1 Replacement Analysis Fundamentals
• 14.1.1 Basic Concepts and Terminology
• 14.1.2 Opportunity Cost Approach to Comparing Defender and Challenger
• 14.2 Economic Service Life
• 14.3 Replacement Analysis when the Required Service is Long
• 14.3.1 Required Assumptions and Decision Frameworks
• 14.3.2 Replacement Strategies under the Infinite Planning Horizon
• 14.3.3 Replacement Strategies under the Finite Planning Horizon
• 14.3.4 Consideration of Technological Change
• 14.4 Replacement Analysis with Tax Considerations
• Summary
• Problems
• Short Case Studies
• Chapter 15 Capital Budgeting Decisions
• 15.1 Methods of Financing
• 15.1.1 Equity Financing
• 15.1.2 Debt Financing
• 15.1.3 Capital Structure
• 15.2 Cost of Capital
• 15.2.1 Cost of Equity
• 15.2.2 Cost of Debt
• 15.2.3 Calculating the Cost of Capital
• 15.3 Choice of Minimum Attractive Rate of Return
• 15.3.1 Choice of MARR when Project Financing is Known
• 15.3.2 Choice of MARR when Project Financing is Unknown
• 15.3.3 Choice of MARR under Capital Rationing
• 15.4 Capital Budgeting
• 15.4.1 Evaluation of Multiple Investment Alternatives
• 15.4.2 Formulation of Mutually Exclusive Alternatives
• 15.4.3 Capital-Budgeting Decisions with Limited Budgets
• Summary
• Problems
• Short Case Studies
• Chapter 16 Economic Analysis in the Service Sector
• 16.1 What Is The Service Sector?
• 16.1.1 Characteristics of the Service Sector
• 16.1.2 Difficulty of Pricing Service
• 16.2 Economic Analysis in The Public Sector
• 16.2.1 What is Benefit-Cost Analysis?
• 16.2.2 Framework of Benefit–Cost Analysis
• 16.2.3 Valuation of Benefits and Costs
• 16.2.4 Quantifying Benefits and Costs
• 16.2.5 Difficulties Inherent in Public Project Analysis
• 16.3 Benefit–Cost Ratios
• 16.3.1 Definition of Benefit–Cost Ratio
• 16.3.2 Profitability Index (Net B/C ratio)
• 16.3.2 Relationship Among B/C Ratio Profitability Index and NPW
• 16.3.4 Comparing Mutually Exclusive Alternatives Incremental Analysis
• 16.4 Analysis of Public Projects Based on Cost-Effectiveness
• 16.4.1 Cost-Effectiveness Studies in the Public Sector
• 16.4.2 A Cost-Effectiveness Case Study
• 16.5 Economic Analysis in Health-Care Service
• 16.5.1 Economic Evaluation Tools
• 16.5.2 Cost-Effectiveness Analysis in the Health Care Sector
• 16.5.3 Cost-Utility Analysis
• Summary
• Problems
• Short Case Studies
• Appendix A Fundamentals of Engineering Review Questions
• Appendix B Interest Factors for Discrete Compounding
• Appendix C Values of the Standard Normal Distribution Function
• Index
• A
• B
• C
• D
• E
• F
• G
• H
• I
• J
• L
• M
• N
• O
• P
• Q
• R
• S
• T
• U
• V
• W
• Y
• Z
• IFC
• IBC