Compound Interest Equations
Economic Criteria
Preface
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; 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
2 ENGINEERING COSTS AND COST ESTIMATING.
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
Types of Estimates; Difficulties in Estimation; One-of-a-kind Estimates; Time and Effort Available; Estimator Expertise
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
3 INTEREST AND EQUIVALENCE.
Computing Cash Flows
Time Value of Money
Simple Interest
Repaying a Dept
Equivalence
Difference in Repayment Plans; Equivalence is Dependent on Interest Rate; Application of Equivalence Calculations
Single Payment Compound Interest Formulas
4 MORE INTEREST FORMULAS.
Uniform Series Compound Interest Formulas
Relationships Between Compound Interest Factors
Single Payment; Uniform Series
Arithmetic Gradient
Derivation of Arithmetic Gradient Factors
Geometric Gradient
Nominal And Effective Interest
Continuous Compounding
Single Payment Interest Factors; Uniform Payment Series; Continuous, Uniform Cash Flow
Spreadsheets for Economic Analysis
Spreadsheet Annuity Functions; Spreadsheet Block Functions; Basic Graphin Using Spreadsheets
5 PRESENT WORTH ANALYSIS.
Economic Criteria
Applying Present Worth Techniques
Useful Lives Equal the Analysis Period; Net Present Worth; Useful Lives Different from the Analyis Period; Infinite Analysis Period--Capitalized Cost; Multiple Alternatives
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; Spreadsheets and Present Worth
6 ANNUAL CASH FLOW ANALYSIS.
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; Some Other Analysis Period
Using Spreadsheets to Analyze Loans
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
7 RATE OF RETURN ANALYSIS.
Internal Rate of Return
Calculating Rate of Return
Plot of NPW vs. Interest Rate ir
Rate of Return Analysis
Analysis Period Spreadsheets and Rate of Return Analysis
7A DIFFICULTIES SOLVING FOR AN INTEREST RATE.
Converting a Cash Flow to a Mathematical Equation
Cash Flow Rule of Signs
Zero Sign Changes; One Sign Change; Two or More Sign Changes; What the Difficulties Mean
External Interest Rate
Resolving Multiple Rate of Return Problems; A Further Look at the the Computation of Rate of Return
8 INCREMENTAL ANALYSIS.
Graphical Solutions
Incremental Rate of Return Analysis
Elements in Incremental Rate of Return Analysis
Incremental Analysis Where There are Unlimited Alternatives
Present Worth Analysis With Benefit-Cost Graphs
Choosing an Analysis Method
Spreadsheets and Incremental Analysis
9 OTHER ANALYSIS TECHNIQUES.
Future Worth Analysis
Benefit-Cost Ratio Analysis
Continuous Alternatives
Payback Period
Sensitivity and Breakeven Analysis
Graphing with Spreadsheets for Sensitivity and Breakeven Analysis
10 DEPRECIATION.
Basic Aspects of Depreciation
Deterioration and Osolescence; 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 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
11 INCOME TAXES.
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 Economic Studies
Economic Analysis Taking Income Taxes Into Account
Capital Gains and Losses For Non-depreciated Assets
Investment Tax Credit
Estimating the After-Tax Rate of Return
After-Tax Cash Flows and Spreadsheets
12 REPLACEMENT ANALYSIS.
The Replacement Problem
Replacement Analysis Decision Map
What Is the Basic Comparison?
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
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
13 INFLATION AND PRICE CHANGE.
Meaning and Effect of Inflation
How Does Inflation Happen?; Definitions for Considering Inflation in Engineering Economy
Constant Dollar Versus Then-Current Dollar Analysis
Price Change With Indexes
What is a Price Index?; Composit 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
14 ESTIMATION OF FUTURE EVENTS.
Precise Estimates
A Range of Estimates
Probability and Risk
Expected Value
Distribution of Outcomes
Uniform Distribution; Normal Distribution; Sampling from Any Distribution Using Random Numbers
Simulation
Simulation with Spreadsheets
15 SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURN.
Sources of Capital
Money Generated from the Operation of the Firm; External Sources of Money; Choice of Source of Funds
Cost of Funds
Cost of Borrowed Money, Cost of Capital
Investment Opportunities
Opportunity Cost
Selecting a Minimum Attractive Rate of Return
Adjusting MARR to Account for Risk and Uncertainty
Inflation and the Cost of Borrowed Money
Representative Values Of MARR Used in Industry
Spreadsheets, Cumulative Investments, and the Opportunity Cost of Capital
16 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR.
Investment Objective
Viewpoint for Analysis
Selectng an Interest Rate
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; Project Politics
17 RATIONING CAPITAL AMONG COMPETING PROJECTS.
Capital Expenditure Project Proposals
Mutually Exclusive Altervatives and Single Project Proposals; Identifying and Rejecting Unattractive Alternatives; Selecting the Best Alternative from Each Project Proposal
Rationing Capital by Rate of Return
Significance of the Cutoff Rate of Return
Rationing Capital by Present Worth Methods
Ranking Project Proposals
18 A FURTHER LOOK AT RATE OF RETURN.
Cash Flow Situations
Analysis of a Cash Flow as an Investment Situation
Cash Flow Rule of Signs; Accumulated Cash Flow Sign Test; Algebraic Sum of the Cash Flow; Net Investment Conditions; Application of the Four Test of a Cash Flow
References
Index
Compound Interest Tables
(Each chapter ends with a Summary section and a Problems section)