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Engineering Economic Analysis


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1: MAKING ECONOMIC DECISIONSA Sea of ProblemsSimple ProblemsIntermediate ProblemsComplex ProblemsThe Role of Engineering Economic AnalysisExamples of Engineering Economic AnalysisThe Decision-Making ProcessRational Decision MakingEngineering Decision Making for Current Costs2: ENGINEERING COSTS AND COST ESTIMATINGEngineering CostsFixed, Variable, Marginal, and Average CostsSunk CostsOpportunity CostsRecurring and Nonrecurring CostsIncremental CostsCash Costs Versus Book CostsLife-Cycle CostsCost EstimatingTypes of EstimateDifficulties in EstimationEstimating ModelsPer-Unit ModelSegmenting ModelCost IndexesPower-Sizing ModelTriangulationImprovement and the Learning CurveEstimating BenefitsCash Flow DiagramsCategories of Cash FlowsDrawing a Cash Flow DiagramDrawing Cash Flow Diagrams with a Spreadsheet3: INTEREST AND EQUIVALENCEA Prescription for SuccessComputing Cash FlowsTime Value of MoneySimple InterestCompound InterestRepaying a DebtEquivalenceDifference in Repayment PlansEquivalence Is Dependent on Interest RateSingle Payment Compound Interest FormulasNominal and Effective InterestContinuous CompoundingSingle Payment Interest Factors: Continuous Compounding4. EQUIVALENCE FOR REPEATED CASH FLOWSUniform Series Compound Interest FormulasExpanded Factors as Calculator FunctionsCash Flows that Do Not Match Basic PatternsEconomic Equivalence Viewed as a Moment DiagramRelationships Between Compound Interest FactorsSingle PaymentUniform SeriesArithmetic GradientDerivation of Arithmetic Gradient FactorsReality and the Assumed Uniformity of A, G, and g.Geometric GradientCompounding Period and Payment Period DifferSpreadsheets for Economic AnalysisSpreadsheet Annuity Functions for Cash Flow TablesSpreadsheet Block FunctionsUsing Spreadsheets for Basic Graphing5: PRESENT WORTH ANALYSISAssumptions in Solving Economic Analysis ProblemsEnd-of-Year ConventionViewpoint of Economic Analysis StudiesSunk CostsBorrowed Money ViewpointEffect of Inflation and DeflationIncome TaxesEconomic CriteriaApplying Present Worth TechniquesUseful Lives Equal the Analysis PeriodUseful Lives Different from the Analysis PeriodInfinite Analysis Period: Capitalized CostMultiple AlternativesBond PricingSpreadsheets and Present Worth6: ANNUAL CASH FLOW ANALYSISLowest Prices on the Net! Buy Now!Annual Cash Flow CalculationsResolving a Present Cost to an Annual CostTreatment of Salvage ValueAnnual Cash Flow AnalysisAnalysis PeriodAnalysis Period Equal to Alternative LivesAnalysis Period a Common Multiple of Alternative LivesAnalysis Period for a Continuing RequirementInfinite Analysis Period: Capitalized CostMultiple AlternativesUsing Spreadsheets to Analyze LoansBuilding an Amortization ScheduleHow Much to Interest? How Much to Principal?Finding the Balance Due on a LoanPay off Debt Sooner by Increasing Payments7: RATE OF RETURN ANALYSISBar Codes Give a Number; RFID Codes Tell A StoryInternal Rate of ReturnCalculating Rate of ReturnPlot of NPW versus Interest RateInterest Rates When There are Fees or DiscountsLoans and Investments are EverywhereIncremental AnalysisPresent Worth AnalysisAnalysis PeriodSpreadsheets and Rate of Return AnalysisSummaryProblemsAppendix 7A: Difficulties in Solving for an Interest RateWhy Multiple Solutions Can OccurModified Internal Rate of Return (MIRR)8: Choosing the Best AlternativeTapping Into GeometryIncremental AnalysisGraphical SolutionsElements in Comparing Mutually Exclusive AlternativesDoing a Set of Incremental Challenger-Defender ComparisonsChoosing an Analysis MethodSpreadsheets and Goal Seek9: OTHER ANALYSIS TECHNIQUESClean, Green, and Far BetweenFuture Worth AnalysisBenefit-Cost Ratio AnalysisVariations on the Theme of Benefit-Cost RatioPayback PeriodSensitivity and Breakeven AnalysisGraphing with Spreadsheets for Sensitivity and Breakeven AnalysisDoing What-If Analysis with Spreadsheets10: UNCERTAINTY IN FUTURE EVENTSThey Only Thought They Were DoneEstimates and Their Use in Economic AnalysisA Range of EstimatesProbabilityJoint Probability DistributionsExpected ValueEconomic Decision TreesRiskRisk Versus ReturnSimulationReal Options11: DEPRECIATIONDepreciation and CompetitivenessBasic Aspects of DepreciationDeterioration and ObsolescenceDepreciation and ExpensesTypes of PropertyDepreciation Calculation FundamentalsHistorical Depreciation MethodsStraight-Line DepreciationSum-of-Years'-Digits DepreciationDeclining Balance DepreciationModified Accelerated Cost Recovery System (MACRS)Cost Basis and Placed-in-Service DateProperty Class and Recovery PeriodPercentage TablesWhere MACRS Percentage Rates (rt ) Come FromMACRS Method ExamplesComparing MACRS and Historical MethodsDepreciation and Asset DisposalUnit-of-Production DepreciationDepletionCost DepletionPercentage DepletionSpreadsheets and DepreciationUsing VDB for MACRS12: INCOME TAXESOn With the WindA Partner in the Business.Calculation of Taxable IncomeTaxable Income of IndividualsClassification of Business ExpendituresTaxable Income of Business FirmsIncome Tax RatesIndividual Tax RatesCorporate Tax RatesCombined Federal and State Income TaxesSelecting an Income Tax Rate for Economy StudiesEconomic Analysis Taking Income Taxes into AccountCapital Gains and Losses for Nondepreciated AssetsInvestment Tax CreditEstimating the After-Tax Rate of ReturnAfter-Tax Cash Flows and SpreadsheetsAppendix 12A: Personal Finance13: REPLACEMENT ANALYSISThe Replacement ProblemReplacement Analysis Decision MapMinimum Cost Life of a New Asset --- the ChallengerDo We Have Marginal Cost Data For the Defender?Are These Marginal Costs Increasing?Replacement Analysis Technique 1: Defender Marginal Costs Can Be Computed andAre IncreasingReplacement Repeatability AssumptionsReplacement Analysis Technique 2: Defender Marginal Costs Can Be Computed and Are Not IncreasingReplacement Analysis Technique 3: When Defender Marginal Cost Data Are Not AvailableComplications in Replacement AnalysisDefining Defender and Challenger First CostsRepeatability Assumptions Not AcceptableA Closer Look at Future ChallengersAfter-Tax Replacement AnalysisMarginal Costs on an After-Tax BasisMinimum Cost Life ProblemsSpreadsheets and Replacement Analysis14: INFLATION AND PRICE CHANGEThe Athabasca Oil SandsMeaning and Effect of InflationHow Does Inflation Happen?Definitions for Considering Inflation in Engineering EconomyAnalysis in Constant Dollars Versus Then-Current DollarsPrice Change with IndexesWhat Is a Price Index?Composite Versus Commodity IndexesHow to Use Price Indexes in Engineering Economic AnalysisCash Flows That Inflate at Different RatesDifferent Inflation Rates per PeriodInflation Effect on After-Tax CalculationsUsing Spreadsheets for Inflation Calculations15: SELECTION OF A MINIMUM ATTRACTIVE RATE OF RETURNBP Goes to RussiaSources of CapitalMoney Generated from the Firm's OperationExternal Sources of MoneyChoice of Source of FundsCost of FundsCost of Borrowed MoneyCost of CapitalInflation and the Cost of Borrowed MoneyInvestment OpportunitiesOpportunity CostSelecting a Minimum Attractive Rate of ReturnAdjusting MARR to Account for Risk and UncertaintyRepresentative Values of MARR Used in IndustryCapital Budgeting or Selecting the Best ProjectsSpreadsheets, Cumulative Investments, and the Opportunity Cost of Capital16: ECONOMIC ANALYSIS IN THE PUBLIC SECTORFrom Waste to Power and MoneyInvestment ObjectiveViewpoint for AnalysisSelecting an Interest RateNo Time-Value-of-Money ConceptCost of Capital ConceptOpportunity Cost ConceptRecommended ConceptThe Benefit-Cost RatioIncremental Benefit-Cost AnalysisElements of the Incremental Benefit-Cost Ratio MethodOther Effects of Public ProjectsProject FinancingProject DurationQuantifying and Valuing Benefits and DisbenefitsProject Politics17: ACCOUNTING AND ENGINEERING ECONOMYThe Two Faces of ABBThe Role of AccountingAccounting for Business TransactionsThe Balance SheetAssetsLiabilitiesEquityFinancial Ratios Derived from Balance Sheet DataThe Income StatementFinancial Ratios Derived from Income Statement DataLinking the Balance Sheet, Income Statement, and Capital TransactionsTraditional Cost AccountingDirect and Indirect CostsIndirect Cost AllocationProblems with Traditional Cost AccountingOther Problems to Watch ForAppendix A: Introduction to SpreadsheetsThe Elements of a SpreadsheetDefining Variables in a Data BlockCopy CommandAppendix B: Time Value of Money (TVM) CalculatorsNotation for TVM CalculatorsExamples with TVM Calculators and Tabulated FactorsProblemsAppendix C: Compound Interest TablesAppendix D: Fundamentals of Engineering (FE) Examination ProblemsReferencesIndex

About the Author

Donald G. Newnan is Professor Emeritus of Industrial and Systems Engineering at San Jose State University.
Jerome P. Lavelle is Associate Dean in the College of Engineering at North Carolina State University.
Ted G. Eschenbach is a consultant and Professor Emeritus of Engineering Management at the University of Alaska Anchorage.


"It is the standard."--Bill McManus, University of Oklahoma

"An excellent text. The best available."--Nicholas Sylvester, University of South Alabama

"It is the standard."--Bill McManus, University of Oklahoma

"An excellent text. The best available."--Nicholas Sylvester, University of South Alabama

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