Engineering Economy: Applying Theory to Practice by Ted EschenbachEngineering Economy: Applying Theory to Practice by Ted Eschenbach

Engineering Economy: Applying Theory to Practice

byTed Eschenbach

Hardcover | August 23, 2010

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Now in its third edition, Ted G. Eschenbach's Engineering Economy: Applying Theory to Practice continues to solidify its reputation as one of the most innovative, authoritative, and reliable texts in Engineering Economics. It provides the tools and concepts - including cost estimating,sensitivity analysis, probability, and multiple objectives - that are necessary to successfully apply engineering economy in industry practice outside of the classroom. Designed to emphasize the strengths of traditional factors and of spreadsheet coverage, Engineering Economy: Applying Theory to Practice, Third Edition, is an ideal text for undergraduate and beginning graduate-level Engineering Economy courses.
Ted G. Eschenbach, P.E., is a consultant and Professor Emeritus of Engineering Management at the University of Alaska Anchorage. He received his Ph.D. in industrial engineering from Stanford University and his M.C.E. degree from the University of Alaska Anchorage.
Title:Engineering Economy: Applying Theory to PracticeFormat:HardcoverDimensions:608 pages, 9.49 × 7.76 × 1.1 inPublished:August 23, 2010Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199772762

ISBN - 13:9780199772766


Table of Contents

Part One: Basic Concepts and Tools1. Making Economic Decisions1.1 What Is Engineering Economy?1.2 Principles for Decision MakingCommon MeasureInclude All ConsequencesOnly Differences MatterMake Separable Decisions SeparatelyAdopt a Systems ViewpointUse a Common Planning HorizonAddress Uncertainty1.3 The Decision-Making Process1. Define Problem2. Choose Objective(s)3. Identify Alternatives4. Evaluate Consequences5. Select6. Implement7. AuditSummary of the Decision Process1.4 The Environment for DecisionsNonlinear ProcessIterative Modeling and SpreadsheetsOne Decision in a Continuing StreamImportance of Communication SkillsAnalysis vs. ActionPrivate and Public Politics1.5 Ethics and Decision MakingGaining Knowledge and Building Trust vs. Favors for InfluenceCost, Quality, and FunctionalityThe Environment We Live InSafety and CostEmerging Issues and "Solutions"Importance of Ethics in Engineering and Engineering Economy1.6 The Role of Engineering EconomyProblem too Small to Merit Engineering EconomyTime Period too Short to Merit Engineering EconomyEngineering Economy Dominates Decision MakingEngineering Economy Is One Factor in Decision Making1.6 Operational Economics1.7 Summary2. The Time Value of Money2.1 What Is Interest?Interest Rates Vary2.2 Simple vs. Compound InterestSimple InterestCompound Interest2.3 Cash Flow DiagramsCategories of Cash FlowTiming of Cash FlowsIt Is Better Not to Simplify the Cash Flow DiagramsDrawing Cash Flow Diagrams with a Spreadsheet2.4 Equivalence for Four LoansEquivalence DefinedCalculating the Interest for Each YearFinding an Equivalent Present Worth2.5 Limits on EquivalenceEquivalence Depends on the Interest RateEquivalence with Respect to Time Value of Money Only2.6 Compounding Periods Shorter than a YearCompounding Periods Are M per YearNominal vs. Effective InterestContinuous Compounding2.7 Summary3. Equivalence A a Factor Approach3.1 Definitions and AssumptionsAssumptionsDefinitionsReality and the Assumed Uniformity of A and G3.2 Tables of Engineering Economy FactorsFactor NotationExpanded Factors as Calculator FunctionsNames of the Engineering Economy FactorsFormat for the Interest RateInterpolationFormulas vs. Factors3.3 Single Payment Factors (Ps and Fs)Formula DevelopmentTabulated Factors(P/F) and (F/P) as a Function of i and N3.4 Uniform FlowsFormula DevelopmentTabulated FactorsCalculating an Interest Rate(A/P), (A/F), (P/A), and (F/A) vs. i and N3.5 Combining FactorsDeferred AnnuitiesAnnuities Due for Prepaid Expenses and Other Beginning-of-Year Cash FlowsConstructing Formulas from Cash Flow DiagramsDeriving One Factor's Formula From Another's3.6 Arithmetic Gradients3.6 Arithmetic GradientsUsing the Arithmetic Gradient FactorsArithmetic Gradient Formulas3.7 Geometric GradientsGeometric Gradients Change at a Constant RateThe Basic Geometric FormulaThe Four Geometric RatesInflationMathematical Model for PWPresent Worth Formula for a Single Geometric GradientUsing Equivalent Discount Rates for Geometric Gradients3.8 Summary4. Spreadsheets and Economic Analysis4.1 Using Spreadsheets for Economic AnalysisWhy Use SpreadsheetsReality and the Flexibility of Spreadsheet ModelsThe Elements of a SpreadsheetRelative and Absolute Addresses4.2 Spreadsheet ModelingUsing a Data BlockDefining Variables in a SpreadsheetUse Relative and Absolute Addresses in Your FormulasExplaining and Labeling Your FormulasFormatting Your Spreadsheets4.3 Financial Functions in SpreadsheetsSpreadsheet Annuity FunctionsSpreadsheet Block Functions4.4 Examples Show Spreadsheet Models Can Be More Realistic4.5 Using Spreadsheets to Get a Project FundedSensitivity AnalysisCreating GraphsDocumenting Data Sources4.6 SummaryPart Two: Analyzing a Project5. Present Worth5.1 The Present Worth MeasureIs PW 0?Standard Assumptions5.2 Examples of When to Use Present Worth5.3 Rolling Back Irregular Cash Flows for PW Calculations5.4 Salvage Values5.5 Capitalized Cost and Perpetual Life5.6 Staged Projects5.7 Cost of Underutilized Capacity5.8 Spreadsheets and Shorter Periods5.9 Spreadsheets and More Exact Models5.10 Summary6. Equivalent Annual Worth6.1 The Equivalent Annual Worth Measure6.2 Assumptions and Sign Conventions6.3 Examples of Annual Evaluations6.4 Finding the EAC of "Irregular" Cash FlowsEAC of a Single Interior Cash FlowDeferred Annuities to Regular Annuities6.5 EAC Formulas for Salvage Values and Working CapitalCapital Recovery with Salvage ValuesWorking Capital6.6 Perpetual LifeAssumptions and FormulasN vs. InfinityArithmetic Gradients and Perpetual Life6.7 Repeated RenewalsRepetition for Every SubperiodCapitalized CostsRepeated Renewals with Neither an Initial nor a Final Cash Flow6.8 Spreadsheets and Analyzing Loan RepaymentsFinding the Balance DueShortening the Time to Payoff by Increasing PaymentsHow Much Goes to Interest? How Much Goes to Principal?6.9 Summary7. Rate of Return7.1 The Internal Rate of Return7.2 AssumptionsLoansInvestmentsMultiple Sign ChangesReinvestment AssumptionApplying the IRR Measure7.3 Finding the IRRHints and Shortcuts for Finding the IRR7.4 Loans and Leases7.5 Spreadsheets and the IRRRATE Investment FunctionIRR Block Function7.6 Multiple Sign ChangesMineral ExtractionEnvironmental RestorationStaged Construction or ExpansionSummary of Multiple Sign Change Consequences7.7 Project Balances over Time7.8 Modified Internal Rate of Return (MIRR)7.9 Summary8. Benefit/cost Ratios and Other Measures8.1 Measures of Economic AttractivenessConceptual DefinitionsFrequency and Patterns of Use8.2 Benefit/Cost Ratio8.3 Present Worth IndexesMathematical Definition of PW Indexes8.4 Future Worth8.5 Payback PeriodDifficulties with Payback PeriodWhen Can Payback Be Used?8.6 Discounted PaybackWhy to Use or Not UseExamples of Use8.7 Breakeven Volume8.8 SummaryPart Three: Comparing Alternatives and ProjectsIntroduction to mutually exclusive and constrained budget problems.9. Mutually Exclusive Alternatives9.1 Applying Engineering Economy to Engineering Design9.2 Key Assumption Is the Interest Rate or Minimum Attractive Rate of ReturnCommon Assumptions9.3 Comparing Alternatives with Lives of the Same Length9.4 PWs and Explicitly Comparing Different-Length LivesApproaches For Defining a Problem HorizonChoosing the Best HorizonMutually Exclusive Alternatives without a Common Horizon9.5 EAWs and EACs and Implicitly Comparing Different-Length Lives9.6 Using EAC for Different-Length Lives Is a Robust ApproachRobustness Due to DiscountingRobustness Due to Estimated Lives9.7 Benefit/Cost and IRR Comparisons of Mutually Exclusive Alternatives Require Incremental Analysis9.8 Defender/Challenger Analysis9.9 PW, EAW, and IRR Have the Same Interest Rate Assumption9.10 Using Spreadsheet GOAL SEEK Tool to Calculate Incremental IRRs9.11 Summary10. Replacement Analysis10.1 Why Is Equipment Replaced, Retired, or Augmented?Reduced PerformanceAltered RequirementsObsolescenceRisk of Catastrophic Failure or Unplanned ReplacementLease or Rental vs. OwnershipSummary of Reasons for Replacement10.2 Old and New Are Mutually ExclusiveDifferent-Length LivesEconomic Life10.3 Sunk Costs, Risks, and Short-Term Cost SavingsSunk CostsRisks of the New often Far Exceed Those of Extending the OldShort-term Cost Savings Are Not Enough to Compare Repair vs. Replace10.4 Optimal ChallengersChallenger's Optimal or Economic LifeCost Curve for the Challenger's Economic LifeSpreadsheets for Challenger's Economic Life10.5 Optimal DefendersTypical Defender's Economic LifeIncorrect Assumptions for Minimizing the Defender's EACWhen to Calculate the Defender=s Best EACFlowchart to Summarize the Decision Rules10.6 Optimal Capacity Problems10.7 Estimating Future ChallengersA Simple Rule of ThumbMAPI10.8 Replacement and Repair ModelsClassifying Replacement ModelsBlock Replacement10.9 Summary and Conclusions11. Constrained Project Selection11.1 The Constrained Project Selection ProblemMutually Exclusive Choices vs. Constrained Project SelectionBudgets and Project SelectionProblem SizeBudget Flexibility and Contingency Allowances11.2 Ranking ProjectsInvestment Opportunity ScheduleRanking by PW or EAW Does Not WorkStrengths and Weaknesses of IRR11.3 Determining the Minimum Attractive Rate of Return Using the Opportunity Cost of CapitalMinimum Attractive Rate of Return (MARR)11.4 A Theoretically Optimal Approach for Determining the Capital Budget11.5 Capital Limits in the Real WorldWhy Capital Are ImposedBudget Limits and the Cost of Capital11.6 Matching Assumptions to the Real WorldAssumption of Indivisible Projects and Increments of FinancingAssumption of Project IndependenceAssumption of Simultaneous EvaluationStability and Reinvestment Assumptions11.7 Present Worth Indexes and Benefit/Cost Ratios11.8 Using the SORT Spreadsheet ToolUsing Spreadsheet Investment and Block FunctionsUsing the SORT Tool11.9 SummaryAppendix 11A Mathematical Programming and SpreadsheetsUsing Spreadsheets to Solve Linear ProgramsDisadvantages of Mathematical Programming ModelsPart Four: Enhancements for the Real World12. Depreciation12.1 IntroductionDefinitions12.2 Basic Depreciation MethodsStraight-Line MethodDeclining Balance MethodSOYD MethodUnits-of-Production Method12.3 Modified Accelerated Cost Recovery System (MACRS)Based on Accelerated Cost Recovery System (ACRS)MACRSAlternate MACRS12.4 Gains and Losses on Sales and Recaptured Depreciation12.5 Optimal Depreciation Strategies12.6 PW of a Depreciation ScheduleStraight-Line MethodDeclining Balance MethodSOYD MethodMACRS12.7 Depletion of ResourcesCost DepletionPercentage Depletion12.8 Section 179 Deduction and Bonus DepreciationSection 179Recapture for Section 179 AssetsBonus Depreciation12.9 Spreadsheet Functions for DepreciationUsing VDB for MACRS12.10 Summary13. Income Taxes13.1 Principles of Income TaxesIncome, Property, Sales, and Value Added TaxesPoint of ViewPrinciples of Calculation13.2 Progressive Marginal Tax RatesEffective Tax Rate for State, Local, and Federal Taxes13.3 Finding Taxable Income When Depreciation Is IncludedCategorizing Before-Tax Cash Flows13.4 Calculating After-Tax Cash Flows and EACs Using Tables or SpreadsheetsSelecting an After-Tax Interest Rate13.5 Calculating After-Tax Cash Flows and EACs using FormulasStraight-Line DepreciationMACRS DepreciationSum-of-the-Years'-digits (SOYD) Depreciation13.6 Investment Tax Credits (ITC) and Capital GainsHistory of ITCComputing and using an ITCCapital Gains13.7 Interest Deductions and an After-Tax IRRLeverage13.8 SummaryAppendix 13A: Personal Income Taxes14. Public Sector Engineering Economy14.1 Defining Benefits, Disbenefits, and CostsAgencies That Do Not Serve the Public DirectlyBenefits to Whomsoever They Accrue14.2 Why Are Public-Sector Problems Difficult?Quantifying and Valuing BenefitsLong Problem HorizonsProbabilities of Rare EventsMultiple Objectives That May ConflictInterest Groups with Differing PerspectivesSelecting an Interest RateSummary14.3 Correct Methods and Interest RatesEvaluating a Single ProjectCriteria for Mutually Exclusive AlternativesCriteria for Constrained Project SelectionDeferred Maintenance14.4 Whose Point of View?What Is Internal? What Is External?Federal SubsidiesConsumers' Surplus14.5 Allocating Costs to Benefit Recipients14.6 Valuing the Benefits of Public ProjectsA Life's Present ValueStandards of Federal AgenciesRisk and Valuing Public Benefits14.7 Cost Effectiveness14.8 Summary15. Inflation15.1 Defining and Measuring Inflation and DeflationThe Consumer Price Index (CPI)Annual Inflation RateProducer Price Indexes15.2 Consistent Assumptions for Interest Rates and Cash Flow EstimatesInflation TerminologyMatching Interest Rates to Inflation AssumptionsDifferential InflationEstimating Differential InflationAccuracy of Inflation Estimates15.3 Solving for PW or EAC When Inflation Is Included15.4 Inflation Examples with Multiple Inflation Rates15.5 Leases and Other Prepaid Expenses15.6 Depreciation and Loan Payments15.7 Inflation and Other Geometric GradientsThe Four Geometric GradientsFormulas Based on the Equivalent Discount Rate15.8 SummaryPart Five: Decision Making Tools16. Estimating Cash Flows16.1 IntroductionImportance of Cost EstimatingThe Impact of Early Project Decisions16.2 Cash Flow Estimating and Life-Cycle StagesHidden CostsCosts during the Project Life Cycle16.3 Cash Flow Estimating StandardsStages of Cash Flow EstimatingConceptual DesignPreliminary Systems DesignFinal Systems DesignCost Estimate Definitions and Accuracy16.4 Design Criteria and SpecificationsDesign CriteriaSpecifying Performance16.5 Modeling the Base Case16.6 Using Indexes for an Order-of-Magnitude Estimate16.7 Using Capacity Functions for Order-of-Magnitude Estimates16.8 Using Growth Curves16.9 Using Learning Curves16.10 Using Factor Estimates16.11 Summary17. Sensitivity Analysis17.1 What Is Sensitivity Analysis?Sources of UncertaintyBreakeven ChartsWhy Do Sensitivity Analysis?17.2 Uncertain Data and Its ImpactDefining the Limits of Uncertain DataEstimating Sensitivities17.3 Techniques for Sensitivity AnalysisScenariosThe Relative Sensitivity of the Economic Criteria to Different VariablesTabulating Relative Sensitivity AnalysisTornado DiagramSpiderplotMore Advanced Techniques17.4 SpiderplotsDefining SpiderplotsInterpreting a Spiderplot17.5 Constructing a SpiderplotBy HandUsing a SpreadsheetChoosing a y-axis17.6 Constructing Tornado DiagramsTornado Diagrams with Positive Values OnlyTornado Diagrams with Positive and Negative ValuesUsing the Tornado Diagram Template17.7 Multiple AlternativesSpiderplotsScenarios17.8 Sensitivity Analysis with Multiple Variables17.9 Summary18. Uncertainty and Probability18.1 Probabilities18.2 Computing Expected Values18.3 Choosing Alternatives Using Expected Values18.4 Economic Decision TreesSequential DecisionsCash Flows That Occur over Time18.5 Risk18.6 Risk/Return TradeoffsBuying InsuranceBalancing Risks and ReturnsEfficient Frontier for Risk/Return Trade-offsApproaches to Risk/Return Tradeoffs18.7 Real Options18.8 Probability Distributions for Economic OutcomesProbability Distributions with Multiple Independent VariablesN and i Need Complete Distributions for Exact AnswersContinuous and Discrete Probability DistributionsSimulation18.9 Summary19. Multiple Objectives19.1 Multiple AttributesDefinitions and Trade-offsAttribute CategoriesSelecting Multiple ObjectivesSummary19.2 The Process of Evaluating Multiple ObjectivesEliminating Dominated and Unsatisfactory AlternativesDecision Rules for Choosing the Best Alternative19.3 Identifying the Attributes19.4 Evaluating the Alternatives19.5 Graphical TechniquesShaded Circles and SquaresPolar Graph19.6 Numerical Scales for EvaluationNumerical VariablesChoosing the Best and the Worst CaseVerbal VariablesMissing Values19.7 Additive ModelsDirect Assignment of WeightsSubjective Assignment of Importance RatingsTabular Additive ModelsGraphical Additive ModelsClosing Comment on Additive Models19.8 Hierarchical Attributes and Objectives19.9 SummaryAppendixesA. AccountingA.1 Role of AccountingA.2 General AccountingBusiness TransactionsA.3 The Balance SheetAssetsLiabilitiesEquityFinancial Ratios Derived from Balance Sheet DataA.4 Income StatementDefinitionFinancial Ratios Derived from Income Statement DataLinking the Balance Sheet, Income Statement, and Capital TransactionsA.5 Traditional Cost AccountingDirect and Indirect CostsIndirect Cost AllocationProblems with Traditional Cost AccountingA.6 Activity Based Costs (ABC)DefinitionABC Provides More Accurate CostsUsing ABCEconomic Justification Using ABC DataTimely and Accurate DataA.7 SummaryB. Time Value of Money (TVM) and CalculatorsB.1 Advantages and Types of TVM CalculatorsB.2 Notation for TVM CalculatorsB.3 Examples with TVM Calculators and Tabulated FactorsC. End-of-Period Compound Interest TablesD. Fundamentals of Engineering (FE) Exam Practice Problems