Preface VII 1 Overview of Engineering Economics 1.1 Why Study Engineering Economics 1 1.2 Text Objectives 2 2 Foundation of Engineering Economics 2.1 Loan Elements 2.1.1 Monies Transferred 3 2.1.2 Balances, Interest Rate & Total Interest 4 2.1.3 Interest Rate Specifications 5 2.1.4 Analogy Between Loans & Rentals 6 2.2 Cash Flows 2.2.1 Definitions 7 2.2.2 Cash Flow Diagram 7 2.3 Fundamental Repayment Equation 2.3.1 Definitions 8 2.3.2 Derivation 9 2.3.3 Total & Normalized Total Interests 10 2.3.4 Using the Fundamental Repayment Equation 10 2.4 Worth, Factors & Equivalence 2.4.1 Worths of a Cash Flow 14 2.4.2 Factors for a Cash Flow 16 2.4.3 12-FACTOR Calculator 18 2.4.4 Present & Future Worths of a Series 19 2.4.5 Equivalence 20 2.5 General Repayment Equation (GRE) 2.5.1 Balance Equation 21 2.5.2 Derivation of the GRE 22 2.5.3 Total Interest Equation 23 2.5.4 Applications of the GRE 24 2.6 Uniform Series Factors & Uniform Worth Factors of a Cash Flow 2.6.1 Present Worth Factor 26 2.6.2 Future Worth Factor 29 2.6.3 Uniform Worth of a Present Cash Flow 30 2.6.4 Uniform Worth of a Future Cash Flow 33 2.6.5 Shifted Basic Series 36 2.7 Gradient Series Factors 2.7.1 Present Worth Factor 39 2.7.2 Future Worth Factor 43 2.7.3 Uniform Worth of a Gradient Series 43 2.8 Geometric Gradient Series Factors 2.8.1 Present Worth Factor 46 2.8.2 Net Present Worth Factor 48 2.8.3 Future Worth Factor 50 2.8.4 Uniform Worth of a Geometric Gradient Series 51 2.9 Rate of Return of a Simple Investment 2.9.1 Comparison of Loans & Investments 53 2.9.2 Rate of Return of an Investment 54 2.9.3 Simple Investments 56 2.10 Calculating the IRR% with Excel 2.10.1 IRR Function 57 2.10.2 Spreadsheet Cells 59 2.10.3 Goal Seek Command 59 2.11 Classification of the Examples 60 2.12 Developing the 12-FACTOR Calculator 2.12.1 Creating the 12-Factor Functions in Excel 61 2.12.2 12-FACTOR Calculator 62 2.12.3 Excel s Three Factor Functions 63 2.13 Summary 64 2.14 Problems 65 3 Intermediate Balances and Other Interest Rates & Series 3.1 Intermediate Balances 3.3.1 Intermediate Balance Equations 69 3.1.2 Annual Interests of a Home Mortgage 71 3.1.3 Recursive Calculation of Intermediate Balances 74 3.2 Other Interest Rates 3.2.1 Annual Percentage Yield 76 3.2.2 Simple Interest 78 3.2.3 Continuous Compounding 79 3.3 Composite Series 3.3.1 Introduction 81 3.3.2 Decreasing Linear Series 83 3.3.3 Composite Series Transformation Procedure 84 3.4 Summary 86 3.5 Problems 86 4 Annual Worth Comparisons 4.1 Introduction 4.1.1 Definitions 89 4.1.2 Rationale & Consistency of Annual Worth Comparisons 90 4.2 Specified Service Time 4.2.1 Introduction 91 4.2.2 ANNUAL WORTH COMPARISON Calculator 92 4.2.3 Using the ANNUAL WORTH COMPARISON Calculator 93 4.2.4 Component Replacement Costs 94 4.2.5 Adding Component Replacement Costs to the ANNUAL WORTH COMPARISON Calculator 95 4.2.6 Effect of the MARR on a Least-Cost Study 96 4.3 Indefinite Service Time 4.3.1 Least Common Multiple 97 4.3.2 Repeatability Assumption 98 4.3.3 Comparison of Specified & LCM Service Times 99 4.3.4 Disadvantages of the LCM Service Time 101 4.4 Other Cost Alternatives 4.4.1 Extra Capacity Versus Staged Construction 101 4.4.2 Dissimilar Alternatives 104 4.4.3 Irregular Alternatives 105 4.5 Perpetual Service Time 4.5.1 Definition 107 4.5.2 Three Annual Worth Limits 107 4.6 Annual Worth Investment Calculations 109 4.6 Summary 111 4.7 Problems 112 5 Present Worth Comparisons 5.1 Specified Service Time 5.1.1 Present Worths Without Replacement Costs 117 5.1.2 PRESENT WORTH COMPARISON Calculator 119 5.1.3 Using the PRESENT WORTH COMPARISON Calculator 119 5.1.4 Component Replacement Costs 120 5.1.5 Adding Component Replacement Costs to the PRESENT WORTH COMPARISON Calculator 122 5.2 Other Cost Alternatives 5.2.1 Extra Capacity & Staged Construction Alternatives 123 5.2.2 Dissimilar & Irregular Alternatives 124 5.3 Perpetual Service Time 5.3.1 Definitions 124 5.3.2 Capitalized Costs of the Basic Series 125 5.3.3 Comparison of Annual Worth Limits & Capitalized Costs 125 5.4 Present Worth Investment Calculations 127 5.5 Choosing a Worth Calculation Method 5.5.1 Least-Cost Studies 129 5.5.2 Other Calculations 129 5.6 Summary 129 5.7 Problems 130 6 Simple and Quasi-Simple Investments 6.1 Simple Investments: A Quick Review 6.1.1 Definition 133 6.1.2 Properties 134 6.2 IRR% of a Manufacturing Plant Investment & End-of-Year Convention 6.2.1 Disbursement Classes 135 6.2.2 Cash Flow Timing 136 6.2.3 End-of-Year Convention 136 6.2.4 Pretax IRR% of a Chemical Plant Investment (SI-Class) 138 6.3 Simple Cost Reduction Investments 6.3.1 Definition 141 6.3.2 Calculating the IRR% (SI-Class) 141 6.4 Multi-Simple Investments 6.4.1 Definitions, Properties & Occurrences 142 6.4.2 IRR of a Quasi-Simple Investment (QSI-Class) 143 6.5 Creating a Polynomial Root Finder in Mathematica 6.5.1 Creating the polyRoots Function 146 6.5.2 Using the polyRoots Function 147 6.6 Incremental Investment Criterion 148 6.7 Summary 149 6.7 Problems 149 7 Non-Simple Investments 7.1 Five Fundamental Properties of Simple & Quasi-Simple Investments 7.1.1 Negative First Cash Flow 153 7.1.2 Positive Last Cash Flow 153 7.1.3 Odd Number of Cash Flow Sign Changes 154 7.1.4 Unique Rate of Rate of Return 154 7.1.5 Positive Balances 154 7.1.6 Fundamental Properties of the Four Basic Non-Simple Investments 154 7.2 Down Payment Investments 7.2.1 Definition, Properties & Occurrence 154 7.2.2 Finding the RORs of a Down Payment Investment 155 7.2.3 Meaning of Negative Balances 157 7.2.4 Mixed Down Payment Investment 157 7.2.5 Properties of a Mixed Down Payment Investment 159 7.3 Termination Investments 7.3.1 Definition, Properties & Occurrence 161 7.3.2 Mixed Termination Investment 162 7.4 Down Payment & Termination Investments 7.4.1 Definition, Properties & Occurrence 164 7.4.2 Mixed Down Payment & Termination Investment 165 7.5 Bi-Simple & Tri-Simple Investments 7.5.1 Definition, Properties & Occurrences 167 7.5.2 Mixed Bi-Simple Investment 167 7.5.3 Mixed Tri-Simple Investments: Two Simple Internal Investments 170 7.6 Summary 171 7.7 Problems 172 8 Mutually Exclusive Investments 8.1 Comparing Two Simple Mutually Exclusive Investments 8.1.1 Definitions 175 8.1.2 Basic MEI Selection Model 176 8.1.3 Relationships Between the Three IRRs 178 8.2 Comparing Three or More Mutually Exclusive Investments 8.2.1 General MEI Selection Procedure 180 8.2.2 Relative Values of the Challenger-Defender IRRs 182 8.2.3 Effect of the MARR on an MEI Study 182 8.3 Equal Initial Cash Flows 183 8.4 Summary 184 8.5 Problems 184 9 After Tax IRR% 9.1 Income Taxes & Depreciation 9.1.1 Combined Income Tax Rate 187 9.1.2 Taxable Income, Income Tax & After Tax Cash Flow 188 9.1.3 Depreciation Expenses 188 9.2 MACRS Depreciation 9.2.1 Percentage Depreciations 191 9.2.2 Net Recovered Capital 191 9.2.3 Calculating an After Tax IRR% 192 9.3 Start-Up Cost & Time 9.3.1 Definitions 192 9.3.2 Percentage Depreciations 192 9.3.3 Calculating the After Tax IRR% with a Start-Up Time 194 9.4 Straight Line Depreciation 194 9.5 Book Depreciation Methods 9.5.1 Straight Line Depreciation 197 9.5.2 Double Declining Balance Depreciation 198 9.5.3 Sum-of-Years-Digits Depreciation 200 9.6 Brief History of U.S. Tax Laws 203 9.7 Summary 203 9.8 Problems 203 10 Sensitivity Analysis 10.1 Creating an IRR% Sensitivity Table 208 10.2 Staged Construction & Break Even Point 211 10.3 Summary 212 10.4 Problems 213 Chapter 11 Other Profitability Measures 11.1 Net Present Value 11.1.1 A 15 Second Review of Calculating an IRR 215 11.1.2 Screening the IRR with a Net Present Value Calculation 216 11.1.3 Calculating a Net Present Value with Excel 216 11.1.4 Comparing Two or More Mutually Exclusive Investments 217 11.2 Accounting Rate of Return 219 11.3 Benefit Cost Ratio 220 11.4 Payback Period 11.4.1 Definition & Calculation 221 11.4.2 Rationale for the Payback Period 222 11.5 Investment Information Package 224 11.6 Summary 224 11.7 Problems 225 Index 227.