Contemporary engineering economics

947 Pages·2006·7.102 MB·English

by  Chan S Park

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C o n t e m p o r a r y
Engineering
Economics
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C o n t e m p o r a r y
Engineering
Economics
F o u r t h E d i t i o n
Chan S. Park
Department of Industrial
and Systems Engineering
Auburn University
Upper Saddle River,NJ 07458
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Library of Congress Cataloging-in-Publication Data on File
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Pearson Prentice Hall
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To my wife,Kim (Inkyung);and my children,Michael and Edward
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CONTENTS
Preface xix
PPAARRTT 1 BBAASSIICCSS OOFF FFIINNAANNCCIIAALL DDEECCIISSIIOONNSS 1
Chapter 1 Engineering Economic Decisions 2
1.1 Role of Engineers in Business 4
1.1.1 Types of Business Organization 5
1.1.2 Engineering Economic Decisions 6
1.1.3 Personal Economic Decisions 6
1.2 What Makes the Engineering Economic Decision Difficult? 7
1.3 Economic Decisions versus Design Decisions 8
1.4 Large-Scale Engineering Projects 9
1.4.1 How a Typical Project Idea Evolves 9
1.4.2 Impact of Engineering Projects on Financial Statements 12
1.4.3 A Look Back in 2005:Did Toyota Make the Right Decision? 13
1.5 Common Types of Strategic Engineering Economic Decisions 13
1.6 Fundamental Principles of Engineering Economics 15
Summary 17
Chapter 2 Understanding Financial Statements 18
2.1 Accounting: The Basis of Decision Making 21
2.2 Financial Status for Businesses 22
2.2.1 The Balance Sheet 24
2.2.2 The Income Statement 27
2.2.3 The Cash Flow Statement 30
2.3 Using Ratios to Make Business Decisions 33
2.3.1 Debt Management Analysis 34
2.3.2 Liquidity Analysis 37
2.3.3 Asset Management Analysis 38
2.3.4 Profitability Analysis 39
2.3.5 Market Value Analysis 41
2.3.6 Limitations of Financial Ratios in Business Decisions 42
Summary 43
Problems 44
Short Case Studies 50
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Chapter 3 Interest Rate and Economic Equivalence 52
3.1 Interest: The Cost of Money 54
3.1.1 The Time Value of Money 55
3.1.2 Elements of Transactions Involving Interest 56
3.1.3 Methods of Calculating Interest 59
3.1.4 Simple Interest versus Compound Interest 62
3.2 Economic Equivalence 63
3.2.1 Definition and Simple Calculations 63
3.2.2 Equivalence Calculations:General Principles 66
3.2.3 Looking Ahead 71
3.3 Development of Interest Formulas 71
3.3.1 The Five Types of Cash Flows 72
3.3.2 Single-Cash-Flow Formulas 73
3.3.3 Uneven Payment Series 80
3.3.4 Equal Payment Series 84
3.3.5 Linear Gradient Series 96
3.3.6 Geometric Gradient Series 102
3.4 Unconventional Equivalence Calculations 107
3.4.1 Composite Cash Flows 107
3.4.2 Determining an Interest Rate to Establish Economic Equivalence 114
Summary 119
Problems 119
Short Case Studies 129
Chapter 4 Understanding Money and Its Management 134
4.1 Nominal and Effective Interest Rates 136
4.1.1 Nominal Interest Rates 136
4.1.2 Effective Annual Interest Rates 137
4.1.3 Effective Interest Rates per Payment Period 140
4.1.4 Continuous Compounding 141
4.2 Equivalence Calculations with Effective Interest Rates 143
4.2.1 When Payment Period Is Equal to Compounding Period 144
4.2.2 Compounding Occurs at a Different Rate than that at
Which Payments Are Made 145
4.3 Equivalence Calculations with Continuous Payments 152
4.3.1 Single-Payment Transactions 152
4.3.2 Continuous-Funds Flow 152
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Contents ix
4.4 Changing Interest Rates 156
4.4.1 Single Sums of Money 156
4.4.2 Series of Cash Flows 158
4.5 Debt Management 159
4.5.1 Commercial Loans 159
4.5.2 Loan versus Lease Financing 167
4.5.3 Home Mortgage 171
4.6 Investing in Financial Assets 175
4.6.1 Investment Basics 175
4.6.2 How to Determine Your Expected Return 176
4.6.3 Investing in Bonds 179
Summary 187
Problems 188
Short Case Studies 199
PPAARRTT 2 EEVVAALLUUAATTIIOONN OOFF BBUUSSIINNEESSSS
AANNDD EENNGGIINNEEEERRIINNGG AASSSSEETTSS 203
Chapter 5 Present-Worth Analysis 204
5.1 Describing Project Cash Flows 207
5.1.1 Loan versus Project Cash Flows 207
5.1.2 Independent versus Mutually Exclusive
Investment Projects 209
5.2 Initial Project Screening Method 210
5.2.1 Payback Period:The Time It Takes to Pay Back 210
5.2.2 Benefits and Flaws of Payback Screening 213
5.2.3 Discounted Payback Period 214
5.2.4 Where Do We Go from Here? 215
5.3 Discounted Cash Flow Analysis 215
5.3.1 Net-Present-Worth Criterion 216
5.3.2 Meaning of Net Present Worth 220
5.3.3 Basis for Selecting the MARR 222
5.4 Variations of Present-Worth Analysis 223
5.4.1 Future-Worth Analysis 223
5.4.2 Capitalized Equivalent Method 227
5.5 Comparing Mutually Exclusive Alternatives 232
5.5.1 Meaning of Mutually Exclusive and “Do Nothing” 232
5.5.2 Analysis Period 235
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5.5.3 Analysis Period Equals Project Lives 236
5.5.4 Analysis Period Differs from Project Lives 238
5.5.5 Analysis Period Is Not Specified 246
Summary 249
Problems 249
Short Case Studies 265
Chapter 6 Annual Equivalent-Worth Analysis 268
6.1 Annual Equivalent-Worth Criterion 270
6.1.1 Fundamental Decision Rule 270
6.1.2 Annual-Worth Calculation with Repeating Cash Flow Cycles 273
6.1.3 Comparing Mutually Exclusive Alternatives 275
6.2 Capital Costs versus Operating Costs 277
6.3 Applying Annual-Worth Analysis 280
6.3.1 Benefits of AE Analysis 281
6.3.2 Unit Profit or Cost Calculation 281
6.3.3 Make-or-Buy Decision 283
6.3.4 Pricing the Use of an Asset 286
6.4 Life-Cycle Cost Analysis 287
6.5 Design Economics 294
Summary 303
Problems 304
Short Case Studies 318
Chapter 7 Rate-of-Return Analysis 322
7.1 Rate of Return 324
7.1.1 Return on Investment 324
7.1.2 Return on Invested Capital 326
7.2 Methods for Finding the Rate of Return 327
7.2.1 Simple versus Nonsimple Investments 327
7.2.2 Predicting Multiple i*’s 329
7.2.3 Computational Methods 331
7.3 Internal-Rate-of-Return Criterion 338
7.3.1 Relationship to PW Analysis 338
7.3.2 Net-Investment Test:Pure versus Mixed Investments 339
7.3.3 Decision Rule for Pure Investments 341
7.3.4 Decision Rule for Mixed Investments 344