Tai Lieu Chat Luong Summary of Discrete Compounding Formulas with Discrete Payments - - = - Factor Excel Cash Flow - Flow Type Notation Formula Command Diagram i S Compound I amount = FV(i,N. N ) Y i M AAA AA / r E 5 I N Present i.---- Summary of Formulas Effective Interest Rate per Payment Period Discrete compounding i = [ ( I + ~ / ( c K ) ] '- 1 Continuous compounding i erlK - 1 - Recovery Period (Year where i - effective interest rate per payment period r = nominal interest rate or APR C = number of interest periods per payment period K = number of payment periods per year r / K = nominal interest rate per payment period Market Interest Rate i - +f + i' i'f where i = market interest rate i f = inflation-free interest rate - ,f = general inflation rate Present Value of Perpetuities p = market related risk index r, = market rate of return Capital Recovery with Return Cost of Debt C R ( i ) = ( I - S ) ( A / P ,i, N ) + iS Book Value = I - x 11 1'1 D, where id = cost of debt c, -the amount of term loan Straight-Line Depreciation c,, = the amount of bond financing - (I - S) D,? - N c,, = total debt = c, t c,, k, = the before-tax interest rate on the term loan kh = the before-tax interest rate on the bond Declining Balance Depreciation D,, - aI(1 - a)"-' t,,, = the firm's marginal - Weighted-Average Cost of Capital tax rate 1 where a = declining balance rate. and 0 < a 5 N Cost of Equity where k = cost of capital where i, = cost of equity c,, = total equity capital rf = risk-free interest rate V = Cd + C, Library of Congress Cataloging-in-Publication Data on File Vice President and Editorial Director, ECS: Marcia J. Horton Acquisitions Editor: Dorothy Marrero Vice President and Director of Production and Manufacturing.
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Pearson Education, Inc., Upper Saddle River, New Jersey Table of Contents nderstanding Money and Its Management 1.1 The Rational Decision-Making Process 1.1 How D o We Make Typical Personal Decisions? 1.2 How Do We Approach an Engineering Design Problem? 1.3 What Makes Economic Decisions Differ from Other Design Decisions? 1.2 The Engineer's Role in Business 1.1 Making Capital-Expenditure Decisions 1.2 Large-Scale Engineering Economic Decisions 1.3 Impact of Engineering Projects on Financial Statements 1.3 Types of Strategic Engineering Economic Decisions 1.4 Fundamental Principles in Engineering Economics Summary 2.1 Interest: The Cost of Money 2.1 The Time Value of Money 2.2 Elements of Transactions Involving Interest 2.3 Methods of Calculating Interest 2.1 Definition and Simple Calculations 2.2 Equivalence Calculations Require a Common Time Basis for Comparison 2.3 lnterest Formulas for Single Cash Flows 2.1 Compound-Amount Factor 2.2 Present-Worth Factor 2.3 Solving for Time and Interest Rates viii TABLE OF CONTENTS 2.4 Uneven-Payment Series 2.5 Equal-Payment Series 2.1 Compound-Amount Factor: Find F, Given A, i, and N 2.2 Sinking-Fund Factor: Find A, Given 5 i, and N 2.3 Capital-Recovery Factor (Annuity Factor): Find A, Given P.4 Present-Worth Factor: Find P, Given A, i, and N 2.5 Present Value of Perpetuities 2.6 Dealing with Gradient Series 2.1 Handling Linear Gradient Series 2.2 Handling Geometric Gradient Series 2.7 Composite Cash Flows Summary Problems 3.1 Market Interest Rates 3.I Nominal Interest Rates 3.2 Annual Effective Yields 3.2 Calculating Effective Interest Rates Based on Payment Periods 3.3 Equivalence Calculations with Effective Interest Rates 3.1 Compounding Period Equal to Payment Period 3.2 Compounding Occurs at a Different Rate than that at which Payments Are Made 3.1 Borrowing with Credit Cards 3.2 Commercial Loans-Calculating Principal and lnterest Payments 3.3 Comparing Different Financing Options Summary Problems , " : & " a'i 'p.1 Measure of Inflation 4.1 Consumer Price Index 4.2 Producer Price Index TABLE OF CONTENTS 4.3 Average Inflation Rate C f ) 4.4 General lnflation Rate (7) versus Specific Inflation Rate (f,) 4.2 Actual versus Constant Dollars 4.1 Conversion from Constant to Actual Dollars 4.2 Conversion from Actual to Constant Dollars 4.3 Equivalence Calculations under Inflation 4.1 Market and Inflation-Free Interest Rates 4.2 Constant-Dollar Analysis 4.3 Actual-Dollar Analysis 4.4 Mixed-Dollar Analysis Summary Problems valuating Business and Engineering Assets ".1 Loan versus Project Cash Flows 5.2 Initial Project Screening Methods 5.1 Benefits and Flaws of Payback Screening 5.2 Discounted-Payback Period 5.3 Present-Worth Analysis 5.1 Net-Present-Worth Criterion 5.2 Guidelines for Selecting a MARR 5.3 Meaning of Net Present Worth 5.4 Capitalized-Equivalent Method 5.4 Methods to Compare Mutually Exclusive Alternatives 5.1 Doing Nothing Is a Decision Option 5.2 Service Projects versus Revenue Projects 5.3 Analysis Period Equals Project Lives 5.4 Analysis Period Differs from Project Lives Summary Problems x TABLE OF CONTENTS 6.1 Annual Equivalent Worth Criterion 6.1 Benefits of AE Analysis 6.2 Capital Costs versus Operating Costs 6.2 Applying Annual-Worth Analysis 6.1 Unit-Profit or Unit-Cost Calculation 6.2 Make-or-Buy Decision 6.3 Comparing Mutually Exclusive Projects 6.1 Analysis Period Equals Project Lives 6.2 Analysis Period Differs from Projects' Lives Summary Problems 7.1 Rate of Return 7.1 Return on Investment 7.2 Return on Invested Capital 7.2 Methods for Finding Rate of Return 7.1 Simple versus Nonsimple Investments 7.3 Internal-Rate-of-Return Criterion 7.1 Relationship to the PW Analysis 7.2 Decision Rule for Simple Investments 7.3 Decision Rule for Nonsimple Investments 7.4 Incremental Analysis for Comparing Mutually Exclusive Alternatives 7.1 Flaws in Project Ranking by IRR 7.2 Incremental-Investment Analysis 7.3 Handling Unequal Service Lives Summary Problems 7A.1 Net-Investment Test 258 7A.2 The Need for an External Interest Rate 260 7A.3 Calculation of Return on Invested Capital for Mixed Investments 261 TABLE OF CONTENTS xi evelopment of Project Cash Flows 267 8.3 Useful Life and Salvage Value 8.4 Depreciation Methods: Book and Tax Depreciation 8.2 Book Depreciation Methods 8.1 Straight-Line Method 8.2 Declining-Balance Method 8.3 Units-of-Production Method 8.3 Tax Depreciation Methods 8.1 MACRS Recovery Periods 8.2 MACRS Depreciation: Personal Property 8.3 MACRS Depreciation: Real Property 8.4 How to Determine "Accounting Profit" 8.1 Treatment of Depreciation Expenses 8.2 Calculation of Net Income 8.3 Operating Cash Flow versus Net Incomc 8.1 Income Taxes on Operating Income 8.2 Gain Taxes on Asset Disposals Summary Problems 9.1 Understanding Project Cost Elements 308 9.1 Classifying Costs for Manufacturing Environmcnts 308 9.2 Classifying Costs for Financial Statement$ 310 9.3 Classifying Costs for Predicting Cost Behavior 312 9.2 Why D o We Need to Use Cash Flow in Economic Analysis? 314 9.3 Income-Tax Rate to Be Used in Economic Analysis 315 xiv TABLE OF CONTENTS 13.3 Using Ratios to Make Business Decisions 13.1 Debt Management Analysis 13.3 Asset Management Analysis 13.5 Market-Value Analysis 13.6 Limitations of Financial Ratios in Business Decisions Summary Problems Preface Engineering economics is one of the most practical subject matters in the engineer- ing curriculum. but it is always challenging and an ever-changing discipline. Contemporary Engineering Economics (CEE) was first published in 1993, and since then we have tried to reflect changes in the business world in each new edition, along with the latest innovations in education and publishing. These changes have resulted in a better, more complete textbook, but one that is much longer than it was originally intended.
This may present a problem: today, covering the textbook in a single term is increasingly difficult. Therefore, we decided to create Fundamentals of Engineering Economics (FEE) for those who like Fundanzentals but think a smaller, more concise textbook would better serve their needs. This text aims not only to provide sound and comprehensive coverage of the con- cepts of engineering economics, but also to address the practical concerns of engi- neering economics. More specifically, this text has the following goals: 1.
To build a thorough understanding of the theoretical and conceptual basis upon which the practice of financial project analysis is built. To satisfy the very practical needs of the engineer toward making informed financial decisions when acting as a team member or project manager for an engineering project. To incorporate all critical decision-making tools-including the most con- temporary, computer-oriented ones that engineers bring to the task of mak- ing informed financial decisions. To appeal to the full range of engineering disciplines for which this course is often required: industrial, civil, mechanical, electrical, computer, aero- space, chemical, and manufacturing engineering, as well as engineering technology.
This text is intended for use in the introductory engineering economics course. Un- like the larger textbook (CEE), it is possible to cover F E E in a single term, and per- haps even to supplement it with a few outside readings or cases. Although the chapters in FEE are arranged logically, they are written in a flexible, modular for- mat. allowing instructors to cover the material in a different sequence.
xvi PREFACE We decided to streamline the textbook by retaining the depth and level of rigor in CEE, while eliminating some less critical topics in each chapter. This resulted in reducing the total number of chapters by four chapters in two steps. Such core topics as the time value of money, measures of investment worth, development of project cash flows. and the relationship between risk and return are still discussed in great detail.
First, we eliminated the three chapters on cost accounting, principles of in- vesting, and capital budgeting. We address these issues in other parts of the textbook, but in less depth than was contained in the deleted chapters. Second, we consolidated the two chapters on depreciation and income taxes into one chapter, thus eliminating one more chapter. This consolidation pro- duced some unexpected benefits-students understand depreciation and income taxes in the context of project cash flow analysis, rather than a sep- arate accounting chapter.
moving the inflation material from late in the textbook to the end of the equivalence chapters enables students to understand better the nature of inflation in the context of time value of money. Fourth, the project cash flow analysis chapter (Chapter 9) is significantly streamlined-it begins with the definitions and classifications of various cost elements that will be a part of a project cash flow statement. it presents the income tax rate to use in developing a project cash flow state- ment. It also presents the appropriate interest rate to use in after-tax eco- nomic analysis.
Finally, it illustrates how to develop a project cash flow statement considering (1) operating activities, (2) investing activities, and (3) financing activities. Fifth, the handling project uncertainty chapter (Chapter 10) has been consol- idated by introducing the risk-adjusted discount rate approach and investment strategies under uncertainty, but eliminating the decision-tree analysis.