Capital Investment Analysis for Engineering and Management,9780133110364

Capital Investment Analysis for Engineering and Management

by ; ;
Edition: 2nd
ISBN13: 9780133110364
ISBN10: 0133110362
Format: Hardcover
Pub. Date: 1996-01-01
Publisher(s): PRENTICE HALL
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Summary

This guide enables engineers and engineering managers to communicate effectively with financial professionals, while offering a balanced presentation of the basics of engineering economic analysis. Focuses on real management situations. Provides accounting/cost accounting fundamentals to measure results. Introduces the concept of " options analysis" applied to capital investment decisions. Aids in conducting economic analyses with liberal use of spreadsheets. Introduces tax considerations and their consequences. For those interested in learning more about capital investment decision methodologies, particularly engineers and engineering managers.

Table of Contents

Preface xvii
PART ONE Basic Capital Project Evaluation Techniques 1(268)
1 Introduction and Cost Concepts
1(18)
1.1 Recognition of a Problem Opportunity
1(1)
1.2 Systems Analysis
2(1)
1.3 Generation of Alternatives
2(1)
1.4 Importance of Estimates in Economic Analyses
2(1)
1.5 Cost Concepts
3(7)
1.6 Cost Factors
10(1)
1.7 Objectives of Firm and Nonmonetary Factors
10(1)
1.8 The Role of the Engineer and Manager in Economic Decision Making
11(1)
1.9 Scope and Importance
11(1)
Problems
11(4)
Appendix 1-A: Accounting Fundamentals
15(4)
2 Computations Involving Interest
19(31)
2.1 Interest Calculations
20(1)
2.2 Equivalence
21(1)
2.3 Compound Interest Formulas
22(9)
Solved Problems
31(4)
2.4 Spreadsheets
35(2)
2.5 Compounding Frequency; Nominal and Effective Rates
37(1)
2.6 Continuous Compounding Interest Formulas
38(3)
Solved Problems
41(4)
Problems
45(5)
3 Equivalent Worth Methods for Comparing Alternatives
50(19)
3.1 Measures of Economic Effectiveness
50(1)
3.2 Defining Investment Alternatives
51(1)
3.3 A Systematic Procedure for Comparing Investment Alternatives
51(2)
3.4 Judging the Economic Worth of Investment Opportunities
53(1)
3.5 Present Worth (PW) Method
54(2)
3.6 Annual Worth (AW) Method
56(2)
3.7 Future Worth (FW) Method
58(2)
3.8 Assumptions in Comparisons of Alternatives with Different Lives
60(2)
3.9 Relationship of Various Analysis Methods
62(1)
Problems
62(7)
4 Rate of Return Methods for Comparing Alternatives
69(34)
4.1 Computation of Internal Rate of Return (IRR) for a Single Investment Opportunity
70(8)
4.2 External Rate of Return (ERR) Method
78(3)
4.3 Using Spreadsheets to Perform IRR and ERR Analyses
81(12)
Problems
93(6)
Appendix 4-A: Use of the ERR Method to Overcome Multiple-Solutions Difficulty with the IRR Method
99(2)
Appendix 4-B: Other Rate of Return and Investment Recovery Measures of Merit for Financial and Management Purposes
101(2)
5 Estimating for Economic Analyses
103(37)
5.1 Introduction
103(1)
5.2 Estimating: Difficulty and Perspective
103(1)
5.3 Estimation Accuracy
104(1)
5.4 Sources of Data
105(3)
5.5 Quantitative Estimating Techniques
108(20)
5.6 Additional Examples of Cost Engineering
128(5)
5.7 Summary
133(1)
Problems
133(7)
6 Consideration of Depreciation and Income Taxes
140(50)
6.1 Introduction to Depreciation
140(5)
6.2 The Tax Reform Act of 1986 and Its Depreciation Provisions
145(6)
6.3 A Comprehensive Example
151(3)
6.4 Introduction to Income Taxes
154(9)
6.5 General Procedure for Making After-Tax Economic Analyses
163(17)
6.6 Summary
180(1)
References
180(2)
Problems
182(8)
7 Analyses for Government Agencies and Public Utilities
190(26)
7.1 Investments by Government Agencies
190(3)
7.2 Comparison of Alternatives: The Benefit-Cost Ratio Method
193(4)
7.3 Investments by Privately Owned Utilities
197(1)
7.4 Comparison of Alternatives: The Revenue Requirement Method
198(6)
7.5 Immediate Versus Deferred Investment
204(5)
7.6 Summary
209(1)
References
209(1)
Problems
209(7)
8 Replacement Analyses
216(28)
8.1 Introduction
216(1)
8.2 Importance of Replacement Studies
216(1)
8.3 Causes of Retirement
217(1)
8.4 Replacement Considerations and Assumptions
217(1)
8.5 Market Value of Old Asset
218(1)
8.6 Specifying the Planning Horizon for a Replacement Study
218(1)
8.7 Cash Flow Approach and Conventional Approach
219(5)
8.8 Asset Life Types
224(1)
8.9 Calculation of Economic Life
224(4)
8.10 Calculation of Remaining Economic Life--Existing Asset
228(4)
8.11 Intangibles in Replacement Problems
232(1)
8.12 Replacement of Assets Subject to Sudden Failure
232(4)
8.13 Summary
236(1)
References
237(1)
Problems
237(7)
9 Capital Planning and Budgeting
244(25)
9.1 Introduction
244(1)
9.2 Sources of Funds
245(1)
9.3 Identification and Evaluation of Opportunities
245(1)
9.4 Minimum Requirements of Acceptability
246(2)
9.5 Project Selection
248(4)
9.6 Postmortem Review
252(1)
9.7 Budget Periods
253(1)
9.8 Timing of Capital Investments and Management Perspective
253(1)
9.9 Leasing Decisions
254(2)
9.10 Capital Expenditure Practices in the United States
256(2)
9.11 Capital Budgeting Forms Used by a Large Corporation
258(8)
Problems
266(3)
Part Two Capital Investment Evaluation Under Risk and Uncertainty 269(132)
10 Introduction to Risk and Uncertainty
269(20)
10.1 The Difference Between Risk and Uncertainty
269(1)
10.2 Causes of Risk and Uncertainty
270(3)
10.3 Weakness in Probabilistic Treatment of Project Analyses Involving Risk
273(1)
10.4 Ways to Change or Influence Degree of Uncertainty
273(1)
10.5 Return, Risk, and Choice
273(1)
10.6 Decision Guides on When and How Much to Consider Risk and Uncertainty
274(4)
10.7 General Model for Risk and Uncertainty Problems
278(1)
10.8 Estimating in Terms of Probability Distributions
279(5)
10.9 Human Problems in Reflecting Degree of Uncertainty in Estimates
284(1)
10.10 Responses to Risk and Uncertainty
284(1)
Problems
285(4)
11 Sensitivity Analysis
289(25)
11.1 Introduction
289(1)
11.2 One-at-a-Time Procedure and Break-Even Analysis
289(7)
11.3 Multiparameter Procedures
296(4)
11.4 Summary
300(1)
Problems
300(8)
Appendix 11-A: Tabular and Graphical Illustrations of Sensitivity Analysis for the Comparison of Alternatives
308(6)
12 Analytical and Simulation Approaches to Risk Analysis
314(27)
12.1 Introduction
314(1)
12.2 Analytical Methods of Risk Analysis
314(11)
12.3 Monte Carlo Simulation of Risk
325(10)
12.4 Method for Determining Required Number of Monte Carlo Trials and Limitations
335(1)
Problems
336(5)
13 Decision Criteria and Methods for Risk and Uncertainty
341(22)
13.1 Introduction
341(1)
13.2 General Model for Risk Problems
341(1)
13.3 Dominance Criterion or Elimination Check
342(1)
13.4 Aspiration-Level Criterion
342(1)
13.5 Most Probable Future Criterion
343(1)
13.6 Expected Value Criterion
344(1)
13.7 Expectation-Variance Criterion
345(2)
13.8 Certain Monetary Equivalence Criterion
347(1)
13.9 Expected Utility Criterion
348(5)
13.10 Expectation and Variance Criteria Applied to Investment Projects
353(2)
13.11 Miscellaneous Decision Rules for Complete Uncertainty
355(3)
Problems
358(5)
14 Decision Tree Analysis
363(24)
14.1 Introduction
363(1)
14.2 A Deterministic Decision Tree
363(2)
14.3 A Deterministic Decision Tree Considering Timing
365(1)
14.4 Consideration of Random Outcomes
365(2)
14.5 A Classical Decision Tree Problem
367(1)
14.6 Constructing a Decision Tree
368(2)
14.7 Use of Bayesian Statistics to Evaluate the Worth of Further Investigative Study
370(4)
14.8 Alternate Method of Analysis
374(1)
14.9 Examples of Decision Tree Applications
375(1)
14.10 Advantages and Disadvantages of Decision Tree Analysis
376(2)
14.11 Summary
378(1)
Problems
378(7)
Appendix 14-A: Bayes's Theorem and Tabular Format for Calculation of Posterior Probabilities
385(2)
15 Statistical Decision Techniques
387(14)
15.1 Introduction
387(1)
15.2 Bayesian Statistics
387(4)
15.3 Expected Value of Perfect Information
391(7)
Problems
398(3)
Part Three Additional Topics in Capital Investment Decision Analysis 401(112)
16 Mathematical Programming for Capital Budgeting
401(26)
16.1 Introduction
401(1)
16.2 Indivisible, Independent Investment Opportunities
401(1)
16.3 Indivisible, Dependent Investment Opportunities
402(3)
16.4 Independent Collections of Mutually Exclusive Opportunities
405(4)
16.5 Divisible Investment Opportunities
409(1)
16.6 The MARR Controversy
410(1)
16.7 Capital Rationing
411(3)
16.8 Portfolio Selection
414(2)
16.9 Goal Programming
416(6)
16.10 Summary
422(1)
References
422(1)
Problems
422(5)
17 Activity-Based Costing
427(20)
17.1 Introduction
427(1)
17.2 What Is Activity-Based Costing?
428(1)
17.3 Traditional Versus Activity-Based Costing Systems
429(6)
17.4 ABC as a Tool for the 1990s and Beyond
435(5)
17.5 Current Issues in the Use of ABC Systems
440(2)
17.6 PC-Based and Activity-Based Cost Accounting Software
442(1)
17.7 Summary
443(1)
Problems
443(4)
18 Dealing with Inflation in Capital Investment Analysis
447(18)
18.1 Introduction
447(1)
18.2 Actual Dollars Versus Real Dollars
448(1)
18.3 Real Interest Rate, Combined Interest Rate, and Inflation Rate
448(1)
18.4 What Interest Rate to Use in Economy Studies
449(1)
18.5 Summary of Formulas for Relating Single Sum A$ and R$ Over Time
450(1)
18.6 Manipulating Series That Are Uniform in R$
451(1)
18.7 Manipulating Series That Inflate (Escalate) at Rate Different from General Inflation
452(1)
18.8 Effect of Inflation on Before-Tax and After-Tax Economic Studies
453(4)
18.9 Deflation
457(1)
18.10 Summary
457(3)
Problems
460(5)
19 Multiple Attribute Decision Making
465(18)
19.1 Introduction
465(1)
19.2 Choice of Criteria
466(1)
19.3 Selection of a Measurement Scale
467(1)
19.4 Dimensionality of the Decision Problem
467(1)
19.5 Selected Analysis Techniques
468(10)
19.6 Summary
478(1)
References
478(1)
Problems
478(5)
20 The Analytic Hierarchy Process
483(30)
20.1 Introduction
483(1)
20.2 Construction of the Decision Hierarchy
484(3)
20.3 Determining the Importance of Attributes and Subattributes
487(2)
20.4 Determining the Relative Standing of Alternatives with Respect to Attributes
489(3)
20.5 Determining the Consistency of Judgments
492(2)
20.6 Determining the Overall Priority Weights of Alternatives
494(2)
20.7 Added Explanation Regarding Example
496(2)
20.8 Hierarchies with More Than Three Levels
498(6)
20.9 Problems of Which to be Aware When Applying the AHP
504(2)
20.10 Other AHP-Based Tools for Multicriteria Decision Problems
506(1)
20.11 Summary
507(1)
References
507(1)
Problems
508(5)
Appendix A Tables of Discrete Compounding Interest Factors (for Various Common Values of i from (1)(4)% to 25%)) 513(22)
Appendix B Tables of Continuous Compounding Interest Factors (for Various Common Values of r from 2% to 25%) 535(7)
Appendix C Table of Random Numbers 542(1)
Appendix D Table of Random Normal Deviates 543(1)
Appendix E The Standardized Normal Distribution Function, F(S) 544(1)
Bibliography 545(7)
Glossary 552(1)
Index 553

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