., ,.........,.. CONTENTS
Preface
xix PART 1 BASICS OF FINANCIAL DECISIONS
Chapter I
1.1 Engineering Economic Decisions
1
2
Role of Engineers in Business
4
5
L 1.1 Types of Business Organization
1.1.2 Engineering Economic Decisions
1.1.3 Personal Economic Decisions
1.2 1.3 1.4 1.5 1.6 What Makes the Engineering Economic Decision Difficult?
Economic Decisions versus Design Decisions
Large-Scale Engineering Projects
9
12 13 Common Types of Strategic Engineering Economic Decisions
Fundamental Principles of Engineering Economics
Summary
13 Understanding Financial Statements
Accounting: The Basis of Decision Making
Financial Status for Businesses
Using Ratios to Make Business Decisions
2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.3.6
15 17 18 1 The Balance Sheet
2.2.2 The Income Statement
2.2.3 The Cash Flow Statement
2.3 7
8
9
1.4.1 How a Typical Project Idea Evolves
1.4.2 Impact of Engineering Projects on Financial Statements
1.4.3 A Look Back in 2005: Did Toyota Make the Right Decision?
Chapter 2
2.1 2.2 6
6
Debt Management Analysis
Liquidity Analysis
Asset Management Analysis
Profitability Analysis
Market Value Analysis
Limitations of Financial Ratios in Business Decisions
21 22 24 27 30 33 34 37 38 39 41 42 Summary
43 Prnhl..Tn<1 AA
viii
CONTENTS
4.4
Changing Interest Rates
4.4.1 Single Sums of Money
4.4.2 Series of Cash Flows
55
56
59
62
4.5
Debt Management
4.5.1 Commercial Loans
Economic Equivalence
3.2. 1 Definition and Simple Calculations
3.2.2 Equivalence Calculations: General Principles
63
63
4.6
3.2 .3
71
Chapter 3
3.1
3.2
3.3
3.4
Interest Rate and Economic Equivalence
52
54
Interest: The Cost of Money
3.1.1 The Time Value of Mon ey
3.1. 2 Elements of Transaction s Involving Interest
3. 1.3 Methods of Calculating Interest
3.1.4 Simple Interest versus Compound Interest
4 .5.2 Loan versus Lease Financing
4.5.3 Home Mortgage
66
Looking Ahead
4.6.2 How to Determine Your Expected Return
4.6.3 Investing in Bonds Summary 71
72
73
80
84
Development of Interest Formulas
3.3. 1 The Five Types of Cash Flows
3.3.2 SingIe-Cash-Flow Formulas
3.3.3 Uneven Payment Series
3.3.4 Equal Payment Series
3.3.5 Linear Gradient Series
3.3.6 Geometric Gradient Series
96
102
3.4. 1 Composite Cash Flows
3.4.2 Determining an Interest Rate to Establish Economic Equivalence
107
107
114
Summary
119
Problems
119
Short Case Studies
129
Unconventional Equivalence Calculations
Problems Short Case Studies PART 2 EVALUATION OF BUSINESS
AND ENGINEERING ASSETS
Chapter 5
". 1
4.1
Understanding Money and Its Management Nominal and Effective Interest Rates
4.1.1 Nominal Interest Rates
4.1.2 Effective Annual Interest Rates
4.1.3 Effective Interest Rates per Payment Period
4.1.4 Continuous Compounding
4.2
4.3
Equivalence Calculations with Effective Interest Rates
4.2.1 When Payment Period Is Equal to Compounding Period
4.2.2 Compounding Occurs at a Different Rate th an that at
Which Payments Are Made
Equivalence Calculations with Continuous Payments
4.3.1 Single-Payment Transactions
4.3 .2 Continuous-Funds Flow
143
144
Independent versus Mutu ally Exclu sive
Investment Projects Initial Project Screening Method
5.2.1
5.2.2
5.2.3
5.2.4
Payback Period : The Time It Takes to Pay Back
Benefits and Flaws of Payback Screening
Discounted Payback Period
Where Do We Go from Here?
5.3
Discounted Cash Flow Analysis
5.3.1 Net-Present-Worth Criterion
5.3.2 Meaning of Net Present Worth
5.3.3 Basis for Selecting the MARR
SA
Variations of Present-Worth Analysis
5.4. I Future-Worth Analysis
5.4.2 Capitalized Equivalent Method
5.5
Comparing Mutually Exclusive Alternatives
5.5.1 Meaning of Mutually Exclusive and " Do Nothing"
5.5.2 Analysis Period
145
152
15 2
152
204
Describing Project Cash Flows
S. J.2
134
136
136
137
140
141
Present-Worth Analysis
203
S. 1. 1 Loan versus Projec t Cash Flows
.-.2 Chapter 4
Investing in Financial Assets
4.6.1 Inves tment Basics
st Kate and Economic Equivalence
52 4.4 Changing Interest Rates
4.4.1 Single Sums of Money
4.4.2 Series of Cash Flows
156 156 158 4.5 Debt Management
4.5.1 Commercial Loans
4.5 .2 Loan versus Lease Financing
4.5.3 Home MOItgage
159 159 167 Investing in Financial Assets
4.6.1 Investment Basics
4.6.2 How to Determine Your Expected Retum
4.6.3 Investing in Bonds
175 st of Money Value of Money of Transactions Invo lving Interest f Calculating Interest terest versus Compound Interest 54 55
56
59
62
alence
and Simple Calculations ce Calculations: Genera! Principles head
63
63 66
71
Interest Formulas ypes of Cash Flows h-Flow Formulas
yment Series ent Series
dient Series Gradient Series
71
Summary 187 72
Problems 188 Short Case Studies 199 73 80
84
96
102 quivalence Calculations Cash Flows
g an Interes t Rate to Establish Economic Equivalence 4.6 AND ENGINEERING ASSETS
107
107
114
Chapter 5
119 5.1 129 5.2 ;tanding Money and Its Management :tive Interest Rates
~rest Rates
nual Interest Rates
~rest Rates per Payment Period :ompounding
ations with Effective Interest Rates nt Period Is Equal to Compounding Period : Occurs at a Different Rate than that at
nts Are Made
Itions with Continuous Payments It Transactions
'nds Flow
134
136 136 137 140
141 143
144
152
152 176 179 Present-Worth Analysis
203 204 Describing Project Cash Flows
5.l.! Loan versus Project Cash Flows
5.1.2 Independent versus Mutually Exclu sive Investment Projects
Initial
5.2. 1 5.2.2 5.2.3 5.2.4 Project Screening Method
Payback Period: The Time It Takes to Pay Back
Benefits and Flaws of Payback Screening
Discounted Payback Period
Where Do We Go from Here?
207 207 209 210 210 213 214 215 Discounted Cash Flow Analysis
5.3.1 Net-Present-Worth Criterion
5.3.2 Meaning of Net Present Worth
5.3.3 Basis for Selecting the MARR
222 5.4 Variations of Present-Worth Analysis
5.4 .! Future-Worth Analysi s
5.4.2 Capitalized Equivalent Method
223 223 227 5.5 Comparing Mutually Exclusive Alternatives
5.5.1 Meaning of Mutually Exclusive and "Do Nothing"
5.5.2 Analysis Period
232 232 5.3 145 152
175 PART 2 EVALUATION OF BUSINESS 119 ~s 171 215 216 220 235 ).:"3 Analy sis Period Equ als Project Lives
5.5.4 Analy sis Period Differs from Project Lives
5.5.5 Anal ys is Period Is Not Specified 236
7.4 Summary 249
Mutually eXclusIve f\.1 It: I lid 1I v t::"
7.4. J Flaws in Project Ranking by IRR
7.4.2 Incremental Investment Analysis
7.4.3 Handling Unequal Service Lives
Problems 249
Summary Short Case Studies 265
Problems 238
246
Short Case Studies Chapter 6
6.1 Annual Equivalent-Worth Analysis
268
Annual Equivalent-Worth Criterion
6.1. J Fundamental Dec ision Rule
6.1.2 Annual-Worth Calculatio n with Repeating Cash Flow Cycles
6.1.3 Comparing Mutuall y Exclusive Alternatives
270
270
273
275
6.2 Capital Costs versus Operating Costs
277
6.3 Applying Annual-Worth Analysis
6.3. J Benefits of AE Ana ly sis
6.3.2 Unit Profit or Cost Calculation
6.3.3 Make-or-Buy Decision
6.3.4 Pricing the Use of an Asset
280
281
28 1
283
286
6.4 Life-Cycle Cost Analysis
287
6.5 Design Economics
294
Summary
303
Problems
304
Short Case Studies
318
A RT 3 ANALYSIS OF PROJECT CASH FL
lhapter 8
Cost Concepts Relevant to Decision
~.l General Cost Terms
8. I. I Manufacturing Costs
8. 1.2 Nonmanufacturing Costs
~ .2 Classifying Costs for Financial Statements
8.2.1 Period Costs
8.2.2 Product Costs
lU Cost Classification for Predicting Cost Behavior
8.3 .1 Volume Index
8.3.2 Cost Behaviors
8.4
Future Costs for Business Decisions
8.4. I Di1lere nti al Cost and Revenue
8.4.2 Opportunity Cost
Chapter 7
7.1 Rate-of-Return Analysis
8.4.3 Sunk Costs
8.4.4 Marginal Cost
322
Rate of Return
7.1. I Return on Investment
7.1.2 Return on Invested Capital
324
324
326
7.2 Methods for Finding the Rate of Return
7.2.1 Simple versus Nonsimple Investm ents
7.2.2 Predi cting Multiple i*'s
7.2.3 Computational Method s
327
327
329
331
7.3 Internal-Rate-of-Return Criterion
7.3.1 Relationship to PW Analysis
7.3.2 Net-Investment Test: Pure versu s Mixed Investm ents
7.3.3 Decision Rule for Pure Investments
7.3.4 Decisi on Rule for Mixed Investments
338
338
339
341
344
8.5 Estimating Profit from Production
8.5 . I Calc ul at ion of Operat ing Income
8.5 .2 Sales Budget for a Manufacturing Business
8.5 .3 8.5.4 8.5.S 8.5.6 Preparing the Production Budget
Preparing the Cost-of-Goods-Sold Budget
Preparing the Nonmanufacturing Cost Budget
Putting It All Together: The Bud geted Income State
8.5.7 Looking Ahead
Summary Problems Short Case Study Contents
236 238 246 249 249 265 'eriod Equals Project Li ves
'eriod Differs from Project Li ves
'eriod Is Not Specified
ies
11
Equivalent-Worth Analysis
7.4
Mutually Exclusive Alternatives
7.4. 1 Flaws in Project Ranking by IRR
7.4.2 Inc remental Investment Analysis
7.4.3 Handlin g Unequal Service Lives
352 352 353 360 Summary
363 Problems
364 Short Case Studies 381 268 ;!nt-Worth Criterion
270 Hal Dec is ion Rule
fort h Calculation with Repeating Cash Flow Cycles
270 PART
3 ANALYSIS OF PROJECT CASH FLOWS
385 g Mutually Exclu sive Alternatives
273 275 Chapter 8
~rsus
277 8.1
General Cost Terms
8. 1.1 Manufac turing Costs
8. 1.2 Nonmallufacturing Costs
388 388 390 8.2
Classifying Costs for Financial Statements
8.2. 1 Period Costs
8.2.2 Product Costs
390 39 1 391 8.3
Cost Classification for Predicting Cost Behavior
8.3 .1 Volume Index
8.3.2 Cost Behaviors
394 394 395 Future Costs for Business Decisions
Differential Cost and Revenue
Opportunity Cost
Sunk Costs
Marg inal Cost
400 400 404 406 406 Estimating Profit from Production
8.5.1 Ca lc ulation of Operating Income
8.5.2 Sales Budget for a Man ufact uring Business
8.5 .3 Preparing the Produc tion Budget
8.5.4 Preparing the Cost-of-Goods-Sold Budge t
8.5.5 Preparing the Nonm anufact urin g Cost Budget
8.5.6 Putting It All Togethe r: The Budgeted Income Statement
8.5.7 Looking Ahead
411 412 412 413 415 416 418 419 420 421 Operating Costs
280 I-Worth Analysis
)f AE Analysis
it o r Cost Calculation
Buy Decision
e Use of an Asset
286 Analysis
287 ics
294 303 304 281 28 1 283 3 18 lies
of-Return Analysis
8.4
8.4. 1
8.4.2
8.4.3
8.4.4
322 Inves tme nt
I Invested Capital
I
[ding the Rate of Return
:rsus No nsimple Investments
~ Multiple i*'s
ional Method s
f-Return Criterion
lip to PW Ana lysis
tment Test: Pure versus Mixed Investments
Rill!>. for Pllrp. Tnvestments
324 324 326 327 327 329 33 1 338 338 339 34 1 Cost Concepts Relevant to Decision Making
8.S
Summary
Problems
386 xi
Chapter 9
Depreciation and Corporate Taxes
Chapter 10
428 Developing Project Cash Flows
9.1 Asset Depreciation
9 .1 . 1 Economic De preciation
9. 1.2 Acco unting Depreciati on
43 1 4 32 432 10.1 C ost-Benefit Estimation for Engineering Projects J 0.1.1 Simple Projects 10.1.2 Complex Projec ts 9.2 Factors Inherent in Asset Depreciation
9.2. 1 Depreciable Propert y
9.2. 2 Cost Basis
9.2 .3 Useful Life and Salvage Value
9.2 .4 De preciati on Methods: Book and Tax Deprec iation
433 433 434 43 5 436 t 0 .2
Book Depreciation Methods
9.3. 1 Straight-Line Me th od
9. 3.2 Acce lerated Method s
9. 3.3 Units-of-Productio n Method
437 Ta x Depreciation Methods
9.4.1 MACR S Deprec iati on
9.4.2 MACRS De preci ation Rules
446 446 447 Depletion
9.5.1 Cost De pleti on
9 .5.2 Percentage De pletion
45 3 9.3 9.4 9.5 9.6 4 37 439 445 45 3 454 Repairs or Improvements Made to Depreciable Assets
9. 6. 1 Revi s ion of Book Deprec iati o n
9.6.2 Revis ion of Tax Depreciation
456 457 9.7 Corporate Taxes
9. 7.1 Income Taxes on Ope rating Income
45 9 45 9 9.8 Tax Treatment of G a ins or Losses on Depreciable Assets
9.S .1 Di sposa l of a M ACRS Prope rty
462 9.8.2 Cal c ul atio ns of Gain s and Losses on MACRS Property
9.9 Income Tax Rate to Be Used in Economic Analysis
9.9 .1 Incre menta l Income Tax Rate
9. 9 .2 C onsideration of S tate Incom e Ta xes
9.10 The Need for Cash Flow in Engineering Economic Analysis
9. 10. 1 Ne t Income ve rsus Ne t Cash Flow 456 462 464 467 467 470 472 472 9.1 0 .2 Treatment of Non cash Expenses
473 Summary
476 Problems
478 Short Case Studies
487 490
Incremental Cash Flows 10.2. I El ements of Cash O utfl ows
10.2. 2 El eme nts of Cash Jnfl ows
10.2. 3 Cl assificatio n of Cash Flow Elements
10.3 Developing Cash Flow Statements
10.3. 1 Whe n Projects Requi re Only Ope rating and Investing.
10. 3.2 Whe n Projects Require Wo rking-Capital Investments
10.3.3 Whe n Projects Are Financed with Borrowed Funds
10.3.4 Whe n Projec ts Res ult in Negative Taxable Income
10. 3.5 When Projec ts Require Multiple Asse ts
10.4 Generalized Cash Flow Approach
10.4. I Setting up Net Cash Flow Equ a tion s
[0.4.2 Presenting Cash Flows in Compac t Tabul ar Form ats
10 .4.3 Lease-or-Bu y Decis ion Summary Problems Short Case Studies PART 4
HAND LING RISK AN D UN C ERTAI
Chapter II
Inflation and Its Impact on Project Ca
11.1 Meaning and Measure ofInflation
11.1. [ Meas uring Infl at ion J 1.1 .2
Actual versus Con stant Dollars 11.2 EquivaJence Calculations under Inflation
11.2. I Market and Inflation-Free Inte rest Rates
11 .2.2 Constant-Do llar Analys is
1 1.2.3 Actu al-Dollar Anal ysis J 1.2.4
Mi xed-Dollar Analy sis 11.3 Effects of Inflation on Project Cash Flows
11. 3.1 Multiple Inflati on Rates
I I .3.2 Effec ts of Borrowed Funds unde r Inflatio n Contents
:iation and Corporate Taxes
Developing Project Cash Flows
Chapter 10
428 490 431 432 432 10.1
10.2
and Salvage Value
1 Methods: Book and Ta x Depreciation
433 433 434 435 436 Incremental Cash Flows
10.2.1 Elements of Cash Outflows
10.2.2 Elements of Cash Inflows
10.2.3 Classification of Cash Flow Elements
10.3
Methods
e Me thod
Me thod s
)duction Me thod
437 437 439 445 Methods
prec iation
preciation Rules
446 446 447 Developing Cash Flow Statements
10.3. 1 When Projects Require Only Operating and Investin g Activities
10.3.2 When Projects Require Workin g-Cap ilal Investments
10.3.3 Whe n Projects Are Fin anced with Borrowed Fund s
10.3.4 Whe n Projects Res ult in Negative Taxable Income
10.3.5 Whe n Projects Require MUltipl e Assels
10.4
ion
)epletion
453 453 454 Generalized Cash Flow Approach
10.4.1 Setting up Net Cash Flow Equation s
10.4.2 Presenting Cash Flow s in Compact Tabular Formats
10.4.3 Lease-or-B uy Dec ision
'ements Made to Depreciable Assets
Book Dep rec iation
Tax De prec iation
456 456 457 lepreciation
Depreciation
n Asset Depreciation
Property
1
10.1 .1 Simple Projects
10.1.2 Complex Projects
Problems
Short Case Studies
PA RT 4
Jains or Losses on Depreciable Assets
I MACRS Property
462 462 Chapter II
of Gains and Losses on MACRS Property
464 ) Be Used in Economic Analysis
ncome Tax Rate
I of State Income Taxes
467 467 470 Flow in Engineering Economic Analysis
ersus Net Cash Flow
Noncas h Expenses
472 on Operating Income
HAN DLING RI SK AND UN CE RTAINTY
Meaning and Measure of Inflation
11.l.l Measuring Inflation
11 .1.2 Actual versus Constant Dollars
11.2
Equivalence Calculations under Inflation
11 .2. 1 Marke t and Inflation-Free Inte rest Rates
11.2.2 Constant-Dollar Analysis
11 .2.3 Actual-Dollar Analysis
11 .2.4 Mixed-Dollar Analysis
11.3
Effects of Inflation on Project Cash Flows
11 .3. 1 Multiple Inflation Rates
I 1.3.2 Effects of Borrowed Funds under Inflation
472 541 Inflation and Its Impact on Project Cash Flows
11.1
473 476 478 487 SIR
520 524 525 537 Summary
459 459 S
492 493 493 494 494 495 497 498 498 502 507 509 513 516 517 Cost-Benefit Estimation for Engineering Projects
542 544 544 550 553 553 553 554 558 558 562 563 xiii
11.4. I Effects of Inflation on Return on Investment 11.4.2 Effects of Inflation on Working Capital
566 569 Summary
572 Problems
574 Short Case Studies
582 Chapter 12
Project Risk and Uncertainty
584 12.1 Origins of Project Risk
586 12.2 Methods of Describing Project Risk
12.2.1 Sensitivity Analysis 12.2.2 Break-Even Analysis 587 587 12.2.3 Scenario Analysis
12.3 Probability Concepts for Investment Decisions
12.3. 1 Assessment of Probabilities 12.3.2 Summary of Probabil istic Information 12.3. 3 Joint and Conditional Probabilities 12.3 .4 Covariance and Coefficient of Correlation 12.4 Probability Distribution of NPW
12.4.1 Procedure for Developin g an NPW Di stribution 12.4.2 Aggregating Risk over Time 12.4. 3 Decision Rules for Comparing Mu tually Exclusive Risk y Alternatives
591 594 596 596 601 603 60S
60S
605 611 616 12.5 Risk Simulation
12.5.1 Computer Simulation
12.5.2 Model Building 12.5.3 Monte Carlo Sampling 12.5.4 Simulation Output Analysis 12.5.5 Risk Simulation with @RISK
618 619 620 623 628 630 12.6 Decision Trees and Sequential Investment Decisions
12.6.1 Structuring a Decision-Tree Diagram 12.6.2 Worth of Obtaining Additional Information 12.6.3 Dec ision Making after Havin g Imperfec t Information
633 634 639 642 Summary
647 Problems
648 Short Case Studies
658 Lnaprer
IJ
l"'I.t::dl-'-JI-'I.IUII~
,",llal,
~I~
ou'+
13.1
Risk Management: Financial Options
13.t. I Buy Call Options when You Expect the Price to C
13. 1.2 Bu y Put Options when You Expect the Price to G
13.2
Option Strategies
13.2. 1 Bu ying Calls to Reduce Capital That Is at Ris k
13.2.2 Protective Puts as a Hedge
13.3 O p tion Pricing
13.3 1 Replicating-Portfolio Approach with a Call Optio
13.3.2 Risk-Free Financing Approach
13. 3.3 Risk-Neutral Probab ility Approach
13.3 .4 Put-Option Valuation
13 .3.5 Two-Period Binom ial Lattice Option Valuation
J 3.3.6 Multiperiod Binomial Lattice Model
13.:n Black-Scholes Option Model
13.4 Real-Options Analysis
13.4. 1 A Conce ptual Framework for Real Options
in Engineering Economics
13.4.2 Types of Rea l-Opti on Models
13.5 Estimating Volatility at the Project Level
13.5.1 Estimating a Project's Volatility through a
Simple Defe rral Option
13.5.2 Use the Existing Mode l of a Financial Opti on to £
13.6 Compound Options
Su mmary
Problems
Short Case Studies
PART 5 SPECIAL TOPICS IN ENGlNEER
ECONOMICS 715 Chapter 14
Replacement Decisions
716 14.1 Replacement Analysis Fundamentals
14. t . 1 Basic Concepts and Temlinology
14.1.2 Opportunity Cost Approach to Comparing
Defender and Challenger
Contents
566
566
569
nalysis under Inflation
Inflation on Return on Investment
Inflation on Working Capital
Chapter 13
666
669
13.2
Option Strategies
13.2.1 Buying Calls to Reduce Capital That Is at Risk
13.2.2 Protective Puts as a Hedge
670
670
673
13.3
Option Pricing
13.3. 1 Replicating-Portfolio Approach with a Call Option
13 ,3.2 Risk-Free Financing Approach
13.3.3 Risk-Neutral Probability Approach
13.3.4 Put-Option Valuation
13.3.5 Two-Period Binomial Lattice Option Valuation
13.3.6 Multiperiod Binomial Lattice Model
13.3.7 Black-Scholes Option Model
675
Real-Options Analysis
13.4. 1 A Conce ptual Framework for Real 0pLions
in Enginee ring Economics
13.4.2 Types of Real-Option Models
686
Estimating Volatility at the Project Level
13.5.1 Estimating a Project's Volatility through a
Simple Deferral Option
13.5.2 Use the Existing Model of a Financial Option to Estimate
697
574
582
ct Risk and Uncertainty
584
:t Risk
586
ribing Project Risk
Analysis
,n Analysis
naly sis
587
.epts for Investment Decisions
t of Probabilities
of Probabilistic Information
""'onditional Probabilities
and Coefficient of Con-elation
596
596
'ibution of NPW
for Deve loping an NPW Distribution
19 Risk over Time
~ules for Comparing Mutually Exclu sive
rnatives
587
591
594
601
13.4
603
605
605
605
13.5
611
616
618
664
Risk Management: Financial Options
13.1.1 Buy Call Options when You Expect the Price to Go Up
13.1.2 Buy Put Options when You Expect the Price to Go Down
13.1
572
ies
Real-Options Analysis
13.6
669
675
677
679
680
681
683
684
687
688
0
2
697
699
Compound Options
703
Summary
708
Simulation
Iding
620
Problems
709
10 Sampling
623
Short Case Studies
713
Output Analysis
lation with @RISK
628
Id Sequential Investment Decisions
: a Decision-Tree Diagram
)btaining Additional Information
taking after Having ImpeIiect
619
630
633
634
639
642
647
648
~s
PART 5
658
Chapter 14
14.1
SPECIAL TOPICS IN ENGINEERING
ECONOMlCS 715
Replacement Decisions
716
Replacement Analysis Fundamentals
14.1.1 Basic Concepts and Terminology
14.1.2 Opportunity Cost Approach to Comparing
Defender and Challenge r
718
718
721
xv
xiv
CC'· tf
~
s
14.2 Econom ic Service Life
723
14.3 Replacement Analysis when the Required Service Is Long
14.3.1 Required Assumption s and Decision Frameworks 14. 3.2 Replacement Strategies under the Infinite Planning Hori zon
14.3.3 Replacement Strategies under the Finite Planning Hori zon
14.3.4 Consideration of Technological Change 728
729
730
73S
738
14.4 Replacement Analysis with Tax Considerations
739
Problems
7SS
7S6
Short Case Studies
768
Summary
Chapter 15
Capital-Budgeting Decisions
776
)6.2
Economic Analysis in Health-Care Service
16.21 Economic Evaluation Tool s
\6.2.2 Cost-Effectiveness Analysis
J 6.2.3
How to Use a CEA
16.3 Economic Analysis in the Public Sector
\6.31 What Is Be nefit-Cost Analysis ?
16.3.2 Framework of Be nefit-Cost Analy sis
16.3.3 Valu ation of Benefits and Costs
16.3.4 Quantifying Benefits and Costs
16.3 .5 Difficulties Inhe rent in Public-Project An alysis
1Ci.4 Benefit-C ost Ratios
16.4.1 Definition of Be nefi t-Cost Ratio
16.4.2 Relationship between BIC Ratio and NPW
16.4.3 Comparing Mutu all y Exclusive Alternatives:
Incremental Analysis
IS.1 Methods of Financing
IS. 1.1 Equity Financing
1S.I.2 Debt Financing
15.1 .3 Capital Structure
778
779
IS.2 Cost of Capital
787
Summary
787
792
794
Problems
780
782
I S.2.1 Cost of Equity
15.2.2 Cost of Debt 15. 2.3 Calculating the Cost of Capital
IS.3
Choice of Minimum Attractive Rate of Return
795
795
797
799
15.3 . 1 Choice of MARR when Project Financin g Is Known 15.3.2 Choice of MARR when Project Financ ing Is Unknown
15. 3.3 C ho ice of MARR under Capital Rat ioning
IS.4
Capital Budgeting
15.4.3 Capita l-Budgeting Decis ion s with Limited Budge ts
803
803
803
80S
Summary
809
Problems
810
Short Case Studies
816
15.4. 1 Evaluation of Multiple Investme nt A lternatives 15.4.2 Fo rmu lation of Mutually Exclusive Alternatives Chapter 16
Economic Analysis in the Service Sector
16.1 What Is the Service Sector?
16. J . 1 Characteristics of the Service Sector 16.1.2 How to Price Service 822
824
825
825
l6.S Analysis of Public Projects Based on Cost-Effectivenl
16.5.1 Cost-Effectiveness Studies in the Public Sector
16.5.2 A Cost-Effecti veness Case Study
Short Case Studies
Appendix A
Index
899
In tere st Factors for Discrete CO l
., Conte nts
~nalysis when the Required Service Is Long
ice Life
Assumptions and Decision Frameworks
ment Strategies under the Infinite Plannin g Horizon
:ment Strategies under the Finite Planning Horizon
j
723
728
729
730
735 738 739 eration of TechnolOgical Change
Analysis with Tax Considerations
755 756 768 ~tudies
apital-BUdgeting Decisions 776 f Financing
ity Financin g
t Financing
ital Structure
:apital
st of Equity
st of Debt
alculatin g the Cost of Capital
)f Minimum Attractive Rate of Return
:hoice of MARR when Project Financin g Is Known
~hoice of M ARR when Project Financin g Is Unknown
778
779
780
782
16.5 Analysis of Public Projects Based on Cost-Effectiveness
\6.5.1 Cos t-Effectiven ess Studies in the Pu bli c Sector
16.5.2 A Cost-Effecti veness Case Stud y 846 847 847 843 792
Short Case Studies 862 794
795
Appendix A
795
797
799
803
803
803
805
809
Index
816
822
,prvice sector?
840 840 843 857 ems
t Case Studies
.h ",
16.4 Benefit-Cost Ratios
\6.4.1 Definiti on of Benefit-Cos t Ratio
16.4.2 Relati onship between BIC Ratio and NPW
16.4.3 Comparing Mu[ually Exclu sive Alternatives: Incremental Analysis Problems 8 10
T _
832 833 833 834 836 840 856 ary
•
16.3 Economic Analysis in the Public Sector
\6.3.1 What [s Benefit-Cos t Analysis?
16.3 .2 Framewo rk of Benefi t-Cos t Anal ys is
16.3.3 Valu at ion of Be nefit s and Cos ts
16.3 .4 Quantifying Be nefits and Costs
16.3.5 Difficulties Inhere nt in Public-Projec t Anal ysis
Summary I Budgeting
Evaluation of Multiple Investment Alternatives
Formulation of Mutually Exclusiv e Alternatives
Capital-Bud geting Decisions with Limited Budgets
\6
826 827 828 829 787
787
hoice of MARR under Capital Rationing
EconomiC Analysis in the Service Sector
16.2 Economic Ana lysis in Health-C are Service
16.2.1 Economic Evaluati on Too ls
16.2 .2 Cost-Effecti veness Analy sis
16.2.3 How to Use a CEA
824
825
Q')
<;
899
Interest Factors for Discrete Compounding
869
xvii