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 موضوع: كتاب Basics of Engineering Economy الإثنين 18 أكتوبر 2021, 12:21 am  

أخواني في الله أحضرت لكم كتاب Basics of Engineering Economy Leland Blank, P. E. Dean Emeritus American University of Sharjah United Arab Emirates and Professor Emeritus Industrial and Systems Engineering Texas A&M University Anthony Tarquin, P. E. Professor Civil Engineering University of Texas—EI Paso
و المحتوى كما يلي :
Brief Contents Chapters 1 Foundations of Engineering Economy 1 2 Factors: How Time and Interest Affect Money 27 3 Nominal and Effective Interest Rates 59 4 Present Worth Analysis 80 5 Annual Worth Analysis 107 6 Rate of Return Analysis 124 7 Benefit/Cost Analysis and Public Sector Projects 160 8 Breakeven, Sensitivity, and Payback Analysis 182 9 Replacement and Retention Decisions 215 10 Effects of Inflation 237 11 Estimating Costs 259 12 Depreciation Methods 287 13 AfterTax Economic Analysis 312 Appendices A Using Spreadsheets and Microsoft Excel 348 B Accounting Reports and Business Ratios 363 C Alternative Evaluation that Includes Multiple Attributes and Risk 370 D Answers to Problems for Test Review and FE Exam Practice 385 Reference Materials 386 Interest Factor Tables 388 Index 414 ivv Contents Preface ix Chapter 1 Foundations of Engineering Economy 1 1.1 What is Engineering Economy? 3 1.2 Performing an Engineering Economy Study 3 1.3 Interest Rate, Rate of Return, and MARR 5 1.4 Equivalence 8 1.5 Simple and Compound Interest 9 1.6 Terminology and Symbols 14 1.7 Cash Flows: Their Estimation and Diagramming 16 1.8 The Rule of 72 20 1.9 Introduction to Using Spreadsheet Functions 21 Summary 23 Problems 23 Problems for Test Review and FE Exam Practice 25 Chapter 2 Factors: How Time and Interest Affect Money 27 2.1 SinglePayment Formulas (FP and PF) 29 2.2 Uniform Series Formulas (PA, AP, AF, FA) 34 2.3 Gradient Formulas 37 2.4 Calculations for Cash Flows That are Shifted 41 2.5 Using Spreadsheets for Equivalency Computations 45 Summary 49 Problems 50 Problems for Test Review and FE Exam Practice 57 Chapter 3 Nominal and Effective Interest Rates 59 3.1 Nominal and Effective Interest Rate Statements 61 3.2 Effective Interest Rate Formulation 63 3.3 Reconciling Compounding Periods and Payment Periods 65 3.4 Equivalence Calculations Involving Only SingleAmount Factors 66 3.5 Equivalence Calculations Involving Series with PP CP 68 3.6 Equivalence Calculations Involving Series with PP CP 70 3.7 Using Spreadsheets for Effective Interest Rate Computations 72 Summary 74 Problems 74 Problems for Test Review and FE Exam Practice 78 Chapter 4 Present Worth Analysis 80 4.1 Formulating Alternatives 82 4.2 Present Worth Analysis of EqualLife Alternatives 84 4.3 Present Worth Analysis of DifferentLife Alternatives 86 4.4 Capitalized Cost Analysis 89 4.5 Evaluation of Independent Projects 94 4.6 Using Spreadsheets for PW Analysis 96 Summary 98 Problems 99 Problems for Test Review and FE Exam Practice 105vi Contents Chapter 5 Annual Worth Analysis 107 5.1 AW Value Calculations 109 5.2 Evaluating Alternatives Based on Annual Worth 112 5.3 AW of a Permanent Investment 114 5.4 Using Spreadsheets for AW Analysis 116 Summary 118 Problems 119 Problems for Test Review and FE Exam Practice 122 Chapter 6 Rate of Return Analysis 124 6.1 Interpretation of ROR Values 126 6.2 ROR Calculation 128 6.3 Cautions when Using the ROR Method 131 6.4 Understanding Incremental ROR Analysis 131 6.5 ROR Evaluation of Two or More Mutually Exclusive Alternatives 135 6.6 Multiple ROR Values 139 6.7 Removing Multiple ROR Values by Using a Reinvestment Rate 143 6.8 Using Spreadsheets for ROR Analysis 147 Summary 151 Problems 151 Problems for Test Review and FE Exam Practice 158 Chapter 7 Benefit/Cost Analysis and Public Sector Projects 160 7.1 Public Versus Private Sector Projects 162 7.2 Benefit/Cost Analysis of a Single Project 166 7.3 Incremental B/C Evaluation of Two or More Alternatives 168 7.4 Using Spreadsheets for B/C Analysis 174 Summary 176 Problems 176 Problems for Test Review and FE Exam Practice 180 Chapter 8 Breakeven, Sensitivity, and Payback Analysis 182 8.1 Breakeven Analysis for a Single Project 184 8.2 Breakeven Analysis Between Two Alternatives 189 8.3 Sensitivity Analysis for Variation in Estimates 192 8.4 Sensitivity Analysis of Multiple Parameters for Multiple Alternatives 197 8.5 Payback Period Analysis 199 8.6 Using Spreadsheets for Sensitivity or Breakeven Analysis 201 Summary 205 Problems 206 Problems for Test Review and FE Exam Practice 213 Chapter 9 Replacement and Retention Decisions 215 9.1 Basics of a Replacement Study 217 9.2 Economic Service Life 218 9.3 Performing a Replacement Study 220 9.4 Defender Replacement Value 224 9.5 Replacement Study Over a Specified Study Period 224 9.6 Using Spreadsheets for a Replacement Study 228 Summary 231 Problems 232 Problems for Test Review and FE Exam Practice 235Contents vii Chapter 10 Effects of Inflation 237 10.1 Understanding the Impact of Inflation 239 10.2 PW Calculations Adjusted for Inflation 241 10.3 FW Calculations Adjusted for Inflation 246 10.4 AW Calculations Adjusted for Inflation 250 10.5 Using Spreadsheets to Adjust for Inflation 252 Summary 253 Problems 254 Problems for Test Review and FE Exam Practice 257 Chapter 11 Estimating Costs 259 11.1 How Cost Estimates Are Made 261 11.2 Unit Method 264 11.3 Cost Indexes 266 11.4 CostEstimating Relationships: CostCapacity Equations 269 11.5 CostEstimating Relationships: Factor Method 271 11.6 CostEstimating Relationships: Learning Curve 273 11.7 Indirect Cost (Overhead) Estimation and Allocation 275 Summary 281 Problems 282 Problems for Test Review and FE Exam Practice 285 Chapter 12 Depreciation Methods 287 12.1 Depreciation Terminology 289 12.2 Straight Line (SL) Depreciation 291 12.3 Declining Balance Depreciation 292 12.4 Modified Accelerated Cost Recovery System (MACRS) 295 12.5 Switching Between Classical Methods; Relation to MACRS Rates 299 12.6 Depletion Methods 301 12.7 Using Spreadsheets for Depreciation Computations 303 Summary 306 Problems 307 Problems for Test Review and FE Exam Practice 310 Chapter 13 AfterTax Economic Analysis 312 13.1 Income Tax Terminology and Relations 314 13.2 BeforeTax and AfterTax Alternative Evaluation 317 13.3 How Depreciation Can Affect an AfterTax Study 320 13.4 AfterTax Replacement Study 326 13.5 Capital Funds and the Cost of Capital 328 13.6 Using Spreadsheets for AfterTax Evaluation 332 13.7 AfterTax ValueAdded Analysis 335 13.8 Tax Considerations for International Projects 337 Summary 339 Problems 340 Problems for Test Review and FE Exam Practice 346 Appendix A Using Spreadsheets and Microsoft Excel 348 A.1 Introduction to Using Excel 348 A.2 Organization (Layout) of the Spreadsheet 351 A.3 Excel Functions Important to Engineering Economy 353 A.4 GOAL SEEK—A Simple Tool for Breakeven and Sensitivity Analyses 361 A.5 Error Messages 362viii Contents Appendix B Accounting Reports and Business Ratios 363 B.1 The Balance Sheet 363 B.2 Income Statement and Cost of Goods Sold Statement 364 B.3 Business Ratios 366 Appendix C Alternative Evaluation that Includes Multiple Attributes and Risk 370 C.1 Multiple Attribute Analysis 370 C.2 Economic Evaluation with Risk Considered 376 Appendix D Answers to Problems for Test Review and FE Exam Practice 385 Reference Materials 386 Interest Factor Tables 388 Index 414 Index A Absolute cell referencing, 349 Accelerated writeoff, 290, 299, 323–26 Accounting ratios, 366–69 statements, 363–65 Accuracy of estimates, 263–64 Acidtest ratio, 367 Activitybased costing (ABC), 279–81 A/F factor, 35–6 Aftertax alternative selection, 318 cash flow, 317 debt versus equity financing, 328 and depreciation, 314 international, 337–39 MARR, 318 rate or return, 318 WACC, 329–32 Aftertax replacement analysis, 326–28 A/G factor, 39. See also Gradients, arithmetic Alternative depreciation system (ADS), 298 Alternatives and breakeven analysis, 189–91 cost, 82 defined, 3, 82 incremental rateofreturn, 131–39 independent, 82 (see also Independent projects) infinite life, 89–94, 114–16 mutually exclusive, 82, 86–96, 112–14, 131–39, 168–74 revenue, 82 types, 82–83 Amortization. See Depreciation Annual interest rate effective, 61–65, 72 nominal, 61, 72 Annual operating costs (AOC), 17, 84, 110, 314 Annual worth advantages, 109 aftertax analysis, 318, 320 of annual operating costs, 110 and B/C analysis, 166, 170, 173 and breakeven analysis, 189–92 equivalent uniform, 110–12, 114 evaluation by, 112–18 and EVA, 335–37 and future worth, 110 and incremental rate of return, 139 of infinitelife projects, 114–16 and inflation, 109, 250–52 and present worth, 110 and replacement analysis, 218–24, 225–28 and sensitivity analysis, 193, 197 AOC. See Annual operating costs A/P factor, 34–35 Arithmetic gradient. See Gradient, arithmetic Attributes evaluating multiple, 370–75 weighting, 371–73 Average, 379–81 Average cost per unit, 188 AVERAGE function, Excel, 379, 384 Average tax rate, 315 B Balance sheet, 363–64 Base amount, and shifted gradients, 38, 39, 43–45 Basis, 289 B/C. See Benefit/cost ratio Beforetax rate of return, 128–30 and aftertaxes, 318 Benefit and cost difference, 167 Benefit/cost ratio calculation, 166–68 conventional, 167 incremental analysis, 168–74 independent project evaluation, 173 modified, 167 for three or more alternatives, 171–73 Benefits direct versus usage costs, 169 in public projects, 163–66 Bonds and debt financing, 328, 330 description, 85 interest computation, 85 present worth, 85–86 rate of return, 130 Book depreciation, 289, 295 Book value by decliningbalance method, 293 defined, 289 by double declining balance method, 293 and EVA, 335–36 by MACRS, 295 versus market value, 289, 326–28 by straight line method, 291 Bottomup approach, 262–63 Breakeven analysis. See also Sensitivity analysis average cost per unit, 188 description, 182, 184–88 fixed costs, 185 and makebuy decisions, 190–92 PW versus i graph, 149 and replacement value, 224 versus sensitivity analysis, 192 single project, 184–89 two alternatives, 189–92Index 415 Breakeven point, 185 Bundles. See Independent projects C Capital cost of (See Cost of capital) debt versus equity, 328 recovery and AW, 110 Capital budgeting. See Independent projects Capitalized cost, 14, 89–94, 114 and annual worth, 114–16 computation, 90 and present worth, 89–94 Capital financing debt, 7, 328 debt versus equity, 328–32 equity, 7, 328 Capital gain, 321, 326 Capital loss 321, 326 Capital recovery in annual worth of costs, 110–12 defined, 110 and inflation, 250–52 and replacement analysis, 218–19 Capital recovery factor. See A/P factor Capital recovery for assets. See Depreciation Cash flow after tax, 317 and EVA, 335 before tax, 317 conventional series, 139–40 defined, 3–4 diagramming, 18–20 discounted, 80 estimating, 16–17, 261–75 incremental, 132 net, 17, 317 nonconventional, 139–40 and payback analysis, 199 positive net, and ROR, 143–44 and public sector projects, 162–63 recurring and nonrecurring, 90 and replacement analysis, 224 revenue versus cost, 82 sign test, 139 zero, 47, 356, 358 Cash flow after taxes (CFAT), 317 Cash flow before taxes (CFBT), 317 Cash flow diagrams, 18–20 Cell references, in Excel, 349 Challenger, in replacement analysis, 217, 221–24, 326 Charts in Excel, 350–51 Class life, 298, 337–39 Composite rate of return (CRR), 143–47 Compound amount factors single payment (F/P), 29–33 uniform series (F/A), 35–36 Compound interest, 9–14 Compounding continuous, 64–65 frequency, 63 interperiod, 71–72 and simple interest, 9–10 Compounding period continuous, 64–65 defined, 61–62 and payment period, 65–66 Constant value dollars, 239, 242 Consultant’s perspective, 217 Continuous compounding, 64–65 Contracts, types, 166 Conventional benefit/cost ratio, 167 Conventional cash flow series, 139–40 Conventional gradient, 38 Cost, lifecycle, 89 Cost alternative, 82, 133, 135 Costcapacity equations, 269–71 Cost centers, 276, 279 Cost depletion. See Depletion Cost driver, 279–81 Costestimating relationships, 269–75 Cost estimation approaches, 262 costcapacity method, 269–71 cost indexes, 266–69 factor method, 271–73 and inflation, 7, 87, 239 learning curve, 275 unit method, 264–65 Cost indexes, 266–69 Cost of capital and debtequity mix, 330 for debt financing, 328, 332 defined, 328 for equity financing, 328 and MARR, 6–7, 328 weighted average, 329–32 Costofgoodssold, 278, 364–65 Cost of invested capital, 335 Cost(s) and alternative evaluation, 82, 133, 135 and annual worth, 110, 218–19 of asset ownership, 110 direct, estimating, 261–75 fixed, 185–88 indirect, estimating, 275–81 of invested capital, 335–37 lifecycle, 89 linear, 185 nonlinear, 187 in public projects, 163 sign convention, 18, 166 sunk, 217 variable, 185–88 Cumulative cash flow sign test, 139 Current assets, 363 Current liabilities, 363 Current ratio, 366 D DB function, Excel, 293, 303–5, 353 DDB function, Excel, 293, 303–5, 353–54 Debt capital, 6, 328–32 Debtequity mix, 329 Debt financing on balance sheet, 363 cost of, 329–32 and inflation, 246 leveraging, 330–31 Debt ratio, 367 Decision making attributes, 370–71 under certainty, 376 engineering economy role, 3 under risk, 376–84 Declining balance depreciation, 292–95, 338, 353 Decreasing gradients, 38 Defender, in replacement analysis, 217, 220–28 Deflation, 241 Delphi method, 371416 Index Depletion, 301–2 Depreciation accelerated, 290, 299, 323–26 alternative system (ADS), 298 book, 289, 295 class life, 298, 337–39 declining balance, 292–95, 296, 338, 353 defined, 289 double declining balance, 293, 296, 299, 353 and EVA, 335–37 halfyear convention, 290, 295 and income taxes, 320–26 MACRS, 295–98 and Excel functions, 299, 360 recovery period for, 295, 298 present worth of, 299 recapture, 320–21 recovery rate, 290, 306 straight line, 291–92, 298 straight line alternative, 298 switching methods, 299–300, 360 Descartes’ rule, 139 Design stages, 89, 263 Designtocost approach, 262–63 Direct benefits, 169–70 Direct costs, 261–75 Disbenefits, 163, 167–68 Discount rate, 80, 164 Discounted cash flow, 14, 80 Discounted payback, 199 Discrete cash flows, compound interest factors (tables), 388–413 Dollars, today versus future, 239–41 Donothing alternative, 4, 82 and B/C analysis, 169–71 and independent projects, 94–96 and rate of return, 135, 137–38 Double declining balance, 293–95 in Excel, 293, 353–54 in switching, 299–300, 360 and taxes, 324 Dumping, 241 E Economic service life (ESL), 218–20, 223, 230 Economic value added (EVA), 335–37 Effective interest rate and compounding frequency, 65–66 for continuous compounding, 64–65 defined, 63 and nominal rate, 61–62 EFFECT function, Excel, 72–74, 354 Effective tax rate, 314, 318 Efficiency ratios, 366 Endofperiod convention, 17–18 Engineering economy defined, 3 role in decisionmaking, 3 terminology and symbols, 14–20 Engineering News Record, 268 Equalservice alternatives, 84, 86–87, 109, 132 Equity financing, 328–32 cost of, 329, 332 Equivalence, 8–9 compounding period versus payment period, 65–66, 68, 70–71 Equivalent uniform annual cost, 107. See also Annual worth Equivalent uniform annual worth. See Annual worth Estimation accuracy, 263–64 of cash flow, 3–4, 261–64 of doubling time, 20–21 of interest rates, 240 and sensitivity analysis, 192–98 before and after tax MARR, 318 before and after tax ROR, 318 using costestimating relations, 269–75 Evaluation criteria, 4 Excel. See also Spreadsheets; specific functions aftertax analysis, 332–35 and B/C analysis, 174–76 and breakeven analysis, 203–5 charts, 350–51 and depreciation, 303–6 error messages, 362 functions listing, 353–61 Goal Seek, Excel, 203, 361–62 imbedded function, 118 and inflation, 252–53 introduction, 21–23 and rate of return, 147–51 and sensitivity analysis, 201–3 spreadsheet layout, 351–53 Expected value, 379–81 Expenses, 314, 364. See also Cost estimation; Cost(s) Experience curve, 275 External rate of return, 143–44. See also Rate of return F F/A factor, 35–36. Face value, of bonds, 85 Factor method estimation, 271–73 Factors capital recovery, 34 gradient arithmetic, 37–39, 43–44 geometric, 39–41, 44 notation, 30, 39 for shifted series, 41–45 single payment, 29–33 sinking fund, 36 tabulated values, 388–413 uniformseries, 34–37 Factory cost, 278, 365 Financial worth of corporations, 336 Financing. See Debt financing; Equity financing First cost, 17, 84, 289 Fiscal year, 363 Fixed assets, 363 Fixed costs, 185–89 Fixed percentage method. See Declining balance depreciation F/P factor, 29 Future worth calculation, 89, 110 evaluation by, 89, 166 and inflation, 246–49 of shifted series, 42 FV function, Excel, 22, 46, 354–55 G Gains and losses. See Capital gain; Capital loss General depreciation system (GDS), 298Index 417 Goal Seek, Excel, 361–62 for breakeven, 203–5 for replacement value, 230–31 Gradient, arithmetic base amount, 38, 43 conventional, 37–39 decreasing, 38 factors, 37, 39, 40 shifted, 43–45 Gradient, geometric base amount, 39 factors, 39–41 shifted, 44 Graduated tax rates, 314–17 Gross income, 301, 314 H Halfyear convention, 290, 295, 305–6 Highly leveraged corporations, 330–31 Hurdle rate. See Minimum attractive rate of return Hyperinflation, 250 I Income gross, 314 net, 335 as revenue, 17, 314, 364 taxable, 314, 316, 335–36 Income statement, 364–65 Income tax, 314–39 average tax rate, 315 and cash flow, 317–20 corporate, 315 defined, 314 and depreciation, 320–26 effective rates, 314, 318 individual taxpayers, 316–17 international, 337–39 present worth of, 324–26 and rate of return, 318 rates, 314–17 and replacement studies, 326–28 tax savings, 318 Incremental benefit/cost analysis, 168–74 Incremental cash flow, 132–35 Incremental costs and benefit/cost analysis, 168–69 definition, 132–33 and rateofreturn, 135–39 Incremental rate of return analysis, 135–39, 320 Independent projects B/C evaluation of, 173 bundles, 95 formation, 82–83 PW evaluation of, 94–98 ROR evaluation of, 135 Indexing, income taxes, 314 Indirect costs activitybased costing, 279–81 definition, 261, 276 factor method, 271–73 rates, 276–77 Infinite life, 89–94, 114–16, 162 Inflation, 237–53 assumption in PW and AW, 87, 109 and capital recovery, 250–52 definition, 7, 239 and future worth, 246–50 high, 250 and interest rates, 240 and MARR, 249 and present worth, 241–46 Initial investment. See First cost Installation costs, in depreciation, 289 Intangible factors, 4. See also Multiple attribute evaluation; Noneconomic factors Interest compound, 10–14 defined, 5 interperiod, 71 rate (See Interest rate) simple, 9–10, 12–14 Interest period, 5 Interest rate. See also Effective interest rate continuous compounding, 64–65 definition, 5 inflationadjusted, 240 inflation free (real), 240, 247 IRR function, 22, 49, 129, 148–51, 355–56 market, 240 multiple, 139–43 nominal versus effective, 61–65 for public sector, 164 unknown, 21, 30 on unrecovered balance, 126 Interest tables, 388–413 Internal rate of return. See Rate of return International aspects after taxes, 337–39 contracts, 166 cost estimation, 263 deflation, 241 depreciation, 289, 291, 337–39 hyperinflation, 250 Inventory turnover ratio, 368 Invested capital, cost of, 335–36 Investment(s). See also First cost extra, 132–35 permanent, 89–90, 114–16 safe, 6–7 IPMT function, Excel, 355 IRR function, Excel, 22, 49, 129, 148–51, 355–56 L Land, 290 Lang factors, 271 Least common multiple (LCM) and annual worth, 109, 139 and future worth, 89 and incremental cash flow, 132, 134 and incremental rate of return, 132, 135, 137–39 and independent projects, 94–95 and present worth, 86–88 Learning curve, 273–75 Leveraging, 330–331 Liabilities, 363–64 Life. See Lives Life cycle, and annual worth, 109 Life cycle costs, 89 Likert scale, 373 Lives common multiple, 86–88, 109 equal, 84, 132 finite, 93, 116 independent projects, 94–95 minimum cost, 218–20 perpetual, 89–94, 114–16 and rate of return, 132–35418 Index Lives—Cont. recovery, in depreciation, 289 unequal, 86–88, 93, 109 unknown, 20, 22, 30, 357 useful, 289 M MACRS (Modified Accelerated Cost Recovery System), 295–99 depreciation rates, 296 and Excel functions, 305, 360–61 PW of, depreciation, 299, 305–6 recovery period, 298 straight line alternative, 298 switching, 299 U.S., required, 291, 295 Maintenance and operating (M&O) costs, 3, 167, 314. See also Annual operating costs Makeorbuy decisions, 112, 183, 191 Manufacturing progress function, 275 Marginal tax rates, 314 Market interest rate. See Interest rate Market value and depreciation, 289 in ESL analysis, 217 estimating, 217 in replacement analysis, 221–24 as salvage value, 86 MARR. See Minimum attractive rate of return Marshall & Swift, 266, 268 Mean, 379 Measure of worth, 5, 192 Minimum attractive rate of return aftertax, 318 definition, 6 establishing, 7, 328–29 as hurdle rate, 7 and independent projects, 94 inflationadjusted, 249 in PW and AW analysis, 84, 86, 112 and rate of return, 131–39 in sensitivity analysis, 192 before tax, 7, 84, 318 and WACC, 329–30 M&O costs. See Annual operating costs; Maintenance and operating costs Modified benefit/cost ratio, 167 Most likely estimate, 197, 376 Multiple alternatives benefit/cost analysis, 168–74 independent, 94–96 rate of return analysis, 135–39 Multiple attribute evaluation, 370–75 Multiple rates of return definition, 139 determining, 139–43 removing, 143–47 Municipal bonds, 85–86 Mutually exclusive alternatives annual worth analysis, 112–16 benefit/cost analysis, 168–74 capitalized cost analysis, 89–94 formation of, 82–83 future worth analysis, 89 present worth analysis, 84–89 rate of return analysis, 135–39 N Net cash flow, 17, 199, 317 Net investment procedure, 144–47 Net present value. See NPV function, Excel; Present worth Net profit after taxes (NPAT), 335–36 Net worth, 363–64 NOMINAL function, Excel, 72–73, 357 Nominal interest rate, 61–63 annual, 63 and effective rates, 63–65 Nonconventional cash flow series, 139–40 Noneconomic factors, 4 Noreturn payback, 199 Norstrom’s criterion, 139 NPER function, Excel, 22, 46, 357 and annual worth, 115 and unknown n, 22, 46–48 NPV function, Excel, 97–98, 357 for arithmetic gradients, 69 imbedding in PMT, 48, 118, 228–30 and present worth, 97–98 in PV vs. i graphs, 149 and shifting, 46–48 O Oneyearlater replacement analysis, 221–24 Operating costs. See Annual operating costs; Cost estimation Optimistic estimate, 197–98 Order of magnitude estimates, 263 Overhead rates. See Indirect costs Owner’s equity, 363 P, Q P/A factor, 34–35, 38 Payback analysis 199–201 limitations, 199, 206 Payment period of bonds, 85 defined, 66 relative to compounding period, 65–72 Payout period. See Payback analysis Percentage depletion. See Depletion Permanent investments, 89, 114. See also Capitalized cost Personal property, 290, 298 Pessimistic estimate, 197–98 P/F factor, 29. P/G factor, 37–38. See also Gradients, arithmetic Planning horizon. See Study period Plant costs, 271–73 PMT function, Excel, 22, 35, 358 and annual worth, 46–48, 111, 116–18 and capital recovery, 116 and economic service life, 228–30 imbedded with NPV function, 48, 118, 228–30 and shifted series, 47–48 Point estimates, 17, 376 Power law and sizing model, 269 Present worth, 84–98 and annual worth, 110 arithmetic gradient, 38 assumptions, 84, 86 of bonds, 85 of depreciation, 299 for equal lives, 84 geometric gradient, 39–40 of income taxes, 324 and independent projects, 94–96Index 419 and inflation, 241–46 and life cycle cost, 89 and multiple interest rates, 140–44 and rate of return, 135–39 and sensitivity analysis, 192–95 in shifted series, 43 singlepayment factor, 29 for unequal lives, 86–89 versus i graph, 149 Present worth factors gradient, 37–40 singlepayment, 29–30 uniformseries, 34–35 Probability defined, 377 and expected value, 379–81 Probability distribution, 377 Productive hour rate method, 278 Profit, 185–87 Profitability index, 124. See also Rate of return Profitability ratios, 366 Profitandloss statement. See Income statement Project netinvestment, 144–47 Property class, 298 Public sector projects, 162–66 and annual worth, 114–16 benefit/cost analysis, 166–74 BOT contracts, 166 capitalized cost, 89–94 Purchasing power, 246–48 PV function, Excel, 22, 35, 358 and NPV function, 97–98, 358 and present worth, 45, 86, 97 and single payment, 32 and uniform series present worth, 35 PW vs. i graph, 149 Quick ratio, 367 R Random samples, 377 Random variable, 377–84 classification, 377 expected value, 379–81 probability distribution of, 377 standard deviation, 382–84 Rank and rate technique, 374 RATE function, Excel, 22, 129, 147–48, 359 Rate of depreciation declining balance, 292–93 MACRS, 295–96 straight line, 291 Rate of return (ROR), 124–51 aftertax, 318–20 and annual worth, 139 on bonds, 130 cautions, 131 composite, 143–44 on debt and equity capital, 330–31 defined, 5, 126 external, 143 on extra investment, 135–39 incremental, 131–33 and independent projects, 136 internal, 126,143 minimum attractive (see Minimum attractive rate of return) and MIRR function, Excel, 150 multiple, 139–47 and mutually exclusive alternatives, 135–39 ranking inconsistency, 132 and reinvestment rate, 144 and sensitivity analysis, 195–96 Ratios, accounting, 366–69 Real interest rate, 240, 247 Real property, 290, 296 Recaptured depreciation definition, 320 in replacement study, 326–28 and taxes, 320–23 Recovery period defined, 289 effect on taxes, 323–24, 326 MACRS, 296, 298 Recovery rate. See Rate of depreciation Reinvestment rate, 144 Replacement analysis, 215–31 aftertax, 326–28 beforetax, 220–24 cash flow approach, 224 consultant’s viewpoint, 217 depreciation recapture, 326–28 economic service life, 218–20 first costs, 217 market value, 217, 221 opportunity cost (conventional) approach, 224 and study periods, 221, 224–26, 228 sunk costs, 217 Replacement value, 224, 230 Retained earnings, 364 Retirement life. See Economic service life Return on assets ratio, 368 Return on invested capital, 144 Return on investment (ROI), 5, 124. See also Rate of return Return on sales ratio, 367 Revenue alternative, 82, 133, 135, 169 Risk and debtequity mix, 330–31 and decision making, 376 and payback analysis, 201 and variation in estimates, 376 Rule of 72, 20–21 Rule of 100, 21 Rule of signs cash flow, 139–41 cumulative cash flow, 139, 142 S Safe investment, 6–7 Sales, return on, 367 Salvage value in B/C analysis, 166 and capital recovery, 110–11 and depreciation, 290, 291, 293, 295 and market value, 86, 112, 222 in replacement analysis, 219–22 Sample, 377 average, 379–81 expected value, 379 standard deviation, 382 Savings, tax, 318 Scatter charts. See xy Excel charts Sensitivity analysis. See also Breakeven analysis; Goal Seek, Excel approach, 192 of one parameter, 192–95 of several parameters, 195–96 with three estimates, 197–98420 Index Service life. See Economic service life Shifted gradients, 43–45 Shifted series, 41–45 Sign changes, 139–40 Simple cash flow series, 139 Simple interest, 9, 12–14 Singlepayment compound amount factor (F/P), 29 Single payment factors, 29–33 Singlepayment present worth factor (P/F), 29 Singlevalue estimates, 17, 376 Sinking fund (A/F) factor, 35–36 SLN function, Excel, 291, 303–4, 359 Solvency ratios, 366 Solver tool, Excel, 96, 195 Spreadsheet analysis. See also Excel aftertax, 332–35 annual worth, 116–18, 333–34 B/C analysis, 174–76 breakeven analysis, 203–5 depreciation, 303–6 effective interest, 72–74 equivalency computations, 45–49 EVA, 336–37 Excel functions, 22, 353–62 inflation, 252–53 layout, 351–53 present worth, 96–98, 333–34 rate of return, 147–51, 333–35 replacement analysis, 228–31 sensitivity analysis, 201–3 Standard deviation, 382–84 STDEV function, Excel, 382, 384 Stocks, 328, 330–31 Straight line alternative, in MACRS, 298 Straight line depreciation, 291–92, 299 Straight line rate, 291, 293 Study period AW evaluation, 109, 112 equal service, 86, 95 FW analysis, 89 independent projects, 95 PW evaluation, 86 replacement analysis, 220–21, 224–26 Sunk cost, 217 Survivor, in multiplealternative analysis, 135–39, 168–73 Switching, depreciation methods, 299–300, 305 T Tax depreciation, 289 Taxable income, 314–26 and CFAT, 317–18 and depreciation, 322, 324–25 negative, 318 Taxes, 314–39. See also Aftertax; Economic value added; Income tax; Taxable income Terminology, 14–15 Time placement of dollars, 17–20, 239 Time value of money, 4–5 Top down approach, 262–63 Total cost relation, 185–88. See also Breakeven analysis Tradein value, 218, 224, 290. See also Market value; Salvage value U Uniform distribution, 377 Uniform gradient. See Gradient, arithmetic Uniform percentage method. See Declining balance depreciation Uniform series compounding period and payment period, 65–72 description, 14 factors, 34–37 shifted, 41–45 Unit method, 264–65 Unrecovered balance, 126, 144 V–Y Value added analysis. See Economic value added (EVA) Value engineering, 263 Variable. See Random variable Variable costs, 185–86 VDB function, Excel, 305–6, 360 for MACRS rates, 296, 305–6 Weighted attribute method, 370–75 Weighted average cost of capital (WACC), 329–32 xy Excel charts, 149, 202, 229, 305, 334, 350–51 Year(s). See also Halfyear convention cash flow diagrams, 18–20 endofperiod con Glossary of Terms and Symbols Term Symbol Description Annual amount or worth A or AW Equivalent uniform annual worth of all cash inflows and outflows over estimated life. Annual operating cost AOC Estimated annual costs to maintain and support an alternative. Average X Measure of central tendency; average of sample values. Benefit/cost ratio B/C Ratio of a project’s benefi ts to costs expressed in PW, AW, or FW terms. Bond dividend I Dividend (interest) paid periodically on a bond. Book value BV Remaining capital investment in an asset after depreciation is accounted for. Breakeven point QBE Quantity at which revenues and costs are equal, or two alternatives are equivalent. Capital recovery CR Equivalent annual cost of owning an asset plus the required return on the initial investment. Capitalized cost CC or P Present worth of an alternative that will last forever (or a long time). Cash fl ow CF Actual cash amounts which are receipts (inflow) and disbursements (outflow). Cash flow before CFBT or Cash flow amount before relevant taxes or after taxes or after taxes CFAT are applied. Composite rate i Unique rate of return when a reinvestment rate c is of return applied to a multiplerate cash flow series. Compounding frequency m Number of times interest is compounded per period (year). Cost estimating C2 or CT Relations that use design variables and changing costs relationships over time to estimate current and future costs. Cost of capital WACC Interest rate paid for the use of capital funds; includes both debt and equity funds. For debt and equity considered, it is weighted average cost of capital. Debtequity mix DE Percentages of debt and equity investment capital used by a corporation to fund projects. Depreciation D Reduction in the value of assets using specifi c models and rules; there are book and tax depreciation methods. Depreciation rate dt Annual rate for reducing the value of assets using depreciation. Economic service life ESL or n Number of years at which the AW of costs is a minimum. Expenses E All corporate costs incurred in transacting business. First cost P Total initial cost—purchase, construction, setup, etc. Future amount or F or FW Amount at some future date considering time value of worth money. (Continued) Term Symbol Description Gradient, arithmetic G Uniform change ( or ) in cash fl ow each time period. Gradient, geometric g Constant rate of change ( or ) each time period. Gross income GI Income from all sources for corporations or individuals. Inflation rate f Rate that refl ects changes in the value of currency over time. Interest Simple interest is based on the principal only; compounding accrues interest on principal plus all accumulated interest. Interest rate i or r Interest expressed as a percentage of the original amount per time period; nominal (r) and effective (i) rates. Interest rate, i f Interest rate adjusted to take infl ation into account. inflationadjusted Life (estimated) n Number of years or periods over which an alternative or asset will be used; the evaluation time. Measure of worth Varies Value, such as PW, AW, i*, B/C, used to judge economic viability. Minimum attractive MARR Minimum value of the rate of return for an alternative to rate of return be financially viable. Net cash fl ow NCF Resulting net amount of cash that fl ows in or out during a time period. Net present value NPV Another name for the present worth, PW. Payback period n p Number of years to recover the initial investment and a stated rate of return. Present amount P or PW Amount of money at the current time or a time denoted as or worth present. Random variable X Parameter or characteristic that can take on any one of several values; discrete and continuous. Rate of return i* or ROR Compound interest rate on unpaid or unrecovered balances such that the final amount results in a zero balance. Recovery period n Number of years to completely depreciate an asset. Salvage value S Expected tradein or market value when an asset is traded or disposed of. Standard deviation s Measure of dispersion or spread about the expected value or average. Study period n Specified number of years over which an evaluation takes place. Taxable income TI Amount upon which income taxes are based. Tax rate T Decimal rate, usually graduated, used to calculate corporate or individual taxes. Tax rate, effective T e Singlefigure tax rate incorporating several rates and bases. Time t Indicator for a time period. Value added EVA Economic value added refl ects net profi t after taxes (NPAT) after removing cost of invested capital during the year.Format for Commonly Used Spreadsheet Functions on Excel Present worth: PV(i%,n,A,F) for constant A series NPV(i%,second_cell:last_cell) first_cell for varying cash flow series Future worth: FV(i%,n,A,P) for constant A series Annual worth: PMT(i%,n,P,F) for single amounts with no A series Number of periods (years): NPER(i%,A,P,F) for constant A series (Note: The PV, FV, and PMT functions change the sense of the sign. Place a minus in front of the function to retain the same sign.) Rate of return: RATE(n,A,P,F) for constant A series IRR(first_cell:last_cell) for varying cash flow series Interest rate: EFFECT(r%,m) for nominal r, compounded m times per period NOMINAL(i%,m) for effective i, compounded m times per year Depreciation: SLN(P,S,n) Straight line depreciation for each period DDB(P,S,n,t,d) Double declining balance depreciation for period t at rate d DB(P,S,n,t) Declining balance, rate determined by the function VDB(P,S,n, start_period, Switch from declining balance to straight end_period, factor) line depreciation VDB(P,0,n,MAX(0,t 1.5), MACRS depreciation for period t
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