Capital Investment Analysis for Engineering

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.

Preface

v

PART ONE -- BASIC CONCEPTS: VALUE, COST, AND CAPITAL INVESTMENT FOUNDATIONS

1

(98)

Value Creation and Financial Accounting

1

(31)

Appendix 1-A Basic Accounting Mechanics

23

(9)

Cost Measurement and the Cost Accounting System

32

(19)

Relevant Costs and Revenues and Estimating

51

(48)

PART TWO -- BASIC CAPITAL INVESTMENT ANALYSIS: APPLICATIONS

99

(282)

Computations Involving Interest

99

(39)

Equivalent Worth Methods for Comparing Alternatives

138

(27)

Rate of Return Methods for Comparing Alternatives

165

(39)

Appendix 6-A Use of the ERR Method to Overcome Multiple-Solutions Difficulty with the IRR Method

193

(2)

Appendix 6-B Other Rate of Return and Investment Recovery Measures of Merit for Financial and Management Purposes

195

(4)

Appendix 6-C Benefit-Cost Ratio Measures of Merit

199

(5)

Consideration of Depreciation and Income Taxes

204

(50)

Dealing with Price Changes in Capital Investment Analysis

254

(20)

Replacement Analysis

274

(42)

New Product and Expansion Analyses

316

(29)

Appendix 10-A Sample Forms for Summary Presentations

341

(4)

Capital Planning and Budgeting

345

(36)

Appendix 11-A Adjusted Present Worth or Value

377

(2)

Appendix 11-B Bundled Financing

379

(2)

PART THREE -- CAPITAL INVESTMENT ANALYSES IN AN UNCERTAIN WORLD: FORMAL ASSESSMENTS

381

(114)

Introduction to Risk and Uncertainty

381

(21)

Sensitivity Analysis

402

(26)

Appendix 13-A Tabular and Graphical Illustrations of Sensitivity Analysis for the Comparison of Alternatives

422

(6)

Analytical and Simulation Approaches to Risk Analysis

428

(18)

Decision Criteria and Methods for Risk and Uncertainty

446

(23)

Decision Tree Analysis

469

(26)

Appendix 16-A Bayes's Theorem and Tabular Format for Calculation of Posterior Probabilities

493

(2)

PART FOUR -- SPECIALIZED TOPICS

495

(91)

Capital Investment Decisions as Real Options

495

(25)

Activity-Based Costing and Activity-Based Management

520

(25)

Multiple-Attribute Decision Making and the Analytic Hierarchy Process

545

(41)

Appendix A Tables of Discrete Compounding Interest Factors (for Various Common Values of i from 1/2 % to 25%)

586

(16)

Appendix B Tables of Continuous Compounding Interest Factors (for r = 10% and 20%)

602

(3)

Appendix C Table of Random Numbers

605

(1)

Appendix D Table of Random Normal Deviates

606

(1)

Appendix E The Standardized Normal Distribution Function, F(S)

607

(1)

Index

608

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Capital Investment Analysis for Engineering and Management

Summary

Table of Contents

Supplemental Materials