This book directs the engineering manager or the undergraduate student preparing to become an engineering manager, who is or will become actively engaged in the management of economic-risk trade-off decisions for engineering investments within an organizational system. In today’s global economy, this may mean managing the economic risks of engineering investments across national boundaries in international organizations, government, or service organizations. As such, this is an applied book. The book’s goal is to provide an easy to understand, up to date, and coherent treatment of the management of the economic-risk trade-offs of engineering investments. This book accomplishes this goal by cumulatively sequencing knowledge content from foundational economic and accounting concepts to cost estimating to the traditional engineering economics knowledge culminating in fundamental engineering managerial economic decision-making incorporating risk into engineering management economic decisions.
Author(s): Teddy Steven Cotter
Series: Topics in Safety, Risk, Reliability and Quality, 39
Publisher: Springer
Year: 2021
Language: English
Pages: 503
City: Cham
Preface
Features of This Book
Course Coverage
Contents
Part I Economic Context of Engineering Management Decision
1 Managerial Economics of Engineering Organizations
1.1 Introduction
1.2 Engineering and Engineering Management
1.3 Types of Business Organizations
1.4 Engineering Economic Decisions
1.5 Engineering Economic Principles
1.6 Engineering Life Cycle Costs
1.7 Engineering Life Cycle Cost Management
1.8 Budgeting for Engineering Operations and Projects
1.9 Summary
1.10 Key Terms
2 General Accounting and Finance Fundamentals
2.1 Introduction
2.2 Sources of Operations Financing
2.3 The Role of Accounting in the Organization
2.4 The Balance Sheet
2.5 The Income Statement
2.6 The Retained Earnings Statement
2.7 The Cash Flow Income Statement
2.8 Financial Ratios Important to Engineering Managerial Economics
2.9 Financial Ratios—Measuring Organizational Health and Performance
2.9.1 Liquidity Ratios
2.9.2 Asset Management Ratios
2.9.3 Debt Management Ratios
2.9.4 Profitability Ratios
2.9.5 Market Value Ratios
2.10 Integrated Ratio Analysis
2.11 Summary
2.12 Key Terms
3 Cost Accounting Fundamentals
3.1 Introduction
3.2 Cost Terms and Purposes
3.3 Cost Accounting in the Organization
3.4 Cost Accounting—Material and Component Analysis
3.5 Cost Accounting—Labor Analysis
3.6 Cost Accounting—Overhead Cost Allocation
3.7 Summary
3.8 Key Terms
4 Cost Estimating Fundamentals
4.1 Introduction
4.2 Cost Estimating Accuracy
4.3 Cost Models
4.4 Cost Estimating Process
4.5 Product Costing
4.6 Operation Costing
4.7 Cost Estimating Models
4.8 Summary
4.9 Key Terms
Part II Economic Analysis of Engineering Activities and Projects
5 Time Value of Money
5.1 Interest Equivalence
5.2 Cash Flow Transactions with Interest
5.3 Cash Flow Income Statement
5.4 Single Payment Discrete Cash Flow Compounding
5.5 Four Methods of Debt Repayment
5.5.1 Payment Series Discrete Cash Flow Compounding
5.6 Compounding Periods and Payment Periods Differ
5.7 Nominal and Effective Interest Rates
5.8 Continuous Cash Flow Compounding
5.9 Spreadsheets for Economic Analysis
5.10 Summary
5.11 Key Terms
6 Measures of Investment Worth
6.1 Investment Time Periods
6.2 Undiscounted Payback Period
6.3 Discounted Payback Period
6.4 Net Present Worth
6.5 Equivalent Uniform Annual Worth
6.6 Future Worth
6.7 Internal Rate of Return
6.8 Investment Worth Metrics Under Differing Project Life Analysis Periods
6.9 Investment Worth Metrics in Spreadsheet Analyses
6.10 Spreadsheets for Alternatives with Multiple Rate-of-Returns
6.11 Summary
6.12 Key Terms
7 Depreciation Effects on Investment Worth
7.1 Depreciation Fundamentals
7.1.1 US Tax Code Depreciation Fundamentals
7.1.2 Depreciation Estimation Fundamentals
7.2 Historical Depreciation Methods
7.2.1 Straight-Line Depreciation
7.2.2 Sum-of-Years-Digits Depreciation
7.2.3 Declining Balance Depreciation
7.3 Modified Accelerated Cost Recovery System (MACRS)
7.4 Depreciation at Asset Disposal
7.5 Unit-of-Production Depreciation
7.6 Depletion
7.6.1 Cost Depletion Method
7.6.2 Percentage Depletion Method
7.7 Spreadsheets and Depreciation
7.8 Summary
7.9 Key Terms
8 Tax Effects on Engineering Investments
8.1 Classification of Taxable Income
8.2 Economic Analysis Taking Taxes into Account
8.2.1 Combined Federal and State Income Taxes
8.3 Capital Gains and Losses for Non-depreciated Assets
8.4 After-Tax Cash Flows with Spreadsheets
8.5 Summary
8.6 Key Terms
9 Inflation Effects on Engineering Investments
9.1 The Meaning and Effect of Inflation on Investment Worth
9.2 Incorporating Inflation in Engineering Managerial Economic Estimates
9.3 Investment Analysis in Real Dollars Versus Actual Dollars
9.4 Cash Flows That Inflate at Different Rates
9.5 Different Inflation Rates Per Period
9.6 Geometric Mean Inflation Rate
9.7 Price and Cost Change with Indexes
9.8 Inflation Effect on After-Tax Calculations
9.9 Summary
9.10 Key Terms
10 Incremental Analysis
10.1 Introduction
10.2 Graphical Incremental Rate of Return Sensitivity Analysis
10.3 Challenger–Defender Incremental Rate of Return Analysis
10.4 Observations on Incremental Rate of Return Analysis
10.5 Summary
10.6 Key Terms
11 Replacement Analysis
11.1 The Replacement Problem
11.2 Economic Service Life of an Asset
11.3 Tax Laws Affecting Replacement Analysis
11.4 Planning Horizon
11.5 Closing Comments on Replacement Analysis
11.6 Summary
11.7 Key Terms
Part III Managing Engineering Investments
12 Determining the Appropriate MARR
12.1 Risk–Return Fundamentals
12.2 Sources of Financing
12.3 Cost of Financing and Investment Opportunities
12.3.1 Weighted Average Cost of Capital
12.3.2 Weighted Marginal Cost of Capital
12.3.3 Opportunity Cost of Capital
12.4 Closing Comments on Determination of MARR
12.5 Summary
12.6 Key Terms
13 Capital Budgeting Engineering Investments
13.1 Capital Expenditure for Project Proposals
13.2 Rationing Capital by Rate of Return
13.3 Rationing Capital by Net Present Worth
13.4 Ranking Project Proposals
13.5 Summary
13.6 Key Terms
14 Benefit–Cost Ratio Analysis
14.1 Characteristics of Major Service Systems
14.2 Economic Evaluation of Services
14.3 Selecting the Appropriate Interest Rate
14.3.1 Public Sector Internal Rate of Return
14.3.2 Public Sector Opportunity Cost
14.4 Cost-Effectiveness Analysis
14.5 Cost-Utility Analysis
14.6 Benefit–Cost Ratio Analysis
14.7 Incremental Benefit–Cost Ratio Analysis
14.8 Factors Affecting Benefit–Cost Ratio Analysis Decisions
14.8.1 Public Sector Investment Financing
14.8.2 Public Sector Investment Life Cycle
14.8.3 Quantifying Benefits and Disbenefits
14.8.4 Public Sector Politics and Policies
14.9 Summary
14.10 Key Terms
15 Introduction to Management Economic Decision Theory and Risk Analysis
15.1 Elements of Engineering Managerial Economic Decisions
15.2 Probability and Statistics Concepts for Management Economic Decisions
15.3 Structuring Decision Problems
15.4 Sensitivity Analyses
15.5 Decision Analysis
15.6 Decision Tree Risk Simulation
15.7 Summary
15.8 Key Terms
Appendix A Use of the Microsoft® Excel® Compound Interest Calculator Spreadsheet
Appendix B Discrete Payment Compound Interest Factors
Appendix C Selected Discrete Payment Compound Interest Factors with Geometric Gradient Percentages
Appendix D Cumulative Standard Normal Distribution
Appendix E Fundamentals of Engineering (FE) Examination Example Questions
Bibliography
Index
