Engineering Managerial Economic Decision and Risk Analysis: Economic Decision-Making and Risk Analysis

Description

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.   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