Engineering Economy 2012

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CONTENTS Preface to Seventh Edition xiii LEARNING STAGE 1 THE FUNDAMENTALS Chapter 1 Foundations of Engineering Economy 2 1.1 Engineering Economics: Description and Role in Decision Making 3 1.2 Performing an Engineering Economy Study 4 1.3 Professional Ethics and Economic Decisions 7 1.4 Interest Rate and Rate of Return 10 1.5 Terminology and Symbols 13 1.6 Cash Flows: Estimation and Diagramming 15 1.7 Economic Equivalence 19 1.8 Simple and Compound Interest 21 1.9 Minimum Attractive Rate of Return 25 1.10 Introduction to Spreadsheet Use 27 Chapter Summary 31 Problems 31 Additional Problems and FE Exam Review Questions 35 Case Study—Renewable Energy Sources for Electricity Generation 36 Case Study—Refrigerator Shells 37 Chapter 2 Factors: How Time and Interest Affect Money 38 PE Progressive Example—The Cement Factory Case 39 2.1 Single-Amount Factors (FP and PF ) 39 2.2 Uniform Series Present Worth Factor and Capital Recovery Factor (PA and AP) 43 2.3 Sinking Fund Factor and Uniform Series Compound Amount Factor (AF and FA) 46 2.4 Factor Values for Untabulated i or n Values 48 2.5 Arithmetic Gradient Factors (PG and AG) 50 2.6 Geometric Gradient Series Factors 58 2.7 Determining i or n for Known Cash Flow Values 61 Chapter Summary 64 Problems 64 Additional Problems and FE Exam Review Questions 69 Case Study—Time Marches On; So Does the Interest Rate 70 Chapter 3 Combining Factors and Spreadsheet Functions 72 3.1 Calculations for Uniform Series That Are Shifted 73 3.2 Calculations Involving Uniform Series and Randomly Placed Single Amounts 76 3.3 Calculations for Shifted Gradients 80 Chapter Summary 86 Problems 86 Additional Problems and FE Exam Review Questions 92 Case Study—Preserving Land for Public Use 93 Chapter 4 Nominal and Effective Interest Rates 94 PE Progressive Example—The Credit Card Offer Case 95 4.1 Nominal and Effective Interest Rate Statements 96 4.2 Effective Annual Interest Rates 99 4.3 Effective Interest Rates for Any Time Period 105 4.4 Equivalence Relations: Payment Period and Compounding Period 106 4.5 Equivalence Relations: Single Amounts with PP CP 107
viii Contents 4.6 Equivalence Relations: Series with PP CP 109 4.7 Equivalence Relations: Single Amounts and Series with PP CP 112 4.8 Effective Interest Rate for Continuous Compounding 114 4.9 Interest Rates That Vary over Time 116 Chapter Summary 117 Problems 118 Additional Problems and FE Exam Review Questions 122 Case Study—Is Owning a Home a Net Gain or Net Loss over Time? 124 LEARNING STAGE 2 BASIC ANALYSIS TOOLS Chapter 5 Present Worth Analysis 128 PE Progressive Example—Water for Semiconductor Manufacturing Case 129 5.1 Formulating Alternatives 129 5.2 Present Worth Analysis of Equal-Life Alternatives 131 5.3 Present Worth Analysis of Different-Life Alternatives 133 5.4 Future Worth Analysis 137 5.5 Capitalized Cost Analysis 138 Chapter Summary 142 Problems 142 Additional Problems and FE Exam Review Questions 147 Case Study—Comparing Social Security Benefits 149 Chapter 6 Annual Worth Analysis 150 6.1 Advantages and Uses of Annual Worth Analysis 151 6.2 Calculation of Capital Recovery and AW Values 153 6.3 Evaluating Alternatives by Annual Worth Analysis 155 6.4 AW of a Permanent Investment 157 6.5 Life-Cycle Cost Analysis 160 Chapter Summary 164 Problems 164 Additional Problems and FE Exam Review Questions 169 Case Study—The Changing Scene of an Annual Worth Analysis 171 Chapter 7 Rate of Return Analysis: One Project 172 7.1 Interpretation of a Rate of Return Value 173 7.2 Rate of Return Calculation Using a PW or AW Relation 175 7.3 Special Considerations When Using the ROR Method 179 7.4 Multiple Rate of Return Values 180 7.5 Techniques to Remove Multiple Rates of Return 184 7.6 Rate of Return of a Bond Investment 190 Chapter Summary 193 Problems 193 Additional Problems and FE Exam Review Questions 198 Case Study—Developing and Selling an Innovative Idea 200 Chapter 8 Rate of Return Analysis: Multiple Alternatives 202 8.1 Why Incremental Analysis Is Necessary 203 8.2 Calculation of Incremental Cash Flows for ROR Analysis 203 8.3 Interpretation of Rate of Return on the Extra Investment 206 8.4 Rate of Return Evaluation Using PW: Incremental and Breakeven 207 8.5 Rate of Return Evaluation Using AW 213 8.6 Incremental ROR Analysis of Multiple Alternatives 214
Page 2: Seventh Edition ENGINEERING ECONOMY
Page 5 and 6: TM ENGINEERING ECONOMY: SEVENTH EDI
Page 7: MCGRAW-HILL DIGITAL OFFERINGS McGra
Page 11 and 12: x Contents Chapter 12 Independent P
Page 13 and 14: xii Contents Appendix B Basics of A
Page 15 and 16: xiv Preface to Seventh Edition CHAP
Page 17 and 18: SAMPLE OF RESOURCES FOR LEARNING OU
Page 19 and 20: CASE STUDY RENEWABLE ENERGY SOURCES
Page 21 and 22: xx Acknowledgment of Contributors G
Page 23 and 24: CHAPTER 1 Foundations of Engineerin
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CHAPTER 2 Factors: How Time and Int
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40 Chapter 2 Factors: How Time and
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CHAPTER 3 Combining Factors and Spr
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CHAPTER 4 Nominal and Effective Int
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LEARNING STAGE 2 Basic Analysis Too
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A future amount of money converted
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5.2 Present Worth Analysis of Equal
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5.3 Present Worth Analysis of Diffe
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5.3 Present Worth Analysis of Diffe
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5.4 Future Worth Analysis 137 If th
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5.5 Capitalized Cost Analysis 139 c
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5.5 Capitalized Cost Analysis 141 S
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Problems 143 5.5 What is meant by t
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Life n , years First cost, $ Seawat
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Additional Problems and FE Exam Rev
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Case Study 149 5.51 The capitalized
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I n this chapter, we add to our rep
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6.2 Calculation of Capital Recovery
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6.3 Evaluating Alternatives by Annu
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6.4 AW of a Permanent Investment 15
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6.4 AW of a Permanent Investment 15
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6.5 Life-Cycle Cost Analysis 161 fo
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6.5 Life-Cycle Cost Analysis 163 Co
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Problems 165 6.8 Eight years ago, O
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Problems 167 increase for a time pe
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Case Study 171 6.47 All the followi
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T he most commonly quoted measure o
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7.2 Rate of Return Calculation Usin
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7.2 Rate of Return Calculation Usin
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7.3 Special Considerations When Usi
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7.4 Multiple Rate of Return Values
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7.4 Multiple Rate of Return Values
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7.5 Techniques to Remove Multiple R
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7.6 Rate of Return of a Bond Invest
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Problems 193 CHAPTER SUMMARY The ra
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Problems 195 lasts only 3 years ver
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Problems 197 return using the modif
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Case Study 201 end of the first yea
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T his chapter presents the methods
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8.2 Calculation of Incremental Cash
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8.4 Rate of Return Evaluation Using
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8.6 Incremental ROR Analysis of Mul
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8.6 Incremental ROR Analysis of Mul
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Chapter Summary 219 Solution by Spr
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Problems 221 Year Incremental Cash
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Problems 223 (b) Determine which ma
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Case Study 227 CASE STUDY HOW A NEW
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T he evaluation methods of previous
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9.1 Public Sector Projects 231 Poli
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9.1 Public Sector Projects 233 Some
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9.2 Benefit/Cost Analysis of a Sing
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9.2 Benefit/Cost Analysis of a Sing
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9.3 Alternative Selection Using Inc
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9.3 Alternative Selection Using Inc
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9.4 Incremental B/C Analysis of Mul
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9.4 Incremental B/C Analysis of Mul
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9.5 Service Sector Projects and Cos
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9.5 Service Sector Projects and Cos
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Chapter Summary 251 TABLE 9-5 Some
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Problems 253 cancer of the bladder,
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Problems 255 Year 0 1 2 3 4 5 6 Inv
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Problems 257 9.44 Four mutually exc
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Case Study 259 ( a) The B/C ratio o
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LEARNING STAGE 2: EPILOGUE Selectin
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Learning Stage 2: Epilogue 263 elem
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LEARNING STAGE 3 Making Better Deci
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T his chapter discusses the differe
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10.2 Debt-Equity Mix and Weighted A
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10.3 Determination of the Cost of D
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10.4 Determination of the Cost of E
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10.5 Effect of Debt-Equity Mix on I
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10.5 Effect of Debt-Equity Mix on I
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10.6 Multiple Attribute Analysis: I
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10.6 Multiple Attribute Analysis: I
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Chapter Summary 283 EXAMPLE 10.9 Th
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Problems 285 credit union loan. Thi
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Problems 287 linear stepper motors.
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Case Study 291 2. The engineer must
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O ne of the most common and importa
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11.1 Basics of a Replacement Study
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11.2 Economic Service Life 297 Larg
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11.2 Economic Service Life 299 Curr
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11.2 Economic Service Life 301 ESL
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11.3 Performing a Replacement Study
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11.3 Performing a Replacement Study
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11.5 Replacement Study over a Speci
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for each year of ownership can be m
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Problems 315 11.15 A piece of equip
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Problems 317 replaced next year or
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Case Study 321 CASE STUDY WILL THE
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I n most of the previous economic c
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12.2 Capital Rationing Using PW Ana
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12.3 Capital Rationing Using PW Ana
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12.4 Capital Budgeting Problem Form
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12.4 Capital Budgeting Problem Form
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12.5 Additional Project Ranking Mea
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Problems 335 other contaminants off
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Problems 337 Project Investment, $
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B reakeven analysis is performed to
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13.1 Breakeven Analysis for a Singl
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13.2 Breakeven Analysis Between Two
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13.2 Breakeven Analysis Between Two
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13.3 Payback Analysis 349 The payba
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13.3 Payback Analysis 351 $3000 per
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13.4 More Breakeven and Payback Ana
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Problems 355 CHAPTER SUMMARY The br
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Problems 357 13.15 For the last 2 y
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Problems 359 tomato and lettuce gre
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Case Study 363 CASE STUDY WATER TRE
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LEARNING STAGE 4 Rounding Out the S
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T his chapter concentrates upon und
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14.2 Present Worth Calculations Adj
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14.3 Future Worth Calculations Adju
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14.4 Capital Recovery Calculations
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Problems 379 PROBLEMS Interest Rate
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Problems 381 14.29 A doctor is on c
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Problems 383 equivalent cost in 3 y
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Case Study 385 CASE STUDY INFLATION
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U p to this point, cost and revenue
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15.1 Understanding How Cost Estimat
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15.3 Cost Indexes 391 TABLE 15-1 To
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15.3 Cost Indexes 393 Solution The
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15.5 Cost-Estimating Relationships:
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15.6 Traditional Indirect Cost Rate
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15.6 Traditional Indirect Cost Rate
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15.7 Activity-Based Costing (ABC) f
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15.8 Making Estimates and Maintaini
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Problems 405 evaluate proposals, di
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Problems 407 15.32 The on-site mana
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Problems 409 ABC Method 15.51 The m
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Case Study 411 drivers for the ABC
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Case Study 413 Information Yucatan
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T he capital investments of a corpo
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16.1 Depreciation Terminology 417 F
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16.3 Declining Balance (DB) and Dou
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16.3 Declining Balance (DB) and Dou
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16.4 Modified Accelerated Cost Reco
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16.4 Modified Accelerated Cost Reco
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16.6 Depletion Methods 427 recovery
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For example, assume a medium-sized
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16A.1 Sum-of-Years-Digits (SYD) and
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16A.2 Switching between Depreciatio
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16A.3 Determination of MACRS Rates
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16A.3 Determination of MACRS Rates
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Problems 439 MARR is 11% per year.
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Problems 441 the sport on the Web o
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Appendix Problems 443 APPENDIX PROB
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T his chapter provides an overview
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17.1 Income Tax Terminology and Bas
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17.2 Calculation of Cash Flow after
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17.3 Effect on Taxes of Different D
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17.4 Depreciation Recapture and Cap
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17.4 Depreciation Recapture and Cap
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17.5 After-Tax Evaluation 457 One p
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17.5 After-Tax Evaluation 459 Sprea
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17.5 After-Tax Evaluation 461 Break
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17.6 After-Tax Replacement Study 46
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17.7 After-Tax Value-Added Analysis
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17.7 After-Tax Value-Added Analysis
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17.8 After-Tax Analysis for Interna
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17.9 Value-Added Tax 471 time is wh
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CFAT calculations. Accordingly, key
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Problems 475 The following informat
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Problems 477 17.37 Freeman Engineer
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Problems 479 (Assume that the asset
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Case Study 483 Case Study Exercises
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T his chapter includes several rela
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18.1 Determining Sensitivity to Par
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18.1 Determining Sensitivity to Par
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18.3 Estimate Variability and the E
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18.4 Expected Value Computations fo
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18.5 Staged Evaluation of Alternati
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18.5 Staged Evaluation of Alternati
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18.6 Real Options in Engineering Ec
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18.6 Real Options in Engineering Ec
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There are many other examples and d
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Problems 505 18.11 Sensitivity to f
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Problems 507 integer. For the accep
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Case Study 511 CASE STUDY SENSITIVI
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Case Study 513 (b) (pessimistic) or
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T his chapter further expands our a
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19.1 Interpretation of Certainty, R
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19.2 Elements Important to Decision
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19.2 Elements Important to Decision
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19.3 Random Samples 523 19.3 Random
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19.3 Random Samples 525 Cumulative
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19.4 Expected Value and Standard De
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19.5 Monte Carlo Sampling and Simul
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Problems 541 19.6 A survey of house
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Case Study 545 TABLE 19-6 Parameter
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548 Appendix A Using Spreadsheets a
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562 Appendix B Basics of Accounting
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564 Appendix B Basics of Accounting
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APPENDIX C CODE OF ETHICS FOR ENGIN
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568 Appendix C Code of Ethics for E
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570 Appendix D Alternate Methods fo
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572 Appendix D Alternate Methods fo
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574 Appendix E Glossary of Concepts
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580 Reference Materials Websites Co
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582 Compound Interest Factor Tables
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PHOTO CREDITS Chapter 1 Opener: Roy
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612 Index Book value (continued) MA
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614 Index Depreciation (continued)
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616 Index Indirect costs (continued
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618 Index Perspective for public se
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620 Index Spreadsheet (continued) p
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