Blank L., Tarquin A. Engineering Economy (McGraw-Hill Series in Industrial Engineering and Management)

766

I

NDEX

N

11

, 23,26, 103-5.

See

al

so

In

terpolation

in in

terest rate

ta

bl

es; Least

co

mmon mul

ti

pl

e; Payback

analysis; Study pe

ri

od

Natural r

eso

urces. See De

pl

e

ti

on

Net cash

fl

ow, 31, 436,

57

4-

75

Net

in

co

me (NT

),

570

Net

in

vestment proce

dur

e, 25

6--

61

et operat

in

g pro

fi

t a

ft

er taxes (NOPAT), 570

Net present va

lu

e. See NPY func

ti

on;

Pr

esent worth

Net profit

af

ter taxes (N

PAT)

, 570, 602- 6

Net worth, 717

Nominal interest rate, 126, 128

annual, 13

0,

13 1

any payment period, 130, 131

of bonds, 196-

97

and eff

ec

ti

ve r

at

es, 133 (ta

bl

e), 1

38

Nonconventional cash

fl

ow se

ri

es, 249- 55

Noneconomic factors, 10

Nonrecurring cash

fl

ows, 180

No

nsimple cash

fl

ow series, 249-

55

No

-return (simple) payback, 1

86

-

87

No

rm

al dis

tri

bution,

66

3,

68

7-

91

Norstrom's c

ri

terion, 250, 593

otation

fo

r factors, 51, 58, 6 1,

67

,

72

NPER func

ti

on, 707- 8

and a

nn

ua

l worth, 2

.3

0

-3

1

and

un

known

11

, 77- 78

NPY f

un

ction, 708

a

ft

er-tax, 5

87

, 588

for ar

itJ

lme

ti

c gra

di

ents, 69

embedding

in

PMT, 227, 394, 703

geometric gradients, 73

independent projects, 430

and present worth, 197- 200

in

PY

vs.

i graphs, 245, 247

sensitiv

it

y analysis, 626, 628

and shift

in

g, 96, 9

8,

107,

110

-

11

o

Ob

solescence, 388

One-add

iti

onal-year re

pl

a

ce

ment studies, 398

Op

erating costs. See A

nn

ual operating costs;

Cos

t es

ti

mation

Op

erations phase, 191, 192-93

Opp

ortunity cost, 30, 352

and replacement analysis, 391, 405

Optimis

ti

c estimate, 629- 31

Overh

ea

d rates.

See

Indir

ec

t

co

sts

Owner

's

equity, 352, 717

p

P,

23, 26

P

IA

factor, 56- 57,

71

- 7

3.

See also Gradients, arithme

ti

c

Phaseout st

age

, 191

Phases of systems, 1

90-9

1

Pl

anning ho

ri

zon.

See

Study pe

ri

od

Plant costs, 505-7

PM

T function,

708-

9

and

af

ter-tax analysis, 587, 5

88

and annual worth, 225, 349

and arithme

ti

c gra

di

ents, 69

and B/C analysis, 323

and

ca

pital reco

ver

y, 223

and

ca

pi

ta

li

ze

d

co

st, 184-85

and

eco

nomic servi

ce

life, 393

a

nd

embedded

NP

V, 703

and ge

om

et

ric gradients, 73

and random s

in

gle amounts,

10

2- 3

and replacement anal

ys

is,

392-93

and s

hi

fted series,

96-98

, 106

a

nd

sinking fund factor, 62

and

uni

fo

rm

se

ri

es present worth, 59

Point estimates, 3 1, 632, 660

Power

law a

nd

siz

in

g model,

503-4

PPMT function, 709

Preferred

stock, 352, 359

Prese

nt

va

lu

e ne

t.

See NPY function; Prese

nt

worth

Prese

nt

worth, 170- 202

after-tax analysi

s,

586

-88

in

a

lt

ernative eva

lu

ation,

16

8

and annual worth, 2 18

assumption

s,

175

of

bo

nd

s,

1

94-97

a

nd

breakeven analysis,

451

and capital budget

in

g, 432

-3

6

of depreciation,

560

fo

r equal

li

ves, 1

72-74

eva

lu

a

ti

on me

th

od, 350 (ta

bl

e)

geometric gradient series, 7 1

-74

income taxes, 586

and independent projects, 428- 34

and inflation,

473-80

and

li

fe-cycle cost, 1

90

a

nd

mUlt

iple interest rates,

249-54

, 3

10

-

11

and rate

of

return,

244-47

,

283-9

1

and sens

iti

vity analysis, 623

-2

6

in

shifted se

ri

es,

94-96

in

simulation, 678, 679

s

in

gle-payme

nt

factor,

50

-52

for

un

equal

li

ves,

174

- 76

Prese

nt

-worth factors

gradie

nt

, 65-

71

s

in

gle-payment factor,

50-52

unifo

rm

-se

ri

es,

56-58

Proba

bi

I i

ty

in

decision

tr

ees,

637-40

defined

,632,66

1

a

nd

expected

va

lu

e, 634

-3

5,

67

1- 72

Probability distribution,

661

- 77

of

continuous va

ri

a

bl

es,

661

, 677

of

di

screte va

ri

a

bl

es,

662-63

a

nd

Excel®, 696

prope

rti

es, 673, 677

a

nd

samples, 667- 73

in

simulation, 678

Produc

ti

ve hour rate, 5

10

Profitability index, 238. See also Rate

of

return

INDEX

Profitabili

ty

ratios, 719

Profit-a

nd

-Ioss statement. See Income statement

Project net-inves

tm

ent,

256-6

1

Property class,

545-46

Property

of

indepe

nd

ent ra

nd

om

va

ri

a

bl

es, 677

Publjc sector projects, 314-19

a

nd

annual worth, 228

benefit/cost analysis, 3

19

-24

BOT

contracts, 319

capita

li

zed cost,

179

-8

5

est

im

a

ti

on, 315, 333, 499

joint ventures, 318

Purchas

in

g power, 480

-8

1,

482-83

PY f

un

c

ti

on, 26, 59, 709- 10

and bond

s,

197

a

nd

NPY

fu

nction, 708

and present worth, 349

and s

hi

fted uniform series,

111

and s

in

gle payment, 52, 55

and unifo

rm

se

ri

es present worth, 59

PW

vs

. i gra

ph

, 245, 287-

91

, 595

Q

Q-Sol

v,

28

Quick ratio,

720

R

r.

See Nominal interest rate

RAND function,

683-86,

710

Ra

nd

om number

s,

668 (table)

genera

ti

on, 7

10

Random samples,

666-71,

678

Random variables

continuous,

660, 661

,6

64-66

, 670- 71

,676-77

,

679-

80,696

cumulati ve distribution, 661- 66

di

screte, 660-

63

,

667-70

, 673- 76,

679-8

0

,696

expected va

lu

e, 67 1

-73

probabiljty

di

stribution

of

, 661 , 662

-63,

667,67

1

standard deviation,

673-73

Range, 676

Ra

nk

a

nd

rate technique, 369

Ranking

in

consisten

cy,

291

RATE function,

76-77

, 245, 710-

11

767

768

Rate

of

depreciation

declining balance, 537

MACRS, 562- 65

INDEX

straight line, 533

s

um

-of-year digits, 555-56

Rate

of

return. See also

In

cremental rate

of

return

after-tax, 588- 94

and annual worth, 248, 29 1- 92

on bonds, 26 1-

63

breakeven, 287, 591

in

capital budgeting, 432- 36

ca

uti

ons,

248-49

composite, 255- 61, 283

computer solutions, 245, 247, 248-49, 252, 253, 263

on

debt capital, 357- 59

d

efi

ned,

13,240

determin

in

g,

74-76,

242-49

on

equi

ty

cap

it

al, 359- 62

evaluation method,

350 (table)

in

Excel

®,

26, 706, 7 1

0-

11

external, 256

on extra investment, 282-

83

incremental, 278- 82

and

ind

ependent projects, 283

and inflation,

14

-

15

,473,482-83

in

stallment

fin

ancing, 24 1

-42

inte

rn

al, 75- 76, 255, 706- 7

minimum

attracti

ve

(see Minimum attractive ra

te

of

return)

multiple, 248, 249- 61

,273

- 75

and

mu

tu

ally exc

lu

sive a

lt

e

rn

atives, 278

and present worth, 242-47, 283-91

ranking

in

consistency, 29 1

a

nd

reinvestme

nt

rate, 256

and sens

iti

vity analysi

s,

623

Ratios, accountin

g,

719-23

Real interest rate, 473, 476, 478, 483

Real property, 533,

541-42

Reasonable estimate,

629-3

1

Recaptured de

pr

eciation

definition, 582

in

replacement studies, 595- 99

a

nd

taxes, 582, 586-87, 606

Reco

ve

ry

period

defined, 533

effect on taxes,

580-82

MACRS,

541

, 544,

545-46

,

561,570

straight

lin

e option, 549

Reco

ve

ry

rate. See Rate

of

depreciation

Recurring cash

fl

ows, 180

Reinvestment, assumption

in

capi

tal

budgeting,

425-27

Reinvestment rate, 256

Repayment

of

loans,

20-22

Replacement analysis

after-tax, 595

-99

an

nu

al worth, 390,

392-96,404-10

before-tax,

386-410

cash flow approach, 403

depreciation recapture, 595

economic service

li

fe

, 388, 39 J

-97

first costs,

388-89

ga

in

s and losses, 595

market va

lu

e, 388-90, 392-93

need for, 388

one-additional year, 398

opportunity cost approach, 389,

403

overview, 398

and study periods,

404-

10

sunk cost

s,

389

unequal-

li

fe

assets, 403, 404, 410

Replacement life. See Economic service life

Replacement

va

lue,

403-5

Retained earnings, 29, 352, 360

Retirement life. See Economic se

rvi

ce life

Return on assets ratio, 721

Return on

in

vested capital, 256

Return

on

in

ves

tm

ent (ROI), 14,238. See also Rate

of

return

Return on sales ratio,

721

Revenue alternatives, 1

72,279

, 293, 591

RIC. See Return on

in

vested capital

Ri

sk

and debt-equity mix,

362-64

and decision making, 656-59, 660- 66

description, 656

and MARR, 353, 362

and payback analysis, 186, 1

88-89

and random sampling, 667

RNG f

un

ct

ion, 696

ROI. See Return on

in

vestment

Root mean square deviation, 674

ROR. See Rate

of

return

Round-off errors,

53,

10

3

R

ul

e

of

72,

35

, 179

Rule

of

100, 35

Rule

of

signs, 249-50, 251, 253, 299

5

s. See Standard deviation

Safe investment, 28-29, 194-95,

360

Sales, return on, 721

Salvage value.

See also Salvage value; Trade-

in

va

lu

e

Va

lu

e added analysis, after tax, 599-603. See also

Econ

om

ic value a

dd

ed

Variable.

See Random varia

bl

es

Variable costs,

444-48

Variance

in cost a

ll

ocation, 509-

11

definition, 673

formula for, 674, 677

and norm a

l.

distribution,

68

8

VDB func

ti

on, 558,

561

-

62

, 712

w

WACC. See Weighted

ave

rage cost

of

capital

Websites, IRS,

568

Blank and Tarqui

n,

xviii

Weighted attribute method,

37

1

-72

Weighted avera

ge

cost

of

capital, 29-30, 3

55

-

57

Working capital, 720

Worth, measures

of

, 9, 678

x

xy Ex

ce

l® charts, 247, 700-7

01

y

Ye

ar(s). See also Half-year

co

nvention;

One-additi

ona

l-year replacem

ent

studies;

Sum-of-year digits depreciation

and end-of-period convention,

31

-3

2

fiscal versus

ca

lendar, 716

symbols,

23

unknown,

77

- 78

z

Zero cash

fl

ow

in

Exce

l® functions, I I I, 198, 70

6,

708

Comparison

of

Mutually Exclusive Alternatives Using Different

Evaluation Methods

Time Evaluate

Select*

Evaluation Equivalence

Lives

of

Period

for

This Interest Alternative

Section

Method

Relation Alternatives

Analysis Series Rate

With

Reference

PW

Equal Lives Cash flows

MARR

Best PW 5.2

PW

Unequal

LCM

Cash flows

MARR

Best PW 5.3

Present

PW Study Study

Updated MARR

Best

PW

5.3

Worth

period period cash flows

Capitalized

Long to Infinity Cash flows

MARR

Best CC

5.5

cost (CC) infinite

Future FW

Same as present worth for equal lives,

Worth

unequal lives, and study period 5.4

AW

Equal or Lives Cash flows

MARR

BestAW

6.3

unequal

Annual

AW

Study Study Updated

MARR

BestAW

6.3

Worth

period period cash flows

AW

Long to Infinity Cash flows

MARR

BestAW

6.4

infinite

PWorAW

Equal Lives Incremental Find

/::"i*

Last

/::"i*

>

cash flows

MARR

8.4

PWorAW

Unequal

LCMof

Incremental Find

/::"i*

Last

/::"i*

>

pair

cash flows

MARR 8.4

Rate

of

Return

AW

Unequal Lives Cash flows

Find

/::"i*

Last

/::"i

* >

MARR 8.5

PWorAW

Study Study Updated Find/::"i*

Last

/::"i*

>

period period incremental

MARR

8.4

cash flows

AW

Equal

or

Lives

Incremental Discount

Last

/::,.B/C

>

9.3

unequal

cash flows rate

1.0

Benefit!

AWorPW

Long to Infinity Incremental Discount Last

/::"B/C

> 9.3

Cost infinite

cash flows rate

1.0

PW

Equal

or

LCMof

Incremental Discount Last

/::"B/C

> 9.3

unequal

pairs

cash flows

rate

1.0

,

Alternative with the numerically largest value has the lowest equivalent cost or highest equivalent income.

Term

Annual amount or worth

Annual operating cost

Benefit/cost ratio

Breakeven point

Book value

Capital budget

Capital recovery

Capitalized cost

Cash flow

Cash flow before

or after taxes

Composite rate

of

return

Cost estimating

relationships

Cost

of

capital

Debt-equity

mix

Depreciation

Depreciation rate

Economic service life

Expected value

(average)

Expenses

First cost

Glossary

of

Common Terms

Symbol

AorAW

AOC

B/C

Q

BE

BV

b

CRorA

CCorP

CF

CFBTor

CFAT

i'

C

2

or

C

r

iorWACC

D-E

D

d,

ESL

or n

X,

f.L

or

E(X)

E

P

Description

(with

initial section reference

in

parentheses)

Equivalent uniform annual worth

of

all cash inflows and

outflows over estimated life (1.7, 6.1).

Estimated annual costs to maintain and support an

alternative (1.3).

Ratio

of

a project's benefits to costs expressed in

PW

,

AW,

or

FW

terms (9.2).

Quantity at which revenues and costs are equal,

or

two

alternatives are equivalent (13.1).

Remaining capital investment

in

an asset after depreciation is

accounted for (16.1).

Amount

of

money available for capital investment

projects (12.1).

Equivalent annual cost

of

owning an asset plus

the required return on the initial investment (6.2).

Present worth

of

an alternative that will last forever

(or a long time) (5.5).

Actual cash amounts whi.ch are receipts (inflow) and

disbursements (outflow)

(1.1 0).

Cash flow amount before relevant taxes

or

after taxes

are applied

(l7.2).

Unique rate

of

return when a reinvestment rate c is

applied to a multiple-rate cash flow series (7.5).

Relations that use design variables and changing costs

over time to estimate current and future costs (15.3-4).

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 (10.2

-3)

.

Percentages

of

debt and equity investment capital

used by a corporation (1.9,

10.3).

Reduction in the value

of

assets using specific models and

rules; there are

book

and tax depreciation methods (16.1).

Annual rate for reducing the value

of

assets using depreciation

models (16.1).

Number

of

years at which the AW

of

costs is a minimum (11.2).

Long-run

yxpected average if a random variable is

sampled many times (18.3, 19.4).

All corporate costs incurred in transacting business (17.1).

Total initial

cost-purchase

,.

construction, setup, etc. (1.3, 16.1).

( Continued'

Term

Future amount

or

worth

Gradient, aritbmetic

Gradient, geometric

Gross

in

come

Inflation rate

Interest rate

Lif

e (estimated)

Life-cycle cost

Measure

of

worth

Minimum attractive

rate

of

return

Net cash flow

Net

present value

Payback period

Present amount

or

worth

Probability

distribution

Random variable

Rate

of

return

Recot'ery period

Salvage value

Standard deviation

Taxable income

Tax rate

Tax rate (effecti ve)

Time

Value added

Symbol

ForFW

G

g

GI

f

i or r

n

LCC

Varies

MARR

NCF

NPV

PorPW

P(X)

x

i*

n

s

or

(T

Tl

T

EVA

Description

(with

initial section reference

in

parentheses)

Amount at some future date considering time value

of

money (1.7).

Uniform change

(+

or

-)

in cash flow each time period

(2

.5

, 3

.3

-4).

Constant rate

of

change

(+

or

-)

each time period (2.6).

Income from all

so

urces for corporations or individuals (17.1).

Rate that reflects changes in the value

of

a currency over

time (14.1).

Interest expressed as a percentage

of

the original amount

per

time period; nominal

(r)

and effective (i) rates (1.4, 4.1

).

Number

of

years

or

periods over which an alternative

or

asset will be used; the evaluation time

(l.7).

Evaluation

of

costs for a system over all stages: feasibility

to design to phaseout

(5.7).

Value, such as PW, A W,

i*

, used to

judg

e economic viability (1.2).

Minimum value

of

the rate

of

return for an alternative to

be financially viable (1.9, 10.2).

Resulting, actual amount

of

cash that flows in or out

during a time period

(1.10).

Another name for the present worth, PW.

Number

of

years to recover the initial investment and

a stated rate

of

return (5.6).

Amount

of

money at the current time

or

a time denoted as

prese

nt

(1.7,5.1).

Distribution

of

probability over different values

of

a variable (19.2).

Parameter or characteristic that can take on

anyone

of

several values; discrete and continuous (19.2).

Compound interest rate on unpaid or unrecovered balances

such that the final amount results in a zero balance (7.1).

Number

of

years to completely depreciate an asset (16.1).

Expected trade-in or market value when an asset

is

traded

or disposed

of

(16.1).

Measure

of

dispersion or spread about the expected value

or

average (19.4).

Amount upon which income taxes are based (17.1).

Decimal rate, usually graduated, used to calculate corporate

or individual taxes (17.1).

Single-figure tax rate incorporating several rates and bases (17.1).

Indicator for a time period (1.7).

Economic value added reflects net profit after taxes (NPAT)

after removing cost

of

invested capital during the year (17.8).

Blank L., Tarquin A. Engineering Economy (McGraw-Hill Series in Industrial Engineering and Management)

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