Contemporary engineering economics 6th global edtion by chan park

Contemporary engineering economics 6th global edtion by chan park Contemporary engineering economics 6th global edtion by chan park Contemporary engineering economics 6th global edtion by chan park Contemporary engineering economics 6th global edtion by chan park Contemporary engineering economics 6th global edtion by chan park v Contemporary engineering economics 6th global edtion by chan park

www.downloadslide.com Contemporary Engineering Economics For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version Global Global edition edition Global edition Global edition Contemporary Engineering Economics sixth edITIon Chan S Park sixth edITIon Park This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author Pearson Global Edition Park_fullcover.indd 27/10/15 4:50 PM www.downloadslide.com Right now, in your course, there are young men and women whose engineering achievements could revolutionize, improve, and sustain future generations Don’t Let Them Get Away Contemporary Engineering Economics, Sixth Edition, together with MyEngineeringLab, is a complete solution for providing an engaging in-class experience that will inspire your students to stay in engineering, while also giving them the practice and scaffolding they need to keep up and be successful in the course Learn more at myengineeringlab.com A01_PARK9091_06_GE_FM.indd 03/11/15 7:47 PM www.downloadslide.com This page intentionally left blank A01_PARK9091_06_GE_FM.indd 30 01/12/15 4:05 pm www.downloadslide.com Contemporary Engineering Economics Sixth Edition Global Edition A01_PARK9091_06_GE_FM.indd 03/11/15 7:47 PM www.downloadslide.com This page intentionally left blank A01_PARK9091_06_GE_FM.indd 30 01/12/15 4:05 pm www.downloadslide.com Sixth Edition Global Edition Contemporary Engineering Economics Chan S Park Department of Industrial and Systems Engineering Auburn University Boston  Columbus  Indianapolis  New York  San Francisco  Hoboken Amsterdam  Cape Town   Dubai  London  Madrid  Milan  Munich  Paris  Montréal  Toronto  Delhi  Mexico City  São Paulo  Sydney  Hong Kong  Seoul  Singapore  Taipei  Tokyo A01_PARK9091_06_GE_FM.indd 03/11/15 7:47 PM www.downloadslide.com Vice President and Editorial Director, ECS: Marcia J Horton Executive Editor: Holly Stark Field Marketing Manager: Demetrius Hall Senior Product Marketing Manager: Bram van Kempen Marketing Assistant: Jon Bryant Senior Managing Editor: Scott Disanno Production Project Manager: Rose Kernan Program Manager: Erin Ault Senior Digital Producer: Felipe Gonzalez Global HE Director of Vendor Sourcing and Procurement: Diane Hynes Senior Acquisitions Editor, Global Edition: Sandhya Ghoshal Associate Project Editor, Global Edition: Sinjita Basu Media Production Manager, Global Edition: Vikram Kumar Senior Manufacturing Controller, Production, Global Edition: Trudy Kimber Director of Operations: Nick Sklitsis Operations Specialist: Maura Zaldivar-Garcia Full-Service Project Management: Laserwords Pvt Ltd Cover Photo Source: Shutterstock Cover Printer: Ashford Colour Press Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2016 The rights of Chan S Park to be identified as the author of this work have been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Contemporary Engineering Economics, 6th edition, ISBN 978-0-134-10559-8 by Chan S Park, published by Pearson Education © 2016 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, withouteither the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners.The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-10909-2 ISBN 13: 978-1-292-10909-1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 14 13 12 11 10 Typeset in 10.5/12, Times LT Pro by Laserwords Pvt Ltd Printed by Ashford Colour Press in the United Kingdom A01_PARK9091_06_GE_FM.indd 03/11/15 7:47 PM www.downloadslide.com For Sophie and Alexander A01_PARK9091_06_GE_FM.indd 03/11/15 7:47 PM www.downloadslide.com This page intentionally left blank A01_PARK9091_06_GE_FM.indd 30 01/12/15 4:05 pm www.downloadslide.com Contents Preface    21 Part 1 Basics of Financial Decisions Chapter 1   Engineering Economic Decisions    31 32 1.1 Role of Engineers in Business 1.1.1 Types of Business Organization 1.1.2 Engineering Economic Decisions 1.1.3 Personal Economic Decisions 1.1.4 Economic Decisions Versus Design Decisions 33 34 35 36 36 1.2 What Makes the Engineering Economic Decision Difficult? 37 1.3 Large-Scale Engineering Projects 1.3.1 Are Tesla’s Plans for a Giant Battery Factory Realistic? 1.3.2 Impact of Engineering Projects on Financial Statements 38 38 40 1.4 Common Types of Strategic Engineering Economic Decisions 1.4.1 Equipment or Process Selection 1.4.2 Equipment Replacement 1.4.3 New Product or Product Expansion 1.4.4 Cost Reduction 1.4.5 Improvement in Service or Quality 40 41 41 42 42 42 1.5 Fundamental Principles of Engineering Economics 42 Summary 45 Short Case Studies 45 Chapter 2  Accounting and Financial Decision Making   46 2.1 Accounting: The Basis of Decision Making 48 2.2 Financial Status for Businesses 2.2.1 The Balance Sheet 2.2.2 The Income Statement 2.2.3 The Cash Flow Statement 49 51 56 57 2.3 Using Ratios to Make Business Decisions 2.3.1 Debt Management Analysis 2.3.2 Liquidity Analysis 2.3.3 Asset Management Analysis 2.3.4 Profitability Analysis 64 65 67 68 70 A01_PARK9091_06_GE_FM.indd 03/11/15 7:47 PM www.downloadslide.com 970  index Differential cash flows, see Incremental cash flows Differential cost and revenue, 429–433 Direct-solution method, rateof-return (ROR) analysis, 356–357 Disbursements, 88 Discount rate, 199–201, 865–866 Discounted cash flow techniques (DCFs), 245–253 minimum attractive rate of return (MARR), 246, 252–253 net-present-worth (NPW), 245–252 project balance diagrams, 207–210 Discounted payback period, 240, 243–244 Discounting factor (e−rt), 180, 182 Discounting process, 106–107 Discounts for health-care services, 892 Discrete compounding, 140, 180–181, 931–960 cash flow formulas, 140 compound interest and, 180–181 interest factors for, 931–960 Discrete payment or receipt (An), 88 Distribution functions, 961–964 Dividends, 66 “Do nothing” option, 261–262 Double-declining balance (DDB) depreciation, 467 E Earning power, 86–87 Earnings per share (EPS), 56 Economic analysis, 497–505, 858–909 benefit–cost analysis, 863–872 benefit–cost ratios, 872–881 cash flow needs, 501–505 cost-effectiveness, 881–899 cost-utility analysis, 896–899 depreciation and, 497–505 Z04_PARK9091_06_GE_IDX.indd 970 health-care services, 890–899 income tax rate and, 497–501 incremental income tax rate for, 497–499 motor vehicle crash costs, 858–859 net income versus cash flow, 502–505 noncash expenses, 502–504 pricing difficulties, 861–862 public sector projects, 862–872, 881–890 service sectors, 858–909 state income taxes, 500–501 Economic depreciation, 459–460 Economic equivalence, see Equivalence Economic service life, 763–768 Economic versus design decisions, 36 Effective interest rates (ia), 164–179 compounding periods of, 165–167 continuous compounding, 169–170 equivalence calculations with, 171–179 nominal interest rate compared to, 164–166 payment periods of, 167–168 quarterly compounding, 164–165 Effective (average) tax rate, 489 End-of-period convention, 90–91 End-of-period payment (A), 88 Engineering economics, 32–45 business organizations, 34–35 decision making, 35–38, 40–42 difficulty of decisions, 37–38 engineer’s role in business, 33–36 large-scale projects, 38–40 motivation and, 32–33 principles of, 42–45 strategic decisions, 40–42 Equal-payment series, 101–102, 111–123, 140 annuity factor (A/P), 119 cash flow transactions, 107–102 discrete compounding formulas, 140 capital-recovery factor (A/P), 119–121 compound-amount factor, 111–113 deferred annuity, 121 present-worth factor (P), 122–123 sinking-fund factor, 114–118 uniform factors, 112, 115 Equipment, 41–42, 520–521 cash outflow from, 520–521 replacement, 41–42 selection, 41 strategic decisions and, 41–42 Equity, 65, 533, 812–813, 821– 826, 829–831 borrowed funds from, 533 capital budgeting and, 812–813, 821–826 capital, 65 common stock, 822 cost of, 821–826 financing, 812–813 net flow, 829–831 preferred stock, 822–823 rate of return on risky assets, 824–825 retained earnings, 821–822 Equivalence, 84–161, 171–187, 578–583 actual dollar (An) analysis, 579–583 adjusted-discount method of analysis, 581–583 annual worth (AW), 235 calculations, 95–101 cash flow and, 141–147, 149–150 cash flow conversions and, 99–101 common time basis for, 96–98 composite cash flows, 141–147 compounding interest, 171–187 constant dollar (A'n) analysis, 578–579 continuous compounding, 180–187 10/22/15 5:43 PM www.downloadslide.com INDEX  971  deflation method of analysis, 580–581 development of formulas for, 101–140 earning power, 86–87 economic, 84–101 effective interest rates using, 171–179 Excel financial functions, 106, 107, 109, 110, 113, 120, 134, 140 future worth (FW), 96, 235 inflation and calculations of, 578–583 inflation-free (real) interest rate (i’), 578 interest rate and, 95–104, 147–149 market interest rate (i), 578 mixed-dollar analysis, 583 present worth (PW), 96, 235 purchasing power, 86–87 skipping pattern in cash flow, 149–150 unconventional calculations, 141–150 Equivalent cash flow, 94–95 European option, 694, 716–717 Excel, 106, 107, 109, 110, 113, 120, 134, 140, 174, 194, 218, 268, 325, 362, 466, 471, 473, 478, 482, 552, 586, 588, 591, 593, 595, 597, 620, 662, 718, 775, 782–783, 785–786, 788 after-tax interest rate calculations, 782–783, 785–786, 788 annual equivalent-worth (AE) calculations, 325 Black–Scholes formula evaluation, 718 cash flow statements under inflation, 586, 588, 591 depreciation calculations, 466, 471, 473, 478, 482 economic service life calculations, 775, 788 financial functions, 106, 107, 109, 110, 113, 120, 134, 140 Z04_PARK9091_06_GE_IDX.indd 971 interest rate calculations, 174, 194, 218, 782–783 loan repayment schedule, 194 net present-worth (NPW) calculations, 268 project cash flow tables, 552 rate-of-return (ROR) calculations, 362, 593, 595 risk analysis worksheets, 620, 662 working-capital spreadsheet, 597 Excel-based simulation software, 661–664 Expected return, 209–212 Expected value, 627–628, 645–646 F Factor notation, 105 Financial options, 693–699 Financial statements, 40, 46–83, 415–418 accounting and, 46–83 balance sheets, 51–55 business status and, 40, 46–83 cash flow statement, 57–64 cost classification for, 415–418 engineering project impact on, 40 income statement, 56–57 matching principle, 415 period costs, 415 product costs, 415–418 Financing, 59, 65, 162–163, 191, 198–201, 523–524, 812–816 See also Interest; Loans capital budgeting and, 812–816 cash flow statements for, 59 debt, 812, 814–815 discount rate, 199–201 equity, 812–813 incremental cash flow from, 523–524 lease or loan, comparison of, 198–201 loan charges, 191 long-term debt, 65 mixed, 816 money management and, 65, 162–163, 191, 198–201 mortgages, 162–163 short-term debt, 65 Fixed assets, 458 Fixed (capacity) costs, 419 Fixed-rate mortgage, 203–205 Floating-rate bonds, 214 Flotation costs, 813 Functional depreciation, 459 Fundamental decision rule, 296–302 Fundamentals of Engineering review questions, 911–930 Future worth (FW), 88, 96, 235, 253–256 See also Net-future-worth (NFW) method Future-worth factor (F), 101, 105–106 G Geometric-gradient series, 103, 129–134, 140 Gradient (G) series, 102–103, 123–134, 140 cash flow transactions, 102–103 composite series as, 123–124 compound growth as, 129 discrete compounding formulas, 140 geometric-gradient series, 103, 129–134 gradient-to-equal-payment series conversion factor, 126–129 linear, 102–103, 123–129 linear-gradient, 102–103, 123–129 present-worth factor (P), 124– 126, 130–132 single-payment present-worth factor, 130 strict, 123 Graphical method, rate-of-return (ROR) analysis, 360–362 Gross margin, 56, 447–448 Growth (expansion) option, 728–730 10/22/15 5:43 PM www.downloadslide.com 972  index H Half-year convention (MACRS depreciation), 479 Health-care services analysis, 890–899 Hedging (insuring) stock, 702–704 I Income statements, 56–57, 447–448 Income tax rate, 497–501 Incremental cash flows, 520–524 classification of elements, 522–524 financing activities, 523–524 inflow elements, 522 investing activities, 523–524 operating activities, 523–524 outflow elements, 520–522 Incremental cost-utility ratios, 897 Incremental costs, 262 Incremental income tax rate, 497–499 Incremental investment analysis, 263, 380–387, 877–881 benefit–cost (B/C) ratios for, 877–881 rate-of-return (ROR) analysis using, 263, 380–387 Independent projects, 239, 837, 838, 892–893 cost-effectiveness and intervention programs, 892–893 capital budgeting for, 837, 838 Inflation, 568–607 actual dollars (An), 575–577, 579–583 average rate (f), 572–573 borrowed funds, effects of on, 589–592 cash flows, impact on, 568–607 constant dollars (A’n), 575–577, 578–579 consumer price index (CPI), 568–569, 570–572 deflation compared to, 570 dollar conversions, 575–577 Z04_PARK9091_06_GE_IDX.indd 972 equivalence calculations under, 578–583 Excel cash flow statements under, 586, 588, 591 general rate (f), 578 interest rates, 578 internal rate of return (IRR), effects of on, 592–595 measure of, 570–577 mixed-dollar analysis, 583 multiple rates of, 587–589 producer price index (PPI), 571 project cash flows, effects of on, 583–592 rate-of-return (ROR) analysis under, 592–598 specific rate (fi), 573–574 working capital, effects of on, 596–598 Inflation-free interest rate (i), 578 Interest, 85–94, 522 actual dollar transactions, 87 calculating methods, 91–94 cash flow diagrams, 89–90 cash outflow from, 522 compound, 91–94 cost of money, 85–94 discrete payment or receipt (An), 88 earning power, 86–87 end-of-period convention, 90–91 end-of-period payment (A), 88 future amount (F), 88 market interest rate, 86, 87 number of periods (N), 88, 90–91 period (n), 88, 90–91 purchasing power, 86–87 rate (i), 86 repayment of borrowed funds, 522 simple, 91 transaction elements, 87–91 Interest factors, 931–960 Interest-only mortgage, 203 Interest rate cap, 206 Interest rates (i), 84–161, 164–179, 246, 248, 252–253, 348–350, 353–362, 578, 780–794 See also Time and value of money after-tax rates, 780–794 annual effective yield, 164 annual percentage rate (APR), 164 break-even (i*), 248, 349–350, 353–362 cash flow solutions for, 108–111 changing, 187–190 compounding period, 165–167 continuous compounding, 169–170, 180–187 continuous funds flow, 182–187 discounting, 180, 182 discrete compounding, 180–181 effective, 164–179 equivalence calculations for, 95–101, 147–149, 171–187 Excel calculations for, 174, 194, 218 inflation and, 578 inflation-free (i’), 578 internal rate of return (IRR), 248 market, 86, 87, 578 minimum attractive rate of return (MARR), 246, 252–253 money management and, 164–190 nominal, 164 payment periods, 167–168 periodic, 191 periods (n) for, 88, 90–91 rate of return, 348–349 series of cash flows, 189–190 single sums, 187–188 time and, 108–111 Interest tables, 103–104 Internal rate of return (IRR), 248, 348, 350–351, 363–379, 387–390, 592–595 break-even interest rate (i*), 366–369 10/22/15 5:43 PM www.downloadslide.com INDEX  973  decision rules, 366–374, 380–381 inflation effects on, 592–595 minimum acceptable rate of return (MARR), 366–376 mixed investments, 363, 368–369 modified internal rate of return (MIRR), 368, 377–379 mutually exclusive alternatives and, 379 net-investment test, 363–365 net-present-worth (NPW) method, 248 present worth (PW) analysis and, 248, 363 project ranking flaws, 379 pure investments, 363, 366–368 rate-of-return (ROR) analysis, 348, 350–351, 363–379, 387–390, 592–595 relative (percentage) measure of, 379 return on invested capital (RIC), 350–351, 369–374 trial-and-error method, 374–376 true, 369 unequal service lines using, 387–390 Intervention programs, 892–896 Inventory, manufacturing costs, 416–417 Inventory turnover ratio, 69 Investing activities, 59 Investment pool, 246, 249–251, 833–834 Investments, 209–220, 262–265, 350–390, 523–524, 622–649, 664–678, 719–739, 837–846 absolute (dollar) measures, 379 aggregating risk over time, 639–645 alternative evaluation of, 837–846 bonds, 212–220 break-even interest rate (i*), 353–355, 366–369 capital budgeting, 837–846 Z04_PARK9091_06_GE_IDX.indd 973 compound options, 733–739 contingent projects, 838–839 decision trees for risk evaluation, 664–678 dependent projects, 837 diversification, expected return, 209–212 expected-value criterion, 645–646 growth (expansion) option, 728–730 incremental cash flows from, 523–524 incremental-investment analysis, 263, 380–387 independent projects, 837, 838 internal rate of return (IRR) for, 350–351, 363–379 limited budgets, 839–846 liquidity, 209 mean-and-variance criterion, 646 mixed, 363, 368–376 mutually exclusive projects, 838 net-investment test, 363–365 nonsimple, 351–353 option to defer, 724–727 present-worth (PW) analysis and, 262–265 probabilities for decision making, 622–633 probability distribution, 634–649 project risk evaluation, 645– 649, 664–678 pure, 363, 366–368 rate-of-return (ROR) analysis, 262–265, 350–390 real-options analysis, 719–739 relative (percentage) measures, 379 return on invested capital (RIC), 350–351, 369–374 return on investment over time, 210–212 return, 209–212 risk-adjusted discount rate method, 646 risk of, 209 scale of, 263–265 scale-up option, 730–733 sequential decisions, 664–678 simple, 351–353 total-investment approach, 263 unequal service lines, 387–390 yield, 215–220 Investors, 48–49 iPhone manufacturing costs, 410–411 IRR, see Internal rate of return (IRR) Irregular (mixed) payment series, 103, 135–139 J Joint probabilities, 630–632, 674–676 L Labor cost, 414 Law of large numbers, 646 Lease financing and loans, comparison of, 198–201 Lease-or-buy decision, 547–553 Leasing expenses, cash outflow from, 521 Lending rate (l), 834 Liabilities, 53 Life-cycle costs, 887–890 Life-cycle cost analysis (LCCA), 306, 312–320 Linear-gradient series, 102–103, 123–129, 140 Liquidity, 209 Liquidity analysis, 67–68 Loans, 190–208, 212–213, 236–239 amortized, 190–196 annual percentage rate (APR), 191 bonds compared to, 212–213 cash flow, 236–239 commercial, 190–198 fees, 191 financing charges, 191 home mortgages, 202–208 10/22/15 5:43 PM www.downloadslide.com 974  index Loans (Continued) installments, 190 lease financing compared to, 198–201 periodic interest rate, 191 project cash flow versus, 236–239 repayment schedule, Excel, 194 terms of, 191 Long-term debt financing, 65 Lowest common multiple of project lives, 276–279 M Macro analysis, 886–887 Make-or-buy (outsourcing) decisions, 308–311, 433 Manufacturing, 413–418, 441– 449, 521 annual production budget, 442–444 cash outflow from, 521 costs, 413–418, 441–449 budgeted income statement, 447–448 cost-of-goods-sold budget, 444–445 direct labor cost, 414 direct raw material cost, 414 profit estimation, 441–449 finished-goods inventory, 417 overhead, 414 product costs, 415–418 raw-materials inventory, 416 work-in-process inventory, 416–417 Marginal cost and revenue, 43–44, 435–440 Marginal contribution rate, 427 Marginal cost of capital, 828–829 Marginal probabilities, 630, 632, 674–676 Marginal tax rate, 489 Marginal yield, 321 Market basket, 570 Market interest rate (i), 86–87, 578 Market value (current), 758–759 Market value analysis, 72–73 Z04_PARK9091_06_GE_IDX.indd 974 Matching concept, 460 Matching principle, 415 Maturity of option (T), 694 Mean-and-variance criterion, 646 Micro analysis, 886 Midmonth convention (MACRS depreciation), 479 Minimum attractive rate of return (MARR), 246, 252–253, 366–376, 829–837 capital budgeting and, 829–837 capital rationing and, 833–837 internal rate of return (IRR) and, 366–376 net-present worth (NPW) and, 246, 252–253 project financing known, 829–831 project financing unknown, 831–833 selection of, 252–253 Mixed (semi-variable) costs, 420 Mixed-dollar analysis, 583 Mixed financing, 816 Mixed investments, 363, 368–369 Model simulations, 650–653 Modified accelerated cost recovery system (MACRS), 474–482, 491 depreciation rules, 476–573 half-year convention, 479 midmonth convention, 479 property classification, 475 recovery allowance percentages, 476 recovery periods, 474–475 straight-line method switched from, 479 taxes on disposal of property, 491 Modified internal rate of return (MIRR), 368, 377–379 Money management, 64–75, 84– 161, 162–232 annual percentage rate (APR), 164 asset management analysis, 68–70 compound interest, 164–187 debt management, 66–67, 190–208 effective interest rates (ia), 164–179 equivalence calculations for, 171–187 interest rates, 164–190 investments, 209–220 mortgage financing, 162–163 nominal interest rate, 164 payment periods, 167–179, 203–206 payment series, 135–140 ratio analysis, 64–75 series of cash flows, 189–190 single sums, 187–188 time value of money, 84–161 Monte Carlo sampling, 654–659 Mortgages, 162–163, 202–208 adjustable rate (ARM), 205–206 adjustment period, 206 cost of, 202 financing, 162–163 fixed-rate, 203–205 fully amortizing, 203 index, 205–206 interest rate cap, 206 interest-only, 203 margin, 206 monthly payment calculation, 203–206 payment cap, 207 points, 202, 203 Motivation and, 32–33 Motor vehicle crash costs, 858–859 Multiple inflation rates, 587–589 Municipal bonds, 214 Mutually exclusive project alternatives, 236, 261–279, 296, 300–302, 379–390, 645–649, 838–846, 877–881, 892, 894–896 analysis period and project lives, 265–279, 300–302 annual equivalence (AE) analysis, 296, 300–302 10/22/15 5:43 PM www.downloadslide.com INDEX  975  benefit–cost (B/C) ratios for, 877–881 capital budgeting for, 838–846 cost-effective interventions, 892, 894–896 “do nothing” option, 261–262 expected-value criterion, 645–646 incremental investment analysis, 263, 380–387, 877–881 independent projects compared to, 239 internal rate of return (IRR) and, 379, 387–390 mean-and-variance criterion, 646 present-worth (PW) analysis, 261–279 probability distribution, 645–649 project ranking and, 379 rate-of-return (ROR) analysis, 379–390 replacement chain approach, revenue projects, 262, 263 risk-adjusted discount rate method, 646 risky alternative comparisons, 645–649 scale of investment, 263–265 service projects, 262, 263, 301–302 total investment approach, 263 unequal-service-life problems, IRR approach, 387–390 N Negative rate of return, 350 Negative taxable income, 535–539 Net cash-flow equations, 543–544 Net cash-flow rule of signs, 353 Net change in working capital, 59 Net equity flow, 829–831 Net-future-worth (NFW) method, 253–256 Net income, 56 Net-investment test, 363–365 Net margin, 56 Z04_PARK9091_06_GE_IDX.indd 975 Net-present-worth (NPW) method, 245–252, 609, 634–649, 876–877 benefit–cost (B/C) ratios and, 876–877 borrowed-funds concept, 251–252 cost of capital, 252–253 internal rate of return (IRR), 248 investment pool, 246, 249–251 minimum attractive rate of return (MARR), 246, 252–253 multiple project alternatives, 247–249 probability distribution of, 609, 634–649 single project evaluation, 246 Net profit margin, 448 Net revenue, 56 Net worth, 46–47 Nominal interest rate, 164–166 Nonmanufacturing costs, 414–415, 445–447 NPW, see Net-present-worth (NPW) method Number of periods (N), 88, 90–91 O Operating activities, 59, 523–524 Operating costs, 303–305, 760, 763–764 Operating income, 488–491 Operating margin, 448 Operating revenue, cash inflow from, 522 Opportunity cost, 433–435, 760–762 Options, 692–753 American, 694, 717 Black–Scholes model, 716–718 call, 693, 695–697, 699–702, 705–708, 716, 719–720 compound, 733–739 defer investment, 724–727 European, 694, 716–717 financial, 693–699 growth (expansion), 728–730 hedging (insuring) stock, 702–704 multiperiod binomial lattice model, 713–716 payoffs, 695 positions, 695 pricing (value), 705–718 put, 693, 697–699, 702–704, 711, 716–717, 720 put-call parity equation, 695 real-options analysis, 719–753 reducing capital at risk, 699–702 replicating-portfolio approach, 705–708 risk management, 693–699 risk-free financing approach, 708–709 risk-neutral probability approach, 709–711 scale-up, 730–733 strategies, 699–704 two-period binomial lattice, 712–713 valuation, 711–718, 727–728 Oracle Crystal Ball software, 661–664 Output analysis, simulation results, 659–661 Overhead cost, 414 P Paid-in capital (capital surplus), 53 Partnerships, 34 Patent and lease valuation, 727–728 Payback methods, 240–245 conventional, 240 cost of funds and, 244–245 discounted, 240, 243–244 payback period for, 240–242 screening, 240, 243 Payback period, 240–242 Payment cap, 207 Payment periods, 167–179, 203–206 compounding interest and, 172–179 10/22/15 5:43 PM www.downloadslide.com 976  index Payment periods (Continued) continuous compounding and, 169–170 effective interest rates and, 167–168, 170–179 interest rates, 167–168 monthly mortgage calculation, 203–206 Payoffs, 695 Percentage depletion, 482–485 Period costs, 415 Periodic interest rate, 191 Periods, 88, 90–91, 164–168, 240– 242, 265–279, 474–475 analysis, 265–279 base, for inflation, 570 compounding interest, 164–167 interest (n), 88, 90–91 payback, 240–242 payment, 167–168 recovery (assets), 474–475 required service, 265 study, 265 Perpetual service life, 256–258 Physical depreciation, 459 Plan for receipts, 89 Planning horizon, 769, 771–779 Points, 202, 203 Preferred stock, 65–66, 822–823 Premium of option (C), 694 Present economic studies, 412 Present value, 88 Present worth (PW), 88, 96, 235 Present-worth (PW) analysis, 234–293 analysis period and project lives, 265–279 capitalized-equivalent (CE) method, 256–260 discounted cash flow techniques (DCFs), 245–253 incremental-investment approach, 263 internal rate of return (IRR) and, 248, 363 minimum attractive rate of return (MARR), 246, 252–253 Z04_PARK9091_06_GE_IDX.indd 976 mutually exclusive alternatives, 261–279 net-future-worth (NFW) method, 253–256 net-present-worth (NPW) method, 245–252 payback methods, 240–245 project and loan cash flows, 236–239 scale of investment, 263–265 service life and, 256–260 service versus revenue projects, 262 stadium expansion plan, 234–235 total-investment approach, 263 Present-worth factor (P), 101, 106–108, 122–123, 124–126, 130–132, 140 discrete compounding with, 140 discounting process, 106–107 equal-payment series, 122–123 geometric-gradient series, 130–132 gradient series (G), 124–126, 130–132 linear-gradient series, 124–126 single cash flows, 101, 106–108 single-payment factor, 130 time and, 108 Price index, 571 See also Consumer price index (CPI) Price-to-earnings ratio (P/E), 73 Principle, 87 Probabilities, 622–633, 673–676, 710 assessment of, 622–627 coefficient of variation, 632–633 conditional, 630–632, 673–674 covariance, 632–633 cumulative distribution, 625–627 decision tree information and, 673–676 distribution of, 623–625 expected value, 627–628 investment decision making and, 622–633 joint, 630–632, 674–676 marginal, 630, 632, 674–676 measurement of, 627–630 random variables, 623 revised (posterior), 676 risk analysis, 622 risk-neutral, 710 standard deviation, 629 variance, 628–630 Probability distribution, 623–625, 634–649 aggregating risk over time, 639–645 expected-value criterion, 645–646 mean-and-variance criterion, 646 mutually exclusive alternatives, 645–649 net-present worth (NPW) and, 609, 634–649 procedure for, 634–639 risk-adjusted discount rate method, 646 Producer price index (PPI), 571 Product costs, 415–418 Product expansion, 42 Profit estimation, 441–449 annual production budget, 442–444 annual sales budget, 441–442 budgeted income statement, 447–448 cost-of-goods-sold budget, 444–444 economic effects on, 449 gross margin, 447–448 net profit margin, 448 nonmanufacturing cost budget, 445–447 operating income calculation, 441 operating margin, 448 project expenses, 441 project revenue, 441 Profit margin on sales, 70–71 Profitability analysis, 70–72 Profitability index (net B/C ratio), 875–876 10/22/15 5:43 PM www.downloadslide.com INDEX  977  Project balance (PB), 368 Project lives, 256–260, 265–279 analysis period and, 265–279 differing from analysis period, 269–276 lowest common multiple of, 276–279 matching analysis period, 266–269 present-worth (PW) analysis, 265–279 salvage value, 269 service life, 256–260 Project risk, 609, 610–622 break-even analysis, 616–620 origins of, 610 scenario analysis, 620–622 sensitivity (what-if) analysis, 611–616 Projects, 38–42, 236–239, 262, 441–449, 516–566, 583–592, 608–691, 739–745, 837–846, 858–909 budgeted income statement, 447–448 benefit–cost analysis, 863–871 budgets for, 441–447 business risks, 39–40 capital budgeting for, 837–846 cash flow statements, 524–542 cash flows, 236–239, 516–566, 583–592 complex, 519–520 contingent, 838–839 cost–benefit estimation, 518–520 cost-effectiveness of, 881–890 cost-only, 536 decision-making for, 38–40 dependent, 837 economic analysis of, 858–909 economical benefits, 38–39 estimating volatility of cash flow, 739–745 expenses, 441 impact on financial statements, 40 Z04_PARK9091_06_GE_IDX.indd 977 incremental cash flows, 520–524 independent, 837, 838 independent, 239 inflation effects on, 583–592 large-scale, 38–40 lease-or-buy decision, 547–553 limited budgets, 839–846 loan cash flow versus, 236–239 mutually exclusive, 236, 838 operating income calculation, 441 profit estimation, 441–449 public (service sector), 858–909 realism of, 38 real-option analysis, 739–745 revenue, 262, 441 risk and uncertainty, 608–691 selection of, 41 service, 262, 536 simple, 518–519 strategic economic decisions for, 40–42 Property depreciation, 460–461 Public sector projects, economic analysis in, 862–871 See also Service sector Purchasing power, 86–87, 568–569 Pure borrowing, 363 Pure investments, 363, 366–368 Put-call parity equation, 695 Put options, 693, 697–699, 702–704, 711, 716–717, 720 buying when price expected to decrease, 697–699 European, 716–717 protective, as a hedge, 702–704 real, 720 PW, see Present-worth (PW) analysis Q Quality improvement, 42 Quick (acid-test) ratio, 68 R Random numbers, simulation sampling with, 654 Random variables, 623 Rate-of-return (ROR) analysis, 346–407, 592–598 break-even interest rate (i*), 349–350, 353–362 collectible cars: return on investment, 346–347 computational methods, 356–362 decision rules, 366–374, 380–381 direct-solution method, 356–357 Excel calculations for, 362, 593, 595 graphical method, 360–362 incremental investment analysis, 263, 380–387 inflation effects on, 592–598 interest rate earned, 348–349 internal rate of return (IRR), 348, 350–351, 363–379, 592–595 marginal efficiency of capital, 348 methods for finding, 351–362 minimum acceptable rate of return (MARR), 366–376 modified internal rate of return (MIRR), 368, 377–379 mutually exclusive alternatives, 379–390 negative rate of return, 350 nonsimple investments, 351–353 return on invested capital (RIC), 350–351, 369–374 return on investment, 346–347, 348–350 simple investments, 351–353 trial-and-error method, 357– 360, 374–376 unequal service lines, 387–390 yield, 348, 350 working capital and, 596–598 Ratio analysis, 64–75 asset management analysis, 68–70 business decisions using, 64–75 10/22/15 5:43 PM www.downloadslide.com 978  index Ratio analysis (Continued) debt management analysis, 66–67 debt ratio, 66 limitations of, 73–75 liquidity analysis, 67–68 market value analysis, 72–73 profitability analysis, 70–72 times-interest-earned ratio, 66–67 Raw material cost, 414 Real-options analysis, 692–753 compound options, 733–739 defer investment option, 724–727 engineering economics using, 719–723 estimating project volatility, 739–745 financial options, 693–699 growth (expansion) option, 728–730 option pricing, 705–718 option strategies, 699–704 patent and lease valuation, 727–728 real call options, 719–720 real put options, 720 scale-up option, 730–733 simple models, 724–728 Recovery allowance percentages, 476 Recovery periods (MACRS depreciation), 474–475 Remaining-balance method, 195–196 Replacement analysis, 756–809 annual equivalent cost (AEC), 764–765 capital (ownership) costs, 763 challenger for, 758, 760–762 current market value, 758–759 decision frameworks for, 769–771 defender for, 758, 760–762 economic service life, 763–768 long required service and, 768–780 Z04_PARK9091_06_GE_IDX.indd 978 operating costs, 760, 763–764 opportunity cost approach, 760–762 sunk costs, 759–760 tax considerations, 780–794 technology and, 769, 780 Replicating-portfolio approach, 705–708 Required service period, 265 Retained earnings, 53, 57, 821–822 Return on common equity (ROE), 71–72 Return on invested capital (RIC), 350–351, 369–374 Return on investment (ROI), 209–212, 346–347 Return on total assets (ROA), 71 Revenue, 56, 262–263, 429–431, 435–437 costs and, 56, 429–431, 435–437 differential, 429–431 marginal, 435–437 projects, 262, 263 Revised (posterior) probabilities, 676 Risk, 39–40, 44, 209, 216, 608–691 aggregating over time, 639–645 analysis, 622 automobile design and, 608–609 bond rating and, 216 decision trees for evaluation of, 664–678 Excel worksheets for analysis, 620, 662 investments and, 209, 609 large-scale projects, 39–40 net-present worth (NPW) distribution, 609, 634–649 probabilities, 622–633 probability distribution, 623– 625, 634–649 project, 609, 610–622 return tradeoff and, 44 sequential investment decisions, 664–678 simulations, 649–664 Risk-adjusted discount rate method, 646 Risk-free financing approach, 708–709 Risk management of financial options, 693–699 Risk-neutral probability approach, 709–711 Robot cost reduction, 294–304 Rollback procedure, 665–666 ROR, see Rate-of-return analysis S Salvage value (assets), 269, 463–464, 491, 493–494, 522 Sampling procedure for simulations, 654 Scale-up option, 730–733 Scenario analysis, 620–622 Second-order conditions, 321 Sensitivity (what-if) analysis, 611–616 Sensitivity graphs, 611, 615 Sequential investment decisions, 664–678 Service improvement, 42 Service life, 256–260, 763–780, 788 annual equivalent cost (AEC) and, 764–765 assets, 763–780 capital (ownership) cost and, 763 economic, 763–768, 788 Excel calculations, 775, 788 long required service, 768–780 operating cost and, 763–764 planning horizon for, 769, 771–779 projects, 256–260 replacement analysis and, 763–780 technological changes and, 780 unequal, 776 Service sector, 262, 263, 301–302, 858–909 benefit–cost (B/C) ratios, 872–881 10/22/15 5:43 PM www.downloadslide.com INDEX  979  benefit–cost analysis, 863–871 characteristics of, 860–861 cost-effectiveness of projects, 881–899 economic analysis in, 858–909 health-care services analysis, 890–899 mutually exclusive alternatives, 262, 263, 301–302 present-worth (PW) analysis, 262, 263, 301–302 pricing difficulties, 861–862 public projects, 862–871, 881–890 Short-term debt financing, 65 Simple interest, 91 Simple projects, cash flow for, 518–519 Simulations, 649–664 computer, 649–650 dependent random variables of, 661 Excel-based software, 661–664 graphic displays for, 660–661 models, 650–653 Monte Carlo sampling, 654–659 Oracle Crystal Ball software, 661–664 output analysis, 659–661 result interpretation, 659–660 risk evaluation, 649–664 Single cash flows, 101, 103–111, 140 compound–amount factor, 103, 105 discounting process, 106–107 discrete compounding formulas, 140 factor notation, 105 future-worth factor (F), 101, 105–106 interest tables, 103–104 present-worth factor (P), 101, 106–108 solving for time and interest rates, 108–111 Single-payment present-worth factor, 130 Sinking-fund factor, 114–118 Z04_PARK9091_06_GE_IDX.indd 979 Skipping pattern, cash flow, 149–150 Social discount rate, 865–866 Specific inflation rate (fi), 573–574 Sponsor’s costs and revenues, 865, 868, 870 Stadium expansion plan, 234–235 Standard deviation, 629 State income taxes, 500–501 Stock, 53, 65–66, 83, 702–704, 719–753, 812–813, 816–820, 822–823 See also Options capital structure of, 816–820 common (capital), 65–66, 83, 822 cost of equity from, 822–823 equity financing, 812–813 hedging (insuring), 702–704 preferred, 65–66, 822–823 real-options analysis, 719–753 treasury, 53 Stockholder’s equity (net worth), 53 Straight-line (SL) depreciation method, 465–466, 479 Strategic decisions, 40–42 cost reduction, 42 equipment replacement, 41–42 equipment selection, 41 product expansion, 42 project selection, 41 quality improvement, 42 service improvement, 42 Strict gradient series, 123 Strike (exercise) price (K), 694 Study period, 265 Sunk costs, 435, 759–760 T Tabular cash-flow formats, 544–545 Tabular method for commercial loans, 192–194 Tax credit, 522 Tax savings, 522, 535 Taxes, 456–515, 522, 535–539, 780–794 after-tax interest rates, 780–794 calculating gains or losses, 491–496 cash outflow from, 522 cash flow statements and, 535–539 corporate, 488–515 depreciation methods, 464, 474–482, 486 income tax rate, 497–501 incremental income tax rate, 497–499 marginal tax rate, 489 modified accelerated cost recovery system (MACRS), 474–482 negative taxable income, 535–539 replacement analysis and, 780–794 state income, 500–501 Technology and replacement analysis, 769, 780 Time and interest rates, 108–111 Time and return on investment, 210–212 Time value of money, 43, 84–161 capital-recovery (annuity) factor, 119–121 cash flow, 101–111, 149–150 cash flow diagrams, 89–90 composite cash flows, 141–147 compound-amount factor, 105, 103, 111–113 economic equivalence, 94–101, 147–149 equal-payment (uniform) series, 101–102, 111–112 equivalence calculations, 101–150 gradient (G) series, 123–135 interest, 85–94, 147–149 interest rates and, 108–111 payment series, 135–140 present-worth factor (P), 101, 106–108, 122–123, 124–126, 130–132, 140 single cash flows, 101, 103–111 sinking-fund factor, 114–118 10/22/15 5:43 PM www.downloadslide.com 980  index Time value of money (Continued) U.S lottery: Sharing the jackpot, 84–85 uneven-payment series, 103, 135–140 unconventional calculations, 141–150 Times-interest-earned ratio, 66–67 Total assets turnover ratio, 70 Total double-declining balance (TDB) depreciation, 467 Total-investment approach, 263 Trade-in allowance, 462 Treasury notes and bonds, 214 Treasury stock, 53 Trend analysis, 71 Trial-and-error method, 357–360, 374–376 True rate of return, 369 U U.S lottery: Sharing the jackpot, 84–85 Underlying asset (S), 694 Unequal service lines, 387–390 Uneven-payment series, 103, 135–140 Uniform series, see Equal-payment series Unit of use, 311 Z04_PARK9091_06_GE_IDX.indd 980 Unit profit (cost) calculation, 306–308 Units-of-production depreciation method, 473–474 Unrecognized gain or loss, 462 Useful life (assets), 463–464 User’s benefits and disbenefits, 864, 867–870 V Value, 705–718, 864–866, 864–866, 868–870 benefits and costs, 864–866, 868–870 Black-Scholes option model, 716–718 calculations for benefit–cost analysis, 868–870 multiperiod binomial lattice model, 713–716 option pricing and, 705–718 put-option valuation, 711 replicating-portfolio approach, 705–708 risk-free financing approach, 708–709 risk-neutral probability approach, 709–711 social discount rate, 865–866 sponsor’s costs, 865, 870 two-period binomial lattice valuation, 712–713 user’s benefits, 864, 868–869 valuation, 711–718, 727–728 Variable operating costs, 419 Variance, 628–630 Volume index, 419 W Weighted-average cost of capital, 827–828 Working capital, 55, 59–60, 67, 521–522, 528–533, 596–598 cash flow statements and, 528–533 Excel spreadsheet for, 597 inflation effects on, 596–598 investments, cash outflow from, 521 net change in, 59–60 project requirements, 528–533 release, cash inflow from, 522 rate-of-return (ROR) analysis and, 596–598 Y Yield to maturity (YTM), 215–220 Z Zero-coupon bonds, 214 10/22/15 5:43 PM www.downloadslide.com Table 3.6  Flow Type Summary of Discrete Compounding Formulas with Discrete Payments Factor Notation Formula S I N G L E Compound amount (F/P, i, N) Present worth (P/F, i, N) E Q U A L Compound amount (F/A, i, N) P A Y M E N T Sinking fund (A/F, i, N) i A = FJ R (1 + i)N - Present worth (P/A, i, N) P = AJ S E R I E S F = P(1 + i)N F = FV(i,N,0,P) N P = F(1 + i) F = AJ = PV(i,N,0,F) -N (1 + i)N - R i = FV(i,N,A) F F NϪ1 A A A (1 + i)N - i(1 + i)N Capital recovery (A/P, i, N) Linear gradient S E R Geometric gradient I E S Present worth (P/A1, g, i, N) Present worth (P/G, i, N) Equal-Payment Conversion factor (A/G, i, N) N A A = PMT(i,N,0,F) R = PV(i,N,A) AA A G R A D I E N T A00_PARK9091_06_GE_IFC.indd Cash Flow Diagram Excel Command A A NϪ1N P A = PJ P = GJ i(1 + i)N N (1 + i) - = PMT(i,N,P) R (1 + i)N - iN - - i 2(1 + i)N (NϪ2)G R 2G G A = GJ (1 + i)N - iN - i[(1 + i)N - 1] R - (1 + g)N(1 + i)-N R i - g P = D T N A1 a b (if i = g) + i A1 J NϪ1 N P A1(1ϩg)NϪ1 A2 A1 N P 10/23/15 10:13 PM www.downloadslide.com Summary of Project Analysis Methods Mutually Exclusive Projects Analysis Method Payback period PP Discounted payback period DPP Present worth PW(i) Future worth FW(i) Capitalized equivalent CE(i) Annual equivalence AE(i) Internal rate of return IRR Benefit-cost ratio BC(i) Profitability index PI(i) A00_PARK9091_06_GE_IFC.indd Description Single Project Evaluation Revenue Projects Service Projects A method for determining when in a project’s history it breaks even ­Management sets the benchmark PP° PP PP° A variation of payback period when factors in the time value of money Management sets the benchmark PP* DPP PP* A method which translates a project’s cash flows into an equivalent net present value PW(i) Select the one with the largest PW Select the one with the least cost in PW A variation of the PW: a project’s cash flows are translated into an equivalent net future value FW(i) Select the one with the largest FW Select the one with the least cost in FW A variation of the PW: a perpetual or very long-lived project that generates a constant stream of annual net cash flow CE(i) Select the one with the largest CE Select the one with the least cost in CE A variation of the PW: a project’s cash flows are translated into an annual equivalent sum AE(i) Select the one with the largest AE Select the one with the least AEC A relative percentage method which measures the yield as a percentage of investment over the life of a project: The IRR must exceed the minimum required rate of return (MARR) IRR MARR Incremental analysis: If IRRA2 - A1 MARR, select the higher cost investment project, A2 A relative measure to evaluate p­ ublic projects by finding the ratio of the equivalent benefits over the equivalent costs BC(i) Incremental analysis: If BC(i)A2 - A1 1, select the higher cost investment project, A2 A relative measure to evaluate projects in terms of net equivalent benefits generated per dollar invested PI(i) Incremental analysis: If PI(i)A2 - A1 1, select the higher cost investment project, A2 10/23/15 10:13 PM Z05_PARK9091_06_GE_IBC.indd = IRR (values, guess) Find: IRR Find: AE Given: Cash flow series = PMT(i%, N, NPW) = NPV(i%, series) Find: NPW Given: Cash flow series Given: Cash flow series = PMT(i%, N, 0, F) = PV(i%, N, A) Find: P Given: A Find: A Given: F = FV(i%, N, A) Find: F Given: A = PMT(i%, N, P) = PV(i%, N, 0, F) Find: P Given: F Find: A Given: P = FV(i%, N, 0, P) Find: F Given: P Excel Function Period 3 A B 250 300 150 -200 Cash Flow Consider a project with the following cash flow series at 12% (n = 0, - $200; n = 1, $150, n = 2, $300, n = 3, 250)? What is the required annual savings to accumulate $50,000 in years at 7% interest rate? What equal-annual-payment series is required to repay $25,000 in years at 9% interest rate? Find the present worth of a payment series of $900 per year for years at 8% interest rate Find the future worth of a payment series of $200 per year for 12 years at 6% Find the present worth of $1,300 due in 10 years at a 16% interest rate Find the future worth of $500 in years at 8% Example Note: When specifying the cash flow input parameters in any Excel function, an outflow must be a negative number Measures of Investment Worth EqualPaymentSeries Single-­ Payment Cash Flows Description Summary of Useful Excel’s Financial Functions (Part A) = PMT(12%, 3, - 351.03) = $146.15 = 89% = IRR(B2:B4, 10%) = NPV(12%, B3:B5) + B2 = $351.03 = PMT(7%, 3, 0, 50000) = ($15,552.58) = PMT(9%, 5, - 25000) = $6,427.31 = PV(8%, 5, 900) = ($3,593,44) = FV(6%,12, - 200) = $3,373.99 = PV(16%, 10, 0, 1300) = ($294.69) = FV(8%, 5, 0, - 500) = $734.66 Solution www.downloadslide.com 10/23/15 10:14 PM Z05_PARK9091_06_GE_IBC.indd Depreciation functions Loan Analysis Functions = NPER(i%, A, P, F) = SLN(cost, ­salvage, life) = DB(cost, salvage, life, period) Number of payments Straight-line Declining balance (fixed rate) = VDB(cost, salvage, life, start_period, end_ period, factor) = RATE(N, A, P, F) Interest rate Declining balance with switching to straight-line = CUMIPMT((i%, N, P, start_period, end_period, type) Cumulative interest payment = DDB(cost, ­salvage, life, period, factor) = PPMT(i%, n, N, P) Principal payment Double declining balance = IPMT(i%, n, N, P) = PMT(i%, N, P) Excel Function Interest payment Loan ­payment size Description Summary of Useful Excel’s Financial Functions (Part B) Find the depreciation amount in period with a = 150%, with switching allowed Find the depreciation amount in period with a = 150% Find the depreciation amount in period with fixed rate = - (salvage/cost)(1/life) = 0.2752 Cost = $100,000, S = $20,000, life = years Find the number of months required to pay off a loan of $10,000 with 12% APR where you can afford a monthly payment of $200 = VDB(100000,20000,5,3,4,1.5) = $10,290 = DDB(100000,20000,5,3,1.5) = $14,700 = DB(100000,20000,5,3) = $14,455 = SLN(100000,20000,5) = $16,000 = NPER(12%/12,200, - 10000) = 69.66 months APR = 0.7499% * 12 = 9% = RATE(60,207.58, -10000) = 0.7499% = CUMIPMT(9%/12,48,10000,1,48,0) = $1,944.82 (type “0 S payment at the end of period) Find the total interest payment over 48 months What nominal interest rate is being paid on the following financing arrangement? Loan amount: $10,000, loan period: 60 months, and monthly payment: $207.58 = PPMT(9%/12,10,48,10000) = ($185.94) = IPMT(9%/12,10,48,10000) = ($62.91) = PMT(9%/12,48,1000) = ($248.45) Solution Find the portion of principal payment for the 10th payment Find the portion of interest payment for the 10th payment Suppose you borrow $10,000 at 9% interest over 48 months Find the size of the equal monthly payment Example www.downloadslide.com 10/23/15 10:14 PM ... blank A01 _PARK9 091_06_GE_FM.indd 30 01/12/15 4:05 pm www.downloadslide.com Sixth Edition Global Edition Contemporary Engineering Economics Chan S Park Department of Industrial and Systems Engineering. .. adaptation from the United States edition, entitled Contemporary Engineering Economics, 6th edition, ISBN 978-0-134-10559-8 by Chan S Park, published by Pearson Education © 2016 All rights reserved... the challenges in contemporary engineering economics Some of the highlighted changes are as follows: • All the chapter opening vignettes—a trademark of Contemporary Engineering Economics have been