{"product_id":"advanced-engineering-economics-isbn-9781119691969","title":"Advanced Engineering Economics","description":"\u003cp\u003e\u003ci\u003eAdvanced Engineering Economics, Second Edition\u003c\/i\u003e, provides an integrated framework for understanding and applying project evaluation and selection concepts that are critical to making informed individual, corporate, and public investment decisions. Grounded in the foundational principles of economic analysis, this well-regarded reference describes a comprehensive range of central topics, from basic concepts such as accounting income and cash flow, to more advanced techniques including deterministic capital budgeting, risk simulation, and decision tree analysis. \u003c\/p\u003e \u003cp\u003eFully updated throughout, the second edition retains the structure of its previous iteration, covering basic economic concepts and techniques, deterministic and stochastic analysis, and special topics in engineering economics analysis. New and expanded chapters examine the use of transform techniques in cash flow modeling, procedures for replacement analysis, the evaluation of public investments, corporate taxation, utility theory, and more. Now available as interactive eBook, this classic volume is essential reading for both students and practitioners in fields including engineering, business and economics, operations research, and systems analysis.\u003c\/p\u003e \u003cp\u003eAbout the Authors vii\u003c\/p\u003e \u003cp\u003ePreface ix\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 1 Basic Concepts and Tools in Economic Analysis\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e1 Accounting Income and Cash Flow 3\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e1.1 What Is Investment? 3\u003c\/p\u003e \u003cp\u003e1.2 The Corporate Investment Framework 4\u003c\/p\u003e \u003cp\u003e1.2.1 The Objective of the Firm 4\u003c\/p\u003e \u003cp\u003e1.2.2 The Functions of the Firm 4\u003c\/p\u003e \u003cp\u003e1.2.3 The Analysis Framework 6\u003c\/p\u003e \u003cp\u003e1.2.4 Accounting Information 6\u003c\/p\u003e \u003cp\u003e1.3 The Balance Sheet 7\u003c\/p\u003e \u003cp\u003e1.3.1 Reporting Format 7\u003c\/p\u003e \u003cp\u003e1.3.2 Cash versus Other Assets 10\u003c\/p\u003e \u003cp\u003e1.3.3 Liabilities versus Stockholders’ Equity 10\u003c\/p\u003e \u003cp\u003e1.3.4 Inventory Valuation 11\u003c\/p\u003e \u003cp\u003e1.3.5 Depreciation 12\u003c\/p\u003e \u003cp\u003e1.3.6 Working Capital 12\u003c\/p\u003e \u003cp\u003e1.4 The Income Statement 13\u003c\/p\u003e \u003cp\u003e1.4.1 Methods of Reporting Income 13\u003c\/p\u003e \u003cp\u003e1.4.2 Reporting Format 13\u003c\/p\u003e \u003cp\u003e1.4.3 Measurement of Revenue 15\u003c\/p\u003e \u003cp\u003e1.4.4 Measurement of Expenses 16\u003c\/p\u003e \u003cp\u003e1.4.5 Retained Earnings, Cash Dividends, and Earnings per Share 16\u003c\/p\u003e \u003cp\u003e1.4.6 Return on Common Equity (ROE) 17\u003c\/p\u003e \u003cp\u003e1.5 The Funds Flow Statement 18\u003c\/p\u003e \u003cp\u003e1.5.1 The Cash Flow Cycle 19\u003c\/p\u003e \u003cp\u003e1.5.2 Basic Relationship 20\u003c\/p\u003e \u003cp\u003e1.5.3 Funds Statement on a Cash Basis 21\u003c\/p\u003e \u003cp\u003e1.5.4 Funds Statement as Working Capital 23\u003c\/p\u003e \u003cp\u003e1.6 Net Income Versus Cash Flows 24\u003c\/p\u003e \u003cp\u003e1.6.1 Deferred Income Taxes 24\u003c\/p\u003e \u003cp\u003e1.6.2 Computing Deferred Income Taxes 24\u003c\/p\u003e \u003cp\u003e1.6.3 Estimating Cash Flows from Income Statement 26\u003c\/p\u003e \u003cp\u003e1.6.4 Use of Cash Flows in Evaluating Investments 26\u003c\/p\u003e \u003cp\u003e1.7 Investment Project and Its Cash Flows 27\u003c\/p\u003e \u003cp\u003e1.7.1 The Project Cash Flow Statement 28\u003c\/p\u003e \u003cp\u003e1.7.2 Cash Flows over the Project Life 29\u003c\/p\u003e \u003cp\u003eSummary 31\u003c\/p\u003e \u003cp\u003eProblems 32\u003c\/p\u003e \u003cp\u003e\u003cb\u003e2 Interest Rates and Valuing Cash Flows 36\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e2.1 Cash Flow Diagram 36\u003c\/p\u003e \u003cp\u003e2.2 Time Preference and Interest 36\u003c\/p\u003e \u003cp\u003e2.2.1 Time Preference 37\u003c\/p\u003e \u003cp\u003e2.2.2 Types of Interest 37\u003c\/p\u003e \u003cp\u003e2.2.3 Nominal and Effective Interest Rates 39\u003c\/p\u003e \u003cp\u003e2.3 Discrete Compounding 42\u003c\/p\u003e \u003cp\u003e2.3.1 Comparable Payment and Compounding Periods 42\u003c\/p\u003e \u003cp\u003e2.3.2 Noncomparable Payment and Compounding Periods 53\u003c\/p\u003e \u003cp\u003e2.4 Continuous Compounding 55\u003c\/p\u003e \u003cp\u003e2.4.1 Discrete Payments 56\u003c\/p\u003e \u003cp\u003e2.4.2 Continuous Cash Flows 58\u003c\/p\u003e \u003cp\u003e2.5 Equivalence of Cash Flows 60\u003c\/p\u003e \u003cp\u003e2.5.1 Concepts of Equivalence 61\u003c\/p\u003e \u003cp\u003e2.5.2 Equivalence Calculations with Several Interest Factors 62\u003c\/p\u003e \u003cp\u003e2.6 Effect of Inflation on Cash Flow Equivalence 65\u003c\/p\u003e \u003cp\u003e2.6.1 Measure of Inflation 65\u003c\/p\u003e \u003cp\u003e2.6.2 Explicit and Implicit Treatments of Inflation in Discounting 66\u003c\/p\u003e \u003cp\u003e2.6.3 Case Study—Home Ownership Analysis during Inflation 71\u003c\/p\u003e \u003cp\u003eSummary 74\u003c\/p\u003e \u003cp\u003eProblems 75\u003c\/p\u003e \u003cp\u003e\u003cb\u003e3 Advanced Cash Flow Modeling Techniques 80\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e3.1 \u003ci\u003eZ\u003c\/i\u003e-Transforms and Discrete Cash Flows 80\u003c\/p\u003e \u003cp\u003e3.1.1 The \u003ci\u003eZ\u003c\/i\u003e-Transform and Present Value 80\u003c\/p\u003e \u003cp\u003e3.1.2 Properties of the \u003ci\u003eZ\u003c\/i\u003e-Transform 82\u003c\/p\u003e \u003cp\u003e3.2 Development of Discrete Present Value Models 87\u003c\/p\u003e \u003cp\u003e3.2.1 Extensive Present Value Models 87\u003c\/p\u003e \u003cp\u003e3.2.2 Simplified Present Value Model 90\u003c\/p\u003e \u003cp\u003e3.2.3 Applications of \u003ci\u003eZ\u003c\/i\u003e-Transforms 90\u003c\/p\u003e \u003cp\u003e3.3 Laplace Transforms and Continuous Cash Flows 96\u003c\/p\u003e \u003cp\u003e3.3.1 Laplace Transform and Present Value 96\u003c\/p\u003e \u003cp\u003e3.3.2 Properties of Laplace Transforms 97\u003c\/p\u003e \u003cp\u003e3.4 Development of Continuous Present Value Models 102\u003c\/p\u003e \u003cp\u003e3.4.1 Extensive Present Value Models 102\u003c\/p\u003e \u003cp\u003e3.4.2 Present Values of Impulse Cash Flows 105\u003c\/p\u003e \u003cp\u003e3.4.3 Extension to Future and Annual Equivalent Models 106\u003c\/p\u003e \u003cp\u003e3.5 Application of the Laplace Transform 107\u003c\/p\u003e \u003cp\u003eSummary 109\u003c\/p\u003e \u003cp\u003eProblems 110\u003c\/p\u003e \u003cp\u003e\u003cb\u003e4 Developing Project Cash Flows 113\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e4.1 Corporate Tax Rates 113\u003c\/p\u003e \u003cp\u003e4.1.1 Tax Structure for Corporations 113\u003c\/p\u003e \u003cp\u003e4.1.2 Depreciation and Its Relation to Income Taxes 113\u003c\/p\u003e \u003cp\u003e4.1.3 Use of Effective and Marginal Income Tax Rates in Project Evaluations 115\u003c\/p\u003e \u003cp\u003e4.2 Depreciation Methods 116\u003c\/p\u003e \u003cp\u003e4.2.1 Depreciation Regulations and Notation 116\u003c\/p\u003e \u003cp\u003e4.2.2 Book Depreciation Methods 117\u003c\/p\u003e \u003cp\u003e4.2.3 Tax Depreciation Method 121\u003c\/p\u003e \u003cp\u003e4.2.4 Multiple-Asset Depreciation 126\u003c\/p\u003e \u003cp\u003e4.3 Capital Gains and Adjustments to Income Taxes 126\u003c\/p\u003e \u003cp\u003e4.4 After-Tax Cash Flow Analysis 128\u003c\/p\u003e \u003cp\u003e4.4.1 Income Statement Approach 128\u003c\/p\u003e \u003cp\u003e4.4.2 Generalized Cash Flows 129\u003c\/p\u003e \u003cp\u003e4.4.3 Effects of Depreciation Methods 131\u003c\/p\u003e \u003cp\u003e4.4.4 Effects of Financing Costs 134\u003c\/p\u003e \u003cp\u003e4.4.5 Effects of Inflation 137\u003c\/p\u003e \u003cp\u003e4.4.6 Cash Flow Analysis for Tax-Exempt Corporations 139\u003c\/p\u003e \u003cp\u003eSummary 140\u003c\/p\u003e \u003cp\u003eProblems 140\u003c\/p\u003e \u003cp\u003e\u003cb\u003e5 Selecting a Discount Rate for Project Evaluation 144\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e5.1 Investment and Borrowing Opportunities 144\u003c\/p\u003e \u003cp\u003e5.1.1 Future Investment Opportunities 144\u003c\/p\u003e \u003cp\u003e5.1.2 Financing Sources 146\u003c\/p\u003e \u003cp\u003e5.1.3 Capital Rationing 147\u003c\/p\u003e \u003cp\u003e5.2 Costs of Capital from Individual Sources 147\u003c\/p\u003e \u003cp\u003e5.2.1 Debt Capital 147\u003c\/p\u003e \u003cp\u003e5.2.2 Equity Capital 154\u003c\/p\u003e \u003cp\u003e5.3 Use of a Weighted-Average Cost of Capital 157\u003c\/p\u003e \u003cp\u003e5.3.1 Net Equity Flows 158\u003c\/p\u003e \u003cp\u003e5.3.2 After-Tax Composite Flows 160\u003c\/p\u003e \u003cp\u003e5.4 Specifying the Weighted-Average Cost of Capital 161\u003c\/p\u003e \u003cp\u003e5.4.1 Basic Valuation Forms 161\u003c\/p\u003e \u003cp\u003e5.4.2 Valuation with Debt and Taxes 163\u003c\/p\u003e \u003cp\u003e5.4.3 The Firm’s Capitalization Rate 163\u003c\/p\u003e \u003cp\u003e5.4.4 Obtaining a Cutoff Rate 166\u003c\/p\u003e \u003cp\u003e5.4.5 Other Issues 167\u003c\/p\u003e \u003cp\u003e5.4.6 Effect of Inflation 168\u003c\/p\u003e \u003cp\u003eSummary 168\u003c\/p\u003e \u003cp\u003eProblems 169\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 2 Deterministic Analysis\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e6 Measures of Investment Worth—Single Project 175\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e6.1 Initial Assumptions 175\u003c\/p\u003e \u003cp\u003e6.2 The Net Present Value Criterion 176\u003c\/p\u003e \u003cp\u003e6.2.1 Mathematical Definition 176\u003c\/p\u003e \u003cp\u003e6.2.2 Economic Interpretation Through Project Balance 180\u003c\/p\u003e \u003cp\u003e6.3 Internal Rate-of-Return Criterion 182\u003c\/p\u003e \u003cp\u003e6.3.1 Computational Methods 182\u003c\/p\u003e \u003cp\u003e6.3.2 Classification of Investment Projects 185\u003c\/p\u003e \u003cp\u003e6.3.3 IRR and Pure Investments 188\u003c\/p\u003e \u003cp\u003e6.3.4 IRR and Mixed Investments 190\u003c\/p\u003e \u003cp\u003e6.3.5 Modified Internal Rate of Return 194\u003c\/p\u003e \u003cp\u003e6.4 Benefit–Cost Ratios 197\u003c\/p\u003e \u003cp\u003e6.4.1 Benefit–Cost Ratios Defined 198\u003c\/p\u003e \u003cp\u003e6.4.2 Equivalence of B\/C Ratios and PV 199\u003c\/p\u003e \u003cp\u003e6.5 Payback Period 200\u003c\/p\u003e \u003cp\u003e6.5.1 Payback Period Defined 200\u003c\/p\u003e \u003cp\u003e6.5.2 Popularity of the Payback Period 201\u003c\/p\u003e \u003cp\u003e6.6 Time-Dependent Measure of Investment Worth 202\u003c\/p\u003e \u003cp\u003e6.6.1 Areas of Negative and Positive Balances 202\u003c\/p\u003e \u003cp\u003e6.6.2 Investment Flexibility 203\u003c\/p\u003e \u003cp\u003eSummary 205\u003c\/p\u003e \u003cp\u003eProblems 207\u003c\/p\u003e \u003cp\u003e\u003cb\u003e7 Decision Rules for Selecting among Multiple Alternatives 213\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e7.1 Formulating Mutually Exclusive Alternatives 213\u003c\/p\u003e \u003cp\u003e7.2 Project Ranking Based on Total Investment Approach 216\u003c\/p\u003e \u003cp\u003e7.2.1 Total Investment Approach 216\u003c\/p\u003e \u003cp\u003e7.2.2 Consistency Within Groups 217\u003c\/p\u003e \u003cp\u003e7.2.3 Modification of Criteria to Include Unspent Budget Amounts 219\u003c\/p\u003e \u003cp\u003e7.3 Incremental Analysis 220\u003c\/p\u003e \u003cp\u003e7.3.1 Irrelevance of Ordering for PV, FV, AE, and PB\u003ci\u003eN\u003c\/i\u003e 220\u003c\/p\u003e \u003cp\u003e7.3.2 Agreement on Increments Between PV and Other Relative Measures 221\u003c\/p\u003e \u003cp\u003e7.3.3 Alternative Derivations 221\u003c\/p\u003e \u003cp\u003e7.3.4 Decision Rules for IRR 222\u003c\/p\u003e \u003cp\u003e7.3.5 A Comprehensive Example for Incremental Analysis 224\u003c\/p\u003e \u003cp\u003e7.4 Reinvestment Issues 228\u003c\/p\u003e \u003cp\u003e7.4.1 Net Present Value 228\u003c\/p\u003e \u003cp\u003e7.4.2 Internal Rate of Return 230\u003c\/p\u003e \u003cp\u003e7.4.3 Benefit–Cost Ratio 231\u003c\/p\u003e \u003cp\u003e7.5 Comparison of Projects with Unequal Lives 232\u003c\/p\u003e \u003cp\u003e7.5.1 Common Service Period Approach 232\u003c\/p\u003e \u003cp\u003e7.5.2 Estimating Salvage Value of Longer-Lived Projects 235\u003c\/p\u003e \u003cp\u003e7.5.3 Reinvestment Issues When Revenues Are Known 239\u003c\/p\u003e \u003cp\u003e7.5.4 Summary Treatment of Unequal Lives 239\u003c\/p\u003e \u003cp\u003e7.6 Decisions on the Timing of Investments 239\u003c\/p\u003e \u003cp\u003eSummary 240\u003c\/p\u003e \u003cp\u003eProblems 242\u003c\/p\u003e \u003cp\u003e\u003cb\u003e8 Deterministic Capital Budgeting Models 247\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e8.1 The Use of Linear Programming Models 247\u003c\/p\u003e \u003cp\u003e8.1.1 Description of a Basic Capital Budgeting Problem 248\u003c\/p\u003e \u003cp\u003e8.1.2 Criterion Function to Be Optimized 248\u003c\/p\u003e \u003cp\u003e8.1.3 Multiple Budget Periods 249\u003c\/p\u003e \u003cp\u003e8.1.4 Project Limits and Interdependencies 249\u003c\/p\u003e \u003cp\u003e8.1.5 LP Formulation of Lorie–Savage Problem 250\u003c\/p\u003e \u003cp\u003e8.1.6 Duality Analysis 250\u003c\/p\u003e \u003cp\u003e8.2 Pure Capital Rationing Models 253\u003c\/p\u003e \u003cp\u003e8.2.1 Criticisms of the PV Model 254\u003c\/p\u003e \u003cp\u003e8.2.2 Consistent Discount Factors 255\u003c\/p\u003e \u003cp\u003e8.3 Net Present Value Maximization with Lending and Borrowing 258\u003c\/p\u003e \u003cp\u003e8.3.1 Inclusion of Lending Opportunities 258\u003c\/p\u003e \u003cp\u003e8.3.2 Inclusion of Borrowing Opportunities 259\u003c\/p\u003e \u003cp\u003e8.4 Weingartner’s Horizon Model 259\u003c\/p\u003e \u003cp\u003e8.4.1 Equal Lending and Borrowing Rates 259\u003c\/p\u003e \u003cp\u003e8.4.2 Lending Rates Less than Borrowing Rates 265\u003c\/p\u003e \u003cp\u003e8.4.3 Inclusion of Borrowing Limits Supply Schedule of Funds 267\u003c\/p\u003e \u003cp\u003e8.4.4 Dual Analysis with Project Interdependencies 271\u003c\/p\u003e \u003cp\u003e8.5 Bernhard’s General Model 272\u003c\/p\u003e \u003cp\u003e8.5.1 Model Formulation 272\u003c\/p\u003e \u003cp\u003e8.5.2 Major Results 273\u003c\/p\u003e \u003cp\u003e8.6 Discrete Capital Budgeting 276\u003c\/p\u003e \u003cp\u003e8.6.1 Number of Fractional Projects in LP Solution 276\u003c\/p\u003e \u003cp\u003e8.6.2 Branch-and-Bound Solution Procedure 277\u003c\/p\u003e \u003cp\u003e8.6.3 Duality Analysis for Integer Solutions 279\u003c\/p\u003e \u003cp\u003e8.7 Capital Budgeting with Multiple Objectives 281\u003c\/p\u003e \u003cp\u003e8.7.1 Goal Programming 281\u003c\/p\u003e \u003cp\u003e8.7.2 Interactive Multiple-Criteria Optimization 283\u003c\/p\u003e \u003cp\u003eSummary 284\u003c\/p\u003e \u003cp\u003eProblems 285\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 3 Stochastic Analysis\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e9 Utility Theory 295\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e9.1 The Concept of Risk 295\u003c\/p\u003e \u003cp\u003e9.1.1 Role of Utility Theory 297\u003c\/p\u003e \u003cp\u003e9.1.2 Alternative Approaches to Decision Making 298\u003c\/p\u003e \u003cp\u003e9.2 Preference and Ordering Rules 298\u003c\/p\u003e \u003cp\u003e9.2.1 Bernoulli Hypothesis 298\u003c\/p\u003e \u003cp\u003e9.3 Properties of Utility Functions 301\u003c\/p\u003e \u003cp\u003e9.3.1 Risk Attitudes 301\u003c\/p\u003e \u003cp\u003e9.3.2 Relationship between Certainty Equivalent and Risk Premium 304\u003c\/p\u003e \u003cp\u003e9.3.3 Types of Utility Functions 304\u003c\/p\u003e \u003cp\u003e9.4 Empirical Determination of Utility Functions 307\u003c\/p\u003e \u003cp\u003e9.4.1 General Procedure 307\u003c\/p\u003e \u003cp\u003e9.4.2 Sample Results 309\u003c\/p\u003e \u003cp\u003e9.5 Mean–Variance Analysis 310\u003c\/p\u003e \u003cp\u003e9.5.1 Indifference Curves 310\u003c\/p\u003e \u003cp\u003e9.5.2 Coefficient of Risk Aversion 312\u003c\/p\u003e \u003cp\u003e9.5.3 Justification of the Mean and Variance Criterion 312\u003c\/p\u003e \u003cp\u003e9.5.4 Justification of Certainty Equivalent Method 314\u003c\/p\u003e \u003cp\u003eSummary 317\u003c\/p\u003e \u003cp\u003eProblems 318\u003c\/p\u003e \u003cp\u003e\u003cb\u003e10 Probabilistic Cash Flow Analysis—Single Project 322\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e10.1 Measures of Project Risk 322\u003c\/p\u003e \u003cp\u003e10.1.1 Downside Risk 322\u003c\/p\u003e \u003cp\u003e10.1.2 How Businesspeople Perceive Risk in Project Evaluation 323\u003c\/p\u003e \u003cp\u003e10.2 Estimating Values in Probabilistic Terms 324\u003c\/p\u003e \u003cp\u003e10.2.1 Statistical Moments of a Single Random Variable 325\u003c\/p\u003e \u003cp\u003e10.2.2 Statistical Moments of Linear Combinations of Random Variables 328\u003c\/p\u003e \u003cp\u003e10.2.3 Products of Random Variables 332\u003c\/p\u003e \u003cp\u003e10.2.4 Quotients of Random Variables 334\u003c\/p\u003e \u003cp\u003e10.2.5 Powers of Independent Random Variables 335\u003c\/p\u003e \u003cp\u003e10.2.6 General Approximation Formulas 338\u003c\/p\u003e \u003cp\u003e10.3 Statistical Moments of Discounted Cash Flows 339\u003c\/p\u003e \u003cp\u003e10.3.1 Expected Net Present Value 339\u003c\/p\u003e \u003cp\u003e10.3.2 Variance of Net Present Value 340\u003c\/p\u003e \u003cp\u003e10.3.3 Mixed Net Cash Flows 343\u003c\/p\u003e \u003cp\u003e10.3.4 Net Cash Flows Consisting of Several Components 344\u003c\/p\u003e \u003cp\u003e10.3.5 Cash Flows with Uncertain Timing: Continuous Case 345\u003c\/p\u003e \u003cp\u003e10.3.6 Cash Flows with Uncertain Timing: Discrete Case 352\u003c\/p\u003e \u003cp\u003e10.4 Probability Distributions of Net Present Value 355\u003c\/p\u003e \u003cp\u003e10.4.1 Discrete Cash Flows Described by a Probability Tree 355\u003c\/p\u003e \u003cp\u003e10.4.2 Use of the First Two Statistical Moments 357\u003c\/p\u003e \u003cp\u003e10.4.3 Use of the First Four Statistical Moments 358\u003c\/p\u003e \u003cp\u003e10.5 Estimating Risky Cash Flows 359\u003c\/p\u003e \u003cp\u003e10.5.1 Beta-Function Estimators for Single Cash Flows 359\u003c\/p\u003e \u003cp\u003e10.5.2 Hiller’s Method for Correlated Cash Flows 365\u003c\/p\u003e \u003cp\u003e10.6 Measure of Operational Risk 367\u003c\/p\u003e \u003cp\u003e10.6.1 Value at Risk—Downside Risk Measurements 367\u003c\/p\u003e \u003cp\u003e10.6.2 How to Calculate the Value at Risk? 367\u003c\/p\u003e \u003cp\u003e10.6.3 Conditional Value at Risk (CVaR) 371\u003c\/p\u003e \u003cp\u003eSummary 373\u003c\/p\u003e \u003cp\u003eProblems 375\u003c\/p\u003e \u003cp\u003e\u003cb\u003e11 Comparing Risky Projects and Portfolio Optimization Theory 386\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e11.1 Comparative Measures of Investment Worth 386\u003c\/p\u003e \u003cp\u003e11.1.1 Mean–Variance, \u003ci\u003eE–V\u003c\/i\u003e 386\u003c\/p\u003e \u003cp\u003e11.1.2 Mean–Semivariance, E–S\u003csub\u003eh\u003c\/sub\u003e 388\u003c\/p\u003e \u003cp\u003e11.1.3 Safety First 391\u003c\/p\u003e \u003cp\u003e11.2 Stochastic Dominance 392\u003c\/p\u003e \u003cp\u003e11.2.1 First-Degree Stochastic Dominance 392\u003c\/p\u003e \u003cp\u003e11.2.2 Second-Degree Stochastic Dominance 395\u003c\/p\u003e \u003cp\u003e11.2.3 Third-Degree Stochastic Dominance 399\u003c\/p\u003e \u003cp\u003e11.2.4 Relationship Between Dominance and Mean–Variance Criterion 402\u003c\/p\u003e \u003cp\u003e11.3 Portfolio Theory 403\u003c\/p\u003e \u003cp\u003e11.3.1 Efficiency Frontier 404\u003c\/p\u003e \u003cp\u003e11.3.2 Diversification of Risk 406\u003c\/p\u003e \u003cp\u003e11.3.3 Full Covariance Model 407\u003c\/p\u003e \u003cp\u003e11.3.4 Index Model 408\u003c\/p\u003e \u003cp\u003e11.3.5 Capital Market Theory 409\u003c\/p\u003e \u003cp\u003e11.4 Discrete Capital-Rationing Models Under Risk 412\u003c\/p\u003e \u003cp\u003e11.4.1 Hillier’s Method for Correlated Projects 413\u003c\/p\u003e \u003cp\u003e11.4.2 Stochastic Programming 414\u003c\/p\u003e \u003cp\u003e11.5 Multiperiod Index Model for Project Portfolio 415\u003c\/p\u003e \u003cp\u003e11.5.1 Model Structure and Assumptions 415\u003c\/p\u003e \u003cp\u003e11.5.2 Procedure 417\u003c\/p\u003e \u003cp\u003e11.6 Uncertainty Resolution 419\u003c\/p\u003e \u003cp\u003eSummary 421\u003c\/p\u003e \u003cp\u003eProblems 423\u003c\/p\u003e \u003cp\u003e\u003cb\u003e12 Risk Simulation 430\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e12.1 An Overview of the Logic of Simulation 430\u003c\/p\u003e \u003cp\u003e12.1.1 Monte Carlo Sampling 431\u003c\/p\u003e \u003cp\u003e12.1.2 Using the Simulation Output 431\u003c\/p\u003e \u003cp\u003e12.2 Selecting Input Probability Distributions 432\u003c\/p\u003e \u003cp\u003e12.2.1 Selecting a Distribution Based on Observed Data 432\u003c\/p\u003e \u003cp\u003e12.2.2 Selecting a Distribution in the Absence of Data 439\u003c\/p\u003e \u003cp\u003e12.3 Sampling Procedures for Independent Random Variables 441\u003c\/p\u003e \u003cp\u003e12.3.1 Inverse Transformation Techniques 441\u003c\/p\u003e \u003cp\u003e12.3.2 Other Frequently Used Random Deviates 444\u003c\/p\u003e \u003cp\u003e12.4 Sampling Procedures for Dependent Random Variables 446\u003c\/p\u003e \u003cp\u003e12.4.1 Assessment of Conditional Probabilities 446\u003c\/p\u003e \u003cp\u003e12.4.2 Sampling a Pair of Dependent Random Samples 447\u003c\/p\u003e \u003cp\u003e12.4.3 Sampling Based on Regression Equation 450\u003c\/p\u003e \u003cp\u003e12.4.4 Conditional Sampling in the Absence of Data 455\u003c\/p\u003e \u003cp\u003e12.4.5 Normal Transformation Method 457\u003c\/p\u003e \u003cp\u003e12.5 Output Data Analysis 460\u003c\/p\u003e \u003cp\u003e12.5.1 Replication and Precision of Results 460\u003c\/p\u003e \u003cp\u003e12.5.2 Comparison of Two Projects 462\u003c\/p\u003e \u003cp\u003e12.6 A Simple Risk Simulation Example 465\u003c\/p\u003e \u003cp\u003e12.6.1 Decision Problem 465\u003c\/p\u003e \u003cp\u003e12.6.2 Replication Results 468\u003c\/p\u003e \u003cp\u003eSummary 469\u003c\/p\u003e \u003cp\u003eProblems 470\u003c\/p\u003e \u003cp\u003e\u003cb\u003e13 Decision Analysis and Value of Information 474\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e13.1 Sequential Decision Process 474\u003c\/p\u003e \u003cp\u003e13.1.1 Structuring the Decision Tree 474\u003c\/p\u003e \u003cp\u003e13.1.2 Expected Value as a Decision Criterion 478\u003c\/p\u003e \u003cp\u003e13.2 Obtaining Additional Information 478\u003c\/p\u003e \u003cp\u003e13.2.1 The Value of Perfect Information 479\u003c\/p\u003e \u003cp\u003e13.2.2 Determining Revised Probabilities 481\u003c\/p\u003e \u003cp\u003e13.2.3 Expected Monetary Value after Receiving Sample Information 486\u003c\/p\u003e \u003cp\u003e13.2.4 Value of the Market Survey 486\u003c\/p\u003e \u003cp\u003e13.3 Decision Tree and Risk 487\u003c\/p\u003e \u003cp\u003e13.3.1 Sensitivity Analysis 487\u003c\/p\u003e \u003cp\u003e13.3.2 Decision Based on Certainty Equivalents 488\u003c\/p\u003e \u003cp\u003e13.4 Investment Decisions with Replication Opportunities 490\u003c\/p\u003e \u003cp\u003e13.4.1 The Opportunity to Replicate 490\u003c\/p\u003e \u003cp\u003e13.4.2 Experiment Leading to Perfect Information 490\u003c\/p\u003e \u003cp\u003e13.4.3 A Case Example—Flexible Cellular Manufacturing Operation 491\u003c\/p\u003e \u003cp\u003e13.4.4 Sampling Leading to Imperfect Information 494\u003c\/p\u003e \u003cp\u003e13.5 Bayesian Inference and Value of Sampling 495\u003c\/p\u003e \u003cp\u003e13.5.1 Bayesian Inference 495\u003c\/p\u003e \u003cp\u003e13.5.2 Bayesian Update with a Discrete Prior Distribution 497\u003c\/p\u003e \u003cp\u003e13.5.3 Bayesian Update with a Continuous Prior Probability Distribution 500\u003c\/p\u003e \u003cp\u003e13.6 Conjugate Prior Distributions 503\u003c\/p\u003e \u003cp\u003e13.6.1 Types of Sampling 503\u003c\/p\u003e \u003cp\u003e13.6.2 Conjugate Distribution for Bernoulli Process 505\u003c\/p\u003e \u003cp\u003e13.6.3 Conjugate Distribution for Poisson Process 507\u003c\/p\u003e \u003cp\u003e13.6.4 Conjugate Distribution for Normal Process 509\u003c\/p\u003e \u003cp\u003e13.6.5 Lognormal Process 512\u003c\/p\u003e \u003cp\u003e13.7 Terminal Analysis: Opportunity Loss and Value of Perfect Information 513\u003c\/p\u003e \u003cp\u003e13.7.1 Opportunity Loss Function 513\u003c\/p\u003e \u003cp\u003e13.7.2 The Expected Value of Sample Information 515\u003c\/p\u003e \u003cp\u003e13.7.3 Optimal Sample Size 517\u003c\/p\u003e \u003cp\u003eSummary 518\u003c\/p\u003e \u003cp\u003eProblems 519\u003c\/p\u003e \u003cp\u003e\u003cb\u003e14 Basic Options Theory 527\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e14.1 Financial Options Concepts 527\u003c\/p\u003e \u003cp\u003e14.1.1 Call Options 528\u003c\/p\u003e \u003cp\u003e14.1.2 Put Options 529\u003c\/p\u003e \u003cp\u003e14.2 Stochastic Process of Asset Dynamics 530\u003c\/p\u003e \u003cp\u003e14.2.1 Underlying Asset Price Movement—Geometric Brownian Motion 531\u003c\/p\u003e \u003cp\u003e14.2.2 Simulated Stock Prices Based on Brownian Motion 534\u003c\/p\u003e \u003cp\u003e14.2.3 Discrete-Time Price Movement 535\u003c\/p\u003e \u003cp\u003e14.2.4 How to Determine the Binomial Parameters 537\u003c\/p\u003e \u003cp\u003e14.3 Upper and Lower Bounds for Option Prices 539\u003c\/p\u003e \u003cp\u003e14.3.1 Upper and Lower Bounds 539\u003c\/p\u003e \u003cp\u003e14.3.2 Put–Call Parity 540\u003c\/p\u003e \u003cp\u003e14.4 Binomial Option Pricing Model 541\u003c\/p\u003e \u003cp\u003e14.4.1 Option Pricing for a Single-Period Model 541\u003c\/p\u003e \u003cp\u003e14.4.2 Risk-Neutral Probabilities 543\u003c\/p\u003e \u003cp\u003e14.4.3 Properties of Option Attributes 544\u003c\/p\u003e \u003cp\u003e14.4.4 Effects of Dividends 545\u003c\/p\u003e \u003cp\u003e14.5 Option Pricing for the Multi-Period Binomial Model 546\u003c\/p\u003e \u003cp\u003e14.6 Pricing an American Option 548\u003c\/p\u003e \u003cp\u003e14.6.1 Early Exercise for an American Call Option 550\u003c\/p\u003e \u003cp\u003e14.7 Black–Scholes Model 550\u003c\/p\u003e \u003cp\u003e14.7.1 Call and Put Options Formulas 551\u003c\/p\u003e \u003cp\u003e14.7.2 Components of the Black–Scholes Model 552\u003c\/p\u003e \u003cp\u003e14.7.3 Formal Derivation of the Black–Scholes Formula 553\u003c\/p\u003e \u003cp\u003e14.7.4 Relationship Between the Binomial Lattice Model and the Black–Scholes Model 555\u003c\/p\u003e \u003cp\u003e14.8 Dividends and Black–Sholes Model 556\u003c\/p\u003e \u003cp\u003e14.8.1 Known Dividend Yield 556\u003c\/p\u003e \u003cp\u003e14.8.2 Known Dollar Dividend 556\u003c\/p\u003e \u003cp\u003e14.9 Pricing Exotic Options 557\u003c\/p\u003e \u003cp\u003e14.9.1 Exchange Options—Margrabe Model 557\u003c\/p\u003e \u003cp\u003e14.9.2 The Geske Model—Compound Option 558\u003c\/p\u003e \u003cp\u003e14.10 Estimating Volatility for Traded Financial Assets 560\u003c\/p\u003e \u003cp\u003eSummary 563\u003c\/p\u003e \u003cp\u003eProblems 564\u003c\/p\u003e \u003cp\u003e\u003cb\u003e15 Real Options Analysis 567\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e15.1 A New Way of Thinking of Investment Strategy under Uncertainty 567\u003c\/p\u003e \u003cp\u003e15.1.1 Identify the Level of Uncertainty 567\u003c\/p\u003e \u003cp\u003e15.1.2 Analytic Tools and Strategies to Resolve Uncertainty 568\u003c\/p\u003e \u003cp\u003e15.2 What Is the Investment Flexibility? 572\u003c\/p\u003e \u003cp\u003e15.3 Real Options Valuation with Financial Option Framework 575\u003c\/p\u003e \u003cp\u003e15.3.1 Basic Modeling Concept 575\u003c\/p\u003e \u003cp\u003e15.3.2 SNPV Calculation with Black–Scholes Formula 576\u003c\/p\u003e \u003cp\u003e15.4 Real Call Options Models 577\u003c\/p\u003e \u003cp\u003e15.4.1 Option to Wait—Delay Options 577\u003c\/p\u003e \u003cp\u003e15.4.2 Option to Expand—Growth Options 579\u003c\/p\u003e \u003cp\u003e15.4.3 Research and Development 580\u003c\/p\u003e \u003cp\u003e15.4.4 Scale-Up Options by Binomial Lattice 582\u003c\/p\u003e \u003cp\u003e15.4.5 Exchange Option—Delay Options with Stochastic Investment Cost 584\u003c\/p\u003e \u003cp\u003e15.5 Real Put Options Models 586\u003c\/p\u003e \u003cp\u003e15.5.1 Option to Abandon 586\u003c\/p\u003e \u003cp\u003e15.5.2 Option to Switch 589\u003c\/p\u003e \u003cp\u003e15.5.3 Option to Scale Down 590\u003c\/p\u003e \u003cp\u003e15.6 Option to Choose 591\u003c\/p\u003e \u003cp\u003e15.7 Compound Real Options 594\u003c\/p\u003e \u003cp\u003e15.7.1 Geske Model 594\u003c\/p\u003e \u003cp\u003e15.7.2 Compound Options with Changing Volatility 598\u003c\/p\u003e \u003cp\u003e15.7.3 A Four-Phased Compound Option with Varying Volatility—A Case Example 599\u003c\/p\u003e \u003cp\u003e15.8 Estimating the Implied Project Volatility 605\u003c\/p\u003e \u003cp\u003e15.9 An Alternative Real Options Valuation Based on the Loss Function Approach 606\u003c\/p\u003e \u003cp\u003e15.9.1 The Concept of Opportunity Loss Function 607\u003c\/p\u003e \u003cp\u003e15.9.2 Valuing Real Call Option with the Standardized Loss Function Approach 607\u003c\/p\u003e \u003cp\u003e15.9.3 Valuing Real Put Option with the Standardized Loss Function Approach 612\u003c\/p\u003e \u003cp\u003e15.9.4 Determining the Correct Amount of Premium to Pay for Real Options 614\u003c\/p\u003e \u003cp\u003eSummary 618\u003c\/p\u003e \u003cp\u003eProblems 619\u003c\/p\u003e \u003cp\u003e\u003cb\u003e15A Bayesian Real Options Analysis 625\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e15A.1 Real Options Premium and Value of Information 625\u003c\/p\u003e \u003cp\u003e15A.1.1 Real Options Valuation Based on Linear Payoff Analysis 625\u003c\/p\u003e \u003cp\u003e15A.1.2 Expected Value of Perfect Information and Its Relation to Option Premium 626\u003c\/p\u003e \u003cp\u003e15A.2 Option Valuation with Opportunity to Replicate 628\u003c\/p\u003e \u003cp\u003e15A.2.1 Option Value with Imperfect Information 629\u003c\/p\u003e \u003cp\u003e15A.2.2 Revised Option Values 631\u003c\/p\u003e \u003cp\u003e15A.3 Bayesian Compound Option—Delay Real Options with Learning 632\u003c\/p\u003e \u003cp\u003e15A.3.1 A Conceptual Modeling Framework 632\u003c\/p\u003e \u003cp\u003e15A.3.2 Effects of Learning 634\u003c\/p\u003e \u003cp\u003e15A.3.3 Decision to Invest in Phase 1 with Upstream Learning 634\u003c\/p\u003e \u003cp\u003e15A.3.4 Development of a Learning Real Options Framework 635\u003c\/p\u003e \u003cp\u003e15A.3.5 Incorporating Bayesian Learning 636\u003c\/p\u003e \u003cp\u003e15A.3.6 Posterior Properties 638\u003c\/p\u003e \u003cp\u003e15A.4 A Case Study—Learning Options in Aerospace Industry 638\u003c\/p\u003e \u003cp\u003e15A.4.1 Background 638\u003c\/p\u003e \u003cp\u003e15A.4.2 Applying the Decision Model 639\u003c\/p\u003e \u003cp\u003e15A.4.3 Option Value Based on Posterior Information 640\u003c\/p\u003e \u003cp\u003e15A.4.4 Economic Interpretation 641\u003c\/p\u003e \u003cp\u003eSummary 642\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart 4 Special Topics in Engineering Economic Analysis\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e16 Evaluation of Public Investments 647\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e16.1 The Nature of Public Activities 647\u003c\/p\u003e \u003cp\u003e16.2 The Procedure of Benefit–Cost Analysis 648\u003c\/p\u003e \u003cp\u003e16.2.1 Valuation of Benefits and Costs 649\u003c\/p\u003e \u003cp\u003e16.2.2 Decision Criteria 651\u003c\/p\u003e \u003cp\u003e16.3 The Benefit–Cost Concept Applied to a Mass Transit System 654\u003c\/p\u003e \u003cp\u003e16.3.1 The Problem Statement 655\u003c\/p\u003e \u003cp\u003e16.3.2 Users’ Benefits and Disbenefits 656\u003c\/p\u003e \u003cp\u003e16.3.3 Sponsor’s Costs 662\u003c\/p\u003e \u003cp\u003e16.3.4 Benefit–Cost Ratio for Project 665\u003c\/p\u003e \u003cp\u003e16.4 Cost–Benefit\/Cost-Effectiveness Analyses 666\u003c\/p\u003e \u003cp\u003e16.4.1 Cost–Benefit Analysis 666\u003c\/p\u003e \u003cp\u003e16.4.2 Cost-Effectiveness Analysis 667\u003c\/p\u003e \u003cp\u003e16.5 Risk and Uncertainty in Benefit–Cost Analysis 667\u003c\/p\u003e \u003cp\u003e16.5.1 Exact Distribution of Benefit–Cost Ratio 668\u003c\/p\u003e \u003cp\u003e16.5.2 Exact Distribution of Incremental Benefit–Cost Ratio 669\u003c\/p\u003e \u003cp\u003e16.5.3 Computer Simulation Approach 673\u003c\/p\u003e \u003cp\u003eSummary 676\u003c\/p\u003e \u003cp\u003eProblems 677\u003c\/p\u003e \u003cp\u003e\u003cb\u003e17 Economic Analysis in Public Utilities 681\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e17.1 Utility Firms and Fair Returns 681\u003c\/p\u003e \u003cp\u003e17.2 Capital Costs for Public Utilities 682\u003c\/p\u003e \u003cp\u003e17.2.1 Debt and Equity Financing for Public Utilities 682\u003c\/p\u003e \u003cp\u003e17.2.2 Weighted After-Tax Cost of Capital 682\u003c\/p\u003e \u003cp\u003e17.2.3 Capital Recovery Cost Based on Book Depreciation Schedule 683\u003c\/p\u003e \u003cp\u003e17.3 The Revenue Requirement Method 685\u003c\/p\u003e \u003cp\u003e17.3.1 Assumptions of the Revenue Requirement Method 685\u003c\/p\u003e \u003cp\u003e17.3.2 Determination of Annual Revenue Requirements 686\u003c\/p\u003e \u003cp\u003e17.3.3 Effect of Inflation in Revenue Requirements 689\u003c\/p\u003e \u003cp\u003e17.4 Equivalence of the Present Value and Revenue Requirement Methods 692\u003c\/p\u003e \u003cp\u003e17.4.1 The A\/T Equity Cash Flows and Revenue Requirement Series 692\u003c\/p\u003e \u003cp\u003e17.4.2 Important Results Regarding the Equivalence of the PV and RR Methods 694\u003c\/p\u003e \u003cp\u003e17.5 Flow-Through and Normalization Accounting 696\u003c\/p\u003e \u003cp\u003e17.5.1 Flow-Through Method 696\u003c\/p\u003e \u003cp\u003e17.5.2 Normalizing Method 698\u003c\/p\u003e \u003cp\u003eSummary 704\u003c\/p\u003e \u003cp\u003eProblems 704\u003c\/p\u003e \u003cp\u003e\u003cb\u003e18 Procedures for Replacement Analysis 708\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e18.1 Quantifying Obsolescence and Deterioration 708\u003c\/p\u003e \u003cp\u003e18.2 Forecasting Future Data 713\u003c\/p\u003e \u003cp\u003e18.3 Basic Concepts in Replacement Analysis 715\u003c\/p\u003e \u003cp\u003e18.3.1 Sunk Costs 715\u003c\/p\u003e \u003cp\u003e18.3.2 Outsider Point of View 716\u003c\/p\u003e \u003cp\u003e18.4 Economic Life of an Asset 721\u003c\/p\u003e \u003cp\u003e18.5 Infinite Planning Period Methods 724\u003c\/p\u003e \u003cp\u003e18.5.1 No Technology or Cost Changes, AE Method 724\u003c\/p\u003e \u003cp\u003e18.5.2 Geometric Changes in Purchase Costs and O\u0026amp;M Costs, PV Method 727\u003c\/p\u003e \u003cp\u003e18.6 Finite Planning Period Methods 730\u003c\/p\u003e \u003cp\u003e18.6.1 Sensitivity Analysis of PV with Respect to Inflation 730\u003c\/p\u003e \u003cp\u003e18.6.2 Dynamic Programming Method 732\u003c\/p\u003e \u003cp\u003e18.7 Building a Data Base 738\u003c\/p\u003e \u003cp\u003e18.8 Recent Advances in Fleet Replacement Studies 740\u003c\/p\u003e \u003cp\u003eSummary 741\u003c\/p\u003e \u003cp\u003eProblems 742\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAppendix A Discrete Interest Compounding Tables A-1\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAppendix B Statistical Tables A-29\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eTable B.1 Cumulative Standard Normal Distribution A-29\u003c\/p\u003e \u003cp\u003eTable B.2 Percentage Points of the χ\u003csup\u003e2\u003c\/sup\u003e Distribution A-30\u003c\/p\u003e \u003cp\u003eTable B.3 Standard Normal Distribution Loss Function A-31\u003c\/p\u003e \u003cp\u003eIndex I-1\u003c\/p\u003e","brand":"Wiley","offers":[{"title":"Default Title","offer_id":47988666466533,"sku":"NP9781119691969","price":152.0,"currency_code":"USD","in_stock":false}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/1842\/7735\/files\/9781119691969.jpg?v=1761781185","url":"https:\/\/k12savings.com\/es\/products\/advanced-engineering-economics-isbn-9781119691969","provider":"K12savings","version":"1.0","type":"link"}