Engineering Economics Analysis (Part 2 of 2)

Explore supplementary analysis to assess how uncertainty in data and assumptions affects project feasibility, focusing on sensitivity and break-even analyses, with notes on risk analysis and Monte Carlo simulations.

Learn to perform sensitivity analysis by varying inputs such as investment, planning horizon, annual savings, salvage value, and minimum attractive rate of return, noting annual savings is most sensitive.

Break-even analysis determines the minimum annual sales required to cover costs and compares one-stage versus two-stage construction using present equivalents, annual equivalents, and future equivalents.

Explore capital budgeting techniques for evaluating single and multiple investments under a capital constraint. Learn enumeration and mathematical programming methods to select independent, mutually exclusive, or contingent projects.

Apply the enumeration method to identify feasible project bundles, compute each bundle's cash flows, enforce budget, dependency, and feasibility constraints, and rank by present equivalent to select the best option.

Explore mathematical programming as an optimization tool for capital budgeting, identifying binary decision variables and the objective to maximize the present equivalent under a budget constraint.

Explore the concept of depreciation, distinguishing economic depreciation from accounting depreciation, including physical and functional forms, and how costs are allocated over useful life for tax and book purposes.

Identify depreciable assets, calculate cost basis including related costs, estimate useful life and salvage value, and note that depreciation method selection is covered in a future lecture.

Examine book depreciation methods—straight-line, units of production, sum-of-years-digits, and declining balance—and compare them with tax depreciation such as capital cost allowance and MACRS for financial reporting and taxes.

Learn the straight line depreciation method, allocating the cost basis less salvage value evenly over an asset's useful life, and calculating the annual depreciation and the resulting book value.

Utilize the units of production method, opposite to straight-line depreciation, to forecast annual service and depreciate assets proportionally to actual usage, illustrated with an excavator and car example.

Learn the sum-of-years-digits method, an accelerated depreciation approach that front-loads depreciation in early years, using cost minus salvage over the asset’s life to compute yearly depreciation and book value.

Explore the declining balance depreciation method, its constant rate and depreciation calculations, and how to switch to straight-line to ensure the end of life book value matches salvage value.

Apply the double declining balance method with a 40% rate to compute depreciation and book value, adjusting with straight-line if needed to match the salvage value.

Compare five depreciation methods—straight line, declining balance, sum of four years digits, double declining balance, and units of production—on a chart from a $10,000 cost basis to $2,000 salvage.

Choose depreciation methods by policy; in Canada, straight-line is common for accounting, while accelerated methods such as declining balance or double declining balance reduce taxes.

Explore the capital cost allowance tax depreciation method in Canada, including class-based rates, the 50% half-year convention, and the key tax terms and calculations.

Learn how taxes shape engineering economic analysis by treating taxes as expenses, and focusing on corporate income tax, tax rates, and taxable income to assess project feasibility.

Describe taxable income and tax rates, including deductions, depreciation (capital cost allowance) and interest, and demonstrate how after-tax cash flow differs from before-tax cash flow in Canadian engineering economics.

Explore the difference between net income and net cash flow in corporate analysis, using a Nova Scotia case to show capital cost allowance and tax effects on cash flow.

Analyze the disposal tax effect on after tax cash flow by comparing salvage value to under-appreciated capital cost at disposal across three cases, yielding a net salvage value.

Demonstrate ATCF analysis by calculating gross income, expenses, interest, taxes, net salvage value, disposal tax effects, and taxable income to assess IRR and present value.

Learn how depreciation and capital cost allowance under class 43 affect after tax cash flow, disposal tax, and salvage value, with present equivalent calculations under a corporate tax framework.

This lecture demonstrates calculating after-tax cash flow with depreciation and a bank loan, analyzing salvage value, loan repayments, taxes, and present value.

Understand replacement analysis for existing assets, weighing maintenance, performance, and salvage value to decide what to replace. A forklift case compares electric vs gasoline options and introduces defender versus challenger.

Identify defender and challenger roles in replacement analysis, compare market value and operating costs, and justify optimal replacement timing while ignoring sunk costs.

Compare the defender and the challenger from insider cash-flow and outsider opportunity-cost viewpoints; determine the cheaper option via initial investment, salvage values, and operating costs using annual or present-value equivalents.

The lecture explains how to determine the economic service life of an asset by minimizing the equivalent uniform annual cost, balancing capital recovery and operating costs.

Determine the optimal replacement time for assets by analyzing cash flow patterns, revenues, costs, and technology changes within a planning horizon to maximize profit or minimize costs.

Determine the optimal replacement time for an asset with finite planning horizon by comparing defender and challenger economic service lives using their equivalent uniform annual costs.

Determine the optimal replacement schedule under a finite eight-year planning horizon by evaluating multiple defender-to-challenger patterns and selecting the cheapest present or annual cost using EUAC.

Explore how public sector projects assess economic and social impacts beyond profit, using feasibility studies and benefit-cost analysis to weigh benefits, costs, and effects on communities.

Compare social benefits to social costs through the benefit-cost ratio, identifying users' benefits and sponsors' costs, quantify in monetary terms, and deem investments feasible when the ratio exceeds one.

Identify and quantify user benefits and costs of a provincial motor vehicle inspection program, including safety gains, productivity retention, and savings, while noting user costs like time and inspection fees.

Quantify the benefits and costs of a motor vehicle inspection program by monetizing fatalities avoided, property damage savings, and time costs, then analyze sponsor costs and revenues.

Compare conventional and modified benefit-cost ratios, or profitability index, using present or annual equivalents, and consider initial cost, operating and maintenance costs, and salvage value.

Apply the incremental benefit-cost ratio to compare multiple public alternatives, arrange by cost, compute delta benefits and costs, and select the design with the highest ratio using conventional and modified BCR.

Determine the true minimum attractive rate of return (MARR) by comparing IRR to the MARR, highlighting feasibility decisions and the roles of capital cost and opportunity cost.

Explore internal and external sources of capital, including debt and equity, such as retained earnings, stock issuance (common and preferred), loans, mortgages, and bonds for project financing.

Understand how a company’s debt–equity mix defines capital structure, influences taxes and returns on equity, and drives balanced financing strategies for cost of capital.

Balance debt and equity to optimize weighted average cost of capital and learn to compute it from retained earnings, new common stock, flotation costs, loans, and bonds, including tax effects.

Calculate the weighted average cost of capital for a 40/60 debt–equity mix and implement MARR-based project evaluation by determining each funding source's cost to reach a 14.71% WACC.

Rank projects by internal rate of return under capital budget limits, identifying opportunity cost. Use the best rejected project's rate of return to determine the minimum attractive rate of return.

Choose the maximum of the weighted average cost of capital and the opportunity cost as the minimum attractive rate of return, then adjust for risk and uncertainty.

Explore how governments set the minimum attractive rate of return for public sector investments using no time value, borrowing costs, and taxpayer opportunity costs.