Question

Engineering Economic Analysis

PLEASE TYPE OUT THE RESPONSE TO EACH QUESTION

• Why is an understanding of depreciation important in performing economic analyses?

• After learning in CH 8 about depreciation, which is a non-cash expense, how does the method used affect income taxes, and why is this important from an economic analysis perspective?

• How does rationing affect Capital Decisions? Distinguish between Independent Opportunities and Mutually Exclusive Opportunities.

• Please explain from a risk perspective, the potential ramifications of making an incorrect Capital Budgeting Decision - think beyond just dollars.

Answer 1

Economic depreciation is a measure of the fall in market value of an asset in a given time period due to various economic influences.

Explanation:

Economic analysis considers the costs that can be foregone while maximizing the returns in a market economy.

Understanding economic depreciation is essential in analyzing the economic trends in that , depression accounts for the loss of value in an asset over time. This can influence the expectation of future revenues in the transactions of goods and services.

Depreciation reduces the value of an asset. It increases the expenses of maintaining the asset thereby reducing its book value in the balance sheet thereby having a great impact in a firms overall financial position. Most fixed assets are procured with credit meaning that payment will take time. If an asset is paid for in full , it is entered s a debit for the value of the asset and as a credit for the payment.

Companies will use their financial flow for the fixed assets. The use of depreciation helps reduce the taxes thereby increasing the net income which is vital in evaluating the operating cash flow for a firm. Understanding depreciation in the non-cash expenses is important to the economic analysis in that it can be used to identify the potential financial growth in the company.

Rationing affects capital decisions in that , firms are restrained from capital availability in executing all projects thereby prioritizing in the projects that will have a high impact in the shareholders' value.

Independent opportunities refer to the existence of two projects whose cash flow and profitability is independent of each other.

Mutually exclusive opportunities refer to the case where a firm will have to choose only one project to undertake.

Incorrect capital budgeting decisions can bring a loss in the expected returns potential. It can limit the financial cash flows to a firm by accounting wrongly for the future expected cash to be generated from a project the firm may want to undertake.