TITLE : ECONOMIC AND FINANCIAL ANALYSIS OF CAPITAL INVESTMENTS.

This book is intended to be used as a general text in the area of economic analysis. To a large extent, it deals with the techniques for evaluating and comparing capital expenditures. Although much has been written about these techniques, it is felt that this book provides additional depth and insight into these techniques as a result of its detailed tax considerations and explicit consideration of financing capital expenditures by combinations of debt and equity. Furthermore, it shows the direct relationship between the definition of cash flow and cost of capital. Much of this is accomplished through a technique used by public utility companies for the evaluation of capital expenditures: the generation of minimum annual revenue requirements. This technique has long been used by public utilities but, for some reason, is not usually included in most discussions regarding the techniques for evaluating capital expenditures. This is unfortunate since it provides an excellent vehicle by which to show, numerically, the relationship between cash flow and cost of capital. In addition, it allows the inclusion of detailed tax considerations into cost comparisons and replacement analysis. Also, the technique provides a means of determining the short-term (yearly) effect of a particular capital expenditure on the gross income requirements of the company.

The basic approach taken in this book is to show and explain the "traditional approaches'' and techniques for evaluating capital expenditures and then extends them to include, explicitly, taxes and debt financing. This is accomplished through the extensive use of detailed numerical examples followed by a discussion of the theoretical aspects. In these discussions a definite attempt has been made to correlate some of the vocabulary used in the areas of finance, accounting, and engineering economy. To some readers of this text, this might be a problem. However, it is worth the effort since, in practice, the vocabulary and terminology in these areas is often used interchangeably. In general, this book is limited to point estimates of the variables involved in the analysis of ca,pital expenditures. However, Chapter 12 does provide an introduction to the probabilistic case. It is believed that this chapter provides a foundation on which to consider more advanced topics.

I take this opportunity to thank my wife Jane and our children Bob and Bartie for their patience and encouragement. Also, I am grateful to Sandra Brewster who typed the final manuscript.

G.T. Stevens, Jr.