Cash Costs Versus Book Costs.

A cash cost requires the cash transaction of dollars "out of one person's pocket" into "the pocket of someone else." When you buy dinner for your friends or make your monthly automobile payment you are incurring a cash cost or cash flow.Cash costs and cash flows are the basis for engineering economic analysis.

Book costs do not require the transaction of dollars "from one pocket to another." Rather, book costs are cost effects from past decisions that are recorded "in the books" (accounting books) of a firm. In one common book cost, asset depreciation (which we discuss in Chapter 11), the expense paid for a particular business asset is "written off" on a company's accounting sy'stemover a number of periods. Book costs do not ordinarily represent cash flows and thus are not included in engineering economic analysis. One exception to this is the impact of asset depreciation on tax payments-which are cash flows and are included in after-tax analyses.


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