Chapter 3 of “Engineering Economic Analysis” by Newnan et al. Essay (Book Review)
Chapter 3, “Interest and Equivalence,” focuses on explaining the function of accuracy within the engineering economic system, including disbursement and the time value of money. It begins with the case of a pharmaceutical company that spent $90,000 for tools adjustment that allowed growing profits significantly. Several curiosity formulas and ideas compose the muse of the engineering economic system and help perceive potential batches and financial savings. The significance of computing cash flows lies in resolving engineering financial system issues by considering paying credit for equipment or some other penalties, the place every various can be considered a disbursement or cash receipt. A set of cash flows is a approach to resolve every of the alternate options, be it the initial cost or the last word spending period.
Money presents a valuable asset, the results of which regularly become evident in a long-time period. In this chapter, the time worth of cash is defined by the instance of banks’ offerings to pay curiosity for the provisional use of others’ money. Simple curiosity is computed on the unique sum without paying attention to accrued curiosity, which is said to be a great place to begin for comprehending the concept and usefulness of compound curiosity. The latter is used in follow more often than the straightforward interest as a result of unpaid interest is added to the unpaid steadiness and regarded as curiosity on prime of interest. Repaying a debt implies the number of one of many four plans: constant principal (1), interest-only (2), fixed cost (3), and all at maturity (4), meaning that no payment is made through the recognized period.
As for equivalence, it is dependent upon the rate of interest acceptable for a person in comparison to the sum of money they presently possess. In the engineering economic system, the understanding of alternatives allows calculating a more favorable option for receiving benefits in both long- or short-term periods. More precisely, in case the sum of $109 within a yr is applicable for a person compared to today’s $100, then these two quantities may be considered equivalent. The strategy of equivalence must be utilized to compare the cash flows of various plans. It is clarified that the equivalent worth may be decided for plans sooner or later in time, depending on a chosen rate of interest. Accordingly, it is possible to evaluate the relative attractiveness of the given alternate options, which is the right method to decide their relevance for a company’s targets.
The third chapter provides varied examples that reveal the difference in repayment plans that end in different outcomes, although they are equal in nature. In construction, plans 2 and 4 are characterized by remaining and rising debt, respectively. In their flip, plans 1 and three present that money owed reduces with time, which is brought on by totally different quantities of dollar-years. It can additionally be emphasised that interest rate largely identifies equivalence because the change within the former leads to destroying the correspondence between two or more series of funds. The variances in economically equal plans may be expressed in the threat of non-payment, which is crucial to bear in mind while making decisions. Furthermore, the chapter offers single payment compound curiosity formulas with examples and solutions. Nominal and effective interest formulas with detailed explanations contribute to an in-depth understanding of the chapter content, promoting consciousness of using these theoretical underpinnings in practical settings.