Chapter four of “Engineering Economic Analysis” by Newnan et al. Essay (Book Review)
In the fourth chapter of their guide, Newnan, Eschenbach, and Lavelle construct on the ideas offered in chapter three – the fundamental ideas of economic engineering evaluation. The chapter introduces the reader to complex problems in financial analysis and presents formulation to work with uniform collection money flows and arithmetic/geometric gradient money flows. The first portion of the chapter is the “Student solar power” case devoted to engineering students in Indiana who analyze the feasibility of their emergency lighting system using sunlight power (Newnan et al., 2018, p. 110). After getting acquainted with the case, the readers are imagined to reflect on 5 questions concerning calculations, the character of costs, and different practical problems.
The next parts of the text are dedicated to practical options helping to gauge choices and the long-term financial outcomes of their implementation. Thus, within the part titled “Uniform series compound interest formulation,” the researchers provide formulation to estimate the expected benefits and costs if there’s a uniform series of funds (Newnan et al., 2018, p. 112). Different ways to characterize information graphically, together with tables for assumptions, are specified and discussed. Step by step, the researchers clarify the notion of the uniform collection compound amount issue, which permits calculating a future single sum. They additionally provide sensible tips for these utilizing Microsoft Excel for calculations. Thus, the fundamental Excel functions serving to to calculate annuities are listed in a well-organized way. To continue, the part “Cash flows that don’t match basic patterns” explains mismatches between totally different diagrams and methods to keep away from this problem (Newnan et al., 2018, p. 120). In particular, some approaches to presenting money circulate diagrams in a normal form are introduced and defined with examples.
Then, in the part “Economic equivalence considered as a moment diagram,” the authors use similarities between money move diagrams and drive diagrams to further illustrate the idea of economic equivalence (Newnan et al., 2018, p. 125). On such diagrams, constructive and negative money flows represent positive and unfavorable forces. This approach to instructing the topic of financial equivalence was developed by Matson and Elizandro greater than ten years ago. In the following subsection, “Relationships between compound interest components,” the authors summarize relationships between compound amount/present price factors in particular person payments (Newnan et al., 2018, p. 127). For the uniform sequence of payments, relationships between capital restoration and present worth components and between compound amount and sinking fund components are established.
The following components of the chapter current new features of financial evaluation by introducing the notions of arithmetic and geometric gradients. The authors decompose cash flows and graphically depict two of its parts – fixed amounts and changes between intervals. They use a sequence of rising money flows to demonstrate how the arithmetic gradient components are derived. This information is then applied to unravel problems and calculate prices given steadily increasing upkeep bills.
The half titled “Geometric gradient” discusses a different scenario, during which the amount of change between intervals is unstable, whereas the speed of progress is fixed (Newnan et al., 2018, p. 135). The method to derive the geometric series current worth factor and use it to unravel tasks with the uniform price of growth is demonstrated with the assistance of examples and pattern problems. In the section named “Spreadsheets for financial analysis,” the authors focus on spreadsheets as the software for engineers (Newnan et al., 2018, p. 139). In particular, attention is paid to money flows illustrated with the help of tables, annuity capabilities in Excel, graphs for data presentation, and the basics of what-if evaluation. In the next part, the method to calculating prices on circumstance that cost and compounding intervals are dissimilar is mentioned. Finally, the chapter ends with a full record of formulas and notations with definitions.
Newnan, D. G., Eschenbach, T. G., & Lavelle, G. P. (2018). Engineering financial analysis (13th ed.). New York, NY: Oxford University Press.