- Email: [email protected]
Books for engineering economics education
307
BOOKS FOR ENGINEERING A REGULAR R.
ECONOMICS EDUCATION
BOOK REVIEW (PART III)
F. de la Mare
INTRODUCTION This article is the third in this series of book reviews. The rationale for the rating scheme used in this article is to be found in Vol. 1 No. 2 (Jiinc 1976) of this international journal. The numerical ratings of the books reviewed in this article are to be found in Table 1 on p. 309 of this article. F. ASSESSING PROJECTS, A Programme For Learning, by Imperial Chemical imiustries Ltd., Methuen. 19 72, 6 booklets cosring 45~. each. 384 (total) pages This set of six booklets presents the most comprehensive programme learning text on the capital budgeting decision that I have ever studied. The topics covered are: Book 1 Discounted Cash Flow Book 2 A Publishing Project Book 3 A Manufacturing Project Book 4 Sensitivity Analysis Book 5 Risk Analysis Book 6 Replacing Equipment. Book I deals with the relationships which exist between: simple and compound interest terms: present value and future value: net present value and DCF rate of return on investment. The definition and explanation of the meaning of the DCF rate of return is quite
profound and constitutes the best explanation on the subject by all those books assessed to date. This book is naturally meant for the uninitiated reader and being a programmed tcs! would give the impression of being repetilive, if studied by someone already acquainted with these capital budgeting techniques. However, the experienced reader would do well to study items 82 and 83, as listed in the book, to test his/her understanding of the meaning of the DCF rate of return. The book ends with a good but brief statement of the need to consider both inflation and uncertainty when assessing capital projects. The uncertainty aspect is well covered in Books 4 and 5 but unfortunately the effects of inflation do not feature elsewhere in the series. Book 2 attempts to define “protit” with a view to explaining the reason behind the motives for increasing wealth. The definition is inadequate however. The real world project involved with publishing this series of six booklets is then used to test the likelihood of the venture being profitable. Furthermore, the book introduces the idea of Corporation Tax and notions of taxation allowances. Unfortunately, much of the book repeats the contents of Book I and is somewhat boring. It does, however, terminate with a Test Paper which is
an excellent idea for testing the reader’s comprehension of Books 1 and 2: the answers are given but are well separated from the bulk of the questions. Book 3 uses a make-believe project (conce:ned with the production and sale of a new plastic) to describe how a new capital project should be analysed. Make-believe memoranda and conversations also help to give the text a feel of reality. The central purpose of this book is the development of a matrix of results showing the effects of different plant sizes and different time delays on the economic merits of the project (measured both as NPVs and DCFs). The book mentions that the choice between projects should be made considering the company’s investment strategy as a whole hut it falls short of a profound explanation of the reasons why the project with the greatest NPV was selected as lhe best choice. This is no real criticism of the book however because very few books on Management Economics really cover this aspect properly. All of the NPV/DCF calculations in this bcok incorporate Corpora:ion Tax and taxation allowances and the treatment of these aspects is quite excellent. (Note: some of the taxation details are now out of date.) Book 4 is a natural extension to Book 3. It commences with a make-believe expenditure proposal, in excellent format, and a part of the narrative which would support such a proposal. The aim of the book is to explore the sensitivity of the project economics to small changes in the key factors which affect these economics. One very good aspect of this book is that it demonstrates that the sensitivity effects cannoi be summated. The book terminates by considering building the project in two stages; each stage incorporating a different technology. This is essentially the initial considerations of Sequential Analysis. Book 5 develops xhe Sensitivity Analysis, considered in Book 4, into Risk Analysis using probability density distributions and random number generators. This is quite an excellent
treatment of the subject. Furthermore, this book develops the Sequential Analysis, started in Book 4, to the point of being able to make decisions based ilpon the mean value criterion. It does not however use the more profound method of sequential analysis based upon conditional probability statistics. Book 6 deals with the optimal replacement strategy problem, using Net Present Value to Perpetuity Factors. This is a good treatment of the subject except that the effects of time horizons, different to perpetuity, are not explored. In summary these books constitute an excellent treatment of those aspects of Course A and B’ which they naturally cover. They are essentially designed for the person who needs to know “how to do the job of capital appraisal”. In some respects therefore they may be a little too detailed for the college-based student but would certainly be ideal for the practising engineer who needs to become. conversant with and be able to use these techniques. The overal ratings are 62% and 45% for Courses A and B respectively. 0. A GUIDE TO THE ECONOMIC EVALUATION OF PROJECTS, by D.H. Allen. Institw tion o,f Chemical Ettginrws, London. 1972. 44 pages. f 2.00” The question of which criteria? (the NPV or the DCF) should be used in the selection of projects has occupied the attention of managerial economists for years. The answers to this problem are known but the implementation of that answer is very complicated: it depends on the sequence of projects which followthe p:oject under review. The rationale behind which criterion should be used is based upon
309
Subject area rank scores (O-5) for book
10
10
10
5
35
20
0
0
1
0
0
0
0
0
0 0
0 0
0
2
4
3
5 :
4 3 0 0 0 2 3 43 30
2 2 0 3 1 3 4 31 38
2 3 0 0 ” 1 2 37 26
0 0 3 4 62 45
‘F: Assessing Projects. A Programme Par Laming, 1.C.1. G: A Guide lo the Economic Evsluation of Projects, by A”en. H: Strategy of Process Engineering, by Rudd and Watson, 1: Introduction to Rocesn Economics, by Holland,
the total cash flow of all futureprojects, up to some selected time hodzon, the objective being to maxim& the company’s future wealth. Professor Ezra Solomon has wril:ten widely on this aspect. For very particular reasons, Merrett and Sykes (see books A and E reviewed previously reviewed (EPE Vol. I, p. 23 1 and 2 17) are quite categoric in their choice of the DCF (on marginal investment) as being the better criterion. Allen mentions that the choice of criterion is still vigorously debated. I should like to qualify that the “vigorousiy debated” aspect revolves around the company’s future financial strategy, which is particular to the risk capacity and competence of that company’s chief executives. In conclusion therefore the decision, as to which criterion to employ, rests with the company (hopefully after having read the substance of all the debate on this subject).
In his introduction, Allen notes that the evaluation of the economic merits of a project should be concerned only with the future consequences of the project and that the project should not be concerned with PUSI decisions or the outcomes of pasI de&ions. This is a very important point in project evaluation and yet a point which is often overlooked, because emotion and politics often creep into the evaluation procedure. It is unfortunate that this guide did not elaborate upon this aspect, which is concerned with the principle ofsunk COSI. The guide also mentions that the economic merits of a project should only be concerned with the marginal changes which that project makes to the cash flow profits of the company. Quite often accotintants like to redistribute overhead costs so that a new project receives (its so called) “fair share” of overheads. An arbitrary reallocatiot overheads is irrelevant
310
to the new project decision but the total effects of the new project and the timing and quantity of resources which it involves must be properly assessed. The guide described several of the more antiquated techniques for evaluating new project ciecisions. Sometimes, of course, the most crude critari:l might suffice, if the project is v?ry lucreative or very unprofitable: indeed under such conditions the technique is nothing more than a “crutch” for the manager who instinctively can “feel the results of the project in his bones!” However, as the sacrifices and risks inherent in a project become more important to the well-being and survival of a company and the choice between alternatives becomes more complex, then the techniques of project appraisal fro longer become “crutches” to the management decision making tut an integral part of that decision process. Under such conditions, the use of techniques other than those based upon discounted cash flow principles cannot be recommended because they are useless as economic decision making tools. I feel that the guide should have emphasised this in greater detail than it has done. Likewise the multiple root DCF rate of return variant is mentioned, without the qualification that ways of overcoming this multiple root problem are available. Unlike Book F, this guide gives a whole page to the treatment of inflation. Not mentioned however is the fact that the cost of capital and the inflation rate might not be independent variables. The interested reader is recommended to consult Book A and E for a fuller appreciation of this aspect of capital budgeting. The evaluation of a project, concerned with the manufacture of DDT, is used to illustrate how the DCF/NP\- of a project should be computed. This is an excellent example though, for an understanding of the taxation effects, the interested reader would probably need to refer to supplementary texts. The treatment of incremental investment also receives consideration.
Also covered in the guide are Sensitivity Analysis, Sequential Decision Making and Risk Analysis (which could have been improved with a diagrammatic representation of the mechanistic natifre of Mont6 Carlo A xdysis). In conclusion it should be stated th. i this is a very good GUlDE bui being confined to a total of 44 pages would obviously need supplementing with more detailed texts. The corresponding overall ratings are 43% and 30% for Cor~sz A and B respectively. H. STRATEGY OF PROCESS ENGINEERING, by Rudd and Watson. Wiley, 1968, 466 pages. f 10 (hard cowl. f 6 (paper backed! This book is extremely well known to the chemical engineering profession. It addresses itself to the needs of the design engineer faced with the complex task of designing processes and plants which will hopefully be economical when performing in the very complex environment of the process industry. As such, the scope of the book is immense and the authors can only be congratulated for their vision of the task confronting the designer and the vigour with which they have examined several of the subjects covered. The book is portioned into three parts: Part I The Creation and Assessment of Alternatives Part II Optimization Part III Engineering in the Presence of Uncertainty. Because of its specialist nature, however, the book does not cover several of the topics used as criteria in this series of book reviews. The overall ratings awarded to this book therefore ax 37% and 38% for Course A and B respectively. Part I. The Creation and Assessmentof Alternatives. Chapter 2 of Part 1 is excellent. It deals with the need for a company to generate plausible alternative ways of achieving a project detini-
311 tion well before there isany attempt to appraise those alternatives. As such it is involved with the innovative skills of the designer. The question: “‘Why do it this way?” is crucial to any proper decision making process and the would-be-decision maker would do well to read this chapter hecause, too often, there is a tendency to short.circuit this vital stage tither because: GO there is a reluctance to brain-storm and search for innovative ideas. (b) people feel ‘safe” in repeating previous design principles, or CC) there is the feeling that detailed design should commence as quickly as possible in order to commercialise the process. all of which can result in lucrative alternatives being overlooked. Chapter 3: The Structure of Systems, is exclusively concerned with the rationale of design and the selection of the design variable, which the designer should use in an attempt to optimize that design. Unfortunately, I found that this chapter tended to labour the obvious. Chapter 4: Economic Design Criteria, devotes 37 pages to the topic of project ap praisal and profitability: the treatment however is inadequate and the main reason for the rather poor scores achieved by the book, when assessed against the criteria established for this series of book reviews. The treatment of depreciation is misleading and the continued use of continuous discounting is to he discouraged. Furthermore, this chapter develops the notion of “economic-life” based upon a cornplete understanding of the behaviour of the other factors influencing the project, such a treatment is naive. Chapter 5 deals with Cost Estimation. This is the best treatment of this subject yet assessed in this series of book reviews. Part II. Optimiunion. Part II deals with several algorithms which are useful for attempting to optimize a design procedure. Linear Programming, Transportation Linear Programming and
Dynamic Programming are reasonably well presented, as are some of the optimum search techniques. The merit of this section, however, is that il: places the use of such techniques into a realistic context. Part 111.Engineerin\gin the Presenceof Uncertainty. Part 111deals with Engineering in the Presence of Uncertainty. Risk and Semitivity Analysis are covered in this section bu” not in the way which is used for assessing these books. This section gives a very engineering orientated coverage of the subject. Reliability Analysis and Hazard Propagation also appear in this section. The book ends with a chapter on simulation, which is well presented and which uses real world examples. I. INTRODUCTION TO PROCESS ECONOMICS, by Hollarzd, Watson and Wilkiwotz. Wiley. 19 74.290 pages. f 2.85 (paper backed) This book is a recent newcomer to the market-place and has received much publicity. It is founded on an extensive series of articles which the authors published in the North American journal “Chemical Engineering”. The fact that the book was written by engineerS soon becomes obvious: four pages of symbols precede the text. Despite an attempt to rigorously define each and every symbol as used ir. the book however, the concepts of the Zero Year, and the exponential and factorial symbols as used in Chapter 1 remain un-lefined. Moreover. there is a point of confusion in this chapter. It says “. It is sometimes argued that continuous compound interest represents real life situations more accurately than anmral compound interest. This is debatable since neither cantjnuous nor annual compounding strictly represents the uneven cash flows in real business s.i+uations. . .” It should have been categorically stated however that the discounting technique has nothing to do with the ways in which the cash flov I arise. Often it is tacitly
312 assumed that the cash flows arise at the end of time periods (normally of a year’s duration). The assumption of continuous compounding does not affect this assumption in any way, it only assumes that somewhere in the analysis there is a fund which attracts interest on a continuous basis (which incidentally is inappropriate for most U.K. big business conditions). Moreover, it should also be stated that end of period discounting (whether of the discrete or continuous type) can lead to highly conservative results and the possibility of excluding lucrative projects from further consideration. Chapter 2: Costs and Traditional Methods of Estimating Profitability, attempts to deal with some of the accounting concepts which naturally form the back-cloth for such a book. Unfortunately, many of these concepts are not properly defined. The treatment of depreciation, however, is good. This chapter should have, but does not, destroy the myth surrounding the apparent usefulness of traditional accounting rates of return for measuring the economic merits of a project. Chapter 3 deals with the NPV/DCF criteria and incorporates all taxation effects. Like so many books on engineering economy however the cost of capital concept receives scant coverage. Chaoter 4 deals with the problem of risk and uncertainty with a good treatment of Sensitivity Analysis, whilst Chapters 5 and 6 give a reasonable treatment of cost estimation. Part III is entitled “Elements of Decision
Making”. Chapter 7 is particularly mathematic, dealing with probability density distributions and their application to problems. Although much of the mathematics is rigorous however, the assumptions underlying the use of some of these models are questionable. Unfo:tunately this last point is not developed in de:ail to help the would-be decision maker. Risk Analysis using Monte Carlo Simulation is covered in reasonable detail as is Utility Theory (that much written about but seldom used topic!). Curve fitting, exponential smoothing and linear programming appear in this chapter. However, their treatment is very cursory and seemingly very much out of context. Chapter 8: Management Considerations, is the concluding chapter and seems to be a receptacle for all sorts of bits-and-pieces. The few pages on Accounting Theory however are very good. 1 must confess that I found this a difficult book to read. This partly arises out of fhe fact that much, indeed the majority, of the book consists of symbols and equations; often with very little supporting description and argument. To some extent, I fee. that the authors have become obsessed with mathematics to the exclusion of a fundamental treatment of the concepts tnderpinning engineering economics. Moreover, I found the subject-tosubject Wow” of the book quite abrupt and, at times, seemingly out of context. The overall ratings given to this book are 37% and 26% for Courses A and B respectively.
BOOKS FOR ENGINEERING A REGULAR R.
ECONOMICS EDUCATION
BOOK REVIEW (PART III)
F. de la Mare
INTRODUCTION This article is the third in this series of book reviews. The rationale for the rating scheme used in this article is to be found in Vol. 1 No. 2 (Jiinc 1976) of this international journal. The numerical ratings of the books reviewed in this article are to be found in Table 1 on p. 309 of this article. F. ASSESSING PROJECTS, A Programme For Learning, by Imperial Chemical imiustries Ltd., Methuen. 19 72, 6 booklets cosring 45~. each. 384 (total) pages This set of six booklets presents the most comprehensive programme learning text on the capital budgeting decision that I have ever studied. The topics covered are: Book 1 Discounted Cash Flow Book 2 A Publishing Project Book 3 A Manufacturing Project Book 4 Sensitivity Analysis Book 5 Risk Analysis Book 6 Replacing Equipment. Book I deals with the relationships which exist between: simple and compound interest terms: present value and future value: net present value and DCF rate of return on investment. The definition and explanation of the meaning of the DCF rate of return is quite
profound and constitutes the best explanation on the subject by all those books assessed to date. This book is naturally meant for the uninitiated reader and being a programmed tcs! would give the impression of being repetilive, if studied by someone already acquainted with these capital budgeting techniques. However, the experienced reader would do well to study items 82 and 83, as listed in the book, to test his/her understanding of the meaning of the DCF rate of return. The book ends with a good but brief statement of the need to consider both inflation and uncertainty when assessing capital projects. The uncertainty aspect is well covered in Books 4 and 5 but unfortunately the effects of inflation do not feature elsewhere in the series. Book 2 attempts to define “protit” with a view to explaining the reason behind the motives for increasing wealth. The definition is inadequate however. The real world project involved with publishing this series of six booklets is then used to test the likelihood of the venture being profitable. Furthermore, the book introduces the idea of Corporation Tax and notions of taxation allowances. Unfortunately, much of the book repeats the contents of Book I and is somewhat boring. It does, however, terminate with a Test Paper which is
an excellent idea for testing the reader’s comprehension of Books 1 and 2: the answers are given but are well separated from the bulk of the questions. Book 3 uses a make-believe project (conce:ned with the production and sale of a new plastic) to describe how a new capital project should be analysed. Make-believe memoranda and conversations also help to give the text a feel of reality. The central purpose of this book is the development of a matrix of results showing the effects of different plant sizes and different time delays on the economic merits of the project (measured both as NPVs and DCFs). The book mentions that the choice between projects should be made considering the company’s investment strategy as a whole hut it falls short of a profound explanation of the reasons why the project with the greatest NPV was selected as lhe best choice. This is no real criticism of the book however because very few books on Management Economics really cover this aspect properly. All of the NPV/DCF calculations in this bcok incorporate Corpora:ion Tax and taxation allowances and the treatment of these aspects is quite excellent. (Note: some of the taxation details are now out of date.) Book 4 is a natural extension to Book 3. It commences with a make-believe expenditure proposal, in excellent format, and a part of the narrative which would support such a proposal. The aim of the book is to explore the sensitivity of the project economics to small changes in the key factors which affect these economics. One very good aspect of this book is that it demonstrates that the sensitivity effects cannoi be summated. The book terminates by considering building the project in two stages; each stage incorporating a different technology. This is essentially the initial considerations of Sequential Analysis. Book 5 develops xhe Sensitivity Analysis, considered in Book 4, into Risk Analysis using probability density distributions and random number generators. This is quite an excellent
treatment of the subject. Furthermore, this book develops the Sequential Analysis, started in Book 4, to the point of being able to make decisions based ilpon the mean value criterion. It does not however use the more profound method of sequential analysis based upon conditional probability statistics. Book 6 deals with the optimal replacement strategy problem, using Net Present Value to Perpetuity Factors. This is a good treatment of the subject except that the effects of time horizons, different to perpetuity, are not explored. In summary these books constitute an excellent treatment of those aspects of Course A and B’ which they naturally cover. They are essentially designed for the person who needs to know “how to do the job of capital appraisal”. In some respects therefore they may be a little too detailed for the college-based student but would certainly be ideal for the practising engineer who needs to become. conversant with and be able to use these techniques. The overal ratings are 62% and 45% for Courses A and B respectively. 0. A GUIDE TO THE ECONOMIC EVALUATION OF PROJECTS, by D.H. Allen. Institw tion o,f Chemical Ettginrws, London. 1972. 44 pages. f 2.00” The question of which criteria? (the NPV or the DCF) should be used in the selection of projects has occupied the attention of managerial economists for years. The answers to this problem are known but the implementation of that answer is very complicated: it depends on the sequence of projects which followthe p:oject under review. The rationale behind which criterion should be used is based upon
309
Subject area rank scores (O-5) for book
10
10
10
5
35
20
0
0
1
0
0
0
0
0
0 0
0 0
0
2
4
3
5 :
4 3 0 0 0 2 3 43 30
2 2 0 3 1 3 4 31 38
2 3 0 0 ” 1 2 37 26
0 0 3 4 62 45
‘F: Assessing Projects. A Programme Par Laming, 1.C.1. G: A Guide lo the Economic Evsluation of Projects, by A”en. H: Strategy of Process Engineering, by Rudd and Watson, 1: Introduction to Rocesn Economics, by Holland,
the total cash flow of all futureprojects, up to some selected time hodzon, the objective being to maxim& the company’s future wealth. Professor Ezra Solomon has wril:ten widely on this aspect. For very particular reasons, Merrett and Sykes (see books A and E reviewed previously reviewed (EPE Vol. I, p. 23 1 and 2 17) are quite categoric in their choice of the DCF (on marginal investment) as being the better criterion. Allen mentions that the choice of criterion is still vigorously debated. I should like to qualify that the “vigorousiy debated” aspect revolves around the company’s future financial strategy, which is particular to the risk capacity and competence of that company’s chief executives. In conclusion therefore the decision, as to which criterion to employ, rests with the company (hopefully after having read the substance of all the debate on this subject).
In his introduction, Allen notes that the evaluation of the economic merits of a project should be concerned only with the future consequences of the project and that the project should not be concerned with PUSI decisions or the outcomes of pasI de&ions. This is a very important point in project evaluation and yet a point which is often overlooked, because emotion and politics often creep into the evaluation procedure. It is unfortunate that this guide did not elaborate upon this aspect, which is concerned with the principle ofsunk COSI. The guide also mentions that the economic merits of a project should only be concerned with the marginal changes which that project makes to the cash flow profits of the company. Quite often accotintants like to redistribute overhead costs so that a new project receives (its so called) “fair share” of overheads. An arbitrary reallocatiot overheads is irrelevant
310
to the new project decision but the total effects of the new project and the timing and quantity of resources which it involves must be properly assessed. The guide described several of the more antiquated techniques for evaluating new project ciecisions. Sometimes, of course, the most crude critari:l might suffice, if the project is v?ry lucreative or very unprofitable: indeed under such conditions the technique is nothing more than a “crutch” for the manager who instinctively can “feel the results of the project in his bones!” However, as the sacrifices and risks inherent in a project become more important to the well-being and survival of a company and the choice between alternatives becomes more complex, then the techniques of project appraisal fro longer become “crutches” to the management decision making tut an integral part of that decision process. Under such conditions, the use of techniques other than those based upon discounted cash flow principles cannot be recommended because they are useless as economic decision making tools. I feel that the guide should have emphasised this in greater detail than it has done. Likewise the multiple root DCF rate of return variant is mentioned, without the qualification that ways of overcoming this multiple root problem are available. Unlike Book F, this guide gives a whole page to the treatment of inflation. Not mentioned however is the fact that the cost of capital and the inflation rate might not be independent variables. The interested reader is recommended to consult Book A and E for a fuller appreciation of this aspect of capital budgeting. The evaluation of a project, concerned with the manufacture of DDT, is used to illustrate how the DCF/NP\- of a project should be computed. This is an excellent example though, for an understanding of the taxation effects, the interested reader would probably need to refer to supplementary texts. The treatment of incremental investment also receives consideration.
Also covered in the guide are Sensitivity Analysis, Sequential Decision Making and Risk Analysis (which could have been improved with a diagrammatic representation of the mechanistic natifre of Mont6 Carlo A xdysis). In conclusion it should be stated th. i this is a very good GUlDE bui being confined to a total of 44 pages would obviously need supplementing with more detailed texts. The corresponding overall ratings are 43% and 30% for Cor~sz A and B respectively. H. STRATEGY OF PROCESS ENGINEERING, by Rudd and Watson. Wiley, 1968, 466 pages. f 10 (hard cowl. f 6 (paper backed! This book is extremely well known to the chemical engineering profession. It addresses itself to the needs of the design engineer faced with the complex task of designing processes and plants which will hopefully be economical when performing in the very complex environment of the process industry. As such, the scope of the book is immense and the authors can only be congratulated for their vision of the task confronting the designer and the vigour with which they have examined several of the subjects covered. The book is portioned into three parts: Part I The Creation and Assessment of Alternatives Part II Optimization Part III Engineering in the Presence of Uncertainty. Because of its specialist nature, however, the book does not cover several of the topics used as criteria in this series of book reviews. The overall ratings awarded to this book therefore ax 37% and 38% for Course A and B respectively. Part I. The Creation and Assessmentof Alternatives. Chapter 2 of Part 1 is excellent. It deals with the need for a company to generate plausible alternative ways of achieving a project detini-
311 tion well before there isany attempt to appraise those alternatives. As such it is involved with the innovative skills of the designer. The question: “‘Why do it this way?” is crucial to any proper decision making process and the would-be-decision maker would do well to read this chapter hecause, too often, there is a tendency to short.circuit this vital stage tither because: GO there is a reluctance to brain-storm and search for innovative ideas. (b) people feel ‘safe” in repeating previous design principles, or CC) there is the feeling that detailed design should commence as quickly as possible in order to commercialise the process. all of which can result in lucrative alternatives being overlooked. Chapter 3: The Structure of Systems, is exclusively concerned with the rationale of design and the selection of the design variable, which the designer should use in an attempt to optimize that design. Unfortunately, I found that this chapter tended to labour the obvious. Chapter 4: Economic Design Criteria, devotes 37 pages to the topic of project ap praisal and profitability: the treatment however is inadequate and the main reason for the rather poor scores achieved by the book, when assessed against the criteria established for this series of book reviews. The treatment of depreciation is misleading and the continued use of continuous discounting is to he discouraged. Furthermore, this chapter develops the notion of “economic-life” based upon a cornplete understanding of the behaviour of the other factors influencing the project, such a treatment is naive. Chapter 5 deals with Cost Estimation. This is the best treatment of this subject yet assessed in this series of book reviews. Part II. Optimiunion. Part II deals with several algorithms which are useful for attempting to optimize a design procedure. Linear Programming, Transportation Linear Programming and
Dynamic Programming are reasonably well presented, as are some of the optimum search techniques. The merit of this section, however, is that il: places the use of such techniques into a realistic context. Part 111.Engineerin\gin the Presenceof Uncertainty. Part 111deals with Engineering in the Presence of Uncertainty. Risk and Semitivity Analysis are covered in this section bu” not in the way which is used for assessing these books. This section gives a very engineering orientated coverage of the subject. Reliability Analysis and Hazard Propagation also appear in this section. The book ends with a chapter on simulation, which is well presented and which uses real world examples. I. INTRODUCTION TO PROCESS ECONOMICS, by Hollarzd, Watson and Wilkiwotz. Wiley. 19 74.290 pages. f 2.85 (paper backed) This book is a recent newcomer to the market-place and has received much publicity. It is founded on an extensive series of articles which the authors published in the North American journal “Chemical Engineering”. The fact that the book was written by engineerS soon becomes obvious: four pages of symbols precede the text. Despite an attempt to rigorously define each and every symbol as used ir. the book however, the concepts of the Zero Year, and the exponential and factorial symbols as used in Chapter 1 remain un-lefined. Moreover. there is a point of confusion in this chapter. It says “. It is sometimes argued that continuous compound interest represents real life situations more accurately than anmral compound interest. This is debatable since neither cantjnuous nor annual compounding strictly represents the uneven cash flows in real business s.i+uations. . .” It should have been categorically stated however that the discounting technique has nothing to do with the ways in which the cash flov I arise. Often it is tacitly
312 assumed that the cash flows arise at the end of time periods (normally of a year’s duration). The assumption of continuous compounding does not affect this assumption in any way, it only assumes that somewhere in the analysis there is a fund which attracts interest on a continuous basis (which incidentally is inappropriate for most U.K. big business conditions). Moreover, it should also be stated that end of period discounting (whether of the discrete or continuous type) can lead to highly conservative results and the possibility of excluding lucrative projects from further consideration. Chapter 2: Costs and Traditional Methods of Estimating Profitability, attempts to deal with some of the accounting concepts which naturally form the back-cloth for such a book. Unfortunately, many of these concepts are not properly defined. The treatment of depreciation, however, is good. This chapter should have, but does not, destroy the myth surrounding the apparent usefulness of traditional accounting rates of return for measuring the economic merits of a project. Chapter 3 deals with the NPV/DCF criteria and incorporates all taxation effects. Like so many books on engineering economy however the cost of capital concept receives scant coverage. Chaoter 4 deals with the problem of risk and uncertainty with a good treatment of Sensitivity Analysis, whilst Chapters 5 and 6 give a reasonable treatment of cost estimation. Part III is entitled “Elements of Decision
Making”. Chapter 7 is particularly mathematic, dealing with probability density distributions and their application to problems. Although much of the mathematics is rigorous however, the assumptions underlying the use of some of these models are questionable. Unfo:tunately this last point is not developed in de:ail to help the would-be decision maker. Risk Analysis using Monte Carlo Simulation is covered in reasonable detail as is Utility Theory (that much written about but seldom used topic!). Curve fitting, exponential smoothing and linear programming appear in this chapter. However, their treatment is very cursory and seemingly very much out of context. Chapter 8: Management Considerations, is the concluding chapter and seems to be a receptacle for all sorts of bits-and-pieces. The few pages on Accounting Theory however are very good. 1 must confess that I found this a difficult book to read. This partly arises out of fhe fact that much, indeed the majority, of the book consists of symbols and equations; often with very little supporting description and argument. To some extent, I fee. that the authors have become obsessed with mathematics to the exclusion of a fundamental treatment of the concepts tnderpinning engineering economics. Moreover, I found the subject-tosubject Wow” of the book quite abrupt and, at times, seemingly out of context. The overall ratings given to this book are 37% and 26% for Courses A and B respectively.