Review of:“ MAINTAINABILITY AND MAINTENANCE MANAGEMNT” by Joseph D. Patton,Jr., Instrument Society of America,Research Triangle Park,N.C., 1980, xiii + 441 pages,list $35.00.

To affect the actual project selection process of a corporate research lab, the project selection process needs to be simple and transparent enough to ensure effective communication among project leaders, research implementers and technology strategists. In this way, the project selection process stimulates project creation. If net present value (NPV) is our project criterion, this requires simplified NPV formulas. In this paper, we develop such formulas in the context of a major application.     

A review of: “PROJECT MANAGEMENT IN MANUFACTURING AND HIGH TECHNOLOGY OPERATIONS” by Adedeji B. Badiru,John Wiley and Sons,Inc., New York, 1988, xxii + 319 pp., ISBN 0471-62892-1, List $44.95.

The conventional approach to considering working capital cash flows in capital budgeting is to omit them or include some ad hoc figures at the initiation and termination of the project. The authors argue for an endogenous system of estimating relevant working capital cash flows on a periodic basis. Otherwise, the present value of working capital cash flows is biased against the project's acceptance. Examples of calculating working capital cash flows as related to changes in annual sales are presented for three time patterns of sales and contrasted to the conventional method. An empirical study of the linear relationship of net working capital and sales revenue of 770 companies is reported, and an alternative cash flow model is offered thai includes working capilal cash flows.     

A review of: “ENGINEERING ECONOMY WITH COMPUTER APPLICATIONS”, by Dr. Arup K. Mnllik,Engineering Technology,Inc., Mahomet,Illinois, 1979, 289 pages,list 517.95.

This paper applies option pricing analysis to the problem of valuing the abandonment option of an investment proposal. The assumption is made that the abandonment option is exercisable at only one point in time in the future and that the project's vatue-in-use and its abandonment value are lognormally distributed. The model is employed to measure how the uniqueness of the project asset, as measured by the correlation between these two lognormal random variables, affects the value of the abandonment option. It is shown that the more unique the asset, or the higher the correlation, the lower is the value of the abandonment option. The model is also employed to examine the impact of increased uncertainty in these two random variables on the value of the abandonment option. The relationships are shown to be nonmonotonic. However, beyond critical thresholds, increased uncertainty in either one of the two variables enhances the value of the abandonment option.     

A Review of: “ECONOMIC ANALYSIS AND INVESTMENT DECISIONS” by Chi U. Ikoku,John Wiley and Sons,New York, 1985, xx + 277 pp., ISBN 0471-81455-5, List $34.95.

(Payback Plus 2.0 is an updated version of PAYBACK which had earlier been released by the Society of Manufacturing Engineers (SME). This new software package is published and distributed by MiCAPP Inc., 16956 230th Avenue, Big Rapids, Michigan 49307. It is available for the IBM-PC or compatible equipment; the advertised list price is £99 + £4 shipping and handling.)     

A review of: “COST ENGINEERING FOR EFFECTIVE PROJECT CONTROL” by Sol A. Ward,John Wiley & Sons,New York,NY, 1992, viii + 227 pp., ISBN 0-471-52851-X. List $54.95.

Our survey of the investor-owned electric utility companies and utility commissions indicates that the use of asset pricing models for estimating the cost of equity is limited in this industry. The respondents cite unfamiliarity with the arbitrage-pricing model as a main reason for not using it. Use of the capital asset pricing model is also less than one would expect. However, deregulation of the industry could create a need for more-precise quantification of risk. In the new environment, utility companies may find asset-pricing models more useful.     

Jiangsu Jinsheng Industry Co.,Ltd.

Jiangsu Jinsheng Industry Co., Ltd, a joint venture company cooperated by Saurer AG, Swiss and Jinsheng, is one of the Top- 100 private technical enterprises of Jiangsu province, with 1,200 employees, RMB 500 million Yuan of assets and several subsidiar- ies including Saurer (Jintan) Textile Machinery Co., Ltd., Jintan Texparts Component Co., Ltd., Jiangsu Jiangsu Jinsheng Automo- bile Air Conditioner Pipe Parts Co., Ltd., Jinsheng Huamao Tech- nical Development Co., Ltd., Jian…     

A review of: “ENGINEERING RELIABILITY: FUNDAMENTALS AND APPLICATIONS”by R. RAMKUMAR Prentice Hall,Englewood Cliffs,New Jersey 1993, xiii + 482 pp. ISBN: 0-13-1767597. List: $70.00.

This paper presents a Real Tune Computer Aided Process Planning (RTCAPP) system which can serve as a support tool for economic decision making during design activities. The system is capable of providing the information about manufacturing implication of each added design feature to the designer during the design process of prismatic parts. A knowledge-based system using a bierarchical planning scheme and a multi-bank rule base is developed to generate near-optimal process plans in real time. The planning process is supported by an optimization module which uses dynamic programming to minimize manufacturing costs. The incremental planning mechanism utilizes as much of the existing plan information as is necessary to generate a new process plan, whenever the design is updated. The system serves as an effective concurrent engineering tool that can be used to provide real time feedback on the manufacturing cost consequences to the designer     

A review of: “REAL OPTIONS: MANAGERIAL FLEXIBILITY AND STRATEGY IN RESOURCE ALLOCATION ” BY LENOS TRIGEORGIS The MIT Press,ISBN: 0-262-20102-X., xiii + 427 pp. List: $52.95.

One of the more controversial aspects of a public utility rate case is the determination of the cost of equity component of the allowed return. In practice, the Capital Asset Pricing Model, CAPM, and the Discounted Cash Flow Model, DCF, are used for this purpose. The difficulties in using the CAPM have been documented elsewhere. This note examines the DCF model.

The DCF implicitly assumes that earnings and dividends are growing at a constant rate. When dividend changes are in discrete jumps, the underlying assumptions of the DCF model have been violated. This note derives a DCF model for dividend changes that occur in discrete jumps.     

A Review of: “MODELING THE SUPPLY CHAIN” BY JEREMY R SHAPIRO Duxbury Press,Pacific Grove,California, 2001, xv + 586 pp. ISBN 0-534-37363-1. List: $71.95.

In this paper, we measure economic profit in an inflationary environment. Inflation adjusted economic profit requires two principal alterations to Economic Value Added (EVA[rgrave]). First, because inflation increases the replacement cost of non-current assets above book value, one must make a downward adjustment to EVA[rgrave] to correctly measure economic profit. Second, we add a term to EVA[rgrave] to represent a manager's ability to increase product price as costs increase. This adjustment is positive because this ability adds value to a firm. When a firm's assets are largely current, the first adjustment is not necessary, and therefore, the second dominates. In this case, EVA[rgrave] underestimates economic profit. Economic profit remains positive when a firm's rate of return on invested capital, after tax and after depreciation, is less than the weighted average cost of capital by as much as the rate of inflation. Even when inflation is modest, unadjusted EVA[rgrave] has the potential to seriously misrepresent the operating performance of a firm.     

A Review of“BUSINESS INVESTMENT POLICY”* A Critical Review GEORGE TERBORGH: Machinery and Allied Products Institute and Council for Technological Advancement, 1200 Eighteenth Street,N.W., Washington,D.C., 1958. 260 pp. $6 (A MAPI Study and Manual)

In my previous article on “Project Justification in a Multi-product Chemical Plant”, which appeared in the Fall 1959 issue of The Engineering Economist, I discussed the underlying causes for equipment acquisition and replacement in the chemical industry, and followed with a presentation of the payout-time technique for evaluating capital expenditure, as designed by a leading dye and pharmaceutical plant. Many other well-known techniques, such as the Annual Cost method, the Discounted Cash Flow, and the MAPI approach, are also available to management. However, none of the techniques mentioned relieves management of the basic responsibility for making the ultimate decisions regarding capital acquisition for expansion or replacement. The methods do present management with an analysis pointing up the relative merits of a given type of investment, and give some indication as to which alternative is the more desirable. Management, nevertheless, must assume responsibility for the final decision.