Chapter 6 of “Engineering Economic Analysis” by Newnan et al. Essay (Book Review)

The sixth chapter focuses on the annual cash flow analysis as one of the main approaches of the company’s cash inflows and outflows examination over a particular time, which determines alternatives into comparable values. If an alternative’s cost is P and the recovering value is S, then there exist three interchangeable ways to calculate EUAC (the relationship between the present worth of cost and the annual cost equivalent). One of the three criteria needs to be met to conduct the annual cash flow analysis: 1) no output/input – maximize EUAW (EUAB – EUAC); 2) fixed output – maximize EUAB; 3) fixed input – optimize EUAC. Regardless of the aforementioned factors, annual cash flow analysis allows for some flexibility if the following two-part condition is applied. An alternative is to be replaced by an equivalent replacement when it reaches the end of its useful life, assuming that the analysis period adds up the useful lives of all the alternatives. If the condition is not valid, it is recommended to conduct a detailed study, assessing the effects of different alternatives over the whole analysis period concerning the difference between them at the end.