Engineering Managerial Economic Decision and Risk Analysis: Economic Decision-Making and Risk Analysis

490 Pages·2021·8.44 MB·English

by  Teddy Steven Cotter

Topics in Safety, Risk, Reliability and Quality
Teddy Steven Cotter
Engineering
Managerial
Economic Decision
and Risk Analysis
Economic Decision-Making and Risk
Analysis
Topics in Safety, Risk, Reliability and Quality
Volume 39
SeriesEditor
AdrianV.Gheorghe,OldDominionUniversity,Norfolk,VA,USA
AdvisoryEditors
HirokazuTatano,KyotoUniversity,Kyoto,Japan
EnricoZio,EcoleCentraleParis,France,PolitecnicodiMilano,Milan,Italy
AndresSousa-Poza,OldDominionUniversity,Norfolk,VA,USA
Moreinformationaboutthisseriesathttps://link.springer.com/bookseries/6653
Teddy Steven Cotter
Engineering Managerial
Economic Decision and Risk
Analysis
Economic Decision-Making and Risk
Analysis
TeddyStevenCotter
DepartmentofEngineeringManagement&
SystemsEngineering
OldDominionUniversity
Norfolk,VA,USA
ISSN1566-0443 ISSN2215-0285 (electronic)
TopicsinSafety,Risk,ReliabilityandQuality
ISBN978-3-030-87766-8 ISBN978-3-030-87767-5 (eBook)
https://doi.org/10.1007/978-3-030-87767-5
©TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNature
SwitzerlandAG2022
Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether
thewholeorpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuse
ofillustrations,recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,and
transmissionorinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilar
ordissimilarmethodologynowknownorhereafterdeveloped.
Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication
doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant
protectivelawsandregulationsandthereforefreeforgeneraluse.
Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthisbook
arebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor
theeditorsgiveawarranty,expressedorimplied,withrespecttothematerialcontainedhereinorforany
errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional
claimsinpublishedmapsandinstitutionalaffiliations.
ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG
Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland
Preface
This is not another book on engineering economics. Rather, this book is directed
to the engineering manager or the undergraduate student preparing to become an
engineeringmanager,whois,orwillbecome,activelyengagedinthemanagement
ofeconomicrisktrade-offdecisionsforengineeringinvestmentswithinanorgani-
zationalsystem.Intoday’sglobaleconomy,thismaymeanmanagingtheeconomic
risks of engineering investments across national boundaries in international orga-
nizations, government, or service organizations. As such, this is an applied book.
Thebook’sgoalistoprovideaneasy-to-understand,up-to-date,andcoherenttreat-
ment of the management of the economic risk trade-offs of engineering invest-
ments. This book accomplishes this goal by cumulatively sequencing knowledge
contentfromfoundationaleconomicandaccountingconceptstocostestimatingto
thetraditionalengineeringeconomicsknowledgeculminatinginfundamentalengi-
neering managerial economic decision making incorporating risk into engineering
managementeconomicdecisions.
From years of working in industry and teaching an introductory engineering
economicscourse,theauthorfoundthatmostpracticingengineeringmanagersand
students preparing for careers in engineering have little or no prior coursework or
training in accounting, micro- or business economics, finance, or cost estimation
from the engineering perspective. Accordingly, this book places these preparatory
subjectsinthefirstfourchaptersofPart1,EconomicContextofEngineeringManage-
mentDecisions,sothatwhenthestudentreachesfundamentalengineeringeconomic
conceptsinPart2,heorsheunderstandscashflowaccountingandtheeconomicand
financialframeworkwithinwhichheorshemustoperateinorganizationalsettings.
Next,thisbookpresentsthefundamentalsofengineeringmanagerialeconomicanal-
ysis in Part 2, Economic Analysis of Engineering Activities and Projects. Finally,
thisbooksynthesizesengineeringmanagerialeconomicsintoengineeringmanage-
rialdecisionandriskanalysisinPart3,ManagingEngineeringInvestments,bytying
togetherpriorconceptsfortheselectionofrisk-adjustedminimumattractiverateof
return, capital budgeting decisions, and benefit–cost decisions in public and regu-
latedsectors.Thebookculminateswithmakingengineeringeconomicmanagerial
investmentriskdecisionsforuncertainfuturecashflows.Thefinalchaptersetsforth
v
vi Preface
probabilityandstatisticsfundamentalsnecessarytomodelfuturevariablecashflows
andappliesthosefundamentalsinsensitivityanalysisandsimulationmodeling.
FeaturesofThisBook
Keydesignfeaturesofthisbookinclude:
1. Thelogicalsequencingofengineeringmanagerialeconomicknowledgefrom
preparatorybackgroundtoengineeringeconomicsfundamentalstoengineering
managerialeconomicdecisionandriskanalysisofvariablefuturecashflows.
2. A structured problem-solving approach is illustrated in manual solutions and
corresponding spreadsheet solutions. The manual solutions illustrate funda-
mentalengineeringmanagerialeconomicdecisionandriskanalysistheoryand
principles,andthecorrespondingspreadsheetsolutionsillustrateapplicationin
practice.
3. Acashflowaccountingapproachistakenthroughouttoengineeringmanage-
rial economic analysis. Accrual accounting is introduced in chapter two and
contrastedtocashflowaccountingwhereappropriatethroughoutthebook,so
the engineering manager or student understands the relationship between the
two.
4. Microsoft Excel® cash flow examples are included throughout the book to
introducetheengineeringmanagerorstudenttotheuseofspreadsheetsinthe
analysis of the economics risk decisions in the management of engineering
functions and projects. These examples may be used as templates to set up
actualengineeringmanagerialeconomicspreadsheetanalyses.
5. Amixofprivateenterpriseandpublicorregulatedsectorsexampleproblemsto
providethestudentwitharobustexposuretoengineeringmanagerialeconomic
problems.
6. Comprehensivecoverageappropriatefortheengineeringmanagerperforming
or the student seeking to learn to perform engineering managerial economic
analysesincluding:
(cid:129)
Economic analyses with or without considering the time value of money.
General and cost accounting, cost estimation, and economic value-added
concepts.
(cid:129)
Planninghorizons.
(cid:129)
Budgetingandtheuseofeconomicratios.
(cid:129)
Economic criteria metrics including present worth, equivalent uniform
annual worth, future worth, internal rate of return, external rate of return,
benefit–cost analyses, and cost-effectiveness. Other metrics such as undis-
countedanddiscountedpaybackarealsodiscussed.
(cid:129)
HistoricalandIRSPublication946MACRSdepreciationmethodsandtheir
effectsoncashflowaccountingandeconomiccriteria.
Preface vii
(cid:129)
Inflation-adjustedcashflows,indexes,andinflationaryeffectsonbeforeand
after-taxeconomicmetrics.
(cid:129)
Challenger–defender and graphical incremental analyses to select the best
mutuallyexclusivealternative.
(cid:129)
Opportunity cost after-tax replacement analyses, optimal replacement
interval,andSection1031like-kindpropertyexchanges.
(cid:129)
CostofcapitalMARRdetermination.
(cid:129)
Capitalbudgetingengineeringmanagerialdecisions.
(cid:129)
Publicandregulatedsectoreconomicanalysesusingbenefit–costanalyses.
(cid:129)
Introduction to economic decision risk analysis and management of engi-
neering economic activities and projects including fundamentals of prob-
ability, structuring decisions, sensitivity analysis, and an introduction to
simulation.
(cid:129)
End-of-chapter problems to facilitate self-study as well as homework
assignments. Answers to problems are provided in a separate solution
manual.
CourseCoverage
Thisbookisdesignedfortwotypesofstudentsandforanytypeofclass.Firstisthe
studentinterestedinpreparingforthefundamentalsofengineeringexamination.A
courseforthisstudentmaybetaughtasatraditionalengineeringeconomicscourse
withmaterialfromthefollowingchapters.
(cid:129)
Chapter2,GeneralAccountingandFinanceFundamentals.
(cid:129)
Chapter4,CostEstimatingFundamentals.
(cid:129)
Chapter5,TimeValueofMoney.
(cid:129)
Chapter6,MeasuresofInvestmentWorth.
(cid:129)
Chapter7,DepreciationEffectsonInvestmentWorth.
(cid:129)
Chapter9,InflationEffectsonEngineeringInvestments.
(cid:129)
Chapter10,IncrementalAnalysis.
(cid:129)
Chapter 15, Introduction to Management Economic Decision Theory and Risk
Analysis(withintroductoryprobabilityandstatistics).
Studying these chapters along with working solutions to the associated chapter
problemswillpreparethestudentfortheeconomicsportionofthefundamentalsof
engineeringexamination.Thesecondtypeofstudentistheonewhoseeksproficiency
inengineeringmanagerialeconomicsasapracticingengineeringmanager.Acourse
for this student should sequentially follow the design of the book from Chap. 1
through15.
The book and supporting lectures, homework, and homework solution manual
aredesignedforuseinatraditionalclassroomlecturesetting,inablendedonline-
classroomsetting,orasaself-contained,onlineasynchronouslearningpackage.In
the traditional classroom lecture setting, this book may be used as a stand-alone
viii Preface
hardcopyorelectronicbook.Intheblendedonline-classroomsetting,theinstructor
has multiple options: (1) hardcopy book with chapters, example problems, home-
work problems, and examinations integrated into a learning management system;
(2) electronic book with student tutorials and self-tests integrated into a learning
management system along with homework solutions and examinations to support
the traditional classroom lectures; and (3) self-contained online learning package
withintegratedelectronicbook,studenttutorials,homeworkassignmentsandsolu-
tions,andexaminationsforusebydistantlearningstudentsorsupportingtraditional
classroom discussions. Instructor lecture notes, Microsoft PowerPoint® or Adobe
PDF® slides, question and problem solutions along with Microsoft Excel® work-
booksolutionsandtemplates,andtestquestionsmaybedownloadedfromanonline
source.
Norfolk,VA,USA TeddyStevenCotter,Ph.D.
Contents
PartI EconomicContextofEngineeringManagementDecision
1 ManagerialEconomicsofEngineeringOrganizations ............. 3
1.1 Introduction ............................................ 3
1.2 EngineeringandEngineeringManagement .................. 4
1.3 TypesofBusinessOrganizations .......................... 7
1.4 EngineeringEconomicDecisions .......................... 9
1.5 EngineeringEconomicPrinciples .......................... 15
1.6 EngineeringLifeCycleCosts ............................. 16
1.7 EngineeringLifeCycleCostManagement .................. 23
1.8 BudgetingforEngineeringOperationsandProjects .......... 27
1.9 Summary .............................................. 30
1.10 KeyTerms ............................................. 34
2 GeneralAccountingandFinanceFundamentals ................. 37
2.1 Introduction ............................................ 37
2.2 SourcesofOperationsFinancing .......................... 38
2.3 TheRoleofAccountingintheOrganization ................. 39
2.4 TheBalanceSheet ...................................... 42
2.5 TheIncomeStatement ................................... 45
2.6 TheRetainedEarningsStatement .......................... 48
2.7 TheCashFlowIncomeStatement ......................... 49
2.8 FinancialRatiosImportanttoEngineeringManagerial
Economics ............................................. 52
2.9 Financial Ratios—Measuring Organizational Health
andPerformance ........................................ 54
2.9.1 LiquidityRatios ................................. 54
2.9.2 AssetManagementRatios ........................ 54
2.9.3 DebtManagementRatios ......................... 55
2.9.4 ProfitabilityRatios ............................... 56
2.9.5 MarketValueRatios ............................. 57
2.10 IntegratedRatioAnalysis ................................. 57
ix