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