Economic and Financial Analysis for Engineering and Project Management

Economic & Financial Studies

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As such, the projects truly are mutually exclusive. If we build the smaller version of the installation, we then forego the opportunity to simultaneously build the larger one at that same site. Under those conditions, if maximizing the rate of return is our guide, then Project Small is clearly the winner, this time by a more noticeable margin. But maximizing rates of return is not the proper objective of a financially oriented business—maximizing wealth is the proper objective. We can measure wealth in one and only one form—dollars.

The amount of wealth a project creates depends on the simultaneous interaction of three key variables:. Note that none of these measures, when viewed in isolation, provides particularly useful information.

Projects with high rates of return might not create much wealth if the investment scale is small or if the cost of capital for the project is high. On the other hand, projects with low rates of return can create large amounts of wealth even if the return exceeds the cost of capital only by a small margin, as long as the investment scale is large enough.

Cost Benefit Analysis Example (CBA Example)

Of course, one should not reject all high-return, small-scale projects. Nor should one invest in all low-return, large-scale projects. It is the specific interaction of the three key variables shown above that determines which project creates the most wealth. This leads us to the net present value measure, which simultaneously considers all three key value drivers. The interaction between the key value drivers over the year investment horizon reveals that investing in the larger project creates more economic wealth than does investing in the smaller one, even though the larger project produces a lower internal rate of return, as we saw earlier.

Exchange Discount Summary

As a standard corporate finance text suggests, if you want to feel good about making great percentage returns, select projects based on the internal rate of return. If you want to get rich, use net present value. The internal rate of return fails to provide the proper signal here because it is insensitive to the scale of the investment, and scale is one of the primary wealth drivers.

The net present value represents the excess dollar amount, that over and above the funds that flow to the capital providers. The choice here is clear. We purchase goods and services with dollars, not percentages. How can he make more money on the smaller spread? The discussion above would be well represented by a more concrete example. The engineer initially considers replacing the old boilers and chillers, and installing new high-efficiency units, pumps, and controls.

This will certainly save the hospital energy and maintenance cost over time. But recently he has also attained some experience with geothermal systems, and decides to consider a much bigger change to a central plant geothermal system. He must use financial analysis to determine which of these two options will be more effective. The capital expenditure for the geothermal system is, of course, much more expensive. The engineer takes all of those project details and calculates the financial metrics in the manner described above see Table 1. We ask you to consider this information to make the call as to the better investment option.

Simple payback. Internal rate of return. Net present value of cash flows. Geothermal system. That is essentially the same question we ask here. It is true that the geothermal system has a slower payback and a lower rate of return. Your item has been added to Shortlist. View All. Return form will be sent to your email Id:.

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Cost Benefit Analysis - Decision Making Tools From giuliettasprint.konfer.eu

More Delivery Options. Delivery in days. Free Delivery Charges: Rs. Shipping Charges : Rs. We will let you know when in stock. Thank you for your interest You will be notified when this product will be in stock. The economic tools needed for project management and how to apply them. The decision-making methods used to identify and select project options. Analytical methods to deal with risk and uncertainty. Strategic approaches to project management and financing. Subject Specific Intellectual and Research Skills Having successfully completed this module you will be able to: Demonstrate understanding of the range of economic and management tools used in civil and environmental engineering projects and the research and advanced scholarship that produced these tools.

Objectives

Critically compare alternative approaches to engineering project economics and management. Communicate the outcomes of financial, economic and managerial analyses to project clients. Compare the various decision-making tools that can be used in project analysis. Transferable and Generic Skills Having successfully completed this module you will be able to: Effective use of financial spreadsheet models to provide solutions to management problems.

Why finance matters for project managers

Understanding of the importance of team working. Effective communication through written reports to both specialist and non-specialist audiences. Subject Specific Practical Skills Having successfully completed this module you will be able to: Produce and interpret financial and accountancy data on costs, revenues and profitability and data on wider socioeconomic costs and benefits. Use computer-based and web-based decision making tools to make critical financial and project management decisions. Deal with complex economic and managerial issues, both systematically and creatively, and make sound judgements in the absence of high quality data.

Demonstrate self-direction and originality in tackling and solving problems, and act autonomously in planning and implementing project tasks at a professional level. Continue to advance your knowledge and understanding and to develop new skills to a high level.

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