CTC 475 Economic Analysis in Technology

Time Value of $ How to choose alternatives based on economics How to choose alternatives based on economics How to account for time value of $ How to account for time value of $ How to account for taxes and depreciation How to account for taxes and depreciation How to conduct sensitivity analyses How to conduct sensitivity analyses

Class info Syllabus Syllabus Schedule Schedule Projects Projects Grades Grades Lectures & recommended homework Lectures & recommended homework

Applications in the Real World Determine the most cost effective project between several alternatives Determine the most cost effective project between several alternatives Determine the type of bridge which should be built Determine the type of bridge which should be built Determine which detour scheme is most cost effective Determine which detour scheme is most cost effective Determine which type of pavement rehabilitation scheme should be chosen Determine which type of pavement rehabilitation scheme should be chosen Personal finances Personal finances

Cash Flow Approach A cash flow occurs when money actually changes hands from one individual to another A cash flow occurs when money actually changes hands from one individual to another A cash flow diagram indicates how much money is exchanged and whether the money flows in or out A cash flow diagram indicates how much money is exchanged and whether the money flows in or out

Problem Solving Process Formulate the problem Formulate the problem Analyze the problem Analyze the problem Search for alternative solutions Search for alternative solutions Evaluate the alternatives Evaluate the alternatives Select the preferred alternative Select the preferred alternative Prepare plans and implement the preferred alternative Prepare plans and implement the preferred alternative

Multiple Decision Criteria Economics Economics Quality Quality Safety Safety Environmental Impact Environmental Impact Community Attitudes Community Attitudes Labor/Management Relations Labor/Management Relations Cash flow position Cash flow position Risk Risk System Reliability System Reliability

Multiple Decision Criteria (cont.) Impact on Personnel Impact on Personnel Training Requirements Training Requirements Comparison w/ Competititors Comparison w/ Competititors Ego Ego Customer Preferences Customer Preferences Capital Requirements Capital Requirements Engineering Design Considerations Engineering Design Considerations Ease of Construction Ease of Construction

Multiple Decision Criteria Others? Others?

Intangibles (Irreducibles) Factors that affect a decision but cannot be expressed in monetary terms Factors that affect a decision but cannot be expressed in monetary terms Engineering project proposals should include intangibles that management may want to consider Engineering project proposals should include intangibles that management may want to consider

Decision-Making is complex People maintain various objectives instead of just one People maintain various objectives instead of just one Multiple objectives are frequently in conflict with each other Multiple objectives are frequently in conflict with each other Decisions made by optimizing objectives at one point in time Decisions made by optimizing objectives at one point in time Goals may be set in terms of outcomes that are “good enough” Goals may be set in terms of outcomes that are “good enough” Despite the difficulties, most people try to be rational when making decisions Despite the difficulties, most people try to be rational when making decisions

The Need to “Sell” your Alternative Avoid spending all your time developing a recommendation and not enough time in selling it Avoid spending all your time developing a recommendation and not enough time in selling it Know your audience and use their rules, words and decision criteria Know your audience and use their rules, words and decision criteria

Managers Choose Weak Alternatives because: Recognize the existence of a problem (thorn in my side) Recognize the existence of a problem (thorn in my side) Understand the recommended solution (familiar, no unknowns) Understand the recommended solution (familiar, no unknowns) Know how to implement the recommendations (low risk) Know how to implement the recommendations (low risk) Anticipate immediate improvements (remove the thorn; pat on the back) Anticipate immediate improvements (remove the thorn; pat on the back)

Business Goals Make as good a product as possible, in as short a time as possible, and for as little cost as possible Make as good a product as possible, in as short a time as possible, and for as little cost as possible Sell as many as possible, as fast as possible, for as much as possible Sell as many as possible, as fast as possible, for as much as possible

Make an Effort to “Sell” your Alternative Know your audience Know your audience Use good communication techniques Use good communication techniques Visual aids Visual aids Voice Control Voice Control Clarity Clarity Executive Summary Executive Summary Correct grammar Correct grammar Graphics Graphics

Cash Flow Exercise Single Sum Mary opens a 2-year CD for $5,000. The CD pays 4% per year compounded yearly. How much is the CD worth in 2 years? Mary opens a 2-year CD for $5,000. The CD pays 4% per year compounded yearly. How much is the CD worth in 2 years?

Cash Flow Exercise Bob places $4,000 into an account every year for 5 years. The account pays 3% per year compounded yearly. How much is the account worth after 10 years. Bob places $4,000 into an account every year for 5 years. The account pays 3% per year compounded yearly. How much is the account worth after 10 years.

Cash Flow Exercise A machine is purchased for $40,000. Net annual revenues are $15,000. The machine is sold after 10 years for $3,000 A machine is purchased for $40,000. Net annual revenues are $15,000. The machine is sold after 10 years for $3,000

Cash Flow Exercise A company purchases a machine for $25,000. Yearly income is estimated at $15,000. Yearly expenses are estimated at $5,000. The machine is sold for $2,000 after 10 years A company purchases a machine for $25,000. Yearly income is estimated at $15,000. Yearly expenses are estimated at $5,000. The machine is sold for $2,000 after 10 years

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