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Über dieses Buch

This book directs the engineering manager or the undergraduate student preparing to become an engineering manager, who is or will become actively engaged in the management of economic-risk trade-off decisions for engineering investments within an organizational system. In today’s global economy, this may mean managing the economic risks of engineering investments across national boundaries in international organizations, government, or service organizations. As such, this is an applied book. The book’s goal is to provide an easy to understand, up to date, and coherent treatment of the management of the economic-risk trade-offs of engineering investments. This book accomplishes this goal by cumulatively sequencing knowledge content from foundational economic and accounting concepts to cost estimating to the traditional engineering economics knowledge culminating in fundamental engineering managerial economic decision-making incorporating risk into engineering management economic decisions.

Inhaltsverzeichnis

Frontmatter

Economic Context of Engineering Management Decision

Frontmatter

Chapter 1. Managerial Economics of Engineering Organizations

Abstract
This book is about engineering managerial decision making and the risks associated with those decisions. Decisions and their associated risks are driven by the context of the decision situation. For engineering managers, this context is the management of engineering and technical functions within for-profit and not-for-profit organizations. Chapter 1 establishes the context of engineering managerial decision making. First, the chapter sets forth definitions of the engineering manager and the four fundamental classes of engineering functions. Second, the basic classes of for-profit organizations within which engineering managers work are described. Third, the product life cycle and annual financial cycle context of capital expenditures and operating costs are defined. Fourth, the chapter describes engineering and technical function contributions to the stages of the product life cycle. Finally, the chapter concludes with a general description of the budgeting process of engineering operations and projects.
Teddy Steven Cotter

Chapter 2. General Accounting and Finance Fundamentals

Abstract
Revenues and expenses along with capital investment costs drive decision making in all organizations, for-profit and not-for-profit. The accounting function collects, summarizes, and reports revenue, expense, and cost transactions. Hence, accounting is the financial language of all organizations. The objective of this chapter is to provide current and future engineering managers and project engineering managers with the accounting knowledge necessary to communicate in an organization’s financial language and apply accounting and financial reports in managing engineering operations and capital projects. First, this chapter sets forth the definition of accounting and the information it provides for organizational decision making. Next, the sources of operations financing are specified, and the minimum attractive rate of return is formally defined. The role of accounting and the accounting cycle are discussed. The three fundamental accounting reports are discussed with an example that illustrates how the three reports integrate within the accounting cycle. Finally, financial ratios that measure an organization’s financial health are specified.
Teddy Steven Cotter

Chapter 3. Cost Accounting Fundamentals

Abstract
Whereas managerial accounting tracks financial performance relative to strategic plans and budgets, cost accounting estimates costs, allocates overhead costs, and develops standard product costs. This chapter will provide an overview of cost accounting fundamentals. First, the chapter will define the different types of costs and cost purposes. Next, cash flow diagram conventions and uses are discussed in terms of breakeven, profit, and loss. Finally, the fundamentals of cost accounting for materials and components, labor, and overhead allocation are presented.
Teddy Steven Cotter

Chapter 4. Cost Estimating Fundamentals

Abstract
Cost engineering arises from need for engineering managers to act as stewards of organizational and project resources. Professional Certified Cost Engineers are often required for organizations to bid on US government or military contracts. Cost engineering is generally recognized as the application of engineering principles, techniques, judgment, and experience to cost estimation, engineering function or project planning and scheduling, and cost control for the purposes of contributing to organizational profitability or the measurement and management of project costs throughout project life cycles. This chapter provides an introduction to engineering cost estimating fundamentals. First, the chapter will set forth a definition of cost estimating and the reasons for cost estimates. Next, the chapter will provide an overview of cost models in the design maturity process. The cost estimating process will be described as a general level of detail. The fundamentals of product and operations costing will be presented. Finally, widely used cost estimating models will be defined with example calculations.
Teddy Steven Cotter

Economic Analysis of Engineering Activities and Projects

Frontmatter

Chapter 5. Time Value of Money

Abstract
Investing in productive assets requires the availability of money. From the finance cycle in lecture two, organizations obtain financing for investment in assets from lenders (banks and other financial institutions) or investors (stockholders). Both sources of funds require a return on their investments that accounts for the risk of loaning money, banks in the form of contractual interest, and investors in the form of dividends or growth in stock value, for the time of the loan or the outstanding stock.
Teddy Steven Cotter

Chapter 6. Measures of Investment Worth

Abstract
Investing in productive assets requires not only the availability of money but also sound, relevant decision criterion. Equivalence provides the basis on which cash flows can be adjusted to account for the interest that must be paid on borrowed or invested money to compensate for the riskiness each alternative. In this chapter, we will explore two criteria used primarily for short-term investments and the four primary criteria used for medium-term and long-term investments.
Teddy Steven Cotter

Chapter 7. Depreciation Effects on Investment Worth

Abstract
We first introduced the concept of depreciation in Chapter two with the statement, “assets are valued at their acquisition cost and adjusted for depreciation and improvement costs.” Likewise in chapter two, under the balance sheet category fixed assets, depreciation was subtracted from plant and asset initial cost to arrive at net fixed assets valuation. On the income statement, depreciation was subtracted as a part of operating expenses to calculate earnings before interest and taxes. However, the methods to estimate annual depreciation expenses were not discussed. This chapter discusses historical depreciation methods, the Modified Accelerated Cost Recovery System depreciation required under US tax code, unit-of-production depreciation, and depletion depreciation.
Teddy Steven Cotter

Chapter 8. Tax Effects on Engineering Investments

Abstract
Governments protect their citizens from outside interference, provide for the general welfare, and provide the parameters (laws and regulations) for everyday behavior for citizens as the basis of social order. Governments protect their citizens from outside influence by investing in and maintaining standing militaries. Governments provide for the general welfare by establishing policies promoting and investing in health, education, commerce, physical, and safety infrastructures. Governments provide social order by investing in governmental and social institutions and legal institutions. Governmental investments require money, and that money is generally raised in the form of taxes and fees. Governmental taxes can be into four major classes.
Teddy Steven Cotter

Chapter 9. Inflation Effects on Engineering Investments

Abstract
Historically, the economies of all countries exhibit year-to-year price inflation. As USA examples, in 1970 the cost of:
Teddy Steven Cotter

Chapter 10. Incremental Analysis

Abstract
To this point it has been assumed that an engineering manager selects from one of multiple economically acceptable investment alternatives. In economic terms, the investment alternatives are assumed to be mutually exclusive. Under net present worth and equivalent uniform annual worth at a stated MARR interest rate, the mutually exclusive project with the highest NPW or EUAW is always preferred. This is not the case for internal rate of investment analysis. Under the IRR criterion, the investment with the highest IRR may not be the preferred alternative. To avoid this problem, we estimate the internal rate of return on the difference in cash flows of pairwise alternatives. The criterion for alternative selection is now maximizing delta-IRR.
Teddy Steven Cotter

Chapter 11. Replacement Analysis

Abstract
All assets have a finite life and require replacement. The engineering managerial economics question is when is the optimum time to replace an asset given the physics and economics of asset use?
Teddy Steven Cotter

Managing Engineering Investments

Frontmatter

Chapter 12. Determining the Appropriate MARR

Abstract
The previous chapters assumed that a stated MARR for a particular asset investment was known. Depending on organizational maturity and accounting policies, MARR may or may not be known for every asset investment type. In small, start-up, entrepreneurial companies with only rudimentary accounting practices, the MARR will most likely be unknown. In more mature, medium-sized companies with maturing management and cost accounting practices, a general MARR may be available for all asset investments. In large corporations with mature management, cost accounting systems, and industrial engineering, a schedule of MARRs will be published by asset risk category. This chapter provides an introductory discussion of how MARR is determined from risk–return analysis. The discussion is a continuation of the finance cycle introduced in Chap. 1.
Teddy Steven Cotter

Chapter 13. Capital Budgeting Engineering Investments

Abstract
An organization’s viability depends on its ability to develop and grow to remain competitive. A well-managed organization expends a significant amount of its management’s time and its resources to develop sound capital budgets to remain viable. Major capital investments in facilities, equipment, and supporting infrastructure are made and implemented through engineering projects. Capital budget projects fall in the medium-to-high risk–return categories.
Teddy Steven Cotter

Chapter 14. Benefit–Cost Ratio Analysis

Abstract
The design, implementation, and management of major service systems (agricultural, cybersecurity, energy, health care, information networks, infrastructure, legal, military, public services, safety, etc., as distinguished from small business services) with long lives (10-plus or 20-plus years) and associated intangible benefits and costs are not amenable to singular economic criterion analysis requiring accurate and precise cash flows. Often, the intangible costs and benefits of major systems are not fully known. Major public sector service systems, however, are foundational in that without their existence the private industrial and small business sectors would not be economically viable. Hence, engineering managers need a broader criterion that more completely accounts for the tangible and intangible benefits and costs of major service systems.
Teddy Steven Cotter

Chapter 15. Introduction to Management Economic Decision Theory and Risk Analysis

Abstract
Except for the introductory discussion of risk–return fundamentals in Sect. 12.​1, discounted cash flow analyses have assumed that estimates of future cash flows are known with certainty. This is never the case in applied engineering economic analyses. Macroeconomic, business economic, and organizational internal variables induce structural and random variation in future cash flow outcomes. Hence, it is essential that the engineering manager accounts for the riskiness of structural and random variation in future cash flow estimates and report probabilities of not achieving required returns on organizational investments.
Teddy Steven Cotter

Backmatter

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