Showing papers in "The Engineering Economist in 1997"

Cost estimation predictive modeling: regression versus neural network

Abstract: Cost estimation generally involves predicting labor, material, utilities or other costs over time given a small subset of factual data on “cost drivers.” Statistical models, usually of the regression form, have assisted with this projection. Artificial neural networks are non-parametric statistical estimators, and thus have potential for use in cost estimation modeling. This research examined the performance, stability and ease of cost estimation modeling using regression versus neural networks to develop cost estimating relationships (CERs). Results show that neural networks have advantages when dealing with data that does not adhere to the generally chosen low order polynomial forms, or data for which there is little a priori knowledge of the appropriate CER to select for regression modeling. However, in cases where an appropriate CER can be identified, regression models have significant advantages in terms of accuracy, variability, model creation and model examination. Both simulated and actua...

Capital budgeting techniques used by small business firms in the 1990s

Abstract: In recent times, small business firms have created 80 percent of the new jobs in the United States. Thus, their methodology for capital investment decisions is very important, though it continues to be somewhat different from that used by larger business firms. A questionnaire survey with 232 small business respondents indicates that the payback method is still the preferred approach by 42.7 percent of the firms. Unlike many larger firms, their time horizon is often the period over which a financial institution will extend them funding. In any event, the “average” minimal payback period in the survey averaged 2.81 years, a time period far shorter than the useful life of the asset and one that would indicate a required return far higher than most firms anticipate. Somewhat encouraging was the increased use of discounted cash flow methods (27.6 percent), which is a higher rate of utilization than that indicated in other surveys of smaller firms over the last few decades.

Evaluating flexible manufacturing systems alternatives using data envelopment analysis

Abstract: The decision to invest in flexible manufacturing systems (FMS) and other advanced manufacturing technologies has been an issue in the practitioner and academic literature for over two decades. To this end, a number of models have been proposed to help decision makers evaluate FMS. Many of these models realize that the justification and investment process will require the consideration of multiple criteria that are capable of incorporating both traditional and non-traditional factors. In this paper data envelopment analysis (DEA) modeling is introduced as a technique to aid in the evaluation of FMS. A number of DEA models and some extensions are presented to aid in the investment and adoption decision process. Managerial and research implications for the use of these models are also presented.

Multiple options in parallel replacement analysis: buy, lease or rebuild

Abstract: An integer programming model solving the demand constrained finite horizon parallel replacement problem with homogeneous assets is presented here with asset purchases, leases and rebuilds as viable replacement options. The model minimizes the purchase, operating, maintenance and salvage costs of a fleet of assets while meeting demand requirements. The formulation is adapted to handle both capital and expense rationing constraints. Computational experience with real sized problems in the transportation industry is discussed and small examples are provided for illustration.

A comparison between two multiattribute decision methodologies used in capital investment decision analysis

Abstract: Two multicriteria decision methodologies applied to evaluating capital investments are the Analytic Hierarchy Process (AHP) and the Non-Traditional Capital Investment Criteria (NCIC) model. In this paper we demonstrate that a mathematical relationship exists between these two models. In-particular, a data set obtained by one method can be mapped into an equivalent data set obtained using the other method. It is suggested that this offers an opportunity of empirically assessing decision makers judgmental capabilities under varying data collection methods. An example problem illustrates the manner in which such comparisons can be made.

Pricing investment and production activities for an advanced manufacturing system

Abstract: In this paper, an activity-based costing (ABC) system is described and a multi-period linear programming model is developed for a general investment decision problem related to advanced manufacturing systems We newly interpret an accounting value associated with each manufacturing activity and derive an economic implication of the dual model in this paper The economic interpretation of the dual formulation of ABC systems is useful for many managerial decision areas such as justifying activity costs already assigned, identifying activity investment opportunities, measuring an activity performance and productivity A case example of planning for a robotic cellular manufacturing system (CMS) is given

Phased capacity expansion - using continuous distributions to model prior beliefs

Abstract: Many current equipment replacement/production capacity expansion decisions carry increasing amounts of performance uncertainty when the alternative processes include technical innovations. In a sequential decision making environment, post-audit information can be used to resolve this uncertainty. In this paper, we demonstrate how three-point, PERT-type estimates can be used to determine continuous prior probability distributions that incorporate the post-audit information in Bayesian revision. Further, we develop the concept of equivalent sample size to insert qualitative judgment into the decision making process. This is initially used to reflect our belief in the estimates' quality, and, subsequently, in an assessment of the quality of the observed sample data. A case study of an actual decision problem is used to illustrate the concepts.

Capacity planning with demand uncertainty

Abstract: We examine how the ability to augment capacity on an as-needed basis affects capacity planning. If it is feasible and desirable to augment all resources on an as-needed basis, optimal capacity planning can be done separately for each resource. Optimality of this simple rule is lost if even one capacity resource imposes “hard” constraints. Simulations indicate that simplifying capacity planning to focus on an expected bottleneck resource dominates product- or resource-level capacity planning, when all resources impose hard constraints and the firm's product mix problem is significant.

Npv-compatibility, project ranking, and related issues

Abstract: The presented paper addresses the question of the NPV-compatibility of the Overall Rates of Return (ORRs), and analyses two project ranking procedures that were advocated in the recent contribution “Overall Rates of Return: Investment Basis, Reinvestment Rates and Time Horizons” by D.M. Shull (The Engineering Economist, Vol.39, No.2, Winter 1994, pp. 139-163). The paper indicates that the current definitions of the ORRs are not fully NPV-compatible, and it provides a generalized, NPV-compatible ORR definition. The paper further shows, using numerical examples, that the two project ranking procedures adopted by Shull are conceptually inadequate. It presents the correct approach to project-ranking, and proves that this approach can be used in conjunction with any NPV-compatible profitability criterion. Also, the paper addresses and rectifies some inaccurate statements and formulas in Shull's contribution. Finally, it is noted that Shull's Scale-Adjusted Return Method was, in fact, introduced ninete...

The effect of time-value of money on discrete time-varying demand lot-sizing models with learning and forgetting considerations

Abstract: In this paper, we consider the problem of incorporating learning, forgetting, and the time-value of money into discrete time-varying demand lot-sizing models to determine lot sizes and relevant costs. The occurrence of forgetting is caused by a break between two intermittent production runs which leads to retrogression in learning and loss of labor productivity. A present value approach is used to discount the stream of future cost flows. This paper extends the original Wagner-Whitin algorithm and the classical EOQ model to models in which the effects of learning, forgetting, and the time-value of money are considered simultaneously. Numerical examples and computational results indicate that corresponding parameters for the three effects have significant effects on the determination of lot sizes and relevant costs. Comparisons among models with and without the three effects are also made.

Integrating uncertainty considerations in learning engineering economy

Abstract: The traditional approach to learning engineering economy in undergraduate curricula typically focuses on solving problems in a deterministic manner. Students generally have little exposure to the uncertain and stochastic nature of, as examples, project cash flows and interest rates. Unfortunately, this traditional approach does not provide students with the skills to deal with real world situations, which inherently involve uncertainty and thereby, risk. In general, engineering economy texts for undergraduate students deal with uncertainty and risk only in brief chapters, usually at the end of the book. The uncertain environment is introduced as a special case, rather than as the norm. In this paper, we propose an approach to learning engineering economy that is integrated with an understanding of uncertainty; in fact, it considers the deterministic case as a special case. The availability of computers today facilitates introducing this uncertainty approach. Computer spreadsheets and software can provide ...

A metamodel approach to sensitivity analysis of capital project valuation

Abstract: A method is presented for using statistical experiment design and multiple regression in the sensitivity analysis of engineering economy or capital budgeting studies where multiple factors are subject to uncertainty. Rather than an enumeration of all combinations of possible changes, a metamodel of the behavior of the project is constructed. Application of this methodology can lead to more specific and useful understanding of the effects of various factors on the project value than is practical with Monte Carlo simulation. In addition, the metamodel can be combined with simulation to provide a distribution of outcomes upon which the project's overall risk can be assessed. The method is illustrated using two actual case studies—a municipal building project and an industrial equipment project.

Comments on “using heuristics to evaluate projects: the case of ranking projects by irr”

Abstract: In their recent paper ( D. Asquith & J.E. Bethel, “Using Heuristics to Evaluate Projects: The Case of Ranking Projects by IRR,” The Engineering Economist, Vol. 40, No. 3 (Spring 1995, pp. 287-294) ), the authors propose a project ranking procedure that is supposed to mitigate the impact of cash flow overvaluation by project managers. In the current contribution, it is indicated that this procedure is based upon a project ranking approach that employs the IRR criterion in a theoretically inadequate way. The correct, incremental approach to the IRR-based project ranking is reiterated, and it is shown that if this approach is applied, then its very design reduces the impact of CF-biases on project ranking. It is also demonstrated that even if competing projects are of equal scale, they must still be ranked by incremental comparison. Finally, it is pointed out that the incremental project ranking is the proper approach regardless of which NPV-compatible profitability measure is applied.

A capital budgeting model based on the project portfolio approach: avoiding cash flows per project

Abstract: The widely used concept of a cash flow per project in capital budgeting has serious weaknesses when resources are shared by different projects. Accordingly, the concept of cash flow per project is not used herein. Instead, the project portfolio approach is used in which costs are considered only in the acquisition and utilization of resources; when these costs actually occur. The main conclusion from this approach is that better capital budgeting decisions can be made if the concept of cash flow per project is avoided when resources are shared.

NET PRESENT VALUE WHEN THE FIRM IS IN A Loss CARRYFORWARD POSITION

Abstract: The typical textbook treatment of net present value (NPV) assumes that the firm as a whole will generate a sufficiently large income on which the marginal tax rate of a particular investment project will be positive and constant. This assumption is inappropriate for a large number of firms that have significant loss carryforward positions. In this paper, we demonstrate the calculation of NPV when-the firm is in a loss carryforward position.