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EMIS 8361 Engineering Economics and Decision Analysis
CATALOG DESCRIPTION:
Introduction to economic analysis methodology. Topics include engineering economy and cost
concepts, interest formulas and equivalence, economic analysis of alternatives, technical rate of
return analysis, and economic analysis under risk and uncertainty. Credit not allowed for both
EMIS 2360 and EMIS 8361. Prerequisite: EMIS 7370.
Instructor:
Office:
E-mail:
Web support:
Class Web Site:
Richard V. (Dick) Helgason
M.S. Engineering Design and Economic Evaluation (U Colorado Boulder)
Ph.D. Operations Research (SMU)
357 Science Information Center
[email protected]
http://courses.smu.edu, select BLACKBOARD
http://engr.smu.edu/emis/8361
COURSE OBJECTIVES:
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To make project-selection decisions based on time-value-of-money concepts
To understand discrete and continuous compounding and the use of nominal and
effective interest rates
To master the use of cash flow diagrams
To be able to make effective use of the common cash flow patterns and their associated
industrial-engineering pattern conversion factors
To understand economic equivalence
To understand the common economic figures-of-merit
To be able to answer the three fundamental questions of project selection:
1. Is a given project worth doing?
2. Given two projects, which is preferable?
3. Given a set of proposed projects subject to a set of arbitrary constraints, which
combination, if any, should be undertaken?
To understand common engineering-application-area computations
To understand technical rate-of-return analysis
To understand decision-making under certainty, risk, and uncertainty
COURSE TOPICS:
Overview
Cash Flow Diagrams
The Algebraic Nature of Cash Flows
The Time Horizon
Growth Processes
Simple Interest Process
Compound Interest Process
Interest Process Formulas
Balance at Points other than Accrual Points
Net Cash Flow Notational Convention
Rates Useful in Economic Analysis
Cash Flow Equivalence
How to Recognize Equivalent Cash Flows
Equivalence As An Economic Chess Game
Standard Cash Flow Pattern Terminology
Mnemonic Industrial Engineering Factors
Time Period Labeling Convention
The Possible Realization Concept
A Notational Convention for Equivalence
Adding and Subtracting Cash Flows
I. E. Factors Relating A, P, and F Patterns
Projects
The 3 Main Questions of Project Selection
Classification of Project Types
Functions on Projects
Worth Functions
Project Balance
Payback
Benefit-Cost Ratio
Project Flows Decomposition
Q1: is a Given Project Worth Doing?
Company-Specific Information
Seven Common Measures of Goodness
Q2: Given Two Projects, Which is Preferable?
Dominance
Applying Q1 to Q2
Industrial Practice: Ranking
Ranking if OK for Worth Functions
Ranking Fails For Rate of Return
Ranking Fails for Benefit-Cost Ratio
Technical Rate of Return Analysis
Review of Polynomials
EMIS 8361
EMIS 8361 Engineering Economics and Decision Analysis
Calculator Formats
Pattern Exercises
The Nonstandard Wave Pattern
Investing for a Perpetuity
Rough Economic Analysis Based on the Wave Pattern
Classical I. E. Capital Recovery Formula
G Factor Mathematics and Equivalence
The Geometric Gradient Pattern
The g' Rate
Effective Rate
Nominal Rates and Subperiodic Compounding
Effective Rates for Subperiodic Compounding
Continuous Compounding
An Application of Continuous Compounding
Effective Interest Rates for Multiyear Continuous
Compounding
Fractional Periods with Continuous Compounding
Continuous Flow of Funds
Infinite Horizons
Infinite A Pattern
Infinite G Pattern
Infinite Geometric Gradient Pattern
Loan Processes
Standard Particulars for Conventional Loans
Time-Dependent Quantities for Conventional Loans
Bond Processes
Standard Bond Particulars
Bond Yields
An Approach to Computing Yield to Maturity
Incorporating Inflation
Constant Dollar Computations
Fundamental Insight
Using Constant Dollar Cash Flow Diagrams
Newton's Method
Present and Future Worth as i Becomes Large
Present and Future Worth as i Approaches -1
Descartes' Rule
Constructing a Cash Flow with Given Rates of Return
An Upper Bound on Rates of Return
Intermediate Project Balances
The Special Rate ipure
Pure vs Mixed Projects
Modified Project Balance
Modified Future Worth and Rate of Return
Polynomial Division Results
Uniqueness of a Pure Rate of Return
Q3: Given a Set of Project Possibilities, Which is the Best
Combination?
Relationships in Sets of Project Alternatives
Two Approaches to Q3
Project Selection Methodology
Techniques for Independent Mutually Exclusive Groups of
Projects
Project Selection with Unequal Horizons
Stand-in Projects
Classical I. E. Approach
Imposition of a Study Period
Implied Salvage Value
Comparison Values
The Variable Lives Complication
Economic Decision-Making Environments
Decision-Making Under Risk
Decision-Making Under Uncertainty
A General Decision-Making Tabular Format
COURSE TEXTBOOK:
Engineering Economy, 9th ed., by G. J. Thuesen (Professor of Industrial Engineering
and Systems Engineering, Georgia Institute of Technology) and W. J. Fabrycky
(Lawrence Professor Emeritus of Industrial and Systems Engineering, Virginia
Polytechnic Institute), Prentice Hall, 2001. Chapters covered:
1. Engineering and Engineering Economy
2. Some Economic and Cost Concepts
3. Interest Formulas
4. Calculations of Economic Equivalence
5. Equivalence involving inflation
6. Bases for comparison of alternatives
7. Decision-making among alternatives
8. Evaluating replacement alternatives
9. Estimates and decision making
10. Decisions under risk and uncertainty
METHOD OF EVALUATION:
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The Midterm Exam (Proctored) is worth 40% of the grade
The Assigned Takehome Problems will be worth 20% of the grade.
The Final Exam (Proctored) will be worth 40% of the grade
EMIS 8361