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UTPA STEM/CBI Courses/Engineering Economics/Using Methods of Project Assessment

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Course Title: Engineering Economics - Financial Viability

Lecture Topic: Using Methods of Project Assessment - Determine the Project or Projects that Are Financially Viable

Instructor: Dr. Alley Butler

Institution: UTPA

Backwards Design

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Course Objectives

  • Primary Objectives- By the next class period students will be able to:
    • Use engineering economics techniques to assess the financial viability of a project or projects.
  • Sub Objectives- The objectives will require that students be able to:
    • Compute the payback, present worth, annual worth, future worth, internal rate of return, and external rate of return for projects,
    • Employ these methods for the determination of financial viability of a project or a group of projects, and
    • Understand the difference between mutually exclusive and independent scenarios and their treatment
  • Difficulties- Students may have difficulty:
    • Understanding each of the different metrics and how to compute these metrics (payback, present worth, annual worth, future worth, internal rate of return, and external rate of return),
    • Employing metrics to determine courses of action for financial viability with a project or a portfolio of projects
    • Understanding the difference between portfolios of projects which are independent and those which are mutually exclusive
    • Understanding the differences in methods for project portfolios which are independent from those which are mutually exclusive
  • Real-World Contexts- There are many ways that students can use this material in the real-world. Here is an example:
    • All engineering projects are examined for financial feasibility. Those projects which are not financially feasible are not undertaken and those projects which are financially feasible may be undertaken.

Model of Knowledge

  • Concept Map
    • Understand the concept of payback period
    • Understand the concept of present worth
    • Understand the concept of annual worth
    • Understand the concept of future worth
    • Understand the concept of internal rate of return
    • Understand the concept of independent projects
    • Understand the concept of mutually exclusive projects
    • Understand the treatment of independent projects
    • Understand the treatment of mutually exclusive projects
  • Content Priorities
    • Enduring Understanding
      • The metrics for determining financial viability of projects
      • There is a difference between independent and mutually exclusive projects
      • When financial viability of a project is indicated
    • Important to Do and Know
      • Procedures for evaluating independent projects
      • Procedures for evaluating mutually exclusive projects
    • Worth Being Familiar with
      • Use of MS-Excel to Complete Computations

Assessment of Learning

  • Formative Assessment
    • In Class (groups)
      • In class questions about metrics
      • In class questions about independent projects
      • In class questions about mutually exclusive projects
    • Homework (individual)
      • Homework to compute payback, present worth, annual worth, future worth, internal rate of return, and external rate of return
      • Homework to evaluate portfolios of independent projects
      • Homework to evaluate portfolios of mutually exclusive projects
  • Summative Assessment
    • In class oral presentation by groups
    • Questions on In Class Examination

Legacy Cycle

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OBJECTIVE

By the next class period, students will be able to:

  • Compute payback period for a project
  • Compute present worth for a project
  • Compute annual worth for a project
  • Compute future worth for a project
  • Compute internal rate of return for a project
  • Compute external rate of return for a project
  • Evaluate a portfolio of independent projects
  • Evaluate a portfolio of mutually exclusive projects
  • Decide which project or projects are financially viable and which are not financially viable

The objectives will require that students be able to:

  • Accept information on capital cost, annual costs, and salvage value of projects and determine the payback period, present worth, annual worth, future worth, internal rate of return, and external rate of return. Use the metrics of payback period, present worth, annual worth, future worth, internal rate of return, and external rate of return to evaluate projects in the portfolios. The result is a determination of which project or projects are financially viable.


THE CHALLENGE

You are an engineer working for the ABC Company. Capital costs, annual costs, and salvage values for various projects are available to you. Some projects are independent and some projects are mutually exclusive. Your boss, the company president, wants your recommendations on what to do with regard to these projects.

GENERATE IDEAS

Students need to decide how to financially evaluate a project.

With an understanding of how to evaluate a project, students need to understand how to financially evaluate portfolios of projects.

MULTIPLE PERSPECTIVES

There are six different ways to financially evaluate a project. Which way is best? Which methods are rapid to produce? Which methods are more lengthy to produce? Which methods give answers that are analogous with other answers? Which methods use questionable assumptions?

What is the difference between a portfolio of independent projects and a portfolio of mutually exclusive projects? How does independence influence the choice of projects? How does mutually exclusivity influence the financial selection of projects?

RESEARCH & REVISE

Some group or team activity takes place in class. Other team activity takes place outside of class. The research and revise activity involves: 1) computation of the various metrics (payback, present worth, annual worth, future worth, internal rate of return, and external rate of return), 2) selection of projects as independent or mutually exclusive, and 3) selection of projects within a portfolio. These issues are split between in-class and out-of-class research and activity to maximize information transmission to the students. Essentially, out of class research activity is used to save in class time and support the team based active learning activities undertaken in class.

TEST YOUR METTLE

The students should report the values of payback, present worth, annual worth, future worth, internal rate of return, and external rate of return. The students should report on which projects are selected for implementation from the different portfolios.


GO PUBLIC

The students take an exam over the material covered in this challenge.

Pre-Lesson Quiz

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  1. How is payback period computed?
  2. What does payback period mean?
  3. How is present worth computed?
  4. What does a positive present worth mean?
  5. How is annual worth computed?
  6. What does annual worth mean?
  7. How is future worth computed?
  8. What does future worth mean?
  9. How is internal rate of return computed?
  10. What does internal rate of return mean?
  11. How is external rate of return computed?
  12. What does external rate of return mean?
  13. What is the relationship among projects which are independent?
  14. What is the relationship among projects which are mutually exclusive?
  15. How are portfolios of independent projects evaluated?
  16. How are portfolios of mutually exclusive projects evaluated?

Test Your Mettle Quiz

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  1. What is the payback period for an example project?
  2. Is the payback for the example project good or bad? Why?
  3. What is the present worth of an example project?
  4. Does the present worth for the example project indicate that the project is or is not financially viable?
  5. What is the annual worth of an example project?
  6. Does the annual worth for the example project indicate that the project is or is not financially viable?
  7. What is the future worth of an example project?
  8. Does the future worth for the example project indicate that the project is or is not financially viable?
  9. What is the internal rate of return for an example project?
  10. Does the internal rate of return for the example project indicate that the project is or is not financially viable?
  11. What is the external rate of return for an example project?
  12. Does the external rate of return for the example project indicate that the project is or is not financially viable?
  13. Are the projects in an example portfolio independent or mutually exclusive?
  14. Evaluate financial viability for projects in a portfolio of independent projects.
  15. Evaluate financial viability for projects in a portfolio of mutually exclusive projects.
  16. Based on theory taught in the course, which financial indicators are analogs of other financial indicators?
  17. Based on theory taught in the course, which financial indicators are better suited for use than others and why?
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