Overview

Explores economic modeling and analysis techniques for selecting alternatives from potential solutions to an engineering problem. Considers measures of merit, such as present worth, annual worth, rate of return, and benefit/cost techniques. Examines recent techniques of economic analysis, especially the tools of decision-making. Explores decisions under uncertainty. Studies the causes of risk and uncertainty and examines ways to change and influence the degree of risk and uncertainty through sensitivity analysis, expectation-variance criterion, decision tree analysis, statistical decision techniques, and multiple attribute decision-making through group case studies.

Syllabus

Depreciation

Depreciation might sound like pure accounting, but it's actually a powerful financial tool that directly impacts which engineering projects move forward. This week reveals how depreciation deductions reduce tax payments and improve after-tax cash flows—transforming a non-cash accounting entry into real economic value through strategic tax planning.

After-Tax Economic Analysis

Until now, you've analyzed investments as if taxes don't exist—but in the real world, tax payments represent massive cash flows that fundamentally reshape every business decision. This week reveals how depreciation deductions, interest payments, and tax rates interact to determine which projects actually create value, often reversing conclusions you'd reach from before-tax analysis alone.

Inflation

Money doesn't hold its value—what costs a dollar today might cost two dollars tomorrow, and this reality fundamentally reshapes every long-term financial decision you'll make. This week reveals how to navigate inflation's persistent erosion of purchasing power, distinguishing between real and nominal values, and ensuring your economic analyses remain accurate when comparing cash flows across time.

Supplementary Analysis

Throughout this course, you've mastered the mathematical frameworks for evaluating engineering investments—but how do we know all those numbers we've been using are correct? This module introduces supplementary analysis tools that test the robustness of economic decisions under uncertainty. You'll learn to identify which parameters matter most, determine critical thresholds where decisions change, and assess the probability that your chosen alternative will actually deliver the expected economic benefits—essential skills for making confident, defensible investment recommendations in the face of real-world uncertainty.

Risk Analysis

You've mastered evaluating investments assuming precise parameter values—but what happens when uncertainty pervades every estimate? Risk analysis transforms how you handle investment decisions by explicitly incorporating probability distributions for uncertain variables, enabling you to quantify not just expected returns but the full range of possible outcomes and their likelihoods. Through systematic probability analysis and Monte Carlo simulation, you'll learn to make informed decisions that acknowledge risk, assess trade-offs between return and uncertainty, and present comprehensive risk profiles that support confident strategic choices even when the future is inherently unpredictable.

Uncertainties and Sequential Decisions

Real-world engineering decisions rarely involve a single choice made in isolation—instead, they unfold as interconnected sequences where each decision opens new possibilities and uncertainties. This module introduces decision tree analysis, a powerful framework for visualizing and evaluating complex decisions that cascade over time under uncertainty. You'll learn to construct decision trees that map all possible choices and chance events, apply backward induction to identify optimal strategies, and quantify the value of information—skills essential for navigating the multifaceted investment decisions you'll face as engineering managers making commitments today while uncertainties about tomorrow remain unresolved.