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One of the most attractive indexes to select the best investment decision is internal rate of return (IRR) measure, but it has some significant faults both in practice and theoretically. Multiple attempts have been made to resolve the IRR challenges, but none of them are perfect. This article presents the Modified Simple Average Internal Rate of Return criterion as a profitability index for calculating a unique rate of return for all various types of cash flow streams so that obtained results are consistent with the net present value method in accept/reject decisions. The presented method is simple to compute and is capable of resolving all known IRR defects including when the resulting rate is greater than −1. [ABSTRACT FROM AUTHOR]

The average internal rate of return (AIRR) fixes many deficiencies associated with the traditional internal rate of return (IRR), including apparent inconsistency with net present value (NPV). The AIRR approach breaks down project NPV into scale (the capital invested) and economic efficiency (the AIRR), and maintains NPV consistency for accept/reject decisions. Here we examine extensions of the AIRR to risky capital asset projects, a domain where the IRR appears intractable. We show that one can uniquely break down a risky NPV into a risk-sensitive project scale and a risk-sensitive extended AIRR, representing risky project efficiency, so that consistency with NPV for accept/reject decisions is maintained in the certainty-equivalent sense, in direct analogy to the deterministic case. This novel breakdown gives managerial insight by helping determine a risky project's locus of uncertainty, be it the project scale, or economic efficiency, or both. In this way, risky features of competing projects can be explored in more detail, leading to insights substantiating the NPV ranking. We also show that under risk neutrality, the expected AIRR is equal to the AIRR of the expected cash flow, a property that notoriously fails for the stochastic IRR. [ABSTRACT FROM AUTHOR]

The two-stage growth model (Danielson, 1998) empowers analysts to quantify the growth expectations supporting a firm's stock price. This article merges that two-stage growth model with the AIRR model developed by Magni (2010, 2013). The new model simplifies the calculation of the firm's expected competitive advantage period and the expected annual growth rate. The new model can be used to quantify expectations for both dividend and non-dividend paying firms and when the return on new investments or the required return on equity might not be constant in the future. [ABSTRACT FROM AUTHOR]

Indonesia is a net salt importer with plans to eliminate salt import dependency through the industry's development and collaboration with higher education institutions. Considering net present value (NPV), internal rate of return (IRR), benefit–cost ratio (B/C ratio), and return on investment (ROI), this case study analyzes the economic feasibility of developing a mini salt production plant. All the economic indices suggest that the project is feasible, specifically NPV, IRR, net B/C ratio, and ROI are IDR 5.3 billion, 42.83%, 1.61, and 395% respectively over 10 years. Thus, the project is economically feasible and can help eliminate import dependency and the higher educational institution's outstanding contribution. [ABSTRACT FROM AUTHOR]

Research in multiple internal rate of return (MROR) has mainly focused on three areas: uniqueness, conditions where MROR occur, and solutions to MROR. In an attempt to solve for MROR, researchers have assumed that the occurrence of MROR is prevalent and thus a solution is direly needed. This article examines the probability that positive MROR would occur when variation is incorporated into the cash flow and the probability of getting positive MROR when multiple sign-change cash flow is generated. Results show that the probability of positive MROR occurring in multiple sign-change cash flows is relatively low and potentially a rare event. [ABSTRACT FROM PUBLISHER]

In this paper we describe an approach for calculating the rates of return of investments whose timing is uncertain. In the framework of the approach, we calculate the expected value of the rate of return. We extend the deterministic Endpoints and Modified Dietz rate of return models by viewing the investments transaction timings as random variables. Our main working assumption is that the transaction timings are uniformly distributed in a certain time interval. We study a series of new rate of return models that have a wide range of practical applications. Our results generalize some well-known rate of return formulas, including the renowned Modified Dietz formula. The models introduced in this paper provide one-period rates of return compliant with the Global Investment Performance Standards (GIPS) requirements. They can be used for GIPS-compliant calculations. [ABSTRACT FROM AUTHOR]

An article by the same author in The Engineering Economist in 2018 (vol. 63(2), 143–157) proved that any transaction could be uniquely partitioned into a sequence of pure investments with strictly decreasing internal rates of return (IRRs). This article uses that result to prove a new condition for a transaction to have a unique IRR and also gives some information on how the IRRs of a transaction must be distributed. [ABSTRACT FROM AUTHOR]

We propose a genuinely internal approach to project valuation and decision based on the average Return On Investment (ROI), obtained as the ratio of total operating profit (NOPAT) to total invested capital or, equivalently, as the ratio of net cash flow to total invested capital. The approach presented enables decomposing the economic value created into the project scale (total capital invested) and the economic efficiency, obtained as the difference between average ROI and a suitably adjusted weighted average cost of capital (WACC). We show that a project's average ROI is equal to the weighted mean of the average Return On Equity (ROE) (total net income divided by total equity capital) and the average Return On Debt (ROD) (total interest expenses to total debt outstanding) and show that the average ROE itself correctly measures shareholder value creation when compared with a suitably adjusted cost of equity. We show that the internal average-based approach presented is also valid under the more general assumption of time-varying cost of capital. [ABSTRACT FROM AUTHOR]

The Engineering Economist is a journal that focuses on data-driven engineering economic models to support capital investment decisions in uncertain economic conditions. The latest issue features articles on various topics. The first article introduces a project valuation framework that incorporates Economic Value Added (EVA) and Market Value Added (MVA) analysis into a binomial tree option pricing model. The second article merges earlier work on valuation and growth expectations with the Average Internal Rate of Return (AIRR) models, simplifying calculations for expected competitive advantage and growth rates. The third article utilizes real options analysis to assess uncertainty in the copper concentrate trading business. The journal publishes original research, case studies, surveys, and reviews related to capital investment problems. [Extracted from the article]

This article considers evaluation of nonconventional projects and projects with cash outflows occurring not only at the beginning of project. It has been proved that, being a monotonically increasing function of a discount or finance rate, the modified internal rate of return (MIRR) fails to characterize the rate of return of such projects. We showed how to eliminate the MIRR's dependence on a finance rate and proved that in this case the MIRR becomes the “equivalent rate of return” proposed by Solomon. The generalized internal rate of return (GIRR) and generalized external rate of return (GERR) indices based on the generalized net present value (GNPV) approach are considered as alternatives to the MIRR. Several nonconventional projects have been evaluated using the MIRR, GIRR, and GERR rules. In order to verify the estimates, we drew up a simple project balance sheet, which demonstrated correctness of the results based on the GIRR and GERR rules and errors inherent in the MIRR application. [ABSTRACT FROM PUBLISHER]

The ability of a project's internal rate of return (IRR) to quantify its economic return has been questioned by many scholars over the past 60 years, most recently by Magni (2010, 2013). Although IRR is a plausible—albeit imperfect—measure of a project's economic return when the cash flow stream is conventional, IRR can be an untenable measure of an unconventional project's economic return. The goal of this article is to identify a simple, intuitive explanation of IRR, one that can be applied to any cash flow pattern. To do this, the article shows how a project's IRR systematically changes when it first crosses from the conventional into the unconventional realm (i.e., a small cash outflow is appended to a conventional cash flow stream) and then as it becomes progressively more unconventional. This process reveals that the most robust economic interpretation of IRR—for both conventional and unconventional projects—is that a project's IRRs are external benchmarks that divide the set of all plausible discount rates into positive and negative net present value (NPV) ranges, rather than internally generated returns. Because it can be difficult to estimate a project's cost of capital with precision, this information can help guide the sensitivity analysis of a project. [ABSTRACT FROM AUTHOR]

Internal rate of return (IRR) is one of the most common and important indicators in investment analysis because it is often used by managers and practitioners as a decision-making criterion. Moreover, the IRR reflects the financial cost in financing decisions and it helps to answer the following question when comparing different financing alternatives: “Which loan is the cheapest?” Among the different types of loans in Brazil, there is a financial product called a prepurchase financing pool (PPFP) that is generally regarded as the best option for financing or loans. The objective of this article is to use the prepurchase financing pool to show the flaws of IRR in financial analysis. In particular, when IRR is used to evaluate the prepurchase financing pool, one finds problems of reliability regarding (i) existence, (ii) uniqueness, and (iii) economic interpretation of the rate. The results show that the prepurchase financing pool is relevant evidence that the IRR flaws are found in financial products. [ABSTRACT FROM AUTHOR]

This article shows that the internal rate of return (IRR) of a project's expected cash flow stream is a weighted average of the IRRs offered by the project's (many) possible future outcomes, where the weights are calculated using the outcome probabilities and invested capital balances. Because the invested capital associated with a particular realization is a function of the Macaulay duration of the cash flows in that outcome, the weights depend on the outcome probabilities and the effective length of each cash flow stream. [ABSTRACT FROM AUTHOR]

They investigate the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments and show that investors are on the investment bandwagon when the second mover's additional profit rate exceeds a threshold value. This issue of I The Engineering Economist i contains four articles that cover a range of topics that contribute to the study of capital investment. Building on prior research showing that any transaction could be uniquely partitioned into a sequence of pure investments with strictly decreasing IRRs, this follow-on research proves a new condition for a transaction to have a unique IRR. [Extracted from the article]

A pure investment is defined here as any transaction where the invested capital is nonnegative at all times during the life of the transaction. This article proves that any transaction whose first non-zero term is negative can be uniquely partitioned into pure investments with strictly decreasing internal rates of return (IRRs). The IRRs of the partitioning transactions put bounds on the IRRs of the original transaction. The partitioning theorem gives a simple characterisation of Arrow/Levhari's results on the optimal truncation of a transaction. The partitioning theorem also has applications to the problem of the optimal time for an investor to sell the remaining terms in a transaction. [ABSTRACT FROM AUTHOR]

In this article, we develop a new optimization model for capital rationing with uncertain project returns. Our model maximizes the probability of meeting a predefined target return by selecting a feasible set of projects subject to budget constraints in multiple time periods. We employ a mixed-integer nonlinear algorithm recently developed in the optimization field to solve the resulting nonconvex optimization problem to optimality. Our model and solution methods are tested and validated through a comprehensive computational experiment. Several managerial insights are obtained about the impact of available budget and target return on the optimal solutions. Notably, we have found that increasing target return may not necessarily result in an increase in optimal total expected return of the selected projects. Our model and solution method offer a unified and computationally tractable approach to precisely quantify the tradeoff between project returned and risk. [ABSTRACT FROM AUTHOR]

This article revisits a classic two-period engineering economy problem known as the oil pump problem and adds randomness to its cash flows one at a time. Conditional cumulative probability density functions of the internal and unconditional cumulative probability density functions of the external rates of return are reported. The analytical results are verified with Monte Carlo simulation. A procedure is proposed to assess project desirability by using the probability of project acceptance as the output. The cumulative distribution functions of both rates are used in numerical examples to illustrate how project desirability or acceptance probabilities can be calculated. It is shown that the distribution of the external rate of return yields the same probability of acceptance as the distribution of the internal rate of return. This article provides an up-to-date and exhaustive review of the literature on the distribution of the rate of return in stochastic investment problems. The review also shows that the oil pump problem is still popular and widely discussed. [ABSTRACT FROM AUTHOR]

An appropriate risk adjustment technique applied to discount rate for evaluating stochastic negative cash flows is discussed. The proposed approach considers a future cash flow as a response to an investment or a borrowing rather than an independent cash flow. As discount rates applied to evaluate investments and borrowings have different meanings, the generalized net present value method is more appropriate to value cash flows with opposite signs. The given method uses two different rates: the finance rate is applied to discount positive present values (PVs) and the reinvestment rate – to discount negative PVs of a nonconventional project. It is shown that these rates are adjusted for risk relatively to their risk-free values in an opposite way. A universal relationship between risk penalty and risk premium is derived from the assumption that investment and borrowing risks are equal in their value. [ABSTRACT FROM AUTHOR]

Renegotiations are often claimed to be the major pitfall in public–private partnership projects. In fact, the literature and empirical evidence suggest a bias toward favoring concessionaires, although there are well-known examples of harmful unilateral decisions by governments. This article establishes a distinction between structural renegotiations (with changes in the risk-sharing agreement) and nonstructural renegotiations (without shifting risk) and analyzes the implications of structural renegotiations in a road concession by comparing the ex ante and ex post financial implications for government, concessionaire, and users. The selected project is one that started as a shadow toll and was later changed to real toll. The analysis shows that the renegotiation essentially transferred costs to the users. The financial burden for the government decreased and the internal rate of return (IRR) of the concessionaire increased slightly although the overall risk profile of the concession decreased. The users supported a 40% higher cost, and the system gained an additional cost component (the electronic tolling system). Overall the global financial costs increased 40% when compared with the initial regime. The article also sets out some discussions and implications for policymakers. [ABSTRACT FROM AUTHOR]

This technical note presents a numerical simulation technique to perform valuations of infrastructure projects with minimum revenue guarantees (MRG). It is assumed that the project cash flows—in the absence of the MRG—can be described in a probabilistic fashion by means of a very general multivariate distribution function. Then, the Gaussian copula (a numerical algorithm to generate vectors according to a prespecified probabilistic characterization) is used in combination with the MRG condition to generate a set of plausible cash flow vectors. These vectors form the basis of a Monte Carlo simulation that offers two important advantages: it is easy to implement and it makes no restrictive assumptions regarding the evolution of the cash flows over time. Thus, one can estimate the distribution of a broad set of metrics (net present value, internal rate of return, payback periods, etc.). Additionally, the method does not have any of the typical limitations of real options–based approaches, namely, cash flows that follow a Brownian motion or some specific diffusion process or whose volatility needs to be constant. The usefulness of the proposed approach is demonstrated with a simple example. [ABSTRACT FROM PUBLISHER]

Capital investment in physical assets has increased over the years. With the increasing complexity and variety of assets, companies are highly dependent on assets performing at high efficiency levels. Equipment performance has become a crucial business factor that has led to a particular focus on the maintenance function. Maintenance is frequently perceived as a function having a poor rate of return due to difficulties in presenting its benefits in terms that management can understand. The cost of quality model allows translating the tradeoffs associated with the quality function into a financial language. This model has gathered importance with its cost categories (PAF: prevention, appraisal, and failure). Based on this model, the cost of maintenance (COM) model is proposed to emphasize the role of opportunity and infant mortality costs in maintenance. This model captures different cost components through the PAF categories, where each is compounded by direct, opportunity, and infant mortality costs. The COM model is employed to estimate maintenance costs of current transformers in a regional transmission division of an electric utility in Latin America. Results show that opportunity costs can account for more than 80% of total maintenance costs, and infant mortality costs can represent more than 15% of these costs. [ABSTRACT FROM AUTHOR]

In occasions called momentum crashes, the usually effective cross-sectional momentum strategy for financial asset allocation produces drastically negative returns. We develop a stochastic mean-risk optimization model featuring CVaR to control the risk, dynamically adjusted CVaR tail probability and objective function weight, and return scenarios generated by hybrid moment-matching. In a 95-year backtest, portfolios rebalanced by our method provide higher returns and lower risk than those rebalanced by a cross-sectional momentum heuristic, while avoiding momentum crashes. [ABSTRACT FROM AUTHOR]

Previous Enterprise Resource Planning (ERP) evaluation methods using closed-form solutions have ignored the unique characteristics of ERP's life cycle. We propose a lifecycle model based on simulation and stochastic processes to capture and evaluate ERP's value, including additional key factors. Our results show that accounting for the life cycle, ERP value differs from traditional wisdom and supports decision making from various factors and scopes, considering ERP's implementation's unique characteristics. [ABSTRACT FROM AUTHOR]

This article presents a novel mathematical model for managing the level of cash reserves for the self-financing phase-able as well as non-phase-able project portfolio selection and scheduling problems. Practically, the executive managers of project-oriented organizations tend to keep cash within their organization to increase their decision-making power. Although this allows managers and investors to invest in future economic projects, it imposes opportunity costs on owners and investors, in which case maintaining cash reserves can turn out to be a major challenge between owners and executive managers. This issue becomes more acute when the project-based organization operates self-financing. Because the financing is limited to the revenues of the finished projects, money withdrawn from the project account without proper management exacerbates financial constraints. Consequently, managers will bypass some future valuable investment opportunities. In this article, from the point of view of cash holding, the expectations of managers and investors in a self-financing phase-able and non-phase-able project-based organization will be met simultaneously. The proposed model is a nonlinear integer program. After linearization, an example is provided to illustrate the applicability and performance of the proposed model. [ABSTRACT FROM AUTHOR]

Cost-benefit analysis is a benefit measurement method that compares the cost required to realize the product, service or result with the benefits to be obtained. It allows future earnings to be calculated with the present value of money and different projects can be compared. In this study, the uncertainties of decision maker inputs were reflected in a more realistic way by dealing with the cost-benefit analysis under decomposed fuzzy sets. The contribution of this study to the literature are the decomposed fuzzy linguistic term scale, which is proposed for the first time, and the new equations and formulations developed for cost-benefit analysis under fuzziness. This study also contributes to the successful applicability of engineering economics issues and financial analysis methods under fuzziness. [ABSTRACT FROM AUTHOR]

The commonly used compound annual growth rate CAGR does not consider volatility, and its calculation fails for time series beginning or terminating with a zero or negative value, which may be the case for a company's earnings history. Thus, a modification of the standard definition is proposed, derived from a covariance-invariant mapping of observations to a two-parameter exponential model. The novel growth rate is called "covariance-invariant CAGR ", which becomes CAGR for the special case of steady growth at a constant rate. It can be obtained using different options such as a chart, look-up table or formula. Further, the extension of the model by an additive constant may be used if negative values dominate. The approach is viewed as easy to apply as the log-linear model but with a superior performance. Compared to nonlinear least-squares regression, unique solutions can be obtained that allow a rather quick calculation. [ABSTRACT FROM AUTHOR]

Operations that depend on transportation vehicles experience a high degree of uncertainty in fuel costs. We construct and analyze the engineering economic problem of how to value flexibility when the vehicle design under consideration enables fuel savings in the future by incurring an initial cost for the vehicle to incorporate features that will support future modifications. For a vehicle manufacturer working with a customer, we derive the optimal threshold fuel costs to incorporate such features and to decommission under the net benefit maximization through a real options approach. From these derivations as well as an illustrative example in the case of winglets for aircraft, we present the managerial insights and economic implications of the flexible design in transportation vehicles. [ABSTRACT FROM AUTHOR]

Optimal upper and lower thresholds model for traffic guarantee are proposed to optimize the risk allocation between a government and a concessionaire considering the perspective of lenders and the risk tolerances of the participants. In this study, the condition for the lender to provide the loan is that the default probability of the project does not exceed the acceptable maximum default probability of the lender. The proposed model uses risk weights to reflect the risk tolerances of government and the concessionaire and adopts a Gini coefficient for risk to describe the rationality of risk allocation. The application of the model to a highway project shows that a traffic guarantee with optimal thresholds effectively balances the project risks for both the government and concessionaire. [ABSTRACT FROM AUTHOR]

The levelized cost of energy is commonly used in both policymaking and capital investment decisions. It unitizes capital costs by amortizing them over an assumed asset life. The life of the asset is usually assumed to be known with certainty. But in many electric power applications, the life is both uncertain and subject to regulatory shocks. In these cases, the standard levelized cost of energy calculation is incorrect and potentially misleading. We propose a corrected version of this measure using expectation under a probability model for shortened life and show its implications for several investment and policy applications. [ABSTRACT FROM AUTHOR]

Among construction industry participants, weather has been perceived to be one of the most critical factors impacting project cashflows. The overall impact of weather on the contractor's project objectives is non-trivial due to construction industry incentive structures and contract specifics. This paper presents a framework that leverages stylized facts from the construction industry to motivate the use of weather derivatives in managing the non-trivial weather impacts. The proposed framework is demonstrated using data provided by a large construction contractor. We show that weather derivative portfolios used for hedging purposes by the contractor can address the contractor's aversion for losses as well as the complicated relationship between weather and construction. Furthermore, weather derivative hedging reduces the contractor's incentive to partake in risk chasing behavior in the face of weather delays and reduces the likelihood of the contractor exploiting other claims channels within the project contract. [ABSTRACT FROM AUTHOR]

The main purpose of this paper is to expand real option analysis out of the realm of pure financial option pricing techniques. To overcome many of the well-known concerns by adopting the financial option pricing techniques for modeling real options problems such as replicating portfolio concept, geometric Brownian motion as underlying stochastic process, and estimating project volatility, we propose an alternative real option valuation based on the loss function approach. The option value determined by the loss function approach is equivalent to the expected value of perfect information (EVPI) in decision analysis. It basically sets the upper bound of risk premium to pay in retaining the options. In practice, many firms utilize the concept of Value at Risk to manage their portfolio risk. If a firm sets a target VAR, then we may be able to link this VAR in refining the actual risk premium to pay in hedging the risk embedded in the investment. With this practice in mind, we present a logic to figure out an appropriate amount of real option premium to pay for a given level of risk tolerance. A comprehensive example is presented to demonstrate the computational procedures as well as economic interpretations on the outcomes. [ABSTRACT FROM AUTHOR]

Green infrastructure has been applied in urban areas to mitigate the negative effects of urbanization and promote the efficient use of resources. This study suggests a methodology for assessing the economic value of installing green roofs and green walls in public buildings, particularly in primary schools. The economic evaluation considers costs and benefits from three perspectives—(i) infrastructure, (ii) users, and (iii) environment—using three levels of analysis (i) financial, (ii) economic, and (iii) socio-environmental. The methodology is applied to ten alternative green roofs/walls scenarios in two primary schools in Lisbon, Portugal, for validation purposes. The cost-benefit analysis is carried out for a 40 and 50-year life cycle, using a 6.67% discount rate. The results show that all scenarios are feasible. The final benefit-cost ratios range between 3.01 and 34.99. A sensitivity analysis shows that the installation cost, esthetic improvement, and increased sound insulation have a significant impact on the results. [ABSTRACT FROM AUTHOR]

A government-subsidized private participation in infrastructure (PPI) project is a solution to attract private investors to invest in financially non-viable infrastructure projects with high social benefits. A government-subsidized PPI project comprises three financing sources: government subsidy, equity, and debt. For government-subsidized PPI projects, the government subsidy level must be determined before the optimal debt ratio can be determined. A government subsidy level that is too low may lead to the project being non-bankable for financial institutes and a level that is too high may result in high excess returns for project investors. This paper develops cooperative game models, which are multiple–variable game models, to determine optimal solutions for four major decision variables – the government subsidy, tariff, debt ratio, and interest rate for project negotiation for PPI projects. This three–party game model is developed to identify terms and conditions that optimize the total benefits of financially non-viable PPI projects, which can lead to successful PPI project negotiations. The Kaohsiung cable car project in Taiwan is used for demonstration purposes. The results of the analysis show that optimal solutions for the three financing sources - government subsidy, equity, and debt - can be determined by the models. [ABSTRACT FROM AUTHOR]

Engineering economy has been studied by the majority of engineering students for many years, yet its place in engineering education is often misunderstood. Logic suggests that the engineering economy course would be highly valued since it is the only course many engineering students will take related to financial matters, but instead there is evidence that the subject is being marginalized. While pressures to reduce program credit hours and changes to the Fundamentals of Engineering exam may play a role in this, perhaps engineering economy has not sufficiently evolved to meet the needs of students or the realities of the contemporary workplace. What can be done to ensure that engineering economy fulfills its potential as an important part of engineering education? There may be few clear-cut answers, but we believe that engineering economy should shift toward a future characterized by rigorous coursework grounded in engineering design principles and applications of risk and uncertainty. This has been our goal in teaching engineering economy at Western Michigan University for many years. The purpose of this paper is to communicate the essential elements of a strategy that has helped to make the course a vibrant component of several engineering programs. [ABSTRACT FROM AUTHOR]

There has been considerable recent emphasis on valid assessment of learning in engineering education. When new teaching pedagogies are introduced, it can be very challenging to demonstrate increases in learning of course concepts. While there are a number of accepted concept inventories available for some engineering topics (statics and dynamics, heat and energy, signals and systems, and statistics), reliable and valid tools for assessing learning are not readily available for many curriculum areas, including engineering economy. This paper discusses the reliability and validity of the Engineering Economy Concept Inventory (EECI) that can be used to assess learning in any introductory engineering economy course. Development of the EECI began in 2009 for use in assessing the effectiveness of model-eliciting activities in the classroom and has since been revised and reformulated a number of times. In the fall of 2018, the EECI was administered at multiple institutions for further evaluation of its validity and results from these groups of students are presented. The paper concludes with remarks regarding the reliability and validity of the instrument and recommendations for its use as a tool to assess knowledge in engineering economy. [ABSTRACT FROM AUTHOR]

Engineering economics courses often require students to take time-constrained, in-class exams in which they solve problems by hand, possibly referring to interest rate tables. Many students rely on partial credit to successfully pass exams. Outside of the classroom, professionals rely on computers to solve engineering economics problems, which raises the question of whether engineering economics courses are correctly assessing student performance. This article describes the study of a large engineering economics class using a non-conventional testing method. Student performance was evaluated using online testing modules with a stringent passing criterion, and the tests could be taken multiple times. The questions for each testing attempt were pulled from a database so that students received a new question every time. We compare the performance of students who were assessed using traditional methods with the performance of students assessed with these online testing modules. Our analysis shows that, overall, students who were assessed using the online testing modules earned better grades than students who were assessed via traditional methods. The analysis also discusses several benefits and drawbacks to using online assessments compared with traditional methods. The online assessment method could be useful in large engineering courses that are formula-based. [ABSTRACT FROM AUTHOR]

Pakistan Railways has faced a severe financial crisis in recent years. Pakistan has recently become a partner with China in a mega-investment project under an agreement called the China-Pakistan Economic Corridor (CPEC). Among other things, CPEC also includes a range of investments in Pakistan Railways. This particular study focuses on the analysis of US$8.2 billion investment in the upgrade and expansion of the Karachi-Peshawar railways link, which is also known as the ML-1 (Main Line 1). The study found ML-1 as economically viable with a payback period of 10 years. Furthermore, ML-1 project investment is expected to result in uplifting Pakistan Railways, mainly through an increase in freight and passenger transportation. Some risk factors may hinder the expected economic return from the CPEC investment in Pakistan Railways. These factors include consistency in the government policies, the status of the Pakistani economy in upcoming years, and law and order situations in the country. The study has a utility for the governments of both countries and larger business communities have stakes in the trade between the two countries. It is equally beneficial for the international community, businesses (both in China and Pakistan) and locals of the region associated with the CPEC infrastructure. [ABSTRACT FROM AUTHOR]

Studies on project failure and its subsequent termination phase are scarce; studies that use a quantitative approach are almost nonexistent. This is most likely because organizations usually do not collect data on project failures, are unable to share such data, or a combination of both. The contribution of this article is twofold: to (1) showcase a methodology to validate a model using actual business cases and (2) validate a project termination phase forecast model (PTPFM) using the methodology. The model is validated through four business cases, comparing the results from the model to the decisions made in reality. [ABSTRACT FROM AUTHOR]

Green roofs and living walls are considered effective solutions for improving the environmental integrity of urbanized areas and the overall performance of buildings. Proposals are emerging not just for buildings but also for existing transport infrastructures that have needs/problems that can be met or addressed by such solutions. However, the economic feasibility of such sustainable solutions has not yet been clarified. This study presents a methodological approach to performing cost–benefit analyses of greening urban transport infrastructures at the separate financial, economic, and socioenvironmental levels. Infrastructure, user, and environmental dimensions are also assessed. Whole life cycle costs and socioenvironmental benefits are considered together. The methodology is applied to one of the main stations in Lisbon, Portugal: Entrecampos Railway Station. Five different case study alternatives for the station's retrofit with green infrastructures are compared to its current situation. The cost–benefit analysis demonstrated that all five greening alternatives are economically feasible. For a 50-year life cycle and a 3.36% discount rate, the net present value ranged between EUR 734,700 and EUR 7,733,279. A sensitivity analysis was also performed, revealing a high degree of influence of discount and inflation rates, recreation, aesthetics improvement, well-being, and the station noise reduction on the net present value, ranging from 1.5 to 9%. [ABSTRACT FROM AUTHOR]

In choosing when to start collecting Social Security, the differences in expected net present values (NPVs) are small—but the corresponding standard deviations are not. Starting earlier is less risky. The case analyzed is single individuals in the U.S. system, but the methodology can be applied to couples and to the systems of other nations. Considering risk and return together places Social Security in the same risk/return framework as other capital investments. Behavioral, situational, and qualitative factors that often dominate decisions on when to start are linked with quantitative approaches to longevity risk and mortality risk. [ABSTRACT FROM AUTHOR]

The main research objectives are to ascertain the state of the art of the postauditing practices of UK small/medium enterprises (SMEs) to fill a gap in the literature and to offer a sound empirical base for future discussion. We show that the reality of those that undertake postaudits differs from the perceptions of those that do not and may therefore present a learning opportunity. The level of importance of the three key objectives (control, learning, and evaluation) of a postaudit appears to be influenced by organizational structure. The reasons for not undertaking a postaudit and difficulties encountered are clearly evidenced. [ABSTRACT FROM AUTHOR]

In this article, we study the use of the international standard for measuring the generosity of research and development tax subsidies, the B-index, as a predictor of the effectiveness of a subsidy. We find a close relationship, with some modifications of the B-index required. We demonstrate how a synthesis of the B-index and a structural model of a firm's wealth-maximizing behavior can be used to evaluate policy proposals regarding modifications to the research and development tax credit. [ABSTRACT FROM AUTHOR]

Project volatility is an essential parameter for real options analysis, and it may also be useful for risk analysis. Many volatility estimation procedures only consider the volatility in the first year of the project. Others consider that different years may have different values of the project volatility. This article takes into account that volatility may change not only with time but also with the state of the project. Two possible definitions for the project volatility are considered, the log-variance and the variance of the project value, and two simulation-based procedures are proposed for estimating state-dependent volatility: two-level simulation and one-and-a-half-level simulation. Computational experiments show that both procedures perform better than the method proposed by Copeland and Antikarov and that the one-and-a-half-level simulation procedure leads to the most accurate estimations of project volatility. [ABSTRACT FROM AUTHOR]

An important application in the real options literature has been in investments in the oil sector. Two commonly applied “stylized facts” in such applications are tested here. One is that the correlation of the returns on oil and the stock market is positive; the other that it is invariant to changes in oil price volatility. Both are rejected in data for 1993–2008 for crude oil and Standard & Poor's 500 stock market index. Based on real options theory, consequences are pointed out. The widespread idea that higher volatility leads to increased value and postponed investment is not necessarily valid. [ABSTRACT FROM PUBLISHER]

In recent years, there has been much expectation that transmission expansion planning should address ever increasing demands for transmission services under significant and complex economic and regulatory uncertainties. In this article, toward meeting the aforementioned expectation, we develop and analyze a real options framework that provides the valuation of a transmission owner's option to expand in his or her network. What distinguishes our framework from the extant literature is that the evolution of the demand follows a geometric Brownian motion process, it explicitly accounts for the physical flow of the electric power economically manifested as the locational marginal prices, and it shows how the values of the expansion options can be determined in the transmission network. Furthermore, our framework shows how to value an option to expedite or delay can be determined given that a specific expansion is planned. An extensive numerical example is presented to illustrate the key features of our framework. [ABSTRACT FROM PUBLISHER]

Rotating savings and credit association (ROSCA) is a well-known microfinance association widely used in many countries around the world with long histories. By considering extra profits that such a system can provide when compared to banking transactions, we develop optimization problems to achieve an optimal design of a ROSCA. We find that ROSCAs might attract investors when deposit and loan rates from formal banking systems are not favorable. Furthermore, optimal rates and optimal orders to maximize system outputs are reported. [ABSTRACT FROM AUTHOR]

Cash flows generated by mining projects tend to be volatile and are extensively influenced by exogenous variables, notably commodity prices and exchange rates. The traditional discounted cash flow (DCF) method, which is normally used for economic feasibility studies and mining project evaluations, presents inconsistencies because the method fails to adequately address uncertainties and operational flexibilities and often ignores certain specific market conditions. Numerous studies have been carried out for mining project evaluations using the real options valuation (ROV) technique for assessing commodity price uncertainty, but there is no research on the combined effects of price and exchange rate uncertainties. Therefore, in order to assess the economic viability of a mining project more accurately, the commodity price and its inherent volatility, the exchange rate and its inherent volatility, and the correlation parameters between them have been incorporated into the model and used in the evaluation process. One of the interesting findings revealed in the study is that project values are overestimated if only commodity price uncertainty is considered in evaluating the project value instead of the joint effect of commodity price and exchange rate uncertainties. This new ROV technique will explore the opportunity to utilize an alternative methodology for approximating project values and to identify valuation opportunities to enhance economic gains or to mitigate economic losses, where the DCF valuation method does not. [ABSTRACT FROM AUTHOR]

This article presents a detailed system dynamic (SD) model of a metal mining investment that is usable in ex-ante profitability and operations management analysis. We show how the SD model can be used to analyze the profitability effect of three operational real options: the option to temporarily close production, the option to abandon production, and the option to increase production through cutoff grade change. The SD model allows for intuitive modeling of the multiple interactive real options and arriving at results that are difficult, or impossible, to reach with commonly used spreadsheet software. We also analyze the effect of mining project debt ratio to the project value and show that correctly choosing the debt ratio affects project profitability. The effect on the project value of using three different future metal price scenarios with two different stochastic processes is illustrated to highlight the importance of correct process selection in modeling future metal price paths. A realistic case of a high-cost nickel (Ni) metal mine is used as a basis for the presented numerical illustration of the model. [ABSTRACT FROM PUBLISHER]

This article presents the “Engineering Economics Jeopardy!” mobile app development process and college students’ satisfaction assessment of the developed app. The app includes a general tools E-book, calculator, reference tables, conceptual questions, and calculation problems in an engaging fashion. The E-book is a summary of the key concepts of engineering economics. The calculator provides functions to solve basic engineering economics problems with formulas. The tables allow the users to compute discrete compound interest factors. Through this Jeopardy! game, users can compete with two virtual opponents that have artificial intelligence to answer conceptual questions and calculation problems. Different sets of problems range from the simple questions on the time value of money to more complex concepts, such as sensitivity analysis, Monte Carlo simulation, and supply–demand equilibrium. This app is intended to give students more opportunity to learn and practice concepts of engineering economics whenever and wherever they want using their mobile devices. Accomplishments of this work include the following: “Engineering Economics Jeopardy!” mobile app has been developed and distributed.Five thousand people have downloaded the app so far.The effectiveness of the developed app has been researched with 116 college students who were enrolled in engineering economics courses across two semesters. [ABSTRACT FROM PUBLISHER]