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Four replacement scenarios were analyzed for a vehicle fleet designed to haul sensitive packages at two different customer locations. In addition to completing an economic replacement analysis study, each option was analyzed according to availability requirements and other intangible attributes. Finally, a thorough sensitivity analysis was performed to examine the impact of reliability assumptions on both life cycle costs and the expected economic life of each option. Once all factors were analyzed, each critical input was graded and scored, leading to the final recommendation to replace the current equipment with a new technology. [ABSTRACT FROM AUTHOR]

An examination of publication trends in The Engineering Economist was presented at the recent Industrial Engineering Research Conference held in Reno, Nevada. Specifically, 686 articles published from 1964 to the present were assigned to 14 categories and analyzed over time. Those trends are summarized here along with a discussion about past, present, and future research trends in engineering economics. [ABSTRACT FROM AUTHOR]

Iterative solutions of forward dynamic programming formulations for the capacitated lot sizing problem are used to generate inequalities for an equivalent integer programming formulation. The inequalities capture convex and concave envelopes of intermediate-stage value functions and can be lifted by examining potential state information at future stages. Several possible implementations that employ these inequalities are tested and it is demonstrated that the proposed approach is more efficient than alternative integer programming-based algorithms. For certain datasets, the proposed algorithm also outperforms a pure dynamic programming algorithm for the problem. [ABSTRACT FROM AUTHOR]

Equipment replacement strategies are highly dependent on the horizon of analysis. While the literature can generally be categorized according to infinite or finite-horizon solutions, this paper examines the case where the horizon will last at least Ts periods but may last as long as Tl periods, due to uncertainty in the length of production runs or the temporary provision of services. Stochastic dynamic programming formulations are presented and solutions that minimize either expected costs or maximum regret are explored. Furthermore, the critical time period where optimal decisions diverge for different horizon realizations is identified. As this time period may be substantially earlier than Ts, a lease option contract is designed that allows owners to lower the risk of high costs that may result from a given horizon realization, while opening a possible source of revenue for a leasor. [ABSTRACT FROM AUTHOR]

This article addresses a rental fleet sizing problem (RFS) in the context of the truck rental industry, subject to uncertain customer travel time and nonstationary customer demand that is dependent on geographical location, time, and the economic cycle of the industry. We integrate tactical (asset purchases and sales) and operational (empty truck movement and vehicle assignment) decisions, with the explicit incorporation of an asset age factor, to achieve lower cost solutions. Typically, the length of time horizon and number of locations under consideration are quite large, which makes the RFS model computationally challenging to solve. Aggregation procedures are employed for location clustering and end-of-horizon effects are examined through demand scenario-based analyses. For the reduced time-space networks, decision analyses are conducted for the RFS model to provide insights into the truck rental business regarding asset movement decisions and asset procurement/disposal decisions over time and locations. [ABSTRACT FROM AUTHOR]

When real options are used to estimate the value of delaying an engineering project, it is necessary to consider the cash flows or project benefits that are lost due to the delay. This note describes various models of these cash flows and surveys previous TEE articles to see which are used and how often delay costs are ignored. The first model considered is based on the lost dividends Black-Scholes model for financial options, which is one of the most common models used in real options even though it does not explicitly consider cash flows. More realistic scenarios include the loss of initial cash flows, delays in starting to receive the same number of cash flows, loss of cash flows at the project horizon, and permanent loss of market share. The outcomes are compared with the often unrealistic case of omitting these delay costs. We assert that the common omission of waiting costs is rarely appropriate and offer models that better capture the costs of delaying real projects. [ABSTRACT FROM AUTHOR]

Volatility is the one parameter that is added to information utilized in traditional discounted cash flow analysis in order to calculate the value of a real option. There is no single, theoretically justified approach for calculating the volatility coefficient for real options. This article reviews and compares the methods currently available to estimate the volatility parameter to be used in real options analysis. As these techniques often overlook the investment cost risk when estimating project volatility, a new method of computing volatility that utilizes the expected internal rate of return is presented. The methods are compared using two case studies. Furthermore, a definition of “actionable” volatility is offered in order to classify the risky parameters to be used in real options valuation. Most methods overestimate the volatility parameter, because the volatility of the decision is included in the estimate, not the volatility associated with the option, which we term actionable risk. [ABSTRACT FROM AUTHOR]

Electronic resource management in academic libraries involves determining which subscriptions to continue, which to end, and which to start each period. This can be modeled as a typical capital budgeting problem, as resources are limited, with the complication that returns are non-financial. This article examines two such models with different objective functions used to “value” subscriptions given the data available on their usage. The models are tested on data collected from 52 different journals subscribed to by Lehigh University over the past two years. It is believed that models of this type will become more useful as electronic usage data becomes more readily available and standardized. [ABSTRACT FROM AUTHOR]

The optimal solution to the infinite-horizon equipment replacement problem with stationary costs is to continually replace an asset at its economic life. The economic life is the age that minimizes the Equivalent Annual Cost (EAC), which includes purchase, operating and maintenance costs less salvage values. We explore the question of whether this is a good policy for the finite-horizon problem, which occurs when companies only require an asset for a specified length of time, usually to fulfill a specific contract. We identify cases, according to capital costs, operating costs, and the interest rate, when this policy is good and when it deviates significantly from optimal. Furthermore, we provide a bound on the minimum number of times that an asset is retained at its economic life over a finite horizon. This is facilitated through a new dynamic-programming formulation to the problem based on the integer-knapsack problem with nonlinear costs. The bound can be derived from any feasible solution, although we provide a closed-form solution for the case of convex EAC values. [ABSTRACT FROM AUTHOR]

Parallel replacement analysis is concerned with determining minimum cost replacement schedules for a group of assets that are economically interdependent and operate in parallel. That is, keep and replace decisions are required for each asset among a group of assets over a specified horizon. The assets are economically linked through economies of scale or budgeting constraints. One application of parallel replacement analysis is fleet replacement. We recently studied the operations, including fleet replacement policies, for a city transit bus operator in Europe. Key factors in their replacement decisions included the ability to choose from multiple manufacturers, purchase price, and government regulations. We explore these and other factors, by solving a heterogeneous replacement problem with fixed costs, budgeting constraints, and demand constraints. Through extensive sensitivity analysis we analyze the impact of various parameters on decisions, in terms of the choice of replacement assets, as well as the optimal time to retain assets. Additionally, we provide motivation for future research in this application area, which is important for many cities. [ABSTRACT FROM AUTHOR]

In this article we present a method for determining project acceptability in the presence of multiple internal rates of return. An internal rate of return is an interest rate that equates the present worth of a cash flow stream to zero. When unique, it provides valuable information about the return on the investment and is often viewed as a measure of efficiency. Unfortunately, this analysis is clouded when there are multiple internal rates of return, which can occur when a project is defined by a mixture of positive and negative cash flows. While many methods have been presented in the literature to deal with this problem, we believe ours to be unique in that it does not rely on the computation of another measure of worth, but rather, the identification of the relevant rate of return from the set of internal rates of return. We show that this rate always produces decisions consistent with present worth under the assumption that at least one real internal rate of return exists. In doing so, we provide new definitions of when a project is borrowing from, or loaning to, the firm. These definitions help in understanding the meaning of multiple internal rates of return, which is also discussed. [ABSTRACT FROM AUTHOR]

Introduces a series of articles on engineering economy.

In this article, the author presents his gratitude towards several area editors of the journal including Thomas Boucher, Kevin Dahm and Ted Eschenbach who helped him throughout his career as an editor. He discusses the progress made by the journal during last nine years. He also mentions that technical improvements are beneficial for our area editors and authors of the journal.