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Session 2139

CALCULATING i FROM FINANCIAL DATA: A LONGITUDINAL ANALYSIS OF CONSTRUCTION RELATED FIRMS Mike Loose, Dr. Ted Eschenbach, P.E., Dr. John Whittaker University of Alberta / TGE Consulting / University of Alberta

Abstract

The interest rate, i, for evaluating investments can be derived from the opportunity cost of capital or the cost of financing. This paper applies a variety of methods to calculate the latter using the published financial data of five publicly listed steel fabrication firms. This industry was chosen because it is part of engineering and construction, the firms have enough organizational continuity, and using a single industry controls for some sources of variability. This analysis is done over time to provide a longitudinal perspective on the stability and meaningfulness of the different proposed measures.

This research is intended to establish a data-based foundation for teaching students in engineering economy courses how to establish the minimum attractive rate of return. This paper will present results for this data set and discuss links with other ongoing research.

Introduction

The interest rate, i, for evaluating investments can be derived exogenously from the cost of financing or endogenously from the opportunity cost of capital (based on the budget and the available investment opportunities). In order to provide data for the broader debate, this paper applies a variety of the methods (such as weighted average cost of capital and marginal cost measures) for defining i using the cost of financing (loans, bonds, stock, and retained earnings). To ensure comparability these firms are selected from publicly held corporations in a single industry listed on North American stock exchanges. This analysis is done over time to provide a longitudinal perspective on the stability and meaningfulness of the different proposed measures.

Steel fabrication firms were chosen for analysis, because of their close connection to the engineering and construction industry and because they have more organizational continuity than some areas of the E&C industry. Also, most of their principals have had courses in engineering economy, so that seems likely to influence approaches used to establish minimum attractive rates of returns. Their engineers use engineering economy and this minimum attractive rate of return in designing buildings, bridges, etc. and in selecting equipment to accomplish the work.

This paper is the second in a series we are developing wherein we intend to examine the usefulness of proposed methods for defining the minimum attractive rate of return (MARR). The first paper, Shifting i’s are not a Firm Foundation1 applied a variety of the methods for defining i using the published financial data of eleven major corporations. The disparate results for the value of i suggested limitations in the exogenously defined financial measures. Our intent is to examine a broader group of firms on an industry by industry basis to better delineate these limitations. This paper examines a single industry, steel fabricators and extends our analysis over

Proceedings of the 2003 American Society for Engineering Education Annual Conference & Exposition © 2003, American Society for Engineering Education

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Eschenbach, T., & Loose, M., & Whittaker, J. (2003, June), Calculating I From Financial Data: A Longitudinal Analysis Of Construction Related Firms Paper presented at 2003 Annual Conference, Nashville, Tennessee. 10.18260/1-2--11495