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Introducing Engineering Economy Students To Real Options

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Conference

2003 Annual Conference

Location

Nashville, Tennessee

Publication Date

June 22, 2003

Start Date

June 22, 2003

End Date

June 25, 2003

ISSN

2153-5965

Conference Session

Trends in Engineering Economy

Page Count

12

Page Numbers

8.775.1 - 8.775.12

Permanent URL

https://peer.asee.org/12112

Download Count

79

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Paper Authors

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Jon Juneau

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Kant Vajpayee

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Eyler Coates

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Abstract
NOTE: The first page of text has been automatically extracted and included below in lieu of an abstract

Session 1139

Introducing Engineering Economy Students to Real Options

Eyler R. Coates, S. Kant Vajpayee, Jon Juneau

University of Southern Mississippi/Engineering Consultant Box 5137, Hattiesburg, MS 39406

Abstract

Engineering economy has been a core requirement in engineering curriculums for many years. The traditional engineering economy courses only include problems with all deterministic inputs, even though deterministic data seldom occur in business. Also, traditional net present value methods make no allowance for flexibility by management and assume a static environment. The analysis of stochastic engineering economic problems has been ignored and the technological changes over the past 15 years have not been fully utilized in the traditional engineering economy courses. Therefore, students are not proficient to do such analyses when working in the business world. This paper demonstrates the ease that engineering economy problems with stochastic input variables and real options can be simulated with simulation software that is readily available to students on personal computers. The novel application presented in this paper will greatly enhance both Engineering Economy and Simulation courses.

Introduction

In order to deal with the variability issues of real business projects, risk analysis is necessary. But, the risk analysis approach is one aspect of economic analyses that is commonly ignored during project evaluations. Ristroph points out that errors in estimates of cash flows are the rule rather than the exception. He also states that the primary question involving most cash flows is not whether they will be correct, but rather by how much will they be incorrect.12 Including risk analyses in engineering economy solutions is an important step for acquiring more information to make better management decisions. Ho and Pike report that “proponents of risk analysis argue that increased risk information improves management’s understanding of the nature of risks, helps identify the major threats to project profitability and reduces forecasting errors.” 9 They also report that “the risk analysis approach provides useful insights into the project, improves decision quality and increases decision confidence.” 9 The methods for risk analysis of projects have been published for a long time and the availability of computers and software is pervasive. Given that the capabilities of doing risk analyses are available, Goyal et al. has questioned why there is so little exposure to the stochastic nature of project cash flows and other project variables in undergraduate curricula.5

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

Juneau, J., & Vajpayee, K., & Coates, E. (2003, June), Introducing Engineering Economy Students To Real Options Paper presented at 2003 Annual Conference, Nashville, Tennessee. https://peer.asee.org/12112

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