Economics of Engineering: A New Fabric from Some Old Threads

Three axioms are used to present the basic fundamental ideas of engineering economics. These axioms are then used to derive a generalization of present value that includes both a local and global perspective. The relationship between the local and global concepts is derived and then used to solve cash flow problems that involve flows placed arbitrarily in time.     

Decreasing Utility for Money and Optimal Corporate Debt Ratio

Increasing the ratio of debt capital to total capital increases leverage or sensitivity of equity earnings per share to changes in pretax earnings on composite capital. If (1) total capital needs, and (2) probabilistic pretax earnings on composite capital are held fixed while the debt ratio is increased, the result is an increased variability of after tax earnings per dollar of equity capital. With the “price” (variability) growing with still further increases in debt ratio, “nonuniform utility of money” concepts are helpful in revealing this growing variability as an “investor barrier” to still greater debt ratios.     

A NOTE ON BIAS IN CAPITAL BUDGETING INTRODUCED BY STOCHASTIC LIFE

This note extends work by Young and Contreras and by Rosenthal on the present worth of cash flows under uncertain timing. In capital budgeting analysis, the use of the expected life of a project instead of the life distribution of the project biases the estimate of its expected net present value. In most situations the bias results in an overestimate of the expected net present value of the project. When the exact life distribution is unknown, the bias can be approximated by Taylor series expansion. The sensitivity of the bias to the discount rate, to cash flow patterns, and to income taxes is also investigated.     

PER UNIT COST ALLOCATION OF INVESTED CAPITAL WITH ANTICIPATED NON-LEVEL PRODUCTION: THE CASE OF EXTRACTIVE INDUSTRIES

The concept of equivalent annual annuity (EAA) has long been used as a method of costing recovery of invested capital and the required return on invested capital over the productive life of a capital project. Academic texts almost universally use EAA methodology with level payment streams (annuities) to allocate capital costs. We develop a methodology for allocating capital costs evenly over each unit of production for projects with anticipated non-level production. This methodology uses a modified EAA approach that allows non-level annuity payment streams. Capital cost allocation is an important component in computing the value of extracted minerals for severance tax purposes; however, many firms and state and federal agencies use ad hocdepreciation schedules to allocate these costs. Ad hocdepreciation methods such as modified accelerated cost recovery system (MACRS) may be appropriate for income tax purposes but are inconsistent with commonly found requirements that severance taxes “shall be assessed on the wellhead or mine mouth fair market value.” The modified EAA approach provides a straightforward alternative that is based on sound financial methodology.     

Communication and knowledge as motivators: understanding Singaporean women’s perceived risks of breast cancer and intentions to engage in preventive measures

As breast cancer is the most prevalent cancer among women in Singapore, encouraging them to engage in preventive measures becomes increasingly important. This study aims to take a closer look at the influence of attention to media, interpersonal communication, news elaboration, and knowledge on women’s (aged between 30 and 70) perceived risks of breast cancer and their intentions to engage in preventive measures in Singapore. Attention to media, frequency of interpersonal communication, fatalistic belief, and knowledge structure density were found to be associated with risk perception of breast cancer among Singaporean women. Findings also showed that frequency of interpersonal communication, risk perception, elaboration, and factual knowledge were positively associated with women’s intentions to take up preventive measures such as breast self-examination, clinical breast examination, and mammography. Implications for theory and practice were discussed.     

Modeling default risk with support vector machines

Predicting default risk is important for firms and banks to operate successfully. There are many reasons to use nonlinear techniques for predicting bankruptcy from financial ratios. Here we propose the so-called Support Vector Machine (SVM) to predict the default risk of German firms. Our analysis is based on the Creditreform database. In all tests performed in this paper the nonlinear model classified by SVM exceeds the benchmark logit model, based on the same predictors, in terms of the performance metric, AR. The empirical evidence is in favor of the SVM for classification, especially in the linear non-separable case. The sensitivity investigation and a corresponding visualization tool reveal that the classifying ability of SVM appears to be superior over a wide range of SVM parameters. In terms of the empirical results obtained by SVM, the eight most important predictors related to bankruptcy for these German firms belong to the ratios of activity, profitability, liquidity, leverage and the percentage of incremental inventories. Some of the financial ratios selected by the SVM model are new because they have a strong nonlinear dependence on the default risk but a weak linear dependence that therefore cannot be captured by the usual linear models such as the DA and logit models.     

A decision analytic approach for technology portfolio prioritization: aviation safety applications

A decision analytic approach for evaluating new aviation safety products and technologies is developed and demonstrated to consolidate five existing program assessment metrics to develop a unified metric that simultaneously considers the relative importance and contribution of each. This allows for a meaningful and objective evaluation and comparison of the National Aeronautics and Space Administration (NASA) Aviation Safety Program (AvSP) advanced aeronautical products and technologies. The resulting decision model is referred to as the Composite Program Assessment Score (CPAS). The CPAS includes the five existing metrics; technical development risk, implementation risk, fatal accident rate reduction, safety benefits and cost, and safety risk reduction, which are each defined and quantified by different sources. The CPAS involves the scaling and combination of these individual metrics. In this paper, two alternative combinatorial modeling approaches to calculate the CPAS are presented. The weighted sum model and an additive value theory model are compared and contrasted. The resulting CPAS metrics allow an overall comparison of all 48 of the NASA AvSP products and technologies. Currently CPAS is based on preliminary weight measures from subject matter experts to reflect the relative importance of each metric. Actual case studies of both linear and non‐linear value functions are demonstrated.