Investment decisions are critical part of a company’s success, and capital budgeting is a central topic of financial management. However, in contrast to other strategic decisions in business, decisions on capital projects are decentralized, from corporate to divisions, divisions to operations, from operations to departments. Engineers at various levels within the organization who make a capital proposal are contributing to the strategic success of the organization. This book will assist engineers to contribute strategically to the organization, so that they can contribute to the success of their company and can make a success of their careers. The purpose of this book is to provide engineers and managers with a working knowledge of the financial evaluation and the funding of capital projects. Four main topics concerning capital investment are covered, namely, the context of these decisions, the assessment of their returns, the assessment of their risks, and their funding and financing. Engineers have developed the field of engineering economics, and financial managers have developed the discipline of capital budgeting, each with its own approach and slightly different terminology. This book borrows from both these disciplines in order to provide engineers with the best possible knowledge about capital projects. An important aspect of the approach adopted here is to provide context to the techniques, methods and concepts of the economic assessment of engineering decisions. An engineer who knows her subject is able to communicate her ideas to people of different professions and with different training. An essential part of effective communication is to understand the other person’s paradigm, to know their basic assumptions. As a result, it is important to understand the basics of decision making, of financial management, and accounting. It is also important to understand the terminology used by different professions. Part I of the book examines these topics, which forms the introduction to the economic assessment of an engineering project. A project is assessed on its economic merits, its profitability. Part II of the book covers the techniques and methods of capital budgeting and engineering economics. In-depth case studies demonstrate the application of these techniques to practical situations.
The assessment of the economic merits of a project usually refers to the returns expected from the project. The cornerstones of finance are risk and return, and it is essential to address the risk of the project in a discussion of its merits. The risk is the chance of the expected returns not materializing. The types of risk, such as stand-alone risk and portfolio risk, for a capital project are examined in Part III of this book. It is also importantto understandthefinancing of a project,thesourcesof finance, and the structureof financialarrangementssuch as projectfinanceand public-private partnerships. Part IV of the book examines both the internal and external sources of funding and the structuring of the financial and legal relationships that enable the project to be built.