Economic Analysis

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Economic Analysis

• Construction Engineering 221

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Economic Analysis

• Another means of risk assessment
• Virtually every decision your make involves an
  assessment of risk
• Whether to drive or fly
• Whether to buy at WalMart or Marshall Field
• Whether to have sex with someone
• Whether to buy a new vehicle or keep your old one
• Whether to major in Con E or History

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Economic Analysis

• Risk assessments are trade-offs between
  sub-optimal choices
• Different forms of risk in construction
• Financial
• Contractual (liability and tort)
• Design (in some deliveries)
• Method of construction
• productivity

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Economic Analysis

• Use contract language and legal documentation to
  protect against contractual risk
• Use economic analysis to make risk decisions
  regarding financial trade-offs
• Use probability for process risk (covered later)

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Economic Analysis

• Can be used for personal or corporate decisions
  (although personal decisions are affected by
  irrationality constraints)
• Can be used for any currency, and even
  cross-currencies with appropriate assumptions
• Can be used across a variety of terms

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Economic Analysis

• Many methods can be used to arrive at the
  correct answer
• Precision is senseless in the face of gross
  assumptions
• Year end convention keeps things simple and is
  robust over the long term (equivalent treatment
  of options)
• Introduction of non-quantifiable factors can be
  problematic -there are ways to handle it

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Economic Analysis

• Cash Flow is the blood of construction- MUST know
  how to predict and value cash flow
• Use cash flow timelines to help visually
  structure the problem and alternatives

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Economic Analysis

• Receipts point up, disbursements point down,
  vector length represents size of cash transfer
• Ignore sunk costs (frequently irrational)
• Types of cash flows
• Single payment (lump sum)
• Uniform series (equal payments at set times)
• Gradient (increasing payments)
• Exponential gradient (decaying stream)

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Economic Analysis

• Problems
• Alternative projects
• Replacement retirement of equipment
• Rate of return
• Loans and repayments
• Capital budgets
• Assumptions and equivilence tomorrow