MIE 353 Engineering Economics Todays Goals

1
MIE 353 Engineering EconomicsTodays Goals

• Class evals
• 2 presentations
• Review for Final
• Uncertainty Analysis
• Hand out answers to practice final
• HC Presentation Tomorrow, Thursday Dec. 13 at
  530.
• Report due Fri. Dec. 15
• Final Tuesday Dec. 18

2
Uncertainty Analysis

• If uncertainty is important, then choose the
  alternative with the highest expected PW
• Example say a parameter can be high with
  probability .22 or low with probability .78.
  Assume we want to maximize PW.

P.22
Value if high 27,000
1-P.78
Value if low 12,000
3
Uncertainty Analysis

• If uncertainty is important, then choose the
  alternative with the highest expected PW
• Example say a parameter can be high with
  probability .22 or low with probability .78

P.22
Expected value of alternative 15,300
Value if high 27,000
1-P.78
Value if low 12,000
4
Uncertainty Analysis

• Example say a parameter can be high with
  probability .22 or low with probability .78
• Alternative 2 has a certain payoff of 20,000
• Choose Alternative 2, since the expected payoff
  is higher

P.22
Expected value of alternative 15,300
Value if high 27,000
1-P.78
Value if low 12,000
5
Uncertainty Analysis EVPI

• Consider the problem if you learn then act
• Alternative 2 has a certain payoff of 20,000
• Choose Alternative 2, since the expected payoff
  is higher
• The value of the decision problem is 20,000

P.22
Expected value of alternative 15,300
Value if high 27,000
1-P.78
Value if low 12,000
6
EVPI Learn then act

• EVPI 21,540 20,000 540

Alt 1
27,000
P.22
20,000
Alt 2
Alt 1
12,000
1-P.78
20,000
Alt 2
7
EVPI

• EVPI 21,540 20,000 1,540

Alt 1
27,000
27,000
P.22
20,000
21,540
Alt 2
Alt 1
12,000
1-P.78
20,000
20,000
Alt 2
8
Final

• Decision analysis and EVPI (ch18.4-5)
• Taxes (ch16-17)
• Interest calculations (ch 4)
• Cost estimations (ch15)
• Choosing between alternatives with different
  useful lives (ch 5.3 6)
• Breakeven analysis (ch13)
• IRR (ch 7-8)
• Decision Making Steps