Engineering Economic Analysis

After Completing This Chapter...

The student should be able to:

·Define various cost concepts..

· Provide specificexamples of how and why these engineering cost concepts are important.

· Define engineering cost estimating.

· Explain the three types of engineering estimate, as well as common difficulties encoun-

tered in making engineering cost estimates.

· Use several common mathematical estimating models in cost estimating.

·Discuss the impact of thelearning curveon cost estimates.

· State the relationship between cost estimating and estimating project benefits.

·Drawcash flow diagramsto show project costs and benefits.

QUESTIONS TO CONSIDER ;;.

1. By investing heavily in warehouses and other infrastructure, Webvan incurred large
   "fixed costs" that it would have to pay regardless of whether it attracted customers. By
   contrast, Tesco invested a more modest sum up front and hired employees only when
   customer orders increased enough to warrant it. How might these choices have affected
   the financial fates of the two companies?


2. In most cases, businesses that are seeking 'financing for start-up or expansion must de-
   velop detailed estimates of their likely costs and future earnings. But Webvan convinced
   investors that it was operating in a "new world" of Internet COlTIlTIerce,to which the
   old rules did not apply. How did this affect investors' willingness to accept Webvan's
   estima.tesof its financial prospects?


3. Generally, businesses view cost considerations as a constraint. Inthis case, however,Jhe

dotcom boom of the 1990s stood that rule on its head: the more Webvan spent, the more'

money investors seemed willing to give the company-at least until the boom ran its

course. Would Webvan have been better off with investors who asked more questions

and imposed more limits? Why or why not?