9/4/2023

ELEC / CPEN 481

Lecture 1
Course Overview

Jeff Carmichael, PhD

Division Manager, Business Development, Metro Vancouver

Past work experience

• Academic research (Penn State, UBC)
• Teaching (Penn State, UBC)
• Private consulting
• Government employment (Metro Vancouver)
Areas of experience
– Water resource management
– Climate change
– Sewage management
– Renewable energy
– Integrated resource recovery
– Business casing
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Administrative overview
• Current Plan: Lectures will be delivered live.
• Questions encouraged
• Abbreviated version of lecture notes will be posted in advance
• Evaluation:
• Individual assignments: 7 assignments totaling 53%
• Group assignment: Business plan 20%
• Final exam 27%

• Assignments will be submitted online

• Encourage you to type your submissions: submit as pdf, with supporting
materials also (such as Excel)
• If hand written and not legible by TAs, will receive zero score
• Late submissions penalized 2% of total score per hour

• Business plan proposal and presentation online live in breakout groups

• Business plan report submitted online

• Final exam will be in person, 1.5 to 2 hours long.

Administrative overview
• Asking questions:
• Questions about course content and/or process: recommend using
Piazza. Head TA Xiao Han and I will monitor frequently and respond to
questions.

• Requests for clarification or re‐grading of your own assignment: email

them to head TA Xiao (xiao.han@ubc.ca who will coordinate responses

• Questions specific to your personal situation: email me

(jeffjcarmichael@gmail.com or jcarmich@ece.ubc.ca)

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Engineering Economics: Financial Decision

Making for Engineers
Seventh Edition

Chapter 1
Engineering Decision Making

Copyright © 2022 Pearson Canada Inc. 1-5

Learning Goals (1 of 2)
1.1 Recognize the complexity of engineering decision
making.
1.2 Be able to define engineering economics.
1.3 Recognize the influence and importance of quantitative
analysis even if decisions are made based on other
criteria.
1.4 Understand how a model can be used to help manage
complex decisions.

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Learning Goals (2 of 2)
1.5 Recognize ethical issues inherent in some complex
engineering decisions.
1.6 Understand that quantitative analysis uses estimates for
future quantities, and that this inherent uncertainty
must always be considered.
1.7 Understand how this textbook is organized.

1.1 What is Engineering Decision Making?

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1.1 Engineering Decision Making (1 of 5)

• Early engineers only had to know technical aspects of
their job.
• Engineering projects use resources (raw material, labour,
and time)
– Choosing the best solution/alternative depends on how
costs and benefits are compared.
• Engineers must be able to choose among several
technically feasible alternatives.

1.1 Engineering Decision Making (2 of 5)

• The practical science of Engineering Economics was
originally developed to:
– deal with determining which of several alternatives was
anticipated to be the most economical.
• Choosing the least expensive is not the only
consideration.
– The engineer has to be aware of the financial constraints
on the problem.

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1.1 Engineering Decision Making (3 of 5)

• An engineer must consider if an engineering project may
cause detrimental environmental effects.
– Example:
• Garrison Diversion Unit, water diversion project cancelled
in the 1960s.
– Would bring salty water and foreign fish species into
Canada.

1.1 Engineering Decision Making (4 of 5)

• Engineers must consider social and political constraints.
– Example:
• Spadina Expressway
– cancelled in 1971 due to public opposition
• Engineers must consider changes in technology
– Example
• Crescent Dunes Solar Energy Project
– Cancelled in 2015 because new technology resulted in
cheaper and more efficient electricity production.

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1.1 Engineering Decision Making (5 of 5)

• Engineers must make decisions in an extremely complex
environment.
• Necessary to all engineering is the ability to choose
among several technically feasible alternatives:
– Defend that choice within a set of moral, social,
environmental, and political criteria.
• These skills form the discipline of engineering
economics.

1.2 What Is Engineering Economics? (1 of 3)

• Originally, engineering economics was the body of
knowledge that allowed the engineer to determine which
alternative was economically best.
– Engineer needed to understand the mathematics
governing time and money.
• Trend is managers are more reliant on the technical skills
of engineers.
• Trend is for engineers to become managers.

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1.2 What Is Engineering Economics? (2 of 3)

• Since engineers are becoming managers,
– understanding how to compare costs is not the only skill
needed to make suitable engineering decisions.
• Engineering economics is defined as:
– “the science of dealing with techniques of quantitative
analysis, those useful in selecting a preferable
alternative from several technically viable ones”

1.2 What Is Engineering Economics? (3 of 3)

• While the evaluation of costs and benefits is important,

and the mathematics for doing this evaluation still makes
up the bulk of studies in engineering economics
– The modern engineer must recognize the limits and
applicability of these economic calculations.
– The modern engineer must be able to take into account
the inherent complexity of the real world.

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1.3 Making Decisions (1 of 5)

• Decisions are made on basis of belief, but “facts” should
be the “foundation” of belief

Figure 1.1

1.3 Making Decisions (2 of 5)

• Preferences are beliefs about what is best.
– Sometimes have an emotional basis.
• Politics and people is about the use of power in
organizations.
– Ex.: Owner of a factory may have a strong opinion that
automation is important
• This impacts engineering decisions on the plant floor.

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1.3 Making Decisions (3 of 5)

• Facts
– Perceptions of truth that may or may not be valid or
verifiable
• Facts contribute to the politics and the people, and
indirectly to the preferences.

1.3 Making Decisions (4 of 5)

• Activities that contribute to the facts are at the bottom of
the pyramid.
– Include:
• a history of previous similar decisions,
• statistics,
• determination of costs.

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1.3 Making Decisions (5 of 5)

• Facts tend to control the politics, the people and the
preferences.
• Facts and the activities that develop the facts form the
foundation of the pyramid.
• Engineering economics facilitates the establishment of
verifiable facts about a decision.
• Note, that the decision eventually made may be contrary
to that suggested by analysis.

1.4 Dealing with Abstractions (1 of 4)

• When dealing with the complexities of reality, it is
advisable to use a model or abstractions.
• When one describes something, it is for purpose.
– In the description, one selects those aspects of the real
world that are relevant to that purpose.
• It would be confusing if a great deal of unnecessary
information every time something was talked about.

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1.4 Dealing with Abstractions (2 of 4)

• Process of simplifying the complexities of the real world is
necessary for any engineering analysis.
– E.g. in designing a truss for a building, it is assumed that
the members exhibit uniform characteristics.
• In the real world, these members would be pieces of
lumber with individual variations.
– Since it is impractical to measure the characteristics of
each piece of wood, a simplification is made.

1.4 Dealing with Abstractions (3 of 4)

• Figure 1.2 illustrates the basic process of modeling that
applies to engineering.

Figure 1.2

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1.4 Dealing with Abstractions (4 of 4)

• In engineering economics, the model is often a
mathematical one that simplifies a more complicated
situation, but does so in a reasonable way.
• Information from the model is related back to the real
problem
– To take into account aspects of the real‐world issue that
may have been ignored in the original modeling effort.
• E.g. Economic model might not have included taxes and
inflation and the result might suggest that taxes and
inflation should not be ignored.

1.5 The Moral Question (1 of 1)

• Complex decisions often have an ethical component.
• Recognizing the ‘ethics’ is important for engineers, since
society relies on them to stick to the “truth” ‐ the
analysis.
• “As guardians of knowledge, engineers have a vital
responsibility to society to behave ethically and
responsibly in all ways.”
• The three anecdotes in Chapter 1 illustrate this.

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1.6 Uncertainty and Sensitivity

Analysis (1 of 4)
• Whenever people predict the future, errors occur.
• Although one cannot expect an engineer to predict the
future precisely, approximations are very useful.
– An engineer may not be able to precisely predict a scrap
rate
• May be able to determine a range of likely rates to help in a
decision making process

1.6 Uncertainty and Sensitivity

Analysis (2 of 4)
• Engineering economics analyses are quantitative in
nature
– Most of the time the quantities used in economic
evaluations are estimates.
• This results in uncertainty in the analysis.
• Sensitivity analysis involves assessing the effect of
uncertainty on a decision.

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1.6 Uncertainty and Sensitivity

Analysis (3 of 4)
• Although a particular value for a parameter can be known
with only a limited degree of certainty, a range of values
can be assessed with reasonable conviction.
• In sensitivity analysis:
– Calculations are done several times, varying each
important parameter over its range of possible values.
– Usually one parameter at a time is changed, allowing the
effect of each change to be assessed independently

1.6 Uncertainty and Sensitivity

Analysis (4 of 4)
• Sensitivity analysis is an integral part of all engineering
economics decisions because data regarding future
activities are almost always uncertain.
• No decision is properly made unless the sensitivity of
that decision to variation in the underlying data is
assessed.

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What will you learn?

What will you learn?

• How to use economic techniques to:
• decide whether to do a project or not
• choose among project options
• help estimate how much money will be needed to implement a project

• How economic measures fit into the broader picture of environmental, social,
and other measures when making decisions

• Other challenges to decision making in the real world

• How to clearly portray and summarize info and recommendations

• How financial people handle data

• How to prepare a financial plan

• How to gather and use financial data to start a business or assess how a
business is doing

• How economic techniques can help you make good financial decisions in your
own life

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Why does this matter?

These techniques should help:

• Lead to good professional and personal

decisions and recommendations

• Create buy-in from other parties

• Align with corporate strategic goals

• Help you start or run a business, with respect to

financial needs and techniques

• Enhance your professional opportunities and

reputation

Is this content innovative and challenging?

Yes, and No…

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Decision making process fundamentals

Decision making process fundamentals

1. Recognize the problem or opportunity

2. Define the goal or objective

3. Determine and reach consensus on scope

4. Select the criteria to determine the best alternative

5. Identify feasible alternatives, including the default option

(“Business As Usual”)

6. Assemble relevant data

7. Construct physical and economic models

8. Predict the outcomes or consequences for each alternative

9. Choose and implement the best alternative

10. Audit the results

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Simple example 1: what to do tonight

Simple example 1: what to do tonight

• Any limitations? Do we agree?
•
• Options?
•
•
• Level of complexity involved
•
• Evaluate pros and cons
•

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Simple example 1: what to do tonight

Evaluation
Cost Laughs Exercise Inconvenience
Watch TV None Low Zero None

Dinner & Medium High Low Medium

movie
Skiing Low Low High Medium

Dancing High Medium High High

Simple example 1: what to do tonight

Evaluation
Cost Laughs Exercise Inconvenience
Watch TV None Low Zero None

Dinner & Medium High Low Medium

movie
Skiing Low Low High Medium

Dancing High Medium High High

• Does any option beat watching TV? How do you know?

• What if you’re sure you don’t want to do the usual:
which alternative is best?

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Simple example 2: what car to buy

Simple example 2: what car to buy

• Define the problem (Scope)
•
• Define measures of success
• Options
• BAU:
• Alternatives:
• Level of complexity involved
•
• Evaluate pros and cons
•

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Simple example 2: what car to buy

Challenges: Legal and procedural issues

• Capital cost as traditional and only factor

• Life cycle analysis (EPA fuel economy

standards)

• Legal / procurement limitations

Challenges: economic analysis (time value of

money)

We will go through this example in greater detail

later.

Example 3: wastewater infrastructure

decisions

• Design decision: include stairway to access below-

ground chamber

• Implications on capital cost vs ongoing maintenance

costs

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Example 4

Wastewater treatment biogas use

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Example 4: wastewater treatment biogas use

Project Overview

• Install biogas cleanup equipment

at Lulu Island WWTP in Richmond

• Use excess digester gas

beneficially by cleaning up and
selling to FortisBC as renewable
natural gas

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Project Schematic: Existing

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Project Schematic: New

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Biogas Upgrading Assessment

Concept:
• Quality requirement
• Innovative but not ‘bleeding edge’
Process assessment:
• technologies reviewed
• Waterwash and Pressure Swing
Adsorption (PSA)

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Business Case Analysis

• 25 year equipment life

• Est $12.3M capital costs

• Initial biomethane sales $630,000 / yr

• Initial O&M costs $150,000 / yr

• Carbon price policy benefits $330,000 / yr

• Positive business case: +$5.4 million NPV

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Challenges and Opportunities

Challenges:
• Scope
• Partnerships
• Financial considerations
• Legal and regulatory considerations
Opportunities:
• Hands‐on operational experience
• Environmental benefits
• Demonstration of innovation
• Synergies and incentives

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Biogas Enhancement and Use

Enhancement possibilities:
• Free up additional biomethane
• Effluent heat recovery
• Enhance generation: Co-digestion
• Direct addition of energy-rich materials
to anaerobic digesters, generating
biogas
• More complete digestion
• Thermal hydrolysis
• Microwave-enhanced oxidation

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Example 5: North Shore Wastewater Treatment Plant

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Example 5: North Shore Wastewater Treatment Plant

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Example 5: North Shore Wastewater Treatment Plant

Effluent heat recovery project
District of North City of North
Vancouver Vancouver

District Energy
Energy Centre: System
Metro Vancouver

Distribution Piping

Example 5: North Shore Wastewater Treatment Plant

Effluent heat recovery project

2016 corporate GHG Costs and Benefits

emissions (tonnes)
Net capital Annual GHG
investment credits (tonnes/yr)
Metro /feds $16,926,000 5,700
5,540 /province
Carbon price $150 / tonne
14,140
(benefits)
Total value of $21,375,000
benefits

Liquid Waste utility Board decision to approve, on basis of value of

Metro Vancouver remainder GHG reductions

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Challenges
• Valuation of environmental improvements
• Parties with different goals, who pays,
regulatory challenges
– Each participant has their own goals
• Who pays
– Who pays and who benefits can matter a lot
• Regulatory challenges
– Regulations are past‐facing, not future‐facing

Context: Triple Bottom Line Analysis

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Triple Bottom Line Analysis

• Not all criteria for success are financial

• Need for decisions and recommendations
to consider triple bottom line /
sustainability goals
• Comparison with business case analysis

Back to Example #1: Triple Bottom Line Analysis

Cost Laughs Exercise Inconvenience

Watch TV None Low Zero None

Dinner & Medium High Low Medium

movie
Skiing Low Low High Medium

Dancing High Medium High High

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Organization of course material and textbook

How economic techniques can help you make good personal financial
decisions: Scattered throughout, including Chapters 3, 8, 9, 12, 13

Core material on economic techniques (“business case analysis”)

• Chapters 2-5, 9

Public versus private analysis challenges, including taxes: Chapters 10, 5 and 8

Other important factors to take into account in economic techniques

• Chapters 12, 7, and parts of 13

How financial people think, work, and handle financial data: Chapters 6 and 8

Business planning and project management: Chapters 6 and 11

How economic measures fit into the broader picture of environmental, social,
and other measures: Chapter 13

Additional material provided to expand on textbook and cover other related

challenges:
• Other challenges to decision making in the real world
• How to clearly portray and summarize decision recommendations

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