Engineering Project Appraisal

by Martin Rogers (Dublin Institute of Technology)

• ISBN13: 9780632056064
• ISBN10: 0632056061
• Format: Paperback
• Copyright: 2001-07-01
• Publisher: Wiley-Blackwell

Summary

Today, practicing engineers need to understand the economic, environmental and social contexts of a development project and be able to resolve problems that arise in these areas. Accredited professional engineering courses (including SARTOR approved courses) now require students to develop an awareness of the economic, financial, social and environmental factors of a development project, along with an understanding of risk analysis and quality systems. Therefore, to be successful, engineering projects must be properly planned and those plans assessed and evaluated on their merits. This book provides details on the evaluation techniques required to assess project plans, and information on both economic and non-economic methods of project appraisal. Working examples and case studies are given to illustrate the applicability of each set of techniques. Engineering Project Appraisal will prove an invaluable and informative guide for both students and practitioners involved in the area of engineering project planning.

Table of Contents

Preface	xi
Introduction	1	(6)
PART 1 ECONOMICS-BASED PROJECT APPRAISAL TECHNIQUES	7	(172)
Decision-making and Project Appraisal	9	(27)
Decision-making context	9	(1)
Techniques for decision-making	10	(10)
Non-analytical decision-making	10	(2)
Analytical decision-making	12	(1)
Reasoned choice	12	(1)
Classical rational decision-making	13	(3)
Behavioural decision-making	16	(2)
Irrational decision-making	18	(1)
Political involvement in the project planning process	18	(2)
Primacy of the rational model	20	(1)
Decision-making conditions	20	(2)
Certainty	21	(1)
Risk	21	(1)
Uncertainty	21	(1)
Project planning process	22	(7)
Identifying project options	22	(2)
Identifying attributes/criteria of evaluation	24	(2)
Methods for engineering project appraisal	26	(3)
Example of a decision process	29	(3)
Case study 1: Economic analysis of alternative port access routes for a major city	30	(1)
Case study 2: Multi-criteria analysis of alternative waste management strategies for a region	31	(1)
Summary	32	(1)
Review of succeeding chapters	33	(1)
References	34	(2)
Basic Tools for Economic Appraisal	36	(22)
Introduction	36	(1)
The time value of money	36	(1)
The estimation of interest	37	(1)
Simple and compound interest	38	(2)
Nominal and effective interest rates	40	(1)
Nominal interest rates	40	(1)
Effective interest rates	41	(1)
Continuous compounding	41	(1)
Time equivalence	42	(2)
Economic computation	44	(13)
Symbols	44	(1)
Formulae for single payments	45	(1)
Uniform series formulae	46	(3)
Geometric series formulae	49	(4)
Calculations involving unknown interest rates	53	(1)
Calculation of unknown years	54	(1)
Additional examples	55	(2)
Summary	57	(1)
Present Worth Evaluation	58	(14)
Introduction	58	(1)
Present worth - the comparison process	59	(11)
Comparing options with equal lives	59	(1)
Comparing options with unequal lives	60	(2)
Comparing options with infinite lives	62	(3)
Life-cycle cost analysis	65	(2)
Payback comparison method	67	(3)
Summary	70	(2)
Equivalent Annual Worth Computations	72	(12)
Introduction	72	(1)
The pattern of capital recovery	72	(1)
Modifying annual payments to include salvage value	73	(2)
Evaluating a single project	75	(1)
The comparison process	76	(6)
Introduction	76	(1)
Equal life projects	77	(1)
Lease or buy?	77	(1)
Projects with different lives	78	(2)
Projects with infinite lives	80	(2)
Summary	82	(2)
Rate of Return Computation	84	(18)
Introduction	84	(1)
Minimum Acceptable Rate of Return (MARR)	84	(1)
Internal Rate of Return (IRR)	84	(1)
IRR for a single project	85	(7)
Calculating IRR for a single project using present worth	85	(2)
Calculating IRR for a single project using annual worth	87	(1)
Single projects with more than one possible rate of return	87	(1)
External rate of return	88	(1)
Historical External Rate of Return (HERR)	89	(1)
Project Balance Method	90	(1)
Unequal lives	91	(1)
Incremental analysis	92	(7)
Introduction	92	(2)
Using rate of return analysis for ranking multiple mutually exclusive options	94	(4)
Using IRR to analyse options with different lives	98	(1)
Summary	99	(3)
Benefit-Cost Ratio, Depreciation and Taxation	102	(11)
Introduction	102	(1)
Costs, benefits and disbenefits	102	(1)
Estimating the benefit-cost ratio for a single project	103	(1)
Comparing mutually exclusive options using incremental benefit-cost ratios	104	(1)
Depreciation	105	(3)
Introduction	105	(1)
Straight-Line Method	106	(1)
Declining Balance Method	106	(2)
Taxation	108	(3)
Summary	111	(2)
Benefit - cost ratio	111	(1)
Depreciation	111	(2)
Cost Benefit Analysis of Public Projects	113	(39)
Introduction	113	(1)
Historical background to Cost Benefit Analysis	114	(2)
Theoretical basis for Cost Benefit Analysis	116	(1)
The procedure of Cost Benefit Analysis	117	(1)
Identifying the main project options	117	(1)
Identifying costs and benefits	117	(2)
Placing valuations on all costs and benefits/disbenefits	119	(2)
Introduction	119	(1)
Shadow pricing	119	(1)
Non-market Valuation of costs/benefits	120	(1)
Assessing and comparing the cost-benefit performance of options	121	(3)
Sensitivity analysis	124	(1)
Final decision	125	(1)
Case study: The Cost Benefit Analysis of a highway improvement project	126	(8)
Background to Cost Benefit Analysis for transport projects	126	(2)
Introduction to case study	128	(1)
Data	129	(1)
Solution	130	(4)
Advantages and disadvantages of traditional Cost Benefit Analysis	134	(2)
Techniques for valuing non-economic impacts	136	(10)
Introduction	136	(1)
Techniques using surrogate market prices	136	(5)
Contingent valuation method	141	(5)
Integrating sustainability into Cost Benefit Analysis	146	(1)
Using Cost Benefit Analysis within different areas of engineering	146	(4)
Introduction	146	(1)
Flood alleviation	147	(1)
Health	148	(1)
Agriculture/irrigation	148	(1)
Transport	149	(1)
Summary	150	(1)
References	150	(2)
Other Economic Analysis Techniques	152	(27)
Introduction	152	(1)
Cost-effectiveness	152	(4)
Introduction	152	(2)
Final comment	154	(2)
The Planned Balance Sheet Method	156	(8)
Introduction	156	(1)
The relevance of pure Cost Benefit Analysis to planning problems	157	(2)
Lichfield's Planned Balance Sheet	159	(1)
Layout of the Planned Balance Sheet	160	(4)
Conclusions	164	(1)
Hill's Goal Achievement Matrix	164	(12)
Introduction	164	(1)
Goal Achievement Matrix and the rational planning process	165	(1)
The basic steps used to form the matrix	165	(1)
Formulating the objectives	166	(1)
Evaluating costs and benefits within the Goal Achievement Matrix	167	(1)
The structure of the Matrix	168	(1)
Uncertainty within Goal Achievement Matrix	169	(1)
The Simplified Goal Achievement Method	169	(2)
An advanced version of the Goal Achievement Matrix	171	(2)
Concluding notes on the Goal Achievement Matrix	173	(3)
Summary	176	(1)
References	177	(2)
PART 2 NON-ECONOMICS-BASED PROJECT APPRAISAL TECHNIQUES	179	(110)
Multi-criteria Analysis	181	(14)
Introduction	181	(1)
Multi-criteria evaluation models detailed within this text	182	(2)
Simple non-compensatory methods	184	(9)
Dominance	184	(2)
Satisficing methods	186	(2)
Sequential Elimination Methods	188	(3)
Attitude-oriented methods	191	(2)
Summary	193	(1)
References	194	(1)
The Simple Additive Model	195	(44)
Background	195	(1)
Introduction to the Simple Additive Weighting (SAW) Method	196	(3)
Sensitivity testing	199	(3)
Probabilistic additive weighting	202	(5)
Introduction	202	(1)
Expected value	203	(1)
Variance	204	(3)
Assigning weights to the decision criteria	207	(13)
Presumption of equal weights	208	(1)
Ranking system for obtaining weights	208	(2)
Ratio system for obtaining weights	210	(1)
Pairwise comparison weighting system	211	(1)
The Resistance-to-Change Grid	212	(2)
Hierarchy of weights	214	(3)
Multiple weighting systems	217	(2)
Scoring systems for the criteria	219	(1)
Checklists	220	(10)
Introduction	220	(2)
Environmental Evaluation System	222	(4)
Sondheim's Environmental Assessment Methodology	226	(2)
Mongkol's Methodology	228	(2)
Case study - Using the Simple Additive Weighting Model to choose the best transport strategy for a major urban centre	230	(7)
Introduction	230	(2)
Assessing the importance weightings for the decision criteria	232	(1)
Assessment of each option on each of the sub-criteria	233	(2)
Results of the Multi-Criteria Assessment	235	(1)
Sensitivity analysis	236	(1)
Summary	237	(1)
References	237	(2)
Analytic Hierarchy Process	239	(19)
Introduction	239	(1)
Hierarchies	240	(1)
Establishing priorities within hierarchies	240	(2)
Establishing and calculating priorities	242	(14)
Introduction	242	(1)
Deriving priorities using an approximation method	243	(2)
Deriving exact priorities using the iterative eigenvector method	245	(2)
Example of the Exact Method for determining priorities	247	(9)
Relationship between AHP and the Simple Additive Weighting model (SAW)	256	(1)
Summary	257	(1)
References	257	(1)
Concordance Techniques	258	(26)
Introduction	258	(1)
Concordance Analysis	258	(3)
PROMETHEE I and II	261	(8)
ELECTRE I	269	(3)
Introduction	269	(1)
Obtaining a ranking from the concordance and discordance indices	270	(2)
Other Concordance Models	272	(10)
Indifference and preference thresholds	272	(1)
ELECTRE III and PROTIETHEE (5th Form)	273	(9)
Summary	282	(1)
References	283	(1)
Concluding Comments	284	(5)
Introduction	284	(1)
Which project appraisal technique should one use?	284	(2)
Future challenges	286	(1)
References	286	(3)
Index	289