All Files in ‘ENEL301 (2021-S2)’ Merged

01. Ethical Behavior for Professional Engineers 1 - Thinking Ethically

Washington Accords Graduate Requirements apply ethical principles, commit to professional ethics/responsibilities/norms of engineering practice, assess societal, health, safety, legal and cultural issues and consequent responsibilities.

Professional engineers must:

Module 2 Outcomes

Students demonstrate understanding of their ethical responsibilities to:

Students can identify/justify ethical course of action in complex situations

ENGR101 Revision

Values/Morals:

Ethics is the study of moral principles:

Laws make up the minimal standards of conduct: actions can be legal but not ethical.

Workplace ethics: personal values + organizational values + external environment (government, norms)

Two parts to ethics:

  1. Discerning right from wrong
  2. Committing to do the right thing

Ethical theories:

Some rule books:

Tests:

TL;DR:

Rationalizations for unethical behavior:

02. Ethical Behavior for Professional Engineers 2: Codes of Ethical Practice

Professionals:

Lessons from 737 MAX: need for broader focus on moral courage in ethics education.

Common rules:

Codes of conducts aren’t worth the paper they’re written on if is not enforced.

AI and Robotics

UK Engineering and Physical Sciences Council:

Google:

Lots of wiggle room.

03. Ethical Behavior for Professional Engineers 3 - Ethics and Culture

Tūrangawaewae - place where one has right to stand; residence, belonging through kinship and whakapapa.

Cultural norms:

Hofstede’s dimensions of national culture; ‘loose’/‘tight’ societies:

Cultural implications:

04. Engineering Management 1 - Introduction to Management Thinking

Introduction

Understanding the basic principles of managing:

Is essential for competent engineers.

Definition of management:

Management is getting things done in organizations through people.

Mary Parker Follet

Taking inputs and optimizing the transformation process.

Environment/         The organization       The environment
resource inputs      creates                consumes/product
                                            output
People               Workflows turn         
Money                resources into         Finished goods
Materials     ---->  outputs        ---->   and/or services
Technology                                        |
Information          (transformation              |
     ^                process)                    |
     |                                            |
     ----------------------------------------------

Leads to

Systems theory of organization:

The Process of Management

Before getting things done, the following must be established:

Vision and mission: organization's purpose
                   |
                   | leads to
                   v
Strategy: how the objectives will be achieved
                   |
                   | leads to
                   v
Implementation: resource allocation, operations needed 
                to fulfil the strategy

Challenges

But recently also:

Roles of a Manager

POLC:

Organising

Structuring an organization and creating conditions/systems where people/resources work to gether to achieve organizational goals:

Leading

Creating a vision and guiding/training/coaching/motivating others:

Planning

Anticipating trends, determining the best strategies/tactics to achieve organizational goals/objectives:

Controlling

Determining if an organization is progressing towards goals/objectives, and taking corrective actions if required:

Management Skills

Higher level managers concentrate more on conceptual skills, but human skills are important regardless of level.

How to Manage

History

Classical Theories

Telling people what to do, motivating them with money.

Scientific Management

Improving the workers, watching the workers all the time to ensure they don’t mess it up. Punish the bad, reward the good.

Engineering the most efficient production methods.

Gaant chart: splitting tasks down into smallest components and showing dependencies.

Administrative Management

Improving the manager by applying ‘universal principles’ of efficient management.

Bureaucratic Management

Improving efficiency by developing the ‘ideal’ organization.

Max Weber:

Behavioral Management Theories

Mayo Hawthorne Studies:

Maslow’s hierarchy of needs; needs have to be satisfied in order of:

If a need is satisfied, it will no longer motivate people.

At work:

McGregor; Theory X/Y:

Human resource approach: people are social and self-actualizing. X/Y acknowledges that only some people are, and that good managers should be able to identify workers as such and treat them accordingly.

Quantitative Management Theories

Modern management theory

Theory Z: combination of American and Japanese (LEAN) management styles

Contingency theory: no universal principle, use contingency principles instead; appropriate managerial actions depend on the situation.

05. Engineering Management 2 - People in Organisations

Management

… is the art of getting things done through people

Peter Drucker

Performance:

What makes people behave as they do? What motivates people? How do groups work?

Individuals react differently to identical situations:

Individual Attributes

Nature:

Nurture:

Motivating People

Three categories of theories of motivation:

McClelland’s Three (Acquired) Needs Theory

Three types of needs, one of which dominates for each person:

Herzerg’s Motivation-Hygiene Theory

Also known as the two factor theory or intrinsic-extrinsic motivation theory.

Hygiene factors eliminate dissatisfaction; these are baseline requirements that are expected:

Motivators increase job satisfaction:

Process Theories

Equity Theory

J. Adams.

Employees try to maintain equity between inputs and outputs compared to others in similar situation.

This is based on people’s perception of themselves; no one things of themselves as a slacker.

Outcomes (self)Input (self)=Outcomes (others)Input (others) \frac{\text{Outcomes (self)}} {\text{Input (self)}} = \frac{\text{Outcomes (others)}}{\text{Input (others)}}

Expectancy Theory

Victor Vroom.

Before committing effort to a task, people ask:

Very much supported by empirical evidence.

Goal Setting Theory

Reinforcement Theory

Based on behavior modification (operant conditioning).

See Pavlov’s dogs.

Types:

Reinforcement schedule, continuous/intermittent, effects this; intermittent reinforcement works much better.

Summary

The approaches are a bag of tricks - pick one or a few, noting that some are not compatible with each other.

To determine if some approach works, rely on scientific data, personal experience and common sense.

If recommending one approach as an area for improvement, evaluate the likelihood of the manager being able to implement it.

06. Engineering Management 3 - Organising

Petronius Arbiter: reorganizing creates the illusion of progress while producing confusion, inefficiency, and demoralisation.

Organizing as a management function:

The middle two points are part of designing organizational structure.

Often, a lot of organizations evolve naturally without a plan which leads to inappropriate structure.

Organizational Structure

Definitions:

Basic Organizational Structure

Three components:

Determinants of Organizational Complexity

Types of Structures

Traditional:

New Developments:

Some structures may be so dysfunctional that the only way to ‘get things done’ is through informal routes.

Functional structure:

Divisional structures:

Functional/divisional hybrid structure:

Team structures:

Cross functional project groups - matrix structures:

Network Structures:

Bureaucratic vs Adaptive Organizations

Bureaucratic vs Adaptive, Mechanistic vs Organic, and kind of Theory X vs Y:

Axis Bureaucratic Adaptive
Authority Centralized Decentralized
Rules and procedures Many Few
Spans of control Narrow Wide
Tasks Specialized Shared
Teams/task forces Few Many
Coordination Formal/impersonal Informal/personal

Mechanistic designs useful for simple and repetitive tasks, production efficiency, well-defined jobs.

Organic designs useful when work efforts are highly interdependent, require high information-processing capabilities, for doing complex/unique tasks or creativity.

The whole company does not need to follow the same type of structure: different departments may have different needs and priorities that lead to some structures being preferred.

e.g. Engineering can be adaptive while legal, HR, finance etc. are bureaucratic.

Organizational Design

The process of creating structures that best serve the company’s mission and objectives.

Size, strategy, tasks, HR, environment, technology and life cycle all influence the organizational design.

The more uncertainty there is in the environment, the more adaptive the organizational structure needs to be. Trade-offs between efficiency/predictability and innovation/flexibility.

Technology and Organizational Design

Technology: knowledge, skills, equipment, methods used to transform inputs into outputs

Manufacturing:

Job Design

Simplification Rotation Enrichment
Scope Narrow Wide Wide
Depth Low Low High
Specialization High Moderate Low

Matrix; columns:

Matrix; rows:

Core Characteristics Model

Allows managers to create a job that best fits people’s needs.

A job high in the five core characteristics is ‘enriched’:

Outcomes:

Alternative Job Arrangements

Stress

Does the structure increase stress? Can this be mitigated or removed?

Stress factors:

NZ: employers have an obligation to ensure workers are not put under inappropriate stress.

07. Engineering Management 4 - Leading

Process of building enthusiasm and directing effort towards the organization’s goal.

Models of Leadership

Trait:

Behavioral:

Contingency:

Traits

Kirkpatrick and Locke

Goleman’s Emotional Intelligence Theory

Five critical components of emotional intelligence:

Behavioral Theories

Specific behaviors differentiate leaders from non-leaders. There are no ‘born leaders’; leaders can be trained, although to varying success - training someone that does not want to lead to lead will be difficult.

Two aspects:

Drucker

A good leader will:

Black Mouton Leadership Grid

Quadrant with two axes: concern for people and concern for people

Middle-of-the-road: balances with output with morale.

Contingency Theories

Considers characteristics from leaders, follows and that of the situation.

Harvard Business Review survey shows a mixture of traits and behaviors are required:

Hersey-Blanchard Situational Leadership Model

Quadrant with two axes: support required (relationship behavior) and guidance required (task behavior):

Fielder’s Contingency Model

Depending on these three characteristics the amount of situational control they have and the preferred leadership style, task- or relationship-oriented, changes.

House’s Path-Goal Theory

Effective leaders clarify paths through which followers can achieve the goal.

Depending on the situation, leaders should be:

This is dependent on the follower’s:

As well as the environment’s:

Team Management vs Leadership

These two terms may or may not be used interchangeably.

Management Leadership
Direct using positional power Guide, influence and collaborate using relational power
Maintain Develop
Focus on systems/structure Focus on relationships
Rely on control Inspire trust
Near-term goals Long-range vision
Ask how/when Ask what/why
Focus on bottom-line Focus on horizon
Accept status quo Challenge status quo
Do things right Do the right things
Focus on operational issues Focus on vision, motivation

08. Engineering Management 5 - Groups and Teams

Groups or Teams

Teams are subsets of groups; teams a structured groups where members work together towards a common goal for which they are all accountable.

In groups, members are at least judged by personal contributions.

Generally speaking, teams are usually more leaderless than groups.

Personality attributes of engineers (Thompson, 1996); not great for teamwork:

Shannon, 1980; once again traits not great for teamwork:

Group Dynamics

Groups have content, the technical problem being solved, and process, how the group is working together. The latter is group dynamic; the process should enhance the group’s ability to solve the task.

Stages of Group Development

Forming: getting acquainted, testing interpersonal behavior. This can take a while.

Storming: developing group structure and patterns of interaction

Norming: sharing acceptance of roles, sense of unity.

Performing: members enacting roles, directing effort towards goal attainment and performance.

Adjourning: members anticipating disbandment

Forming

Group/team leadership develops:

Tips:

Norming

Norms:

Examples in the workplace: people coming in a few minutes late, people staying late until the boss leaves.

Cohesiveness

Degree to which members are attracted to and motivated to remain part of the group.

The more cohesive the group, the greater the conformity to group norms.

The desire for group conformity can have enormous influence on an individual’s judgement, attitude and performance. This can be to the detriment of the individual’s interests; group think.

Asch experiments: simple question with obvious correct solution. If all others in the group (eve a small group) pick the wrong answer, the participant often picks the wrong answer.

The more homogenous the group, the easier it is to manage relationships and the easier it is to be cohesive.

The more heterogeneous the group, the greater the variety of ideas, perspectives and experiences which may overcome the difficulty of getting the group performing.

High cohesiveness can make the group difficult to manage and less likely to listen to outsiders - it is not necessarily good, especially if they have harmful norms.

Conflict

Small amounts of conflict are optional.

Conflict can be inter/intragroup, or interpersonal and can be increased by:

Workplace Tips

09. Engineering Management 5b - Group Decision Making

Vroom-Jago Leader-Participation Model

The former options favours authority decisions, the latter group decisions. Consultative decisions are in between the two extremes.

Vroom-Yetton-Jago Group Decision Styles

Autocratic/Authority Decisions:

Consultative Decisions:

Collaborative/Group Decisions:

Managing Group Decision Making

For managed teams, the manager clarifies the choice.

For self-leading teams, the team clarifies the decision making process: authority, majority, consensus, unanimity.

Delegation

Another option is delegation: share the problem with subordinate(s) and support their decision. The appropriateness of this depends on the nature of the task and skills of the subordinate(s).

Good delegation requires:

Four Quadrant Delegation

Leaders must be explicit in the choice of quadrant and follow through on their choice.

Advantages and Disadvantages

Advantages:

Disadvantages:

Irving Janis; symptoms of groupthink:

Avoiding groupthink:

10. Engineering Management 6 - Planning

Planning consists of:

Mission

Reason for the organization’s existence.

Good mission statements should include:

Missions should serve the organization’s stakeholders well.

Values: broad beliefs about what is or not appropriate. The culture reflects the dominant value system (e.g. profit, environmental sustainability) of the organization as a whole.

Goals vs Objectives

Goals:

Objectives:

Warning: anything that isn’t measured regresses; if you don’t set what you are measuring correctly, meeting the metrics does not necessarily mean helping the mission.

Types of Plans

Strategic plans: organization wide plans; establish overall objectives and position the organization in terms of its environment. Strategic plans are:

Operational plans: plans that specify details on how to achieve overall objectives. Operational plans are:

Types of Operational Plans

Single-use plans:

Standing plans:

Planning Process

  1. Define objectives
  2. Determine current state relative to objectives
  3. Develop premises regarding future conditions
  4. Analyze and choose among alternatives
  5. Implement the plan and evaluate results

Strategic Planning

Controlling

Determining if an organization is actually progressing towards its goals/objectives and taking corrective action if not. Involves:

11. Marketing for Engineers

Not just advertising and selling.

A societal/managerial process through which people/groups obtain what they need and want through creating and exchanging products and value with others.

Drucker:

The aim of marketing is to make selling superfluous. The aim is to know and understand the custer so well that the product or service fits and sells itself.

Mistakes

Product orientation:

Marketing orientation:

What does the customer want?

Black and Decker are not in the business of making drills; they are in the business of making customized holes.

The biggest mistake a company can make: build something that no-one wants

You must focus on customer needs and wants: the customer doesn’t care how good it is or hard it is to build, only the value it provides to them.

People aren’t rational and don’t tell you what they want; they cannot articulate their needs well.

Models to Explain Consumer Behavior

Consumer Influences

Situational:

Cultural:

Social:

Personal:

Psychological:

Product Market

A market is a group of potential customers with similar needs who are willing to exchange something of value with sellers offering various need-satisfying goods or services.

Value proposition: who wants it and what will they pay for it?

Marketing World

The consumer is at the heart of the marketing, but is not necessarily who you sell to; the customer.

B2B companies provide goods/services to other businesses that ultimately provide goods/services to consumers.

The Consumer

Ask:

Use this to cluster customers into relatively homogenous segments you can target.

The big question: is your share of the target market going to be profitable?

Marketing Strategy

The customer is at the heart of the strategy, but the environment is also critical.

The marketing environment has several variables but can be split into two broad categories, micro and macro.

The macro environment:

The micro environment:

The marketing strategy has several variables it can control called; the 4 Ps/The Marketing Mix:

Gaining Market Share

To gain market share in your target market, you must have a competitive advantage - an unique selling point.

Product differentiation can be found in many different ways:

Four Ps: Pricing Strategies

Four Ps: Place

Distribution channels, warehousing.

Coke: online, dairy, bar, vending machine, supermarket.

NB: price changes depending on location

Four Ps: Promotional Mix

Advertising:

Public relations: when an organization creates goodwill/mutual understanding with target audiences through:

Also:

12. Law for Engineers

Exam: one question on law. Need to know definitions and key elements of negligence and/or contracts, purpose/aims of Fair Trading/Consumer Guarantees Act, and state if there is negligence or a contract and explain what elements are missing.

Making and Classification of Law

Two primary sources: parliament and the courts.

Parliament

Parliament is:

Parliament creates Acts of Parliament/statute.

However, legislation is a superset of statues, including regulations, rules and bylaws.

Regulations and rules: when parliament delegates law-making power to other government bodies.

Bylaws: laws delegated to local councils.

The Courts

Common law: decisions made by judges make the law. Judges refer to previous cases, making the law if there are no relevant cases.

Statutes becoming more significant over time with common law becoming a fallback.

Parliamentary sovereignty: Parliament can create statutes that override common law.

Parliamentary Process

NZ Courts

Basic hierarchy:

Classification of Law

International law: inter-state relations (Treaties, Conventions, etc.)

Public law: government/individual relations (e.g. crimes, traffic offences, tax, constitutional law, human rights, welfare)

Private law: individual/individual relations (e.g. contract law, negligence, land law)

Contracts

Contract: agreement/promises between two or more people that is intended to be enforceable at law.

Agreement is critical: they must be mutually understood and legally enforceable promises between parties.

Basically any commercial transaction is a contract, even if there is no paper being signed (e.g. buying a coffee).

Elements of a Contract

Parties must intend that their agreement will be enforceable at law:

II: Offer and Acceptance

Offer: “An expression of willingness to contract made with the intention that it will become binding on the person making it as soon as it is accepted by the person to whom it is addressed.”

Acceptance: “A final and unqualified expression of assent to the terms of the offer.”

A counter-offer (implicitly rejects and then) destroys the original offer and substitutes it with a new offer.

Silence is not acceptance (e.g. if I don’t hear from you by x, I assume you have accepted my offer).

Invitations to treat

‘Treating’ means to negotiate. Hence, this means an invitation to make an offer.

It is a preliminary step towards a contract; it is a signal of preparedness to negotiate entering a contract.

It is NOT a promise to be bound if accepted.

Advertisements, catalogues, goods displayed on shelves etc. are all examples of invitations to treat.

Some examples of invitations to treat:

III: Consideration

Each party gives the other something and each party gets something in return: ‘the price of the promise’.

It must be sufficient - real and valuable, but does not need to be adequate (this is up to the parties to decide).

Each party must give something that is legally recognizable as consideration, even if it is purely nominal (e.g. a dollar for a patent, lease of land for a peppercorn). Without consideration, it would be a gift and not a contract.

IV: Capacity

People, natural or artificial, may have the capacity to contract.

Minors:

Intoxication limits contractual capacity: if a person is so intoxicated that they do not know what they are doing and this is appreciated (realized) by the other party, the contract is voidable by the intoxicated person.

A party is the victim of unfair treatment if you can show their consent was given under either:

Or there is:

VI: Legality

Contracts may be void for reason of illegality:

In some cases, the courts have power to effect a fair outcome (e.g. if it is found to be illegal after a payment is sent but before the product is delivered, the court can order the money to be returned).

Negligence

Part of private law; not a part of public/criminal law.

It is a species of Tort (means wrong in French). Other torts include defamation, breach of privacy (fairly new) and nuisance (interference with enjoyment of land).

Negligence is an act done by a person where they, without just cause or excuse, cause harm to the plaintiff; it is liability for careless acts or omissions.

In New Zealand, personal injury goes through the ACC, preventing you from suing others for negligence.

Tort is NOT contract. The distinction is the relationship between parties:

Donoghue v Stevenson (1932) House of Lords

The highest court in the UK, the House of Lords, created the tort of negligence in this decision.

Donoghue’s friend bought bottle of ginger beer (hence she was not party to a contract), finding a snail in the bottle and developed health issues because of it. She filed a lawsuit against Stevenson, the manufacturer, with the court holding that:

… You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbor. Who, then, in law is my neighbor? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.

Negligence is liability under civil law to recover for a loss and is separate from criminal law. For example, you could be charged under criminal for dangerous driving and separately sued for negligence.

Three Key Elements to Negligence

  1. Duty of care owed: the person is a ‘neighbor’
  2. There is a breach of duty: failing to reach the standard of care that a reasonable person (or person professing special skills) ought to have
  3. The breach causes loss/damage
    • ‘but for’ test: but for the failure in duty, the loss/damage would not have occurred
    • The chain of causation between the breach of duty and loss/damage is not too far/remote
      • e.g. crashing into a car, causing them to miss an important contract; liable for the damage to the car but not the damage from missing the contract

Negligent Advice

Duty: usually arises when an advisor is in the business of giving advice or hold themselves out as having skill and expertise (the defendant knew or ought to have known the advice would be relied upon).

Breach of duty: failing to meet a standard assessed by reference to the reasonable specialist advisor/expert - could be reflected in a code of ethics.

Loss: there must be proof of actual loss.

Consumer Protection

Fair Trading Act 1986: attempts to stop unfair competition by increasing consumer protection by requiring information about the product and services to be true.

Consumer Guarantees Act 1993: establishes minimum standards for goods and services which are purchased by consumers and gives remedies against those that fail to meet the guaranteed standards.

There is no contracting out of these acts for domestic consumers (adding a clause that these acts will not apply), although it may be possible if the consumer is in trade.

The acts are complementary:

Fair Trading Act, Section 9:

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive

Consumer Guarantees Act

The Consumer Guarantees Act applies when goods or services are supplied by a supplier or manufacturer to a consumer. It does not apply to someone supplying something privately.

Guarantees for Goods by suppliers include:

  1. Guarantee as to title
    • They have the right to sell the goods
  2. Guarantee as to acceptable quality, safe, durable
    • Standards depend on the circumstances
  3. Guarantee as to fitness for purpose
    • If you are told it can do X, it should be able to do X
  4. Guarantee as to price; reasonable price if no price if mentioned (more relevant for services)

Guarantees for Goods by manufacturers include:

  1. Guarantee of acceptable quality
  2. Guarantee as to repairs and spare parts
  3. Express guarantees
    • e.g. if manufacturer offers 10 year guarantee for the product, they must provide it

Guarantees for services include:

  1. Guarantee as to reasonable care and skill
  2. Guarantee as to fitness for particular purpose
  3. Guarantee as to time of completion
  4. Guarantee as to price

Example

Civil engineer gets contract to build bridge to cross a wide rural-water race which cuts across the driveway to the farmer’s home and garage. Stipulated that it must be able to carry domestic cars and motorbikes. No time for completion specified, but took a year to get engineering drawings.

Collapses the first time it is used, initial investigations indicating it lacked a central pillar that should have been required due to its length.

Questions:

13. Intellectual Property

Introduction

Virgina Nichols from New Zealand Intellectual Property Office.

Intellectual property: any fruit of the human intellect.

IP is a catch-all term that includes:

Importance of IP

IP:

~90% of the value of the business can be its IP.

Engineers are paid predominantly to produce IP.

IP Strategy

An IP strategy is important for businesses to:

IPONZ

IPONZ helps businesses, both domestic and international protect the IP rights in NZ. They:

They examine, grant and register IP rights under the:

Registered Trans Tasman patent attorneys have specialist qualifications and interact with IPONZ and overseas office on their clients behalf.

Types of IP

Many types including but not limited to:

Patents

Gives you the exclusive right to stop others from making, using, selling, importing, marketing or licensing your invention for up to 20 years. To own a patent, you must have acquired that right from each and every inventor.

This right is granted by the government in exchange for full disclosure of the invention. The right only exists in each country/region where the patent is granted - you must get protections in every country/region. There is usually a maximum duration of 12 months between starting the patent process and having to decide which countries it will be patented to (Patent Cooperation Treaty).

If it can be easily reverse-engineered, a patent is likely to be useful. If it is a black box, a trade-secret may be more suitable.

Patents are assets and hence can be bought, sold, licensed or transferred.

Patents are attractive to investors as it demonstrates technical competence, gives licensing opportunities, is useful as a marketing tool (e.g. “our patented system…”).

Patents protect how things work: function, not form. This makes it particularly relevant to engineers.

Patents can be granted for:

An provisional patent specification can be submitted to buy time for a complete specification (12 months, extendable to 15 months) before requesting an examination within five years. Within about three months IPONZ will examine the patent, after which there can be a back and forth with the examiner to respond to issues.

Computer Programs

In New Zealand, computer programs are not inventions “to the extent that it relates to a computer as such.”

That is, if the contribution made by the alleged invention lies solely in it being a computer program, it is not an invention.

Fisher and Paykel exception: created a new and improved way of operating a washer machine to get clothes cleaner and use less electricity. The invention isn’t the software but the improved operation of the washing machine.

In determining if it is an invention, the Commissioner or court considers:

Laws related to computer programs vary by country and change over time.

Māori Advisory Committee

Advises if the invention claimed in the patent application is derived from Māori traditional knowledge or from indigenous plants or animals and if so, whether the commercial exploitation is likely to be contrary to Māori values.

Patents must be:

“Keep it secret; keep it safe”

The number one rule for patents. A patent application must be filed before:

There are exceptions e.g. can patent up to six months after disclosing in a gazetted exhibition.

The Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP) introduced a grace period of one year. However, this is NOT recognized in most other jurisdictions.

Keeping it secret: legal action can be taken if information of a confidential quality is disclosed under an obligation of confidence and they attempt to make unauthorized use of it. Written agreements are the best evidence of this (e.g. non-disclosure/confidentiality/secrecy agreements). Note: NDAs may have extra clauses related to ownership, which should be considered separately.

The default position is that if you are employed to create IP, your employer will own it. A good employment contract will have clauses relating to this.

Licensing

You need a license any time you use someone else’s IP: just because it is available on the internet does not mean you have permission to use it.

Accessing IP as a licensee:

Commercializing IP as a licensor:

Copyright automatically projects original works such as artwork, computer programs, written work, and music.

Its protects the particular expression of the idea, not the underlying idea.

Copyright works fall into one of several categories:

Copyright ownership agreements must be in writing, but copyright protection itself is free and automatic (in New Zealand).

This relies on internal record keeping. Files can be lost or overwritten easily so physical printouts may be useful. Proving infringement requires evidence of:

If there is evidence of an independent design process, you can defend against infringement. Unlike patents, copyright is about copying the idea, so coming up with the idea independently does not breach copyright.

Industrial Copyright (NZ only):

The copyright symbol © may be useful as a deterrent, indicating that you are aware of your rights.

Issues:

Design Rights

Design: new or original shape, configuration, pattern or ornament applied to an article by any industrial process or means.

In New Zealand, designs protect eye appeal, not function (this would fit under industrial copyright in NZ) e.g. shape of containers, chairs, spa pools, cars etc…

Design rights are filed with IPONZ, have a novelty requirement and provide up to 15 years of protection (although most aren’t renewed past five years - the design is old by that point).

Trade Marks

Signs that distinguish your goods and service in the marketplace from those of other people.

Trade marks include works, logos, pictures, shapes, sounds, smells, colours, animations, and position marks.

Trade marks to avoid:

Google it, do trade mark checks (IPONZ database), or professional searches before developing a new brand.

Trade mark strategy:

14. Engineering Economic Analysis 1 - Time Value of Money

Fundamental Principle of Financial Analysis:

Time is money

A dollar today is worth more than a dollar tomorrow.

Interest

Simple/Fixed Interest

Present value PV=1000\mathrm{PV} = 1000, deposit it at a bank at yearly interest rate (or rate of return or growth rate) i=1%i = 1\%.

Future value at time tt:

FVt=PV(1+it) \mathrm{FV}_t = \mathrm{PV}(1 + it)

(this module ignores tax)

This can be shown in a cash flow diagram:

1000    1010   1020             FV_t
  |------|-------|-------|--...--|
t 0      1       2       3       t 
  PV

Cash outflows are negative values; cash inflows are positive. The point of view matters: depositing money (-ve) and receiving it later (+ve) is different from borrowing money (+ve) and returning it later (-ve).

Compounding Interest

Annual Compounding Interest

FVt=PV⋅(1+i)t \mathrm{FV}_t = \mathrm{PV} \cdot (1 + i)^t

(i+1)t(i + 1)^t is called the future value factor.

Varying Compounding Interest Periods

If the compounding interest period is not a year, a modified formula is required. Let mm be the number of compounding periods in a year:

FVt=PV⋅(1+im)mt \mathrm{FV}_t = \mathrm{PV} \cdot \left(1 + \frac{i}{m} \right)^{mt}

The larger the value of mm, the larger the interest.

The effective annual interest rate (EAR) can also be calculated:

EAR=(1+im)m−1 \mathrm{EAR} = \left(1 + \frac{i}{m}\right)^m - 1

NB: APR, annual percentage rate, is interest rate per period times the periods per year - simple interest.

NB: in the test, round to the nearest dollar and percentages to the nearest basis point (0.01%).

Continuous Compounding Interest Rule

Limiting case when mm tends to infinity:

FVt=PV⋅eit \mathrm{FV}_t = \mathrm{PV} \cdot e^{it}

Future Value of Multiple Uniform Cash Flows: Annuity

A series of equally spaced, level cash flows that occurs over a finite number of periods.

Disbursements begin at end of period 1 and continue to the end of the period (maturity date).

FVannuity=C[(1+i)t−1i] \mathrm{FV}_\mathrm{annuity} = C\left[\frac{(1 + i)^t - 1}{i} \right]

where cc is the annual disbursement, ii the interest rate and tt the number of years.

Present Value and Discounting

You should discount the future value to find the current value

FVt=PV⋅(1+i)t∴PV=FVt(1+i)t \begin{aligned} \mathrm{FV}_t &= \mathrm{PV} \cdot (1 + i)^t \\ \therefore \mathrm{PV} &= \frac{\mathrm{FV}_t} {(1 + i)^t} \end{aligned}

The term (1+i)−t(1 + i)^{-t} is the present value/discount factor.

ii is called the discount rate in this context.

e.g. you need to pay xx in tt years. Your bank account as an interest rate of ii. How much do I need to have now?

Present Value of Uniform Multiple Cash Flows (Annuity)

PVannuity=∑t=1nCt(1+i)t \begin{aligned} \mathrm{PV}_\text{annuity} = \sum_{t = 1}^n\frac{C_t}{(1 + i)^t} \end{aligned}

Where CtC_t is the cash flow at time tt. Since it is an annuity the value is constant.

For a geometric series whose nnth term is Tn=arnT_n = ar^n where aa is the initial value, the sum of the first nn values is:

Sn=a(1−rn)1−r S_n = \frac{a(1 - r^n)}{1 - r}

Therefore, r=11+ir = \frac{1}{1 + i} and a=C1+ia = \frac{C}{1 + i} (TODO 1+i1 + i because there is no t0t_0?):

Sn=PVannuity=Ci+1⋅1−11+it1−11+i=Ci+1⋅1−1(1+i)t1+i1+i−11+i=Ci+1⋅1−1(1+i)t1+i1+i−11+i=Ci+1⋅1−1(1+i)ti1+i=C⋅1−1(1+i)ti \begin{aligned} S_n = \mathrm{PV}_\text{annuity} &= \frac{C}{i + 1} \cdot \frac{1 - \frac{1}{1+i}^t}{1 - \frac{1}{1+i}} \\ &= \frac{C}{i + 1} \cdot \frac{1 - \frac{1}{(1+i)^t}}{\frac{1+i}{1+i} - \frac{1}{1+i}} \\ &= \frac{C}{i + 1} \cdot \frac{1 - \frac{1}{(1+i)^t}}{\frac{1+i}{1+i} - \frac{1}{1+i}} \\ &= \frac{C}{i + 1} \cdot \frac{1 - \frac{1}{(1+i)^t}}{\frac{i}{1+i}} \\ &= C \cdot \frac{1 - \frac{1}{(1+i)^t}}{i} \\ \end{aligned}

Hence, the formula for the present value of an annuity is:

PVannuity=C[1−1(1+i)ti] \mathrm{PV}_\mathrm{annuity} = C \left[\frac{1 - \frac{1}{(1 + i)^t}}{i} \right]
Example: Buying House

$450,000 house, $50,000 deposit, borrowing the rest at 6.00% fixed interest rate over 30 years, compounding monthly.

C=i⋅PVannuity1−1(1+i)tC=0.0612⋅$400, ⁣0001−1(1+0.0612)12∗30C=$2, ⁣398 \begin{aligned} C &= \frac{i \cdot \mathrm{PV}_\mathrm{annuity}}{1 - \frac{1}{(1 + i)^t}} \\ C &= \frac{\frac{0.06}{12} \cdot \text{\textdollar}400,\!000}{1 - \frac{1}{(1 + \frac{0.06}{12})^{12 * 30}}} \\ C &= \text{\textdollar}2,\!398 \end{aligned}

Present Value of Uniform Multiple Cash Flows (Annuity) with Constant Growth

The payment increases by a constant rate of gg each period with a discount rate of rr per period. Only valid where r>gr > g.

PVgrowing annuity=Cr−g[1−(1+g1+r)t] \mathrm{PV}_\text{growing annuity} = \frac{C}{r - g}\left[1 - \left(\frac{1 + g}{1 + r}\right)^t \right]

For future value:

FVgrowing annuity=C[(1+r)t−(1+g)tr+g] \mathrm{FV}_\text{growing annuity} = C \left[\frac{(1 + r)^t - (1 + g)^t}{r + g} \right]
Example: Land Lease

20 year lease, $100,000 decontamination afterwards.

NPAT (net profit after tax) of $100,000 in first year, average growth rate g=5.00%g = 5.00\% per annum. Cost of capital rr is 10.00%10.00\%.

NB: cost of capital is specific case of opportunity cost, rr. The opportunity cost is the delta between the maximum possible gain with the asset versus what you are doing with it now (TODO confirm?)

What is the present value of the cash flows?

        100K   105K  110.25K    265.33K - 100K
  |------|------|------|-----...-----|
t 0      1      2      3             20
PVgrowing annuity=Cr−g[1−(1+g1+r)t]=$100, ⁣0000.1−0.05[1−(1+0.051+0.1)20]=$1, ⁣211, ⁣208 \begin{aligned} \mathrm{PV}_\text{growing annuity} &= \frac{C}{r - g}\left[1 - \left(\frac{1 + g}{1 + r}\right)^t \right] \\ &= \frac{\text{\textdollar}100,\!000}{0.1 - 0.05}\left[ 1 - \left( \frac{1 + 0.05}{1 + 0.1} \right)^{20} \right] \\ &= \text{\textdollar}1,\!211,\!208 \end{aligned}

Then subtract the present decontamination cost $100, ⁣000/1.120\text{\textdollar}100,\!000/1.1^{20} to get a value of $1,196,344.

Present Value of Infinite Uniform Multiple Cash Flows (Perpetuity)

The present value of the infinite cash flow is called the capitalized value. This is often used in commercial property as rent is known quantity and they assume it will be paid forever (the difference between 20 years and infinity isn’t that large).

Terms such as “for the foreseeable future” mean for in perpetuity.

PVperpetuity=Cr \mathrm{PV}_\text{perpetuity} = \frac{C}{r}

NB: annuity formula is derived by modelling it as the difference between two perpetuities.

Example

Starting in one years time, there will be a $250,000 per annum scholarship. Assuming the bank will pay 5.00% interest, what must today’s lump sum deposit be to ensure it can be funded forever?

PVperpetuity=$250, ⁣0000.05=$5, ⁣000, ⁣000 \mathrm{PV}_\text{perpetuity} = \frac{\text{\textdollar}250,\!000}{0.05} = \text{\textdollar}5,\!000,\!000

A business is making $500,000 of profit a year and is likely to do so for the foreseeable future. Assuming he can invest the sale money at 8% interest, how much should he sell the business for?

PVperpetuity=$500, ⁣0000.08=$6, ⁣250, ⁣000 \mathrm{PV}_\text{perpetuity} = \frac{\text{\textdollar}500,\!000}{0.08} = \text{\textdollar}6,\!250,\!000
Perpetuity with Constant Growth

r>gr > g so lim⁡t→∞(1+g1+r)t=0\lim_{t \to \infty}\left(\frac{1 + g}{1 + r}\right)^t = 0 and hence, the present value is simply Cr−g\frac{C}{r - g}

Example

Dividends predicted to rise 4.00% per annum. Own 100,000 shares, dividend of 10 cents per share today. Plan to invest all dividends with expected return of 5.00% per year. What is the capitalized value of the dividend stream?

PVperpetuity=$100, ⁣000⋅0.10.05−0.04=$1, ⁣000, ⁣000 \mathrm{PV}_\text{perpetuity} = \frac{\text{\textdollar}100,\!000 \cdot 0.1}{0.05 - 0.04} = \text{\textdollar}1,\!000,\!000

A $500,000 dollar gift bequeathed to city for construction and maintenance. Maintenance will cost $15,000 a year, with an additional $25,000 every ten years. Interest earned on the balance after construction is 6.00% per annum.

How much will be left for initial construction.

Annual maintenance: C/r=$15, ⁣000/0.06=$250, ⁣000C/r = \text{\textdollar}15,\!000 / 0.06 = \text{\textdollar}250,\!000

Maintenance every decade: r=1.0610−1=0.79084r = 1.06^{10} - 1 = 0.79084, so C/r=$25, ⁣000/0.79084=$31, ⁣612C/r = \text{\textdollar}25,\!000/0.79084 = \text{\textdollar}31,\!612.

So $500, ⁣000−$250, ⁣000−$31, ⁣612=$218, ⁣388\text{\textdollar}500,\!000 - \text{\textdollar}250,\!000 - \text{\textdollar}31,\!612 = \text{\textdollar}218,\!388 is left for construction.

Annuity Due

If first payment is today, not in one period time (i.e. payments at the start of the period).

The time value of money for first payment does not need to be adjusted, so it can be modelled as the payment value plus the present value of an annuity lasting t−1t - 1 years.

Alternatively, you can model it as a standard annuity that you multiply by 1+i1 + i (annuity transformation method).

Example: you get 20 payments of $465 dollars every year starting today. You will invest the money in government bonds with an interest rate of 8.00%.

PVannuity=C+C[1−1(1+i)t−1i]=465+465[10.08−10.08(1+0.08)19]=4, ⁣930.674 \begin{aligned} \mathrm{PV}_\mathrm{annuity} &= C + C \left[\frac{1 - \frac{1}{(1 + i)^{t - 1}}}{i} \right] \\ &= 465 + 465\left[ \frac{1}{0.08} - \frac{1}{0.08(1 + 0.08)^{19}} \right] \\ &= 4,\!930.674 \end{aligned}

15. Engineering Economic Analysis 2 - Risk and Return

Fundamental Principle of Financial Analysis:

Risk expects appropriate return

Risk: measure of the potential variability of an outcome from its expected value

Return: money earned as a result of money spent

Low risk = low expected rate of return

Low risk + high expected rate of return = scam

The expected return on an investment provides compensation to investors both for the waiting (time value of money) and for worrying (risk of the investment).

90 day bank rate: lend money to bank for 90 days, bank guarantees it will return it with interest (almost the official cash rate).

Interest rates at banks almost nothing at the moment ~0.25% per annum.

Risk and Diversification

Diversifiable/unsystematic/specific/unique risk: risk that you can mitigate by investing in a diverse range of funds. Compare this to non-diversifiable/systematic/market risk where you cannot mitigate the risk.

Markets, low to high risk:

Portfolio theory: diversification eliminates specific risk; for a reasonably diverse portfolio (8 or so reasonably different companies), the majority of specific risk is mitigated and only systematic risk matters.

Return on Capital

Two basic sources of capital:

People how provide the capital, debt or equity, needs to decide if the expected return on capital justifies the risk.

Interest or profit available from an alternative investment is called the opportunity cost of using the capital in the proposed undertaking.

Risk, Return and the Cost of Capital

Debt capital usually requires some kind of collateral (e.g. mortgage - repossession) while equity capital does not, making it riskier and hence cost more.

For large companies the cost of capital (CCC) is the weighted average cost of borrowing (debt) and the cost of selling shares (raising equity):

WCC=∑Ciri∑Ci \textrm{WCC} = \frac{\sum{C_i r_i}}{\sum{C_i}}

where Ci\text{C}_i is negative if there is an opportunity cost (e.g. sitting in bank account with interest).

If the company is not seeking funding it can set its own minimum acceptable rate of return (MARR).

Example: Weighted Cost of Capital

Buy a house for $500,000 with a 20% deposit ($100,000 of equity).

Assume that at this moment, half of the equity is in a savings account (at 2%) and half in shares (returning 7%).

The remaining 80%, $400,000 is borrowed - debt. The house is collateral in the case that you cannot pay, making it low risk for the bank. Mortgage rates are currently 5.5%.

The weighted cost of capital is 0.1⋅2%+0.1⋅7%+0.8⋅5.5%=5.3%0.1 \cdot 2\% + 0.1 \cdot 7\% + 0.8 \cdot 5.5\% = 5.3\%.

The present value factor/discount factor (the (1+i)−t(1 + i)^{-t} part of PV=FVt(1+i)−t\mathrm{PV} = \mathrm{FV}_t(1 + i)^{-t}) may be:

The Treasury has its own set of discount rates to be used in government-funded projects. They are real and pre-tax (e.g. in 2020 the discount rate for infrastructure projects was 6% p.a.)

KiwiSaver: government gives you up to $521.43 per annum, and employers match your contribution (up to a certain point).

Example: $45,000 p.a., 3% ($1350) contributed to KiwiSaver. Matched by employer and eligible for max government contribution: a total of $3,221. In 48 years, assuming an annual average rate of return of 5% this will be worth:

FVt=PV(1+r)t=$3, ⁣221.43⋅(1.05)48=33, ⁣507 \mathrm{FV}_t = \mathrm{PV}(1 + r)^t = \text{\textdollar}3,\!221.43 \cdot (1.05)^{48} = 33,\!507

Inflation

Inflation, the rate at which prices as a whole are increasing (measured with Consumers Price Index - CPI), must be taken into account.

NB: the CPI does not take into account things such as house or construction material prices

Real refers to constant dollar - money without inflation i.e. your purchasing power.

Nominal refers to current dollar - money with inflation i.e. the number in your bank account.

Over the last 20 years, the Reserve Bank has attempted to keep annual CPI increases between 1 and 3 percent, with a target of 2% - in the 80s it was in the 10-20% range.

Converting Rates

The Fisher Equation:

1+ireal=1+inominal1+inflation 1 + i_\text{real} = \frac{1 + i_\text{nominal}}{1 + \text{inflation}}

Where ireali_\text{real} is the real inflation rate, inominali_\text{nominal} is the nominal inflation rate and inflation\text{inflation} is the inflation rate.

For rates under around 10%, the approximation, ireal≈inominal−inflationi_\text{real} \approx i_\text{nominal} - \text{inflation}, can be used. Do not use this approximation in the test.

Example: Money in Bank Account

$1,000 lent at 5% compounding interest for 10 years. Assuming 3% inflation, what is the real interest rate?

nominal FVt=PV(1+inominal)t=$1, ⁣000⋅1.0510=$1, ⁣629 \begin{aligned} \text{nominal } \mathrm{FV}_t &= \mathrm{PV}(1 + i_\text{nominal})^t \\ &= \text{\textdollar}1,\!000 \cdot 1.05^{10} \\ &= \text{\textdollar}1,\!629 \end{aligned}

Using the Fisher equation:

ireal=1+inominal1+inflation−1=1+0.051+0.03−1=1.94% \begin{aligned} i_\text{real} &= \frac{1 + i_\text{nominal}}{1 + \text{inflation}} - 1 \\ &= \frac{1 + 0.05}{1 + 0.03} - 1 \\ &= 1.94\% \end{aligned}
real FVt=PV(1+ireal)t=$1, ⁣000⋅1.019410=$1, ⁣212 \begin{aligned} \text{real } \mathrm{FV}_t &= \mathrm{PV}(1 + i_\text{real})^t \\ &= \text{\textdollar}1,\!000 \cdot 1.0194^{10} \\ &= \text{\textdollar}1,\!212 \end{aligned}

Hence, in ten years time you will be able to buy $1,212 worth of stuff.

Example: KiwiSaver

Using the previous KiwiSaver from above,

nominal FV48=PV(1+r)t=$3, ⁣221.43⋅(1.05)48=33, ⁣507 \text{nominal }\mathrm{FV}_{48} = \mathrm{PV}(1 + r)^t = \text{\textdollar}3,\!221.43 \cdot (1.05)^{48} = 33,\!507

Assuming a 2% inflation, rreal=(1+rnominal)/(1+infl)−1=1.05/1.02−1=2.94%r_\text{real} = (1 + r_\text{nominal})/(1 + \text{infl}) - 1 = 1.05/1.02 - 1 = 2.94\%.

Hence, the nominal value - equivalent purchasing power when you retire, is real FV48=$3, ⁣221⋅1.029448=$12, ⁣943\text{real }\mathrm{FV}_{48} = \text{\textdollar}3,\!221 \cdot 1.0294^{48} = \text{\textdollar}12,\!943.

Example: Present Value of Infinite Uniform Multiple Cash Flows (Perpetuity)

[from previous lecture]

Starting in one years time, there will be a $250,000 per annum scholarship. Assuming the bank will pay 5.00% interest, what must today’s lump sum deposit be to ensure it can be funded forever?

The example previously used nominal rate of return to get a value of $500,000.

Assuming average inflation of 3%, the real rate of return is 1.94%. With this:

PVperpetuity=Cr=$250, ⁣0000.0194=$13, ⁣890, ⁣000 \mathrm{PV}_\text{perpetuity} = \frac{C}{r} = \frac{\text{\textdollar}250,\!000}{0.0194} = \text{\textdollar}13,\!890,\!000

Hence, 13.9 million dollars is required in order to provide $250,000 worth of value every year for perpetuity.

If you want to keep using the nominal rate, you must reflect inflation in cashflow. Using the formula for growing perpetuity:

PVperpetuity=Cr−g=$250, ⁣0000.05−0.03=$12, ⁣500, ⁣000 \mathrm{PV}_\text{perpetuity} = \frac{C}{r - g} = \frac{\text{\textdollar}250,\!000}{0.05 - 0.03} = \text{\textdollar}12,\!500,\!000

Example: Nominal vs Real Cash Flow Comparison

Nominal vs. real cash flow does not matter as long as you are consistent in your calculations.

e.g. buying couch at $200 today and two annual payments of $300. Real rate of return of 5%, expected inflation of 3%. What is the actual price?

Using Nominal dollars/rate of return. Rearrange the Fisher equation:

1+ireal=1+inominal1+inflation(1+ireal)⋅(1+inflation)=1+inominalinominal=(1+ireal)⋅(1+inflation)−1 \begin{aligned} 1 + i_\text{real} &= \frac{1 + i_\text{nominal}}{1 + \text{inflation}} \\ (1 + i_\text{real}) \cdot (1 + \text{inflation}) &= 1 + i_\text{nominal} \\ i_\text{nominal} &= (1 + i_\text{real}) \cdot (1 + \text{inflation}) - 1 \end{aligned}

Hence, the nominal rate of return is 1+3%1+5%−1=8.15%\frac{1 + 3\%}{1 + 5\%} - 1 = 8.15\%

Then we use the standard compound interest formula to find that Price=$200+$3001+8.15%+$300(1+8.15%)2=$733.88\text{Price} = \text{\textdollar}200 + \frac{\text{\textdollar}300}{1 + 8.15\%} + \frac{\text{\textdollar}300}{(1 + 8.15\%)^2} = \text{\textdollar}733.88.

Using real dollars and rate of return: payments will be $200 initially, $300/1.03=291.26\text{\textdollar}300/1.03 = 291.26 in the first year, and $300/(1.03)2=282.78\text{\textdollar}300/(1.03)^2 = 282.78 in the second.

We can then use the standard compound interest formula to find that Price=$200+$291.261+5%+$282.78(1+5%)2=$733.88\text{Price} = \text{\textdollar}200 + \frac{\text{\textdollar}291.26}{1 + 5\%} + \frac{\text{\textdollar}282.78}{(1 + 5\%)^2} = \text{\textdollar}733.88.

Example: Discount Rate

Government considering new hydroelectric power plant with capital expenditure of 100 million in year 1 and increasing at 10% per annum for the next two years (currently no inflation therefore real). What is the present value of the cost in real terms?

  PV  -100  -110  -121
  |-----|-----|-----|
  0     1     2     3

Treasury’s real, pre-tax discount rate is 5.0% per annum.

We cannot use the the present value of a growing annuity formula as the growth rate is greater than the discount rate.

Hence, do it manually three times with the formula:

PV=FVt(1+r)t \mathrm{PV} = \frac{\mathrm{FV}_t}{(1 + r)^t}

We get PV=−1001.05−100⋅1.11.052−100⋅1.121.053=−229.54\mathrm{PV} = -\frac{100}{1.05} - \frac{100 \cdot 1.1}{1.05^2} - \frac{100 \cdot 1.1^2}{1.05^3} = -229.54.

Sensitivity Analysis: these analyses are sensitive to the choice of cashflow and discount rate. We usually want to do best case, worst case and most likely analyses.

16. Engineering Economic Analysis 3 - Cashflow Analysis Techniques

Time value of money

Risk expects appropriate return

How do we use these fundamentals as a basis for engineering economic analysis?

How do we ensure we make decisions that are economically justified?

By comparing cash flows of alternatives.

Systematic Economic Analysis Technique (SEAT)

  1. Identify the investment alternatives (doing nothing may be a valid option)
  2. Define the planning horizon
  3. Specify the discount rate
  4. Estimate the cash flows
  5. Compare the alternatives
  6. Perform supplementary analyses (e.g. break-even, risk, sensitivity to discount rate)
  7. Select the preferred alternative

3. Specify the Discount Rate

Example: 2019 Exam

$1.1 million dollars in capital required. 200K sitting in a bank account at 2% interest per annum (personal opportunity cost), 500K from the bank at 4% interest (debt cost), 400K from rich aunt in return for 50% ownership, expecting an average rate of return of at least 25% (equity cost).

a. What fundamental principle of economic analysis is behind aunt’s rate of return? What assumption is she making? Discount rate? risk expects appropriate return

b. Weighted cost of capital

1.02 * 200/1100 - 1.04 * 500/1100 - 1.25 * 400/1100 = -0.74

−WCC=200⋅2%+500⋅4%+400⋅25%1100=11.27% -\mathrm{WCC} = \frac{200 \cdot 2\% + 500 \cdot 4\% + 400 \cdot 25\%}{1100} = 11.27\%

4. Estimate the Cash Flows

Engineering economic decisions usually involve:

Cash Flows:

Sunk costs: disregard money already spent as a result of past decisions.

4. Compare the Alternatives

Analyze future cash flows considering:

Method 1: Payback

Time it takes for incremental benefits to pay back the initial investment.

Often used as part of an initial screening process when evaluating investments.

Basic method is to establish is payback period is less than some period of time defined by management policy (could be set completely arbitrarily). If it is within the acceptable range a formal evaluation can be done.

When calculating, assuming cashflow in each time period (e.g. year) is constant in order to get a fractional payback period.

Downsides:

Method 2a: Net Present Value

Discounted future value (future cash flows) minus present value (initial cost):

NPV=∑0tCt(1+r)t \text{NPV} = \sum_0^t\frac{C_t}{(1 + r)^t}

Where rr the discount rate/minimum acceptable rate of return (MARR).

NPV provides an estimate of a project’s net contribution to the value of the firm by giving proper treatment to the time value of money and the riskiness of the investment.

Steps:

  1. Determine the initial cost of the project C0C_0 - t=0t = 0 so no discounting is required to get the present value
  2. Estimate the project’s future cash flows (nominal or real?)
  3. Determine the riskiness of the project and hence the discount rate
    • Risk free? Use the risk free rate
    • Risky? Discount rate will be higher
  4. Calculate the NPV
  5. Choose the option with the highest NPV (or if there is only one option, if it is positive)

Advantages:

Disadvantages:

If payback and NPV contradict each other, always use NPV.

Example: Power Plant

900 million dollar power plant with cash flows of 300 million a year for 4 years, after which it will be decommissioned at a cost of 90 million.

 -900   300/r   300/r^2  300/r^3 300/r^4  -90/r^5
---|-------|-------|-------|-------|-------|
t  0      1      2      3      4      5

At 6% discount rate, NPV is 72 million.

At 16% discount rate, NPM is -1 million.

Example: Solar Panels

$13,204 system cost with estimated annual savings of $1,478 (real cost). Assuming a 20 year system life and 7% discount (real) rate (average after tax rate of return for stock market):

NPV=C0+PVannuity=C0+C[1r−1r(1+r)t]=−$13, ⁣204+$1, ⁣478⋅10.59=$2, ⁣454 \begin{aligned} \mathrm{NPV} &= C_0 + \mathrm{PV}_\text{annuity} \\ &= C_0 + C\left[\frac{1}{r} - \frac{1}{r(1 + r)^t} \right] \\ &= -\text{\textdollar}13,\!204 + \text{\textdollar}1,\!478 \cdot 10.59 \\ &= \text{\textdollar}2,\!454 \end{aligned}

Method 2b: Net Future Value

Calculate the future value of an investment undertaken. This can be any time in the future, not necessarily at the end of the project.

It is typically used to measure the worth of an investment at the time of commercialization.

NFV Example

Site purchased for 1.5 million, building costing 4 million at end of year 1 and 6 at the end of year 2. On project termination building/land will be sold for 8 million.

Manufacturing equipment installed in year 2 at a cost of 13 million.

Estimated revenues over six year life: 6, 8, 13, 18, 14, 8.

MARR is 15%. Calculate the equivalent worth at the start of operations (end of year 2).

               -13                                  8
  -1.5   -4    -6     6     8     13    18    14    8
    |-----|-----|-----|-----|-----|-----|-----|-----|
    -2    -1    0     1     2     3     4     5     6

NFV=−1.51.15−2+⋯+81.157=18.4\text{NFV} = -\frac{1.5}{1.15^-2} + \dots + \frac{8}{1.15^7} = 18.4. Alternatively, you can calculate NPV⋅(1.15)3\text{NPV} \cdot (1.15)^3.

Method 3: Internal Rate of Return (IRR)

Find discount rate at which the net present value (NPV) is zero.

Let NPV=0\mathrm{NPV} = 0 and solve for rr.

NPV=∑0tCt(1+IRR)t=0 \text{NPV} = \sum_0^t\frac{C_t}{(1 + \text{IRR})^t} = 0

Do this via direct solution, trial and error, graphically, by Excel, etc…

If the IRR is greater than the cost of capital or the MARR, then accept the project.

IRR is easier to understand but harder to establish with confidence (IRR can get things wrong - NPV will be right).

Pitfalls of IRR:

IRR Example

Installing new windows to save $4,000 per year over the building’s remaining 30 year life.

The windows have an initial cost of $80,000 and no salvage value.

The organization has a MARR of 8%.

This cannot be solved symbolically.

In Excel, put all the yearly costs in a row and use IRR(range) to get the estimate.

Comparing Projects Where Option Lives Differ from Analysis Period

Economic Analysis Fundamentals:

Money has time value

Risks and returns tend to be positively correlated

Make investments that are economically justified

Consider only differences in cash flows among investment alternatives

Compare investment alternatives over a common period of time

The last point is important to consider and can be done through two different but equally good methods:

Option 1: Lowest Common Multiple

Use lowest common multiple: assume you can repeat the same decision after the end of each project period.

e.g. If one option is five years and the other ten years, then NPV10y=NPV5y+NPV5y/(1+r)5\text{NPV}_{10y} = \text{NPV}_{5y} + \text{NPV}_{5y}/(1 + r)^5.

TODO Example?

Assume 7% opportunity costs, maintenance costs for $ options $(), ()()

Option 2: Equivalent Annual Cost

Dividing the PVA by annuity factor to get average annual cost in terms of present value.

EAC=present value of costsannuity factor \text{EAC} = \frac{\text{present value of costs}}{\text{annuity factor}}

Where the annuity factor is the present value annuity factor:

PVA=C⋅1−1(1+i)ti=C⋅1i−1i(1+i)t \begin{aligned} \mathrm{PVA} &= C \cdot \frac{1 - \frac{1}{(1+i)^t}}{i} \\ &= C \cdot \frac{1}{i} - \frac{1}{i(1+i)^t} \\ \end{aligned}
EAC Example 1

Two alternatives with annual costs of (−15,−4,−4,−4)(-15, -4, -4, -4) and (−10,6,−6)(-10, 6, -6). Assuming r=6%r = 6\%, NPVs are −25.69-25.69 and −21.00-21.00 respectively (first value is the initial cost).

Calculating the annuity factor for r=6%r = 6\% for three years, we get PVA=1/0.06−1/(0.06(1.06)3)=2.67\mathrm{PVA} = 1/0.06 - 1/(0.06(1.06)^3) = 2.67. We can then divide the NPV by this to get −25.67/2.67=−9.61-25.67/2.67 = -9.61.

Repeating with the second option and r=6%r = 6\% for two years, we get −21.00/1.83=−11.45-21.00/1.83 = -11.45.

Hence, the first option has a lower EAC so should be chosen.

EAC Example 2

25K in maintenance every 10 years. What is the total perpetuity?

Assuming 6.00% rate, we can calculate the equivalent annual cost:

PVA=1i−1i(1+i)t=10.06−10.06(1.06)10=7.36 \begin{aligned} \mathrm{PVA} &= \frac{1}{i} - \frac{1}{i(1+i)^t} \\ &= \frac{1}{0.06} - \frac{1}{0.06(1.06)^{10}} \\ &= 7.36 \end{aligned}

So the EAC is $25, ⁣000/7.36=$3, ⁣397\text{\textdollar}25,\!000/7.36 = \text{\textdollar}3,\!397. Using the perpetuity formula, perpetuity=C/r=$3, ⁣387/0.06=$56, ⁣612\text{perpetuity} = C/r = \text{\textdollar}3,\!387/0.06 = \text{\textdollar}56,\!612.

EAC Example 3: Replacement Machine

Operating machine costing $12,000 per annum to run with two years of life left. Scrap value will cover the cost of removal.

New machine costs $25,000 and $8,000 per annum to run, will last five years.

Assume OCC is 6.00%.

Options: replace now or in a year.

If replacing now:

NPV=−25−8[10.06−10.06(1.06)5]=−25−8⋅4.21=58.70 \begin{aligned} \text{NPV} &= -25 - 8\left[ \frac{1}{0.06} - \frac{1}{0.06 (1.06)^5}\right] \\ &= -25 - 8 \cdot 4.21 \\ &= 58.70 \end{aligned}

If replacing next year, cost is shifted forwards one year, so 58.70/1.06=55.3758.70/1.06 = 55.37. Add on the cost of operating for the current year to get a total cost of 67.3767.37.

If replacing this year, EAC is 58.70/4.21=13.9458.70 / 4.21 = 13.94. If replacing next year, annuity factor is 4.924.92 (six years, not five years, at 6%) and hence the EAC is 13.6913.69.

Hence, replacing next year is the cheaper option.

NB: can simply by just assuming EAC is $12,000 if not replacing.

EAC Example 4: Replacement Machine 2

Pressure vessel with operating costs of 60K, can operate for five more years. Sell now, can probably get 30K value, sell in five years = zero salvage value.

New pressure vessel costs 120K, can sell for 50K in five years time. Annual operating costs of 30K.

Use MARR of 20%, determine if pressure vessel should be replaced.

Annuity factor for five years at 20%: 10.2−10.2(1.2)5=2.99\frac{1}{0.2} - \frac{1}{0.2(1.2)^5} = 2.99.

Keep: because you did not sell it, you take a 30K ‘loss’, making EAC=(−30−60∗2.99)/2.99=−70.04\text{EAC} = (-30 -60 * 2.99)/2.99 = -70.04.

Buy: EAC=NPV/annuity=(−120−30∗2.99+50/1.25)/2.99=−189.62/2.99=−63.41\text{EAC} = \text{NPV}/\text{annuity} = (-120 - 30 * 2.99 + 50/1.2^5)/2.99 = -189.62/2.99 = -63.41. The two options are not mutually exclusive: buying the new machine does not necessarily mean you sell the old one, so the 30K from selling the machine should not be considered.

Cost Benefit Analysis (CBA)

Commonly used in public sector projects.

The discounted costs and benefits of a development for all stakeholders over its lifespan must be evaluated.

The CBA assigns values to all direct and indirect outcomes of an independent project with future costs discounted.

Use the benefit-cost ratio (BCR):

BC=PV benefitsPV costs=FV benefitsFV costs \frac{B}{C} = \frac{\text{PV benefits}}{\text{PV costs}} = \frac{\text{FV benefits}}{\text{FV costs}}

If the BCR is greater than 1, the project should proceed (assuming there is no capital rationing - there’s enough money for the project).

Three types of benefits/costs should be considered:

When considering the BCRs of mutually exclusive alternatives, incremental analysis methods are required.

17. Financial and Management Accounting 1 - Basic Financial Accounting

What is Accounting

The information identification, recording, analysis and reporting of economic information.

Four fundamental qualities of accounting:

Stakeholders:

There are two types of accounting:

Financial decisions of an entity:

Generally Accepted Accounted Principles (GAPP)

Accounting rules/standards that companies must adhere to when preparing financial statements and reports. Standardized by country.

Fundamental Accounting Principles

Assumption of Arm’s Length Transaction

Two parties involved in an economic transaction arrive at a decision independently and rationally

i.e. no collusion between parties (e.g. transfer of assets between subsidiary companies, between family members).

The Cost Principle

The value of most assets are recorded at their historical cost, even if it has increased in value since its purchase.

Some exceptions (e.g. securities held for trading, asset impairment) allow the recorded cost to be set to its fair market value.

The Revenue Recognition Principle

Revenue is recognized when a transaction is completed (e.g. the product is sold), even if the money is not received until later.

The Going Concern Assumption

Assumption that the company will continue to operate indefinitely unless there is evidence to the contrary.

Three Core Financial Statements

Income Statement

The Statement of Financial Performance.

Covers revenue, expenses and profit (or loss):

Revenue:

Expenses:

Gross profit=Revenue−cost of salesNet profit=Gross profit−expenses \begin{aligned} \text{Gross profit} &= \text{Revenue} - \text{cost of sales} \\ \text{Net profit} &= \text{Gross profit} - \text{expenses} \end{aligned}

Cost of Sales in Manufacturing

Direct costs (DC) are materials and labour that can be charged directly.

Indirect costs (ID)/overhead/burden are the costs involved in operating the organization but not directly involved in manufacturing the product:

Cost of goods sold=direct costs+manufacturing overhead \text{Cost of goods sold} = \text{direct costs} + \text{manufacturing overhead}

i.e. cost directly invested into good being sold.

EBIT and EBITDA

Measures of a company’s ability to earn profit through its operations - separates out profitability.

Non-operating revenues and expenses are excluded from these measures.

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.

EBIT: Earnings Before Interest and Taxes. Hence, this includes depreciation and amortization - basic costs required for operation.

Interest: on loans.

Depreciation: money set aside every year for a tangible asset (machine, computer) used in the task that generates the revenue under the assumption that after the end of the equipment life (some known time period), it will have to be replaced.

Amortization: depreciation, but for intangible assets. Patents, copyright, loans etc… Also includes goodwill - agreement to buy a product you pay for later (no interest but delayed payment, so you must carry that duty to pay into the future).

By removing these things, it separates profitability and efficiency of operations from the effects of how you are funded (interest rates vary, taxes vary a lot by region etc.) and how you account for your assets (depreciation and amortization varies by company depending on the amount of assets).

Cash Flow Statement

This is an overall statement of cash that flows through the organization.

The Statement of Financial Performance shows revenue earned and expenses incurred.

The Statement of Cash Flow shows revenue received and expenses paid.

Inputs:

Outputs:

Covers all activities undertaken that cause a flow of cash through the organization. Includes operating activities, investments, financial activities.

NB: net income accounts for taxes and interest.

Balance Sheet

Also known as the Statement of Financial Position.

One of the longer itemized sheets.

Attempts to identify:

Assets:

Inventory is comprised of raw materials, work-in-progress and finished goods.

Valuing Capital Assets

Methods of Depreciation

Given market value PP, scrap value SS and life time nn:

The money withheld by depreciation is called Reserve accumulation.

Liabilities

Amounts owed by the business to both outside parties and those within the business.

Current/short-term liabilities:

Non-current/long-term liabilities:

Shareholder’s Equity

Financial interest of the owner in the entity (owner’s claim to the business). This includes:

Equity is the value if all assets were liquidated and all debts paid off:

equity=total assets−total liabilities \text{equity} = \text{total assets} - \text{total liabilities}

Ratio Analysis

Relationships between values found in Statements of Financial Performance and Position.

It can be used compare the performance of an organization between years, other organizations, accepted benchmarks or published industry norms.

Leverage

AKA Gearing, Solvency.

Leverage ratios shows how heavily the company is in debt and its ability to meet long-term liability obligations.

long-term debt ratio=long-term debtlong-term debt+equitydebt-equity ratio=long-term debt total liabilitiesequitytotal debt ratio=total liabilitiestotal assetstimes interest earned=EBITinterest payments \begin{aligned} \text{long-term debt ratio} &= \frac{\text{long-term debt}}{\text{long-term debt} + \text{equity}} \\ \\ \text{debt-equity ratio} &= \frac{\sout{\text{long-term debt}}\text{ total liabilities}}{\text{equity}} \\ \\ \text{total debt ratio} &= \frac{\text{total liabilities}}{\text{total assets}} \\ \\ \text{times interest earned} &= \frac{\text{EBIT}}{\text{interest payments}} \end{aligned}

Liquidity

Liquidity ratios measure how easily the firm can get cash (in unforeseen circumstances) and meet its short-term liability obligations.

quick ratio (acid test)=cash+marketable securities+receivablescurrent liabilities=current assets−inventorycurrent liabilities \begin{aligned} \text{quick ratio (acid test)} &= \frac{\text{cash} + \text{marketable securities} + \text{receivables}}{\text{current liabilities}} \\ &= \frac{\text{current assets} - \text{inventory} }{\text{current liabilities}} \end{aligned}

It is not always possible to quickly convert inventory to cash, especially in unforeseen circumstances, so the quick ratio is an indication of if it can meet its immediate debts (within a quarter).

Typically, a ratio close to 11 is healthy; a ratio a lot larger means they are carrying too much cash while a small ratio means they may not be able to meet its obligations.

There are also two other liquidity ratios of note:

current ratio (working capital ratio)=current assetscurrent liabilitiescash ratio=cash+marketable securitiescurrent liabilities \begin{aligned} \text{current ratio (working capital ratio)} &= \frac{\text{current assets}}{\text{current liabilities}} \\ \\ \text{cash ratio} &= \frac{\text{cash} + \text{marketable securities}}{\text{current liabilities}} \end{aligned}

Compared to the current ratio, the quick ratio excludes inventory and the cash ratio excludes receivables.

Efficiency

Efficiency/turnover ratios measure how productively the firm is using its assets.

asset turnover=salestotal assetsinventory turnover=cost of goods soldinventory \begin{aligned} \text{asset turnover} &= \frac{\text{sales}}{\text{total assets}} \\ \\ \text{inventory turnover} &= \frac{\text{cost of goods sold}}{\text{inventory}} \end{aligned}

Asset turnover: how much of the asset are you using to generate sales?

Inventory turnover:

Profitability

AKA earning power.

Profitability ratios measure the organization’s return on investments.

gross profit margin=net sales−cost of salesnet salesnet profit margin=net profit after tax (NPAT)net salesreturn on assets (ROA)=EBITtotal assetsreturn on equity (ROE)=net profit after taxtotal equity=net profit after taxassets - debts \begin{aligned} \text{gross profit margin} &= \frac{\text{net sales} - \text{cost of sales}}{\text{net sales}} \\ \\ \text{net profit margin} &= \frac{\text{net profit after tax (NPAT)}}{\text{net sales}} \\ \\ \text{return on assets (ROA)} &= \frac{\text{EBIT}}{\text{total assets}} \\ \\ \text{return on equity (ROE)} &= \frac{\text{net profit after tax}}{\text{total equity}} \\ &= \frac{\text{net profit after tax}}{\text{assets - debts}} \end{aligned}

These ratios may require the income statement.

Gross profit margin:

Net profit margin:

Return on assets:

Return on equity:

18. Financial and Management Accounting 2 - Management Accounting

Cost Concepts

A technique for determining the cost of a project.

Manufacturing Costs

Raw materials, work-in-progress and finished goods. Inventory size determined by:

Fixed Costs

Costs that do not vary with output e.g. rent, depreciation, lighting and supervisor salaries.

Usually they are only fixed over a certain range of production - the relevant range. Factors such as requiring bigger warehouses limit the range.

Variable Costs

Cost that vary with output:

Usually a linear function of quantity.

Total Cost

TC(x)=VC(x)+FC≈mx+c \begin{aligned} \mathrm{TC}(x) &= \mathrm{VC}(x) + \mathrm{FC} \\ &\approx mx + c \end{aligned}

Where xx is quantity.

Total costs can be calculated through several methods:

Costing Terminology

  ┌─            Direct  ───┐  ─────┐  ─────┐
  │            Material    │       │       │
  │                        │       │       │
  │                     Prime      │       │
  │        ┌──  Direct   Cost      │       │
  │        │    Labor      │     Cost      │
  │        │               │   of Goods    │
  │        │               │ Manufactured  │
  │        │   Indirect ───┤       │       │
  │        │   Material    │       │     Cost
  │Conversion              │       │   of Goods
  │  Costs │               │       │     Sold
  │        │   Indirect  Factory   │       │
  │        │    Labor   Overhead   │       │
Selling    │               │       │       │
 Price     │               │       │       │
  │        │    Fixed/     │       │       │
  │        └──  Misc    ───┤  ─────┘       │
  │                        │               │
  │             General/   │               │
  │              Admin    Non-Factory      │
  │                        Overhead        │
  │            Selling/    │               │
  │            Marketing  ─┘  ─────────────┘
  │
  │
  └─             Profit

Price-Demand Relationship

Law of Demand: inverse price-quantity relationship (price rising reduces quantity demanded). Not necessarily linear.

SP=a−bD \text{SP} = a - b\text{D}

Where D\text{D} is the demand (units demanded) and SP\text{SP} is the selling price.

Hence, total revenue, TR=SP⋅D=aD−bD2\text{TR} = \text{SP} \cdot \text{D} = a\text{D} - b\text{D}^2 where aa and bb are positive and D<abD < \frac{a}{b}.

Limitations of CPV Analysis

CPV analysis has a short-term decision-making model with no recognition of the time value of money.

It:

Long-term analysis should consider the entire life-cycle of the product (activity-based costing). In the future the selling price may include externalities such as the cost of battery recycling for EVs, carbon costs for flight tickets etc.

Break-Even Analysis

Used to evaluate the minimum amount of sales required to cover costs at a given price.

At break even, $\text{TR} = \text{TC}. Hence:

SP⋅x=VC(x)+FC \text{SP} \cdot x = \text{VC}(x) + \text{FC}

Where xx is the number of units.

This assumes that any quantity can be sold at a given price and that the total cost curve is a straight line.

Significance:

Average Cost and Economies of Scale

Average Cost (AC): total cost over units produced. This is the basis for normal pricing.

As production volume increases, average costs decreases - fixed costs spread over a larger number of units.

Marginal Costs

Marginal Cost (MC): incremental/variable cost of producing one more unit (TC(x+1)−TC(x)\mathrm{TC}(x + 1) - \mathrm{TC}(x)). Hence, marginal cost varies depending on current production quantity.

Marginal cost is the basis for last minute pricing.

Contribution Margins

Profitability when taking variable costs into account.

Contribution Margin (CM)=Total Revenue−Variable CostsContribution Margin per Unit=Total RevenueUnits−Variable CostsUnits=Selling Price−Variable CostsUnitsContribution Margin Ratio (CMR)=Contribution Margin per UnitSelling Price \begin{aligned} \text{Contribution Margin (CM)} &= \text{Total Revenue} - \text{Variable Costs} \\ \\ \text{Contribution Margin per Unit} &= \frac{\text{Total Revenue}}{\text{Units}} - \frac{\text{Variable Costs}}{\text{Units}} \\ &= \text{Selling Price} - \frac{\text{Variable Costs}}{\text{Units}} \\ \\ \text{Contribution Margin Ratio (CMR)} &= \frac{\text{Contribution Margin per Unit}}{\text{Selling Price}} \end{aligned}

Example: Break-Even Analysis with Contribution Margins

Without Contribution Margins
TC(x)=x⋅SP10, ⁣000+100x=200x10, ⁣000=100xx=100 \begin{aligned} \text{TC}(x) &= x \cdot \text{SP} \\ 10,\!000 + 100x &= 200x \\ 10,\!000 &= 100x \\ x &= 100 \end{aligned}
With Contribution Margins
CM(x)=x⋅SP−x⋅VC=x(SP−VC)=x(200−100)∴CM per Unit=100∴CMR=100/SP=0.5 \begin{aligned} \text{CM}(x) &= x\cdot \text{SP} - x \cdot \text{VC} \\ &= x(\text{SP} - \text{VC}) \\ &= x(200 - 100) \\ \\ \therefore \text{CM per Unit} &= 100 \\ \\ \therefore \text{CMR} &= 100/\text{SP} \\ &= 0.5 \\ \end{aligned}

Now for break-even units:

TR=TCSP⋅x=FC+VC⋅x∴x=FCSP−VC=FCCM per Unit=10, ⁣000100=100 \begin{aligned} \text{TR} &= \text{TC} \\ \text{SP} \cdot x &= \text{FC} + \text{VC} \cdot x \\ \therefore x &= \frac{\text{FC}}{\text{SP} - \text{VC}} \\ &= \frac{\text{FC}}{\text{CM per Unit}} \\ &= \frac{10,\!000}{100} \\ &= 100 \end{aligned}

Break-even revenue (BE$\text{BE}_{\text{\textdollar}}):

TR=TC=TC⋅SP=FCCM per Unit⋅SP=FC(CM per UnitSP)=FCCMR=10, ⁣0000.5=20, ⁣000 \begin{aligned} \text{TR} &= \text{TC} \\ &= \text{TC} \cdot \text{SP} \\ &= \frac{\text{FC}}{\text{CM per Unit}} \cdot \text{SP} \\ &= \frac{\text{FC}}{\left(\frac{\text{CM per Unit}}{{\text{SP}}}\right)} \\ &= \frac{\text{FC}}{\text{CMR}} \\ &= \frac{10,\!000}{0.5} \\ &= 20,\!000 \end{aligned}

Aside: Service Costing

Calculate costs of:

price of service=materials cost+hourly charge-out rate \text{price of service} = \text{materials cost} + \text{hourly charge-out rate}

Hourly charge-out rate includes labour, overhead (including procurement cost for materials) and margins.

Example: nominal 40 hours a week for 2080 hours per year (52 weeks a year) minus:

So potential chargeable time is ~70% of the time, minus management, meetings, marketing etc that is not directly chargeable to the client.

Then there are costs for rent, power, stationary, depreciation, vehicle expenses, phones/internet, insurance, accountants, legal, advertising, cleaning etc.

So chargeable rate per hour could be something like direct labour (salary) plus annual expenses divided by ~25 hours/week * 48 week. Hence, chargeable rate can easily be more than double the hourly cost of labour.

19. Sustainable Development 1 - Introduction

Brundtland Commission’s definition for sustainability:

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Ngai Tahu Vision Statement:

Mō tātou, ā, mō kā uri ā muri ake nei

For us and our children after us

Sustainability is:

NZ, 2020:

Ministry for the Environment 2019 climate change programme:

Climate Change Reponse Amendment Act 2019:

Financial Sector Amendment Bill:

NZ emission reduction targets: four unconditional national targets (conditional: tragedy of the commons)

NZ Greenhouse Gas Inventory:

Kaitiakitanga: being responsible in relation to natural and physical resources: stewardship

Issues:

As a computer/electrical/mechatronics engineer:

As a software engineer:

Considering impacts: some are not ‘reasonably forseeable’:

20. Environmental Sustainability 2 - Triple Bottom Line

Sustainable practices cannot separate:

Hence, environmental sustainability is covered last in the course

Difficulties:

Hence, we must ask: How can we evaluate conflicting economic, environmental and social interests?

Triple Bottom Line Analysis

A cost-benefit analysis that takes into account environmental and social interests.

International standards and transparency are essential to ensure comparisons are valid; many standards exist.

Probably should be the de facto standard: Global Reporting Initiative (GRI).

KPMG corporate responsibility reporting survey in 2017:

Limitations:

Hence, TBL is not a robust decision-making tool, but it is a useful exercise to get conceptual model of the issues.

Environmental Impacts

Compliance-based sustainable engineering:

Environmental Impact Assessments (EIA)/Assessments of Environmental Effects (AEE)

May be required by regulatory bodies or done voluntarily.

EIAs reports on indicators of impacts:

Standard methodologies should be used in EIAs to ensure credibility:

Life cycle analysis:

Potential metrics for environmental impacts:

Societal Sustainability

Once again, the baseline is legality. GRI has a few categories:

This should extend to suppliers and partners as well as a company’s own practices.

ISO also has standards for social responsibility (ISO 26000), although they are more guidelines than prescriptive steps.

Social Impact Assessment

IANA definitions:

Impacts on people’s:

Trading off competing requirements and rights are extremely difficult, but this does not mean we should not try.

So how do we evaluate competing societal and stakeholder interests?

Evaluating Competing Societal/Stakeholder Interests

Step 1 - Identify stakeholders.

Step 2 - Consult with stakeholders:

Economic Sustainability

Much easier to evaluate than environmental (and much, much easier than) and societal impacts.

Step 1 - does the proposal make economic sense on its own? Discounted cash flow analysis, NPV, IRR etc.

Step 2 - assess economic sustainability:

Levelized Cost of Energy (LCOE):

Energy Return on Investment (EROI):

Cost of Emissions:

Social Cost of Carbon (SSC, SC-CO_2):

Benefit Cost Analysis (BCA):

21. Sustainable Development 3 - Techniques and Cases

Life Cycle Assessment (LCA)

LCAs are a tool to evaluate the environmental performance of a product or service.

Standards available: ISO 14040, 14044.

LCAs quantity the environment impacts of a product/service over its full life cycle: material extraction/processing, production, packaging/distribution, use/end-of-life.

This can be quantified through many different indicators: carbon emissions, embodied energy, acidification, ecological footprint, water use, carcinogens etc.

Raw materials/resources converted to either energy or materials. Either way, emissions arise, going to air, water and ground.

‘Classic’ LCA questions:

Why bother doing LCAs:

Doing an LCA (ISO 14040)

 Goal and        
  scope     ---->  Interpretation
definition  <---- 
  ^  |            
  |  |            
  |  v            
Inventory   ---->  Interpretation 
deployment  <----
  ^  |
  |  |
  |  v
  Impact    ---->  Interpretation
assessment  <----

Goal and Scope Definition

Frame the study:

Functional unit:

System boundary:

What environmental indicators will you use?

Identify data requirements:

Inventory Deployment

Document the inventory: report should be transparent and be specific enough that a reader can generate the same results.

LCA practitioner:

LCA commissioner:

Impact Assessments

Must characterize the impacts.

May:

Interpretation

Iterate back to other steps:

Sensitivity studies: determine effect of key assumptions on your outcomes.

Uncertainty studies: find the effects of data uncertainty on outcomes (Monte Carlo simulations).

Basic LCA

E=QFE = QF where:

Process:

Consequential LCAs

Attributional/normal-process LCAs uses historical data, assuming that environmental impact increases linearly with demand.

Consequential LCAs models the consequences from a change in demand and consider displacement effects in the economy.

If in a supply-constrained market, increased demand result in higher prices. Hence, some projects/people will no longer be able to afford that thing and must choose a cheaper alternative which may have different environmental impacts.

e.g. if UC switches the boiler from coal to wood pellets, this increased wood pellet demand may hike prices, forcing someone living in Christchurch to switch to gas for heating their homes.

e.g. in UK, if beef demand increases too much, the additional beef is often imported from Brazil where there can sometimes be deforestation to provide grassland to feed the cows.

Note that increased demand may also lead to a less-than-linear increase in environmental impacts.

Sustainability outcomes are very much inter-twined with the economy.

Case Study: PHEV vs ICE in Australia

Functional unit: 1km of driving.

System includes:

But excludes human labour, road infrastructure (even though PHEV is heavier and hence may wear the road more), overheads and other services.

Needed model of PHEV charging patterns (probability of car charging at a given hour of a day) for households and fleet vehicles. Large spike at 11 pm when electricity got cheaper. Could infer charge duration from average daily use and supported charging speed etc.

Needed data on electricity grid - mix of electricity sources and hence environmental impact changes depending on time as peak load power plants turn on. Need to model how energy generated from different electricity sources would be impacted by increasing energy demand (dependent on the time of day).

Greenhouse gas emissions known for each electricity source, so can model greenhouse gas emissions per unit electricity for a given time of day and hence, emissions be kilometer travelled.

Notes:

Toy study - Hydrogen Fuel Cells

Case Study: Bio Jet Fuel

Ended up being environmentally positive but financially unviable.

Related conclusions:

Corporate Greenhouse Gas Reporting

NZ Emissions Trading Scheme:

Corporate reporting:

Different standards available; ISO14064 is the main one, but there are also free standards, the Greenhouse Gas Protocol corporate accounting and reporting standard being one of the more well-known ones.

Three scopes:

Ministry for the Environment has guide available: plug in yearly organizational fuel use, out pops scope 1 and 2 emissions. Misses some materials/systems though.

Case study:

Spheres of influence and control: