Engineering Economics for MBA Students

The purpose of this paper is to provide details on an Engineering Economy course offered to a part-time (evening) MBA program at William & Mary. The students included engineers and non-engineers. All students had taken multiple courses in accounting and finance prior to taking Engineering Economy. Thus, the focus of the course was on relevant applications of engineering economy through journal paper reviews, public media, traditional homework assignments, and the creation of a Social Security tool. The course was not focused primarily on typical time value of money concepts, since those concepts were well known from the finance courses. The course included a project, which was completed in pieces. The project was to build an individual Social Security tool in Microsoft Excel. The tool incorporated the various breakpoints for when to claim and the risk of claiming early versus late, etc. The first stage of the tool was to complete the Microsoft Excel tool for just the basic breakpoints (i.e., earliest claiming age, full retirement age, and age 70) where month-by-month was the time frame; calculating the Net Present Value (NPV) for a given time value of money rate (8%) and age of death (85th birthday). The second stage of the tool was to determine the optimal claiming age given different ages of death. The third stage was to do a sensitivity analysis on the age of death, the time value of money rate, and whether or not Social Security “runs out of money” (i.e., drops benefits to 75%). This stage used a mortality calculator to assign a probability of death in any given month, and to calculate the NPV and the standard deviation of the various claiming scenarios (i.e., to measure risk). The readers of this paper will benefit from learning about this course since it is an applied course with professional students. The students were fairly aware of the time value of money concepts, but were lacking in applications outside of their industry domain and the usage of Microsoft Excel to calculate these problems. Furthermore, using a project that impacts all (Social Security) sparked interest in the course and its material. Introduction The purpose of this paper is to provide details on an Engineering Economy course offered to a part-time (evening) MBA program at William & Mary. The MBA programs at the Mason School of Business at William & Mary are consistently ranked between 25 and 50 in the U.S. from various ranking organizations, and in the top 100 worldwide. The part-time (evening) MBA program has a concentration in Engineering Management, and the Engineering Economy course is an elective within that concentration. The business school does not offer a doctorate. The university overall is a top 10 public university in the U.S., and is a traditional liberal arts university. It does not currently have any engineering degree programs, although it did in the past. Literature Review There are many articles that discuss how to teach or integrate business topics to engineering students [1 3]. However, the opposite situation is not well covered in the literature for general business topics. With regards to Engineering Economy and as it relates to Finance, this has been evaluated by Ted Eschenbach [4], as it relates to encouraging change in the way Engineering Economy is taught. Additionally, suggestions for how Engineering Managers should teach Engineering Economy has been surveyed and presented [5]. The project that is presented later in the paper follows the engineering economic evaluation of when to claim social security from both the NPV perspective and the risk perspective. For a full research review of such topics, the paper by Ted Eschenbach and Neal Lewis is suggested [6]. The design of a project for when to claim social security has been discussed and presented from both the individual perspective [7] and the couple’s perspective [8]. Student Make-up The course included 22 students, eight of which had an undergraduate engineering degree and worked in an engineering or technical capacity. Approximately half of the students took the course to satisfy an elective requirement without regard to the course topic (i.e., it fit their schedule), and the other half took the course to satisfy credits towards the Engineering Management concentration of the MBA program. Course Structure The course included 14 sessions, 11 face-to-face and 3 online. The sessions were approximately 2.75 hours each and the course met two or three times per week. The topical coverage of those sessions consisted of the following, in order: 1. Time Value of Money Calculations and Excel Review 2. Decision Making Process, Deferred Annuities, and Arithmetic and Geometric Gradients 3. Rate of Return and Breakeven Review 4. Problem Session 5. Mutually Exclusive Alternatives and Incremental Analysis 6. Replacement Analysis 7. Capital Budgeting and Mathematical Programming Approach 8. Sensitivity Analysis and Decision Trees 9. Cost Estimation and Learning Curves 10. Public Sector and Inflation 11. Multiple Criteria Decision Making and Analytic Hierarchy Process 12. Goal Programming 13. Real Options 14. Problem Session Furthermore, the students were required to review 5 articles (one per week, starting in the second week). These articles were then discussed during the class case-study. The paper topics did not align directly with the subject topics for the 14 lessons. The following articles were reviewed (Lessons 4, 6, 9, 12, and 14): 1. R. Ries, M.M. Bilec, N.M. Gokhan, and K.L. Needy, “The Economic Benefits of Green Buildings: A Comprehensive Case Study,” The Engineering Economist, 51, 259-295, 2006. 2. H-M.S. Wang, K.M. Spohn, L. Piccard, and L. Yao, “Feasibility Study of Wind Power Generation System at Arctic Valley,” The Engineering Management Journal, 22, 21-33, 2010. 3. R.A. Followill and B.C. Olsen, “A Closed-Form, After-Tax, Net Present Value Solution to the Mortgage Refinancing Decision,” The Engineering Economist, 60, 165-182, 2015. 4. B.C. Boehmke, A.W. Johnson, E.D. White, J.D. Weir, and M.A. Gallagher, “The influence of operational resources and activities on indirect personnel costs: A multilevel modeling approach,” The Engineering Economist, 61, 289-312, 2016. 5. J.V. Farr, I.J. Faber, A. Ganguly, W.A. Martin, and S.L. Larson, “Simulation-based costing for early phase life cycle cost analysis: Example application to an environmental remediation project,” The Engineering Economist, 61, 207-222, 2016. The students did complete graded problem sets that included the traditional Engineering Economy applications and calculations. In addition, each week students submitted a one slide review of an article where Engineering Economy or the time value of money was discussed. A small sample of these were shared each week during class, with the students providing the overview while the instructor moderated. Project [Note, this section is verbatim; that is, exactly from the Project Assignments.]: Part 1: Perhaps the most important individual decision with regards to the time value of money for a US worker is when to begin taking Social Security. For this question, we will assume it is a mutually exclusive decision (and “do nothing” is not a viable option). To make it a bit easier, we’ll make some basic assumptions. Date of Birth: May 31, 1960 Current Year Earnings: $100,000 Note: Values inputted into https://www.ssa.gov/oact/quickcalc/ Results below. We will assume these values are valid for our analysis. a) Compare the three alternatives based on Present Worth, Annual Worth, and Future Worth: 62 and 1 month: $1642 per month 67: $2418 per month 70: $3057 per month Assume the individual lives until they are 85 years old (i.e., they die on their 85 birthday). Assume Social Security does not run out of money. Assume an 8% MARR (i.e., time value of money interest rate). Assume payments received at the end of the month (i.e., they get the last payment). b) Use Excel to determine the “optimal” choices for a “death” at age 62 and 1 month until 100 years old. (I apologize for the morbidity of this question.) Hint: It may be better to do this (visually) with a line graph, after creating a table of monthly cash flows and then calculating PWs based on ages. Assume Social Security does not run out of money. Assume an 8% MARR (i.e., time value of money interest rate). Assume payments received at the end of the month. Assume the individual dies at the end of a month (i.e., they get the last payment). Figure 1: Calculations from the Social Security Quick Calculator [9] Part 2: Context and assumptions are the same as Part 1, unless otherwise specified. I’m looking for you to answer and/or show the following from your analysis; using tables, charts, graphs, etc.; but you may still need to provide a short “write up” to explain your thoughts to go along with your figures: a) Which assumption is most sensitive to small changes (-10% to +10%)? b) Which assumption is most sensitive to large changes (-30% to +30%)? c) If this was a friend who was healthy, what would you recommend he or she do? Alternatively, what would you tell him or her not to do? d) Any other thoughts or comments as it relates to this question and your analysis? Part 3: Context and assumptions are the same as Parts 1 and 2, unless otherwise specified. Assume an interest rate of 5% (note that this is a change from prior assignments). Perform the following analysis: a) Using some form of mortality calculator (or just make something up that is reasonable) assign a Probability of Death for each time period (make sure the probabilities sum to 1). [At minimum assume an equally likely death probability between 62 and 100.] b) Calculate the Net Present Value (either at 62 and 1 month, or at the start of taking retirement payments) and Future Value (at time of death) for each of the three scenarios (62 & 1, 67, and 70).