MITESD_70Jf09_lec04

MITESD_70Jf09_lec04 - MIT OpenCourseWare http/ocw.mit.edu...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
MIT OpenCourseWare http://ocw.mit.edu ESD.70J / 1.145J Engineering Economy Module Fall 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms .
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ESD.70J Engineering Economy Module - Session 4 1 ESD.70J Engineering Economy Fall 2009 Session Four Michel-Alexandre Cardin Prof. Richard de Neufville
Background image of page 2
ESD.70J Engineering Economy Module - Session 4 2 Questions for “Big vs. small” The past three sessions have covered ways to model uncertainty. It seems like the big plant is better… Does it feel right? We had assumed full commitment to building one small plant each year regardless of what demand reality turns out to be So much for flexibility and common sense. Let’s correct that oversight!
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ESD.70J Engineering Economy Module - Session 4 3 Session four – Flexibility • Objectives: – Build flexibility into the cash flow model – See how that impacts our decision-making – Perform simple breakeven analysis using Goal Seek – Introduce Solver – Excel self-study references
Background image of page 4
ESD.70J Engineering Economy Module - Session 4 4 Key limitation of NPV analysis • It assumes future decisions are made today, for example for constructing small plants Decide whether to build a plant Decide whether to build a plant Decide whether to build a plant Year 1 Year 2 Year 3 • But the decisions are actually made each year Decide whether to build a plant Year 1 Year 2 Year 3
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ESD.70J Engineering Economy Module - Session 4 5 • There is a LOT of value in delaying decisions until: – More information becomes available – Forecast uncertainty decreases with time and collection of additional data • Ability to delay decisions into the future is an example of flexibility • Flexibility is the magic bullet against uncertainty! Key limitation of NPV analysis
Background image of page 6
ESD.70J Engineering Economy Module - Session 4 6 • Recall the spreadsheet we built for Session Two – ESD70session2-2.xls • Press “command =” or “F9”: which plan is better?
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/04/2011 for the course ESD 15.094 taught by Professor Jiesun during the Spring '04 term at MIT.

Page1 / 24

MITESD_70Jf09_lec04 - MIT OpenCourseWare http/ocw.mit.edu...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online