Chapter 6: Evaluations
Introduction
Imagine that you are a senior engineer working for the provincial government. You are assigned to lead a group assessing the feasibility of a proposed nuclear power station just north of Prince Albert. The power station will operate for several decades, requiring long-term estimates for maintenance and operational costs, as well as projected revenues. Daily operations at the station will create jobs for workers from nearby communities, and draw qualified professionals from across the country. Effects on the surrounding environment must be considered, including the safe storage of waste materials and the impact of decommissioning the station at the end of its life cycle. The station will also reduce provincial CO2 emissions by replacing fossil fuel energy sources that are currently used. Aside from power generation, the nuclear reactor at the site could be used to produce important medical isotopes which local hospitals would otherwise be required to import from international suppliers.
What methods should your group use when preparing the recommendation for this project? You are now familiar with many tools for evaluating projects; these tools are a dependable resource for evaluating investments that involve a straightforward set of cash flows. However, when considering a complex, long-term project where the potential costs and benefits are not solely monetary, more factors must also be considered.
Some questions your group of engineers might consider are:
- What is the total cost of this power station over its full life cycle, including design, construction, operation, and decommissioning?
- Who are the people involved with or affected by (the stakeholders) this project, and how important are their concerns?
- What value should be assigned to the environmental, social, and economic impacts of this project? Can this value be quantified? What is the relative importance of each impact?
- In purely financial terms, is there a benefit to replacing existing fossil fuel power stations with this nuclear power station?
- Can the benefits and costs of the power station be compared to one another to reach a decision?
In this chapter we will discuss the evaluation of complex projects, and how various analysis techniques can be used in situations like the one given above. The first topics covered will be replacement analysis and life cycle costs, which deal with the broad financial scope of a project. Then we will cover benefit-cost (or cost-benefit) analyses and feasibility studies, and discuss the differences between service projects and revenue projects.
Key Concepts
- Replacement Analysis
- Life Cycle Cost
- Benefit-Cost Analysis
- Feasibility Studies
- Services Projects vs Revenue Projects
Learning Objectives
After completing this chapter, students should be able to:
- Replacement Analysis
- Life Cycle Cost
- Services Projects vs Revenue Projects
- Benefit-Cost Analysis
- Feasibility Studies
