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Engineers Should Study Finance: 5 Reasons Why

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ericha2
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ROI or NPV?
ericha2   7/21/2014 2:26:32 PM
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I personally like ROI better for comparing individual project, as the ratio lets you combine multiple projects for better return.  Given the scenario of N projects of which you don't have funding for all of them, however, I think NPV of sets of projects--each of which maxes out the funding available (each of which has a positive NPV)--is the best comparison.  I wouldn't try all possible combinations; I'd start with the ones that have the highest ROI and come up with several possible groupings that uses up the available funding, then pick the one with the highest NPV.

This assumes, of course, that each project is risk-free.  That is rarely the case.  As part of this exercise I'd try to make some reasonable guesses about how risky each project is.  Is this something the team has done before (not very risky)?  Is it new to the team (pretty risky)?  Is it new to the world (very risky)?  What's the likelyhood that a competitor will emerge that drops your sales--do you have strong barriers to entry (such as patents, regulations, customer relationships, or proprietary technology or distribution channel  that's hard to duplicate), or is this an area that a strong competitor would naturally want to enter?  What's the likelyhood that there is a supplier gets too much control and sucks up all the profit (think Intel and Microsoft for PCs).  Discounting ROI & NPV for risk is not an easy task--there is no simple formula you can use.  But to not include this as part of the analysis neglects what happens in the real world!

I also personally like the idea of doing some portfolio-style analysis on projects--some portion are low risk with low return, and some portion are higher risk with higher return.  If the high-return projects pay off, that's great.  If not, you've still got the low-risk projects to keep you going.

Measurement.Blues
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CEO
Re: Engineering and Economics
Measurement.Blues   7/21/2014 12:25:56 PM
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I'd like to amend GarySXT's statement to say:

Financially successful engineering is as much about good economics and good marketing as it is good technology.

I argue that you can have good engineering without financial success. remember Beta video tape?

Sanjib.A
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CEO
Re: MBA
Sanjib.A   7/21/2014 12:17:42 PM
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Exactly!! I tried doing MBA part-time while doing job but found finance a boring subject. Mathematical problems finance were interesting to solve but I found accounting horribly confusing...the balance sheet...oh!! I had to give-up for other reasons, but I was happy that I got rid of that...after all I like to spend time with electronics during that extra time became available...

But I agree that to be a good engineering manager or an entrepreneur, once should have good understanding of finance.

Larry Desjardin
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Blogger
Re: Engineering and Economics
Larry Desjardin   7/21/2014 11:40:45 AM
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Well said.  It is at the nexus of technology, markets, and economics.

GarySXT
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Freelancer
Engineering and Economics
GarySXT   7/21/2014 11:38:16 AM
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Good engineering is as much about good economics as it is good technology.

 

antedeluvian
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Blogger
Re: MBA
antedeluvian   7/21/2014 9:35:34 AM
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Martin

I actually though it would be a good idea to get an MBA part time.

When I finsihed my engineering degree, since I finished so far back in the pack, I decided that I wouldn't be a good engineer. I then did an MBA. It seemed to me an engineer as a manager was a good plan since a) you could get further organizationally and b) there were always managers who needed to understand what the engineers were doing.

Circumstances conspired and got me into engineering rather than management, and I have only recently moved part-time into management.

MeasurementBlues
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Blogger
MBA
MeasurementBlues   7/21/2014 8:55:48 AM
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I actually thought it would be a good idea to get an MBA part time. My best classes were economics and the worst were accounting and business law. Coming from an engineering background, I found the whole cencept of law illogical.

The required finance class was easy, but boring.

So I ended up taking a job as an editor.

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