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Engineers Should Study Finance: 5 Reasons Why

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perl_geek
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Bogus degrees
perl_geek   7/21/2014 4:57:40 PM
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MBAs are really only worth anything from the top half-dozen schools, and then only for the contacts you make, rather than the course contents. There's nothing about the basics of finance that you can't teach yourself from books. Just remember you always work to 2 decimal places.

Larry Desjardin
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Re: ROI or NPV?
Larry Desjardin   7/21/2014 4:57:25 PM
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Bert, I'll put you down as an NPV vote.

 

You make a good point about the idealized graphs. Even if they don't exist in nature, they are still useful.  Many decisions are binary: Do THIS or THAT.  In those cases, you only need to have enough information to make the right decision- you don't have to be precise in exactly how much better alternative A is than B.  Additionally, there is still value in at least trying to state your best guess- whether its schedule, sales volume, or price elasticity.  Before spending big bucks on a project, there should at least be a reasonable scenario where the investment makes sense.  The inaccuracies that you noted is exactly why I like rules of thumb and simplified analysis. The math is easier, and very little accuracy is lost compared to the raw assumptions.  

Bert22306
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CEO
Re: ROI or NPV?
Bert22306   7/21/2014 4:43:25 PM
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On the NPV vs ROI question, I think maybe NPV is more important for strategic direction, where ROI might be used to solve a tactical problem. It seems kind of obvious that a company wanting to survive in the long term, and keep its employees paid, cannot do so based on ROI alone. But if you have to decide whether or not to invest money on a component, or buy off the shelf, then ROI would answer that question for you.

The graphs you draw are clear and straightforward, the problem being that rarely if ever does anyone have good enough data to draw them. They are the kinds of graphs one sees in marketing presentations, often without any numbers on the axes, more useful to present a concept than accurate predictions. Engineers should know very well the concept of measurement tolerance. The analogy in this case might be, designing a system with components with high tolerance for error, which wil lead to designs that are going to be much less than optimal.

The VHS vs Beta race was one where VHS seemed to have the upper hand on recording time, just about throughout. At the beginning, Beta was good for only one hour, and VHS for two. If you're wanting to record prime time TV shows for time-shift viewing, that's pretty critical. In spite of the popular wisdom, there were other technical advantages to VHS that took Beta several years to match (heads retracting on rewind, stereo audio capability designed in from the start, not to mention availability of format from multiple vendors, also from the start).

Larry Desjardin
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Re: Engineering and Economics
Larry Desjardin   7/21/2014 4:03:49 PM
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I'll think about it. High tech is characterized with risk, as a commentor below has pointed out. There are no sure things. Part of portfolio management is to accept that some failueres will occur, so your winners must be robust enough to pay for all the lost investments.  

Remember the USAF MATE program, and the CIIL programming language? I wonder if ANY of those products were financially successful.  

ericha2
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Re: Engineering and Economics
ericha2   7/21/2014 3:59:30 PM
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Interestingly, I'm told that Beta won in Turkey (I have family that lives there).  This lends more credence to the explanation of the rental market being the driving factor. 

Measurement.Blues
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CEO
Re: Engineering and Economics
Measurement.Blues   7/21/2014 3:53:59 PM
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Larry, Speaking of failures, we've both been around the test business long enough to have seen a few there. Remember the HP Logic Dart? The first version was an engineering mess (very hard to use). The released version was so much better that it went on to win Test & Measurement World's Test Product of the year. It was off the market in less than two years.

I also remember the LeCroy Scopestation, the first oscilloscope (1993 I think) with a PC motherboard. This DOS-based scope was ahead of it's time and it failed.

Can you think of any otherS? If we can come up with 5 or more, it could be a slideshow.

 

Larry Desjardin
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Blogger
Re: ROI or NPV?
Larry Desjardin   7/21/2014 3:42:25 PM
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Ericha,

 

Thanks for being the first commentor to take a shot at the NPV vs. ROI question. I'll write you down as a vote for ROI.  I will refrain from answering yet, to see if we have more comments on this subject.

 

Yes- risk is a crucial element! Good comment. There are many ways to handle risk, each with their own peculiarities.

Larry Desjardin
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Blogger
Re: Engineering and Economics
Larry Desjardin   7/21/2014 3:38:46 PM
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I think this is correct.  VHS and Beta were both viable standards, but VHS developed the rental market faster. It was a virtuous cycle (or a viscious cycle if you were in the Beta camp).  The slight VHS rental market share advantage led more people to get VHS players. Then more outlets concentrated on VHS in response to the larger number of players. Then VHS players were heavily in demand, and the rental outlets focused even more on VHS. And so forth until there was only VHS.  Had Beta gained a matching share early on in the rental market, the whole industry could have switched to Beta.

We saw the same thing play out on Blu-Ray vs. HD DVD.  Here is was the movie studio adoption that swung the advantage to Blu-Ray. 

ericha2
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Re: Engineering and Economics
ericha2   7/21/2014 2:32:40 PM
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I think why the product failed really matters in this case.  As I understand it, the reason Beta lost in the US was pretty much random chance--there were a few more movies available in VHS, and that tipped the market just a bit in the favor of VHS.  Positive feedback then ensued--more movies were made for VHS because there were more VHS players, and vice versa. 

 

There is also a camp that believes that super-long recording time (6 hours?) was first available on VHS; this probably had some effect as well, and may have been just enough stimulus to get the above-mentioned positive feedback going.  I don't remember how long it took Sony to respond to this, but I think it was quite a while--well over a year.   If that's the case, then it's really bad Engineering (in the broad sense--including management and marketing, but also the product developers as well) to allow a competing format to have a key feature for some months with no response.

ericha2
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Rookie
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.

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