Engineered Systems - January 2009 - (Page 82) What financing challenges did the first ancient Egyptian engineer face? After setting the table with that interesting scenario, we move on to modern engineering economics. There, calculating the cost of generating one dollar of savings is joined by the value of assessing the oft-overlooked cost of doing nothing. The result is a stronger argument for sustainable building and retrofitting in the contemporary age, and that’s no pyramid scheme. BY LARRY CLARK, LEED® AP imple payback might have, in the past, been effective in justifying engineering projects. However, with today’s availability of widely diverse energy-savings initiatives, more sophisticated tools may be needed if we’re to do a reliable and credible economic analysis of an energy-savings project. Going back to ancient Egypt, many historians believe that Imhotep was the first engineer (and architect), since he is credited with designing the Step Pyramid for the Pharaoh Djoser in the 27th century BC. It is unlikely, however, that engineering economics was a part of the process on that particular project, since its budget — if one existed — does not seem to have been recorded. However, when the Great Pyramid was built a century later, its cost of 1,600 talents was noted. Depending upon whether these were gold or silver talents, that project in today’s dollars would likely be in the range of $50 million to nearly half a billion U.S. dollars. And, although the concept of “interest” was apparently recognized by then (in 2000 BC, the Babylonians paid interest on the grain they borrowed1), it is probably a safe assumption that the project was “pay as you go,” particularly since there’s very little chance of an ROI from a tomb! Or is there? Perhaps Cheops’ son, Radjedef, put in a fast-food franchise and started selling tours of Dad’s tomb … If that were the case, what would the economics of the enterprise have looked like? If we examine the most basic model of simple payback, with cash flow coming entirely from tour ticket revenues — without any regard to operating or maintenance costs, the time value of the money (assuming they had actual money then, which is problematical); or risk — and we assume that: (1) the price of admission is one 3,600th S (1/3,600) of a talent (equivalent to a Babylonian shekel, with apologies to academia) and (2) an expected average attendance of 10,000 visitors a day, 365 days a year, then the model would look like: • Cash flow =1 shekel/person x 10,000 persons/day x 365 days/year = 3.65 million shekels/year or (dividing by 3,600) 1,013.89 talents/year • Payback period=1,600 talents/1,013.89 talents/year = 1.58 years This model is, of course, very simplistic. It does, however, point out a significant limitation of simple-payback analysis, which is its inability to compare different solutions on an “apples to apples” basis or to other potential investments (uses of the same money) or even to not making any investment. That may not have been a problem in ancient Egypt, but in today’s business environment, more precise tools are obviously required, and simple payback is more typically used on discrete capital projects with clearly defined operational savings. The challenges of the ancient engineers — perhaps even through the time of da Vinci and his Renaissance colleagues — were far more technical than economic. That probably changed with the Industrial Revolution, and today the study of engineering economics is a frequently required part of an undergraduate engineering curriculum and one of the subjects covered on the Fundamentals of Engineering (FE) examination.2 And in reality, the economic hurdles facing an engineering project today are often more daunting than are the technical obstacles. Any engineer who’s had to “sell” a high-first-cost project to a recalcitrant client, or to his or her top management, knows this to be fact. 82 En gi neer ed S y stem s January 2009
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