This is a review of the Project Finance section
of the course. We repeat the goals of the section and emphasize
the tasks that a student should be able to do for the first examination.
To prepare for the exam you should study carefully the contents
of each of the first seven lessons on this site. The answer keys
for the Events and Homework assignments are on the Canvas
site. You should study these before the exam, but you may not
view the keys during the exam.


Goals 

Each lesson in the section has a
collection of goals. Most of them describe activities that you
should understand and be able to perform. The paragraphs below
describe the purpose of each lesson. Click the bush icon to see
the goals of the individual lessons.


Economics
and the Engineer
This lesson describes how economics and finance pervade
the modern world and how they are important for engineering
practice. Corporations show their financial status
and activities with financial statements. The lesson
provides an introduction.

Engineering
Projects
This lesson identifies the features of projects and
focuses on aspects of particular interest to this course.
The work of an engineer is often organized into projects.

Capital
Costs
This lesson is about estimating the expenses
associated with capital projects. The cash flow of
the capital costs indicates how the expenditures are
distributed in time.

LifeCycle
Costs
This lesson is about estimating the lifecycle costs (and revenues) for the project. When comparing
alternative solutions it is important to consider the
costs and revenues associated with the project from
the initial financial investment through the disposal
of assets associated with the project. This interval
between birth and death is the life cycle.

Estimates
This lesson addresses the question on
how individual cost estimates should be made. Since
the methods of this course are used primarily for planning,
the expenditures and receipts associated with capital
and lifecycle costs are always estimates of future
events.

Estimation
with Risk
This lesson introduces probability models
for describing uncertain estimates. Estimates of a
cash flow, where most of the amounts are realized in
the future, always involve uncertainty or risk.

Project
Cost with Risk
This lesson uses probability theory and
simulation for assessing the risks associated the capital
cost of a project.




Exam Format 

The first midterm exam will be administered
during the regular class meetings. The exam will have both closed
and open book parts. The closedbook part will be distributed
first. When you turn in this part, you will receive
the openbook part. No strict time limit is enforced for the
completion of the closed bookpart, but leave at least one hour
for the openbook part. The openbook part must be submitted
by the end of the class meeting. You will have a 1.75 hours to
complete both parts.
Closed Book 
The closedbook part will
have questions mostly of a conceptual nature.
You may use calculators, but no other materials
are allowed. Some problem types are listed below to help focus
your studies for the closedbook part.
The closedbook part might ask you to replicate
the computations of the Estimate addin. One example
is illustrated below. Given the data, you may be asked
to fill in the Cost column on the far right and
the Cash
Flow row on the bottom. Similar questions might be
asked about other forms created by the Estimate addin.
We will use interest rates of zero, so all P/F factors
are 1.
The closedbook part may also have simple
balance sheet questions as illustrated at the end of Lesson
1 (Economics and Engineers).
You should study the textbook with regard
to the characteristics of projects and the definition
and characteristics of the WBS and CBS.
These topics are also discussed in Lessons 3 and 4.
You should know and be able to use the
Cost Estimating Relations described
in Lesson 5 (Estimates). You should also understand
the difference between fixed and variable costs with regard to estimation.

Open Book 
For the openbook part, you may use calculators, computers, Excel, the
ME353 website, the Excel addins and the course textbook.
You may not use cell phones, iPads, the Canvas site or any files such as event keys, homework keys or summary sheets prepared
before the exam. Any device not mentioned is not permitted. A hard copy of the exam will be distribued and
space on th exam sheets will be provided for your answers. To receive
credit you must write your answers on the paper form.
You will be able to submit an Excel workbook through Canvas
when you are finished with the exam. We will only refer
to that workbook for questions of partial credit.
Problems will be similar to those given
in the events and homework. Be sure that you are able to use the Estimate and Random
Variables addins as described in the lessons.




Text 

Review the textbook chapters and
sections referenced in the lessons. Some questions may relate
to items in the Goals covered in the text, but not emphasized
in the webbased materials. 

Economics
and Engineers 

The primary skills taught in this
Lesson 1 regard the construction and interpretation of simple
financial statements including the balance sheet, income statement
and cash flow statements.
Click the Q icon below to open a quiz on
financial statements. This quiz was also in Lesson 1. It is a
PDF document. The quiz is made up of old exam questions. Work
the problems to the best of your ability. Then open the Scorecard.
This is a Flash movie
that you can use to selfgrade your quiz. Then click on the Q/A icon
to open the key to the quiz. Again, this is a PDF document. The
quiz has three questions with a total of 11 parts. Enter 11 on
the appropriate scorecard field and follow the instructions to
grade yourself on the quiz. If you do well, the scorecard will
give you a graphic award.


Financial
Statements Quiz 




Financial
Statements Quiz Key 




Engineering Projects 

Lesson 2 describes the characteristics
of a project and the activities that take place during the project
life cycle. Chapter 1 of the textbook provides a considerable
discussion about the characteristics of projects.


Capital Costs 

In Lesson 3 we learn the phases
of the life cycle and how to estimate capital costs. These are
the costs (and perhaps revenues) associating with installing
or completing a project. They do not include the entire cash
flow associated with the project. These are the lifecycle costs
and are described in the next lesson.
The lesson introduces the work breakdown schedule (WBS) used to describe, organize and estimate the costs of a
project. The Estimate addin
is used to construct the WBS.


LifeCycle Costs 

Lesson 4 considers the lifecycle cost (LCC), which is the sum of all expenditures less receipts from origination
of the project to disposal of the system. In additional to the
capital costs considered in the Lesson 3, the LCC includes
the operating costs and revenues for each year of the life cycle
as well as the disposal costs. The lesson introduces cost
breakdown schedule (CBS)
for organizing the estimation of the LCC for a system. The Estimate addin is used
to construct an LCC model. 

Estimates 

Lessons 3 and 4
introduce the work breakdown schedule (WBS) and cost
breakdown schedule (CBS) for organizing the estimation of
costs for projects and systems, respectively. A question that
remains to be answered is how does one find estimates for the
activities or components at the lowest level of these two schedules?
Lesson 5 introduces some methods and models that have been
used for cost estimation. The methods that use mathematical models
are called cost
estimating relationships or CERs. 

Estimates with
Risk 

Lesson 6 describes the risks
associated with a project, particularly focusing on the risks
regarding cash flows. Uncertainty of estimation is always present
and in our view, it is better to account for
uncertainty explicitly rather than simply neglect it. The
methods for dealing with risk introduced here will be used throughout
the course. This lesson uses the Random
Variables addin.
Four distributions are considered when associating random variables
to estimates: Uniform, Triangular,
Beta and Normal. Distribution parameters affect the shape of
their density functions. Features of the distributions are used
for point estimates of uncertain quantities. These include the
mean, median and percentiles. Simulation can also be used for
point estimates, but simulated values are only useful when used
as part of a simulation study, as described in the next lesson.


Project Cost with
Risk 

Lesson 7 combines
the results of previous lessons to obtain estimates for the capital
cost of a project. The estimates explicitly consider risk. The
WBS model is adapted to include probability distributions for
cost components. Using formulas from probability theory we compute
the mean and variance of the project cost. With these results
we can compute several measures that assist decisionmakers in
risky circumstances. For most situations, the results obtained
are approximate in that the normal distribution is used to model
the capital cost. When this approximation is unacceptable, MonteCarlo
simulation is used to obtain results.
The lesson uses both the Estimate and
the Random Variables addins. Although these addins
allow risk to be included in the LCC estimates, this topic is not addressed here. 

Summary 

