WK7 _Tony_Deciding on best use of my building

Problem Definition

I am putting up a building and there are several uses to which the building can be put. I need to take a decision on the best use for the building.

Proposed Alternatives/Solutions

1. Reside in the building with my family

2. Let out the building for a rental income

3. Sell the building for a profit

Quantitative and Qualitative Analysis of Alternatives

Option 1

I currently live in a rented apartment. The rent I pay is $4,605 pa, maintenance for 1^st year was $2,302, subsequent years 10% i.e $460. The landlord increased the rent this year to $5,263. To reside in the building I am constructing I will save what I am currently paying as rent and part of the maintenance cost as the building will still be new. I will also be free from continual rent increase by the landlord, inconvenience of sharing limited facilities with neighbours and will have privacy. Yearly rent savings will be 5,263 + 10% (maint) = $5789.3. I will however drive longer distance to work but will enjoy the comfort of the new home as it was designed to taste. If the savings remain at this level it will take 23 years to recoup my investment in the property. The invested sum is shown in Option 2 below

Option 2

This option requires me to remain in my present rented apartment and earn a rental income from the new building. Data supporting this option are as follows:

Cost of land/fence $24,342

Cost of construction $100,000

Interest on borrowed funds $6,578

Total cost of project $130,920

Going rent $6,578pa: 20 years to recoup investment, keeping rent constant.

Annual maintenance is 10% of rental income: $658

Net rental income: 6,578 – 658 = $5,920

The apartment is near my office so I walk to & from the office. I will miss the comfort, convenience and privacy of the new home.

Option 3

This option involves selling off the completed building to earn a profit on the investment. I will remain in my present rented apartment.

Data supporting this option are:

Cost of project as in Alternative 2: $130, 920

Going selling price $177,632

Consider a 20yr period as in lease option, yearly income ignoring the interest on the received money, is $8,881

Investment is recouped within a year. I will miss the comfort, convenience and privacy of the new home. I will also be exposed to continual rent increases by the landlord of my rented apartment

Selection Criteria

1. Yearly income

2. Comfort & Convenience

3. Distance from office

4. Time to recoup investment

5. Privacy

Analysis & comparison of alternatives

The comparative analysis will be done using the additive weighting technique. Additive weighting is probably the most popular single-dimensional method because it includes both the performance ratings and the importance weights of each attribute when evaluating alternatives [1]. Furthermore, it produces recommendations that tend to agree with the intuitive feel of the decision maker concerning the best alternative [2]. The technique uses importance weights established from ordinal ranking of the attributes as shown in table 2 and nondimensional values of the attributes. The nondimensional values are established using the following formulas;

Rating = Worst outcome-outcome being made dimensionless - when low values are best [3]

Worst outcome-Worst outcome

Rating = Worst outcome-outcome being made dimensionless - when high values are best [4]

Worst outcome-Worst outcome

Summarised below are the base data for the various options.

Attributes	Option 1- Reside in Bldg	Option 2: Lease Building	Option 3: Sell Building
Yearly income/savings	$5,789	$5,920	$8,881
Comfort & Convenience	Excellent	Fair	Fair
Distance from Office	5km	0.5km	0.5km
Time to recoup investment	23years	20years	1year
Privacy	Excellent	Fair	Fair

Table 1

Ordinal Ranking of attributes

Comfort & convenience >yearly income

Comfort & convenience>distance from office

Comfort & convenience>privacy

Comfort & convenience>time to recoup investment

Privacy>yearly income

Privacy>distance from office

Privacy>time to recoup investment

Yearly income>distance from office

Yearly income>time to recoup investment

Time to recoup investment>distance from office

Ranking: Comfort =4; Privacy = 3; Yearly income = 2; Time to recoup investmt = 1; distance from office = 0

Nondimensional scaling of attributes

Attribute Value Rating Procedure Dimensionless Value

Yearly income $5,789 yearly inc – 5,789/3,092 0.0 (opt 1)

5,920 0.04 (opt 2)

8,881 1.00 (opt 3)

Comfort Excellent (comfort^a – 1)/2 1.0 (opt 1)

Fair 0.0 (opt 2)

Fair 0.0 (opt 3)

Distance fr off. 5km (5 – dist)/4.5 0.0 (opt 1)

0.5km 1.0 (opt 2)

0.5km 1.0 (opt 3)

Time to recoup 23yrs (23-time to recoup)22 0.0 (opt 1)

20 0.14 (opt 2)

1 1.0 (opt 3)

Privacy Excellent (Privacy^b-1)/2 1.0 (opt 1)

Fair 0.0 (opt 2)

Fair 0.0 (opt 3)

a. Scale of 1-3 use. 3 –excellent, 2-good, 1-fair

b. Ditto

Attribute	Relative rankc	Normalised weight (A)	Option 1 (B) (A xB)	Option 2 (B) (AxB)	Option 3 (B) (AxB)
Yearly income	3	3/15 = 0.2	0.0 0.00	0.04 0.008	1.0 0.20
Comfort	5	5/15 = 0.33	1.0 0.33	0.0 0.0	0.0 0.00
Distance	1	1/15 = 0.07	0.0 0.00	1.0 0.07	1.0 0.07
Time	2	2/15 = 0.13	0.0 0.00	0.14 0.018	1.0 0.13
Privacy	4	4/15 = 0.27	1.0 0.27	0.0 0.0	0.0 0.00
Sum	15		0.60	0.096	0.40

Table 2: Additive weighting technique

C –relative rank = ordinal rank + 1. Highest rank, best

B – Dimensionless value of attributes

Selection of Best Option

The decision on best option is based on the comparative analysis done using the additive weighting technique. When using the technique the option or alternative with the highest weighted score is the best option. From Table 2 above, that option is option 1 (score 0.60) which is to reside in the building with my family. Comfort and privacy are very important to me and they weighed heavily in this decision. The technique gave a recommendation that agreed with my intuitive feel. This is what I like most about the technique.

Performance monitoring and Post Evaluation

1. Maintain very well the new building so as to retain the value and hence continued comfort

2. Have good security personnel to maintain privacy

References

1. Engineering Economy -15^th Edition.14.7.2-Additive weighting techniques

2. Ibid

3. Engineering Economy -15^th Edition.14.7.1-Nondimensional scaling

4. Ibid

Week 12_LanreGiwa_Project Decision using Multi-Attribute Technique

Problem Recognition / Identification

In an engineering company, the executives are trying to decide on the strategy to be taken regarding two project offers available to them. They have decided not to only judge based on the monetary values but to use non-monetary attributes.

Development of Feasible Alternatives/Solutions

The following are the alternatives available to the company:

Alternative 1 / Project A – Accept and execute Project A from company ABC.

Alternative 2 / Project B– Accept and execute Project B from company XYZ

Alternative 3 / Project C – Accept and execute Project A from company ABC and Project B from Company XYZ

Alternative 4 – Do nothing

Possible Outcomes and Cash Flow of Alternatives / Solutions

Alternative 1: This project from company ABC is a detailed engineering design job that will be executed with estimated Man-Hours of about 35,000 hours. This is a very large project that will keep the staff busy and will bring revenue to the company. However, company ABC is offering very low labour rates for the engineers to execute the job.

Alternative 2: The second alternative is a Front End Engineering Design (FEED) project from company XYZ. The company wants to construct a 22km pipeline and the estimated man-hours is about 15,000 hours. The good part is that the Labour rates are very juicy and well above the average in the market.

Alternative 3: This option is for the company to combine and execute the two projects concurrently. Considering the large volume of work, the company will ultimately require a lot of resources (such as engineers, furniture and computers) for the projects. The benefit of combining the project is that it wil generate a lot of revenue for the company.

Alternative 4: This will be for the company not to choose any of the options and just maintain status quo for whatever reason.

Selection Criteria / Attributes of best solution

• Outcome of Profitability Analysis
• Knowledge and Experience
• Cordial Relationship
• Labour rates
• Estimated Man-Hours
• Opportunity Cost
• Availability of Resources to Execute Project

Analysis and comparison of the Alternatives/Solutions

The analysis was carried out by wide consultation amongst the members of staff and the historical records available to the management staff of the engineering company.

Below is a quantitative analysis of the alternatives

The analysis will be carried out using the multi-attribute additive weighting technique. The table 1 below shows a summary Information of attributes and subsequently shows the alternatives available to the company

SUMMARY INFORMATION FOR CHOICE OF A COST ESTIMATING METHODOLOGY
	ALTERNATIVES
ATTRIBUTES	PROJECT A	PROJECT B	PROJECT C	DO NOTHING
Outcome of Profitability Analysis	Poor	Good	Excellent	Poor
Knowledge and Experience	Excellent	Good	Excellent	Poor
Cordial Relationship	Poor	Excellent	Good	Poor
Labour Rates	Poor	Excellent	Good	Poor
Estimated Man-Hours	Excellent	Poor	Excellent	Poor
Opportunity Cost	Good	Good	Poor	Poor
Availability of Resources to Execute Project	Good	Excellent	Poor	Excellent
3 LEVEL GRADING SYSTEM	GRADES	DEFINITION
Excellent	3	Having fulfilled or met the inherent attribute between 70% - 100%
Good	2	Having fulfilled or met the inherent attribute between 40% - 79%
Poor	1	Having fulfilled or met the inherent attributes between 0% - 39%

Table 1 – Summary Information of attributes and Project alternatives

From the table above, a 3-level grading system was used to grade the attributes based on the degree of compliance. For the additive weighting technique, it is imperative to convert the grading to dimensionless values, hence the table 2 below shows the attributes converted to dimensionless values.

DIMENSIONLESS VALUES OF THE COST ESTIMATING ALTERNATIVES
ATTRIBUTES	PROJECT A	PROJECT B	PROJECT C	DO NOTHING
Outcome of Profitability Analysis	0	0.5	1	0
Knowledge and Experience	1	0.5	1	0
Cordial Relationship	0	1	0.5	0
Labour Rates	0	1	0.5	0
Estimated Man-Hours	1	0	1	0
Opportunity Cost	0.5	0.5	0	0
Availability of Resources to Execute Project	0.5	1	0	1
Total	3	4.5	4	1

Table 2: Ranking of Attributes

Figure 3 below shows that the ordinal ranking of the attributes have been converted to relative ranking and the relative ranking have all been normalized.

RANKING AND NORMALIZED WEIGHT OF ATTRIBUTES
ATTRIBUTES	Ordinal Ranking	Relative Ranking	Normalized Weight
Outcome of Profitability Analysis	7	8	0.23
Knowledge and Experience	3	4	0.11
Cordial Relationship	2	3	0.09
Labour Rates	6	7	0.20
Estimated Man-Hours	5	6	0.17
Opportunity Cost	1	2	0.06
Availability of Resources to Execute Project	4	5	0.14
Total		35	1.00
NOTES
Ordinal Ranking is ordering of attributes from most preferred to the least preferred
Relative Ranking = Ordinal Ranking + 1
For relative ranking, A rank of 8 is Highest while 1 is Lowest
Normalized Weight = Relative Ranking / Total Relative Ranking

Table 3: Ranking and Normalized weight of Attributes

Kindly note that the ranking of the attributes was done such that relative weights were assigned with higher numbers signifying greater importance. Normalization of these relative ranking was achieved by dividing individual weights by the sum of all the relative weights..

The next table 4 shows the calculation of the best option using the additive weighting compensatory model.

MULTI-ATTRIBUTE DECISION MODEL USING COMPENSATORY ADDITIVE WEIGHTING TECHNIQUE
			Calculation of Scores for each alternative
			PROJECT A		PROJECT B		PROJECT C		DO NOTHING
ATTRIBUTES	Relative Rank	Normalized Weight	Performance	Weight Value	Performance	Weight Value	Performance	Weight Value	Performance	Weight Value
Outcome of Profitability Analysis	8	0.23	0	0.00	0.5	0.11	1	0.23	0	0.00
Knowledge and Experience	4	0.11	1	0.11	0.5	0.06	1	0.11	0	0.00
Cordial Relationship	3	0.09	0	0.00	1	0.09	0.5	0.04	0	0.00
Labour Rates	7	0.20	0	0.00	1	0.20	0.5	0.10	0	0.00
Estimated Man-Hours	6	0.17	1	0.17	0	0.00	1	0.17	0	0.00
Opportunity Cost	2	0.06	0.5	0.03	0.5	0.03	0	0.00	0	0.00
Availability of Resources to Execute Project	5	0.14	0.5	0.07	1	0.14	0	0.00	1	0.14
Total Score				0.39		0.63		0.66		0.14
								BEST CHOICE
Based on Ranking Sheet, Relative Ranking = Ordinal Ranking +1
For relative ranking, A rank of 9 is Highest while 1 is Lowest

Based on the analysis above, I have come up with the best alternative that the company will adopt as its nest strategy.

Best Alternative to be Selected

Amongst all the options analyzed, I would recommend option 3 or Project C as the best choice for the company to execute. Put another way, accepting and executing the two jobs by getting more resources such as buying more computers and employing more engineers to execute both jobs concurrently would be the best option for the company to choose.

Performance Monitoring / Post evaluation

For performance monitoring and post evaluation, the company should send out a customer evaluation form to the two clients to inquire on the level of client satisfaction on the deliverables. This will help the company know areas of development. Secondly, customer evaluation forms should be sent to the internal clients (employees) to know the concerns of the staff regarding the work load and how to address the issues. Another area of evaluation is the total profit of the company for the period and level of experience achieve doing both jobs

References:

1. AACE International. Skills & Knowledge of Cost Engineering, 5^th Edition Revised.Chapter-9, pp.9.1-9.9 Edited by Dr. Scott J. Amos, PE. 2010. AACE International. Morgantown, WV, USA.

2. Sulliven, W. G., Wicks, E.M., Koelling, C. P., et al. (2009). Engineering Economy (14^th ed.), Chp 14 pp551 -570. New Jersey: Pearson Education.
3. Brassard M, Ritter D. The memory Jogger 2. Tools for Continuous Improvement and Effective Planning.2010.