The relationship between Finance and Engineering is a simple one. Engineering costs money and finance provides it.
It is easy for an engineer to become focused on the technical detail of their profession, particularly when a project is technically sexy or is large or innovative. In these circumstances it is easy for an engineer to see the relationship between finance and engineering as being one where finance has the simple role of funding engineering.
While this is true on one level, engineers often hold this view in the abstract and simply do not relate to issues associated with finance and how to make it easier for financiers to fund their project.
How different it can be if an engineer sees their role as not only understanding the world of finance but also being an active participant in the financial debate. And perhaps more significantly, presenting their project in a manner which recognizes the relationship between finance and engineering, and in a manner which is readily understood by financiers.
There are two significant examples where engineers could lift their game. The first is to consign any thought of the use of “Payback period” as an analytical tool to the trash bucket as it has no relationship to rational financial analysis. The second is to learn to undertake a “Discounted Cash Flow (DCF) analysis” correctly. These two simple steps will do much to make the relationship between finance and engineering a more comfortable one.
The DCF methodology commonly used by engineers who do make some attempt at analyzing the financial effects of engineering projects is often simply an inflation adjusted cash flow model that probably chooses the capital project which has a smaller up front cost and larger deferred cost, simply on the logic that inflation will somehow make it more attractive.
The DCF analysis was developed to enable financiers to evaluate investments across differing industries and risks. To incorporate the best aspects of finance and engineering in project analysis, the DCF analysis undertaken by engineers should therefore include in its analysis not only the inflation risk, but also the market (or industry) risk. This can affect the outcome of an evaluation between closely competing projects even within the same industry. It therefore more closely resembles the analysis that a financier will undertake when comparing funding your project against a competing project in another industry.
The expression of engineering projects in a financial context gives funders a greater level of comfort when considering your project and also when considering the capabilities of the engineering team who will undertake the project.