Revision: September 2001

**This subject is substantially different from previous offerings
with the same numbers**

It builds upon previous versions; namely those called "Engineering
Systems Analysis" and, more recently, "Dynamic Strategic Planning." Much
of the basic material is similar. However, the focus is now squarely on
the systems analysis tools useful for designing and managing important
technical projects operating in the inevitably risky environment.
Specifically, it culminates in the presentation of the several methods of
analyzing "real options." Many researchers and practitioners believe that
these techniques will revolutionize the way we will develop and manage
complex projects. Indeed, a number of implementations have already
demonstrated gains in overall performance of 10 to 30 percent. These are
significant opportunities.

**Organization of Syllabus**

The syllabus consists of 2 major blocks covering 5 interlocking topics.

**Part 1** covers the elements of engineering systems analysis in
the context of certainty:

- Evaluation techniques for projects that exist more than 3 to 5
years. These feature the discounted cash flow analyses essential for any
realistic assessment of significant systems. They are sophisticated
versions of traditional "engineering economy."
- Concepts for correctly modeling technically and economically
efficient performance of systems. These derive from the economic notions
of production and cost functions. These theoretical functions lose
important technical realities, however, and need to be replaced by
technical cost models derived from a deep understanding of the
engineering details of the system.
- Optimization over a system model anchored in a context of certainty,
specifically linear and dynamic programming. Linear programming, in
addition to being a powerful means to optimize systems for fixed
conditions, illustrates the important concepts of sensitivity analysis,
shadow prices and opportunity costs. Dynamic programming is an essential
means to calculate the value of real options.

**Part 2** presents the techniques for analyzing systems in the
context of uncertainty. These are:

- Decision and utility analysis. These two methods provide a coherent
basis for determining the optimal value of possible choices in the
design and management of a system and, thus, for determining an optimal
choice. However, they do deal effectively with evaluation over time,
because they do not support a way to do a discounted cash flow that
properly accounts for changing patterns of risk.
- Real Options analysis, a integrated approach that not only properly
deals appropriately with evaluation over time in risky situations but
also pinpoints the value of specific design elements. It thus gives
designers and managers the means to decide what kinds of flexibility to
build into a system, and when to exercise these options. With sufficient
data, real options analysis directly calculates the value of flexible
choices. More generally, as demonstrated theoretically and by example
applications, real options analysis of engineering systems requires
approximate methods.

**Prerequisites**

The full course builds upon a basic knowledge of calculus and of
probability. Recognizing the variety of backgrounds among the students, it
presents all the more advanced material required. However, it expects that
students are mathematically agile and that many students will have seen
several of the methods in some context or another. The course therefore
presents the more advanced mathematical treatments rapidly, focussing on
the essential elements.

Students should either already be familiar with spreadsheet programs,
or spend extra time at the beginning of the course to become familiar with
Excel©.

In the short version of the course given at Cambridge University, the
instructors expect the participants to be familiar with the material in
Part 1.

**Course Materials**

The text for the course is *Applied Systems Analysis* (R. de
Neufville, McGraw-Hill, 1990). Participants can get photocopied versions
from the Teaching Assistant for the subject for $20. Book versions are
unavailable except in the library. Prof. de Neufville is preparing a
completely revised version of the text.

Software for course is *Treeage*© (student edition) also available
from the Teaching Assistant for $ 20.

Students will find it convenient to have their own copy of both the
software and the text, but may share with colleagues if they want. The
assignments assume that each student has these materials readily
available, including in the final exam.

Additionally, participants can view and download copies of the pdf
versions of the PowerPoint slides on the web site for the course. As the
instructors will routinely improve their presentations as the course
proceeds, the web versions of the slides may differ from those actually
shown in class. Every effort will be made to keep the web site current
up-to-date, even after the presentations.

**Computer Environment**

The course web site (at top of this file) is the primary means of
distributing basic information about the course. It contains the:

- Syllabus and schedule of classes,
- Pdf versions of slides used in the lectures (see previous section),
- Assignments of readings and homework,
- Electronic versions of major homework exercises, and
- A variety of software that students can use in the course

Students will be using Treeage© (student edition) to work on
assignments.

**Recitations**

Weekly problem-solving sessions will occur at times the instructors
will establish in consultation with the class.

Prof. de Neufville will be available for at least half an hour after
each class for immediate questions and comments. Students can also make
appointments with him for personal discussions.

**Grading**

The teachers will base grades principally on written material:
homework, the mid-semester quiz and a final examination. The approximate
weights are:

- Homework: 40%
- Mid-semester quiz: 20%
- Final Examination: 40%

They will modulate the final grade by an appreciation of the
participant's progress throughout the semester. Those who finish strongly
and demonstrate that they have, at the end, mastered the material will
receive more credit for these final grades.

Examples of previous mid-semester quizzes are posted on the web page,
in the "Exercises" section, as Exercises 15 -- 17. These indicate the kind
of questions that will appear on future mid-semester quizzes. However,
note that their content may not match the current syllabus, so that future
quizzes may cover different material.

**Absences**

Students should complete all assignments on time. The teaching
assistant will mark down unexcused late assignments.

Likewise, students should plan on being at the mid-semester quiz and
the final examination. Students who have conflicts should discuss them
with Prof. de Neufville at the beginning of the semester to see what
arrangements might be made. No one should expect special treatment or the
extra effort to write equivalent examinations and give them at alternative
times.

Prof. de Neufville will, of course, accept reasonable excuses (family
emergencies, sickness) when presented near the event.

**Academic Honesty **

To avoid any potential confusion that might result from different
expectations in other courses or establishments, please note the standards
that apply in this subject.

- Anyone found cheating in a quiz or examination (copying from another
student or using unauthorized materials, etc) will receive a zero for
the event.
- Assignments turned in for grading are to be done individually,
although the instructors expect that students will discuss the issues
involved in problem sets and often learn best collectively. In practice
this means that students may lead each other to the proper understanding
of the material and collaborate on setting up computer runs. However,
students should ultimately prepare their own reports for each assignment
individually, in their own format and words.
- Demonstrated evidence of copying (exactly the same presentation,
same wording of sentences, etc.) will result in zeros for each paper
with this evidence.