Applications of Engineering Valuations in Management
- C.E. Reistle Jr. (Humble Oil & Refining Co.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- June 1956
- Document Type
- Journal Paper
- 11 - 12
- 1956. Original copyright American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc. Copyright has expired.
- 4.2 Pipelines, Flowlines and Risers
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One of the most important decisions which the management of a corporation is called upon to make involves the investment of company funds to produce maximum benefit for the stockholders. Generally, this is not a one-time decision which can be made and then forgotten, as new funds are constantly being generated which require investment; and new investment opportunities are developing which require funds. In arriving at these investment decisions and in balancing the flow of earnings with the opportunities for investment, the valuation of the proposed investment represents the basic data which are available in management. In a producing company, this valuation is generally of an engineering type.
The engineering valuation should encompass every phase of a company's operation. It should provide the information with which management can measure and compare new investments but also should measure existing investments and operations. Management depends to a very large degree upon their technical staffs for new ideas and new opportunities, both in investments and in improving the return on existing investments through improved operation.
Even the simplest type of engineering valuation requires consideration of a multitude of factors. Extremely complex is valuation of new construction in which the income resulting from the investment is related to the operation and income of a number of facilities. But management must have valuations to act as guides at each step in the road. In construction, not only must the physical equipment be properly selected, but the size must be chosen to strike a proper balance between rate of income and initial investment. The effect of the new construction on the income of existing or anticipated other equipment must be analyzed and included in the valuation.
Investments and Engineering Valuations
From this discussion, it can be seen that the management of any profit-conscious corporation must lean heavily upon engineering valuations in arriving at decisions on all types of investments. The very large number of points which must be included serves to emphasize the importance of and the reliance placed upon a proper valuation. But there is also one factor which should not be included. That is the safety factor.
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