TABLE OF CONTENTS This unit introduces the concepts that are used in translating control improvement into financial results. The basic concepts and terminology of capital budgeting are defined. Many terms are also defined in Appendix C.
Learning Objectives When you have completed this unit you should:
Understand the differences among control, process, and economic performance.
Understand the concept of cash flow.
Know how projects are evaluated.
Know how probabilities can be used to combine cash flows of differing scenarios into an expected cash flow.
In many fields, measures of performance are used to characterize how well a given entity meets its objective. The appropriate measure depends on the objective. For instance, a baseball player's hitting performance may be measured by batting average, while a team's performance is better characterized by its won-lost record. When considering the implementation of a control project, several measures must be considered, including control performance, process performance, and economic performance.
Control performance is a measure of how well the control system achieves its objective. This objective is usually regulatory (i.e., holding a measured or computed quantity at its desired value), and performance is measured statistically and expressed as some function of deviation from target, or variability. Among the commonly used functions are range, maximum error, and standard error. Range is the difference between the maximum and minimum values. Maximum error is the largest deviation from set point. Standard error is the root mean square deviation from set point. If the loop is...
