GDB3023: Engineering Economics and Entrepreneurship-

May 2020

Assignment 1

Name:
Sanjeev Nehru Jawahar Nehru
ID:
16001174
Submission Deadline:
9/6/2020
Course Coordinator:
Pn Zazilah Bt May

PIC for Assignment:

Lakshmi
Introduction to Engineering Economy- Chapter 1

Problem 1-1
Stan Moneymaker needs 15 gallons of gasoline to top off his automobile’s gas tank. If he drives
an extra eight miles (round trip) to a gas station on the outskirts of town, Stan can save $0.10 per
gallon on the price of gasoline. Suppose gasoline costs $3.90 per gallon and Stan’s car gets 25 mpg
for in-town driving. Should Stan make the trip to get less expensive gasoline? Each mile that Stan
drives creates one pound of carbon dioxide. Each pound of CO2 has a cost impact of $0.02 on the
environment. What other factors (cost and otherwise) should Stan consider in his decision making?

Solutions:
Since
Gas Required by Car= 15 gallons,
Gas price in Town= $3.90 per Gallon
Gas price if he drives 8 extra miles: $3.80 per Gallon
Saving amount between two gas locations; $0.10 per Gallon
Car mileage: 25 miles per gallon
Gallons of Gas Consumed for 8 miles ride:
𝐺𝑎𝑙𝑙𝑜𝑛𝑠 𝑜𝑓 𝐺𝑎𝑠 1 1
= 𝑋 𝑚𝑖𝑙𝑒𝑠
8𝑚𝑖𝑙𝑒𝑠 𝐶𝑎𝑟 𝑀𝑖𝑙𝑒𝑎𝑔𝑒(𝑚𝑝𝑔) 8
1
= 𝑋 8 𝑚𝑖𝑙𝑒𝑠
25 𝑚𝑝𝑔
𝑔𝑎𝑙𝑙𝑜𝑛𝑠
= 0.32
8𝑚𝑖𝑙𝑒𝑠

Saving Considering Mileage for 8 Miles Ride:

(Saving amount Between two gas

locations X Gas Required by car) −
Saving (𝑂𝑢𝑡𝑠𝑘𝑖𝑟𝑡 𝑇𝑜𝑝𝑢𝑝) = (Gallons Consumed For 8Miles Ride X
 Gas price if he drives 8 extra miles)

$ 0.10 0.32 𝑔𝑎𝑙𝑙𝑜𝑛𝑠 $3.80

= (( ) X 15 gallons) – (( ) X (𝐺𝑎𝑙𝑙𝑜𝑛𝑠) )
𝐺𝑎𝑙𝑙𝑜𝑛𝑠 8 𝑚𝑖𝑙𝑒𝑠

= $ 0.284

Real Saving considering carbon dioxide cost impact:

𝐹𝑖𝑛𝑎𝑙 𝑆𝑎𝑣𝑖𝑛𝑔𝑠 (𝑂𝑢𝑡𝑠𝑘𝑖𝑟𝑡𝑠 𝑇𝑜𝑝𝑢𝑝)
𝑃𝑜𝑢𝑛𝑑 𝐶𝑂2 𝐶𝑟𝑒𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡 𝐼𝑚𝑝𝑎𝑐𝑡
= 𝑆𝑎𝑣𝑖𝑛𝑔 𝑂𝑢𝑡𝑠𝑘𝑖𝑟𝑡𝑠 𝑇𝑜𝑝𝑢𝑝 − ( 𝑋 𝑥8 𝑀𝑖𝑙𝑒𝑠)
𝑀𝑖𝑙𝑒𝑠 𝑃𝑜𝑢𝑛𝑑

1 $0.02
= $ 0.284 − ( 𝑋 𝑋8)
𝑃𝑜𝑢𝑛𝑑 𝑃𝑜𝑢𝑛𝑑
= $ 0.124 𝑀𝑖𝑙𝑒𝑠

Yes, If he was to choose of obtaining the gasoline on the outskirt, the amount he will save is $
0.124 in which considering the fact of Carbon dioxide contribution and the Gas consumption
price for the 8 miles travel. Thus, if he were to have a trip outskirt, the amount he saved
would be $0.124 which is not a good value in return for 8 mile drive out of town.
He would consider the following factor in which the certainty would be high and may be time
and cos consuming and proceed for in town top up:
a) Time Consuming leading to NPT (Non-Productive Time)
b) Car maintenance cost for car depreciation
c) Traffic Jam May cause high gas consumption
d) Accident probability will be higher

Problem 1-3
3. A typical discounted price of a AAA battery is $0.75. It is designed to provide 1.5 volts
and 1.0 amps for about an hour. Now we multiply volts and amps to obtain power of 1.5
watts from the battery. Thus, it costs $0.75 for 1.5 Watt-hours of energy. How much would
it cost to deliver one kilo Watt-hour? How does this compare with the cost of energy from
your local electric utility at $0.10 per kilo Watt-hour?
Solution

Price of AAA Battery: $0.75

Energy Generated by Battery, Watt /hour = (Work/ Time)
(Voltage X Current)/ hr
(1.5 X 1.0) = 1.5 Watt/hr
So, the usage of AAA battery would cost $0.75 for a 1.5 Watt/hr
1
Cost Consumption for 1 Watt/hr = ( Cost for 1.5 Watt/hr) X ( 𝐸𝑛𝑒𝑟𝑔𝑦 𝐶𝑜𝑛𝑠 )
𝑢𝑚𝑝𝑡𝑖𝑜𝑛

1 $0.50
= $0.75 X ( )=
1.5 𝑊𝑎𝑡𝑡/ℎ𝑟 𝑘𝑤/ℎ𝑟

𝑘𝑊 1
Cost of Energy by local electric utility for 1Watt/hr = (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑛𝑒𝑟𝑔𝑦 𝑓𝑜𝑟 1 ( ℎ𝑟) 𝑋 )
ℎ𝑟 1000
$0.10 1
=( 𝑋 )
𝑘𝑤/ℎ𝑟 1000

$0.0001
=
𝑘𝑤/ℎ𝑟

The local electric utility only cost $0.0001 per kilo Watt-hour but as for the battery the cost
consumption is $0.50 per kilo Watt-hour. Thus, to look at an option of one time use for the first
hour, most probably using the local current utility would be a better option as it is 5000 times
cheaper. But as for the battery, the consumption is based on the battery price. So, it is a one-time
purchase for the battery and will not have any on-going charges but as for local utility, the cost
will tend to be on going.
In conclusion, if the usage of battery contributes to the cost of energy exceeds that of 5000
times compared to local utility cost, then I could say battery is a better option. And if the
consumption is less than that 5000 times margin in cost, then local utility would be the best
option. Here the judgement is based on the amount of usage time which contributes to
either battery option or the local utility power consumption.
Problem 1-5
Henry Ford’s Model T was originally designed and built to run on ethanol. Today, ethanol (190-
proof alcohol) can be produced with domestic stills for about $0.85 per gallon. When blended with
gasoline costing $4.00 per gallon, a 20% ethanol and 80% gasoline mixture costs $3.37 per gallon.
Assume fuel consumption at 25 mpg and engine performance in general are not adversely affected
with this 20–80 blend (called E20).

a. How much money can be saved for 15,000 miles of driving per year?
b. How much gasoline per year is being converted if one million people use the E20
fuel?(1.3)

Solution:

Ethanol Cost by Domestic stills: $0.85/gallon

(X)Ethanol + (Y) Gasoline : $4.00/ Gallon
(0.2)Ethanol + (0.8)Gasoline : $3.37

Fuel Consumption: 25 mpg

*Engine performance is unaffected

E20 Ethanol and Gasoline Percentage Cost Effect:

(0.2 X $0.85)= $0.17/ gallons ( 20%Ethanol)

($3.37-$0.17) = $3.2/gallons (80% Gasoline)

Gasoline $/Gallon=
3.2
= 4 $/𝐺𝑎𝑙𝑙𝑜𝑛
0.8

a) Gasoline Usage Per Year=

1 15000 1
15000 𝑀𝑖𝑙𝑒𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑋 ( )= 𝑋( 𝑔𝑝𝑚)
𝑀𝑖𝑙𝑒𝑎𝑔𝑒 𝑦𝑟 25

= 600 gallons
Money Saved=
Price of unknown mixture per 600 Gallons – Price of E20 per 600 Gallons
($4.00/g X 600 gallons) - (S3.37/ gallons X (600 gallons) = $ 378 per year
b) Gasoline per year Converted @ 1 million users

Since a person roughly uses 600 gallons per year, so 1 million users use 600 million gallons in a
year:
The gallons of gasoline used= 600 million gallons per year X 0.8 = 480 million gallons
The price of gasoline converted= $3.2/gallons X (600 million) . Gasoline worth 1 920 000 000/
year is being converted from 480 million gallons.
Problem 1-12
During your first month as an employee at Greenfield Industries (a large drill-bit manufacturer),
you are asked to evaluate alternatives for producing a newly designed drill bit on a turning
machine. Your boss’ memorandum to you has practically no information about what the
alternatives are and what criteria should be used. The same task was posed to a previous employee
who could not finish the analysis, but she has given you the following information: An old turning
machine valued at $350,000 exists (in the warehouse) that can be modified for the new drill bit.
The in-house technicians have given an estimate of $40,000 to modify this machine, and they
assure you that they will have the machine ready before the projected start date (although they
have never done any modifications of this type). It is hoped that the old turning machine will be
able to meet production requirements at full capacity. An outside company, McDonald Inc., made
the machine seven years ago and can easily do the same modifications for $60,000. The cooling
system used for this machine is not environmentally safe and would require some disposal costs.
McDonald Inc. has offered to build a new turning machine with more environmental safeguards
and higher capacity for a price of $450,000. McDonald Inc. has promised this machine before the
startup date and is willing to pay any late costs. Your company has $100,000 set aside for the start-
up of the new product line of drill bits. For this situation,
a. Define the problem.
b. List key assumptions.
c. List alternatives facing Greenfield Industries.
d. Select a criterion for evaluation of alternatives
e. Introduce Risk into this situation
f. Discuss how nonmonetary considerations may impact the selection
g. Describe how a post audit could be formed

a) Problem faced is to decide on:

1. To carry on with the previous employee ideas in investing on an old $350 000
machine with different company consist of an inexperience in house technician and
an experienced McDonald Inc offering to modify it with different costs.
 2. The option either to carry on modifying the existing tuning machine by bearing
disposal cost or to proceed with getting a new turning machine with an extremely
high cost to bear but the safety and late cost being included.
3. Evaluating whether the total cost will affect the $100 000 kept for the start up of
new product line.

b) The Key Assumptions that could be made are:

1.Assume that the machine is operable after modifying

2.The Cost of start up and transportation is neglected
3.The method done by previous employee is not patented
4.The new and modified turning machine will generate the same revenue
5. Frequent Maintenance breakdowns and Lifespan of the modified machine and
the new one is the same
6. The drill bit forming process is the same for both new and modified machine
and is the same as well as the logistics and utilities cost.
c) Alternatives

1. Modify an old machine through inexperienced in-house technician which

cost $40000 with before start up assurance but still need to bear disposal
cost
2. Modify and old machine with experienced Mcdonald Inc which $20000
with no information regarding ready duration and still need to bear disposal
cot
3. Getting a new machine under Mcdonald Inc which cost $450 000 with
assured before start up readiness and bearing any late costs

d) Criterion are:

1. Quality of the turning machine is not affected and the specifications are the same
2. The cost in modifying or getting a new one affected by new product line
allocation.
3. The turning machine availability before start up
4. The cost for environmental issues and disposal allocation.

e) Risks that I will be facing are:

1. The reliability of the old machine is less and there are possibility in which the
machine could not ready before start up.
2. There are multiple problems regarding safeguards and maintenance might
occur for the old machine
 f) Non-monetary considerations include:

1. Safety and environmental concerns

2. Quality and Reliability differences of new and old machine
3. The image of company if being able to use modified machine to produce new drill
bits
4. Any sort of warranty for good maintenance record.

g) Post Audit

1. Can the machine being able to achieve the benchmark for products expectation
on quality and time.
2. Did the total production costs be able to generate increase in profits by time to
be able to match the initial start-up costs.
3. Were the maintenance cost of the machine Is acceptable

Problem 1-20
A deep-water oil rig has just collapsed into the Gulf of Mexico. Its blowout-preventer system has
failed, so thousands of barrels of crude oil each day are gushing into the ocean. List some
alternatives for stopping the unchecked flow of oil into the Gulf.
Solutions:
1. Performing well-killing procedures
- A well-control method which is necessary can be done through the volumetric
method or Driller’s method which uses mud to circulate the influx out and to displace
the well.
2. Building a relief wall
- A secondary well drilled at drilling site to pump heavier mud by tapping into the
troubled well

3. Perform Static Kill

-A method used by British Petroleum (BP) which involves pumping of heavy mud and
cement through the blow-out preventer into the well to suffocate and prevent the flow of
oil.
4. Other strategies

- Use dispersants which must be done within a few hours of spill and chemicals may
cause environmental damages
- In Situ Burning (ISB) During Oil Spill which could act as response technology and
could eliminate large amount of oil with minimal environmental effect.
- Puncture a hole on the pipeline of transporting crude and clamp it.