Republic of the Philippines

BATANGAS STATE UNIVERSITY

Pablo Borbon Main II
Batangas City

COLLEGE OF ENGINEERING, ARCHITECTURE & FINE ARTS

ACTIVITY GUIDE

Project Title: Engineering Economic Analysis Procedure

Name: Legaspi, Ivan
Macatangay, Jackelyn Gem
Manalo, Elyssa Joy
Mercado, Charlie Ercole
Nibay, Alinna Maree
Section:

Learning Outcome:
▪ Apply Engineering Economics Analysis Procedure

Objective:
The specific goal for this exercise is:
▪ to apply and analyze Engineering Economics procedure by evaluating a company-based problem.

Activity Task:
This is a group activity. Analyze the given situation and answer what is being asked on the latter part
of the problem. Show your complete solution to the problem.

Problem:

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 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.
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 For this situation,
a. Define the problem
Greenfield Industries demands an evaluation of alternatives for producing newly designed drill bit
on a turning machine using information on the unfinished analysis posed by the previous
employee.
b. List key assumptions
-The old turning machine is not in full capacity for production
-The book cost of the old turning machine is $350,000
-The company is looking forward for a constant production starting the due date given to the team.
c. List alternatives facing Greenfield Industries
Option I: Keep the old turning machine and let the in-house technician design a new drill bit.
Option II: Keep the old turning machine and contact Mcdo Inc, the producer of the turning machine, to
design a new drill bit.
Option III: Sell the old turning machine and contact Mcdo Inc, the producer of the old turning
machine, to produce new turning machine and new drill bit which is environmentally safer than the old
one.
d. Select a criterion for evaluation of alternatives
a.) Modification Cost
b.) Maintenance Cost
c.) Environmental Impact
d.) Production Capacity
e. Introduce risk into this situation
1. Environmental Risk
2. Risk of Delay
3. Reduced Production Capacity Risk
f. Discuss how non-monetary considerations may impact the selection.
For non-monetary considerations, we listed Environmental Impact and Production Capacity.
For the first one, Environmental Impact:
Two options are using the old turning machine which possesses a cooling system that requires
proper disposal (which increase total cost by an amount equal to disposal cost). In worst case scenario,
improper disposal might cost the company a pursuit for environmental codes negligence.
Ranked from best option to least option:
1. Alternative III
2. Alternative II and Alternative I
For the second consideration, Production Capacity:
Production Capacity includes the ability of the machine to operate from the projected starting
date. In addition, it\ comprises the capacity of the machine to minimize maintenance cost.
Ranked from best option to least option:
1. Alternative II
2. Alternative III
3. Alternative I
g. Describe how a post-audit could be performed.

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 a.) The first alternative is to keep the machine valued at $350,000 + $40,000(estimated) +
recurring disposal cost (cooling system) for a modification designed by the in-house technicians
which promised no delay but lack in experience in modifying such turning machine.
b.) The second alternative is to keep the machine valued at $350,000 + $60,000 + recurring
disposal cost (cooling system) for a modification that will be easily done by McDonald Inc.
c.) The third alternative is to liquidate the old turning machine for $350,000 at most and spend
the liquidated asset + $100,000 for a new machine with more environmental safeguards and
higher capacity insured to be delivered before projected starting date by late cost.

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