Chapter 2

W.R. Economy & Management

Tutorial
Chapter 4: Project Scheduling and Resources Allocation

Example (1):

An investment of $10,000 can be made in a municipal project that will produce

uniform annual revenue of $5,310 for 5 years, and then has a salvage value of
$2000. The annual disbursement (cost) for operation and maintenance is $3,000.
The company is willing to accept any project that earns 10% or more in all
invested capital. Show whether this is a desirable investment using:
(1) PW method (2) IRR method

Example (2):

New equipment has been proposed to increase the productivity of a drainage

project by $8,000 per year. The purchase value of the equipment is $25,000 and
the salvage value is $5,000 at the end of its economic life of 5 years. Using FW
and AW methods determine whether the equipment is recommended or not. i =
20%.

Example (3):

As groundwater wells age, they sometimes begin to pump sand (and become
known as sanders). This can cause damage to downstream desalting equipment.
The situation can be dealt with by drilling a new well at a cost of $1,000,000 or
by installing a tank and self-cleaning screen ahead of the desalting equipment.
The tank and screen will cost $230,000 to install and $61,000 per year to operate
and maintain. A new well will have a pump that is more efficient than the old
one, and it will require almost no maintenance, so its operating cost will
be$18,000 per year. If the salvage values are estimated at 10% of the first cost,
calculate the incremental rate of return and determine which alternative is better
at a MARR of 6% per year over a 20-year study period.

Example (4):

Two alternative water supply projects are described in the table below. Project A
has a large initial investment to meet the water demands for 40 years. Project B
uses investment in two stages to meet the same demand. Decide which project
should be selected using: (1) PW method (2) IRR method
Chapter 4: Project Scheduling and Resources Allocation

Example (5):
Two equivalent machines are being considered for purchase. Machine 2 is
expected to be technologically advanced enough to provide net income longer
than machine 1.

Which machine should be recommended?

Example (6):
A small hydroelectric plant was built for $800,000 during a decade(without
considering the time value of money). The plant consists of a canal 6.7 m deep,
carries water 304.8 m along a river to a “trash rack,” where leaves and other
debris are caught. A pipeline 1.8 m wide capable of holding 1,360,777 kg of
liquid then funnels the water into the powerhouse at 2.29m/sec, thereby creating
14,968.55kg of thrust against the turbines. A company will purchase any
electricity the plant can supply, which is estimated as 6 million kilowatt-hours
per year. Suppose that the net annual income will be $120,000. With normal
maintenance, the plant is expected to provide service for at least 50 years.
Chapter 4: Project Scheduling and Resources Allocation

Was the $800,000 investment a wise one? Examine the situation by computing
the project NPW at return rates of 8% and 12%.

Example (7):
Resolve the previous example using infinite service life of the project. Examine
the use of the CE(i) criterion for engineering projects with long lives.

Example (8):
A dam has just installed new software system for management and monitoring
of water storage in the reservoir. The system is to be used for the indefinite
future. The director wants to know the total equivalent cost of the system: (a)
now (CE cost), and (b) for each year hereafter (AW value). The system has an
initial cost of $150,000 and an additional cost of $50,000 after 10 years. The
annual software maintenance contract cost is $5,000 for the first 4 years, and
$8,000 thereafter. In addition, there is expected to be a periodic major upgrade
cost of $15,000 every 13 years. Assume that i= 5% per year.