CE 6030 - Construction Economics and Finance

Civil Engineering, IIT Madras

(January – April 2022)
Assignment 4
(Monte-Carlo simulations, Breakeven Analysis)
Instructions –
1. Submit your solutions as a pdf against your name in the Google Classroom folder.
2. Include screenshots of the excel sheet in your pdf file, as well as submit your solution excel
file along with the pdf file.
3. Questions are simple, so do on your own. Understanding the underlying concepts is important
and you may get some question from these assignment in your final exam. So take this as a
learning opportunity.
4. Any malpractice related to cheating etc. will be dealt strictly.
5. Good luck. All questions are compulsory.
6. Late submission will be awarded a penalty of 4 marks. Any submission made 8 hrs after the
deadline will not be evaluated.

Q.1 (5 Marks) For solving the monte-Carlo simulation, some background of the probability
theory is needed. All the necessary concepts and associated methods also have been discussed in the
reading attached.
To-Do –
(a) You have to solve Example 19.8 and example 19.9 (which are essentially the same problems
but one is presenting a solution by hand and the other presenting a solution by spreadsheet).
(b) You also have to comment in the differences in the answer you obtain in 19.8 and 19.9.
(c) Repeat the calculation in 19.9, for 100 samples, for 1000 samples, and 10,000 samples
(instead of 30 in the original solved example) and provide a comparison of the results obtained (a).
Include the spreadsheet as part of your submission.
To do differently from the steps followed in the reading –
(a) The Table 19-5 in the solved example, shows only the first 5 values. Your solution should show all 30
values.
(b) Use the following table of random numbers instead of the one shown in the Reading. Clearly define
your rule of selecting 30 random numbers. The probability of two students having the same rule is very
low in this case.
Figure 19-11 (Refer to the reading) need not be drawn again in your submission, and the graphs can be
read when applicable. Solution by hand does not mean that the answers cannot be typed using a computer.

Question 2 - (2marks) Rohit has an estimate of the cash inflows after taxes (CFAT) for a
proposed project, whose expected life is 2 years, are shown in the given decision tree. As
shown, the initial investment needed for the project is INR 1,20,000. The cash inflows are
shown on arrows and the associated probabilities are shown inside the circles. Assuming that
there is no correlation between the cash inflows of two years, and, that the annual interest rate
is 10%, the expected net present value of the proposed project is ___________?. Show detailed
analysis steps.
Question 3 (3 Marks) Answer the question on the basis of the cash flow diagram given below.
Show detailed steps in your solution.

a) What is the expected return for this investment?

b) What is the associated risk measured in terms of standard deviation?

c) What is the chance that above investment will run into losses?

Question 4 - (2marks) A construction company has two alternatives to purchase an excavator

which is to be employed at a construction site for excavation of earth. The cash flow details of
the two alternatives are presented as follows;
Alternative-1:
- Initial purchase cost = $4865000 , Salvage value = $1250000 , and Useful life = 12 years
- The operating cost for excavating 1m3 of earth is $11.0. The excavator can excavate
52 m3 of earth in one hour.
Alternative-2:
- Initial purchase cost = $5350000 , Salvage value = Rs.1410000 ,Useful life = 12 years
- The operating cost for excavating 1m3 of earth is Rs.8.0. The excavator can excavate
60 m3 of earth in one hour.
The company's minimum attractive rate of return (MARR) is 10.5% per year. Determine the
number of horse the excavators have to operate per year such that the company is indifferent to
the two alternatives.

Question 5 - (3marks) A creek situated near the thermal station receives wastes daily. When
the creek is full, it is necessary to remove the waste to a dumpyard which is located 8.2
kilometers from the thermal station. Currently, when the creek is full, the waste is removed by
pump into a tank truck and hauled away. This process requires the use of a portable pump that
initially costs $800 and has an 8-year life. The company pays a contract individual to operate
the pump and oversee environmental and safety factors at a rate of $100 per day, plus the truck
and driver must be rented for $200 per day. The company has the option to install a pump and
pipeline to the remote site. The pump would have an initial cost of $1600 and a life of 10 years
and will cost $3 per day to operate. The company’s MARR is 10% per year.

(a) If the pipeline will cost $12 per meter to construct and will have a 10-year life, how many
days per year must the waste in the creek require pumping to justify construction of the
pipeline?
(b) If the company expects to pump the waste in the creek once per week every week of the
year, how much money can it afford to spend now on the 10-year life pipeline to just break
even?

Question 6 - (2marks) Anushka can select from two manufacturing systems for manufacturing
high-end DI pipes . Auto system Hybrid system
 ( a ) Use an AW relation to determine the minimum number of hours per year to operate the
pumps that will justify the Hybrid system, if the MARR is 10% per year.
( b ) Which system is economically better if it operates 7 hours per day, 365 days per year?

Question 7 - (2marks) An irrigation canal contractor wants to determine whether he should

purchase a used Caterpillar mini excavator or a Toro powered rotary tiller for servicing irrigation
ditches in an agricultural area of California. The initial cost of the excavator is $26,500 with a
$9000 salvage value after 10 years. Fixed costs for insurance, license, etc. are expected to be
$18,000 per year. The excavator will require one operator at $15 per hour and maintenance at
$1 per hour. In 1 hour, 0.15 mile of ditch can be prepared. Alternatively, the contractor can
purchase a tiller and hire 2 workers at $11 per hour each. The tiller costs $1200 and has a
useful life of 5 years with no salvage value. Its operating cost is expected to be $1.20 per hour,
and with the tiller, the two workers can prepare 0.04 mile of ditch in 1 hour. The contractor’s
MARR is 10% per year. Determine the number of miles of ditch per year the contractor would
have to service for the two options to break even.

Question 8 - (1marks) A European manufacturing company has new equipment with a first cost
of 12,000 euros, an estimated salvage value of 2000 euros, and a recovery period of 8 years.
Use the Sum-of-Years-Digits Depreciation method to tabulate annual depreciation and book
value.