WRD720S - 2022

TASK 01 – EE: Engineering Economics

1.
A project requires loan finance of N$ 5000 now and N$ 3000 in 3 years’ time.

Determine repayment of the loan with the following two options:

• Option 1:
Loan repayment: Over 5 years In five (5) equal annual instalments, if the interest rate is 5%
p.a.
• Option 2:
Capitalization of the loan present value (equal to the loan repayment calculated for
Option 1), as a single payment in 5 years’ time with interest being 7% p.a.

Structure the answer to provide the following:

1.1 cash flow diagrams for each repayment option considered

1.2 financial repayment value determination for both options

Both options must be carried out by:

(a) hand calculations, aided with interest factors, and

(b) using MS Excel spreadsheet built-in financial functions

[28]

2.
A lump-sum deposit of $7000 is made now into an investment account that pays 5% pa. interest.

Withdrawal of the moneys deposited will be as follows:

• An equal amount end-of-year of N$ 1200 for 5 years, starting next year.

• At the end of the sixth year, the account will be closed, and the remaining balance be
withdrawn.

2.1 Draw a cash flow diagram indicating the investment and withdrawals

2.2 Determine the final account balance using calculation by hand aided with interest factors.

[10]

3.
An energy utility company requires that for each of their power generators annual investments be
placed into a capital reserve fund to ensure funds being available for unexpected major
refurbishment of equipment.

For this purpose, N$ 5000 was deposited annually for a period of 15 years which made N$ 100000
available now for refurbishments.

1
What rate of return did this practice provide to the company?
(Solve both by hand calculation and MS Excel Spreadsheet financial function application.)

[14]

4.
The cost of a pump set for a sewer pump station is expected to amount to N$ 80000 and to have a
life of 5 years. Maintenance costs are estimated to be 2% of the initial cost and the latter will
increase linearly at 10% annually.

4.1 Draw a cash-flow timeline for each system option, indicating all cost components.

4.2 For a rate of return of 10% p.a., what is the:

(a) total present cost of the pump set over its life of 5 years?

(b) from the total present cost in 4.2(a), determine the EUAC over the life of the pump set.

[12]

5.
The supply from a treatment plant is required to meet growth in water demand for a particular
region. The existing facility has reached the end of its economic operational life and design

capacity, requiring a new larger facility to be constructed.

Three (3) different locations for constructing the new facility has been identified and related cost
and benefit data are given below.

Location 1 Location 2 Location 3

1. Initial land cost (N$ million) 19.3 28.5 35.0

2. Facility initial construction cost:
(N$ million) 460.0 446.0 446.0
3. Project benefits:
(N$ million per year) 23.0 19.0 14.0

Based on a 50-year project life and a rate of return of 3% p.a.:

5.1 Determine the economic feasibility of construction of the facility at any of

the three locations identified, using a EUAC benefit-cost ratio analysis. (6)

5.2 Rank the economically feasible construction locations for the new facility
from least to most beneficial, based on economics alone using an
incremental EUAC benefit-cost analysis. (4)

Do all calculations in N$ millions (in accordance with the monetary data given).

[10]

2
6.
A choice must be made between two operational systems for a new sewerage pump station.

Both systems have an estimated life of 30 years.

The economic data for the two alternative systems are as follows:

System 1:
Initial installation cost = N$ 1.8 Million.
Retrofit of installation every 15 years = N$ 1.2 Million
Estimated energy costs per year = N$ 50000.
Estimated operation & maintenance cost per year = N$ 36000.
Estimated salvage value at end of life = N$ 20000.

System 2:
Initial installation cost = N$ 2.0 Million.
Refurbishment every 15 years = N$ 450000.
Estimated energy costs per year = N$ 25000.
Estimated annual O & M cost = N$ 32000.
Estimated salvage value at end of life = N$ 35000.

6.1 Draw a cash-flow timeline for each system option, indicating all cost components.
6.2 Do a comparative economic analysis of the system options assuming a rate of return of
10% p.a. and select the best system based on economics alone.
Do calculations by hand aided by interest factors using a EUACF approach . [26]

TOTAL MARK = 100