Engineering Economics

ASSIGNMENT

Full Marks: 5
Q No1.
A proposed mill in an isolated area can be furnished with power and water by a
gravity feed system. A stream high above the mill will be tapped to provide flow for
water needs and power requirements by connecting it to the mill with a ditch-and -
tunnel system or with a wood-and-concrete flume that winds its way down from the
plateau. Either alternative will meet current and future needs, and both will utilise
the same power-generating equipment.
The ditch-and-tunnel system will cost Rs. 5, 00,000 with an annual maintenance
cost of Rs. 2000. The flume has an initial cost of Rs. 2, 00,000 and a yearly
maintenance cost of Rs. 12,000. In addition, the wood portion of the flume will have
to be replaced every ten years at a cost of Rs.1,00,000.
Compare the alternative on the basis of capitalised costs with an interest rate of 6
per cent.

Q No2.

National Homebuilders, Inc., plans to purchase new cut-and-finish equipment. Two

manufacturers offered the estimates below.

Vendor A Vendor B
First cost(Rs.) 15,000 18,000
Annual M&O cost (Rs.) 3500 3100
Salvage value (Rs.) 1000 2000
Life, years 6 9

a) Determine which vendor should be selected on the basis of a present worth comparison, if
the MARR is 15% per year.

(b) National Homebuilders has a standard practice of evaluating all options over a 5-year
period. If a study period of 5 years is used and the salvage values are not expected to change,
which vendor should be selected?

Q No3.

A second-hand bulldozer acquired at the beginning of the first year at a cost of Rs.58,000 has
an estimated salvage value of Rs.8000 and an estimated useful life of 12 years. Determine the
following:

(a) The amount of annual depreciation by the straight-line method.

(b) The amount of depreciation for the third year computed by the double-declining balance
method.

(c) The amount of depreciation for the second year computed by the sum-of-years digit
method.

Q No4.

Two mutually exclusive alternatives are being considered

Year A B
0 -2500 -6000
1 746 1664
2 746 1664
3 746 1664
4 746 1664
5 746 1664

If the minimum attractive rate of return is 8%, which alternative should be selected? Solve
the problem by

(a) Present worth analysis

(b) Annual cash flow analysis

(c) Rate of return analysis

Q No5.

Several alternative projects involving water supply systems are under consideration by a public
utility board. The following data in dollars, have been summarised for your consideration

A B C D E
First cost 2000 100 700 1200 500
Annual 70 4 60 100 30
operating cost
Annual 150 0 55 170 25
recreation
benefits
Annual 200 30 50 160 90
increase in
agricultural
production
All costs are given in thousands of dollars, and negligible salvage values are assumed at the end of 50
year life. Since annual operating costs are to be paid from area property tax revenues, they are
treated as a disbenefit. Use a tax-free interest rate of 7 percent.

(a) Which projects should be selected if the alternatives are independent?

(b) Which project should be selected if the alternatives are mutually exclusive?