IENG 302
Engineering Economics
3/7/2016
ENGINEERING ECONOMICS
EXAM III
Last Name:
_____________________________
Score:
Possible:
_____
100
First Name:
________________________
Instructions:
Complete this exam using only your engineering notebook, calculator, and the provided tables. Do not
write on the provided tables – return the tables at the exam’s end.
For each problem, provide the following details:
 Cash flow diagram with values and periods illustrated
 Equation(s) used to solve the problem, with the values used, ex.: $2000 (P|A, 4%, 22)
 For each part of each problem, double underline the answer and associated units
All interest rates given are the APR, unless otherwise stated. Point values for all questions are shown. Note any necessary
assumptions, and show your work legibly to obtain credit.
Do not open or start this exam until instructed. The exam is 50 minutes in length.
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1.) (55 pts, total) After two years of business, Jethro has experienced a doubling in the demand for his … um … biofuel.
Jethro is considering either replacement of the distilling equipment or the upgrading and repair of the current equipment.
Its’ current bioreactor, made from a Model A Ford by Uncle Jesse, cost $ 1 000 two years ago, and must have a new radiator
(er … condenser) at a cost of $ 35 immediately if used for production. To meet demand, a second distillery would also be
needed, and as luck would have it, there is an identical machine available for $ 850. This second model would not need the
new condenser before production. The Model A salvage values would be $ 450 (each) at the end of the first year, and each
salvage value will decrease by $15 / year until the end of their physical lives 8 years from now. The operating cost of each
Model A would start at $ 3 400 / year, and each operating cost would increase by $ 5 / year after the first year.
Jethro could get an $800 trade-in allowance on a new reactor from his cousin Bubba instead, and be able to handle the
product demand with a single Bubba Boiler. Bubba’s machine would cost $ 10 000, and have a salvage value equal to
$ 5 000 at the end of Year 1, decreasing by $250 / year after that. Maintenance and operating costs for Bubba’s machine are
$ 4 800 / year, and would increase by $ 30 each succeeding year.
Assuming that everything except the immediate costs are paid at the end of each year, that the MARR is 10% per year, and
that the ESL of the Bubba Boiler is 7 years:
a.) (9 pts) Calculate the salvage value and construct a cash flow diagram for the Model A option, as described above, if
kept for the 8-year physical life using the Opportunity Cost Approach. Show all component cash flow patterns
(i.e. each machine’s salvage, each machine’s operating increase, etc.), rounding to the nearest dollar:
b.) (8 pts) Calculate the salvage value and construct a cash flow diagram for Bubba’s option, as described above, if
kept for the 7-year ESL using the Opportunity Cost Approach. Show all component cash flow patterns, rounding
to the nearest dollar:
c.) (2 pts) Create an algebraic formula to compute the salvage value for Bubba’s Boiler for each year from n = 1 up to
the 7-year ESL.
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Engineering Economics
3/7/2016
d.) (9 pts) Using the Opportunity Cost Approach, carefully set up the appropriate equivalent comparison equation for
the cash flows at the Bubba Boiler’s 7-year ESL in table factor form. Then compute the correct comparison value,
rounding to the nearest dollar.
e.) (23 pts) Assume that we obtain the following table of values for the Economic Service Life of the combined Model
A distillerys option. Using the Opportunity Cost Approach, set up the equations in table factor form for the
missing ownership and operation costs, then complete the table (to the nearest dollar). Note: Salvage value changes
each year.
Life
1
2
Ownership Cost
Operating Cost
$
953
$
6,800
$
557
$
6,805
$
357
$
6,814
$
317
$
6,818
$
290
$
6,822
$
270
$
6,826
$
256
$
6,830
Total Cost
3
4
5
6
7
8
f.) (2 pts) What is the Economic Service Life of the Model A option?
__________________ yrs
g.) (2 pts) Which bioreactor option should be selected today?
_____________________
h.) (2 pts) When should Jethro plan to replace today’s best testing option?
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Engineering Economics
3/7/2016
2.) (45 pts, total) A state DOT engineer has been tasked with the job of figuring out the best way to connect two cities
that are 30 miles apart. Currently, shipments between the two cities travel by ox-cart – but if a highway is built between
them, the public will see much larger benefits…and fewer accidents. Ox-carts are inherently dangerous, with regular
fatal accidents! It is estimated that the cost to the public of a major accident is $1 054 722.
A total of 127 000 trucks would use the new road each year: the combined Chambers of Commerce estimate that
75 000 truck shipments would travel East to West and 52 000 truckloads would travel West to East each year. If the
DOT interest rate is 12% per year, answer the following questions for a Benefit-Cost Ratio analysis:
a.) (1 pt) Quantify the annual benefits to the general public for Option A, rounding to the nearest dollar:
b.) (5 pts) Quantify the total annual equivalent costs to the DOT for Option A, rounding to the nearest dollar:
c.) (9 pts) Quantify the annual dis-benefits to the general public for Options A & D, rounding to the nearest dollar:
Option A:
Option D:
Option A: If a three lane road were paved with two lanes running West, the two cities would see $25 000 000 annually
in the value of goods shipped. The cost to the citizens of the two cities to ship goods East – West would be $9.50 per
truck (because there are two lanes running that way), and the cost to ship each truckload West – East would be $12.30.
The public could expect to pay for a major accident once every 5 years; the DOT would have to pay $950 000 per mile to
construct the road and an annual total of $20 000 to maintain it for the 15 year project life.
Option B: If a three lane road were paved with two lanes running East, the two cities would still see $25 000 000
annually worth of goods shipped. The cost to the citizens to ship goods West – East would be $9.50 per truck (because
there would now be two lanes running that way), and the cost to ship each truckload East – West would be $12.30. The
public could expect to pay for a major accident once every 5 years; the DOT would have to pay $950 000 per mile to
construct the road and an annual total of $20 010 (because of additional No Passing zone signs) to maintain it for the 15
year project life.
Option C: If a four lane road were paved with two lanes running each direction, the two cities would then see a total of
$28 000 000 worth of goods shipped annually. The cost to the citizens to ship goods in either direction would be $9.50
per truck (because there would be two lanes running each way). The public could expect to pay see a major accident
once every 8 years; the DOT would have to pay $1 100 000 per mile to construct the road and an annual total of
$25 000 to maintain it for the 15 year project life.
Option D: If a two lane road were paved with a lane running each direction, the two cities would then see a total of
only $18 000 000 worth of goods shipped annually. The cost to the citizens to ship goods in either direction would be
$12.30 per truck (because there is only a single lane available in each direction). The cost to the DOT would be only
$500 000 per mile to construct the road and an annual total of $19 000 to maintain it for the 8 year project life. The
public could expect to see a major accident once every 2 years, though.
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Engineering Economics
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d.) (30 pts, sub-total) Assume that the following table describes the benefit – cost profiles for the four projects (A – D).
Compute and compare only the appropriate incremental B/C values, in order, to select the best option. Show your
work, keep at least 2 decimal places in each ratio, and name the best option at the end of each comparison.
Annual
Benefits
Dis-benefits
Costs
B/C Ratio
Project A
$ 25,000,000
$ 1,551,024
$ 4,204,491
5.58
Project B
$ 25,000,000
$ 1,613,124
$ 4,204,520
5.56
Project C
$ 28,000,000
$ 1,355,752
$ 5,315,673
5.01
Project D
$ 18,000,000
$ 2,085,010
$ 4,856,268
3.28
1st Analysis (3 pts.; describe results):
1st Comparison (9 pts), comparing Project _____ to Project _____:
Ratio:
Best Project: _____
2nd Comparison (9 pts), comparing Project _____ to Project _____:
Ratio:
Best Project: _____
3rd Comparison (9 pts), comparing Project _____ to Project _____:
Ratio:
Best Project: _____
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Engineering Economics
3/7/2016
(This page is blank for use in your calculations.)
Stop. This is the end of the exam. Quietly gather your materials and turn in this exam as you exit the room.
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