ENGINEERING ECONOMY 2023-2024

Homework/Assignment 6

Full Name of submitter: Điền Gia Luân Student ID: IELSIU22058

Your Group number is: 01
Title of your Group project is: Evaluating a single project (part1)

Note:
1. Name the file: 2324EE_HW6_G[group#]
Group#: are as per the number you have registered as guided in the file “Semester
Project Requirement” and be finalized by lecturer.
2. Present the answer in a clean and respectful manner. Continue using this form to
complete your works and submit PDF on Blackboard.
3. Only 1 member in group submits (it is not necessary to be the leader to submit).
4. Due date is defined in detail at each “ASSIGNMENT INFORMATION” from
Blackboard. Maximum score of late submission is two third of “Point Possible”
5. If you cannot submit on Blackboard: Email your work to TA, and CC to your Lecturer,
attached also the screenshot of your Blackboard showing error in that transaction.
Email of Lecturer: tvly@hcmiu.edu.vn
Email of TA: thuyduongphamm91@gmail.com

Textbook (16th Edition) – 11 exercises. Provide detailed formula, calculation & explanation.

9.1 You own an old “water skiing” motor boat that is a real gas guzzler. It is 10-years old and
can be sold now for $3,000 cash. Assume its market value (MV) in 2 years will be $500. The
annual maintenance expenses are expected to be $400 into the foreseeable future, and the boat
averages only 2 miles per gallon of fuel. Gasoline costs $5.00 per gallon, and the boat will be
used for about 200 miles per year. The company’s before-tax MARR is 20% per year. Based on
this information, should the existing robot be replaced right now? Assume the robot will be
needed for an indefinite period of time. If you sell the old boat, you can buy a newer model boat
for $10,000. It will be under a maintenance warranty for 2 years, so this expense is negligible.
The newer boat will average 10 miles per gallon of fuel and will have an MV of $7,000 in 2
years. Use a 2-year study period to determine which alternative is preferred. The MARR is
15% per year. State your assumptions.

- Defender (keep old boat):

Investment cost: $3,000
Annual cost= 200/2*$5= $500
MV0 = P=$3000
MV2 = $500
 ENGINEERING ECONOMY 2023-2024

PW = - $3,000 - $400(P/A, 15%, 2) - 500(P/A, 15%, 2) + 500(P/F, 15%, 2)

= - $4085.

- Challenger (buy new boat):

Investment cost: $10,000
MV0 = P= $10000
MV2= $7000

PW = -10000 - 100 x (P/A, 15%, 2) + 7,000 x (P/F, 15%, 2)

= - $4869.87.

=> The defender's PW is higher, which means that the old boat option offers a lower cost than
purchasing the new one. Thus, choose old boat alternative.

9.6 A steam generation system at a biomass- fueled power plant uses an electrostatic preci-
pitator (ESP) to clean its gaseous effluents. The power plant has consistently made use of the
same type of ESP over the past several years. The installed cost of a new ESP has been relatively
constant at $80,000. Records of operation and maintenance expenses indicate the following
average expenses per year as a function of the age of the ESP. The MVs of the ESP are also
reasonably well known as a function of age. Determine the best time to replace the ESP if the
MARR is 15% per year.

EOY Market Loss index Cost of O&M Total cost EUAC

value (MV) (mvk-1 – capital ( mvk- expense
mvk) 1) * 0.15
0 $80,000 - - - - -
1 $60,000 $20,000 $12,000 $30,000 $62,000 $62,000
2 $50,000 $10,000 $9,000 $30,000 $49,000 $55,953
3 $40,000 $10,000 $7,500 $35,000 $52,500 $54,958
4 $25,000 $15,000 $6,000 $40,000 $61,000 $56,168
5 $12,500 $12,000 $3,750 $45,000 $60,750 $56,922

Calculation of approximate total cost, which is the sum of the loss in value. Cost of capital, and
the annual operating and maintenance O&M expenses
EUAC1 (15%)
= 80,000(A/P,15%,1) - 60,000(A/F,15%,1)+[0*(P/F,10%,0)+30,000(P/F,15%,1)]*(A/P,15%,1)
 ENGINEERING ECONOMY 2023-2024

= $62,000
Likewise, we have:
EUAC2 = [$62,000(P/F,15%,1) +$49,000(P/F,15%,2)](A/P,15%,2) = $55,953
EUAC3 =[$55,952(P/A,15%,2) +$52,500(P/F,15%,3)](A/P,15%,3) = $54,958
EUAC4 = [$54,960(P/A,15%,3) +$61,000(P/F,15%,4)](A/P,15%,4) = $56,168
EUAC5 = [$56,176(P/A,15%,4)+$61,250(P/F,15%,5)](A/P,15%,5) = $56,922
=> The EUAC is minimum in the year 3, which is the economic life of the ESP. Thus, it should
be replaced after 3 years.

9.8 A city water and waste-water department has a four-year-old sludge pump that was initially
purchased for $65,000. This pump can be kept in service for an additional four years, or it can be
sold for $35,000 and replaced by a new pump. The purchase price of the replacement pump is
$50,000. The projected MVs and operating and maintenance costs over the four- year planning
horizon are shown in the table that follows. Assuming the MARR is 10%, (a) determine the
economic life of the challenger and (b) determine when the defender should be replaced.

a. The economic life of the challenger

EOY MARKET LOSS IN COST OF O&M TOTAL COST EUAC

VALUE VALUE CAPITA EXPENSES AT EOY
(MV0) L
(MVK-1- MVK) (loss + cost +
(MVK-1) expense)

1 $40,000 $10,000 $5,000 $13,000 $28,000 $28,000

2 $32,000 $8,000 $4,000 $15,500 $27,500 $27,761.8

3 $24,000 $8,000 $3,200 $18,000 $29,200 $28,194.7

4 $16,000 $8,000 $2,400 $20,500 $30,900 $28,780.6

EUAC1 (10%) = $28,000

EUAC2 (10%) = [$28,000(P/F,10%,1) +$27,500(P/F,10%,2)](A/P,10%,2)

= [$28,000*0.9091+$27,500*0.8264] *0.5762 = $27,761.8

EUAC3 (10%) = [$27,761.8(P/A,10%,2) +$29,200(P/F,10%,3)](A/P,10%,3)

= [$27,761.8*1.7355+$29,200*0.7513] *0.4021 = $28,194.7

 ENGINEERING ECONOMY 2023-2024

EUAC4 (10%) = [$28,194.7(P/A,10%,3)+$30,900(P/F,10%,4)](A/P,10%,4)

= [$28,194.7*2.4869+$30,900*0.6830] *0.3155 = $28,780.6

=> Hence, the economic life of the challenger is 2 years.

b. The economic life of the defender

EOY MARKET LOSS IN COST OF O&M TOTAL EUAC

VALUE VALUE CAPITAL EXPENSES COST AT
(MV0) EOY
(MVK-1- (MVK-1)
MVK) (loss + cost
+ expense)

1 $25,000 $10,000 $3,500 $18,500 $32,000 $32,000

2 $21,000 $4,000 $2,500 $21,000 $27,500 $29,857.1

3 $17,000 $4,000 $2,100 $23,500 $29,600 $29,777.7

4 $13,000 $4,000 $1,700 $26,000 $31,700 $30,195

EUAC1 (10%) = $32,000

EUAC2 (10%) = [$32,000(P/F,10%,1) +$27,500(P/F,10%,2)](A/P,10%,2)

= [$32,000*0.9091+$27,500*0.8264] *0.5762 = $29,857.1

EUAC3 (10%) = [$29,857.1(P/A,10%,2) +$29,600(P/F,10%,3)](A/P,10%,3)

= [$29,857.1*1.7355+$29,600*0.7513] *0.4021 = $29,777.7

EUAC4 (10%) = [$29,777.7(P/A,10%,4) +$31,700(P/F,10%,4)](A/P,10%,4)

= [$29,777.7*2.4869+$31,700*0.6830] *0.3155 = $30,195

=> All EUAC of the defender are greater than the optimum EUAC of the challenger, so we
should replace the defender.

9.15 A small high-speed commercial centrifuge has the following net cash flows and
abandonment values over its useful life (see Table P9-15, p. 439). The firm’s MARR is 10% per
year. Determine the optimal time for the centrifuge to be abandoned if its current MV is $7,500
and it won’t be used for more than five years.

PW for 1 year = -$7,500 + ($6,200 + $2,000)( P/F,10%,1) = -$45

PW for 2 years = -$7,500 + $2,000( P/A,10%,2) + $5,200(P/F,10%,2) = $268
 ENGINEERING ECONOMY 2023-2024

PW for 3 years = -$7,500 + $2,000( P/A,10%,3) + $4,000(P/F,10%,3) = $479

PW for 4 years = -$7,500 + $2,000( P/A,10%,4) + $2,200(P/F,10%,2) = $342
PW for 5 years = -$7,500 + $2,000( P/A,10%,5) = $82
=> PW is maximum at 3 years

9.26 Extended Learning Exercise A truck was purchased four years ago for $65,000 to move
raw materials and finished goods between a production facility and four remote warehouses. This
truck (the defender) can be sold at the present time for $40,000 and replaced by a new truck (the
challenger) with a purchase price of $70,000.
a. Given the MVs and operating and maintenance costs that follow, what is the economic life of
the challenger if MARR = 10%? Note: This is a before-tax analysis that does not require any
calculations involving the defender.
b. Suppose that the defender was set up on a depreciation schedule with a five-year MACRS
class life at the time of its purchase (four years ago). The defender can be sold now for $40,000,
or a rebuilt engine and transmission can be purchased and installed at a cost of $12,000 (capital
investment with three-year depreciable life, straight line, salvage value = 0). If the defender is
kept in service, assume that it will have operating and maintenance costs as shown in Part (a) and
a MV of $0 at the end of four years. Determine the ATCFs for the defender. (t = 40%).

0. MARR = 10%
EOY MV Loss in Cost of O& Marginal Cost EUAC
(k) Value Capital M (TCk)

0 $70,0
00

1 $56,0 $14,000 $7,000 $5,5 $26,500 $26,500.

00 00 265

2 $44,0 $12,000 $5,600 $6,8 $24,400 $25,500

00 00

3 $34,0 $10,000 $4,400 $7,4 $21,800 $24,381

00 00

4 $22,0 $12,000 $3,400 $9,7 $25,100 $24,538.

00 00 63

● Loss in Value:
o $70,000 - $56,000 = $14,000
 ENGINEERING ECONOMY 2023-2024

o $56,000 - $44,000 = $12,000

o $44,000 - $34,000 = $10,000
o $34,000 - $22,000 = $12,000
● Cost of Capital:
o 10% x $70,000 = $7,000
o 10% x $56,000 = $5,600
o 10% x $44,000 = $4,400
o 10% x $34,000 = $3,400
● Marginal Cost
o $14,000 + $7,000 + $5,500 = $26,500
o $12,000 + $5,600 + $6,800 = $24,400
o $10,000 + $4,400 + $7,400 = $21,800
o $12,000 + $3,400 + $9,700 = $25,100
● EUAC:
o EUAC1=$26,500(P/F,10%, 1)(A/P, 10%, 1)=$26,500(0.9091)(1.1)=$26,500.265
o EUAC2= [$26,500(P/F,10%, 1) +$24,400(P/F, 10%, 2)](A/P, 10%, 2)
= [$26,500(0.9091) +$24,400(0.8264)](0.5762)
= $25,500
o EUAC3=[$26,500(P/F,10%, 1)+$24,400(P/F, 10%, 2)+$21,800(P/F, 10, 3)](A/P,
10%, 3)
= [$26,500(0.9091)+$24,400(0.8264)+$21,800(0.7513)](0.4021)
= $24,381
o EUAC4= [$26,500(P/F,10%, 1)+$24,400(P/F, 10%, 2)+$21,800(P/F, 10, 3)
+$25,100(P/F, 10%, 4)](A/P, 10%, 4)
= [$26,500(0.9091)+$24,400(0.8264)+$21,800(0.7513)+
$25,100(0.6830)](0.3155)
= $24,538.63
⇒ Hence, The minimum EUAC is $24,381. So, the economic life = 3 years.
b. The Book Value of the Defender Truck:
BV0=$65,000(10.200.320.1920.1152) =$11,232
The Market Value of the Defender Truck: MV0=$40,000

EOY (A) (B) (C) = (A) + (B) (D) = -0.4(C) (E) = (A) + (D)
BTCF Depreciation Taxable Income Taxes at ATCF
[-MV] income t = 40%

0 - None -$28,768 $11,507.2 -$28,492.8

$40,000

0 - None 0 0 -$12,000
$12,000

1 -$8,500 -$11,488 -$19,988 $7,995.2 -$504.8

 ENGINEERING ECONOMY 2023-2024

2 - -$7,744 -$18,244 $7,297.6 -$3,202.4

$10,500

3 - -$4,000 -$18,000 $7,200 -$6,800

$14,000

4 - 0 -$16,000 $6,400 -$9,600

$16,000

● Annual depreciation (The three-year deprecible life):

B−SN 3 −$ 12,000−0
= = -$4,000
3 3
● EOY 0 (Year 0 of the analysis period is at the end of current (fifth) year of service
of the defender)
o MV0=$40,000
o BV0=$65,000(1-0.2-0.32-0.192-0.1152)=$11,232
o (C) =-(MV0+BV0)=-($40,000-$11,232)= -$28,768
o (D) = -0.4(C) = -0.4(-$28,768) = $11,507.2
o (E) = (A) + (D) = -$40,000 + $11,507.2 = -$28,492.8
● EOY 1 ( The fifth-year MACRS depreciation is 0.1152)
o (B) = -$4,000 - $65,000(0.1152) = -$11,488
o (C) = (A) + (B) = -$8,500 - $11,488 = -$19,988
o (D) = -0.4(C) = -0.4(-$19,988) = $7,995.2
o (E) = (A) + (D) = -$8,500 + $7,995.2 = -$504.8
● EOY 2 ( The sixth year MACRS depreciation is 0.0576)
o (B) = -$4,000 - $65,000(0.0576) = -$7,744
o (C) = (A) + (B) = -$10,500 - $7,744 = -$18,244
o (D) = -0.4(C) = -0.4(-$18,244) = $7,297.6
o (E) = (A) + (D) = -$8,500 + $7,297.6 = -$3,202.4
● EOY 3 ( The seventh year MACRS depreciation is 0)
o (B) = -$4,000 - $65,000(0) = -$4,000
o (C) = (A) + (B) = -$14,000 - $4,000 = -$18,000
o (D) = -0.4(C) = -0.4(-$18,000) = $7,200
o (E) = (A) + (D) = -$14,000 + $7,200 = -$6,800
● EOY 4 ( The eighth year MACRS depreciation is 0)
o (B) = $65,000(0) = 0
o (C) = (A) + (B) = -$16,000 - 0 = -$16,000
o (D) = -0.4(C) = -0.4(-$16,000) = $6,400
o (E) = (A) + (D) = -$16,000 + $6,400 = -$9,600
 ENGINEERING ECONOMY 2023-2024

10.3 A proposal has been made for improving the downtown area of a small town. The plan calls
for banning vehicular traffic on the main street and turning this street into a pedestrian mall with
tree plantings and other beautification features. This plan will involve actual costs of $6,000,000
and, according to its proponents, the plan will produce benefits and disbenefits to the town as
follows:
Benefits:
Increased sales tax revenue $450,000 per year
Increased real estate property taxes $325,000 per year
Benefits due to decreased air pollution $80,000 per year
Quality of life improvements to users $70,000 per year
Disbenefits:
Increased maintenance $175,000 per year
a. Compute the B–C ratio of this plan based on a MARR of 10% per year and an infinite life for
the project.
b. How does the B–C ratio change for a 20-year project life?

0. MARR of 10% per year and an infinite life for the project.
Sum of benefits minus disbenefits is:
= 450,000 + 325,000 + 80,000 + 70,000 - 175,000 = $750,000 per year
B/C Ratio = $750,000 / (0.1 x $6,000,000) = 1.25
This plan is acceptable because B/C > 1
b. B/C Ratio = $750,000 / (A/P, 10%, 20) ($6,000,000)
= $750,000 / (0.1175) ($6,000,000) =1.06
This plan is acceptable because B/C ratio > 1

10.7 A toll bridge across the Mississippi River is being considered as a replacement for the
current I-40 bridge linking Tennessee to Arkansas. Because this bridge, if approved, will become
a part of the U.S. Interstate Highway system, the B–C ratio method must be applied in the
evaluation. Investment costs of the structure are estimated to be $17,500,000, and $325,000 per
year in operating and maintenance costs are anticipated. In addition, the bridge must be
resurfaced every fifth year of its 30-year projected life at a cost of $1,250,000 per occurrence (no
resurfacing cost in year 30). Revenues generated from the toll are anticipated to be $2,500,000 in
its first year of operation, with a projected annual rate of increase of 2.25% per year due to the
anticipated annual increase in traffic across the bridge. Assuming zero market (salvage) value for
the bridge at the end of 30 years and a MARR of 10% per year, should the toll bridge be
constructed?

PW(benefit) = C * [(1+g) n/(1+i) n - 1]/(g-i)

= $2,500,000 [(1+0.0225)30/(1+0.1)30 - 1]/(0.0225-0.1)

 ENGINEERING ECONOMY 2023-2024

= $2,500,000 [(1.0225) 30/(1.1) 30- 1]/(-0.0775)

= $2,500,000 x 11.46171719

= $28,654,292.97

PW (cost) = $17,500,000 + $325,000 (P/A,10%,30) + $1,250,000 [(P/F,10%,5) +

(P/F,10%,10) + (P/F,10%,15)+ (P/F,10%,20)+(P/F,10%,25)]

= $17,500,000 + $325,0009.4269 +$1,250,000 [0.6209 + 0.3855 + 0.2394 +

0.1486+0.0923]

= $22,422,177.5

B/C ratio = Present value of benefit / present value of total cost

$ 28,654,292.97
= = 1.28 > 1
$ 22,422,177.5

10.8 Refer back to Problem 10-7. Suppose that the toll bridge can be redesigned such that it will
have a (virtually) infinite life. MARR remains at 10% per year. Revised costs and revenues
(benefits) are given as follows: (10.7, 10.9)
Capital investment: $22,500,000
Annual operating and maintenance costs: $250,000
Resurface cost every seventh year: $1,000,000
Structural repair cost, every 20th year: $1,750,000
Revenues (treated as constant—no rate of increase): $3,000,000
a. What is the capitalized worth of the bridge?
b. Determine the B–C ratio of the bridge over an infinite time horizon.
c. Should the initial design (Problem 10-7) or the new design be selected?

$ 3,000,000
0. PW(benefits)= =$30,000,000
10 %
PW(costs)=$22,500,000 +
$ 250,000+ $ 1,000,000 (A / F , 10 % ,7)+ $ 1,750,000( A /F ,10 % , 20)
10 %
=$22,500,000 + $ 250,000+ $ 1,000,000(0.1054 )+ $ 1,750,000 ¿ ¿
= $26,360,250

CW (10%) = PW (benefits) PW (costs) = $30,000,000-$26,360,250=$3,639,750

=> Therefore, the B-C ratio of the bridge over an infinite time horizon is 1.14

b. B/C Ratio = $30,000,000/ $26,360,250 = 1.14

 ENGINEERING ECONOMY 2023-2024

c.
d. Assume repeatability for the initial design
$ 30,000,000 ( A / P , 10 % ,)−$ 28,654,750( A /P , 10 % , 30)
ΔB/ΔC Ratio =
$ 26,360,250 ( A / P , 10 % ,)−$ 22,422,258( A /P , 10 % , 30)

$ 30,000,000 (0.1)−$ 28,654,750(0.1061)

=
$ 26,360,250 (0.1)−$ 22,422,258(0.1061)

= -0.16 < 1

⇒ The initial design should be selected.

10.10 In the development of a publicly owned, commercial waterfront area, three possible
independent plans are being considered. Their costs and estimated benefits are as follows:
a. Which plan(s) should be adopted, if any, if the controlling board wishes to invest any amount
required, provided that the B–C ratio on the required investment is at least 1.0?
b. Suppose that 10% of the costs of each plan are reclassified as disbenefits. What percentage
change in the B–C ratio of each plan results from the reclassification?
c. Comment on why the rank-orderings in (a) are unaffected by the change in (b).
Plan Benefit Cost B-C ratio Is Acceptable?

A $139,000 $123,000 1.13 YES

B $150,000 $135,000 1.11 YES

C $114,000 $99,000 1.15 YES

=> Since the required investment is at least 1.0, all the plans are acceptable.

b) Reduction in cost = Old cost x 10%

The new cost = Old cost - reduction in cost

The new benefit = Old benefit - reduction in cost

New PW of New PW of
Reduction Inc B-C Ratio Percentage change
Costs benefits

R= 10% x C C’ = C - R B’ = B - R B’/C’ (B’/C’)/(B/C) – 1

12,300 110,700 126,700 1.1445 1.30%
13,500 121,500 136,500 1.1235 1.10%
9,900 89,100 104,100 1.1684 1.50%
 ENGINEERING ECONOMY 2023-2024

c) The rank-orderings in part (a) are unaffected by the change in part (b) because:

The correct answer is the first option i.e. option A. A constant subtracted from the denominator
and numerator does not appreciably affect the recomputed ratio.

10.11 Five mutually exclusive alternatives are being considered for providing a sewage-
treatment facility. The annual equivalent costs and estimated benefits of the alternatives are as
follows:

The useful life of both alternatives is 50 years. Using an interest rate of 5%, determine which
alternative (if either) should be selected according to the conventional B–C-ratio method.

The order: B E A C D

Alternative Cost ($) Benefit B-C ratio Accepted

B 900 810 0.9 No

E 990 1140 1.15 Yes

A 1050 1110 1.06 Yes

C 1230 1390 1.05 Yes

D 1350 1500 1.11 Yes

B-C ratio = Benefit/Cost

Alternative E should be the Baseline

The incremental analysis:

Alternative Cost ($) Benefit B-C ratio Accepted

A-E 60 -30 -0.5 No

C-E 240 250 1.047 Yes

D-C 120 110 0.917 No

Sewage authority should invest in the Alternative C since the increment is justified.
 ENGINEERING ECONOMY 2023-2024

10.12 A town in northern Colorado is planning on investing in a water purification system. Three
mutually exclusive systems have been proposed, and their capital investment costs and net
annual benefits are the following (salvage values are negligible). If the town’s MARR is 10% per
year, use the B–C ratio method to determine which system is best.

EOY A B C

0 -$160,000 -$245,000 -$200,000

1 $80,000 $120,000 $80,000

2 $70,000 $100,000 $80,000

3 $60,000 $80,000 $80,000

4 $50,000 $60,000 $80,000

Annual MARR i% = 10%

System PW Benefit PW Cost B-C ratio

A $209,808 $160,000 1.31

B $292,828 $245,000 1.2

C $253,600 $200,000 1.26

1 1 1 1
PW (A Benefit) = $50,000 + $60,000 + $70,000 + $80,000
¿¿ ¿¿ ¿¿ ¿¿

= $209,808
1 1 1 1
PW (B Benefit) = $60,000 + $80,000 + $100,000 + $120,000
¿¿ ¿¿ ¿¿ ¿¿

= $292,828
PW (C Benefit) = $80,000(P/A, 10%, 4) = $253,600
Since the B-C ratio column show that system A has the biggest value with 1.31
=> System A is the best solution.