Economy Engineering

TEKNIK INDUSTRI

Nama Anggota Kelompok :

Anggina Vanessa ( 1106013624 )
Deo Gratias ( 1106069430 )
Hasna Afifah ( 1106069595 )
Nurman Wibisana ( 1106069563 )
Richard Sihombing ( 1106054473 )
Yonathan Elia Munthe ( 1106054372 )

8.18. A chemical company is considering two processes for isolating DNA material
.The incremental cash flow between the two alternatives, J and S, is estimated.
The company uses a marr of 50 % per year. The rate of return on the
incremental cash flow below is less than 50%, but the company CEO prefers the
more expensive process. The CEO believes she can negotiate the initial cost of
the more expensive process downward. By how much would she have to reduce
the first cost of S, the higher cost alternatives, for it to have an incremental rate
of return of exactly 50 %?
Year

Incremental cash flow

$-900,000

400,000

700,000

950,000

Answer
1. Calculated incremental cash flowpada in year 0 when NPV=0 with i*=50%
0 = X + $400,000 ( P/F, 50%, 1) + $700,000 ( P/F, 50%, 2) + $950,000 ( P/F, 50%,3
)
0 = X + $400,000 ( P/F, 50%, 1) + $700,000 ( P/F, 50%, 2) + $950,000 ( P/F, 50%,3
)
0 = X + $859,245
X = $-859,245
Reduce the initial cost

= -$900,000-(-$859,245)
= -$40,755

8.23.Two roadway designs are under consideration for access to a permanent

suspension bridge. Design 1A will cost $3 million to build and $100,000 per year
to maintain. Design 1B will cost $3.5 million to build and $80,000 per year to
maintain. Use an AW-based rate of return equation to determine which design is
preferred. The marr is 10% per year.
Answer :
1A

1B

Incremental

Initial

-$ 3 million

-$ 3.5 million

-$0,5 million

Maintenance /

-$ 100.000

-$ 80.000

$ 20.000

Year
MARR / year
Total

10%
-$4.000.000

-$4.300.000

-$300.000

PW A = -$3 million - $100.000 / 10% = -$4.000.000

PW B = -$3.5 million - $80.000 / 10% = -$4.300.000
PW Incremental = -$0.5 million + $20.000 / 10% = -$300.000
The incremental cash flow of the larger investment dont justify ( -300.000 ) so the
cheaper one is Design A

8.28

A metal plating company is considering four different methods for recovering

by product heavy metals from a manufacturing sites liquid waste. The

investment costs and incomes associated with each method have been
estimated. All methods have a 10 year-life. The marr is 12% per year.(a) if the
methods are independent, because they can be implemented at different plants,
which ones are acceptable? (b)if the methods are mutually exclusive, determine
which one method should be selected, using a ROR evaluation.

Methode

First cost,$

Salvage Value

Annual Income

-15,000

+1,000

+4,000

-18,000

+2,000

+5,000

-25,000

-500

+6,000

-35,000

-700

+8,000

Answer :
A) using PW method

Method
0
1
2
3
4
5
6
7
8
9
10
IRR ( i* )

-15000
4000
4000
4000
4000
4000
4000
4000
4000
4000
1000

-18000
5000
5000
5000
5000
5000
5000
5000
5000
5000
2000

-25000
6000
6000
6000
6000
6000
6000
6000
6000
6000
-500

-35000
8000
8000
8000
8000
8000
8000
8000
8000
8000
-700

23%

24%

19%

17%

Method A:
0 = -15000 + 4000(P/A,i*,10) + 1000(p/f, i*,10)

Subtituting MARR (=12%) for i*, the RHS is positive (=7922.8),

i*=23%>MARR therefore select A
Method B :
0 = -18000 + 5000 (P/A, i*,10) + 2000(p/f,i*,10)
Subtituting

MARR

(=12%)

for

i*,

the

RHS

is

positive

(=10895),

i*=24%>MARR therefore select B

Method C :
0 = -25000 + 6000(P/A,I*,10) 500(P/F,i*,10)
Subtituting

MARR(=12%)

for

i*,

the

RHS

is

positive

(=8740.2),

is

positive

(=9976.2),

i*=19%>MARR therefore select C

Method D :
0 = -35000 + 8000(P/A,i*,10) 700(P/F,i*,10)
Subtituting

MARR(=12%)

for

i*,

the

RHS

i*=17%>MARR therefore select D

Project A, B, C, D selected because their i*>MARR

Year
Initial Cost
salvage Value
Annual Income
Incremental Comparison
0
1
2
3
4
5
6
7
8
9
10
incremental i* ( i* )
incremental justified ?
alternative selected

A
B
C
D
-15.000
-18.000
-25.000
-35.000
1.000
2000
-500
-700
4.000
5000
6000
8.000
A to DN
B to A
C to B
D to B
-3.000
-7000
-17000
-15.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
1000
3000
4.000
1000
-2500
-2700
1.000
31%
-2%
9%
23%
yes
yes
no
no
A
B
B
B

B)
A-DN : It is already shown in Athat i* for method A >MARR. Therefore, A is
selected over DN. Alternatively, we can write (using PW method) :
0 = -15000 + 4000(P/A,i*,10) + 1000 (P/F,i*,10)
I*>MARR select A
B-A :
0 = -3000 + 1000(P/A,Di*,10) + 1000(P/F,Di*,10)
It can be shown Di* > 12% RHS is positive therefore select B
C-B :
0 = -7000 + 1000(P/A,Di*,10) -2500(P/F,Di*,10)
With Di* = 12% RHS is negative; Hence Di* < MARR(=12%) therefore select
B again
D-B :
0 = -17000 + 3000(P/A,Di*,10) 2700(P/F,Di*,10)
Here,again Di* < MARR therefore B is still the selection. Select B

8.30

An independent dirt contractor is trying to determine which size dump truck to

buy. The contractor knows that as the bed size increases, the net income
increases, but he is uncertain whwther the oincremental expenditure required for
the larger trucks is justifie. The cash flow associated with each size truck are
estimated below. The contractors MARR is 18% per year, and all trucks are
expected to have a useful life of 8 years. (a) determine which size truck should
be purchased. (b) if two trucks are to be purchased, what should be the size of
the second truck?
Truck Bed Size, Cubic Meters
8
10
15
20
25

Initial Investment,
$
-10.000
-14.000
-18.000
-24.000
-33.000

Annual Operating
Cost, $
-4.000
-5.500
-7.000
-11.000
-16.000

Slavage Value,
$
2000
2.500
3.000
3.500
6.000

Annual
Income, $
6.500
10.000
14.000
20.500
26.500

Answer :
Year
Initial Cost
Annual Operating Cost
salvage Value
Annual Income
Annual Profit
Incremental Comparison
0
1
2
3
4
5
6
7
8
incremental i* ( i* )
incremental justified ?
alternative selected

10

15

20

25

-10.000
-4.000
2.000
6.500
2.500
8 to DN
-10.000
1.500
1.500
1.500
1.500
1.500
1.500
1.500
2.000
5%
no

-14.000
-5.500
2.500
10.000
4.500
10 to DN
-14.000
4.500
4.500
4.500
4.500
4.500
4.500
4.500
2500
27%
yes
10

-18.000
-7.000
3.000
14.000
7.000
15 to 10
-4.000
3.500
3.500
3.500
3.500
3.500
3.500
3.500
500
86%
yes
15

-24.000
-11.000
3.500
20.500
9.500
20 to 15
-6.000
2.500
2.500
2.500
2.500
2.500
2.500
2.500
500
37%
yes
20

-33.000
-16.000
6.000
26.500
10.500
25 to 20
-9.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
2.500
1%
no
20

A ) DN vs 8:0 = -10000(A/P,i,5) + (6500-4000) + 2000(A/F,i,5)

Solve for i by trial and error or excel

I= 5% < MARR
Eliminate 8
DN vs 10:0 = -14000(A/P,i,5) + (10000-5500) + 2500(A/F,i,5)
Solve for i by trial and error or excel
i = 27% > MARR
Eliminate DN
10 vs 15:0 = -4000(A/P,i,5) + (7000 4500) + 500(A/F,i,5)
Solve for i by trial and error or excel
I = 86%
Eliminate 10
15 vs 20:0 = -6000(A/P,i,5) + (9500-7000) + 500(A/F,i,5)
Solve for i by trial and error or excel
I = 37% > MARR
Eliminate 15
20 vs 25:0 = -9000(A/P,i,5) + (10.500-9500) + 2500(A/F,i,5)
Solve for i by trial and error or excel
I = 1% < MARR
Eliminate 25
Purchase 20 m3 truck
B) for second truck, purchase truck that was eliminated next to 15 m3

8.31

An engineer at anode metal is considering the projects below, all of which can
be considered to last indefinitely.if the companys MARR is 13 % per year,
determine which should be selected (a) if they are independent and (b) if they
are mutually exclusive (c)assume the projects are mutually exclusive and that
the incorrect decision rule to select the one project that invests the most
money and has a ROR that exceeds the MARR has been applied. What
project was selected ? why is this an incorrect choice?
First Cost ($)

Annual Income ($)

Alternative rate of
return (%)

-$20,000

$4,000

20%

-$10,000

$2,000

20%

-$15,000

$2,000

19,3%

-$70,000

$10,000

14,3%

-$50,000

$6,000

12%

Answer :
(a) If they are independent we must selected the choice who has ROR >
MARR alternative A, B, C, and D are selected
(b) (b) If theyre mutually exclusive
A
First Cost ($)
Annual Income ($)
Alternative rate of return (%)

-$20,000

-$10,000

-$15,000

-$70,000

-$50,000

$4,000

$2,000

$2,000

$10,000

$6,000

20%

20%

19,3%

14,3%

12%

Project E is eliminated due to its ROR which is less than MARR

Now compare B and C, C will the new challenge and B the defender.
fromC to B comparison is determined from
(

Since

so C will be the new defender.

 Compare A to C is determined from

(

The

is less than MARR so D eliminated and A remains. So, A is selected.

c) The incorrect decision rule to select the one project that invest the most
money and has a ROR that exceeds the MARR has been applied.

First Cost ($)

$20,000

$10,000

$15,000

$70,000

$50,000

Annual Income ($)

$4,000

$2,000

$2,000

$10,000

$6,000

Alternative rate of return

(%)

20%

20%

19,3%

14,3%

12%

Find the NPV

Project B

Project C

Project A

Project D

9.15

A state highway department is considering the conscruction of a new

highway through a scenic rural area.The road is expected to cost $6million, with
annual upkeep estimated at $20,000 per year. The improved accessibility is
expected to result in additional income from tourists of $350,000 per year. If the
road is expected to have a useful life of 25 years, use the (a) B-C method and
(b)B/C method at an interest rate of 6% per year to determine if the highway
should be constructed .(c) what is the modified B/C value?
Answer :
(a)

B-C analysis

AW = C = 469,380 + 20,000 = $ 489,380

Annual benefits = B = $350,000
B-C = 350,000 489,380 = - $ 139,380
Since B-C <0, the highway shouldnt be build.
(b)

B/C analysis

AW = C = 469,380 + 20,000 = $ 489,380

Annual benefits = B = $350,000
B/C = 350,000/489,380 = 0.715
Since B/C < 1.0, the highway shouldnt be build.
(c)For modified B/C ratio,
C = 6,000,000 (0.07823) = $ 469,380
B = 350,000 20,000 = $ 330,000
Modified B/C = 330,000/469,380
= 0.703
Since modified B/C < 1.0, the highway shouldnt be build

9.18

Two routes are under consideration for a new interstate highway segment. The
long route would be 25 kilometers and would have an initial cost of $21 million.
The short transmountain route would span 10 kilometers and would have an
initial cost of $45 million. Maintenance costs are estimated at $40,000 per year
for the long route and $15,000 per year for the short route. Additionally, a major
overhaul and resurfacing will be required every 10 years at a cost of 10% of the
first cost of each route. Regardless of which route is se- lected, the volume of
traffic is expected to be 400,000 vehicles per year. If the vehicle operating
expense is assumed to be $0.35 per kilometer and the value of reduced travel
time for the short route is estimated at $900,000 per year, determjne which route
should be selected, using a conven- tionalBIC analysis. Assume an infirute life
for each road, an interest rate of 6% per year, and that one of the roads wiII be
built.
Answer :
Alternative Comparison
A

Distance

25 km

10 km

Initial Cost

$21 million

$45 million

Maintenance

$40.000

$15.000

10% Initial Cost

10% Initial Cost

Vehicle

400.000 unit

400.000 unit

Operating Vehicle/km

$0.35

$0.35

Reduced Travel Time

$900.000

Cost/year
Overhaul Cost/10
year

Cost

A
Distance
Initial Cost
Maintenance Cost/year
Overhaul Cost/10 year
Vehicle
Operating Vehicle/km
Reduced Travel Time
Total Benefit ( B )
Total Cost ( C )
Overall B/C
Incremental B ( B )
Incremental cost ( C )
B/C

25 km
$21 million
$40.000
10% Initial Cost
400.000 unit
$0.35
0
3.500.000
40.234.032
0,086991033

B
10 km
$45 million
$15.000
10% Initial Cost
400.000 unit
$0.35
$900.000
2.300.000
85.283.712
0,026968807
1.200.000
45.049.680
0.02

A. FW10 = 21 million (F/P,6%,10) + 40.000 (F/A,6%,10) + 2.100.000

= 21 million (1.7908) + 40.000 (13.1808) + 2.100.000
= 37.606.800 + 527.232 + 2.100.000
= $40.234.032
B. FW10 = 45 million (F/P,6%,10) + 15.000 (F/A,6%,10) + 4.500.000
= 45 million (1.7908) + 15.000 (13.1808) + 4.500.000
= 80.586.000 + 197.712 + 4.500.000
= $85.283.712
C = FWb FWa
= $85.283.712 - $40.234.032
= $45.049.680
Benefit
A.

0 + 400.000 (0.35)(25) = $3.500.000

B.

$900.000 + 400.000 (0.35)(10) = $2.300.000

B = A-B = $3.500.000 - $2.300.000 = $1.200.000
B/C = $1.200.000/$45.049.680
= $0.02
Because B/C less than 1, so we choose option A (long road)

9.20

A privately owned utility is considering two cash rebate programs to achieve

water conservation. Program 1, which is ex- pected to cost an average of $60 per
household, would involve a rebate of 75 % of the purchase and installation costs
of an ultralow-ftush toilet. This program is pro- jected to achieve a 5% reduction
in overall household water use over a 5-year evalua- tion period. This will benefit
the citizenry to the extent of $1 .25 per household per month. Program 2 would
involve grass re- placement with desert landscaping. This is expected to cost
$500 per household, but it will result in reduced water cost at an estimated $8 per
household per month (on average). At a discount rate of 0.5% per month , which
program , if either, should the utility undertake? Use the B/C method.
Answer :
First compare program 1 to do-nothing (DN).
Cost/household/mo = $60(A/P,0.5%,60)
= 60(0.01933)
= $1.16
B/C1 = 1.25/1.16
= 1.08, Eliminate DN
Compare program 2 to program 1.
cost = 500(A/P,0.5%,60) 60(A/P,0.5%,60)
= (500 60)(0.01933)
= $8.51
benefits = 8 1.25
= $6.75
Incr B/C2 = 6.75/8.51
= 0.79 Eliminate program 2
The utility should undertake program 1.

9.23

The California Forest Service is consider- ing two locations for a new state park.
Lo- cation E would require an investment of $3 million and $50,000 per year in
mainte- nance. Location W would cost $7 million to construct, but the Forest
Service would receive an additional $25,000 per year in park use fees. The
operating cost of loca- tion W will be $65,000 per year. The rev- enue to park
concessionaires will be $500,000 per year at location E and $700,000 per year at
location W. The disbenefits associated with each location are $30,000 per year
for location E and $40,000 per year for location W. Use (a) the B/C method and
(b) the modified B/C method to determine which location , if either, should be
selected, using an in- terest rate of 12% per year. Assume that the park will be
maintained indefinitely.
Answer :
E
$ 3.000.000
$ 50,000
$ 500,000
$ 30.000

First Cost
Annual / Year
Revenue / Year
Disbenefit

W
$7.000.000
$ 65,000
$ 700,000
$ 40,000

(a) Location E
AW = C = 3,000,000(0.12) + 50,000
= $410,000
Revenue = B = $500,000 per year
Disbenefits = D = $30,000 per year
Location W
AW = C = 7,000,000 (0.12) + 65,000 - 25,000
= $880,000
Revenue = B = $700,000 per year
Disbenefits = D = $40,000 per year
B/C ratio for location E:
(B D)/C = (500,000 30,000)/410,000
= 1.15

Location E is economically justified. Location W is now incrementally compared

to E.
cost of W = 880,000 410,000
= $470,000
benefits of W = 700,000 500,000
= $200,000
Incr disbenefits of W = 40,000 30,000
= $10,000
Incr B/C = (B D)/C = (200,000 10,000)/470,000
= 0.40
Since incr(B D)/C < 1, W is not justified. Select location E.

(b) Location E
B = 500,000 30,000 50,000 = $420,000
C = 3,000,000 (0.12) = $360,000
Modified B/C = 420,000/360,000 = 1.17
Location E is justified.
Location W
B = $200,000
D = $10,000
C = (7 million 3 million)(0.12)
= $480,000
M&O = (65,000 25,000) 50,000
= $-10,000
Note that M&O is now an incremental cost advantage for W.
Modified B/C = 200,000 10,000 + 10,000
480,000
W is not justified; select location E.

= 0.42

9.26 Public service company of Texas is considering four size of pipe for a new
pipeline. The costs per kilometer (km) for each size are given in the table.
Assuming that all pipes will last 15 years and the companys MARR is 8% per
year, which size pipe should be purchased based on a B/C analysis? Installation
cost is considered a part opf the initial cost.

Initial

140

160

200

240

9,180

10,510

13,180

15,850

600

800

800

1,500

5,800

5,200

4,900

investment,$/km
Installation
cost,$/km
Annual

cost, 6,000

$/km

Answer :

Size

140

160

200

240

Total first cost

9,180+600 =

10,510+800 =

13,180+800 =

15,850+1,500

11,310

14,580

= 17,350

9,780

Initial investment,$/km
Installation cost,$/km
Annual cost, $/km
Annual Total Cost ( C )
Benefit ( B )
Overall B/C
Alternative Compared
Incremental Benefits ( B )
Incremental Cost ( C )
B/C
Incremental Justified
Pipeline Selected

140
9,18
600
6.000
1142,6
6.000
5,25119

160
200
240
10,51
13,18
15,85
800
800
1,5
5.800
5.800
4.900
1321,347
1703,381
2027,001
5.800
5.200
4.900
4,389459
3,052751
2,417365
160-140
200-160
240-200
200
600
300
178,7499
382,0341
323,6191
1,118882
1,57054
0,927016
yes
yes
no
160
200
200

160 - 140 mm
C = (11,310 9,780)(A/P,8%,15)
= 1,530(0.11683)
= $178.75
B = 6,000 5,800
= $200
B/C = 200/178.75
= 1.12 > 1.0

Eliminate 140 mm size.

200 -160 mm
C = (14,580 11,310)(A/P,8%,15)
= 3270(0.11683)
= $382.03
B = 5800 5200
= $600
B/C = 600/382.03
= 1.57 > 1.0

Eliminate 160 mm size.

240 -200 mm
C = (17,350 14,580)(A/P,8%,15)
= 2770(0.11683)
= $323.62
B = 5200 4900
= $300
B/C = 0.93 < 1.0

So Select 200mm

Eliminate 240 mm size.