EXAMPLE Assign
EXAMPLE Assign
This final step implements Principle 7 and is accomplished during and after
the time that the results achieved from the selected alternative are collected.
Monitoring project performance during its operational phase improves the
achievement of related goals and objectives and reduces the variability in desired
results. This step is also the follow-up step to a previous analysis, comparing
actual results achieved with the previously estimated outcomes. The aim is to learn
how to do better analyses, and the feedback from post-implementation evaluation is
important to the continuing improvement of operations in any organization.
Unfortunately, this final step is often not done consistently or well in engineering
practice; therefore, it needs particular attention to ensure feedback for se in
ongoing and subsequent studies.
Your father bought a small apartment building for Php1 million in a college town. He
spent Php100,000 of his own money for the building and obtained a mortgage from a
local bank for the remaining Php900,000. The annual mortgage payment to the bank is
Php105,000. Your father also expects that annual maintenance on the building and
grounds will be Php150,000. There are four apartment units (two bedrooms each) in
the building that can be rented for Php3,600 per month. Refer to the seven-step
procedure to answer these questions:
a. Does your father have a problem? If so, what is it?
b. What are his alternatives (identify at least three)?
c. Estimate the economic consequences and other required data for the alternatives
in part (b).
d. Select a criterion for discriminating among alternatives, and use it to advise your
friend on which course of action to pursue.
e. Attempt to analyze and compare the alternatives in view of at least one criterion
in addition to cost.
f. What should your father do based on the information you and he have
generated?
8 | Chapter 1 - Introduction to Engineering Economy
SOLUTION:
a. A quick set of calculations shows that your father does indeed have a problem.
A lot more money is being spent by your father each year than is being
received.
Outflows: Php105,000 + Php150,000 = Php255,000
Inflows: 4 units x Php3,600/unit per month x 12 months = Php172,800
The problem could be that the monthly rent is too low. He’s losing Php82,200
per year. Now, that’s a problem!
c. Option 1: Raise the monthly rent to Php14,400 + Php R for the four
apartments to cover monthly expenses of Php21,250. Note that the minimum
increase in rent would be
(Php21,250 – Php14,400)/4 = Php1,712.50 (almost 50% increase!)
Option 2: Lower monthly expenses to Php21,250 – Php C so that these
expenses are covered by the monthly revenue of Php14,400 per month. This
would have to be accomplished primarily by lowering the maintenance cost.
Monthly maintenance expenses would have to be reduced to
(Php14,400 – Php105,000/12) = Php5,650.
This represents more than a 50% decrease in maintenance expense.
Option 3: Try to sell the apartment building for Php X, which recovers the
original Php100,000 investment and (ideally) recovers the Php6,850 per
month loss (Php82,200/12) on the venture during the time it was owned.
Option 4: Walk away from the venture and kiss your investment goodbye!
The bank would likely assume possession through foreclosure and may try to
collect fees from your father. This option would also be very bad for your
father’s credit rating.
d. One criterion could be to minimize the expected loss of money. In this case,
you might advise your father to pursue Option 1 or 3.
e. For example, let’s use “credit worthiness” as an additional criterion. Option 4
is immediately ruled out. Exercising Option 3 could also harm your father’s
credit rating. Thus, Options 1 and 2 may be his only realistic and acceptable
alternatives.
f. Your father should probably do a market analysis of comparable housing in
the area to see if the rent could be raised (Option 1). Maybe a fresh coat of
paint and new carpeting would make the apartment more appealing to
prospective renters. If so, the rent can probably be raised while keeping
100% occupancy of the four apartments.
9 | Chapter 1 - Introduction to Engineering Economy
EXERCISE 1
1. While studying for the engineering economy final exam, you and two friends find
yourselves craving a fresh pizza. You can’t spare the time to pick up the pizza
and must have it delivered. “Pick-Up-Sticks” offers a 1-1/4-inch-thick
(including toppings), 20-inch square pizza with your choice of two toppings for
Php650 plus 15% sales tax and a Php50 delivery charge (no sales tax on delivery
charge). “Fred’s” offers the round, deep-dish Sasquatch, which is 20 inches in
diameter. It is 1-3/4 inches thick, includes two toppings, and costs Php750
plus 5% sales tax and free delivery.
a. What is the problem in this situation? Please state it in an explicit and
precise manner.
b. Systematically apply the seven principles of engineering economy to the
problem you have defined.
c. Assuming that your common unit of measure is pesos (i.e., cost), what is the
better value for getting a pizza based on the criterion of minimizing cost per
unit volume.
d. What other criteria might be used to select which pizza to purchase?