ENGINEERING ECONOMICS TUTORIAL QUESTIONS

School: National Higher Polytechnic Institute (NAHPI), The University of Bamenda-Cameroon

Course Facilitator: Dr Fozoh I. Aziseh

Instructions: Answer the following questions in preparation for your CA and Exams

Question One

According to a study by The National Electricity Corporation of Cameroon (SONEL), which was the sole
government agency responsible for the development of electric power and its supply to consumers, the
economically exploitable hydropower potential in Cameroon is estimated at 20000MW in total. The total
installed capacity of power generating facilities of SONEL was only 804MW in 1991, 723 (90%) of hydro and
81MW (10%) equivalent of thermal power by small diesel plants. As a result, the development of the Memve
Ele Hydroelectric power development project as a main source of electric power. The project costs were
estimated as follows;

The general implementation schedule of the Memve Ele Hydroelectric power development project shows that
the estimated time for the project to go to completion is 5 years. An evaluation of the project shows a budget
surplus (NIPPON KOEI, 1993 p93-144).

On the bases of the precondition activities that must take place before the commencement of any project, and
on the bases of the fundamental engineering economics concepts that must be understood by an engineer,
justify the failures of the Memve Ele Hydroelectric power project in Cameroon and many other engineering
projects in Cameroon have lasted for more than the predicted time and have not gone to completion till today,
at the end, justify the final success of the Bambili road project.

Question Two

1. Which of the following statements is incorrect? (a) Economic decisions are time evaluation. (b) Time and
risk are the most important factors in any financial evaluation. (c) For the large-scale engineering projects,
engineers must consider the impact of the project on the company financial statement. (d)One of the primary
roles of engineers is to make capital expenditure decisions.

2. When evaluating a large-scale engineering project, which of the following items is important? (a) Expected
profitability (b) Timing of cash flows. (c) Degree of financial risk. (d) All of the above.

3. Which of the following disciplines defines the discipline of engineering economics most closely? (a)
Economic decisions made by engineers. (b) Economic decisions related to financial assets. (c) Economic
decisions primarily for real assets and services from engineering projects. (d) Any economic decision related
to the time value of money.

4. Which of the following statement is not one of the four fundamental principles of engineering economics?
(a) Receiving a dollar today is worth more than a received dollar tomorrow. (b) To expect a higher return on
investment, you need to take a higher risk. (c) Marginal revenue must exceed marginal cost to justify any
production. (d) When you are comparing different alternatives, you must not focus only on differences in
alternatives.

A. An engineer borrows 10000frs from a local bank to purchase some equipment for a construction
project pending funding. The agreement is to pay back the loan according to a graduated payment
 plan. If your first payment is set at 1500frs, how would the remaining payments look like at a
borrowing rate of 10% over five years?
B. Consider two engineering equipment with cash flow transactions

n 0 1 2 3 4
Equipment A -3000 0 0 0 4500
Equipment B -2000 1300 1500
Compute the rate of return for each and comment on your results.

Question Three

A corporation is considering replacing 20 conventional (C) 25-HP, 230-V, 60-Hz, 1800-rpm induction motors
with modern premium efficiency (PE) motors. Both have power output of 18.650kW per motor
(25HP*0.746kW/HP). C motors have a published efficiency of 89.5% while PE motors have 93%. Initial cost
of C motors is 13000frs while that of PE motors is 15600. The motors are operated for 12 hours per day, 5
days per week and 52 weeks per year with total utility cost of 0.07kWh. the life cycle of both motors is 20
years at an interest rate of 13% compounded annually with no appreciable salvage value.

a) Determine the total input power for both motors

b) Determine the total kWh per year for both motors
c) Determine the annual energy cost for both motor types
d) Determine the capital costs for both motors types
e) Determine the total annual equivalent cost
f) Determine the savings or loss per operating hours obtained by switching from C motors to PE
motors
g) Determine the breakeven number of operating hours for PE motors.

Question Four

You are in the planning department of the T construction Co. LTD, which has contracted to undertake fairly
extensive motorway repair works in the West Region. Due to problems of weather at that time of the year, and
as the police have asked for co-operation in stopping work from time to time if undue traffic occurs, there is
some doubt as to the precision of estimates for completing each phase of the work. However, Co, are happy
that the following network data is applicable to the job. To avoid candidates being confused by technicalities
the activities are coded A to G as follows:

Time estimates (weeks)

Activity Optimistic Most likely Pessimistic Preceeding

A 4 7 13 -
B 3 6 9 -
C 4 4 12 A
D 2 3 10 B
E 1 3 11 B
F 4 6 8 C,D
G 1 5 15 E
(a) Construct the relevant network, (b) Determine the estimate length of the critical path, (c) Determine the
standard deviation of the critical path.

T company has to undertake a second project which could use equipment released from the above project if it
fishes early, or it could hire up to 2 excavators at a cost of 4000 MU each. For each excavator not hired when
one was needed a financial penalty of 14000 MU would be incurred. The situation is summarized in the pay-
off table. The decision on hiring must be taken now before the first project is started.

Time table to complete first project

Under 16 weeks 17-18 weeks 19 weeks and

over
 Extra costs incurred in MU
Number of 0 0 14000 28000
excavations hired 1 4000 4000 18000
2 8000 8000 8000
(d) Derive the probabilities of completing the first project in the given time periods.

(e) Recommend to the company how many excavators should be hired using the criterion of the lowest
expected cost.

Question Five

An engineer wishes to set aside budget to cover the maintenance costs of a machine for its lifetime of 12 years.
The maintenance charges are $1000 annually and paid at the end of each year of service. How much money
must be invested at the beginning of the first year to pay for the maintenance costs if the interest rate is 4% on
the set aside dollars?

Question Six

A computer purchased for $1200 will have a salvage value of $600 after 6 years. Annual maintenance charges
are estimated to be $100. At an interest rate of 10%, what is the equivalent uniform annual cost (EUAC)?

Question Seven

A company wishes to make 5 equal annual investments so that on the date of the last investment, it will have
$50,000 to buy a new machine. What amount must be invested each year at an interest of 4%?

Question Eight

Calculate the annual inflation-adjusted interest rate, if the general inflation rate is 2% per year, and the interest
rate is 3.5% per year? If the inflation adjusted interest rate from a government study was given as 7.00%, and
inflation for the stated period was 2.5%, what was the real interest rate per period?

Question Nine

As a result of the conflict in the Persian Gulf, Kuwait is studying the feasibility of running a steel pipeline
across the Arabian Peninsula to the Red Sea. The pipeline will be designed to handle 3 million barrels of crude
oil per day at optimum conditions. The length of the line will be 600 miles. Calculate the optimum pipeline
diameter that will be used for 20 years for the following data at i = 10%: Pumping power =
1.333Q∆P/1,980,000 horsepower Q = volume flow rate, cubic ft/hr, ∆P = 128QµL/gπD4, pressure drop lb/sq
ft, L = pipe length, ft, D = inside pipe diameter, ft, t = 0.01 D, pipeline wall thickness, ft, µ = 8500 lb/hr ft, oil
viscosity, g = 32.2 × 12,960,000 ft/hr2, Power cost, $0.015 per horsepower hour, Oil cost, $18 per barrel,
Pipeline cost, $1.00 per pound of steel, Pump and motor costs, $195 per horsepower. The salvage value of the
steel after 20 years is assumed to be zero considering the cost of removal. Since the pipe size will be measured
in inches, we will assume the following basic conversion units: 1 mile = 5280 ft, 600 miles = 600 × 5280 =
3,168,000 ft, 1 barrel = 42 U.S. gal, 1 barrel = 42 gal × 231 in.3/gal = 9702 in.3, 1 barrel = 9702 in.3/123 =
5.6146 ft3, Density of steel = 490.75 lb/ft3

a) Determine the operating cost in pumping oil

b) Calculate the Pump and motor cost
c) Calculate the required amount and cost of steel
d) Calculate the annual equivalent cost
e) Calculate the economical pipe size
f) Calculate the equivalent annual cost at optimal pipe size
g) Calculate the total annual oil revenue
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