1 Million+ Step-by-step solutions

Think back to your first hour after awakening this morning. List 15 decision-making opportunities that existed during that hour. After you have done that, mark the decision-making opportunities that you actually recognized this morning and upon which you made a conscious decision.

Some of the following problems would be suitable for solution by engineering economic analysis. Which ones are they?

(a) Would it be better to buy an automobile with a diesel engine or a gasoline engine?

(b) Should an automatic machine be purchased to replace three workers now doing a task by hand?

(c) Would it be wise to enroll for an early morning class so you could avoid traveling during the morning traffic rush hours?

(d) Would you be better off if you changed your major?

(e) One of the people you might marry has a job that pays very little money, while another one has a professional job with an excellent salary. Which one should you marry?

Which one of the following problems is most suitable for analysis by engineering economic analysis?

(a) Some 45jt candy bars are on sale for 12 bars for $3. Sandy, who eats a couple of candy bars a week, must decide whether to buy a dozen at the lower price.

(b) A woman has $150,000 in a bank checking account that pays no interest. She can either invest it immediately at a desirable interest rate or wait a week and know that she will be able to obtain an interest rate that is 0.15% higher.

(c) Joe backed his car into a tree, damaging the fender. He has automobile insurance that will pay for the fender repair. But if he files a claim for payment, they may change his "good driver" rating downward and charge him more for car insurance in the future.

If you have $300 and could make the right decisions, how long would it take you to become a millionaire? Explain briefly what you would do.

The owner of a small machine shop has just lost one of his larger customers. The solution to his problem, he says, is to fire three machinists to balance his workforce with his current level of business. The owner says it is a simple problem with a simple solution. The three machinists disagree. Why?

Every college student had the problem of selecting the college or university to attend. Was this a simple, intermediate, or complex problem for you? Explain.

The college bookstore has put pads of engineering computation paper on sale at half price. What is the minimum and maximum number of pads you might buy during the sale? Explain.

Consider the seven situations described. Which one situation seems most suitable for solution by engineering economic analysis?

(a) Jane has met two college students that interest her. Bill is a music major who is lots of fun to be with. Alex, on the other hand, is a fellow engineering student, but he does not like to dance.

Jane wonders what to do.

(b) You drive periodically to the post office to pick up your mail. The parking meters require 10jt for 6 minutes-about twice the time required to get from your car to the post office and back. If parking fines cost $8, do you put money in the meter or not?

(c) At the local market, candy bars are 45 it each or three for $1. Should you buy them three at a time?

(d) The cost of automobile insurance varies widely from insurance company to insurance company. Should you check with several companies when your insurance comes up for renewal?

(e) There is a special local sales tax ("sin tax") on a variety of things that the town council would like to remove from local distribution. As a result a store has opened up just outside the town and offers an abundance of these specific items at prices about 30% less than is charged in town. Should you shop there?

(f) Your mother reminds you that she wants you to attend the annual family picnic. That same Saturday you already have a date with a person you have. been trying to date for months.

(g) One of your professors mentioned that you have a poor attendance record in her class. You wonder whether to drop the course now or wait to see how you do on the first midterm exam. Unfortunately, the course is required for graduation.

An automobile manufacturer is considering locating an automobile assembly plant in your region. List two simple, two intermediate, and two complex problems associated with this proposal.

Consider the following situations. Which ones appear to represent rational decision making? Explain.

(a) Joe's best friend has decided to become a civil engineer, so Joe has decided that he, too, will become a civil engineer.

(b) Jill needs to get to the university from her home. She bought a car and now drives to the university each day. When Jim asks her why she didn't buy a bicycle instead, she replies, "Gee, I never thought of that."

(c) Don needed a wrench to replace the spark plugs in his car. He went to the local automobile supply store and bought the cheapest one they had. It broke before he had finished replacing all the spark plugs in his car.

Identify possible objectives for NASA. For your favorite of these, how should alternative plans to achieve the objective is evaluated?

Suppose you have just 2 hours to answer the question, How many people in your home town would be interested in buying a pair of left-handed scissors? Give a step-by-step outline of how you would seek to answer this question within two hours.

A college student determines that he will have only $50 per month available for his housing for the coming year. He is determined to continue in the university, so he has decided to list all feasible alternatives for his housing. To help him, list five feasible alternatives.

Describe a situation where a poor alternative was selected, because there was a poor search for better alternatives.

Choose the better of the undesirable alternatives. The three economic criteria for choosing the best alternative are minimize input, maximize output, and maximize the difference between output and input. For each of the following situations, what is the appropriate economic criterion?

(a) A manufacturer of plastic drafting triangles can sell all the triangles he can produce at a fixed price. As he increases production, his unit costs increase as a result of overtime pay and so forth. The manufacturer's criterion should be _____.

(b) An architectural and engineering firm has been awarded the contract to design a wharf for a petroleum company for a fixed sum of money. The engineering firm's criterion should be _____.

(c) A book publisher is about to set the list price (retail price) on a textbook. The choice of a low list price would mean less advertising than would be used for a higher list price. The amount of advertising will affect the number of copies sold. The publisher's criterion should be _____.

(d) At an auction of antiques, a bidder for a particular porcelain statue would be trying to _____.

As in Problem 1-18, state the appropriate economic criterion for each of the following situations.

(a) The engineering school held a raffle of an automobile with tickets selling for'50~each or three for $1. When the students were selling tickets, they noted that many people had trouble deciding whether to buy one or three tickets. This indicates the buyers' criterion was _'

(b) A student organization bought a soft-drink machine for use in a student area. There was considerable discussion over whether they should set the machine to charge Sot, 75~, or $1 per drink. The organization recognized that the number of soft drinks sold would depend on the price charged. Eventually the decision was made to charge 75~. Their criterion was.

(c) In many cities, grocery stores find that their sales are much greater on days when they have advertised their special bargains. However, the advertised special prices do not appear to increase the total physical volume of groceries sold by a store. This leads us to conclude that many shoppers' criterion is _'

(d) A recently graduated engineer has decided to return to school in the evenings to obtain a master's degree. He feels it should be accomplished in a manner that will allow him the maximum amount of time for his regular day job plus time for recreation. In working for the degree, he will

Seven criteria are given in the chapter for judging' which is the best alternative. After reviewing the list, devise three additional criteria that might be used.

Suppose you are assigned the task of determining the route of a new highway through an older section of town. The highway will require that many older homes must be either relocated or torn down. Two possible criteria that might be used in deciding exactly where to locate the highway are:

(a) Ensure that there are benefits to those who gain from the decision and that no one is harmed by the decision

(b) Ensure that the benefits to those who gain from the decision are greater than the losses of those who are harmed by the decision. Which criterion will you select to use in determining the route of the highway? Explain.

Identify benefits and costs for Problem 1-21.

In the fall, Jay Thompson decided to live in a university dormitory. He signed a dorm contract under which he was obligated to pay the room rent for the full college year. One clause stated that if he moved out during the year, he could sell his dorm contract to another student who would move into the dormitory as his replacement. The dorm cost was $2000 for the two semesters, which Jay had already paid. A month after he moved into the dorm, he decided he would prefer to live in an apartment. That week, after some searching for a replacement to fulfill his dorm contract, Jay had two offers. One student offered to move in immediately and to pay Jay $100 per month for the eight remaining months of the school year. A second student offered to move in the second' semester and pay $700 to Jay. Jay estimates his food cost per month is $300 if he lives in the dorm and $250 if he lives in an apartment with three other students. His share of the apartment rent and utilities will be $200 per month. Assume each semester is 4 ½ months long. Disregard the small differences in the timing of the disbursements or receipts.

(a) What are the three alternatives available to Jay?

(b) Evaluate the cost for each of the alternatives.

(c) What do you recommend that Jay do?

An electric motor on a conveyor burned out. The foreman told the plant manager that the motor had to be replaced. The foreman indicated that there were no alternatives and asked for authorization to order the replacement. In this situation, is any decision making taking place? If so, who is making the decision(s)?

Bill Jones's parents insisted that Bill buy himself a new sport shirt. Bill's father gave specific instructions, saying the shirt must be in "good taste,” that is, neither too wildly colored nor too extreme in tailoring. Bill found three types of sport shirts in the local department store:

• Rather somber shirts that Bill's father would want him to buy

• Good-looking shirts that appealed to Bill

• Weird shirts that were even too much for Bill He wanted a good-looking shirt but wondered how to convince his father to let him keep it. The clerk suggested that Bill take-home two shirts for his father to see and return the one he did not like. Bill. Selected a good-looking blue shirt he liked, and also a weird lavender shirt. His father took one look and insisted that Bill keep the blue shirt and return the lavender one. Bill did as his father instructed. What was the key decision in this decision process, and who made it?

A farmer must decide what combination of seed, water, fertilizer, and pest control will be most profitable for the coming year. The local agricultural college did a study of this farmer's situation and prepared the following table. Plan Cost/acre Income/acre

The last page of the college's study was torn off, and hence the farmer is not sure. Which plan the agricultural college recommends. Which plan should the farmer adopt? Explain.

Identify the alternatives, outcomes, criteria, and process for the selection of your college major? Did you make the best choice for you?

Describe a major problem you must address in the next two years. Use the techniques of this chapter to structure the problem and recommend a decision.

One strategy for solving a complex problem is to break the problem into a group of less complex problems and then find solutions to the smaller problems. The result is the solution of the complex problem.. Give an example in which this strategy will work. Then give another example in which this strategy will not work.

On her first engineering job, Joy Hayes was given the responsibility of determining the production rate for a new product. She has assembled data as indicated on the graphs:

(a) Select an appropriate economic criterion and estimate the production rate based upon it.

(b) Joy's boss told Joy: "I want you to maximize output with minimum input." Joy wonders if it is possible to achieve her boss's criterion. She asks your advice. What would you tell her?

Willie Lohmann travels from city to city in the conduct of his business. Every other year he buys a used . car for about $12,000. The auto dealer allows about $8000 as a trade-in allowance with the result that the salesman spends $4000 every other year for a car. Willie keeps accurate records, whi.ch show that all other expenses on his car amount to 22.3 per mile for each mile he drives. Willie's employer has two plans by which salesmen are reimbursed for their car expenses:

(a) Willie will receive all his operating expenses, and in addition will receive $2000 each year for the decline in value of the automobile.

(b) Willie will receive 32 per mile but no operating expenses and no depreciation allowance. If Willie travels 18,000 miles per year, which method of computation gives him the larger reimbursement? At what annual mileag

Maria, a college student, is getting ready for three final examinations at the end of the school year. Between now and the start of exams, she has 15 hours of study time available. She would like to get as high a grade average as possible in her math, physics, and engineering economy classes. She feels she must study at least 2 hours for each course and, if necessary, will settie for the low grade that the limited study would yield. How much time should Maria devote to each class if she estimates her grade in each subject as follows:

A city is in need of increasing its rubbish disposal facilities. There is a choice of two rubbish disposal areas, as follows. Area A: A gravel pit with a capacity of 16 million cubic meters. Owing to the possibility of high ground water, however, the Regional Water Pollution-Control Board has restricted the lower 2 million cubic meters of fill to inert material only (earth, concrete, asphalt, paving, brick, etc.). The inert material, principally clean earth, must be purchased and hauled to this area for the bottom fill. Area B: Capacity is 14 million cubic meters. The entire capacity may be used for general rubbish disposal. This area will require an average increase in a round-trip haul of 5 miles for 60% of the city, a decreased haul of 2 miles for 20% of the city. For the remaining 20% of the city, the haul is the same distance as for Area A. . Assume the following conditions:

• Cost of inert material placed in Area A will be

•. $2.35 1m3. Average speed of trucks from last pickup to disposal site is 15 miles per hour. The rubbish truck and a two-man crew will cost $35 per hour.

•Truck capacity of 41/2tons per load or 20 m3.

• Sufficient cover material is available at all areas; however, inert material for the bottom fill in Area A must be hauled in. Which of the sites do you recommend?

An oil company is considering adding an additional grade of fuel at its service stations. To do this, an additional 3000-gallon tank must be buried at each station. Discussions with tank fabricators indicate that the least expensive tank would be cylindrical with minimum surface area. What size tank should be ordered?

The vegetable buyer for a group of grocery stores has decided to sell packages of sprouted grain in the vegetable section of the stores. The product is perishable and any remaining unsold after one week in the store is discarded. The supplier will deliver the packages to the stores, arrange them in the display space, and remove and dispose of any old packages. The price the supplierwill charge the stores depends on the size of the total weekly order for all the stores.

__Weekly Order Price per Package__

Less than 1000 packages..........................................................35

1000-1499...................................................................................28

1500-1999...................................................................................25

2000 or more..............................................................................20

The vegetable buyer estimates the quantity that can be soldper week, at various selling prices,as follows:

__Selling Price Packages Sold per Week__

60 fC..........................................................................................300

45...............................................................................................600

40.............................................................................................1200

33.............................................................................................1700

26.............................................................................................2300

The sprouted grain will be sold at the same price in all the grocery stores. How many packages should be purchased per week, and at which of the five prices listed above should they be sold?

Cathy Gwynn, a recently graduated engineer, decided to invest some of her money in a "Quick Shop" grocery store. The store emphasizes quick service, a limited assortment of grocery items, and rather high prices. Cathy wants to study the business to see if the store hours (currently 0600 to 0100) can be changed to make the store more profitable. Cathy assembled the following information.

__Time Period Daily Sales in the Time Period__

0600-0700......................................................................$20

0700-0800........................................................................40

0800-0900........................................................................60

0900-1200......................................................................200

1200-1500......................................................................180

1500-1800......................................................................300

1800-2100......................................................................400

2100-2200......................................................................100

2200-2300........................................................................30

2300-2400........................................................................60

2400-0100.........................................................................20

The cost of the groceries sold averages 70% of sales. The incremental cost to keep the store open, including the clerk's wage and other incremental operating costs, is $10 per hour. To maximize profit, when should the store be opened, and when should it be closed?

Jim Jones, a motel owner, noticed that just down the street the "Motel 36" advertises a $36-per-night room rental rate on its sign. As a result, this competitor rents all 80 rooms every day by late afternoon. Jim, on the other hand, does not advertise his rate, which is $54 per night, and he averages only a 68% occupancy of his 50 rooms.

There are a lot of other motels nearby, but only Motel 36 advertises its rate on its sign. (Rates at the other motels vary from $48 to $80 per night.) Jim estimates that his actual incremental cost per night for each room rented, rather than remaining vacant, is $12. This $12 pays for all the cleaning, laundering, maintenance, utilities, and so on. Jim believes his eight alternatives are:

What should Jim do? Show how you reached your conclusion.

A firm is planning to manufacture a new product. The sales department estimates that the quantity that an be sold depends on the selling price. As the selling price is increased, the quantity that can be sold decreases. Numerically they estimate: P = $35.00 - 0.02Q where P =selling price per unit Q = quantity sold per year On the other hand, the management estimates that the average cost of manufacturing and selling the product will decrease as the quantity sold increases. They estimate C = $4.00 Q + $8000 where C = cost to produce and sell Q per year The firm's management wishes to produce and sell the product at the rate that will maximize profit, that is, where income minus cost will be a maximum. What quantity should the decision makers plan to produce and sell each year?

A manufacturing firm has received a contract to assemble 1000units of test equipment in the next year. The firm must decide how to organize its assembly operation. Skilled workers, at $22 per hour each, could be assigned to individually assemble the test equipment. Each worker would do all the assembly steps, and it would take 2.6 hours to complete one unit. An alternate approach would be to set up teams of four less skilled workers (at $13 per hour each)and organize the assembly tasks so that each workerdoes part of the assembly. The four-man team would be able to assemble a unit in one hour. Which approach would result in more economically assembly?

A grower estimates that if he picks his apple crop now, he will obtain 1000 boxes of apples, which he can sell at $3 per box. However, he thinks his crop will increase by 120 boxes of apples for each week he delays picking, but that the price will drop at a rate of l5 per box per week; in addition, he estimates approximately 20 boxes per week will spoil for each week he delays picking. When should he pick his crop to obtain the largest total cash return? How much will he receive for his crop at that time?

Bob Johnson decided to purchase a new home. After looking at tracts of new homes, he decided .that a custom-built home was preferable. He hired an architect to prepare the drawings. In due time, the architect completed the drawings and submitted them. Bob liked the plans; he was less pleased that he had to pay the architect a fee of $4000 to design the house. Bob asked a building contractor to provide a bid to construct the home on a lot Bob already owned. While the contractor was working to assemble the bid, Bob came across a book of standard house plans. In the book was a home that he and his wife liked better than the one designed for them by the architect. Bob paid $75 and obtained a complete set of plans for this other house. Bob then asked the contractor to provide a bid

to construct this "stock plan" home. In this way Bob felt he could compare the costs and make a decision. The building contractor submitted the following bids:

Custom-designed home.....................$128,000

Stock-plan home....................................128,500

Bob w/s willing to pay the extra $500 for it. Bob's wife, however, felt they should go ahead with the custom-designed home, for, as she put it, "We can't afford to throwaway a set of plans that cost $4000." Bob agreed, but he disliked the thought of building a home that is less desirable than the stock plan home. Then he asked your advice. Which house would you advise him to build? Explain.

Venus Computer can produce 23,000 personal computers a year on its daytime shift. The fixed manufacturing costs per year are $2 million and the total labor cost is $9,109,000. To increase its production to 46,000 computers per year, Venus is considering adding a second shift. The unit labor cost for the second shift would be 25% higher than the day shift, but the total fixed manufacturing costs would increase only to $2.4 million from $2 million.

(a) Compute the unit manufacturing cost for the daytime shift.

(b) Would adding a second shift increase or decrease the unit manufacturing cost at the plant?

A small machine shop, with 30 hp of connected load, purchases electricity under the following monthly rates (assume any demand charge is included in this schedule):

First 50 kw-hr per hp of connected load at 8.6 per kw-hr

Next 50 kw-hr per hp of connected load at 6.6 per kw-hr

Next 150 kw-hr per hp of connected load at 4.0 per kw-hr

All electricity over 250 kw-hr per hp of connected load at 3.7~per kw-hr The shop uses 2800 kw-hr per month.

(a) Calculate the monthly bill for this shop. What are the marginal and average costs per kilowatt-hour?

(b) Suppose Jennifer, the proprietor of the shop, has the chance to secure additional business that will require her to operate her existing equipment more hours per day. This will use an extra 1200 kw-hr per month. What is the lowest figure that she might reasonably consider to be the "cost" of this additional energy? What is this per kilowatt-hour?

(c) She contemplates installing certain new machines that will reduce the labor time required on certain operations. These will increase the connected load by 10 hp, but since they will operate only on certain special jobs, will add only 100 kw-hr per month. In a study to determine the economy of installing these new machines, what should be considered as the "cost" of this energy? What is this per kilowatt-hour?

Two automatic systems for dispensing maps are being compared by the state highway department. The accompanying breakeven chart of the comparison of these systems (System I vs System II) shows total yearly costs for the number of maps dispensed per year for both alternatives. Answer the following questions.

(a) What is the fixed cost for System I?

(b) What is the fixed cost for System II?

(c) What is the variable cost per map dispensed for System I?

(d) What is the variable cost per map dispensed for System II?

(e) What is the breakeven point in terms of maps dispensed at which the two systems have equal annual costs?

(f) For what range of annual number of maps dispensed is System I recommended?

(g) For what range of annual number of maps dispensed is System IT recommended?

(h) At 3000mapsper year, what are the marginal and average map costs for each system?

Mr. Sam Spade, the president of Ajax, recently read in a report that a competitor named Bendix has the following relationship between cost and production quantity:

c = $3,000,000 - $18,000Q + $75Q^{2}

Where C = total manufacturing cost per year and Q = number of units produced per year.

A newly hired employee, who previously worked for Bendix, tells Mr. Spade that Bendix is now producing 110units per year. If the selling price remains unchanged, Sam wonders if Bendix is likely to increase the number of units produced per year, in the near future. He asks you to look at the information and tell him what you are able to deduce from it.

A privately owned summer camp for youngsters has the following data for a 12-week session:

Charge per camper ................................$120 per week

Fixed costs ...............................................$48,000 per session

Variable cost per camper .......................$80 per week

Capacity ....................................................200 campers

(a) Develop the mathematical relationships for total cost and total revenue.

(b) What is the total number of campers that will allow the camp to just break even?

(c) What is the profit or loss for the 12-week session if the camp operates at 80% capacity?

Two new rides are being compared by a local amusement park in terms of their annual operating costs. The two rides are assumed to be able to generate the same level of revenue (and thus the focus on costs). The Thmmy Tugger has fixed costs of $10,000 per year and variable costs of $2.50 per visitor. The Head Buzzer has fixed costs of $4000 per year, and variable costs of $4 per visitor. Provide answers to the following questions so the amusement park can make the needed comparison.

(a) Mathematically determine the breakeven number of visitors per year for the two rides to have equal annual costs.

(b) Develop a graph that illustrates the following:

• Accurate total cost lines for the two alternatives (show line, slopes, and equations).

• The breakeven point for the two rides in terms of number of visitors.

• The ranges of visitors per year where each alternative is preferred.

Consider the accompanying breakeven graph for an investment, and answer the following questions as they pertain to the graph.

(a) Give the equation to describe total revenue for x units per year.

(b) Give the equation to describe total costs for x units per year.

(c) What is the "breakeven" level of x in terms of costs and revenues?

(d) If you sell 1500 units this year, will you have a profit or loss? How much?

Quatro Hermanas, Inc. is investigating implementing some new production machinery as part of its operations. Three alternatives have been identified, and they have the following fixed and variable costs:

Determine the ranges of production (units produced per year) over which each alternative would be recommended for implementation by Quatro Hermanas. Be exact. Consider the range of production to be from 0-30,000 units per year.

Three alternative designs have been created by Snakisco engineers for a new machine that spreads cheese between the crackers in a Snakisco snack. Each machine design has unique total costs (fixed and variable) based on the annual production rate of boxes of these crackers. The costs for the three designs are given (where x is the annual production rate of boxes of cheese crackers).

You are asked to do the following.

(a) Mathematically determine which of the machine designs would be recommended for different levels of annual production of boxes of snack crackers. Management is interested in the production interval of 0-150,000 boxes of crackers per year. Over what production volume would each design (A or B or C) be chosen?

(b) Depict your solution from part (a) graphically, putting x per year on the horizontal axis and $ on the vertical axis, so that management can see more easily the following:

i. Accurate total cost lines for each alternative (show line, slopes, and line equations).

ii. Any relevant breakeven, or crossover points

in terms of costs between the alternatives.

iii. Ranges of annual production where each alternative is preferred.

iv. Clearly label your axes and include a title for the graph.

A small company manufactures a certain product. Variable costs are $20 per unit and fixed costs are $10,875. The price-demand relationship for this product is P = -0.25D + 250, where P is the unit sales price of the product and D is the annual demand. Use the data (and helpful hints) that follow to work out answers to parts (a)-(e).

Set up your graph with dollars on the y axis, (between o and $70,000) and, on the x axis, demand D: (units produced or sold), between 0 and 1000 units.

(a) Develop the equations for total cost and total revenue.

(b) Find the breakeven quantity (in terms of profit and loss) for the product.

(c) What profit would the company obtain by maximizing its total revenue?

(d) What is the company's maximum possible profit?

(e) Neatly graph the solutions from parts (a), (b), (c) and (d)

A painting operation is performed by a production worker at a labor cost of $1.40 per unit. A robot spray painting machine, costing $15,000, would reduce the labor cost to $0.20 per unit. If the device would be valueless at the end of 3 years, what is the minimum number of units that would have to be painted each year to justify the purchase of the robot machine?

Company A has fixed expenses of $15,000 per year and each unit of product has a $0.002 variable cost. Company B has fixed expenses of $5000 per year and can produce the same product at a $0.05 variable cost. At what number of units of annual production will Company A have the same overall cost as Company B?

A firm believes the sales volume (S) of its product depends on its unit selling price (P) and can be determined from the equation P = $100 - S. The cost (C) of producing the product is $1000 + lOS.

(a) Drawa graph with the sales volume(S) from 0 to 100 on the x axis, and total cost and total income from 0 to 2500 on the y axis. On the graph –draw the line C = $1000 + lOS. Then plot the curve of total income [which is sales volume (S) x unit selling price ($100 - S)]. Mark the breakeven points on the graph.

(b) Determine the breakeven point (lowest sales volume where total sales income just equals total production cost).

(c) Determine the sales volume (8) at which the firm's profit is a maximum.

Consider the situation of owning rental properties that local university students rent from you on an academic year basis. Develop a set of costs that you could classify as recurring and others that could be classified as nonrecurring.

Define the difference between a "cash cost" and a "book cost." Is engineering economic analysis concerned with both types of cost? Give an example of each, and provide the context in which it is important.

In your own words, develop a statement of what the authors mean by "life-cycle costs." Is it important for a firm to be aware of life-cycle costs? Explain why.

In looking at Figures 2-4 and 2-5, restate in your own words what the authors are trying to get across with these figures. Do you agree that this is an important effect for companies? Explain.

Figure 2-4

Figure 2-5

In the text the authors describe three effects that complicate the process of making estimates to be used in engineering economy analyses. List these three effects and comment on which of these might be most influential.

Northern Tundra Telephone (NIT) has received a contract to install emergency phones along a new 100-mile section of the Snow-Moose Turnpike. Fifty emergency phone systems will be installed about 2 miles apart. The material cost of a unit is $125. NTT will need to run underground communication lines that cost NTT $7500 per mile (including labor) to install. There will also be a one-time cost of $10,000 to network these phones into NTT's current communication system. You are asked to develop a cost estimate of the project from Nit’s perspective. If NTT adds a profit margin of .35% to its costs, how much will it cost the state to fund the project?

You and your spouse are planning a second honeymoon to the Cayman Islands this summer and would like to have your house painted while you are away. Estimate the total cost of the paint job from the information given below, where:

Cost total = Cost paint + Cost labor + Cost fixed

Paint information: Your house has a surface area of 6000 ft2. One can of paint can cover 300 ft2. You are estimating the cost to put on two coats of paint for the entire house, using the cost per can given. Note the incremental decrease in unit cost per can as you purchase more and more cans.

__Number of Cans Purchased Cost per Can__

First 10 cans purchased....................................$15.00

Second 15 cans purchased...............................$10.00

Up to next 50 cans purchased...........................$7.50

Labor information: You plan to hire five painters who will paint for 10hours per day each. You estimate that the job will require 4.5 days of their painting time. The painter's labor rate is $8.75 per hour. Fixed cost information: There is a fixed cost of $200 per job that the painting company charges to cover travel expenses, clothing, cloths, thinner, administration, and so on.

You are interested in having a mountain cabin built for weekend trips, vacations, to host family, and perhaps eventually to retire in. After discussing the project with a local contractor, you receive an estimate that the total construction cost of your 2000 ft2 lodge will be $150,000. Costs within each category include labor, material, and overhead items. The percentage of costs for each of several items (categories) is broken downs follows:

(a) What is the cost per square foot of the 2000 ft2 lodge?

(b) If you are also considering a 4000 ft2 layout option, estimate your construction costs if:

i. All cost items (in the table) change proportionately to the size increase.

ii. The first two cost items do not change at all; all others are proportionate.

Sung Sam, Inc. is currently designing a new digital camcorder that is projected to have the following per unit costs to manufacture:

__Cost Categories Unit Costs__

Materials costs.............................$112

Labor costs.......................................85

Overhead costs..............................213

Total Unit Cost...............................213

Unit Costs.....................................$410

Sung Sam adds 30% to its manufacturing cost for corporate profit. Answer the following questions:

(a) What unit profit would Sung Sam realize on each camcorder?

(b) What is the overall cost to produce a batch of 10,000 camcorders?

(c) What would Sung Sam’s profit be on the batch of 10,000 if historical data shows that 1%of product will be scrapped in manufacturing, and 3% of finished product will go unsold, 2% of sold product will be returned for refund?

(d) How much can Sung Sam afford to pay for a contract that would lock in a 50% reduction in the unit material cost previously given? IT Sung Sam does sign the contract the sales price will remain the same as before.

Fifty years ago, Grandma Bell purchased a set of gold plated dinnerware for $55, and last year you inherited it. Unfortunately a house fire at your home destroyed the set. Your insurance company is at a loss to define the replacement cost and has asked your help. You do some research and find that the Aurum Flatware Cost Index (AFCI) for gold-plated dinnerware, which was 112 when Grandma Bell bought her set, is at 2050 today. Use the AFCI to update the cost of Bell's set to today's cost to show to the insurance company.

Your boss is the director of reporting for the Athens County Construction Agency (ACCA). It has been his job to track the cost of construction in Athens County. 1\venty-five years ago he created the ACCA Cost Index to track these costs. Costs during the first year of the index were $12 per square foot of constructed space (the index value was set at 100 for that first year). This past year a survey of contractors revealed that costs were $72 per square foot. What index number will your boss publish in his report for this year?

It the index value was 525 last year, what was the cost per square foot last year?

An refinisher of antiques named Constance has been so successful with her small business that she is planning to expand her shop with all new equipment. She is going to start enlarging her shop by purchasing the following equipment.

What would be the net cost to Constance to obtain this equipment-assume that she can trade the old equipment in for 15% of its original cost. Assume also that the relative price to purchase the equipment has not changed over time (that is, there has been no inflation in equipment prices).

Refer to Problem 2-26 and now assume the prices for the equipment that Constance wants to replace have not been constant. Use the cost index data for each piece of equipment to update the costs to the price that would be paid today. Develop the overall cost for Constance, again assuming the 15% trade-in allowance for the old equipment. Use any necessary data from Problem 2-26.

Five years ago, when the relevant cost index was 120, a nuclear centrifuge cost $40,000. The centrifuge had a capacity of separating 1500 gallons of ionized solution per hour. Today, it is desired to build a centrifuge with capacity of 4500 gallons per hour, but the cost index now is 300. Assuming a power-sizing exponent to reflect economies of scale, x, of 0.75, use the power-sizing model to determine the approximate cost (expressed in today's dollars) of the new rector.

Padre works for a trade magazine that publishes. lists of Power-Sizing Exponents (PSE) that reflect economies of scale for developing engineering estimates of various types of equipment. Padre has been unable to find any published data on the VMIC machine and wants to list its PSE value in his next issue. Given the following data (your staff was able to find data regarding costs and sizes of the VMIC machine) calculate the PSE value that Padre should publish.

Cost of VMIC-100 today $100,000

Cost of VMIC-50 5 years ago $45,000

VMIC equipment index today = 214

VMIC equipment index 5 years ago = 151

Develop an estimate for each of the following situations.

(a) The cost of a 500-mile automobile trip, if gasoline is $1 per gallon, vehicle wear and tear is $0.08 per mile, and our vehicle gets 20 miles per gallon.

(b) The total number of hours in the average human life, if the average life is 75 years.

(c) The number of days it takes to travel around the equator using a hot air balloon, if the balloon averages 100 miles per day, the diameter of the earth is ""4000 miles.

If 200 labor hours were required to produce the 15tunit in a production run and 60 labor hours were required to produce the 7th unit, what was the learning-curve rate during production?

Rose is a project manager at the civil engineering consulting firm of Sands, Gravel, Concrete, and Waters, Inc. She has been collecting data on a project in which concrete pillars were being constructed however not all the data are available. She has been able to find out that the 10th pillar required 260 person-hours to construct, and that a 75% learning curve applied. She is interested in calculating the time required to construct the 15tand 20th pillars. Compute the values for her.

Sally Statistics is implementing a system of statistical process control (SPC) charts in her factory in an effort to reduce the overall cost of scrapped product. The current cost of scrap is $X per month. If an 80% learning curve is expected in the use of the SPC charts to reduce the cost of scrap, what would the percentage reduction in monthly scrap cost be after the charts have been implemented for 12 months?

Randy Duck out has been asked to develop an estimate of the per-unit selling price (the price that each unit will be sold for) of a new line of hand-crafted booklets that offer excuses for missed appointments. His assistant Doc Duck out has collected information that Randy will need in developing his estimate:

Cost of direct labor........................$20 per hour

Cost of materials............................$43.75 per batch of 25 booklets

Cost of overhead items.................50% of direct labor cost

Desired profit..................................20% of total manufacturing cost

Doc also finds out that

(1) They should use a 75% learning curve for estimating the cost of direct labor,

(2) The time to complete the 15tbooklet is estimated at 0.60 hour, and (3) the estimated time to complete the 25th booklet should be used as their standard time for the purpose of determining the unit selling price. What would Randy and Doc's estimate be for the unit selling price?

Develop a statement that expresses the extent to which cost estimating topics also apply to estimating benefits. Provide examples to illustrate.

On December 1, AI Smith purchased a car for $18,500. He paid $5000 immediately and agreed to pay three additional payments of $6000 each (which includes principal and interest) at the end of 1, 2, and 3 years. Maintenance for the car is projected at $1000 at the end of the first year and $2000 at the end of each subsequent year. AI expects to sell the car at the end of the fourth year (after paying for the maintenance work) for $7000. Using these facts, prepare a table of cash flows.

Bonka Toys is considering a robot that will cost $20,000 to buy. After 7 years its salvage value will be $2000. An overhaul costing $5000 will be needed in year 4. O&M costs will be $2500 per year. Draw the cash flow diagram.

Pine Village needs some additional recreation fields. Construction will cost $225,000 and annual O&M expenses are $85,000. The city council estimates that the value of added youth leagues is about $190,000. Annually In year 6 another $75,000 will be needed to refurbish the fields. The salvage value is estimated to be $100,000 after 10 years. Draw the cash flow diagram.

Identify your major cash flows for the current school term as first costs, O&M expenses, salvage values, revenues, overhauls, and so on. Using a week as the time period, draw the cash flow diagram.

In your own words explain the time value of money. From your own life (either now or in a situation -that might occur in your future), provide an example in which the time value of money would be important.

Magdalen, Miriam, and Mary June were asked to consider two different cash flows: $500 that they could receive today and $1000 that would be received 3 years from today. Magdalen wanted the $500 dollars today, Miriam chose to collect $1000 in 3 years, and Mary June was indifferent between these two options. Can you offer an explanation of the choice made by each woman?

Solve the diagram below for the unknown Q assuming a 10% interest rate.

The following series of payments will repay a present sum of $5000 at an 8% interest rate. Using single payment factors, what present sum is equivalent to this series of payments at a 10%interest rate?

__ End of Year__

__Year Payment__

1................................$1400

2................................. 1320

3................................. 1240

4................................. 1160

5................................. 1080

A man went to his bank and borrowed $750. He agreed to repay the sum at the end of 3 years, together with the interest at 8% per year. How much will he owe the bank at the end of 3 years?

The local bank offers to pay 5% interest on savings deposits. In a nearby town, the bank pays 1.25% per 3 month period (quarterly). A man who has $3000 to put in a savings account wonders whether the increased interest paid in the nearby town justifies driving his car there to make the deposit. Assuming he will leave all money in the account for 2 years, how much additional interest would he obtain from the out-of-town bank over the local bank?

The Apex Company sold a water softener to Marty Smith. The price of the unit was $350. Marty asked for a deferred payment plan, and a contract was written. Under the contract, the buyer could delay paying for the water softener if he purchased the coarse salt for recharging the softener from Apex. At the end of 2 years, the buyer was to pay for the unit in a lump sum, with interest at a rate of 1.5% per quarter-year. According to the contract, if the customer ceased buying salt from Apex at any time prior to 2 years, the full payment due at the end of 2 years would automatically become due.

Six months later, Marty decided to buy salt elsewhere and stopped buying from Apex, whereupon Apex asked for the full payment that was to have been due 18 months hence. Marty was unhappy about this, so Apex offered as an alternative to accept the $350 with interest at 10% per semiannual period for the 6 months that Marty had been buying salt from Apex. Which of these alternatives should Marty accept? Explain.

One thousand dollars is borrowed for one year at an interest rate of 1%per month. If the same sum of money could be borrowed for the same period at an interest rate of 12% per year, how much could be saved in interest charges?

A sum of money Q will be received 6 years from now. At 5% annual interest the present worth now of Q is $60. At the same interest rate, what would be the value of Q in 10 years?

In 1995 an anonymous private collector purchased a painting by Picasso entitled Angel Fernandez De Soto for $29,152,000. The picture depicts Picasso's friend Desoto seated in a Barcelona cafe drinking absinthe. The painting was done in 1903 and valued then at $600. If the painting was owned by the same family until its sale in 1995, what rate of return did they receive on the $600 investment?

(a) If $100 at Time "0" will be worth $110 a year hence and was $90 a year ago, compute the interest rate for the past year and the interest rate next year.

(b) Assume that $90 invested a year ago will return $110 a year from now. What is the annual interest rate in this situation?

How much must you invest now at 7.9% interest to accumulate $175,000 in 63 years?

We know that a certain piece of equipment will cost $150,000 in 5 years. How much will it cost today using 10% interest?

The local garbage company charges $6 a month for garbage collection. It had been their practice to send out bills to their 100,000 customers at the end of each 2-month period. Thus, at the end of February it would send a bill to each customer for $12 for garbage collection during January and February. Recently the firm changed its billing date: it now sends out the 2-month bills after one month's service has been performed. Bills for January-February, for example, are sent out at the end of January. The local newspaper points out that the firm is receiving half its money before the garbage collection. This unearned money, the newspaper says, could be temporarily invested for one month at 1% per month interest by the garbage company to earn extra income. Compute how much extra income the garbage company could earn each year if it invests the money as described by the newspaper.

Sally Stanford is buying an automobile that costs $12,000. She will pay $2000 immediately and the remaining $10,000 in four annual end-of-year principal payments of $2500 each. In addition to the $2500, she must pay 15% interest on the unpaid balance of the loan each year. Prepare a cash flow table to represent this situation.

For the following diagram, compute the IRR to within 112%.

For the following diagram, compute the interest rate at which the costs are equivalent to the benefits.

For the following diagram, compute the rate of return.

For the following diagram, compute the rate of return on the $3810 investment.

For the following diagram, compute the rate of return.

Consider the following cash flow:

__Year Cash Flow__

o..........................-$1000

1....................................0

2.............................+300

3.............................+300

4.............................+300

5.............................+300

Compute the rate of return on the $1000 investment to within 0.1%.

What sum of money now is equivalent to $8250 two years hence, if interest is 4% per 6-month period?

A sum of money invested at 2% per 6-month period (semiannually), will double in amount in approximately how many years?

The United States recently purchased $1 billion of 30-year zero-coupon bonds from a struggling foreign nation. The bonds yield 41/z% per year interest. The zero-coupon bonds pay no interest during their 30-year life. Instead, at the end of 30 years, the U.S. government is to receive back its $1 billion together with interest at 4112%per year. A U.S. senator' objected to the purchase, claiming that the correct interest rate for bonds like this is 5lf4%. The result, he said, was a multimillion dollar gift to the foreign country without the approval of Congress. Assuming the senator's math is correct, how much will the foreign country have saved in interest when it repays the bonds at 41/z% instead of 51/4% at the end of 30 years?

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