B. Tech.
(Civil) VII Semester (2024)
C.E. 704 Engineering Economics & Construction Management
Tutorial No 5 (Annual Worth Method)
Source: Engineering Economy by Leland T. Blank, Anthony J. Tarquin, McGraw-Hill Book Company, New Delhi.
Q.No.
Solved Examples of Text Book
1 Heavenly Pizza, which is located in Toronto, fares very well with its competition
in offering fast delivery. Many students at the area universities and community
colleges work part-time delivering orders made via the web. The owner, Jerry, a
software engineering graduate, plans to purchase and install five portable, in-car
systems to increase delivery speed and accuracy.
The systems provide a link between the web order-placement software and the
On-Star system for satellite-generated directions to any address in the area. The
expected result is faster, friendlier service to customers, and larger income.
Each system costs $4600, has a 5-year useful life, and may be salvaged for an
estimated $300. Total operating cost for all systems is $1000 for the first year,
increasing by $100 per year thereafter.
The MARR is 10%. Perform an annual worth evaluation for the owner that
answers
the following questions. Perform the solution by hand and by spreadsheet.
(a) How much new annual net income is necessary to recover only the initial
investment at the MARR of 10% per year?
(b) Jerry estimates increased net income of $6000 per year for all five systems. Is
this project financially viable at the MARR?
(c) Based on the answer in part (b), determine how much new net income
Heavenly Pizza must have to economically justify the project. Operating costs
remain as estimated.
2 Luby’s Cafeterias is in the process of forming a separate business unit that
provides meals to facilities for the elderly, such as assisted care and long-term
care centers. Since the meals are prepared in one central location and distributed
by trucks throughout the city, the equipment that keeps food and drink cold and
hot is very important. Michele is the general manager of this unit, and she wishes
to choose between two manufacturers of temperature retention units that are
mobile and easy to sterilize after each use. Use the cost estimates below to select
the more economic unit at a MARR of 8% per year.
Capital Recovery CR
3 A delivery car had a first cost of $30,000, an annual operating cost of $12,000,
and an estimated $4000 salvage value after its 6-year life. Due to an economic
Source: Engineering Economy by Leland T. Blank, Anthony J. Tarquin, McGraw-Hill Book
Company, New Delhi
slowdown, the car will be retained for only 2 years and must be sold now as a
used vehicle. (a) At an interest rate of 10% per year, what must the market value
of the 2-year-old vehicle be in order for its AW value to be the same as the AW
for a full 6-year life cycle? (b) Compare your answer in (a) with the first cost and
expected salvage after 6 years. Is the required market value a reasonable one, in
your opinion?
4 U.S. Steel is considering a plant expansion to produce austenitic, precipitation
hardened, duplex, and martensitic stainless steel round bars that is expected to
cost $13 million now and another $10 million 1 year from now. If total operating
costs will be $1.2 million per year starting 1 year from now, and the estimated
salvage value of the plant is virtually zero, how much must the company make
annually in years 1 through 10 to recover its investment plus a return of 15% per
year?
Alternative Comparison—Different Lives
5 An international textile company’s North America Division must decide which type of
fabric cutting machines it will use—straight knife or round knife. The estimates are
summarized below. Compare them on the basis of annual worths values at i = 10% per
year using (a) factors, and (b) single-cell spreadsheet functions
Permanent Investments
6 ABC Beverage, LLC purchases its 355-ml cans in large bulk from Wald-China Can
Corporation. The finish on the anodized aluminum surface is produced by mechanical
finishing technologies called brushing or bead blasting. Engineers at Wald are switching
to more efficient, faster, and cheaper machines to supply ABC. Use the estimates and
MARR = 8% per year to select between the two alternatives. Brush alternative: P =
$−400,000; n = 10 years; S = $50,000; nonlabor AOC = $−60,000 in year 1, decreasing
by $5000 annually starting in year 2 Bead blasting alternative: P = $−400,000; n is large,
assume permanent; no salvage; nonlabor AOC = $−70,000 per year
Source: Engineering Economy by Leland T. Blank, Anthony J. Tarquin, McGraw-Hill Book
Company, New Delhi
