GDB3023

ENGINEERING ECONOMICS & ENTREPRENEURSHIP

SEPTEMBER 2019
ASSIGNMENT #3 [CLO1]

3-6 An electric power distributor charges residential customers $0.10 per kilowatt-
hour (kWh). The company advertises that “green power” is available in 150 kWh
blocks for an additional $4 per month. (Green power is generated from solar, wind
power, and methane sources.).
(a.) If a certain customer uses an average of 400 kWh per month and commits
to one monthly 150 kWh block of green power, what is her annual power
bill?
(b.) What is the average cost per kWh with green power during the year?
(c.) Why does green power cost more than conventional power?

Solution

3-6 (a) Standard electric bill = (400 kWhr)(12 months/year)($0.10/kWhr) = $480 per year.
Green power bill = (12 months/year)($4/month) = $48 per year.
Total electric bill = $528 per year.

(b) $528 / 4,800 kWhr = $0.11 per kWhr (a 10% increase due to green power usage)

(c) The technology used to capture energy from solar, wind power and methane is more
expensive than traditional power generation methods (coal, natural gas, and so on).

3-11 The purchase price of a natural gas-fired commercial boiler (capacity X) was
$181,000 eight years ago. Another boiler of the same basic design, except with
capacity 1.42X, is currently being considered for purchase. If it is purchased,
some optional features presently costing $28,000 would be added for your
application. If the cost index was 162 for this type of equipment when the
capacity X boiler was purchased and is 221 now, and the applicable cost capacity
factor is 0.8, what is your estimate of the purchase price for the new boiler?

Solution

3-11 Let CA = cost of new boiler, SA = 1.42X

CB = cost of older boiler, today SB = X

221
𝐶𝐵 = $181,000 ( ) = $246,920
162

1.42𝑋 0.8
𝐶𝐴 = $246,920 ( ) = $326,879
𝑋

Total cost with options = $326,879 + $28,000 = $354,879

3-21 The cost of building a supermarket is related to the total area of the
building. Data for the last 10 supermarkets built for Regork, Inc., are
shown in the accompanying table.

Building Area (sq.ft) Cost ($)

1 14,500 800,000
2 15,000 825,000
3 17,000 875,000
4 18,500 972,000
5 20,400 1,074,000
6 21,000 1,250,000
7 25,000 1,307,000
8 26,750 1,534,000
9 28,000 1,475,500
10 30,000 1,525,000

(a.) Develop a CER for the construction of supermarkets. Use the CER
to estimate the cost of Regork’s next store, which has a planned area
of 23,000 square feet.
(b.) Compute the standard error and correlation coefficient for the CER
developed in Part (a).

Solution

(10)(265,765,100,100) − (216,150)(11,637,500)
𝑏1 = = 51.5
(10)(4,948,222,500) − (216,150)2

11,637,500 − (51.5)(216,150)
𝑏0 = 50,631
10

(a) The resulting CER relating supermarket building cost to building area (x) is:

𝐶𝑜𝑠𝑡 = 50,631 + 51.5𝑥

So the estimated cost for the 23,000 ft2 store is:

$51.5
𝐶𝑜𝑠𝑡 = $50,631 + ( 2 ) (23,000 𝑓𝑡 2 ) = $1,235,131
𝑓𝑡

(b) The CER developed in part (a) relates the cost of building a supermarket to its
planned area using the following equation:

𝐶𝑜𝑠𝑡 = 50,631 + 51.5𝑥

 1
𝑥̅ = (216,150) = 21,615
10
1
𝑦̅ = (11,637,500) = 1,163,750
10

Using Equations (3-10) and (3-11), we can compute the standard error and
correlation coefficient for the CER.

35,677,238,861
𝑆𝐸 = √ = 66,780
10 − 2

14,220,537,500
𝑅= = 0.9765
√(276,140,250)(767,999,625,000)

3-22 In the packaging department of a large aircraft parts distributor, a fairly reliable
estimate of packaging and processing costs can be determined by knowing the
weight of an order. Thus, the weight is a cost driver that accounts for a sizable
fraction of the packaging and processing costs at this company. Data for the past
10 orders are given as follows:
Packaging and
97 109 88 86 123 114 112 102 107 86
Processing Costs ($), y
Weight (Pounds), x 230 280 210 190 320 300 280 260 270 190

(a.) Estimate the b0 and b1 coefficients, and determine the linear regression
equation to fit these data
(b.) What is the correlation coefficient (R)?
(c.) If an order weighs 250 lb, how much should it cost to package and process
it?

Solution

xi = weight of order (lbs) yi = packaging and processing cost ($)

(a) 𝑦 = 𝑏0 + 𝑏1 𝑥

∑ 𝑥𝑖 = 2,530 𝑥̅ = 253 ∑ 𝑥𝑖2 = 658,900

∑ 𝑦𝑖 = 1,024 𝑦̅ = 102.4 ∑ 𝑦𝑖2 = 106,348

∑ 𝑥𝑖 𝑦𝑖 = 264,320
 264,320 − (253)(1,024)
𝑏1 = = 0.279
658,900 − (253)(2,530)

𝑏0 = 102.4 − (0.279)(253) = 31.813

𝑦 = 31.813 + 0.279𝑥
𝑆𝑥𝑦
(b) 𝑅=
√𝑆𝑥𝑥 𝑆𝑦𝑦

(2,530)(1,024)
𝑆𝑥𝑦 = 264,320 − = 5,248
10

(2,530)2
𝑆𝑥𝑥 = 658,900 − = 18,810
10

(1,024)2
𝑆𝑦𝑦 = 106,348 − = 1,490.4
10
5,248
𝑅= = 0.99
√(18,810)(1,490.4)

(c) 𝑦 = 31.813 + (0.279)(250) = $101.56

3-27 Extended Learning Exercise. You have been asked to prepare a quick estimate of
the construction cost for a coal-fired electricity generating plant and facilities.
A work breakdown structure (levels one through three) is shown is Table P3-27.
You have the following information available:

 A coal-fired generating plant twice the size of the one you are estimating
was built in 1993. The 1993 boiler (1.2) and boiler support system (1.3) cost
$110 million. The cost index for boilers was 110 in 1993, it is 492 in 2016.
The cost capacity factor for similar boilers and support systems is 0.9.
The 600-acre site is on property you already own, but improvements (1.1.1)
and roads (1.1.2) will cost $2,000 per acre, and railroads (1.1.3) will cost
$3,000,000. Project integration (1.9) is projected to cost 3% of all other
construction costs.

 The security systems (1.5.4) are expected to cost $1,500 per acre,
according to recent (2016) construction of similar plants. All other support
facilities and equipment (1.5) elements are to be built by Viscount
Engineering. Viscount Engineering has built the support facilities and
equipment elements for two similar generating plants. Their experience is
expected to reduce labor requirements substantially; a 90% learning curve
can be assumed. Viscount built the support facilities and equipment on their
first job in 95,000 hours. For this project, Viscount’s labor will be billed
to you at $60 per hour. Viscount estimates that materials for the
construction of the support facilities and equipment elements (except
1.5.4) will cost you $15,000,000.

 The coal storage facility (1.4) for the coal-fired generating plant built in
1993 cost $5 million. Although your plant is smaller, you require the same
size coal storage facility as the 1993 plant. You assume you can apply the
cost index for similar boilers to the coal storage facility.

What is your estimated 2016 cost for building the coal-fired generating facility?
Summarize your calculations in a cost estimating worksheet, and state the
assumptions you make
Solution

The following spreadsheet was used to calculate a 2016 estimate of $320,274,240 for the
plant.

Element Code Units/Factors Price/unit Subtotal Totals

1.1.1-2 600 $2,000 $1,200,000
1.1.3 $3,000,000
1.1 $4,200,000
1.2-3 2.3969a $110,000,000 $263,659,000 $263,659,000
1.4 4.4727b $5,000,000 $22,363,500 $22,363,500
1.5.1-3
Labor 80,390c $60 $4,832,400
Materials $15,000,000
1.5.4 600 $1,500 $900,000
1.5 $20,723,400
1.9 3% $310,944,672 $9,328,340
TOTAL ESTIMATED COST IN 2016 $320,274,240
a
Factor value for boiler and support system (WBS elements 1.2 and 1.3):

492 1 0.9
( ) ( ) = 2.3969
110 2
b
Factor value for the coal storage facility (WBS element 1.4):

492
( ) = 4.4727
110
c
Labor time estimate for the 3rd facility (WBS elements 1.5.1, 1.5.2, and 1.5.3):

log(0.9)
𝐾 = 95,000 ℎ𝑜𝑢𝑟𝑠, 𝑠 = 0.9, 𝑛 = = −0.152
log(2)

𝑍3 = 95,000(3)−0.152 = 80,390 ℎ𝑜𝑢𝑟𝑠