KATHMANDU UNIVERSITY

ENGINEERING ECONOMICS
Assignments for final evaluation (Strictly only for students securing less than 18 marks in internal)
Attempt ALL Questions (Please do use of formulas as taught in classroom. Please do not use interest
or annuity table (like (P/A, i%,n) to solve any of the problems below. Answer should be in serial
number of ascending order. Answer should be presented in written form in the answer sheet and
should be converted into pdf and mail the examiner). Please follow the instructions properly. Total
marks of the assignment is 25. Auto and Design should mail me in [email protected] and
remaining should mail me in [email protected] by 9AM of 9th of May.
1. Research has derieved a conclusion that a university degree is a better
investment. Suppose that a college graduate earns about 75% more money
per hour than a highschool graduate. If the lifetime earnings of a high-
school graduate average $1,200,000, what is the expected value of earning a
college degree?
2. Consider a perfectly competitive market. When is convenient for a firm to
shut-down? And when is convenient to keep the production running?
Why? Why firms in perfectly competitive markets are price takers?
3. A lash adjuster keeps pressure constant on engine valves, thereby increasing
fuel efficiency in automobile engines. The relationship between price (p)
and monthly demand (D) for lash adjusters made by the Wicks Company is
given by this equation: D = (2,000 − p)/0.10. What is the demand (ˆD) when
total revenue is maximized? What important data are needed if maximum
profit is desired?
4. A large wood products company is negotiating a contract to sell plywood
overseas. The fixed cost that can be allocated to the production of plywood
is $800,000 per month. The variable cost per thousand board feet is
$155.50. The price charged will be determined by p = $600 − (0.5)D per
1,000 board feet.
a. For this situation, determine the optimal monthly sales volume for this
product and calculate the profit (or loss) at the optimal volume.
b. What is the domain of profitable demand during a month?
5. A company produces and sells a consumer product and is able to control the
demand for the product by varying the selling price. The approximate
2700 5000
relationship between price and demand is p = $38 + D  D2 , for D > 1,
where p is the price per unit in dollars and D is the demand per month. The
company is seeking to maximize its profit. The fixed cost is $1,000 per
month and the variable cost (cv) is $40 per unit.
a. What is the number of units that should be produced and sold each month
to maximize profit?
b. Show that your answer to Part (a) maximizes profit.
6. What is IRR and ERR? Which method is most scientific to calculate the
return of the projects? Explain.
7. A large company in the communication and publishing industry has
quantified the relationship between the price of one of its products and the
demand for this product as Price = 150 − 0.01 × Demand for an annual
printing of this particular product. The fixed costs per year (i.e., per
printing) = $50,000 and the variable cost per unit=$40. What is
themaximumprofit that can be achieved if the maximum expected demand is
6,000 units per year? What is the unit price at this point of optimal demand?
8. An electric power plant uses solid waste for fuel in the production of
electricity. The cost Y in dollars per hour to produce electricity is Y =12
+0.3X +0.27X2, where X is in megawatts. Revenue in dollars per hour from
the sale of electricity is 15X−0.2X2. Find the value of X that gives maximum
profit.
9. The annual fixed costs for a plant are $100,000, and the variable costs are
$140,000 at 70% utilization of available capacity, with net sales of
$280,000. What is the breakeven point in units of production if the selling
price per unit is $40?
10. The world price of zinc has increased to the point where “moth balled” zinc
mines in east Tennessee have been reopened because of their potential
profitability. (a) What is the estimated annual profit for a mine producing
20,000 tons per year (which is at 100% capacity) when zinc sells for $1.00
per pound? There are variable costs of $20 million at 100% capacity and
fixed costs of $17 million per year. (b) If production is only 17,000 tons per
year, will the mine be profitable?
11. A cell phone company has a fixed cost of $1,500,000 per month and a
variable cost of $20 per month per subscriber. The company charges $39.95
per month to its cell phone customers.
a. What is the breakeven point for this company?
b. The company currently has 73,000 subscribers and proposes to raise its
monthly fees to $49.95 to cover add-on features such as text messaging,
song downloads, game playing, and video watching. What is the new
breakeven point if the variable cost increases to $25 per customer per
month?
c. If 10,000 subscribers will drop their service because of the monthly fee
increase in Part (b), will the company still be profitable?
12. In a learning curve application, 658.5 work hours are required for the third
production unit and 615.7 work hours are required for the fourth production
unit. Determine the value of n (and therefore s) in learning curve equation.
13. A plant operation has fixed costs of $2,000,000 per year, and its output
capacity is 100,000 electrical appliances per year. The variable cost is $40
per unit, and the product sells for $90 per unit.
a. Construct the economic breakeven chart.
b. Compare annual profit when the plant is operating at 90% of capacity
with the plant operation at 100% capacity. Assume that the first 90% of
capacity output is sold at $90 per unit and that the remaining 10% of
production is sold at $70 per unit.
14. Six years ago, an 80-kW diesel electric set cost $160,000. The cost index for
this class of equipment six years ago was 187 and is now 194. The cost-
capacity factor is 0.6.
a. The plant engineering staff is considering a 120-kW unit of the same
general design to power a small isolated plant. Assume we want to add a
precompressor, which (when isolated and estimated separately) currently
costs $18,000. Determine the total cost of the 120-kW unit.
b. Estimate the cost of a 40-kW unit of the same general design. Include the
cost of the $18,000 precompressor.
15. The capital investment cost for a switchgrass-fueled ethanol plant with a
capacity of 250,000 gallons per year is $3 million. The costcapacity factor
for this particular plant technology is 0.59 for capacities ranging from
200,000 gallons per year to 500,000 gallons per year. What is the estimated
capital investment for a similar ethanol plant with a capacity of 500,000
gallons per year?
16. In a building construction project, 7,500 feet of insulated ductwork is
required. The ductwork is made from 14-gauge steel costing $8.50 per
pound. The 24-inch-diameter duct weighs 15 pounds per foot. Insulation for
the ductwork costs $10 per foot. Engineering design will cost $16,000, and
labor to install the ductwork will amount to $180,000. What is the total cost
of the installed ductwork for this project?
17. A biotech firm is considering abandoning its old plant, built 23 years ago,
and constructing a new facility that has 50% more square footage. The
original cost of the old facility was $300,000, and its capacity in terms of
standardized production units is 250,000 units per year. The capacity of the
new laboratory is to be 400,000 units per year. During the past 23 years,
costs of laboratory construction have risen by an average of 5% per year. If
the cost-capacity factor, based on square footage, is 0.80, what is the
estimated cost of the new laboratory?
18. What is the differences between conventional and modified BC ratio? In
what circumstances these ratio should be applied in project evaluation?
19. The structural engineering design section within the engineering department
of a regional electrical utility corporation has developed several standard
designs for a group of similar transmission line towers. The detailed design
for each tower is based on one of the standard designs. Atransmission line
project involving 50 towers has been approved. The estimated number of
engineering hours needed to accomplish the first detailed tower design is
126. Assuming a 95% learning curve,
a. What is your estimate of the number of engineering hours needed to
design the eighth tower and to design the last tower in the project?
b. What is your estimate of the cumulative average hours required for the
first five designs?
20. A health club offers you a special low membership rate of $29 per month for
a “guaranteed no price increase” period of 100 months. The manager of the
club tells you proudly that “this $29 a month for a lifetime membership is
less expensive than a major medical treatment for heart disease costing
$4,000 one hundred months from now.” If your personal interest rate is 9%
(APR) compounded monthly, is the manager correct in his statement?
21. On January 1, 2005, a person’s savings account was worth $200,000. Every
month thereafter, this person makes a cash contribution of $676 to the
account. If the fund was expected to be worth $400,000 on January 1, 2010,
what annual rate of interest was being earned on this fund?
22. An effective annual interest rate of 35% has been determined with
continuous compounding. What is the nominal interest rate that was
compounded continuously to get this number?
23. A loan shark lends money on the following terms: "If I give you $50 on
Monday, you owe me $60 on the following Monday."
a. What nominal interest rate per year (r) is the loan shark charging?
b. What effective interest rate per year (ia) is he charging?
24. A person needs $18,000 immediately as a down payment on a new home.
Suppose that she can borrow this money from her company credit union.
She will be required to repay the loan in equal payments made every six
months over the next 12 years. The annual interest rate being charged is
10% compounded continuously. What is the amount of each payment?
25. A mutual fund investment is expected to earn 11% per year for the next 25
years. If inflation will average 3% per year during this 25-year period of
time, what is the compounded value (in today’s dollars) of this savings
vehicle when $10,000 is invested now?
26. Different organizations apply different methods of depreciation, Why? Why
organizations switches between depreciation methods?
27. Consider the following two investment alternatives. Determine the range of
investment costs for Alternative B (i.e., min. value < X < max. value) that
will convince an investor to select Alternative B. MARR = 10% per year,
and other relevant data are shown in the following table. State clearly any
assumptions that are necessary to support your answer.
Alt. A Alt. B
Capital investment $5,000 $X
Net annual receipts $1,500 $1,400
Market value $1,900 $4,000
Useful life 5 Years 7 Years
28. The Ford Motor Company is considering three mutually exclusive electronic
stability control systems for protection against rollover of its automobiles.
The investment (study) period is four years, and MARR is 12% per year.
Data for the fixture costs of the systems are as follows.
Alternatives
A B C
Capital investment $12,000 $15,800 $8,000
Annual savings $4,000 $5,200 $3,000
MV (after 4 years) $3,000 $3,500 $1,500
IRR 19.2% 18% 23%
Plot the AW of each alternative against MARR as the MARR varies across
this range: 4%, 8%, 12%, 16%, and 20%. What can you generalize about the
range of the MARR for which each alternative is preferred?
29. Determine the preferred design cost alternative, using the IRR method. The
MARR is 20% per year. One of the designs must be selected for the
compressor, and each design provides the same level of service. On the
basis of this information
Design Alternatives
A B C D
Capital Investment $100,000 140,600 148,200 122,000
Annual Expenses 29,000 16,900 14,800 22,100
Useful Life 5 5 5 5
Market Value 10,000 14,000 25,600 14,000
30. In a replacement analysis for a vacuum seal on a spacecraft, the following
data are known about the challenger: the initial investment is $12,000; there
is no annual maintenance cost for the first three years, however, it will be
$2,000 in each of years four and five, and then $4,500 in the sixth year and
increasing by $2,500 each year thereafter. The salvage value is $0 at all
times, and MARR is 10% per year. What is the economic life of this
challenger?
31. A city water and waste-water department has a four-year-old sludge pump
that was initially purchased for $65,000. This pump can be kept in service
for an additional four years, or it can be sold for $35,000 and replaced by a
new pump. The purchase price of the replacement pump is $50,000. The
projected MVs and operating and maintenance costs over the fouryear
planning horizon are shown in the table that follows. Assuming the MARR
is 10%, (a) determine the economic life of the challenger and (b) determine
when the defender should be replaced.
Challenger Defender
Year Market Value O & M Costs Market Value O & M Costs
1 $25,000 $18,500 $40,000 $13,000
2 21,000 21,000 32,000 15,500
3 17.000 23,500 24,000 18,000
4 13,000 26,000 16,000 20,500
32. A large city in the mid-West needs to acquire a street-cleaning machine to
keep its roads looking nice year round. A used cleaning vehicle will cost
$85,000 and have a $20,000 market (salvage) value at the end of its five-
year life. A new system with advanced features will cost $150,000 and have
a $40,000 market value at the end of its five-year life. The new system is
expected to reduce labor hours compared with the used system. Current
street-cleaning activity requires the used system to operate 8 hours per day
for 20 days per month. Labor costs $50 per hour (including fringe benefits),
and MARR is 12% per year.
a. Find the breakeven percent reduction in labor hours for the new system.
b. If the new system is expected to be able to reduce labor hours by 17%
compared with the used system, which machine should the city purchase?
33. A high-speed electronic assembly machine was purchased two years ago for
$50,000. At the present time, it can be sold for $25,000 and replaced by a
newer model having a purchase price of $42,500; or it can be kept in service
for a maximum of one more year. The new assembly machine, if purchased,
has a useful life of not more than two years. The projected resale values and
operating and maintenance costs for the challenger and the defender are
shown in the accompanying table on a year-by-year basis. If the before-tax
MARR is 15%, when should the old assembly machine be replaced? Use the
following data table for your analysis.
Challenger Defender
Year Market Value O & M Costs Market Value O & M Costs
0 $42,500  $25,000 
1 31,000 $10,000 17,000 $14,000
2 25.000 12,500  
34. In a replacement analysis for a vacuum seal on a spacecraft, the following
data are known about the challenger: the initial investment is $12,000; there
is no annual maintenance cost for the first three years, however, it will be
$2,000 in each of years four and five, and then $4,500 in the sixth year and
increasing by $2,500 each year thereafter. The salvage value is $0 at all
times, and MARR is 10% per year. What is the economic life of this
challenger?
35. Two electric motors are being considered to drive a centrifugal pump. One
of the motors must be selected. Each motor is capable of delivering 60
horse power (output) to the pumping operation. It is expected that the
motors will be in use 800 hours per year. The following data are available:
Motor X Motor Y
Capital investment $1,200,000 $1,000,000
Electrical efficiency 0.92 0.80
Annual maintenance $160,000 $100,000
Useful Life 3 years 6 years
If electricity costs $7 per kilowatt-hour, which motor should be selected if
the MARR is 8% per year? Assume repeatability. (1hp = 0.746kw)

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Submission Deadline: 9AM of 9th May