Engineering Economic Analysis

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Problems 171

Construction

Cost

Annual

Maintenance

Cost

operation for 30 years. The telephone company is

evaluating two options to serve the demand.

Option 1 Provide one cable now with capacity to

serve 4000 lines. The cable cost will be

$200,000, and annual maintenance costs

will be $15,000.

Option 2 Provide a cable with capacity to serve

2000 lines now and a second cable to

serve the other 2000 lines in 10 years.

The cost of each cable will be $150,000,

and each cable will have an annual main-

tenance of $10,000.

The telephone cables will last at least 30 years, and the

cost of removing the cables is offset by their salvage

value.

(a)Which alternative should be selected based on a

10% interest rate?

(b)Will your answer to(a)change if the demand

for additional lines occurs in 5 years instead of

10 years?

5-53 Dick Dickerson Construction Inc. has asked to you

help them select a new backhoe. You have a choice be-

tween a wheel-mounted version, which costs $50,000

and has an expected life of 5 years andasalvage

value of $2000, and a track-mounted one, which costs

$80,000, with a 5-year life and an expected salvage

value of $10,000. Both machines will achieve the

same productivity. Interest is 8%. Which one will you

recommend? Use a present worth analysis.

5-54 Walt Wallace Construction Enterprises is investigat-

ing the purchase of a new dump truck. Interest is 9%.

The cash flows for two likely models are as follows:

in two stages

:t stage:120,000 m3

~servoir

ond stage:Add 80,000 m3

If capacity, additional

onstruction and

naintenance costs

full capacity now

),000 m3 reservoir

$14,200,000

$12,600,000

$22,400,000

$75,000

$25,000

$100,000

If interest is computed at 4%, which construction plan

is preferred?.

A ""'ekly businessmagazineoffersa I-year subscrip-

til-_ for $58 and a 3-year subscription for $116. If

you thought you would read the magazine for at least

the next 3 years, and consider 20% as a minimum

rate of return, which way would you purchase the

magazine:Withthree I-year subscriptionsor a single

3-year subscription? (Answer:Choose the 3-year

subscription. )

Use an 8-year analysis period and a 10% interest rate

to determine which alternative should be selected:

First cost

Uniform annual benefit

Useful life, in years

A

$5300

$1800

4

B

$10,700

$2,100

8

Two alternative courses of action have the following

schedules of disbursements:

Based on a 6% interest rate, which alternative should

be selected?

2 Telefono Mexico is expanding its facilities to serve a
new manufacturing plant. The new plant will require
2000 telephone lines this year, and another 2000 lines
after expansion in 10 years. The plant will be in

(a)Using present worth analysis, which truck should

the firm buy, and why?

(b)Before the construction company can close the

deal, the dealer sells out of ModelBand cannot

get any more. What should the firm do now and

why? ..a..-

5-55 Two different companies are offering a punch press

for sate. CompanyAcharges $250,000 to deliver and

install the device. CompanyAhas estimated thatthe

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I!

l~'

'Ir'

Year A B

(^0) -$1300
(^10) -$100
2 0 -200
3 0 -300
(^40) -400
(^50) - -500
-$1300 -1500
Annual
First Operating Annual' Salvage
Model Cost Cost Income Value Life
A $50,000 $2000 $9,000 $10,000 lOyr
B $80,000 $1000 $12,000 $30,000 lOyr