Engineering Economic Analysis

264 INCREMENTALANALYSIS

PROBLEMS

Unless otherwise noted, all problems for Chapter 8

should be solved by rate of return analysis.

8-1 A firm is considering moving its manufacturing plant
from Chicago to a new location. The industrial en-
gineering department was asked to identify the var-
ious alternatives together with the costs to relocate
the plant, and the benefits. The engineers examined
six likely sites, together with the do-nothing alterna-
tive of keeping the plant at its present location. Their
findings are summarized as follows:

Plant Location

Denver

Dallas

San Antonio

Los Angeles

Cleveland

Atlanta

Chicago

First

Cost ($OOOs)

$300

550

450

750

150

200

o

Uniform Annual

Benefit ($OOOs)

$ 52

137

117

167

18

49

o

The annual benefits are expected to be constant over

the 8-year analysis period. IT the firm uses 10%

annual interest in its economic analysis, where

should the manufacturing plant be located? (An-

swer:Dallas)

8-2 In a particular situation, four mutually exclusive
alternatives are being considered. Each of the al-
ternatives costs $1300 and has no end-of-useful-life
salvage value.

Alternative

A

B

C

D

IT the MARR is 8%, which alternative should be

selected? (Answer:Alt. C)

8-3 A more detailed examination of the situation in Prob-

lem 8-2 reveals that there are two additional mutu-

ally exclusive alternatives to be considered. Both cost

more than the $1300 for the four original alternatives.

8-4

IT the MARR remains at 8%, which one of the six

alternatives should be selected? Neither Alt.EnorF

has any end-of-useful-life salvage value.

(Answer:Alt.F)

The owner of a downtown parking lot has employed a

civil engineering consulting firm to advise him on the

economic feasibility of constructing an office build-

ing on the site. Bill Samuels, a newly hired civil engi-

neer, has been assigned to make the analysis. He has

assembled the following data:

Alternative

Total

Investment-

Total

Net Annual

Revenue from

Property

Sell parking lot

Keep parking lot

Build I-story building

Build 2-story building

Build 3-story building

Build 4-story building

Build 5-story building

$. 0

200,000

400,000

555,000

750,000

875,000

1,000,000

$ 0

22,000

60,000

72,000

100,000

105,000

120,000

*Includes the value of the land.

The analysis period is to be 15 years. For all alterna-

tives, the property has an estimated resale (salvage)

value at the end of 15 years equal to the present totaJ

investment. If the MARR is 10%, whatrecommenda-

tion should Bill make?

8-5 An oil company plans to purchase a piece of vacan1

land on the comer of two busy streets for $70,000.

On properties of this type, the company installs busi-

nesses of four different types.

Useful Calculated

Life Rate

Annual Benefit (years) of Return

$100 at end of first^10 10.0%

year; increasing$30

per year thereafter

$10 at end of first^10 8.8%

year; increasing$50

per year thereafter

Annual end-of-year^10 15.0%

benefit= $260

$450at end of first^10 18.1%

year; declining$50

per year thereafter

Annual

End-of- Useful Calculated

Years Life Rate

Alternative Cost Benefit (years) of Return

E $3000 $ 488^10 10.0%

F 5850 1000 10 11.2%