Engineering Economic Analysis

17-3 AI Dale is planning his Christmas shopping for seven
people. To quantify how much his various relatives
would enjoy receiving items from a list of prospective
gifts, AI has assigned appropriateness units (called
"ohs") for each gift if given to each of the seven
people. A rating of 5 ohs. represents a gift that the
recipient would really like. A rating of 4 ohs indi-
cates the recipient would like it four-fifths as much;
3 ohs, three-fifths as much, and so forth. A zero rating
indicates an inappropriate gift that cannot be given to
that person.
The objective is to select the most appropriate set
of gifts for the seven people (that is, maximize total
ohs) that can be obtained with the selected budget.
(a) How much will it cost to buy the seven gifts the
people would like best, if there is ample money
for Christmas shopping?
(b)If the Christmas shopping budget is set at $112,
which gifts should be purchased, and what is their
total appropriateness rating in ohs?
(c) If the Christmas shopping budget must be cut to
$90, which gifts should be purchased, and what
is their total appropriateness rating in ohs?
(Answer: (a), $168)
The foUowing facts are to be used in solving
Problems 17-4 through 17.7 In assembling data
for the Peabody Company annual capital budget,
five independent projects are being considered.
Detailed examinationby the staff has resulted in the
identification of three to six mutually exclusive do-
something alternativesfor each project. In addition,

each project has a do-nothing alternative. The projects

and their alternatives are listed at the top of next page.

Each project concerns operations at Peabody's

St. Louis brewery. The plant was leased from another

firm many years ago, and the lease expires 16 years.

from now. For this reason, the analysis period for all

projectS is 16 years. Peabody considers 12% to be the

minimum attractive rate of return.

. In solving the Peabody problems, an important
assumption concerns the situation at the end of the
useful life of an alternative when the alternative has a
useful life less than the 16-year analysis period. Two
replacement possibilities are listed.

Assumptio.n 1:When an alternative has a useful

life less than 16 years, it will be replaced by a

new alternative with the same useful life as the

original. This may need to occur more than once.

The new alternative will have a 12% computed

rate of return and, hence, a NPW =0 at 12%.

Assumption2: When an alternative has a useful

life less than 16 years, it will be replaced at the

end of its useful life by an identical alternative

(one with the same cost, uniform annual bene-

fit, useful life, and salvage value as the original

alternative).

17-4 For an unlimited supply of money, and replace-

ment Assumption 1, which project alternatives should

Peabody select? Solve the problem by present worth

methods. (Answer: Alternatives 1B, 2A, 3F, 4A,

and5A)

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(^534) RATIONINGCAPITALAMONG COMPETINGPROJECTS

• TABLE P17-3 Data
  "Oh" Rating of Gift If
  Given to Various Family Members

Prospective Gift- Father Mother Sister Brother Aunt Uncle Cousin

1. $20 box of candy^4421523


2. $12 box of cigars^3001012


3. $16 necktie 2 0 0 3 0 3 2


4. $20 shirt or blouse^5344414


5. $24 sweater^3454342


6. $30 camera^1525120


7. $ 6 calendar^0010101


8. $16 magazine subscription^4344313


9. $18 book^3423403


10. $16 game^2232212