CEE 307

Construction Engineering
Homework __
Engineering Economics
Answer the following questions from:

Eschenbach, T. (2003). Engineering Economy - Applying Theory to Practice (2nd Edition).

Oxford University Press.

Access at:
http://www.knovel.com/web/portal/browse/display?_EXT_KNOVEL_DISPLAY_bookid=2619
&VerticalID=0

Chapter 2: Time Value of Money

Problems 2.32, 2.33, 2.39

Chapter 3: Equivalence – A Factor Approach

Problems 3.33, 3.57

Chapter 5: Present Worth

Problems 5.32, 5.34

Chapter 6: Equivalent Annual Worth

Problems 6.32, 6.34

Chapter 7: Internal Rate of Return

Problems 7.24, 7.25, 7.34

Chapter 9: Mutually Exclusive Alternatives

Problems 9.10, 9.25, 9.26
2.32 A certificate of deposit compounds interest annually at 10%. What amount has accumulated
for retirement at age 65 if $10,000 is deposited at:
(a) Age 25?
(b) Age 35? (Answer: $174,494)
(c) Age 45?
(d) Age 55? (Answer: $25,937)

2.33 Ramon has set a goal for his retirement fund at age 65 of $500K. His one deposit is $100K.
What interest rate is required if the deposit is made at:
(a) Age 25? (Answer: 4.11%)
(b) Age 35?
(c) Age 45?
(d) Age 55?

2.39 If the nominal interest rate is 24%, what is the effective interest rate when interest is
compounded:
(a) Annually?
(b) Semiannually? (Answer: 25.44%)
(c) Quarterly?
(d) Monthly?
(e) Daily?
(f) Continuously?

3.33 Creekside Engineering will pay $24,000 per year for errors and omissions liability
insurance. What is the present worth of the coverage for 10 years?
(Firms similar to Creekside average one claim every 10 years.) The interest rate is 9%.

3.57 A new highway will take 2 years to construct. User benefits of $7 million (or M) per year
will start in year 3. Beginning in year 5, user benefits will increase by $1M per year. What is the
present worth of the benefits over 20 years if i = 6%?

5.32 Western Coal is considering a modification of its plans for the open-pit mine described in
Problem 5.31. Adding a coal-slurry pipeline (its life is also 20 years) will increase the first cost
by $4M, increase annual net revenues by $750K, and increase closure costs by $1M. If the
interest rate is 15%, what is the PW of the slurry pipeline?
(Answer: PW = $633.2K)

5.34 Baker and Sons specializes in land development and construction management. It is
considering whether to develop a research park near a major engineering school. The land will
cost $20M, and the design and construction of the infrastructure will cost $25M. The plan is to
build a new building each year for 15 years at an average cost of $10M. Operating costs for the
buildings will be paid by the tenants. In year 20, the research park will be sold for $250M (land,
buildings, and goodwill). Tenants will pay 15% of the cost of the buildings each year in rent. If
Baker and Sons uses an interest rate of 8%, what is the PW of the research park? (Assume 1 year
for infrastructure construction and 1 year for each building.)
6.32 A proposed tunnel has a first cost of $800M, annual O&M costs of $14M, a salvage value in
year 100 of $225M, repaving every 10 years at $45M, and repainting lines and mending railings
every 5 years $1.2M (note that this cost is included in the repaving cost for the years where
repaving is done). Find the EAC (i = 5%) for a 100-year horizon.
(Answer: $57.92M)

6.34 A tunnel cost $280M. Every 10 years, it is repaved at a cost of $12M. Halfway between the
repavings, it is resurfaced at a cost of $7M. It is rewired every 20 years at a cost of $15M. With
proper maintenance ($20M per year), the tunnel will last forever. If i = 5%, what is the EAC for
the tunnel?

7.24 A $2500 computer system can be leased for $79 per month for 3 years. After 3 years, it can
be purchased for $750. This is also the salvage value if the system was purchased originally.
What is the effective annual rate for leasing the computer?

7.25 Power Designs’ professional liability insurance can be paid annually or semiannually. If
paid annually, it costs $12,000. If paid semiannually, $750 is added to each payment. If the
installment plan is chosen, what is the effective annual rate being paid on the “loan”?
(Answer: 65.3%)

7.34 A coal deposit can be mined more rapidly if a third dragline and conveyor system is added.
The initial cost would be $1.5M. Annual revenues for each of the next 12 years would increase
from $800K to $1200K, and then for the next 6 years, revenues would drop from $800K to $0.
Thus, the mining is 50% faster, and the deposit is depleted 6 years earlier. The system will have
no salvage value. What roots are there for the PW equation? Is there a meaningful IRR? Is the
third dragline economically attractive if i is 20%? Graph the PW for interest rates of 0% to
100%?
(Answer: roots are 7.23% and 19.20%)

9.10 The state highway department may purchase new lawn-mowing equipment. The best
alternative requires an initial investment of $90,000. Each year, the new equipment is expected
to save the state $19,500. The equipment will be used for 6 years and has little
or no expected salvage value. Using benefit/cost analysis and an interest rate of 10%, should the
equipment be purchased? (Answer: B/C = .944; no)

9.25 Two alternative bridges have the same supports and approaches. However, one is made of a
few galvanized steel, and the other is made of more conventional painted metal. The galvanized
bridge has a life of 45 years, and the painted bridge has a life of 30 years. For the following
costs, compare the PWs of the two choices. What life did you use, and what assumptions did you
make? (i∗ = 8%)

Type First Cost Annual Operations

Galvanized steel $85 million $1.5 million
Painted metal $60 million $2.1 million
9.26 If you drive 10,000 miles per year, which tire should you buy? Tire A costs $65 and should
last 40,000 miles. Tire B costs $85 and should last 60,000 miles. You have an outstanding
balance on your credit card, and you are paying 20% as an effective annual rate.
(a) What are comparable EACs for the two alternatives?
(b) What are comparable PWs for the two alternatives?
(Answer to part a: Save $.45 per year or 1.8% with Tire A.)