ENGINEERING ECONOMICS AND ENTREPRENEURSHIP (GDB3023) – May 2019

Group Name:

1. Mohamad Hamizan Bin Mohd Fuad (24117) – ME

2. Marissa (24080) - PE
3. Sitisaro Binawae (22306) – CE
4. Ahmed Rashid Hammadi (20549) - PE

Chapter 1: Introduction to Engineering Economy

Problem 1-1: Stan Moneymaker needs 15 gallons of gasoline to top off his automobile’s gas tank. If he
drives an extra eight miles (round trip) to a gas station on the outskirts of town, Stan can save $0.10
per gallon on the price of gasoline. Suppose gasoline costs $3.90 per gallon and Stan’s car gets 25 mpg
for in-town driving. Should Stan make the trip to get less expensive gasoline? Each mile that Stan
drives creates one pound of carbon dioxide. Each pound of CO2 has a cost impact of $0.02 on the
environment. What other factors (cost and otherwise) should Stan consider in his decision making?

Solutions:

The gas required in the car is 15 gallons. The price of gas in-town is $3.90 per gallon. If the person
drives extra 8 miles, he can save $0.10 per gallon, thus the cost of gas there is $3.80 per gallon. The
mileage of the car is 25 mpg in town. Each mile drive creates one pound of carbon dioxide which cost
$0.02 on environment (social cost). The person is dealing with two alternatives; one is to obtain gas
near the house (in the town) and other is to obtain gas on the outskirt of the town.

Savings, If he buy the gas at the outskirts of the town;

$0.10
𝑆𝑎𝑣𝑖𝑛𝑔𝑠 = (15 𝑔𝑎𝑙 𝑥 ) − (8 𝑚𝑖𝑙𝑒𝑠 𝑥 $0.02/𝑚𝑖𝑙𝑒) = $1.34
𝑔𝑎𝑙

Per mile, the savings will be:

$1.34
𝑆𝑎𝑣𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑚𝑖𝑙𝑒 = = $0.1675/𝑚𝑖𝑙𝑒
8 𝑚𝑖𝑙𝑒

Alternative B: Buy the gas in-town.

The mileage of the car is 25 miles per gallon, which means that each gallon will be able to let him
travel up to 25 miles. Thus the 8 miles driving will need amount of gasoline of:

8 𝑚𝑖𝑙𝑒𝑠
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑔𝑎𝑠 𝑓𝑜𝑟 8 𝑚𝑖𝑙𝑒𝑠 𝑑𝑟𝑖𝑣𝑖𝑛𝑔 𝑖𝑛 𝑡𝑜𝑤𝑛 = ( ) = 0.32 𝑔𝑎𝑙
25 𝑚𝑖𝑙𝑒𝑠/𝑔𝑎𝑙
The savings using this method will be:

$3.9
𝑆𝑎𝑣𝑖𝑛𝑔𝑠 = (0.32 𝑔𝑎𝑙 𝑥 ) = $1.248
𝑔𝑎𝑙

Conclusion: Yes, the person should take the trip to get less expensive gasoline because obtaining the
gasoline on the outskirt of the town gives him higher savings which is $1.34 than savings of obtaining
the gasoline in-town $1.248. The difference of savings from these two methods are:

𝑆𝑎𝑣𝑖𝑛𝑔𝑠 = $1.34 − $1.248 = $0.092

Thus he will get extra $0.092 savings when he take the trip to the outskirts of the town.

The other factors (cost and otherwise) should Stan consider in his decision making are;

1. Depreciation of car.
2. Probability if accident.
3. Traffic jam.
4. Time-consuming to get cheaper price of gasoline.
Problem 1-3: A typical discounted price of a AAA battery is $0.75. It is designed to provide 1.5 volts
and 1.0 amps for about an hour. Now we multiply volts and amps to obtain power of 1.5 watts from
the battery. Thus, it costs $0.75 for 1.5 Watt-hours of energy. How much would it cost to deliver one
kilo Watt-hour? How does this compare with the cost of energy from your local electric utility at $0.10
per kiloWatt-hour?

Solutions:

Cost deliver one-kilo Watt-hours;

$0.75
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑊𝑎𝑡𝑡 − ℎ𝑜𝑢𝑟 =
𝑊𝑎𝑡𝑡
1.5
ℎ𝑜𝑢𝑟

= $0.50 𝑝𝑒𝑟 𝑊𝑎𝑡𝑡 − ℎ𝑜𝑢𝑟

𝐶𝑜𝑠𝑡 𝑓𝑜𝑟 1 𝑘𝑊ℎ = 1000 × $0.50 𝑝𝑒𝑟 𝑊𝑎𝑡𝑡 − ℎ𝑜𝑢𝑟

= $500 𝑝𝑒𝑟 𝑘𝑖𝑙𝑜 𝑊𝑎𝑡𝑡 − ℎ𝑜𝑢𝑟 𝑓𝑜𝑟 𝑝𝑜𝑤𝑒𝑟 𝑓𝑟𝑜𝑚 𝑎 𝑠𝑖𝑛𝑔𝑙𝑒 𝐴𝐴𝐴 𝑏𝑎𝑡𝑡𝑒𝑟𝑦

The local electricity however, only costs $0.10 per kilo Watt-hour. Thus, this is 5,000 times
more costly than energy from our local utility. The local electricity utility is much cheaper since it is a
facility provided and the cost is highly subsidized by the government.
Problem 1-5: Henry Ford’s Model T was originally designed and built to run on ethanol. Today, ethanol
(190-proof alcohol) can be produced with domestic stills for about $0.85 per gallon. When blended
with gasoline costing $4.00 per gallon, a 20% ethanol and 80% gasoline mixture costs $3.37 per gallon.
Assume fuel consumption at 25 mpg and engine performance, in general, are not adversely affected
with this 20–80 blend (called E20).

a) How much money can be saved for 15,000 miles of driving per year?
b) How much gasoline per year is being converted if one million people use the E20 fuel?

Solutions:

a) The usage of the gasoline per year:

15,000 miles per year

= 600 𝑔𝑎𝑙𝑙𝑜𝑛𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟.
25 mpg

Thus, the savings if uses E20:

𝑆𝑎𝑣𝑖𝑛𝑔𝑠 = 600 𝑔𝑎𝑙𝑙𝑜𝑛𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 ($4.00 − $3.37)

= $𝟑𝟕𝟖 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓

b) The amount of gasoline/year converted if 1 million people uses E20 where it uses 20% of
ethanol will be:
𝑔𝑎𝑙
𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒 𝑠𝑎𝑣𝑒𝑑 = 0.20 (600 ) (1,000,000 𝑝𝑒𝑜𝑝𝑙𝑒)
𝑦𝑒𝑎𝑟
= 120 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑔𝑎𝑙𝑙𝑜𝑛𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Problem 1-12: During your first month as an employee at Greenfield Industries (a large drill-bit
manufacturer), you are asked to evaluate alternatives for producing a newly designed drill bit on a
turning machine. Your boss’ memorandum to you has practically no information about what the
alternatives are and what criteria should be used. The same task was posed to a previous employee
who could not finish the analysis, but she has given you the following information: An old turning
machine valued at $350,000 exists (in the warehouse) that can be modified for the new drill bit. The
in-house technicians have given an estimate of $40,000 to modify this machine, and they assure you
that they will have the machine ready before the projected start date (although they have never done
any modifications of this type). It is hoped that the old turning machine will be able to meet production
requirements at full capacity. An outside company, McDonald Inc., made the machine seven years ago
and can easily do the same modifications for $60,000. The cooling system used for this machine is not
environmentally safe and would require some disposal costs. McDonald Inc. has offered to build a
new turning machine with more environmental safeguards and higher capacity for a price of $450,000.
McDonald Inc. has promised this machine before the startup date and is willing to pay any late costs.
Your company has $100,000 set aside for the start-up of the new product line of drill bits. For this
situation,

a) Define the problem.

b) List key assumptions.
c) List alternatives facing Greenfield Industries.
d) Select a criterion for evaluation of alternatives.
e) Introduce risk into this situation.
f) Discuss how nonmonetary considerations may impact the selection.
g) Describe how a post audit could be performed.

Solutions:

a) Problem: To find the least expensive method for setting up capacity to produce drill bits.
b) Assumptions: The revenue per unit will be the same for either machine; startup costs are
negligible; breakdowns are not frequent; previous employee’s data are correct; drill bits are
manufactured the same way regardless of the alternative chosen; in-house technicians can
modify the old machine, so its life span will match that of the new machine; neither machine
has any resale value; there is no union to lobby for in-house work; etc.
c) Alternatives:
1. Modify the old machine for producing the new drill bit (using in-house technicians).
2. Buy a new machine for $450,000.
 3. Get McDonald Inc. to modify the machine.
4. Outsource the work to another company.
d) Criterion: Least cost in dollars for the anticipated production runs, given that quality and
delivery time are essentially unaffected (i.e., not compromised).
e) Risks: The old machine could be less reliable than a new one; the old machine could cause
environmental hazards; fixing the old machine in-house could prove to be unsatisfactory; the
old machine could be less safe than a new one; etc.
f) Non-monetary Considerations: Safety; environmental concerns; quality/reliability
differences; “flexibility” of a new machine; job security for in-house work; image to outside
companies by having a new technology (machine); etc.
g) Post Audit: Did either machine (or outsourcing) fail to deliver a high-quality product on time?
Were maintenance costs of the machines acceptable? Did the total production costs allow an
acceptable profit to be made?
Problem 1-20: A deep-water oil rig has just collapsed into the Gulf of Mexico. Its blowout-preventer
system has failed, so thousands of barrels of crude oil each day are gushing into the ocean. List some
alternatives for stopping the unchecked flow of oil into the Gulf.

Solutions:

There are several alternatives in order to stop the flow of oil into the Gulf. Firstly, the
contaminated area has to be secured. The alternatives that can be done by oil company are as follows:

1. Performing well killing procedures

Well “killing” is the well control method that must be done when blowout occurs. There are
several types of well killing method, which are:

a. Volumetric Method, this method is used when there is no drill string in the borehole. Heavier
mud will need to be circulated once the gas causes blowout reaches surface, the equipment
needed for this process is known as snubbing unit.
b. The Engineer’s (one circulation) method, which is used when the drill string is in the borehole.
This method is performed by circulating out the influx due to blowout and circulating the heavier
mud in simultaneously.
c. Driller’s (two circulation) method, which also used as alternative when the drill string is in the
borehole. In this method, the original mud is used to circulate the influx out. Heavier mud will be
used in the second circulation to displace the well.

For these methods, economic evaluation will have to consider for the costs of heavier mud to be used
and equipment needed.

2. Perform static kill

Static kill is an alternative method to kill the well which was used by BP (British Petroleum)
oil company to stop the blowout that occurred in Macondo well, Gulf of Mexico. The method is
carried out by essentially pumping heavy mud and cement through the blow-out preventer and into
the well. The idea being that the mud is so dense that it will suffocate the flow of oil, forcing it back
down the well into the reservoir.

3. Building a relief well

One of the methods and an alternative that need to be considered when the killing method
is not successful is to build a relief well. Relief well is a secondary well drilled at a safe distance from
the original drilling site, tapping into the troubled well and pumping the heavier mud. In this method,
economic evaluation will have to consider for the costs of new drilling platform, drilling equipment,
and heavier mud needed.

4. Further strategy to resolve the contamination problem

Referring to Macondo well blowout, the company have done several strategies to resolve the
contamination problem due to the blowout, which are:

a. Adding more capacity for production and burn excessive oil and gas

The oil company added more production vessels on site to collect and process oil and gas.
The excessive oil and gas are also extracted from the blowout preventer, passes it through a manifold
on the seafloor and burn oil and gas in the surface.

b. Injecting chemical dispersants

Chemical dispersants were injected into the oil, intended to dissolve as much of the released
oil and gas in the water as possible to keep the hydrocarbons away from cleanup workers’ lungs and
coastal ecosystems. The impact of the chemical on the underwater ecology, however, is unknown.

c. Repairing equipment and blow out preventer

Sealing cap and blow out preventer to be repaired, potentially to stop the flow of oil from the
well and allow the engineers to take the pressure reading in the well.