GDB3023

ENGINEERING ECONOMICS & ENTREPRENEURSHIP

SEPTEMBER 2019
ASSIGNMENT #1 [CLO1]

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?

Solution
Because each pound of CO2 has a penalty of $0.20,

Savings = (15 gallons X $0.10/gallon) - (8 lb)($0.20/lb) = $1.34

If Stan can drive his car for less than $1.34/8 = $0.1675 per mile, he should make the
trip. The cost of gasoline only for the trip is (8 miles ÷ 25 miles/gallon)($3.90/gallon)
= $1.25, but other costs of driving, such as insurance, maintenance, and depreciation,
may also influence Stan’s decision. What is the cost of an accident, should Stan have
one during his weekly trip to purchase less expensive gasoline? If Stan makes the trip
weekly for a year, should this influence his decision?

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 kilo Watt-hour?

Solution
Cost per Watt-hour = $0.75/1.5 Watt-hours = $0.50 per Watt-hour

At a cost of $0.50 per Watt-hour, it would cost (1,000)($0.50 per Watt-hour) = $500
per kilo Watt-hour for power from a single AAA battery. This is 5,000 times more
costly than energy from your local utility. No wonder we turn off our battery operated
devices when we're not using them!
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?

Solution
(a) 15,000 miles per year / 25 mpg = 600 gallons per year of E20
Savings = 600 gallons per year ($4.00 − $3.37) = $378 per year

(b) Gasoline saved = 0.20 (600 gal/yr)(1,000,000 people) = 120 million gallons per year

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 postaudit could be performed.

Solution
(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 high quality
product on time? Were maintenance costs of the machines
acceptable? Did the total production costs allow an acceptable
profit to be made?

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.

Left to student