ADDIS ABABA SCIENCE AND TECHNOLOGY UNIVERSITY

COLLEGE OF ARCHITECTURE AND CIVIL ENGINEERING

DEPARTMENT OF CIVIL ENGINEERING

GROUP ASSIGNMENT
ON
___________________________ ENGINEERING ECONOMICS___________________________

I. Choose the best answer and circle the letter of your choice among the alternatives.
1. Engineering economics can help answer all of the following questions except:
a. Which project/alternative is more economical?
b. How long will it take before I have $1,000,000 in my bank account?
c. Shall I lease or buy an excavator for my construction company?
d. How can I maintain a high standard of on-the-job safety for my employees?

II. Provide short and precise answer for the following questions.
2. Why time value of money is important in engineering economics?
3. What is the difference between internal rate of return and incremental rate of return?
4. Explain depreciation and its causes? State the important items which are required in calculating
depreciation by any depreciation method?
5. Describe at least three objectives of economic analysis of projects?
6. Describe the general procedures to conduct a sensitivity analysis of mutually exclusive
alternatives?
7. Why investors are always looking a risk-free way of business to get fast rate of their returns?

III. Work out the following questions as neatly as possible.

8. A Business firm invested on a project with an initial cost of $1,200,000 and annual operation &
maintenance cost of $50,000. The project has a selvage value of $800,000 at the end of
10years and the project is expected to yield average annual revenue of 165,000. Using the
given cash flow description, draw Cash flow diagram of the project.

9. A new automobile offers free maintenance during the first year of ownership. The maintenance
costs the second year are estimated to be $100 and to increase by $100 each year thereafter.
Assume you are planning on owning the automobile 5 years and that your cost of money is 8%.
The future worth of the maintenance costs is nearest to:
10. QYZ, Inc. is evaluating new widget machines offered by three companies. The machines have
the following characteristics:
Companies Company A Company B Company C
Initial Cost, ETB 15,000 25,000 20,000
Maintenance and operating cost,
1,600 400 900
ETB/year
Uniform benefit, ETB/year 8,000 13,000 9,000
Salvage value, ETB 3,000 6,000 4,500
Useful life, in years 4 4 4
Using Incremental rate of return analysis, from which company, if any, should you purchase the
widget machine? Take MARR=15%.

11. A small company manufactures a certain product. Variable costs are 20 ETB per unit and
fixed costs are 10,875 ETB. The price-demand relationship for this product is P=-0.25Q+ 250,
where P is the unit sales price of the product and Q is the annual demand. Use the data (and
helpful hints) that follow to work out answers to parts (a)-(d). Set up your graph with dollars on
the y axis, (between 0 and 70,000 ETB) and, on the x axis, demand D: (units produced or sold),
between 0 and 1000 units.
(a) Develop the equations for total cost and total revenue?
(b) Find the breakeven quantity (in terms of profit and loss) for the product?
(c) What profit would the company obtain by maximizing its total revenue?
(d) What is the company's maximum possible profit?

12. By using incremental B/C analysis at an interest rate of 10% per year among the three
alternatives which alternative should be selected. Use a 10-year life period.
Cash flow terms Alt. A Alt. B Alt. C
Initial cost, ETB 800,000 700,000 550,000
Uniform annual Benefits,
125,000 115,000 90,000
ETB/year
Salvage value, ETB 270,000 250,000 230,000

13. If you make an annual deposit of 2000 birr in a bank at the beginning of the year, starting
1st January 2001with an interest rate of 6% per year, what will be the value of all deposits on
31st December 2011?
A) Using the simple interest approach
B) Using the compound interest approach
14. The initial cost of the excavator is 800,000 birr and the selvage value is expected to be
150,000 birr at the end of 10 years. Calculate the book value and depreciation of the
excavator at 4th, 6th and 8th year by the following methods:
a) Straight line method
b) Double decline balance method
c) Sum of year digit method
15. Three mutually exclusive alternatives are being considered:
Alternatives A B C
Initial Cost, $ -5000 -4000 -3000
Benefit at end of the , first year, ETB 2000 2000 2000
Uniform benefit at end of subsequent years, ETB/year 1000 1250 1000
Useful life, in years 6 5 4
At the end of its useful life, an alternative is not replaced. If the MARR is 10%, which alternative
should be selected?
(a) Based on the discounted payback period?
(b) What is the NPV of each project?

16. A project manager in the 35% tax bracket has an annual salary of Birr 144,000 and
allowable expenses and deductions of Birr 24,000. He has professional benefits and interest of
Birr 16,000 for the year.
a) Calculate the income tax to the government?
b) Determine what percentage of his annual salary goes toward the Federal income taxes?

17. A machine is purchased for 300,000 ETB and has a useful life of 12 years. At the end of 12
years, the salvage value is 30,000 ETB. By straight-line depreciation method, what is the book
value of the machine at the end of 8 years?

18. An equipment which was purchased at a cost of 22,000birr four years ago is considered for
replacement against a challenger whose cost is 18,000birr. The existing equipment can be traded
in today at 6,000birr and if kept on for another 6 years, will have a salvage value of 2,000birr.
The annual maintenance cost of the existing asset is 7,000birr per year. The challenger has an
annual operating cost of 3,500birr and its salvage value 3,000birr at end of year 6, i = 15%.
Verify if it is worth replacing the existing equipment with the new equipment?
19. A city that is attempting to attract a professional foot ball team is planning to build a new
stadium costing 250 million birr. Annual upkeep is expected to amount to 800,000 birr per year.
The artificial turf will have to be replaced every 10 years at a cost of 950, 000 birr. What will
be its capitalized cost at an interest rate of 8% per year if the facility is planning to maintain
every 5 years indefinitely?

20. If you make 4 annual deposits of $100 in your savings account which earns a 10% annual
interest, what equal annual amount can be withdrawn over 4 subsequent years?

21. A company bought a machine at $10,000 and expects that the machine would run for 2,000
hours during its life. It is expected to have no scrap value.
year 1 2 3 4
Annual working hours 800 600 350 250

Calculate the annual depreciation charge at the end of each year with respect to the Production
Output?

22. Suppose, you want to set up a college savings plan for your daughter. She is currently 10
years old and will go to college at age 18. You assume that when she starts college, she will need
at least $100,000 in the bank. Find the annual Equivalent savings (A) in order to have the
necessary funds using the sinking-fund factors if the current rate of interest is 7%. Assume that
end-of-year payments are made.

23. Assume the Gilgel Gibe III Hydropower project construct its components with an initial
cost of Birr 2 Billion and its annual operational and maintenance cost estimated to be
500,000. The reservoir Silt Deposition will be discarded per every 40 years with Birr 15
Million and powerhouse components maintained per every 20 year with a cost of birr 3
million. Assuming the interest rate of 10% per year determine the annual cost of the project.
Good Luck!