ME 3232 Homework #4

1.

Jones Construction Company needs a temporary office building at a construction site.

Two types of heating schemes are being considered. The first method is to use bottled
gas for floor-type furnaces. The second is to install electric radiant panels in the walls
and ceiling. The temporary building will be used for 5 years before being dismantled.
Bottled
Gas
Investment cost
Service life
Salvage value
Annual O&M cost
Extra annual expenses

$6000
5 years
0
$2000

Electric
Panels
$8500
5 years
$1000
$1000
$ 220

Compare the alternatives based on the present equivalent criterion at i = 10%.

Adapted from Grant EL, Ireson W, Leavenworth WG. Engineering Economy. 8th Ed. New
York: John Wiley and Sons, 1990.
2.

A certain factory building has an old lighting system, and lighting this building costs, on
average, $20,000 a year. A lighting consultant tells the factory supervisor that the
lighting bill can be reduced to $8000 a year if $50,000 were invested in relighting the
factory building. If the new lighting system is installed, an additional annual
maintenance cost of $3000 per year must be considered. If the old lighting system has
zero salvage value, and the new lighting system is estimated to have a life of 20 years,
what is the net annual benefit for this investment in new lighting? Consider the MARR
to be 12%. Also consider that the new lighting system has zero salvage value at the end
of its life.

3.

A chemical company is considering two types of incinerators to burn solid waste

generated by a chemical operation. Both incinerators have a burning capacity of 20 tons
per day. The following data have been compiled for comparison:

Installed cost
Annual O&M costs
Service life
Salvage value

Incinerator A

Incinerator B

$1,200,000
$50,000
20 years
$60,000

$750,000
$80,000
10 years
$30,000

If the firms MARR is known to be 13%, determine the processing cost per ton of solid
waste by each incinerator. Assume that incinerator B will be available in the future at the
same cost.

4.

Consider the cash flows for the following investment projects.

Assume MARR=15%.
n
0
1
2
3
4
(a)
(b)
(c)
(d)
(e)

5.

A
-$1500
1350
800
200
100

Projects Cash Flow

B
C
-$1500
-$3000
1000
1000
800
X
800
1500
150
X

D
1500
-450
-450
-450
-450

E
-$1800
600
600
600
600

Suppose Projects A and B are mutually exclusive. Which project would be

selected based on the PE criterion?
Repeat (a) using the FE criterion.
Find the minimum value of X that makes project C acceptable.
Would you accept D at i = 18%?
Assume that projects D and E are mutually exclusive. Which project would you
select based on the PE criterion (at MARR = 15%)?

An electrical utility is experiencing a sharp power demand, which continues to grow at a

high rate in a certain local area.
Two alternatives are under consideration. Each alternative is designed to provide enough
capacity during the next 25 years. Both alternatives will consume the same amount of
fuel, so fuel cost is not considered in the analysis.
Alternative A: Increase the generating capacity now so that the ultimate demand can be
met without additional expenditures later. An initial investment of $30 million would be
required, and it is estimated that this plant facility would be in service for 25 years and
have a salvage value of $0.85 million. The annual operating and maintenance costs
would be $0.4 million.
Alternative B: Spend $10 million now and follow this expenditure with future additions
during the 10th year and the 15th year. These additions would cost $18 million and $12
million, respectively. The facility would be sold 25 years from now with a salvage value
of $1.5 million. The annual operating and maintenance costs initially will be $250,000,
increasing to $0.35 million after the second addition (from 11th year to 15th year) and to
$0.45 million during the final 10 years. (Assume that these costs begin 1 year subsequent
to the actual addition.)
If the firm uses 15% as a MARR, which alternative should be undertaken based on the
present equivalent criterion?