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Christopher Willis, PhD, CAPM, P.

Eng, MCSCE

Engineering Management Principles and Economics


ENGR301-2/R Exam Review 2
1. The federal government is planning a hydroelectric project for a river basin. In addition to producing
electric power, this project will provide flood control, irrigation, and recreational benefits. The
estimated benefits and costs expected to be derived from the three alternatives under consideration are
listed as follows:
Decision Alternatives
B
$9,000,000
$1,000,000
$150,000

Initial Cost
$8,000,00
Annual Power Sales
$700,000
Annual Flood Control
$120,000
Savings
Annual Irrigation
$250,000
$300,000
Benefits
Annual Recreation
$80,000
$120,000
Benefits
Annual Operation and
$270,000
$250,000
Maintenance Costs
Assume the interest rate is 10% and the life of each project is 30 years. Find:

C
$11,000,000
$1,200,000
$200,000
$300,000
$70,000
$270,000

a. The benefit-cost ratio of each alternative.


b. Select the best alternative according to incremental B/C ratio analysis.
2. Candice De Freitas, a Concordia University student, wants to start a small scale painting business during
her off-school hours. She purchases some used painting equipment and has two mutually exclusive
options: Option 1, do most of the painting by herself and limit the business to only residential painting;
and Option 2, hire some helpers to do both commercial and residential jobs. In both cases she expects
to close the business in three years when she graduates. The cash flows for the two mutually exclusive
alternatives are given as follows:
n
Option 1
Option 2
0
-$3,000
-$12,000
1
$1,350
$4,200
2
$1,800
$6,225
3
$1,500
$6,330
Which project would Candice select at MARR = 10%?
3. The purchase of a truck with an operators platform on a telescoping hydraulic boom will reduce labour
costs for sign installations by $10,000 per year. The price of the truck boom is $57,000, and its
operating costs will exceed those of the present equipment by $100 per month. The resale value is
expected to be $6000 in 12 years. Should the boom truck be purchased when the prevailing interest
rate is 12%? Answer using annual worth analysis.
4. An asset was purchased 5years ago at a price of $52,000. It was expected to have an economic life of
8years, at which time its salvage value would be $4000. If the function the asset was serving is no longer
needed, what price must it be sold for now to recover the invested capital when i=12%?
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