EGN3613 Module 9 Calculation Example

Engineering Economics Calculations
Cost Benefit Analysis accounting for initial costs, maintenance, benefits, and salvage values of decisions. Samples of annual rate of return calculations.
(Solution Set #10)
Q1. A local government is considering promoting tourism in the city. It will cost $5,000 to develop the plan. The anticipated annual benefits and costs are as follows:
If the city government uses a discount rate of 6% and a study period of 5 years, is this tourism project justifiable according to the benefit-cost analysis?
Q2. A city government is considering increasing the capacity of the current wastewater treatment plant. The estimated financial data for the project are as follows:
Description Cash flow
Capital investment $1,500,000
Project life 25 years
Incremental annual benefits $180,000
Incremental annual costs $75,000
Salvage value $35,000
Discount rate 6%
Calculate the benefit-cost ratio for this capacity expansion project.
Q3. A city government is considering two types of town-dump sanitary systems. Design A requires an initial outlay of $400,000, with annual operating and maintenance costs of $50,000 for the next 15 years; design B calls for an investment of $300,000, with annual operating and maintenance costs of $80,000 per year for the next 15 years. Fee collections from the residents would be $85,000 per year. The interest rate is 8%, and no salvage value is associated with either system.
a. By the benefit-cost ratio (BC (i)), which system should be selected?
b. If a new design (design C), which requires an initial outlay of $350,000 and annual operating and maintenance costs of $65,000, is proposed, would your answer to (a) change?
Q4. Determine the rate of return per year for the cash flow shown in the following table:
Year Cash flow
0 0
1 -$80,000
2 -$9,000
3 $40,000
4 $70,000
Q5. The office of Naval Research sponsors a contest for college student to build underwater robots that can perform a series of tasks without human intervention. Your college won $7,000 first prize over 21 other colleges. If the team spent $2,000 at time zero, what annual rate of return did the team make over the project life of two years?