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Engineering Economics
Assignment No.3
Q. No. 1: A small-scale industry is in the process of buying a milling machine. The purchase value
of the milling machine is Rs. 60,000. It has identified two banks for loan to purchase the milling
machine. The banks can give only 80% of the purchase value of the milling machine as loan. In
Urban Bank, the loan is to be repaid in 60 equal monthly installments of Rs. 2,500 each. In State
Bank, the loan is to be repaid in 40 equal monthly installments of Rs. 4,500 each. Suggest the most
economical loan scheme for the company, based on the annual equivalent method of comparison.
Assume a nominal rate of 24%, compounded monthly.

Q. No. 2: An item has an yearly demand of 1,000 units. The different costs with regard to make and
buy are as follows. Determine the best option.

Q. No. 3: A company has purchased a bus for its officers for Rs. 10,00,000. The expected life of the
bus is eight years. The salvage value of the bus at the end of its life is Rs. 1,50,000. Find the
following using sum-of-the-years digits method of depreciation and the sinking fund method of
depreciation:
a) Depreciation at the end of the seventh year
b) Book value at the end of the fifth year

Q. No. 4: Stillwater has initiated discussions on attracting rail service. A depot would need to be
constructed, which would require $500,000 in land and $5.2 million in construction costs. Annual
operating and maintenance costs for the facility would be $150,000, and personnel costs would be
an additional $120,000. Other assorted costs would be born by the railroad and federal authorities.
Annual benefits of the rail service are estimated as listed below.

$1,300,000 Railroad annual payments

$200,000 Rail tax charged to passengers

$180,000 Convenience benefits to local residents

$120,000 Additional tourism dollars for Stillwater

Apply the B-C ratio method, with a MARR of 8% per year and 20 year study period, to determine if
the rail service should be established.
Q. No. 5: Two routes are under consideration for a new interstate highway segment. The long route
would be 25 kilometers and would have an initial cost of $21 million. The short transmountain
route would span 10 kilometers and would have an initial cost of $45 million. Maintenance costs
are estimated at $40,000 per year for the long route and $15,000 per year for the short route.
Additionally, a major overhaul and resurfacing will be required every 10 years at a cost of 10% of
the first cost of each route. Regardless of which route is selected, the volume of traffic is expected
to be 400,000 vehicles per year. If the vehicle operating expense is assumed to be $0.35 per
kilometer and the value of reduced travel time for the short route is estimated at $900,000 per year,
determine which route should be selected, using a conventional B/C analysis. Assume an infinite
life for each road, an interest rate of 6% per year, and that one of the roads will be built.

Q. No. 6: