DEPARTMENT OF STRUCTURAL AND CONSTRUCTION ENGINEERING

SC 431/TM321 Engineering Economics

Assignment No. 1 – Submission date: 11th December, 2018 at 1300 hrs in hard copy
(State any assumptions made)
A student will be selected randomly to demonstrate his/her solution on the board for each question

Question 1: A contractor has bought a piece of heavy construction equipment for Tshs. 750 Million
Tshs. The equipment will last for 12 years with the operating costs expected to be as follows:

Year 1 2 3 4 5 6 7 8 9 10 11 12
OC 45 55 60 65 70 70 225☼ 60 70 70 75 -
125☼☼
NWH 8 8 7 7 6 6 6 8 8 8 7 7
OC – Operating costs (in Million TZS); NWH – Number of Working Hours Per Day
☼ - Includes 150 Million TZS for rehabilitation; ☼☼ - Includes 200 Million TZS obtained from sale as
salvage

i. Compute the hourly hire rate if the expected return on the investment is15% per annum.
ii. Compute the hire rates if the envisaged inflation is about 6% per annum and that the tabulated
figures are in constant prices.
iii. Compute the maximum hire rate if situation in b applies but also that the figures in the Table
(except for capital costs) have a margin of error of ± 10%.

Question 2: Compare the following investment projects shown on Table 1.1 on the basis of non-discounting
criteria and suggest the best option. Give reasons for your choice: (all figure in Million Tshs)

Table 1.1: Project Investments, Costs and Revenues

Year Project 1 Project 2 Project 3 Project 4
0 -500 -450 -600 -550
1 50 130 90 130
2 60 50 90 120
3 70 60 90 110
4 80 80 90 100
5 90 110 90 90
6 100 100 90 80
7 110 70 90 70
8 120 40 90 60
9 130 120 90 50

Question 3:An excavator needs repairing at an estimated cost of £4,000. If the repair is not carried out it is
estimated that the operating expenses for the excavator will involve an increase of £1,400 per year for
each for the next 3 years. If the minimum acceptable rate of return in 10 per cent, compare the two
alternatives using the net present worth method.

Question 4:A specialized piling rig is purchased by a contractor for one project only. The duration of
the project is two years. The economic life of the rig is 10 years, but if it is sold at the end of the project
that is after 2 years, then the contractor will be able to get half the purchase price. If the rig costs
£50,000 and the required rate of return is 10 per cent, what is the annual cost of the rig to the
contractor if operating expenses are ignored?

Question 5:A small office building can be purchased for £120,000 and it is expected to generate an
annual rental income of £15,000. General expenses in running the office building are estimated at £7,000
per year. The office is said to have a resale value at the end of 5 years of £90,000. What rate of return can
be expected if the office building is purchased as an investment?

Question 6: Five projects, A, B, C, D, and E, in ascending order of investment magnitude, are mutually
exclusive and are being evaluated to determine the one to be implemented. In using incremental
analysis, Project D involves an additional investment of £50,000 over Project C for an increase of cash flow

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of £5,873 per year for 20 years. If the rate of return required is 8 per cent, determine whether
Project D should be implemented if, considering its own related cash flows it has return of 12 per cent.

Question 7: A small office building is designed to provide 10,000 square feet of usable space. If
completely constructed in one phase, its estimated cost of construction is £350,000. However, the design
allows the building to be constructed in two phases: - the first of 6,000 square feet (at an estimated cost of
£230,000) and the second for the remainder (at an estimated cost of £170,000). The developer, concerned
only with the first 6 years of the building’s life, decides to evaluate the consequences of building the whole
building initially against that of building the first phase initially and completing the second phase at the end
of year3. The required rate of return is 10 per cent. Table 6.1 shows the net revenues during this period of
time. Carry out the evaluation of the two proposals and state clearly the decision that you would
recommend, together with your reasons.

Table 6.1: Net Revenues of Office Building Project

Year Alt. 1: Complete building Alt. 2: Two phases
1 £ 80 000 £ 30 000
2 £ 90 000 £ 50 000
3 £ 120 000 £ 40 000
4 £ 120 000 £ 100 000
5 £ 110 000 £ 90 000
6 £ 100 000 £ 110 000
(Construct building in two phases)

Question 8: A hydroelectric project, if completely developed now, will cost £70,000,000. Annual
operation and maintenance charges will amount to £3,500,000 per year. Alternatively, £40,000,000 may
be invested in the project now and the remainder of the work carried out in 12 years’ time at a cost of
£39,000,000. In this alternative case annual operation and maintenance charges will be £2,400,000 per year
for the first 12 years and £4,000,000 per year thereafter. Both schemes are assumed to have perpetual life.
Compare their equivalent annual costs with interest at 12 per cent.

Question 9:
A reinforced concrete road pavement, including the base, is laid for £7.5 per square foot. A flexible
pavement to give the same service is laid for £6.75 per square foot. The flexible pavement has major
maintenance every 5 years, which cost the equivalent of £0.25 per square foot every year. The concrete
pavement has a first life of 40 years, after which it is resurfaced with asphalt costing £2.35 per square foot.
Thereafter it is maintained at the same cost as a flexible pavement. In addition, both types of road require
annual maintenance estimated to amount to £0.05 per square foot.
On the basis of both roads giving perpetual service, compare the capitalized costs of 2000 square yards of
road at an interest rate of t 2 per cent.

Question 10:
You have three options for purchase or hire of a bulldozer that can perform similar tasks from three
different companies that offer the following conditions:

Company A: Initial payment of USD 120,000 with further equal installments of USD 80,000 at the end of
years 2, 4 and 6. The equipment can be purchased back by the supplier at the end of its useful 8 years life at
10% present worth of cost.

Company B: Equal installments of USD 52,000 at the end of each year over a period of 8 years of its life of
8 years. You anticipate that you can probably sell the equipment for USD 30,000 of its value but you are
not sure.

Company C: Offers you a hire rate of USD 35,000 per annum for the first year but the rate increases by
10% every year for the next eight years. All operation and maintenance costs shall be borne by your firm.
Hire fees are paid at the beginning of the respective year.

(i) Which option is more favorable assuming that the cost of capital is 10% per annum. Assume a
pessimistic scenario.
(ii) Would an optimistic scenario change the choice of the option?

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