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School of PE Contents

CHAPTER 0 CONTENTS

Chapter 0 Contents ................................................................................................................. 0-2

Preamble ............................................................................................................................. 0-3

How to use this Refresher Course Study Guide ................................................................... 0-4

Chapter 1 Estimating Quantities and Costs ............................................................................. 1-5

Engineering Economics – Factor Tables .......................................................................... 1-6

Factor Table Quick View Exercise ................................................................................... 1-9

Time Value of Money ..................................................................................................... 1-11

Compound Interest – Nominal and Effective .................................................................. 1-13

Solving Engineering Economic Problems ....................................................................... 1-15

Present Worth ................................................................................................................ 1-16

Future Worth or Value .................................................................................................... 1-17

Benefit/Cost Analysis ..................................................................................................... 1-19

Rate of Return Benefit Cost Analysis – Alternatives ....................................................... 1-21

Capitalized Cost ............................................................................................................. 1-22

Rate of Return – Gradient Series ................................................................................... 1-23

Finding Rate of Return ................................................................................................... 1-25

FINDING “N” – NUMBER OF YEARS ..................................................................... 1-26

Financing: Taking a Loan, Paying Cash, or Leasing ...................................................... 1-28

STRAIGHT-LINE DEPRECIATION .......................................................................... 1-32

Modified Accelerated Cost Recovery System (MACRS)................................................. 1-33

Time Value of Money – Project Costing ......................................................................... 1-34

Capitalization Cost ......................................................................................................... 1-35

ALTERNATE PROJECT SELECTION ..................................................................... 1-36

Percentage of a Number ................................................................................................ 1-37

Chapter 2 Workshop Questions ............................................................................................. 2-1

0-2
School of PE Contents

PREAMBLE

The material provided in the refresher course is intended for instructional

use only. The design code reference and solution techniques are a guide
for instruction. The reference material included herein should not be used
as a sole source for the PE Exam and/or engineering practice. The
NCEES provides updated design Code standards that should be the
source for your use. Visit the NCEES website for the most current
information regarding the PE Exam and confirm the design standards used
for the test construction

All solution steps have been vetted and are provided for ease of instruction.
There are many methods that can be used to arrive at a solution which fit
your specific educational background and experience. Alternate methods
and computational techniques based on your familiarity should be used.

0-3
School of PE Contents

HOW TO USE THIS REFRESHER COURSE STUDY GUIDE

Throughout the Refresher Course Notes the following symbol
represents references to the Civil Engineering Reference Manual for
the PE Exam (CERM14) and page locations for further review and
study:
Sample 1 This symbol provides the reference to
similar subject matter in the CERM-14. The
 Chapter
reference guides you to the general area to help aid
your self study. Often the subject matter and  Page number
course material are not an exact match but the

location points to a general area to find additional information about the subject matter

Sample 2:

fast facts
This example text box contains subject material that is supplemental to the
subject matter and/or enhances its knowledge. The information is intended for
self-study.

Sample 3:
This is an example text box shows necessary
equations.

Sample 4:

CERM-14 reference
This symbol represents CERM-14 page reference
materials which should be inserted for review.

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School of PE Estimating Quantities and Costs

CHAPTER 1 ESTIMATING QUANTITIES AND COSTS

1
CHAPTER
Engineering
Economics

Concept Engineering Economics

Factor Tables
Terminology Time Value of Money

Alication
Compound Interest
Present Worth
Future Worth
Annual Cost
Rate of Return
Benefit/Cost Ratio
Internal Rate of Return

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School of PE Estimating Quantities and Costs

ENGINEERING ECONOMICS – FACTOR TABLES

P – Present worth of money

F – Future worth of money
A – An end-of-period cash receipt or disbursement in a uniform series
G – Gradient series
i – Interest rate per interest period
n – Number of interest periods
Single Payment Present Worth F

F
P = F(P/F, i, n) =
(1  i) n P

Interest Formulas: Payments

Single Payment Compound Amount Factor

(F/P, i%, n) = (1 + %, i )n

Single Payment Present Worth Factor

(P/F, i%, n) = 1/ (1 + %, i )n= 1/ (F/P, i%, n)

Uniform Series Compound amount Factor

(F/A, i%, n) = (1 + %, i )n - 1 / i

Uniform Series Sinking Fund Factor

(A/F, i%, n) = i / (1 + i)n - 1 = 1 / (F/A, i%, n)

fast facts
Factor Tables are derived from the equations shown in the introductory pages
of this section. The Factor Tables are a convenience, however, not all % factors are
available and although interpolation can be used, it is strongly recommended to
become as familiar with the equations. CERM A-154 provides a summary of the
varying equations used in engineering economics.

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 School of PE Estimating Quantities and Costs

See Appendix Pages A-154 through A-173 in CERM-14 for

Factor Tables
For example, where F/P is the column selector for the Factor Tables, the interpretation is:
Calculate “F” / Given “P”

Factor Name Converts Shorthand Equation

Single Payment
Compound Amount Calculate F given P (F/P, i%, n) (1 + i)n

Single Payment
Present Worth Calculate P given F (P/F, i%, n) (1 + i) –n

Uniform Series i
Calculate A given F (A/F, i%, n)
Sinking Fund 1  i n  1

i 1  i 
n
Capital Recovery Calculate A given P (A/P, i%, n)
1  i n  1

Uniform Series
Calculate F given A (F/A, i%, n)
1  i n  1
Compound Amount i

Uniform Series 1  i n  1
Calculate P given A (P/A, i%, n)
Present Worth i 1  i 
n

Uniform Gradient 1  i n  1  n
Calculate P given G (P/G, i%, n)
Present Worth i 2 1  i  i 1  i 
n n

Uniform Gradient 1
Calculate F given G (F/G, i%, n)
1  i   1  n
n

Future Worth i2 i

Uniform Gradient 1 n

Uniform Series Calculate A given G (A/G, i%, n) i 1  i n  1

Note the mathematical relationships among the equations:

1
F/G = (F/A – n)/i = (F/A) (A/G)

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School of PE Estimating Quantities and Costs

CERM-14 reference
Appendix
Insert Content of page A-154 here.
Notes:
 Use the Table on this page as a summary reference for the engineering
economics equations

 Become familiar with the equations and use the equations especially if
questions are given with interest rates for which Factor Tables are not
available.

Where: A = Annual Amount

F = Future Worth

P = Present Worth

G = Uniform Gradient Amount

n = number of compounding periods or life of asset

i = effective rate per period

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School of PE Estimating Quantities and Costs

FACTOR TABLE QUICK VIEW EXERCISE

The following factor table quick exercise uses the value of $1.00 using 10% for 10-yrs. Using
the appropriate Factor Table found in the Appendix, find the appropriate answer. Use the
Calculate “x” / Given “y” study aid. Practice with the following series of questions.

a. If you want $1.00, 10-yrs from now, deposit $_____ now.

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

b. If you deposit $1.00 at the end of every year for 10-yrs the present value is?

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

c. $1.00 today is worth $_______10-yrs from now in an account yielding 10%

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

d. The annual amount of interest deposited in the account with a starting balance of $1.00
at 10% for 10-yrs is?

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

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School of PE Estimating Quantities and Costs

e. If you want to have $1.00 in the bank, deposit $_____every year for 10–years at 10% an
annual yielding account.

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

f. If you deposit $1.00 every year in an account yielding 10%, you will have this amount in
10-yrs $__________.

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

g. If you deposit $1 in yr-1; $2-at the beginning of yr-2; $3 at the beginning of yr-3, and so
onto the 10th year, the present worth of the deposits is $__________.

a. 0.3855
b. 6.1446
c. 2.5937
d. 0.1627
e. 0.0627
f. 15.9374
g. 22.8913

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School of PE Estimating Quantities and Costs

TIME VALUE OF MONEY

1. - Question If you want to have $60,000 in 10 years, the amount that should be
put into a 6.0% (effective annual rate) savings account now is most nearly:

a. $33,503.69
b. $43,000.39
c. $48,475.09
d. $53,500.60

Solution:

This problem could also be stated: What is the equivalent present worth of $60,000 ten
years from now if monthly money is worth 6% per year?

P = F(P/F, I, n) = $60,000(P/F, 6%, 10) = $60,000 * 0.5584 = $33,503.69 (answer is a)

2. - Question The cost of utilities, taxes and maintenance on a home is $3,000 per
year. The amount of money that would have to be invested now at 8% to cover these
expenses for the next 5 years is most likely: (Assume no inflation or tax increase).

a. $10,980
b. $11,980
c. $12,980
d. $13,980

Solution:

Referencing Appendix (pg. A-154) in CERM-

14 and using the Factor Tables, compute:

$3,000 (P/A, 8%, 5) = $3,000 x 3.9927 =

$11,978.10 (answer is b)

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School of PE Estimating Quantities and Costs

3. - Question Your home mortgage is $300,000 for 30 years with a

nominal annual rate of 7%. The monthly payment is most nearly:

a. $1,899.00
b. $1,900.00
c. $1,995.10
d. $2,015.00

Solution:

n = 360 months interest = 7%-annual ÷ 12-months/year

= 0.583% per month

$300,000(A/P, 0.00583, 360) = Apply the equation:

i(1+i)n
= 0.006650339 (1+i)n - 1

A = 300,000 x 0.006650339 = $1,995.10 per month (answer is c)

fast facts
This question illustrates the importance of interpreting the information
provided before running through the computations. Although the nominal annual
rate is given as 7%, the monthly rate needs to be computed. A common approach
would be to use the CERM Appendix Factor Tables to find the monthly payments
which would yield:
(A/P, 7%, 30) = $300,000(A/P, 0.0806, 30) = $24,180/12 = $2,015. / month or a 1%
error.

Conclusion: Be familiar and comfortable with both the Factor Tables and the
Equations which comprise the results in the Tables.

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School of PE Estimating Quantities and Costs

4. - Question An engineer deposits a “X” amount every 6 months for 3

years so that she’ll have $10,000 at the end of this period. The interest rate
is 5% per year which is rebalanced every 6-month. The amount deposited
is most nearly:

a. $1,565.50
b. $1,585.50
c. $1,595.50
d. $1,600.50

Solution: Determine the components and apply the equation:

n = 6 deposits i = 2.5% per 6-month period

F = $10,000(A/F, 2.5%, 6) = 0.15655 A = $1,565.50 (answer is a)

COMPOUND INTEREST – NOMINAL AND EFFECTIVE

5. - Question A credit card advertises a nominal rate of 18%

compounded monthly. If no monthly payments are made, the effective
annual interest rate is most nearly:

a. 18.00%
b. 18.25%
c. 18.75%
d. 19.56%

The actual rate is, (18% / 12) = 1.5% per month. The effective annual rate
is:
i = (1 + .015)12 – 1 = 0.1956 or 19.56% if you do not pay anything each
month. (answer is d)

fast facts
This question illustrates that 18% interest per month is
equivalent to 19.56% effective annual rate. The terms are
synonymous as they are dependent upon a “point in time”.

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School of PE Estimating Quantities and Costs

fast facts
Compound interest is the concept of adding accumulated
interest back to the principal, so that interest is earned on interest
from that moment on. The act of declaring interest to be principal
is called compounding (i.e., interest is compounded). Interest rates
must be comparable in order to be useful, and in order to be
comparable, the interest rate and the compounding frequency must
be disclosed.
Since most people think of rates as a yearly percentage,
many governments require financial institutions to disclose a
(nominally) comparable yearly interest rate on deposits or
advances.
Compound interest rates may be referred to as annual
percentage rate, annual percentage yield, effective interest rate,
effective annual rate, and by other term. Compound interest may
be contrasted with simple interest, where interest is not added to
the principal (there is no compounding).
Note that the effective interest rate i depends on the
frequency of compounding. The following illustrates the effects of
compounding.

Example: nominal interest rate r = 10%

–Compounded annually: i = r = 10%

–Compounded quarterly: i = (1 + 0.1 / 4)4 - 1 = 10.38%

–Compounded monthly: i = (1 + 0.1 / 12)12 - 1 = 10.471%

–Compounded weekly: i = (1 + 0.1 / 52)52 - 1 = 10.506%

–Compounded daily: i = (1 + 0.1 / 365)365 – 1 = 10.516%

–Compounded continuously: i = e 0.1 – 1 = 10.517%

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School of PE Estimating Quantities and Costs

SOLVING ENGINEERING ECONOMIC PROBLEMS

Uniform Series Present Worth Factor

 (1  i) n  1 A A A A A
P = A (P/A, i, n) = A n 
 i(1  i) 

P
Uniform Series Future Worth Factor A A A A A
 (1  i) n  1
F = A (F/A, i, n) = A 
 i 

Net Present Worth F

NPW = PW of benefits – PW of costs

Benefit-Cost Ratio
B PW of benefits 
 
C PW of costs

fast facts
Engineering Economics applies the principles reviewed in the previous
section and allows the calculation for the time value of money to be evaluated at a
“common” point in time.
The majority of engineering economic analysis questions are alternative
comparisons. In these questions, two or more mutually exclusive investments
compete for limited funds.
To help with the analysis, cash flow diagrams can be drawn to help visualize
and simplify problems having diverse receipts and disbursements. The most
obvious advantage for the diagram is to clearly see the reference point in time.
Remember to pay particular attention to counting the “zero” position.

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School of PE Estimating Quantities and Costs

PRESENT WORTH

6. - Question A heavy equipment rental company uses a high

interest rate of 30% for the rental of a specialty heavy haul dump truck.
The net annual profit for this investment is most nearly:

a. - $3,900
Description Amount
b. - $4,500
Total annual income: $55,000
c. +$5,000
Capital cost: $80,000
d. +$6,000 Annual operating cost: $28,600
Lifespan: 6 years

Solution:

Calculate the annual capital recovery with return:

$80,000 (A/P, 30%, 6yrs) = $30,272

Calculate the net annual profit:

55,000 – (30,272 + 28,600) = - $3,872 (net loss) (answer is a)

fast facts
This question illustrates a counterintuitive result for the interpretation of the
data presented. At first glance, the business scenario appears that it should be
profitable. However, the high rate of 30% is intended to cover uncertainty during the
rental period. After computation, the results show that it does not cover uncertainty.

However, if the annual income were $60,000, then the net annual profit would
be 60,000 - (30,272 + 28,600) = $1,128 and the truck rental would return a net profit.

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School of PE Estimating Quantities and Costs

FUTURE WORTH OR VALUE

7. - Question Two alternatives have the cash flows as shown in the

Table. At a 4% interest rate, the end of term yield for the alternative that
should be selected to maximize its value is most nearly:

a. -$247.60 Alternative
b. +$247.60 Year A B
c. -$284.20 0 -$2000 -$2800
d. +$284.20 1 +800 +1100
2 +800 +1100
Solution: 3 +800 +1100
This example will be solved using Future Worth analysis at the end of 3-
years.

Net Future Worth (NFW) = Future Worth of Benefits – Future Worth of Costs

NFWA = 800(F/A, 4%, 3) – 2000 (F/P,4%,3)

=800(3.122) – 2000(1.125)= +$247.60

NFWB = 1100(F/A, 4%, 3) – 2800 (F/P,4%,3)

=1100(3.122) – 2800(1.125)= +$284.20
To maximize Net Future Worth, choose alternative B: + $284.20

(answer is d)

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School of PE Estimating Quantities and Costs

8. - Question A contractor purchased a Caterpillar D-13 dozer for

$100,000 and owned it for five years. The annual cost for maintenance and
repair is provided in the Table. With annual interest rate at 7% and end-of-
year disbursements, the uniform annual cost for
maintenance and repair for the dozer is most nearly: Year Maintenance
and Repair
a. $10,000 Costs
1 $4,500
b. $11,000
2 $9,000
c. $12,000
3 $11,800
d. $13,000
4 $13,500
5 $22,500
Solution: The Equivalent Uniform Annual Cost (EUAC) can be computed
for this irregular series of payments in two steps:

Step 1: Compute the Present Worth for five years using the single
payment present worth factors.

PW of cost = 4500(P/F, 7%, 1) + 9000(P/F, 7%,2) + 11800(P/F, 7%, 3) +

13500(P/F, 7%, 4) + 22500(P/F, 7%,5)

= 4500(.9346) + 9000(.8734) + 11800(.8163) + 13500(.7629) +

22500(.7130)

= $48,040.29
Step 2: With the PW of cost known, compute the EUAC using the
capital recovery factor.

EUAC = 48,040(A/P, 7%, 5)

= 48,040(.2439)

= $11,717.03 (answer is c)

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School of PE Estimating Quantities and Costs

BENEFIT/COST ANALYSIS

9. - Question An Earthwork Contractor is planning the purchase of

new equipment. Three options are under review:

Option 1 Option 2 Option 3

Initial Cost 500,000 600,000 700,000
Annual O&M cost 10,000 15,000 20,000
Annual Revenue 100,000 120,000 150,000
The interest rate is 10% and the life of each option is 20 years. The Benefit
to Cost Ratio (BCR) for the recommended option is most nearly:

a. 1.40
b. 1.46
c. 1.47
d. 1.48

Solution: Find the Benefit to Cost ratio for each option using the
equations found in the CERM-14.
B
Set the BENEFITS equation to: C
Option X = (P/A, i. 10%) for each option.
Benefits (Option1) = Present Worth of $100,000 annual revenue for 20 years @10%
From the interest tables or by equation calculation:
PW (Benefits) = 8.514 x $100,000 = $851,400

Set the COST equation to:

Costs (Option 1) = Initial Cost + Present Worth of $10,000 / year O&M
From the interest tables or by equation calculation:
PW (O&M) = 8.514 x $10,000 = $85,140

Therefore: B/C (Option 1) = $851,400 ÷ ($500,000+$85,140) = 1.455

Similarly, B/C (Option 2) = $1,021,680 ÷ ($600,000+$127,710) =1.403

And, B/C (Option 3) = $1,277,100 ÷ ($700,000+$170,280) =1.467

Option 3 brings the most benefit to the contractor. (answer is c)

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School of PE Estimating Quantities and Costs

The formalized development of a Benefit to Cost did not occur until the Federal
Navigation Act of 1936 was introduced. This act required that projects that were carried
out by the U.S. Corps of Engineers have a higher benefit to the general public than the
total investment in the projects.

A benefit-cost ratio (BCR) is an indicator, used in the formal discipline of cost-benefit

analysis, that attempts to summarize the overall value for money of a project or
proposal. A BCR is the ratio of the benefits of a project or proposal, expressed in
monetary terms, relative to its costs, also expressed in monetary terms.

Benefit cost ratio (BCR) takes into account the amount of monetary gain realized by
performing a project versus the amount it costs to execute the project. The higher the
BCR the better the investment. General rule of thumb is that if the benefit is higher
than the cost the project is a good investment. BCR comparison of the present value of
an investment decision or project with its initial cost. A ratio of greater than one
indicates that the project is a viable one.

fast facts
All comparisons must be made at a single time reference point. Use PW
(Present Value), FV (Future Value) or AW (Annual Worth) as a basis. (PW and
AW are the most commonly used). The analysis will be performed using Present
Worth. If the Benefit to Cost Ratio (B/C) > 1.0, then the project is a go.

Benefits Costs:
 TOTAL construction cost, e.g.
 Revenue generated ($) o initial design
o legal costs
 (Safety benefits) o Other costs associated
with the projects
 The service life costs
 Salvage and/or disposal cost
 Operations and maintenance
costs
 Interest rates

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School of PE Estimating Quantities and Costs

RATE OF RETURN BENEFIT COST ANALYSIS – ALTERNATIVES

10. - Question An audit is being conducted on the recent construction
of a new asphalt plant to determine whether profitability can be increased.
An enhanced production process will not affect the production output or
revenue. The benefit-cost ratio of the enhanced plant is most nearly:

a. 1.02
b. 1.25
c. 1.38
d. 1.73

Factors Existing Plant Enhanced Plant

Initial Cost ($) 0 18,000
Salvage Value ($) 0 6,000
Annual Cost ($) 575,000 570,000
Life (years) - 6
Rate of Return (%) 12 12

Solution: Step 1: The anticipated savings which is considered the benefit is on an

annual basis, the one-time cash flow must be converted to an annual amount for the
analysis. The reduction in cost is considered a benefit.

Benefit = $575,000 – $570,000 = $5,000 per year

Step 2: Convert the initial cost to an annual amount using the Factor Table (A/P)

$18,000 (A/P, 12%, 6-y) = $18,000 x 0.2432 = $4,361.40

A = P [( i (1 + i)n ÷ ((1 + i)n -1)]

Step 3: Convert the salvage value which is a single payment and a future value
into an annual amount (A/F)

$6,000 ( A/F, 12%, 6-y) = $6,000 ( 0.1232 ) = $739.35

A = F ( i ÷ ((1 + i)n -1)

Total annual cost is given as:

Cost = $4,361.40 - $739.35 = $3,622.05

Step 4: The Benefit-Cost Ratio is computed using the results:

BCR = $5,000 ÷ $3,622.05 = 1.38

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School of PE Estimating Quantities and Costs

CAPITALIZED COST
11. - Question The reconstruction costs for a County roadway
pavement project are provided in the Table below. The capitalized cost
used to determine the cost effectiveness of the project is most nearly:

a. 7,000,000 Description Cost

b. 7,776,000 Original Construction Cost $24.000,000
c. 7,927,000 Reconstruction Cost $7,000,000
d. 8,029,000 Annual Maintenance: First 10-years $40,000
Annual Maintenance: Second 10-years $85,000
Major Maintenance ( every 10 years ) $350,000
Solution: Residual Value $400,000
Bond Rate 5%
Capitalized Cost =

= $7,000,000 Reconstruction Cost

+ ($40,000) (P/A,i=5,n=10) Annual Maintenance 1st 10-years

+ ($85,000) (P/A,i=5,n=10) (P/F,i=5,n=10) Annual Maintenance 2nd 10-years

+ ($350,000) (P/F,i=5,n=10) Major Maintenance

- ($400,000) (P/F,i=5,n=20) Residual value

= $7,775,902.




400k

4 12 14 16 18 20
0 2 6 8 10 



i = 5%

$7-M 350k

40k/yr 85k/yr

(answer = b)
Discussion: Why is the 2nd annual cost multiplied by (P/F)?
Remember to diagram your work.

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School of PE Estimating Quantities and Costs

RATE OF RETURN – GRADIENT SERIES

12. - Question The rate of return for a capital investment represented

by the following cash flow table is most nearly:

a. 9.25%
b. 9.58%
Year 0 1 2 3 4 5
c. 10.83%
d. 11.00% Cash Flow (000) -$595 +$250 +$200 +$150 +$100 +$50

Solution:

The cash flow table shows a declining uniform gradient series for year one
through year five of the investment. The analysis will consider establishing
a zero balance equation. Namely,

PW of cost – PW of benefits = 0 

The equation establishes and shows the declining balance of $50,000 in

the factor P/G, specifically:

t=0

Combined
t=0

t=0 t=0
minus

$250,000 Gradient ($50,000)/yr

t=0 t=0

595 – [250 (P/A, i, 5) – 50(P/G, i, 5)] = 0

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School of PE Estimating Quantities and Costs

The following solution steps use an iterative process to determine the

appropriate interest rate, where:
Try i = 10% (Use the factor table and apply the values)
595 – [250 (3.791) – 50 (6.862)] = - 9.65

Try i = 12% (Use the factor table and apply the values)
595 – [250 (3.605) – 50 (6.397)] = +13.60

The rate of return is between 10% and 12%. Using linear interpolation equation:

Rate of Return = 10% + 2% x 9.65 - 0 = 10.83% (answer = c)

13.60 + 9.65

fast facts
The Present Worth of a project is known as the capitalized cost
or life-cycle cost. Capitalized costs are the amount of money at time
zero needed to support the project on the earned interest only.

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School of PE Estimating Quantities and Costs

FINDING RATE OF RETURN

13. - Question An $8200 investment returned $2000 per year over a

five-year useful life. The rate of return on the investment is most nearly:

a. 6.50%
b. 7.00%
c. 8.25%
d. 9.00%
Solution: To find the rate of return set the Benefit/Cost ratio equal to one.
Use the following equation:
PW of Benefits = 1
PW of Costs

Set the equation to equal the following:

2000 (P/A, i, 5) = 1
8200

Rewrite the equation and find i, the analysis yields the following:

2000 (P/A, i, 5) = 8200 = 4.1 (P/A, i, 5)

2000

Search in the Interest Factor Tables in CERM-14 Appendix for the value of i, where:

(P/A, i, 5) = 4.1

The search reveals the value of 4.1 in the 7% interest rate table, no
interpolation is required.

Therefore, 7% is the (answer is b)

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School of PE Estimating Quantities and Costs

FINDING “N” – NUMBER OF YEARS

14. - Question A new residential community, opened in June 2008,
will need to add a second unit to the new water treatment plant when the
population reaches 40,000. An average of 6,000 new residents are moving
into the community each year. The estimated birthrate for the community is
8 per 1,000 and the death rate is 14 per 1,000 resulting in a negative
annual increase of -0.6%. The number of years before the second unit is
needed for the new water treatment plant is most nearly:
a. 6.67
b. 6.78
c. 6.83
d. 6.98
Solution: The population must reach 40,000 before the second unit is
needed, so that F = 40,000. The number of new residents expected each
year is 6,000, therefore, A = 6,000. The residents should have a natural
rate of negative annual increase of -0.6%, i = -0.006.
Use the F/A equation as follows and solve for n:
F = A (1+i)n – 1
i . 

n = ln( F i / A + 1) 
ln (1+i)

n = ln (40,000 x (-0.006)) / 6,000] + 1) 
ln (1 - 0.006)

n = 6.78 = 6.8-yr (answer)

Note: since the negative i is small and the n is not large, the number of
years required to reach 40,000 is just a little more than if I were zero
(40,000/6,000 = 6.67 = 6.7-years).
Population Flow Diagram

i = -0.6% F=40,000
0 1 2 3 4 5 6 n-1 n

A=6,000

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School of PE Estimating Quantities and Costs

15. - Question The operation and maintenance cost for a newly

constructed dormitory is $135,000 for the first year and is expected to
increase $22,000 each year thereafter. The net present worth for the 30-
year lifespan of the structure with a bond rate of 4% is most nearly:

a. 4,325,250
b. 5,325,500
c. 6,760,000
d. 7,800,200

Solution: The problem statement represents a gradient series where the

initial cost is increased each year. The cash flow must be broken down into
parts as shown below.
Combined
t=0 t=0

t=0 Gradient @ $22,000/yr

$135,000
t=0 t=0
t=0
+
t=0

Apply the equation for the combined cash flows to determine the net
present worth.

P = A (P/A, 4%, 30-yr) + G (P/G, 4%, 30-yr)

= $135,000 (17.2920) + $22,000 (201.0618)
= $6,757,780.

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School of PE Estimating Quantities and Costs

FINANCING: TAKING A LOAN, PAYING CASH, OR LEASING

16. - Question Based on the sell value for the vehicle of $17,817 at
the end of 42 months the financial information shown is with a monthly
compounding period. The most economical financing option is:

a. Option A
b. Option B
c. Option C
d. Option A and B are identical

Option A: Purchase the vehicle at the dealer finance price of $32,508, and
pay for the vehicle over 42 months with equal monthly payments at 5.65%
Annual Percentage Rate (APR) financing.

Option B: Cash purchase the vehicle at a discount price of $31,020 to be

paid immediately as the money will be withdrawn from an account yielding
4.5% Annual Percentage Rate (APR).

Option C: Lease the vehicle for 42 months where the first month’s
payment is included in the due at signing amount.

A – Dealer B - Cash C - Lease

Finance Finance
Vehicle Price $32,508 $32,508 $32,508
Down payment $4,500 $0 $0
APR(%) 5.65%
Monthly payment $736.53 $513.76
Length 42 months 42 months
Lease Administration Fee $994
Cash due at end of lease $395
Purchase option at end of lease $17,817
Cash due at signing $4,500 $31,020 $1,507.76

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School of PE Estimating Quantities and Costs

Solution: With traditional financing (Option A), the monthly payment is

based on the entire $32,508 value of the vehicle, and the retained
ownership of the vehicle at the end of the financing terms. While
comparing the options over 42 months, consideration must be given to the
unused portion (resale value) of the vehicle at the end of the term.
Consider the resale value of the vehicle in order to determine the net cost
of owning it. As the resale value, use the $17,817 quoted by the dealer in
the lease option.

Note that the 5.65% APR represents the dealer’s interest rate used in
calculating the loan payments. With 5.65% interest, the monthly payments
are given but they are derived from:

A = ($32,508 - $4,500) (A/P, 5.65%/12, 42) = $736.53

For Option B, note that the 4.5% APR represents the earning opportunity
rate. In other words, if the car is not purchased, the money continues to
earn 4.5% APR. Therefore, 4.5% APR represents the opportunity cost of
purchasing the car. As such, the interest rate to use in the analysis is
clearly the 4.5% APR rate.

With a lease payment (Option C), payments are based on the portion of
the vehicle used during the prearranged period. At the end of the lease,
the vehicle is returned to the dealer and lease is settled to the agreed-upon
disposal fee.

Special Supplemental Note: The accompanying table lists the items of

interest under each option. For each option, license, title, and registration
fees, as well as taxes and insurance, are extra but equivalent for all
options, therefore disregarded for the analysis. For the lease option, the
lessee must transfer $1,507.76 at signing. This cash due at signing
includes the first month’s lease payment of $513.76 and the administration
fee. Typically, the lease rate is based on 60,000 miles over the life of the
contract. There will be a surcharge at the rate of an amount of and agreed
to cents per mile for any additional miles driven over 60,000. No security
deposit is required; however, a $395 disposition fee is due at the end of the
lease, at which time the lessee has the option to purchase the car for
$17,817. The lessee is also responsible for excessive wear and use. The
greatest financial appeal for leasing is low initial outlay costs.

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School of PE Estimating Quantities and Costs

For each option, calculate the net equivalent total cost at n = 0. Since the
loan payments occur monthly, calculate the effective interest rate per
month, which is 4.5% / 12-months.

Since the interest rate is given as APR, the problem statement identifies
that the payments are compounded monthly, the APR must be divided by
12-months. Use the engineering economics equations to calculate the
values since the Factor Table may not be available.

P/A = 1  i n  1
i1  i n

= (1+ 0.045/12)42 – 1
0.045/12 (1+0.045/12)42

P/A = 38.7924

Special Note: P/A for 41 months = 37.9379

P/F = (1 + i) –n

= (1 + 0.045/12)-42

P/F = 0.8545

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School of PE Estimating Quantities and Costs

Option A: Conventional Debt Financing

The equivalent present cost of the total loan payment is the down payment
PLUS the first month payment:
P = $4,500 + $763.53 (P/A, 4.5%/12, 42)
P = $34,119.16

The equivalent present worth of the resale value of the car is:
P = $17,817 (P/F, 4.5%/12, 42)
P = $15,224.63

The equivalent net finance cost is:

P = $34,119.16 - $15,225.13
P = $18,894.53

Option B: Cash Financing

The equivalent present worth costs is:

P = $31,020 - $17,817 (P/F, 4.5%/12, 42)

P = $31,020 - $15,224.63
P = $15,795.37

Option C: Lease Financing

As stated in the problem statement, the equivalent present cost of the total
lease payment is the amount due at signing which is the administrative fee
and includes the first month’s payment, plus the monthly payments for 41
months, plus the cash due at the end of the lease:

P = $1507.76 + $513.76 (P/A, 4.5%/12, 41) + $395 ((P/F, 4.5%/12, 42)

P = $1507.76 + $19,490.96 + $337.54
P = $21,336.26

Summary: With 4.5% interest compounded monthly, the cash financing

option is the most economical - Option B.

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School of PE Estimating Quantities and Costs

STRAIGHT-LINE DEPRECIATION

17. - Question A contractor purchased a track excavator for $125,000

with a life expectancy of 10-years and a salvage value of $16,000. Using
the straight-line method of depreciation, the book value ($) at the beginning
of the eight year is most nearly:

a. 12,500
b. 16,250
c. 37,800
d. 48,700

Solution:

Depreciation = ($125,000 – $16,000) ÷ 10-years = $10,900

The book value at the beginning of the 8th-year is the equivalent to 7-years:

$125,000 – (7-y)($10,900) = $48,700.

Straight-line depreciation is the simplest and

most-often-used technique, in which a company
estimates the salvage value of the asset at the
end of the period during which it will be used to
generate revenues (useful life) and will expense
a portion of original cost in equal increments
over that period. The salvage value is an
estimate of the value of the asset at the time it
will be sold or disposed of; it may be zero or
even negative. Salvage value is also known as
scrap value or residual value.

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School of PE Estimating Quantities and Costs

MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)

18. - Question A forestry utility trailer valued at $12,500 was purchased

June 2013 with a service life of 5-years. Using MACRS, the maximum
depreciation value will occur in which service year:

a. 1
b. 2
c. 3
d. 5

The Modified Accelerated Cost Recovery System (MACRS) is the

current tax depreciation system in the United States. Under this system, the
capitalized cost (basis) of tangible property is recovered over a specified
life by annual deductions for depreciation. The duration lives of the assets
are specified broadly in the Internal Revenue Code. The Internal Revenue
Service (IRS) publishes detailed tables of lives by classes of assets. The
deduction for depreciation is computed under one of two methods
(declining balance switching to straight line or straight line) at the election
of the taxpayer, with limitations. See IRS Publication 946 for a 120 page
guide to MACRS. The key elements for the solution steps are the time of
acquisition (half; quarter, etc.); and the life of the asset.

See CERM and select the 5-year column and multiply the asset value by
the percent value. Note that this table provides a “half-year” convention.

First year: $12,500 x 20% = $ 2,500

Second year: $12,500 x 32% = $ 4,000
Third year: $12,500 x 19.2% = $ 2,400 

Fourth year: $12,500 x 11.52% = $ 1,440
Fifth year: $12,500 x 11.52% = $ 1,440
Sixth year: $12,500 x 5.76% = $ 720

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School of PE Estimating Quantities and Costs

TIME VALUE OF MONEY – PROJECT COSTING

19. - Question An Earthwork contractor installed a water main that

was completed in March 2009 with an actual project cost of $1,247/LF. A
similar project is being bid in April 2012. The contractor’s estimate using
an annual construction inflation factor of 4.38% is most nearly:

a. $1,247/LF
b. $1,354/LF
c. $1,423/LF
d. $1,547/LF

Solution:

Often there are conditions where costs are evaluated using historical data.
The following equation provides a cost evaluation based on a progression
of time.
𝑬𝑽 = 𝑶𝑪 (𝟏 + 𝒊)𝒏

Where:
EV = Estimate Value for the time period of the project
OC = Original Cost or base year of estimating data
i = Construction Inflation (%)
n= number of years between the OC and the time the project is to be
implemented.

Apply the equation:

𝐸𝑉 = $1,247(1 + 0.0438)3.08 = $1,423/𝐿𝐹 (answer is c)

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School of PE Estimating Quantities and Costs

CAPITALIZATION COST

20. - Question The construction of a new bakery requires the property

development firm to pay the municipality the cost to expand its sewage
treatment plant. In addition to the expansion costs, the developer must pay
$60,000 annually toward the plant operating costs. The developer plans to
finance the annual costs by placing money into a fund that earns 5% per
year to pay its share of the plant operating costs forever. The amount to be
paid to the fund is most nearly:

a. $120,000

b. $600,000
c. $1,200,000
d. $2,200,000

Solution: Using CERM-14 equation 87.10 for a present worth of an infinite

(perpetual) series of annual amounts is known as capitalized cost.

P = A / i = 60,000 ÷ .05 = $1,200,000 (answer is c)

21. - Question An earthwork contractor is considering the

purchase of a new excavator. Based on 10% interest, the equivalent
uniform annual cost for the excavator is most nearly:
Description Amount
a. $12,000
b. $27,000 Initial Cost $80,000
c. $28,000 End of useful life salvage value $20,000
d. $32,000 Annual Operating Cost $18,000
Useful Life 20-years

Solution:

EUAC = 80,000 (A/P, 10%, 20) – 20,000 (A/F, 10%, 20) + annual
operating cost

= 80,000 (0.1175) – 20,000 (0.0175) + 18,000

= 9400 – 350 + 18,000

= $27,050 (answer is b)

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School of PE Estimating Quantities and Costs

ALTERNATE PROJECT SELECTION

22. - Question A global microchip manufacturer is planning to build a

new microprocessor production facility in a rapidly developing area of the
country. The facility can be built at a reduced capacity now for $30 million
and can be expanded 15 years later for an additional $20 million. An
alternative is to construct the facility now for $40 million. Both alternatives
would provide the needed capacity for the 25-year analysis period.
Operational cost differences are small and may be ignored. At 6%
interest, which alternative should be selected:

a. Two stage construction with a $1,700,000 savings

b. Single stage construction with a savings of $1,700,000
c. Two stage construction with a $300,000 savings
d. Single stage construction with a savings of $300,000

Solution:

Analysis of the two-stage construction:

PW of cost = $30 million + $20 million (P/F, 6%, 15)

= $30 million + $8.3 million
= $38.3 million

Analysis of the single-stage construction:

From the information provided:

PW of cost = $40 million

Two-stage construction alternative is preferred with a $1,700,000 savings.

(answer is a)

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School of PE Estimating Quantities and Costs

PERCENTAGE OF A NUMBER

fast facts

Percentage of a number
A percentage is a way of expressing a ratio or a fraction as a whole number, by using 100
as the denominator. One percent is one per one hundred or one hundredth of a whole
number; notation: 1%.

Below are the statements of main percentage problems and their solutions.

1. Find the number b that makes up p% of a number a. b= a p%

100

2. Find the number a whose p% is equal to a number b. a= 100 b

p%

3. What percentage does a number b make up of a number a? p% = 100 b %

a

Percent Change

To compute the percent change between two numbers:

The equation is: (old value – new value) divided by old value;

Old – New = Percent Change

Old

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School of PE Workshop Questions

CHAPTER 2 WORKSHOP QUESTIONS

2
CHAPTER
Workshop
Questions

Engineering Economics
Concept

Terminology Factor Tables

Time Value of Money

Alication Compound Interest

Present Worth
Future Worth
Annual Cost
Rate of Return
Benefit/Cost Ratio
Internal Rate of Return

2-1
School of PE Workshop Questions

23. - Question A city engineer is deciding which of two alternatives to

select for a public works project. If the bond rate is 7.5% per year, the
Benefit to Cost ratio of the alternative to be selected is most nearly:

a. 1.432
b. 1.438
c. 1.471
d. 1.481
Alternative Capital Cost Annual Salvage Disposal Useful Life
Benefit Value Cost

A $480,000 $75,000 $25,500 $16,500 16 yrs

B $400,000 $75,000 $0 $12,500 12 yrs

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School of PE Workshop Questions

24. - Question With interest at 10%, the benefit-cost ratio for this
municipal government project is most nearly:

Initial cost $200,000

Additional costs at end of years 1 & 2 $30,000/yr

Benefits at end of years 1 & 2 $0

Annual benefits from year’s 3 to 10 $90,000/yr

a. 1.05
b. 1.25
c. 1.35
d. 1.57

25. - Question The acquisition cost of a specialty hoist crane is

$23,000. Annual scheduled and unscheduled maintenance costs are $200
and $400, respectively. The annual operating cost of the crane is $1,500
and its life expectancy is 7-years. The disposal cost is $2,000 and the
annual interest rate is 4%. The life cycle cost ($) for this purchase is most
nearly:
a. 37,124
b. 37,605
c. 38,502
d. 38,651

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School of PE Workshop Questions

2-4
School of PE Workshop Questions

Solution – 22
Alternative A:
PW of Benefits = $75,000 (P/A, 7.5%, 16)
= $75,000 (9.1490)
= $686,175

PW of Costs = $480,000 + $16,500 (P/F, 7.5%, 16) - $25,500 (P/F, 7.5%, 16)
=$477,162

B/C = $686,175 ÷ $477,162 = 1.438

Alternative B:
PW of Benefits = $75,000 (P/A, 7.5%, 12)
= $75,000 (7.7394)
= $580,455

PW of Costs = $400,000 + $12,500 (P/F, 7.5%, 12) – 0 (P/F, 7.5%, 12)

= $405,256.88

B/C = $580,455 ÷ $405,256 = 1.432

Since B/C ratio of Alternative A is more than Alternative B, select Alternative A.
(answer = b)

Solution – 23

PW Cost = $200,000 + $30,000 (P/A, 10%, 2)

= $200,000 + $30,000 (1.736)

= $252,080

PW Benefits = $90,000 (P/A,10%,8) (P/F, 10%, 2)

= $90,000 (5.335) (0.8264)

= $396,800

B/C = $396,800/$252,080 = 1.574 (answer = d)

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School of PE Workshop Questions

Diagram the solution:

1 2 3 4 5 6 7 8 9 10

1 2 8 7 6 5 4 3 2 1

30k

i = 10% n-10

Solution – 24

Define the components of the question to known terms:

Capital Cost $23,000
Annual Operating Cost $1,500
Annual Maintenance Cost:
Scheduled $200
Unscheduled $400
Life Expectancy 7-years
Disposal Cost $2,000
Interest rate 4%

Establish Equations for solution, obtain the table factors:

Life Cycle Cost =

= $23,000 Capital Cost
+ $1,500 (P/A, i=4, n=7) Annual Operating Cost
+ $200 (P/A, i=4, n=7) Scheduled maintenance
+ $400 (P/A, i=4, n=7) Unscheduled Maintenance
+ $2,000 (P/F, i=4, n=7) Disposal Cost

= $37,124.21

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