ENGINEERING ECONOMY COMPUTATIONAL PROBLEM
1. Equipment Purchase vs. Leasing
A contractor is considering acquiring a bulldozer for a long-term project. The options are:
1. Purchase: Costs ₱4,500,000 upfront, with an annual maintenance cost of ₱250,000. Salvage value
after 5 years is ₱800,000.
2. Lease: Costs ₱1,200,000 per year, including maintenance.
If the contractor's interest rate is 10% per year, which option is more economical over a 5-year period?
2. Machine Replacement Decision
A company owns an old lathe machine with an operating cost of ₱100,000 per year. A new machine costs
₱800,000, has an annual operating cost of ₱30,000, and a salvage value of ₱100,000 after 10 years. The
company's minimum attractive rate of return (MARR) is 12%. Should they replace the old machine?
3. Choosing Between Two Bidding Strategies
A contractor can either:
1. Bid Low: Has a 70% chance of winning but results in a net profit of only ₱1,500,000 if won.
2. Bid High: Has a 40% chance of winning but results in a net profit of ₱3,500,000 if won.
Which bidding strategy has the highest expected profit?
4. Comparing Labor Cost vs. Automation
A contractor is choosing between manual labor and automation for site preparation:
1. Manual Labor: Costs ₱3,000,000 over 3 years.
2. Automation: Requires an initial investment of ₱5,000,000 but reduces labor costs to ₱500,000 per year.
With a discount rate of 8%, which is the better option?
5. Evaluating Two Road Construction Materials
Two materials can be used for road construction:
1. Material A: Costs ₱6,000 per square meter, lasts 10 years, and has a maintenance cost of ₱500 per year
per square meter.
2. Material B: Costs ₱8,000 per square meter, lasts 15 years, and has a maintenance cost of ₱200 per year
per square meter.
Using a 10% interest rate, which material is more economical?
6. Contractor’s Capital Investment Decision
A contractor can invest in either:
1. Project X: Costs ₱7,000,000 and generates annual cash inflows of ₱2,500,000 for 4 years.
2. Project Y: Costs ₱6,000,000 and generates annual cash inflows of ₱2,000,000 for 5 years.
If the MARR is 10%, which project should be chosen based on Net Present Value (NPV)?
7. Salvage Value Impact on Equipment Choice
A backhoe costs ₱3,200,000, has an annual operating cost of ₱250,000, and a 7-year useful life. After 7 years,
the salvage value is estimated at ₱600,000. If the company's cost of capital is 9%, what is the equivalent
uniform annual cost (EUAC)?
8. Break-even Analysis for a New Construction Method
A new construction method reduces labor costs but requires new equipment:
1. Current Method: ₱5,000,000 per year.
2. New Method: Requires ₱10,000,000 investment but reduces costs to ₱2,500,000 per year.
How many years does it take for the new method to break even?
9. Inflation Impact on Building Maintenance Costs
A company expects building maintenance costs to start at ₱200,000 per year and increase by 5% annually
due to inflation. If the company’s discount rate is 8%, what is the present worth of a 10-year maintenance
plan?
10. Deciding Between Two Construction Sites
A contractor must choose between two locations:
1. Site A: Land costs ₱3,000,000 with annual operating costs of ₱500,000.
2. Site B: Land costs ₱5,000,000 with annual operating costs of ₱300,000.
If the discount rate is 7% and the project will last 15 years, which site has the lower total cost?
COMPLEX ENGINEERING ECONOMY COMPUTATIONAL PROBLEM
A construction contractor is considering two options for acquiring a new concrete mixer for a series of upcoming
projects. The contractor wants to determine which option is more economically viable over a 5-year period,
considering purchase costs, operating and maintenance expenses, and salvage values.
Option A: Purchase a New Mixer
Initial purchase cost: ₱1,500,000
Expected useful life: 5 years
Annual maintenance and operating cost: ₱100,000
Salvage value at the end of 5 years: ₱300,000
Option B: Rent a Mixer
Rental cost per year: ₱350,000
No maintenance costs (covered by the rental provider)
No salvage value (since it is rented)
The contractor has a 10% annual interest rate on borrowed capital.
Questions:
1. Compute the total cost of each option over 5 years.
2. Compute the present worth of each option using a 10% discount rate.
3. Which option is the better financial decision for the contractor?
