60. CHAPTER 2: ESTIMATING ENGINEERING COSTS AND BENEFITS 2 — Several general models and techniques for developing cost and benefit estimates discussed. The per-unit and segmenting models use different levels of detail and costsanq benefits per square foot or other unit. Cost index data are useful for updating historic costs to formulate current estimates. The power-sizing model is useful for scaling up gp down a known cost quantity to account for economies of scale, with different power siz exponents for industrial plants and equipment of different types. Triangulation suggegs that one should seek varying perspectives when developing estimates of a project’s costs and benefits. Different information sources, databases, and analytical models can all be used to create unique perspectives. As the number of task repetitions increases, efficieney improves because of learning or improvement. This is summarized in the learning-curve percentage, where doubling the cumulative production reduces the time to complete the task, which equals the learning-curve percentage times the current production time, Cash flow estimation must include project benefits. These include labor cost savings, avoided quality costs, direct revenue from sales, reduced catastrophic risks, improved traf. fic flow, and cheaper power supplies. Benefits are frequently overestimated resulting in an “optimists bias.” Cash flow diagrams are used to model the positive and negative cash flows of potential investment opportunities. These diagrams provide a consistent view of the problem (and the alternatives) to support economic analysis, PROBLEMS er year are $2 million and the total labor cost is $9,109,000. To increase its production 10 46,000 Flnedl Variable, Average’ and Marginal conte robots per year, Venus is considering adding a see- 24 Electricity is sold for $0.15 per kilowatt-hour (KWh) for the first 10,000 units each month and $0.10/kWh for all remaining units. If a firm uses 22,000 kWhimonth, what i its average and marginal One of your firm’s suppliers discounts prices for larger quantities. The first 1000 parts are $13 each. ‘The next 2000 are $12 each. All parts in excess ‘of 3000 cost SII each. What ate the average cost and marginal cost per part for the following quantities? (@ 500 (®) 1500 (©) 2500, (a) 3500 23 A new machine comes with 200 free service hours lover the first year. Additional time costs $150 per hour. What are the average and marginal costs per 25 ‘ond shift. The unit labor cost for the second shift would be 25% higher than the day shift, but the {otal fed manufacturing costs would increase only 0 $24 million from $2 million, (@) Compute the unit man daytime shift. (6) Would adding a second shift increase or decrease the unit manufacturing cost at the plant? wufacturing cost for the ou fo the follwing quant? 246 Company A has fied expemes of $15 oa ee © ans cach unio prodct has a $0.20 vant 288 ) Company B has fixed expenses of Song ee? &2% 4 (a3 tnd can proce the same rot ata 800 2a 2-4 Venus Robotics can produce 23,000 robots a year @ em its daytime shift. The fixed manufacturing costs Fea ener ene beer ‘Company B? ia2 29 240 a Heinrich is a manufacturing engineer with the Miller Company. He has determined the costs of producing a new product to be as follows: Equipment cost: $288,000/year Equipment salvage value at EOYS = $41,000 ‘Variable cost per unit of production: $14.55 Overhead cost per year: $48,300 If the Miller Company uses a S-year planning hori- zon and the product can be sold for a unit price of $39.75, how many units must be produced and sold each year to break even? Contributed by Paul R. McCright, University of South Florida ‘An assembly line can produce 90 units per hour. The line's hourly cost is $4500 on straight time (the first 8 hours). Workers are guaranteed a minimum of 6 hours. There is a 50% premium for overtime, how- ever, produetivity for overtime drops by 5%. What are the average and marginal costs per unit for the following daily quantities? (a 450 (6) 600 (©) 720 (@) 900 Christine Lynn travels from her home to a remote island. Her trip involves: car travel of 200 miles, air travel of 300 miles, and a boat ride of 50 miles. She is interested in calculating the average fuel cost per mile (per person) of her trip. Assume the fuel effi ciency of car, air, and boat travel is 20, 0.20, and 2 niles per gallon, respectively, and that fuel cost per gallon is equal for all and is $3,00/gallon. She was alone in the car and among 180 people on the plane and 10 on the boat. What is the average fuel cost per mile, per person? This month your vendor invoiced $50,000 in test- ing charges for your production run. The unit cost for testing is twice as much for each of the first 500 "units per month as compared to each unit over 500. If we shipped 750 units to the vendor this month, find: (a) Average cost per unit; i (b) Cost per unit below the price break point; (©) Marginal cost for the 600" unit, The Country Fields Retirement Community charges 6,000/month for a single senior citizen to reside in an efficiency apartment with assisted living care. ‘The facility has operating expenses of $600,000 per ‘month, Staffing levels are dependent on the number of residents, Each senior who enters the community ——— oy Ma LE requires additional food, personal care, and support staff time. The estimated cost for each person is $4000 per person per month. (a) How many senior citizen residents does the facil- ity need to have in order to reach the breakeven point? (b) What is the company’s annual profit or loss if they maintain an average residency level of 350 senior citizens? Contributed by Gillian Nicholls, University of Alabama Huntsville ‘The Ozzie Chocolate Company is preparing to offer 4 new produit in its candy offerings, the Minty Dark Chocolate Bite bar. Material costs per new candy bar are $0.20 for chocolate, $0.01 for sugar, and $0.02 for mint flavoring. Labor costs of the new product ‘are approximately $0.12 per bar. Adding a produc- tion line devoted to the new candy will cost $250,000 per year. (a) If the sales price is $1.25 per candy bar, how ‘many must the company make per year in order to break even? Assume that each bar made is sold at full price. (b) What is the company’s profit or loss if they make and sell 300,000 candy bars at the $1.25 price in the first year? Contributed by Gillian Nicholls, University of Alabama Huntsville ‘A small machine shop, with 30 hp of connected. load, purchases electricity at the following monthly. rates (assume any demand charge is included in this schedule) per hp of connected load: First 0 kWh at 12.6¢ per kWh [Next SO kWh at 10.6¢ per kWh Next 150 kWh at 9.0¢ per kWh (Over 250 kWh at 7.7¢ per kWh ‘The shop uses 2800 kWh per month, (@) Calculate the monthly bill for this shop. What are the marginal and average costs per Kilowatt-hour? ; (b) A contract for additional business wouldwill add only 100 kWh per month. In a study 0 determine the economy of installin new machines, what should be considered as the ‘cost” of this energy? What is this per kilowatt hour? Two automatic systems for dispensing maps are being compared by the state highway department The accompanying breakeven chart of the compar ison ofthese systems (System I vs. System Tl) shows total yearly costs for the number of maps dispensed per year for both alternatives. Answer the following questions. (a) Whats the fixed cost for System I? (b) What is the fixed cost for System 11? (c) What is the variable cost per map dispensed for System 1? (@) What isthe variable cost per map dispensed for System II? (©) What is the breakeven point in terms of maps dispensed at which the two systems have equal annual costs? (A) For what range of annual number of maps dis- pensed is System I recommended? (g) For what range of annual number of maps dis: pensed is System Il recommended? (8) At 3000 maps per year, what ate the marginal and average map costs for each system? ‘Total cost, System I:y ‘Tal cost, System I: lor 50 5 ‘Maps Dispensed per year thousands) 0 2-15 A privately owned sums the following data for er a for youngster bas a 12-week session: Sa ed costs 192,000 per sesso ‘Variable cost per camper 000 per session Capacity a $320 per week 200 campers 62 CHAPTER 2: ESTIMATING ENGINEERING COSTS AND BENEFITS (q Develop the mathematical relationships for tt cost and total revenue (b) What is the total number of campers that will allow the camp to just break even’ ) What isthe profit or loss for the 12-week session at 80% capacity? costs per camper if the camp operates (d) What are marginal and averag at 80% capacity? 2-16 Two new rides are being compared by a local amuse- ment park in terms of their annual operating costs, ‘The two rides would generate the same level of rev- cenue (thus the focus on costs). The Tummy Tugger has fixed costs of $10,000 per year and variable costs ‘of $2.50 per visitor. The Head Buzzer has fixed costs ‘of $4000 per year and variable costs of $4 per visitor. (a) Mathematically find the number of visitors per ‘year for the two rides to have equal annual cost (b) Develop a breakeven graph to show: + Accurate total cost lines for the two alter tives (show line, slopes, and equation). * The breakeven point forthe two rides in terms of numberof visitors © The ranges of visitors per year where each alternative is preferred. 2417. Consider the accompanying breakeven graph for an investment, and answer the following questions. $35 a) ‘Total Revenue” = 05 “ | $20) fs a 0230 s00 7501000 1250 1300 178) Output (onisyear) i j @ bed the equation for total revenue for x units P {Give the equation or toa costs for x wit © ‘What isthe “breakeven” level of x? IE you sell 1500 units this ved fence ee hi AC 1500 units, what are ave eae ‘your marginal and @1s Quatro Hermanas, Ine. is investigating implement- ing some new production machinery as part of its One ice. Thee alent es vga en rand they have the following fixed and variable costs: Annual Annual Variable Costs Alternative FixedCosts per Unit A $100,000, $20.00 B 200,000 5.00 c 7.50 Determine the ranges of production (units produced. yer year) over which each altemative would be recommended up to 30,000 units per year 219 Three alternative designs have been created by Snakisco engineers for a new machine that spreads cheese between the crackers in a Snakisco snack. ‘The costs forthe three designs (where xis the annual production rate of boxes of cheese crackers) follow: Design Fixed Cost _ Variable Cost ($/x) A $100,000 205% B 350,000 10.5 600,000 8.08 (a) Management is interested in the production interval of 0-150,000 boxes of crackers per yea Mathematically determine the production vol- ume over which each design (A or B or C) would be chosen. (®) Depict your solution from part (a) graphically, clearly labeling your axes and including a title forthe graph, so that management can easly see the following: i. Accurate total eost lines for each alternative (show line, slopes, and line equations). ii, Any relevant breakeven, or crossover points. iii, Ranges of annual production where each he alternative is preferred. iting operation is performed ya prove: tion worker at a labor cost of $140 per unit. ‘A robot spray-painting machine, costing $15,000, ‘ould reduce the labor cost to $0.20 per unit. Ifthe ‘vice would be valueless atthe end of 3 years, what +s the minimum number of units that would have t Painted each year to justify the purchase of the "obot machine? 221 22 Problems 63 Mr. Sam Spade, the president of Ajax, recently read in a report that a competitor named Bendix has the following relationship between cost and production quantity C= 83,000,000 ~ $18,009 + $750" Where C = total manufacturing cost per year and Q = number of units produced per year. ‘A newly hired employee, who previously worked for Bendix, tells Mr. Spade that Bendix is now pro- ducing 110 units per year. Ifthe selling price remains ‘unchanged, Sam wonders if Bendix is likely to increase the number of units produced per year in the near future. He asks you to look at the information and tell him what you are able to deduce from it. ‘A small company manufactures a certain product. Variable costs are $20 per unit and fixed costs are $10,875. ‘The price-demand relationship for this product is P = —0.25D + 250, where P is the unit sales price of the product and D is the annual demand. Fixed cost + Variable cost # Revenue = Demand x Price «© Profit = Revenue ~ Total cost «© Total cost ‘Set up your graph with dollars on the y axis (between, 0 and $70,000) and, on the x axis, demand D: (units produced or sold), between 0 and 1000 units. (a) Develop the equations for total cost and total revenue. (b) Find the breakeven quantity (©) What profit is eamed if total revenue is maximized? (a) What is the company's maximum. possible profit? (c) Graph the solutions to each part. 'A firm believes a product's sales volume (S) depends ‘on its unit selling price (P) as $ = $100—P. The ‘production cost (C) is $1000 + 108. (a) Graph the sales volume (5) from 0 to 100 on the ‘x axis, total cost and total income from $0 to $2500 on the y axis, C = $1000 + 10S, and plot the curve of total income. Mark the breakeven points on the graph, (b) Determine the breakeven point (lowest sales vol- ‘ume at which total sales income just equals total ‘production cost). (©) Determine the sales volume (S) at which the firm's profit isa maximum.Sunk and Other Costs 224 Define as either sunk, ‘opportunity, eash, oF book: h of the costs below (@) Amount you could have sold a piece of equipment for last month, (6) Value claimed for tax purposes on a depreciated soda filling machine (©) Price paid to a consultant fora feasibility study ‘on a prospective project (a) Monthly utility expense. (©) Salary you could have earned while you were on non-paid leave (f), Value of floor space in a warehouse facility left empty the past 10 quarters (g) Low price of a stock that you chose not to 2.25 Define the difference between a a “book cost.” Is engineering ec concerned with both types of cost? Give an exam- ple of each, and provide the context in which itis important 2.26 In your own words, develop a statement of what the authors mean by “life-cycle costs.” It is important for a fim to be aware of life-cyele costs. Can you explain why” 2.27, Most engineering students own a computer. What costs have you incured at each stage of your computer's life cycle? Estimate the total cost of ‘ownership. Estimate the benefits of ownership. Has itbeen worth it? 2.28 In looking at Figures 2-4 and 2-5, restate in your ‘own words What the authors are trying to get across With these graphs. Do you agree that this is an Important effet for companies? Explain 2.29. In the text we describe three effects that complicate the process of making estimates to be used in engi- neering economy analyses. List these three effects snd comment on which might be the most influential 2.30 List and classify your costs in this academic year as, recurring or nonrecurring, 2.21 Last year to help with your New Year's resolutions you purchased a $500 piece of fitness equipment. However, you use it only once a week on average. $200 (10 someane with a New Year's resolution) and rely on the university gym until you graduate in May. f you don't sell until May, you will get only $100. IFyou keep the heavy piece, you'l have to pay 25 to move it to the ety of your new job (where 64 CHAPTER 2: ESTIMATING ENGINEERING COSTS AND BENEFITS. 3 232 233 235 you interned last summer), There is no convenient ‘ jon. What costs and intangible consequences are relevant t0 your decision? What should you do? You are reevaluating the pump choice that was made last year by your boss. The expected cost savings have not occurred because the pump is too small. Choice A, at $90,000, is to replace the pump with ‘one that isthe right size and sell the old one. Choice B, at $100,000, is to buy a small pump to use in tan ‘dem with the existing pump. The two-pump solution has slightly higher maintenance costs, but itis more flexible and reliable. What criteria should you use? Which choice would you recommend, and why? Consider the situation of owning rental properties that local university students rent from you for the academic year. Develop a set of costs that you could classify as recurring and others that could be classified as nonrecurring A pump has failed in a facility that will be com- pletely replaced in 3 years. A brass pump costing ‘36000 installed will last 3 years, However, a used stainless steel pump that should last 3 more years has been sitting in the maintenance shop for a year ‘The pump cost $13,000 new. The accountants say the pump is worth $7000 now. The maintenance supervisor says that it will cost an extra $500 to reconfigure the pump for the new use and that he ‘could sell it used (as is) for $4000, (a) Whats the book cost of the stainless steel pump? (b) What is the opportunity cost of the stainless steel pump? (6) How much cheaper or more expensive would it bbe to use the stainless steel pump rather than ‘new brass pump? Develop an estimate for each of the following (a) The cost of a $00-mile automobile ti tip, if gaso- line is $4 per gallon, vehicle wear and tear is $0.65 per mile, and our vehicle gets 25 miles aallon. Z ri () The (otal number of hours in the average human life, if the average life is 75 years, (6) The number of days it takes to travel around the equator using a hot aie balloon, if the balloon averages 100 miles per day. the diameter of the carth is ~4000 miles. (@) The total area in square miles of the United States of America, if Kansas isan average state. Kansas has an area of 390 miles miles236 237 238 239 Bob Johnson decided to buy a new home, After looking at tracts of new homes, he decided that a custom-built home was preferable. He hired an architect t0 prepare the plans for a fee of $7000, While a building contractor was working on a bid to construct the home on a lot Bob already owned, Bob found a standard house plans on the Internet for $200 that he and his wife liked better. Bob then asked the contractor to provide a bid to construct this “stock plan” home. The building contractor submitted the following bids: Custom-designed home $258,000 Stock plan home 261,000 Bob was willing to pay the extra $3000 for the stock- plan home. Bob’s wife, however, felt they should go ahead with the custom-designed home, for, as she put it, “We can’t afford to throw away a set of plans that cost $7000,” Bob agreed, but he disliked the thought of building a home that is less desirable than the stock plan home. Which house would you advise him to build? Explain, Sales of your product are directly related to popula- ‘ion in any given region. If sales volume is assumed to be 10% of population, estimate sales for each of the seven continents, and total worldwide sales. A local minor league baseball team plays home games in a stadium that has four sections that each hold 2000 fans. On an average night, attendance in each higher section is filled to 70% the capacity of one below it. Estimate attendance on an average "nigh if the bottom section is completely filled: What Percent of the stadium is full? ‘Your dining room (11’ x 13’) has a hardwood floor discolored by uneven fading from sunlight exposure, and your living room (12/ x 12') has wall-to-wall ‘carpet ruined by your aging dog. You have obtained ‘Some cost figures (all per square foot) from a local flooring store for refinished and new hardwood floors. The cost to purchase and install red oak “ooring is $3.55 (includes tax), and labor is $1.50. Refinishing costs the same $1.50. For new or old ‘oors the labor/material/tax cost to apply a new light ‘tin is $1.00 and two coats of polyurethane cost ‘nother $1.00. The store's sales manager estimates that you should include a 5% wastage factor on sy es pachase, Assume you wil be EMOWE lisposing of the carpet yourself without {llimate the cash cost ofthis project. Contributed by iillian Nicholle University of Alabama Huntsville ‘Segmenting Models 240 Northern Tundra Telephone (NTT) has received a 2a 2.42 Problems 65 contract to install emergency phones along a new 100-mile section of the Snow-Moose Tumpike. Fifty emergency phone systems will be installed about 2 miles apart. The material cost of a unit is $125. NTT will need to run underground communi cation lines that cost NTT $7500 per mile (including labor) to install. There will also be a one-time cost of $10,000 to network these phones into NTT’s current communication system. (a) Develop a cost estimate of the project from NIT’s perspective. (b) If NTT adds a profit margin of 35% to its costs, how much will it cost the state to fund the project? ‘You and your spouse are planning a second hon- eymoon to the Cayman Islands this summer and would like to have your house painted while you are away. Estimate the total cost of the paint job from the information given below, where: Costiott = Costpaint + Costiapor + Costined aint information: Your house has a surface area of 6000 ft?. One can of paint can cover 300 fi. ‘You are estimating the cost to put on two coats of paint for the entire house Number of Cans Purchased Cost per Can First 10 cans purchased $15.00 Second 15 cans purchased $12.50 Up to next 50 cans purchased si2 Labor information: You plan to hire five painters who will paint for 8 hours per day each. You estimate that the job will require 4.5, days of their painting time. The painter's rate is $18 per hour. Fixed cost information: ‘The painting company charges $1200 per job to cover travel expenses, clothing, cloths, thinner, administration, and soon. ‘You want a mountain cabin built for weekend trips, ‘vacations, to host family, and perhaps eventually to retire in, After discussing the project with a local ‘contractor, you receive an estimate that the total construction cost of your 2000-f lodge will be $250,000. The percentage of costs is broken down66. CHAPTER 2: ESTIMATING ENGINEERING CO’ vercaneape at Cost items Total Costs Consrcton permits egal and 8 ide ecs ontwny, sie clearing, reparation 15 Wala, Hoong. cape B Heating, vetlaion, at B ‘condoning (HVAC) riocue punbing, commmnicaons 10 | Roofing flooring 2 | 100 (a) What is the cost per square foot of the 2000-2 lodge? (If you are also considering a 4000-f layout ‘option, estimate your construction costs if i, All cost items (in the table) change propor- tionatey to the size increase. ii, The first two cost items do not change at all; HVAC changes by 50%; and all others are proportionate 243 SungSam, Inc. is designing a new digital camcorder that is projected to have the following per-unit costs 10 manufacture: co crores _ Uo Materials costs $6 Labor costs af Overhead costs 110 Total unitcost S197 SoS a8 30% to its mamfacrng ost for eee (2) What on prot would SungSam rez on ‘cameorder’? be (b) What she overall cost to prods a tach of 1000 camcorders? (6) What would SungSan’s prot be onthe batch of 10,000 IC hore at sho’ tht 14 Prot wil be capped in amuscuing, 39 OF fished product wll go unsold, and 3% of tol proit wl be etre or fn? (a) How teh can SungSam afford py fo acon. tat hat would lock in 50% reson In )STS AND BENEFITS Indexes and Sizing Models 2.44 245 unit material cost previously given? If SungSam the sales price will not timate the cost of expanding a planned new clini by 20,000 ft2. The appropriate capacity exponent is 0166, and the budget estimate for 200,000 ft? was $15 million. [A new aerated sewage lagoon is required in a small town, Earlier tis year one was built on a similar in an adjacent city for $2.3 million. ‘The new lagoon will be 65% larger. Use the data in Table 2-1 estimate the cost of the new lagoon. Fifty years ago, Grandma Bell purchased a sel of gold-plated dinnerware for $55, and last ye ‘you inherited it, Unfortunately a fire at your home destroyed the set. Your insurance ep pany is at a loss to define the replacement eo land has asked your help. You do some research and find that the Aurum Flatware Cost Inder (AFC!) for gold-plated dinnerware, which was 112 when Grandma Bell bought her set, is at 2050 today. Use the AFCI to update the cost of Bell's set to today's cost to show to the insurance company. ‘Your boss is the director of reporting for the Cost Index to track these costs. Costs during the fi ‘year of the index were $12 per square foot of €0 structed space (the index value was set at 100 that first year). This past year a survey of co revealed that costs were $90 per square foot. index number will your boss publish in his repor' this year? Ifthe index value was 600 last year, ‘was the cost per square foot last year? A tefinisher of antiques named Constance has so! ee small business that she isp ning to expand her shop. She is going to start ing her shop by purchasing the following eaA, What would be the net cost to Constance to obtain this equipment? Assume that she can trade the old equipment in for 15% of its original cost. Assume there has been no inflation in equipment prices. 49 Refer to Problem 2-48 and now assume the prices for the equipment that Constance wants to replace have not been constant. Use the cost index data for each piece of equipment to update the costs to the price that would be paid today. Develop the overall cost for Constance, again assuming the 15% trade-in allowance for the old equipment. Trade-in value is based on original cost. Cost Index Original When Originally Cost Index Equipment Purchased Today Varnish bath 154 17 Power scraper 780 900 Paint booth 49, 76 250 Five years ago, when the relevant cost index was Q 120. + nuclear centrifuge cost $40,000. The een- trifuge had a capacity of separating 1500 gallons of ionized solution per hour. Today, itis desired to build a centrifuge with capacity of 4500 gallons per hour, but the cost index now is 300. Assuming a power-sizing exponent to reflect economies of scale, + of 0.75, use the power-sizing model to determine the approximate cost (expressed in today's dollars) of the new reactor. 251 Padre works for a trade magazine that publishes lists of power-sizing exponents (PSE) that reflect sconomies of scale for developing engineering esti- nates of various types of equipment. Padre has teen unable to find any published data on the MIC machine and wants to list its PSE value in his next issue. Given the following data calculate the PSE value that Padre should publish, (Note: ‘The VMIC-100 can handle twice the volume of & VMIC-s0,) ‘Cost of VMIC-100 today $100,000 Cost of VMIC-50 5 years ago $45,000 YMIC equipment index today = 214 MIC equipment index 5 years ago = 151 2 Remerowski Corporation Inc. asks you to estimate © He costto purchase a new pice of production equi: ent. The company purchased this same type of “vipment in the past for $10,000. The original “Auipment had a capacity of 2,000 units, while the 253 Learning-Curve Models 254 255 257 Problems _67 new equipment has a capacity of 1,000 units, The power-sizing exponent for this type of equipment is 0.28. In addition, the cost index for this type of equipment was 126 when the original unit was purchased and is now 160. If Remerowski uses an 8% annual interest rate to evaluate equipment Purchases, estimate the cost to purchase the new Piece, Contributed by Gillian Nicholls, University of Alabama Huntsville Sage Lorimer owns a boutique that sells jewelry made by her husband and other local artists. She is considering expanding the business by opening a second store. The current store has 1,200 square feet of retail space and 400 square feet of space for administrative offices. For the new store she would like to double the retail space and triple the admin- istrative space of the current store, At the time the current shop was purchased, retail space sold for $75 per square foot and general office space cost $30 per square foot. The cost indexes at the time were 153 for retail space and 120 for office space. The costs indexes are now 140 for retail space and 132 for office space. Estimate the cost for Sage to purchase a second store at this time. Contributed by Gillian Nicholls, University of Alabama Huntsville If 200 labor hours were required to produce the 1°" unit in a production run and 60 labor hours ‘were required to produce the 7" unit, what was the learning-curve rate during production? Ima New isa recent employee who initially requires 15 minutes to complete a job task. If she experiences aan 85% learning rate, how much time will it take her to complete the sixth task? Rose is a project manager at the civil engineering consulting firm of Sands, Gravel, Concrete, and ‘Waters, Inc, She has been collecting data on a project in which concrete pillars were being constructed; however not all the data are available, She has been able to find out that the 10! pillar required 260 person-hours to construct, and that a 75% learning curve applied. She is interested in calculating the time required to construct the 1% and 20 pillars. Compute the values for her, Home Building Inc. (HBI seeks to schedule manual labor for 18 new homes being constructed. Histor- ‘ical data leads HBI to apply a 92% learning curve Conn ee the first home requires 3.5 ‘build, estimate the time required to build (a) the th n68 CHAPTER 2: ESTIMATING ENGINEERING COSTS AND) (6) all 18 houses. What imate be for all 18 of above if the learning (80% house, (b) the tenth house ‘would the manual labor est the HBI houses in the problem 759 . ceurve rate is (d) 704 Ima Neworker requires 30 minutes to produce her te is 65%, output ,(€ 258 first unit of output. If her learning curve how many units will be produced before the rate exceeds 12 units per hour? 2-59 An industrial engineering consulting firm usually “observes 2 90% learning fof enterprise level software with its clients. If the first installation required 75 hours, estimate the time required for (a) the fifth, (b) the tenth, and (e) the twentieth installations. 40. Sally Statistics is implementing a system of st G@ sical proces conte (SPC) chats in er factory Tarot wo reduce the overall cst of srapped i ys The eurent cast of sap is SX per month Mf an 80% teaming eure is expected in the we Of the SPC chars to reduce the cost of erp Stat would the percentage reduction in monthly wap cont be afer tbe chants have been sed for TE months? (Hin, Model each month as unit of production) urve rate in the installation 2461 A new product needs 40 labor hours to complete the build for the first unit. If production operates at a 78% learning curve rate, calculate the average labor ‘hours required per unit to produce five units. 2-62 New technicians in an oncology department process patients at rates shown below. Steady state occurs at the eighth unit, Patient number, 1 Process time (min): 75 61 67 4340 3 8 345 52 50 45 (a) Calculate the learning curve rate for units 1-8. (b) What is the total time needed t0 process 12 patients? Benefit Estimation 2463 Esintng Denes is fen mor dict tan cot xin, Ue he cael fe ome its ta Seem Reet -costs and benefits, ay Te mors meation n 8 fw comiarseess that ents ae overeat whe os fe te underestimated toy called ths he “ops bi” What do hy men by nd wa eek canithve on tea craton of projet? BENEFITS, 2-65 Je labeling the columns “cost ‘and the rows “recurring” and Think about your life: and “non-recurring costs les in each cell list two to three items/exampl and B have the same cost to implemes maintain, and dispose of over their life eycles, Wii impact will tal benefits play in the comparison of the alternatives? Projects A ‘any inereme! Many types of employees are on performance-basl contract {mounts depending on the performance (productit= ity) of the worker. Give examples of employees are on these types of contracts. Develop a statement that expresses the extent 1 ‘which costestimating topics also apply to estima benefits, Provide examples to illustrate. Large projects, such as a new tunnel under the son, the Big Dig in Boston, the Denver airport, an military jet, and a natural gas pipeline from Al to the Midwest, often take 5 to 15 years from concept to completion (a) Should benefit and cost estimates be adjusted for the greater influences and impacts of inflai government regulatory changes, and changin jocal economic environments? Why or why ni) (b) How does the public budget-making proce interact with the goal of accurate benefit cost estimating for these large projects? Contributed by Morgan Henrie, University of Ala Anchorage ‘A home run king’s team pays: him a base salary 0 ‘$15.0 million per season plus $100,000 per home! cover 50. If the king hits 70 home runs next ‘what will his salary be for the year? Elizabeth sells baking ovens for Little Gina's P Equipment Co, Her base salary is $80,000/yea she eams 109 of gross sales above 100 units sold year: Each oven retails for $25,000. Wat minim ‘number of units would Elizabeth have to sell Year in order o ear a six-figure salary? ‘An independent computer programmer is evalt 4 contract with a new web company. The aff thre salary options for the two-month (2 2.000/month pus $780 pe 1,00 tines of + (2) $4.250/month flat salary, and (3) no Pay but $2,750 per 1,000 ines of code. Assume Programmer's living expenses and costs samme for all three options, and that the ‘needs between 1,000 and 10,000 lines of testedwriten. If the programmer wants to maximize her salary, what plan should be chosen for various levels of tested ines written? cash Flow Diagrams 273 On December 1, Al Smith purchased a car for $25,000. He paid $7500 immediately and agreed to pay three additional payments of $8000 each (which includes principal and interest) at the end of 1, 2, and 3 years. Maintenance for the car is projected at $1000 at the end of the first year and $2000 at the 4 cnd of each subsequent year. Al expects to sell the ¥ cat atthe end of the fourth year (after paying for the maintenance work) for $12,000. Using these facts, prepare a table of cash flows. 274 Bouka Toys is considering @ robot that will cost $50,000 to buy. After 5 years its salvage value will tbe $2500, An overhaul costing $5000 will be needed in Year 3, O&M costs will be $2000 per year. Draw the cash flow diagram, 275. Pine Village needs some additional recreation fields. Construction will cost $300,000, and annual O&M expenses are $85,000. The city council estimates that the value of added youth leagues is about $200,000 annually. In year 6 another $75,000 will be needed to refurbish the fields. The salvage value is estimated to be $50,000 after 10 years. Draw the cash flow diagram, 276 Identify your major eash flows forthe current school term as first costs, O&M expenses, salvage values, Problems 69 revenues, overhauls, and so on. Using a week as the time period, draw the cash flow diagram, 2-77 HiTech Ine, is investing in a new production line to manufacture their newest high volume consumer product. Design costs forthe past three years, leading Lup to production, have been $0.75 million per year. ‘Today production machinery totaling $3.65 million is being purchased 10 equip the new line. Operat- ing and maintenance expenses will total $50,000 per year, and materials and overhead costs will be $1.75 million annually. The new line will operate for 7 years, at which time equipment will be sold at 10% ‘of purchase price. Revenue from the new product is. expected to be $2.0 million the first year, inereas- ing by $0.50 million per year for the next 4 years, then decreasing by $0.75 million in years 6 and 7. HiTech has asked you to create a cash flow table and diagram, CASES @ ‘The following cases from Cases in Engineering Economy 4 are suggested as matched with this chapter. case3 Wildcat Oil in Kasakstan Rough order-of-magnitude estimation of total facility cost and annual revenue. Option for NPV and different size facility. Raster Blaster Questions to guide students. Includes breakeven analysis. cAse25