CHAPTER 7 Solutions Manual

For

Basics of Engineering Economy, 1e

Leland Blank, PhD, PE
Texas A&M University
and
American University of Sharjah, UAE

Anthony Tarquin, PhD, PE

University of Texas at El Paso

PROPRIETARY MATERIAL.
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Chapter 7
7.1 The primary purpose of public sector projects is to provide services for the
public good at no profit.
7.2 eBay - private, farmers market - private, state police department public, car racing
facility - private, social security public, EMS - public, ATM - private,
travel agency- private, Six Flags amusement park - private, gambling casino private, swap meet - private.
7.3 Large initial investment - public, short life projects - private, profit - private,
disbenefits - public, tax-free bonds - public, subsidized loans public, low interest
rate - public, income tax private, water quality standards public.
7.4 Disbenefits are consequences to people while costs are consequences to government;
disbenefits are considered in the numerator of a B/C ratio while costs are in the
denominator.
7.5 (a) $400,000 annual income to local businesses because of tourism created by
new national park - benefit
(b) Cost of fish from hatchery to stock lake at state park - cost
(c) Less tire wear because of smoother road surface - benefit
(d) Decrease in property values due to closure of govt research lab - disbenefit
(e) School overcrowding because of military base expansion - disbenefit
(f) Additional revenue to local motels because of extended national
park season benefit
7.6 A BOT project is one that involves a public-private partnership wherein the private
partner is responsible for building, operating, and subsequently transferring the
project to a governmental entity.
7.7 Benefits and disbenefits might exactly offset each other because benefits to one part
of the general population might represent disbenefits to a different part of the
population. For example, reduced traffic accidents are good for motorists but bad for
tow- truck owners
7.8 The salvage value placed in the denominator because it is a recovery of cost, which
is a consequence to the government.
7.9 A modified B/C analysis has only the initial investment cost in the denominator.

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7.10 B = $285,000
C = 12,000,000(A/P,6%,40) + 1,100,000
= 12,000,000(0.06646) + 1,100,000
= 797,520 + 1,100,000
= $1,897,520
B/C = 285,000/1,897,520
= 0.15
7.11 Convert all cash flows to AW
B = 3,800,000(A/P,8%,20)
= 3,800,000(0.10185)
= $387,030
D = $65,000
C = 1,200,000(A/P,8%,20) + 300,000
= 1,200,000(0.10185) + 300,000
= $422,220
B/C = (387,030 65,000)/ 422,220
= 0.76
7.12 The total cost (TC) has to be $800,000.
TC = P(A/P,6%,10) + 600,000
800,000 = P(0.13587) + 600,000
P = $1,471,995
7.13 B = $600,000
D = $190,000
C = 650,000(A/P,6%,20) + 150,000
= 650,000(0.08718) + 150,000
= $206,667
B/C = (600,000 190,000)/206,667
= 1.98
7.14 (a) B = $340,000
D = $40,000
C = 2,300,000(0.06) + 120,000
= $258,000
B/C = (340,000 40,000)/258,000
= 1.16
(b) Modified B/C = (340,000 40,000 120,000)/138,000
= 1.30

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7.15 Use present worth, since most of the cash flows are already present dollars.
(a) Conventional B/C ratio
B = 200,000 + 100,000(P/A,6%,40)
= 200,000 + 100,000(15.0463)
= $1,704,630
D = 18,000(P/A,6%,40)
= $270,833
C = 1,200,000 + 200,000(P/F,6%,3)
= 1,200,000 + 200,000(0.8396)
= $1,367,920
S = 90,000(P/F,6%,5)
= 90,000(0.7473)
= $67,257
B/C = (1,704,630 270,833)/(1,367,920 67,257)
= 1.10
(b) Modified B/C ratio = (B D + S)/C
= (1,704,630 270,833 + 67,257)/1,367,920
= 1.10
7.16 Use annual worth, since most of the cash flows are in annual dollars.
(a) Conventional B/C ratio
B = 300,000(0.06) + 100,000
= 18,000 + 100,000
= $118,000
D = $40,000
C = 1,500,000(0.06) + 200,000(P/F,6%,3)(0.06)
= 90,000 + 200,000(0.8396)(0.06)
= $100,075
S = 70,000
B/C = (118,000 40,000)/(100,075 70,000)
= 2.59
(b) Modified B/C ratio = (B D + S)/C
= (118,000 40,000 + 70,000)/100,075
= 1.48
7.17 B = 41,000(33 18) = $615,000
D = 1100(85) = $93,500
C = 750,000(A/P,0.5%,36)
= 750,000(0.03042)
= $22,815

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B/C = (615,000 93,500)/22,815

= 22.86
7.18 B = $194,000 per year
C = 45(172,000)(A/P,6%,10)
= 7,740,000(0.13587)
= $1,051,634
S = $80,000
B/C = 194,000/(1,051,634 80,000)
= 0.20
7.19

B = $500,000 per year

D = $45,000 per year
C = P(A/P,7%,10) + 150,000
= 0.14238P + 150,000
2.3 = (500,000 45,000)/ (0.14238P + 150,000)
0.3275P = 455,000 - 2.3(150,000)
P = $335,880

7.20 B = 1250(140) = $175,000 per year

C = 595,000(A/P,6%,5) + 56,000 + 19,000
= 595,000(0.23740) + 75,000
= $216,253
B/C = 0.81 Therefore, the utility should send the samples out.
7.21 The alternatives are usage alternatives; only compare against each other.
PW of Incremental benefits, B = 950,000 250,000
= $700,000
PW of cost alt 1 = 600,000 + 50,000(P/A,8%,20)
= 600,000 + 50,000(9.8181)
= $1,090,905
PW of cost alt 2 = 1,100,000 + 70,000(P/A,8%,20)
= 1,100,000 + 70,000(9.8181)
= $1,787,267
PW incremental cost = 1,787,267 - 1,090,905
= $696,362

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B/C = 700,000/696,362
= 1.01
Select alternative 2.
7.22 Compare EC vs DN
B = $110,000 per year
D = $26,000 per year
C = 38,000(A/P,7%,10) + 49,000
= 38,000(0.14238) + 49,000
= $54,410
B/C = (110,000 26,000)/54,410
= 1.54
Eliminate DN
Compare EC vs NS
Incremental B = 160,000 110,000
= $50,000
Incremental D = 0 26,000
= $-26,000
Cost EC = $54,410 (from above)
Cost NS = 87,000(A/P,7%,10) + 64,000
= 87,000(0.14238) + 64,000
= $76,387
Incremental C = 76,387 - 54,410
= $21,977
Incremental B/C = [50,000 -(-26,000)]/21,977
= 3.46 Eliminate EC
Select alternative NS.
7.23 Cost for method A = 14,100 + 6000 + 4300 + 2600
= $27,000
Cost for method B = $5200 + 1400 + 2600 + 1200
= $10,400
Incremental costs for method A = 27,000 10,400
= $16,600
Benefits for method A = 600 (P/A,7%,20)
= 600(10.5940)
= $6356.40
B/C = 6356/16,600
= 0.38
Select method B.

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7.24 (a) Program 1 vs DN

B = 1.25 per month
C = 60(A/P,0.5%,60)
= 60(0.01933)
= $1.16
B/C = 1.25/1.16
= 1.08 Eliminate DN
Program 1 vs 2
Incremental B = 8.00 1.25
= $6.75
Incremental C = (500 60)(A/P,0.5%,60)
= 440(0.01933)
= $8.51
Incremental B/C = 6.75/8.51
= 0.79
Select program 1.
(b) B/C for program 1 = 1.08 (from above)
Therefore, program 1 O.K.
B for program 2 = 8.00 per month
C for program 2 = 500(A/P,0.5%,60)
= 500(0.01933)
= $9.67
B/C for program 2 = 8.00/9.67
= 0.83
Therefore, reject program 2
7.25 Cost conventional = 200,000 10,000(P/F,7%,5)
= 200,000 10,000(0.7130)
= $192,870
Cost Solar = 1,300,000 150,000(P/F,7%,5)
= 1,300,000 150,000(0.7130)
= $1,193,050
Incremental cost for solar = 1,193,050 192,870
= $1,000,180
Incremental benefits solar = (80,000 9000)(P/A,7%,5)

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= 71,000(4.1002)
= $291,114
Incremental B/C = 291,114/1,000,180
= 0.29
Therefore, select conventional
7.26 Rank alternatives according to increasing cost: DN, 1, 2, 3, 4
DN vs 1: B/C = (16,000 10,000)/15,000(A/P,10%10)
= 6000/15,000(0.16275)
= 2.46
Eliminate DN
1 vs 2: Incremental B = (20,000 16,000) (12,000 10,000)
= $2000
Incremental C = (19,000 15,000)(A/P,10%,10)
= 4000(0.16275)
= $651
Incremental B/C = 2000/651
= 3.07
Eliminate 1
2 vs 3: Incremental B = (19,000 20,000) (9,000 12,000)
= $2000
Incremental C = (25,000 19,000)(A/P,10%,10)
= 6000(0.16275)
= $976.50
Incremental B/C = 2000/976.50
= 2.05
Eliminate 2

3 vs 4: Incremental B = (22,000 19,000) (11,000 9,000)

= $1000
Incremental C = (33,000 25,000)(A/P,10%,10)
= 8000(0.16275)
= $1302
Incremental B/C = 1000/1302
= 0.77
Eliminate 4
Select method 3.

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7.27 Cost of S = 50,000,000(0.06) + 150,000 = $3,150,000

Cost of D = 75,000,000(0.06) + 130,000 = $4,630,000
Cost of N = 60,000,000(0.06) + 140,000 = $3,740,000
Rank alternatives according to increasing cost: S, N, D
S vs N: Incremental B = 7,600,000 5,900,000 = $1,700,000
Incremental C = 3,740,000 3,150,000 = $590,000
Incremental B/C = 1,700,000/590,000
= 2.88
Eliminate S
N vs D: Incremental B = 5,900,000 4,100,000 = $1,800,000
Incremental C = 4,630,000 - 3,740,000 = $890,000
Incremental B/C = 1,800,000/890,000
= 2.02
Eliminate N
Select alternative D.
7.28 Cost of Project Good = 10,000 1500 = $8500
Cost of Project Better = 8000 2000 = $6000
Cost of Project Best = 20,000 16,000 = $4000
Cost of Project Best of All = 14,000 3000 = $11,000
Rank alternatives according to increasing cost: DN, Best, Better, Good, Best of All
DN vs Best: Incremental B = 25,000 20,000 = $5000
Incremental C = 4000 0 = $4000
Incremental B/C = 5000 /4000
= 1.25
Eliminate DN
Best vs Better: Incremental B = [(11,000 1,000) (25,000 20,000) = $5000
Incremental C = 6000 4000 = $2000
Incremental B/C = 5000 /2000
= 2.50
Eliminate Best
Better vs Good: Incremental B = [(15,000 6000) (11,000 1000)
= $-1000
Eliminate Good
Better vs Best of All: Incremental B = [(42,000 31,000) (11,000 1000)
= $1000
Incremental C = 11,000 6000 = $5000
Incremental B/C = 1000 /5000
= 0.20
Eliminate Best of All
Select project Better

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7.29

Rank alternatives according to increasing cost: DN, A, F, E, C, D, B

Eliminate A based on B/C vs DN < 1.0
F vs DN = 1.08
Eliminate DN
F vs E = 1.33
Eliminate F
E vs C = 4.00
Eliminate E
C vs D = 1.17 Eliminate C
D vs B = 0.33
Eliminate B
Select alternative D

7.30 Rank alternatives according to increasing cost: DN, G, J, H, I, L, K

Eliminate H and K based on B/C vs DN < 1.0
G vs DN = 1.15
Eliminate DN
G vs J = 1.07
Eliminate G
J vs I = 1.07
Eliminate J
I vs L is not done
Must compare I vs L incrementally; survivor is best alternative.
7.31

Rank alternatives according to increasing cost: DN, X, Y, Z, ZZ

Eliminate X based on B/C vs DN < 1.0
Y vs DN = 1.07
Eliminate DN
Y vs Z = 1.40
Eliminate Y
Z vs ZZ = 1.00 Eliminate Z
Select alternative ZZ

Problems for Test Review and FE Exam Practice

7.32 Answer is (d)
7.33 Answer is (b)
7.34 Answer is (b)
7.35 Can use either PW, AW, or FW values; For PW,
B/C = (245,784 30,723)/(100,000 + 61,446) = 1.33
Answer is (b)

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7.36 Alternatives are ranked according to cost; eliminate K and M since B/C <1.0.
J vs L = 1.42
Eliminate J
Answer is (c)
7.37 Answer is (a)
7.38 B/C = [(220 140) (30 30)]/150 = 0.53
Answer is (c)
7.39 Since alternatives are independent, only compare against DN.
Answer is (d)
7.40 B/C = [20 + 30(P/F,10%,5) 7(P/F,10%,3)]/100 25(P/A,10%,4) = 1.61
Answer is (b)
7.41 B/C = [10,000/0.10]/[50,000 + 50,000(P/F,10%,2)
= 1.095
Answer is (a)

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