MUH 351

ENGINEERING ECONOMY
Case Study

Case Study Teams: You can work on this case by yourself, or you can partner with another
classmate. If you work as a team, you need to submit a single report.

Deliverables: A case report should be uploaded to the MOODLE. In the report you have to cover
the following areas:

Description of the general methodology

Discussion of assumptions (either required or used by your team)
Statement of recommendations

Your report should be original, and it should reflect your own efforts. Any cheating will
be graded as zero.

CASE:

Anatolia Construction Company specializes in railway construction. The company has

established a solid reputation in railway construction, especially in the area of boring railway
tunnels in high-risk geological formations such as sandstones. In recent years they took part in
several high-profile projects, and the company has built a solid reputation in the market. In
response to increasing number of projects, the company is planning to upgrade its machine park
portfolio with a tunnel boring machine. They want to use this new machine, primarily in the new
projects. The company recently awarded several tunnel projects in Yozgat, Sivas and Erzincan
regions as a part of Ankara-Erzurum fast rail project. The new machine can excavate 10-15
meters per day, and it is an ideal fit to bore tunnels in soft rock formations of sedimentary
formations of Yozgat and Sivas.

A new boring machine costs 40 million Euro. For operation costs, an hourly rate of 7000 Euro is a
reasonable assumption based on 24-hour per day operation. Anatolia construction will be paid
20 thousand Euro per meter of tunnel completed. The company is expecting to have solid work
for the next 5 to 10 years, as the government is planning to expand high-speed rail network to

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entire Turkey. However, the company has a signed contract for 2 years only, and the company
has to bid for new contracts after that.

The company already has 5 million Euro in cash, and they hope to secure a private loan of 10
million Euro from an investor. This investor is not expecting any return in the first five years.
However, he wants 15 million Euro back at the end of year 5.

As for the loan the company has three options:

Option 1.

Fixed 0.60 % per month for 10 years.

Option 2

An adjustable rate loan. The interest is %0.4 per month for the first 5 years. The company must
pay at least the interest as a minimum monthly payment. After the fifth year, the interest
readjusts to 0.9 percent per month. The loan should be paid off within 10 years. There is no
early payment penalty. The company can pay off the outstanding balance at any time they
choose.

Option 3

An adjustable rate loan. The interest is 0.1 % per month for the first 3 years. The interest
readjusts to 1.5% per month from year 4 to 10.

Develop a financing strategy for Anatolia Engineering Company. Assume that the company can
earn 0.75 percent interest on his unused cash reserves. The company can payback any loan early
without any termination fee.

The hourly rate for the boring machine is 7000 Euro per hour. When machine remains idle, it still
cost the company 1000 Euro per hour to keep the machine operation ready. There is also
monthly fixed cost of 1 million Euro.

When developing strategies consider the cases where the machine is not operational for 24
hours.