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4 Semester-Industrial Engineering (Entry 2015)
Engineering Economics (EE)

Date: 20th April 2017 Total Marks: 20

Note: Submit the handwritten assignment in next week on 27th April 2017 till 03Pm.

Problem No.1
An experimental composite engine block for an automobile will trim 20 pounds of weight compared
with a traditional cast iron engine block. It is estimated that at least $2,500 in life-cycle costs will be saved for
every pound of weight reduction over the engines 8-year expected life. Given that the engines life is
8 years, what assumptions have been made to arrive at the $2,500 per pound savings?
Problem No.2
Classify each of the following cost items as mostly
fixed or variable:
Raw materials Administrative salaries
Direct labor Payroll taxes
Depreciation Insurance (building and Supplies equipment)
Utilities Clerical salaries
Property taxes Sales commissions
Interest on borrowed money Rent

Problem No.3
A group of enterprising engineering students has developed a process for extracting combustible methane gas
from cow manure (dont worry, the exhaust is odorless).With a specially adapted internal combustion engine,
the students claim that an automobile can be propelled 15 miles per day from the cow gas produced by a
single cow. Their experimental car can travel 60 miles per day for an estimated cost of $5 (this is the allocated
cost of the methane process equipmentthe cow manure is essentially free).
a. How many cows would it take to fuel 1,000,000 miles of annual driving by a fleet of cars? What is the annual
b. How does your answer to Part (a) compare to a gasoline-fueled car averaging 30 miles per gallon
when the cost of gasoline is $3.00 per gallon?

Problem No.4
A municipal solid-waste site for a city must be located at Site A or Site B. After sorting, some of the solid refuse
will be transported to an electric power plant where it will be used as fuel. Data for the hauling of refuse from
each site to the power plant are shown in
TABLE P2-4 Table for Problem 4
Site A Site B
Average hauling
distance 4 miles 3 miles
Annual rental fee
for solid-waste site $5,000 $100,000
Hauling cost $1.50/yd3-mile $1.50/yd3-mile
If the power plant will pay $8.00 per cubic yard of sorted solid waste delivered to the plant, where should
the solid-waste site be located? Use the citys viewpoint and assume that 200,000 cubic yards of refuse will be
hauled to the plant for one year only. One site must be selected.
Problem No.5
Stan Moneymaker presently owns a 10-year-old automobile with low mileage (78,000 miles). The NADA
blue book value of the car is $2,500. Unfortunately, the cars transmission just failed, and Stan decided to
spend $1,500 to have it repaired. Now, six months later, Stan has decided to sell the car, and he reasons that
his asking price should be $2,500 + $1,500 = $4,000. Comment on the wisdom of Stans logic. If he receives
an offer for $3,000, should he accept it? Explain your reasoning.

Problem No.6
You have been invited by friends to fly to Germany for Octoberfest next year. For international travel,
you apply for a passport that costs $97 and is valid for 10 years. After you receive your passport, your
travel companions decide to cancel the trip because of insufficient funds. You decide to also cancel your
travel plans because traveling alone is no fun. Is your passport expense a sunk cost or an opportunity cost?
Explain your answer.

Problem No.7
Suppose your company has just discovered $100,000 worth (this is the original manufacturing cost)
of obsolete inventory in an old warehouse. Your boss asks you to evaluate two options: (1) re machine the
obsolete parts at a cost of $30,000 and then hopefully resell them for $60,000 or (2) scrap them for $15,000
cash (which is certain) through a secondhand market. What recommendation would you make to your boss?
Explain your reasoning.

Problem No.8
A friend of yours has been thinking about quitting her regular day job and going into business for herself.
She currently makes $60,000 per year as an employee of the Ajax Company, and she anticipates no raise for at
least another year. She believes she can make $200,000 as an independent consultant in six-sigma black belt
training for large corporations. Her start-up expenses are expected to be $120,000 over the next year. If she
decides to keep her current job, what is the expected opportunity cost of this decision? Attempt to balance the
pros and cons of the option that your friend is turning away from.

Problem No.9
Suppose your wealthy aunt has given you a gift of $25,000. You have come up with three options
for spending (or investing) the money. First, youd like (but do not need) a new car to brighten up
your home and social life. Second, you can invest the money in a high-tech firms common stock. It is
expected to increase in value by 20% per year, but this option is fairly risky. Third, you can put the money
into a three-year certificate of deposit with a local bank and earn 6% per year. There is little risk in the third
a. If you decide to purchase the new car, what is the opportunity cost of this choice? Explain your reasoning.
b. If you invest in the high-tech common stock, what is the opportunity cost of this choice? Explain your

Problem No.10
In your own words, describe the life-cycle cost concept. Why is the potential for achieving life-cycle
cost savings greatest in the acquisition phase of the life cycle?