Jimma University

Construction Economics (CEGN 6108)

Assignment 4
Answer the following three questions clearly (45 points)
1) A small company purchased now for $23,000 will lose $1,200 each year for the first
four years. An additional $8,000 is invested in the company during the fourth year
will result in a profit of $5,500 each year from the fifth through to fifteen year. At
the end of 15 year the company can be sold for $33,000. The desired rate of return
is 15%.
A) Calculate the NPV of the project.(3 points)
B) Determine the IRR?(3 points)
C) Calculate the future worth in MARR = 12% (2 points)
2) A new office building is constructed at the cost of $3 million. It is estimated to have
a life of 50 years, with a value at that time of $200,000. It will have maintenance
cost of $30,000 per year. It will also have major repairs costing $80,000 that occur
at the years 10, 20, 30, and 40. And it will have additional repairs at the end of year
25 costing $400,000. Determine, first the present worth of the funds, and then the
value of the annual if the target ROI of the firm is 15%. (8 points)
3) In order to meet some new environmental standards, engineers and technicians at
a chemical firm have designed a new waste control system for one of the processes.
The cost of the installed design is expected to be $3500, 000. It will have little or no
salvage value at the end of the 12 years. The savings over the current disposal costs
are expected to be $65,000 per year. The firm typically desires a return of 12% in
projects such as this.
A) Evaluate the pocket using the present worth, future worth, and annual amount
methods and determine whether the projects should be accepted or not? (6
points)
B) Determine the IRR of the project (3 points)
C) Compare the answer in part (b) to the target value of 12%.(2 points)
D) What nonfinancial benefits are associated with this type of project? (2 points)
4) A family is considering having a new furnace installed. They have received
quotations from two companies. They desire to earn 8% from their investment.
One furnace is expected to cost $1,800 initially, having operating costs of $1,000
per year, and lasts 10 year. The second alternative is advertised as a “high
efficiency” model and would cost $2,600 initially, have annual costs of $800 per
year, and lasts 12 years. Determine the best alternative. Which of the four analysis
methods should be used? (8 points)
5) Four new designs for tooling re proposed. The organizations target rate on
investment is 15%. No residual salvage value would exist for any of the
alternatives. They would each have six years life.
A B C D
First cost 60,,000 80,000 100,000 40,000
Saving/year 15,000 25,000 31,000 12,000
Determine each alternative’s IRR and calculate incremental IRR (8 points)
 Construction Economics

Assignment 1

Due date: August 5, 2019

Answer all the questions. Please show your steps clearly

1) A company produces and sells a consumer product and thus far has been able to control
the volume of the product by varying the selling price. The company is seeking to maximize
its net profit. It has been calculated that the relationship between price and demand, per
month, is approximately D = 500 − 5P , where P is the price per unit in dollars. The fixed
cost is $1,000 per month, and the variable cost is $20 per unit. Obtain the answer, both
mathematically and graphically, to the following questions:
a) What is the optimal number of units that should be produced and sold per month?
b) What is the maximum profit per month?
c) What are the breakeven sales quantities (i.e., range of profitable demand volume)?
2) Suppose that the ABC Corporation has a production (and sales) capacity of $1,000,000 per
month. Its fixed costs – over a considerable range of volume – are $350,000 per month,
and the variable costs are $0.50 per dollar of sales.
a) What is the annual breakeven chart (D’)? Develop (graph) the breakeven chart.
b) What would be the effect on D’ of decreasing the variable cost per unit by 25% if
the fixed costs thereby increased by 10%?
c) What would be the effect on D’ if the fixed costs were decreased by 10% and the
variable cost per unit were increased by the same percentage?
3) A local defense contractor is considering the production of fireworks as a way to reduce
dependence on the military. The variable cost per unit is $40 D. the fixed cost that can be
allocated to the production of fireworks is negligible. The price charged per unit will be
determined by equation P = $180 − (5) D , where D represents demand in units sold per
week.
a) What is the optimum number of units the defense contractor should produce in
order to maximize profit per week?
b) What is the profit if the optimum numbers of units are produced?
 Jimma University
Construction Economics (CEGN 6108)
Assignment 3
Answer the following three questions clearly (20 points)
1) Inventory is purchased by an electronic components wholesale company from a
manufacturer. The components have a value of $51.50 per unit and 100
components are purchased. Two weeks later, a retail customer orders 25 of these
components at a price of $67.00 per unit. Show the entries in the Accounting
Equation when the components are purchased by the wholesaler and then when
the units are sold to the retailer. (4 points)
2) You are given departmental financial information for a hypothetical Satellite
Components Corporation in the table below. Using horizontal and vertical
analysis, calculate
A) Scrap as a percentage of total output from the department for five months. (1
point)
B) Productivity for each month. (1 point)
C) The percentage of direct labour to total labour cost for each month. (1 point)
D) The percentage of direct labour to total units produced in the period. (1 point)
E) What additional information would you like to have, if you were the team
leader of this department cost improvement team? State any conclusions from
the preceding analysis. (2 points)
Satellite Components Corp.
Thrust Flow Monitor Component department Costs
Cost January February March April May
Volume – units 10,500 12,000 11,000 14,000 13,000
Direct material ($) 400,000 510,000 476,000 450,000 600,000
Indirect materials 15,000 30,000 25,000 41,000 30,000
($)
Direct labour ($) 800,000 900,000 900,000 1,000,000 940,000
Indirect labour ($) 40,000 45,000 44,000 76,000 63,000
Rework ($) 20,000 15,000 10,000 9,000 12,000
Scrap ($) 5,000 8,000 10,000 15,000 12,000
 3) Discussion case
Valley Service Inc.,
Valley service is a small maintenance company. It was started 10 years ago as a one
person business and it has grown rapidly. It provides commercial, industrial, and home
repair services. One section provides lawn cutting, leaf removal, and land scraping
services for homeowners. Another section provides housekeeping and maintenance
services for offices and industrial customers, from the routine daily office cleaning to
large warehoused cleaning. A third section provides landscaping, repair, and
maintenance services for apartments and condominium projects.

The organization is profitable. Jim Maxwell, the owner, works hard, sometimes 60 to 70
hours per week. He has the payroll, bookkeeping, and tax work done by a small
accounting firm in the neighborhood, and he personally signs all the checks. The
accountant, Bob Harrison, has been discussing with Jim the potential problems that valley
service may be facing soon. Bob has said that growth is fast to be supported by internal
profits and Jim is going to have to consider borrowing or obtaining funds from outside
sources if he wants to continue to grow. Jim has been recently approached by a
competitor who wants to sell his business to Jim. Also, a small local industrial thrush and
waste company is for sell and Jim believes it would fit into his company’s service.

Valley service has some experiences and loyal employees. Some have been with Jim a
number of years. Valley has a lot of equipment, including mowers, pickup trucks, vans,
power cleaning equipment, tools, and other equipment. The company rents an old 20,000-
square foot garage that serves as storage for vehicles, repair facility, equipment storage,
and offices for the company.

Although the company is very profitable, as the annual Income Statements show that Jim
never seem to have enough cash in the checking account to pay the bills and purchase
new equipment. Bob has talked to Jim about the organization’s cash flow problems, but
Jim does not understand the details of accounting. Jim knows that he may have to begin
to borrow long-term funds from the bank in order to grow. He doesn’t like the idea of the
business taking on debt. Also, he has considered making the company’s stock available
to some of the more experienced and loyal employees. He feels this would be a good
motivator and reward for them, as well as a potential source of funds without borrowing.
He has been approached by a relative who has offered to invite in the company in
exchange for stock.

Let one night at office, while thinking about all these problems, Jim jotted down the
following list on the back of an envelope. He has been carrying the envelope with him for
the last two weeks, but he does not have any conclusions or solutions.
• Should the waste disposal company be purchased?
• Is the purchase of the competitor a good idea?
• Would the employees be interested in buying stock or receiving it as a bonus?
• How should the bank be approached for loan?
• Bob keeps talking about cash flow and net income – is this important?
• How can we keep expanding and purchasing the equipment we need?
• Disadvantages of having a relative as an owner?
• Any other source money that I can use?
• How can we be as successful as we are and still not have any money?
• I need a plan – don’t know how to put it together?
• Our equipment needs consistently needing repairs and it is wearing out. How can
we have a continuous replacement program?
• What should be done first, second, and third?
1) What suggestion can you make to Jim? Why? (2 point)
2) Help Jim decide what to do first, second, and third? Reason out why?(3 points)
3) What could Bob do to help Jim? (2 points)
4) Why is Jim always short of cash if the company is profitable? (2 points)
5) If you were Jim, what would you do? Why? (2 point)