Barry, a Texas Crude Company engineer who did not take Engineering Economy while

ID: 1180250 • Letter: B

Question

studying at Tech, recommended that Texas Crude purchase a special tool to reduce the

cost of pumping oil out of the bayous of St. Martin Parish. As a result of Barry's

recommendation, Texas Crude purchased the tool for $30,000 on January 1, 2005.

By January 1, 2006, the tool had saved a total of $5,000 and went on line full

time. After going on line full time, the tool saved Texas Crude $9,000 each year for the

next three years and Barry was happy. However, Barry recommended the "el-cheapo"

model, and it started breaking down during the early part of year five, and ended up by

saving only $4,000 during year five.

It was scrapped as being unusable at the end of year five, and had a zero salvage

value. Barry told his boss that his recommendation had been correct, as it had saved

Texas Crude $6,000 and that is a savings of 20%.

Use a MARR of 10% and evaluate the effectiveness of the tool and the correctness

of Barry's recommendation.

Effectiveness of the tool can be measured by calculating net prresent value of the tool

NPV of the tool = -30000 + 5000/1.1 + 9000/1.1^2 + 9000/1.1^3 + 9000/1.1^4 + 4000/1.1^5 =-$2623.89

Barry's recommendation is not correct. The present value of tool is negative and hence it was not effective

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