Engineering Economics Problem: The engineer/architect must be prepared to make a
ID: 2470413 • Letter: E
Question
Engineering Economics Problem:
The engineer/architect must be prepared to make alternative analyses of various financing methods, as well as for various physical alternative designs. In comparing debt financing versus pay-as-you-go financing, two main items of consideration come into play: (1) the interest rate paid on borrowed money, which may be higher than the minimum desirable rate of return, particularly if a revenue bond is being used, and (2) the time frame of achieving benefits will be substantially altered depending upon the effect of financial alternatives on scheduling. A 10-mile stretch of state highway is to be reconstructed at a total cost of $30,000,000. Road users' costs on the existing facility are currently $2,000,000/year and maintenance costs are $6,000/year. The new facility will reduce these to $1,000,000/year and $2,000/year, respectively. There are two funding/construction options. First, the highway can be rebuilt now, in one year, with a serial bond issue bearing 6%/year, issued for 20 years. Second, if financed out of current taxes, construction will proceed at 2 miles/year, taking 5 years to complete. With this option, in each year 1/5 of the construction cost will be paid, and 1/5 of the maintenance and users' costs reductions is experienced. In either instance, the service life of the new road is considered to be 30 years from the project inception. The minimum desirable rate of return is 8%/year.As the project manager, which funding plan would you recommend to the state? Why?Explanation / Answer
see result from both scenario as follow : Serial bond option is recommended becuase of lower NPV than second option
Serial bond Issue Year savings Interest Loan Repay Total Cash flow DCF @ 8% NPV 1 1,004,000 (1,800,000) - (795,999) 0.926 (737,036) 2 1,004,000 (1,800,000) - (795,998) 0.857 (682,440) 3 1,004,000 (1,800,000) - (795,997) 0.794 (631,888) 4 1,004,000 (1,800,000) - (795,996) 0.735 (585,081) 5 1,004,000 (1,800,000) - (795,995) 0.681 (541,741) 6 1,004,000 (1,800,000) - (795,994) 0.630 (501,611) 7 1,004,000 (1,800,000) - (795,993) 0.583 (464,454) 8 1,004,000 (1,800,000) - (795,992) 0.540 (430,050) 9 1,004,000 (1,800,000) - (795,991) 0.500 (398,194) 10 1,004,000 (1,800,000) - (795,990) 0.463 (368,697) 11 1,004,000 (1,800,000) - (795,989) 0.429 (341,386) 12 1,004,000 (1,800,000) - (795,988) 0.397 (316,098) 13 1,004,000 (1,800,000) - (795,987) 0.368 (292,683) 14 1,004,000 (1,800,000) - (795,986) 0.340 (271,002) 15 1,004,000 (1,800,000) - (795,985) 0.315 (250,928) 16 1,004,000 (1,800,000) - (795,984) 0.292 (232,340) 17 1,004,000 (1,800,000) - (795,983) 0.270 (215,129) 18 1,004,000 (1,800,000) - (795,982) 0.250 (199,194) 19 1,004,000 (1,800,000) - (795,981) 0.232 (184,438) 20 1,004,000 (1,800,000) (30,000,000) (30,795,980) 0.215 (6,607,222) 21 1,004,000 - - 1,004,021 0.199 199,455 22 1,004,000 - - 1,004,022 0.184 184,680 23 1,004,000 - - 1,004,023 0.170 171,000 24 1,004,000 - - 1,004,024 0.158 158,334 25 1,004,000 - - 1,004,025 0.146 146,606 26 1,004,000 - - 1,004,026 0.135 135,746 27 1,004,000 - - 1,004,027 0.125 125,691 28 1,004,000 - - 1,004,028 0.116 116,381 29 1,004,000 - - 1,004,029 0.107 107,760 30 1,004,000 - - 1,004,030 0.099 99,778 NPV (12,806,182) Tax savings amount investment Year Cash flow savings Total Cash flow DCF @ 8% NPV 1 (6,000,000) 200,800 (5,799,200) 0.926 (5,369,630) 2 (6,000,000) 401,600 (5,598,400) 0.857 (4,799,726) 3 (6,000,000) 602,400 (5,397,600) 0.794 (4,284,789) 4 (6,000,000) 803,200 (5,196,800) 0.735 (3,819,803) 5 (6,000,000) 1,004,000 (4,996,000) 0.681 (3,400,194) 6 - 1,004,000 1,004,000 0.630 632,690 7 - 1,004,000 1,004,000 0.583 585,824 8 - 1,004,000 1,004,000 0.540 542,430 9 - 1,004,000 1,004,000 0.500 502,250 10 - 1,004,000 1,004,000 0.463 465,046 11 - 1,004,000 1,004,000 0.429 430,598 12 - 1,004,000 1,004,000 0.397 398,702 13 - 1,004,000 1,004,000 0.368 369,169 14 - 1,004,000 1,004,000 0.340 341,823 15 - 1,004,000 1,004,000 0.315 316,503 16 - 1,004,000 1,004,000 0.292 293,058 17 - 1,004,000 1,004,000 0.270 271,350 18 - 1,004,000 1,004,000 0.250 251,250 19 - 1,004,000 1,004,000 0.232 232,639 20 - 1,004,000 1,004,000 0.215 215,406 21 - 1,004,000 1,004,000 0.199 199,450 22 - 1,004,000 1,004,000 0.184 184,676 23 - 1,004,000 1,004,000 0.170 170,997 24 - 1,004,000 1,004,000 0.158 158,330 25 - 1,004,000 1,004,000 0.146 146,602 26 - 1,004,000 1,004,000 0.135 135,743 27 - 1,004,000 1,004,000 0.125 125,688 28 - 1,004,000 1,004,000 0.116 116,377 29 - 1,004,000 1,004,000 0.107 107,757 30 - 1,004,000 1,004,000 0.099 99,775 NPV (14,380,007)Related Questions
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