GDB3023: Engineering Economics and Entrepreneurship-

May 2020

Assignment 3

Name:
Sanjeev Nehru Jawahar Nehru
ID:
16001174
Submission Deadline:
23/6/2020
Course Coordinator:
Pn Zazilah Bt May

PIC for Assignment:

Lakshmi
 Cost-Estimation Techniques - Chapter 3

Problem 3-6

An electric power distributor charges residential customers $0.10 per kilowatt-hour (kWh). The
company advertises that “green power” is available in 150 kWh blocks for an additional $4 per
month. (Green power is generated from solar, wind power, and methane sources.) (3.3)

a. If a certain customer uses an average of 400 kWh per month and commits to one monthly 150
kWh block of green power, what is her annual power bill?

b. What is the average cost per kWh with green power during the year?

c. Why does green power cost more than conventional power?

Solutions:

a) Power Usage: 400kwh / Month

Green Power Usage : 150kWh / Month
Standard Power Usage: (400 kWh- 150 kWh) = 250kWh

Green Power Usage Cost in a month = (150 kWh X $0.10 ) + $4

= $19/Month

Standard Power Usage Cost in a month = ( 250 kWh X $0.10)

=$25/Month
12 𝑀𝑜𝑛𝑡ℎ𝑠
Annual Power Bill Cost = Total Power Usage Cost in a month X
1𝑌𝑒𝑎𝑟

$19+$25 12 𝑀𝑜𝑛𝑡ℎ𝑠
= X = $528
𝑀𝑜𝑛𝑡ℎ 1𝑌𝑒𝑎𝑟

𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑜𝑤𝑒𝑟 𝐶𝑜𝑠𝑡 𝑖𝑛𝑐𝑙𝑑 𝐺𝑟𝑒𝑒𝑛 𝑃𝑜𝑤𝑒𝑟

b) Average Cost Per kWh of green power =
𝑇𝑜𝑡𝑎𝑙 𝑃𝑜𝑤𝑒𝑟 𝑈𝑠𝑎𝑔𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟

$528
=
400𝑘𝑊ℎ 𝑋 12 𝑀𝑜𝑛𝑡ℎ𝑠

= $0.11 per kilowatt-hour(kWh)

There is an increase of $0.01(10 percent) from the standard cost per kilowatt-hr.

c) Green power although coming from a environmental friendly source cost more than
standard electricity due to the capital cost needed to be covered due to a completely new
infrastructure built and these money would be fed back to the electricity generators and the
providers of green power which invested in green technology involving solar, wind and
other renewable sources. The generation method is costly compared to the standard ones.
Problem 3-11

The purchase price of a natural gas-fired commercial boiler (capacity X) was $181,000 eight years
ago. Another boiler of the same basic design, except with capacity 1.42X, is currently being
considered for purchase. If it is purchased, some optional features presently costing $28,000 would
be added for your application. If the cost index was 162 for this type of equipment when the
capacity X boiler was purchased and is 221 now, and the applicable cost capacity factor is 0.8, what
is your estimate of the purchase price for the new boiler? (3.3, 3.4)

Solution

𝐼𝑛̅
𝐶𝑛 = 𝐶𝑘 ( )
𝐼𝑘̅

Where k = reference year for which cost or price of item is known;

n = year for which cost or price is to be estimated (n > k);
𝐶𝑛 = estimated cost or price of item in year n;
𝐶𝑘 = cost or price of item in reference year k.

Let 𝐶𝑛−8 = cost of old boiler 8 years ago,

𝐶𝑛 = cost of old boiler, today,

Cost of the boiler today:

𝐼𝑛̅
𝐶𝑛 = 𝐶𝑛−8 ( ̅𝐼𝑛−8
)

221
= ($181 000) ( ) = $ 246 919.75
162

𝑆𝐴 𝑋
𝐶𝐴 = 𝐶𝐵 ( )
𝑆𝐵

where 𝐶𝐴 = cost for plant A ($)

𝐶𝑏 = cost for plant B ($)

𝑆𝐴 = size of plant A (Both in same physical units)

𝑆𝐵 = size of plant B
X = cost-capacity factor to reflect economies of scale.

Let ; 𝐶𝐴 = cost for new boiler ($)

𝐶𝑏 = cost for old boiler today ($)

1.42𝑋 0.8
𝐶𝐴 = $ 246 919.75( )
𝑋
= $ 326 879.61

Total cost with optional safety features = $326,879.61 + $28,000 = $354, 879.61
Problem 3-21

The cost of building a supermarket is related to the total area of the building. Data for the last 10
supermarkets built for Regork, Inc., are shown in the
accompanying table.

Building Area (ft2) Cost ($)

1 14,500 800,000
2 15,000 825,000
3 17,000 875,000
4 18,500 972,000
5 20,400 1,074,000
6 21,000 1,250,000
7 25,000 1,307,000
8 26,750 1,534,000
9 28,000 1,475,500
10 30,000 1,525,000

a. Develop a CER for the construction of supermarkets. Use the CER to estimate the cost of
Regork’s next store, which has a planned area of 23,000 square feet. (3.4)

b. Compute the standard error and correlation coefficient for the CER developed in Part (a). (3.4)

Solution:
Option 1: Computation Based on The Below Formula

Form Linear Equation: y= bo + b1x where n = 10

Option 2: By Using Excel Spreadsheet

Using Data Analysis method

X Variable 1 Line Fit Plot

2,000,000

1,000,000
Y

0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
X Variable 1

Y Predicted Y

Coefficients Standard Error t Stat P-value

Intercept 50631.14803 89394.41311 0.566379 0.58666908
X Variable 1 51.49751802 4.018701673 12.81447 1.2978E-06

bo (Gained from Intercept Coefficient) = 50 631.15

b1 (Gained from X Variable 1 Coefficient) = 51.497518

Sub into equation: y= bo + b1x to form the CER relating the supermarket building cost to building
area(x):
Y(cost)= 50 631.15 + 51.498X
So the estimated cost for the 23000 ft2 is :
Y(cost)= 50 631.15 + 51.498X
= 50 631.15 + 51.50(23000)
= $ 1 235 131.15

b) Obtaining the standard error and correlation coefficient

Option 1: Computation Based on this Formula

Option 2: By Using Excel Spreadsheet

Regression Statistics
Multiple R 0.97649641
R Square 0.953545239
Adjusted R Square 0.947738394
Standard Error 66780.64733
Observations 10

SE( Standard Error) = 66 780. 65

Correlation coefficient,R (obtained from Multiple R column), = 0.97649641

Problem 3-22

In the packaging department of a large aircraft

parts distributor, a fairly reliable estimate of packaging and processing costs can be determined by
knowing the weight of an order. Thus, the weight is a cost driver that accounts for a sizable fraction
of the packaging and processing costs at this company. Data for the past 10 orders are given as
follows: (3.4)

Packaging Weight (Pounds), x

Processing
Costs ($), y
97 230
109 280
88 210
86 190
123 320
114 300
112 280
102 260
107 270

86 190

a. Estimate the b0 and b1 coefficients, and determine the linear regression equation to fit these
data.

b. What is the correlation coefficient (R)?

c. If an order weighs 250 lb, how much should it cost to package and process it?
Solutions:
a)
Option 1: Computation Based on The Below Formula
Form Linear Equation: y= bo + b1x where n = 10
Option 2: By Using Excel Spreadsheet
Using Data Analysis method

Coefficients Standard Error t Stat P-value

Intercept 31.8128655 3.387382072 9.391578754 1.35353E-05
X Variable 1 0.279000532 0.013196368 21.1422206 2.63193E-08

bo (Gained from Intercept Coefficient) = 31.81287

b1 (Gained from X Variable 1 Coefficient) = 0.27900
b)
Option 1: Computation Based on this Formula

Option 2: By Using Excel Spreadsheet

Regression Statistics
Multiple R 0.991169678
R Square 0.982417331
Adjusted R Square 0.980219497
Standard Error 1.809876031
Observations 10

Correlation coefficient,R (obtained from Multiple R column), = 0.9912

c)

Sub into equation: y= bo + b1x to form the CER relating the supermarket building cost to building
area(x):
Y(cost)= 31.81287+ 0.279X
= 31.81287+ 0.279(250lb)
= $101.56
Problem 3-27

Extended Learning Exercise. You have been asked to prepare a quick estimate of the construction
cost for a coal-fired electricity generating plant and facilities. A work breakdown structure (levels
one through three) is shown is Table P3-27. You have the following information available:

• A coal-fired generating plant twice the size of the one you are estimating was built in 1993. The
1993 boiler (1.2) and boiler support system (1.3) cost $110 million. The cost index for boilers was
110 in 1993, it is 492 in 2016. The cost capacity factor for similar boilers and support systems is
0.9. The 600-acre site is on property you already own, but improvements (1.1.1) and roads (1.1.2)
will cost $2,000 per acre, and railroads (1.1.3) will cost $3,000,000. Project integration (1.9) is
projected to cost 3% of all other construction costs.

• The security systems (1.5.4) are expected to cost $1,500 per acre, according to recent (2016)
construction of similar plants. All other support facilities and equipment (1.5) elements are to be
built by Viscount Engineering. Viscount Engineering has built the support facilities and equipment
elements for two similar generating plants. Their experience is expected to reduce labor
requirements substantially; a 90% learning curve can be assumed. Viscount built the support
facilities and equipment on their first job in 95,000 hours. For this project, Viscount’s labor will be
billed to you at $60 per hour. Viscount estimates that materials for the construction of the support
facilities and equipment elements (except 1.5.4) will cost you $15,000,000.

• The coal storage facility (1.4) for the coal-fired generating plant built in 1993 cost $5 million.
Although your plant is smaller, you require the same size coal storage facility as the 1993 plant.
You assume you can apply the cost index for similar boilers to the coal storage facility.

What is your estimated 2016 cost for building the coal-fired generating facility? Summarize your
calculations in a cost estimating worksheet, and state the assumptions you make
Solutions:

i) Factor Value for the Boiler and Support System (1.2 &1.3)

492
(1/2)0.9 = 2.3969
110

ii) Factor Value for coal storage facility( 1.4)

492
= 4.4727
110

iii) Labor time estimate for 3rd facility (1.5 except 1.5.4)
 𝑍𝑢 = 𝐾(𝑈 𝑛 )

where u = the output unit number;

Zu = the number of input resource units needed to produce output unit u;
K = the number of input resource units needed to produce the first output unit;
s = the learning curve slope parameter expressed as a decimal
(s = 0.9 for a 90% learning curve);
n = log s/log 2 = the learning curve exponent.

U =3 units involved
K= 95 000 hours
S= 0.9
n= log s/log 2 =

𝑍3 = 𝐾(𝑈 𝑛 )
= 95000( 3−0.512 )
= 80 389.82 hours

Element Code Unit/Factors Price/Unit Cost($) Total Cost ($)

Land Improvements 1.1.1
Roads, parking and 600 $2000/acre $1,200,000
Paved 1.1.2
Railroads 1.1.3 $3,000,000
1.1 $4,200,000
Boiler 1.2
i)2.3969 $110,000,000 $263,659,000
Boiler Support System 1.3 $263,659,000
Coal-fired generating
ii)4.4727
plant 1.4 $5,000,000 $22,363,500 $22,363,500

Support Facility and

equipment( Except 1.5 iii)80 390 $60 $4823400 +
1.5.4) $15000000(materials)
Security system 1.5.4 600 $1,500 $900,000
1.5 $20,723,400
1.1-
1.5 $310,945,900
Project integration 1.9 3% $310,945,900 $9,328,377
TOTAL COST ESTIMATED COST IN 2016: $320,274,277

So the total cost estimated as for 2016 is $320,274,277