PROJECT MANAGEMENT

AND ECONOMICS
Project Base Learning Assignment
2016-ME-109

Solution of Question-1
Part(a)
Given:
Fixed Cost = CF = $5,000
Variable Cost = cv = $15.50
Price = p = 87.50 - 0.02D
To Find:
 Optimal Volume of Sprinklers
 Range of profitable demand
From the price equation, we can find the values of a and b,
a= 87.5
b= 0.02
Now, we need to find out the optimal volume of sprinklers. Let it be D*.
D*=(a-cv)/2b
D* = (87.5-15.5)/ (2(0.02)) = 1800
Hence the optimal value is 1800.
Now we need to determine the whether the company makes profit.
Total revenue = aD*- bD*2 = 87.5(1800) - 0.02(1800)2
= 92700
Total cost = CF + cvD*
= 55,000 + 15.5(1800)
= 82900
Now we know the that company will make profit if;
Total revenue – Total cost > 0
92700 – 82900 > 0
9800 > 0
Hence the company makes profit. We can also check this by using second derivative. Since
(d2p)/ (dD2) = -0.04 < 0

Part(b)
Given:
Fixed Cost = CF = $5,000
Variable Cost = cv = $15.50
2016-ME-109

Price = p = 87.50 - 0.02D

To Find:
 Optimal Volume of Sprinklers
 Range of profitable demand
We need to determine the range of demand in which the company makes profit. For that we
have to find the breakeven points.
Total revenue = total cost
aD- bD2 = CF + cvD
bD2 – aD + cvD +CF = 0
Putting the values;
0.02D2 – D (87.5 – 15.5) + 55,000 = 0
0.02D2 – 72D + 55,000 = 0
This equation can be solved by using quadratic formula to find values of D.
D = (-b± √(b^2-4ac))/2a
Here;
b = -72
a = 0.02
c= 55,000
By putting these values in quadratic formula, we get two values of D
D1 = 1100
D2 = 2500

Part(c)
The Excel calculations and graph are show as:
Monthly Price per unit Total Revenue Total Cost Profit
Demand
0 87.5 0 55000 -55000
200 83.5 16700 58100 -41400
400 79.5 31800 61200 -29400
600 75.5 45300 64300 -19000
800 71.5 57200 67400 -10200
1000 67.5 67500 70500 -3000
1200 63.5 76200 73600 2600
1400 59.5 83300 76700 6600
1600 55.5 88800 79800 9000
1800 51.5 92700 82900 9800
2000 47.5 95000 86000 9000
2200 43.5 95700 89100 6600
2016-ME-109

2400 39.5 94800 92200 2600

2600 35.5 92300 95300 -3000
2800 31.5 88200 98400 -10200
3000 27.5 82500 101500 -19000
3200 23.5 75200 104600 -29400
3400 19.5 66300 107700 -41400
3600 15.5 55800 110800 -55000
3800 11.5 43700 113900 -70200
4000 7.5 30000 117000 -87000
4200 3.5 14700 120100 -105400
4400 -0.5 -2200 123200 -125400
4600 -4.5 -20700 126300 -147000
4800 -8.5 -40800 129400 -170200
5000 -12.5 -62500 132500 -195000
5200 -16.5 -85800 135600 -221400
5400 -20.5 -110700 138700 -249400
5600 -24.5 -137200 141800 -279000
5800 -28.5 -165300 144900 -310200
200000

150000
2600; 95300
100000
1000; 70500
50000
t.r/t.c

0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total Revenue
40 80 120 160 200 240 280 320 360 400 440 480 520 560 Total Cost
-50000

-100000

-150000

-200000
Demand

Solution of Question-2
Let, we have selected the Skardu, place in Northern Pakistan where the average outside
temperature recorded is 46-degree Fahrenheit and inside temperature of a home in it is 70-
degree Fahrenheit.
Heat loss in Btu/hour = (∆Temperature in ℉) × (Area in ℉) × (Conductance in Btu/hour)/(ft^2-℉)
Q = (T_in - T_out) A.U.
No. of heating days = 3 months = 90 days
Average inside temperature = 70 ℉
Average outside temperature = 46 ℉
2016-ME-109

Area = 2400 ft^2

Q = (70° - 46°) × 90 × 2400 × 24 × 0.397 =49.39 × 10^6
Efficiency=100 %
Cost of electricity= $ 0.074 per kWh
As, 1KWh=3413 Btu and (1 kWh)/ (3413 Btu) = 293 kWh per million Btu
(293 kWh)/ (Million (10^6) Btu) × ($ 0.074)/kWh ≅ $ 21.75/10^6 Btu

R11 R19 R30

Investment Cost $600 $900 $1300
Cost of heat loss $1609.5 $1518.15 $1416.6
per year
Cost of heat loss $40237.5 $37953.75 $36540
over 25 years
Total life cost $40837.5 $38853.75 $37840

Result
To minimize the total life cost, we select the R30 insulation.
This thing is further elaborated as:
No. of Years R11 R19 R38
1 1604.468 1513.4036 1435.3484
2 3208.936 3026.8072 2870.6968
3 4813.404 4540.2108 4306.0452
4 6417.872 6053.6144 5741.3936
5 8022.34 7567.018 7176.742
6 9626.808 9080.4216 8612.0904
7 11231.276 10593.8252 10047.4388
8 12835.744 12107.2288 11482.7872
9 14440.212 13620.6324 12918.1356
10 16044.68 15134.036 14353.484
11 17649.148 16647.4396 15788.8324
12 19253.616 18160.8432 17224.1808
13 20858.084 19674.2468 18659.5292
14 22462.552 21187.6504 20094.8776
15 24067.02 22701.054 21530.226
16 25671.488 24214.4576 22965.5744
17 27275.956 25727.8612 24400.9228
18 28880.424 27241.2648 25836.2712
19 30484.892 28754.6684 27271.6196
20 32089.36 30268.072 28706.968
21 33693.828 31781.4756 30142.3164
22 35298.296 33294.8792 31577.6648
23 36902.764 34808.2828 33013.0132
24 38507.232 36321.6864 34448.3616
2016-ME-109

Graph showing the cost of different insulators for 25 years

120000

100000

80000
Axis Title

60000

40000

20000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Axis Title

No. of Years R11 R19 R38

Solution of Question-3

Part(a)
View Point: Nestle Organization
Convention: End of Year (EOY)

Figure 1: Cash Flow Diagram

Part(b)
Given
Initial Investment = Rs. 30 Million
2016-ME-109

Expected Life = 20 years

Annual Cost = Rs. 50,000 /year
Yearly Cost = Rs. 100,000 /year
To Find
Interest rate (i%)
For the project to be feasible the future worth of the project should be 30 Million
Net Annual Expenses = 100,000 + 50,000 = Rs. 150,000
3,000,000 = 150,000 (F/A, i%, 20)
(F/A, i%, 20) = 200
According to the Table C-18 in the appendix given in book, i% lies between 20% and 25%
At the interest rate of 20%:
(F/A, i%, 20) = 186.688
At the interest rate of 25%:
(F/A, i%, 20) = 342.9447
Solving by interpolation gives
i% = 20.426%

Part(c)
Built in function used: RATE (20, -150000, 30000000) = 20.568%
Sensitivity analysis:
Excel spreadsheet is shown as:
Interest Rate Future Worth
0.1 -21408750.08
0.11 -20369575.18
0.12 -19192133.63
0.13 -17857975.66
0.14 -16346260.85
0.15 -14633462.61
0.16 -12693038.01
0.17 -10495059.56
0.18 -8005804.496
0.19 -5187297.261
0.2 -1996800.057
0.21 1613753.977
0.22 5698390.988
0.23 10317796.64
0.24 15540093.62
0.25 21441704.28
0.26 28108307.25
2016-ME-109

0.27 35635897.36
0.28 44131959.37
0.29 53716766.91
0.3 64524818.87
0.31 76706427.04
0.32 90429469.48
0.33 105881326

Part(d)
The above values are plotted as:
2016-ME-109

Solution of Question-4

Part(a)
View Point: Food Company
Convention: End of Year (EOY)

Figure 2: Cash Flow Diagram

2016-ME-109

Part(b)
Given
Initial Investment = 0
N = 7 years
Annual Cost = $ 100,000 /year
Future cash inflow = Rs. 1000 000 0
To Find
Interest rate (i%)
We know that
F=A (F/A, i%, n)
1000000=100000(F/A, i%,7)
10= (F/A, i%,7)
We will see the indices to find the interest rate at which (F/A, i%,7) is equal to 10.
At the interest rate of 10%,
(F/A, i%,7) = 9.4872
At the interest rate of 12%,
(F/A, i%,7) =10.0890
This implies that our interest rate is in between 10% and 12%.
Using interpolation:
i%= 11.68%

Part(c)
By using the built in Rate function in Microsoft Excel:
i% = RATE (7, -100000,0,1000000)
i% = 11.71%
Sensitivity Analysis is shown as;
Interest Rates % Future Worth
0.1 -51282.9
0.11 -21672.58827
0.12 8901.172838
0.13 40465.75419
0.14 73049.13663
0.15 106679.9203
2016-ME-109

0.16 141387.334

Part(d)
Graphically, it is shown as:

Future Worth
200000

150000

100000

50000

0
0.08 0.09 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17

-50000

-100000