Financial Management Assignment

Financial Management in Construction
Assignment (20 points)
1. A hydroelectric dam is projected to produce annual benefits that grow in concert with the
regional economic growth rate of 2%. The first benefit amount, $600,000, occurs at the
end of year 5 (after the dam is constructed and the reservoir fills). If the interest rate is 8%
and the benefits are assumed to continue growing through year 50 (50-year planning
period), what is the present value of benefits (at t = 0)?`
2. A city wants to set aside enough money to build, operate, and renovate a sewage treatment
plant in perpetuity. An engineering company estimates that the plant will cost an immediate
$20 million to build and will require $5 million every 20 years to replace major equipment
and $10 million every 50 years to pay for the major structural renovation. It is estimated
that operation and maintenance costs will be $1.5 million every year. What amount will
the city need to set aside? Interest earned on the annuity is 7%.
3. An engineering firm has identified five ways to cut costs in its main office. Only one of the
options can be implemented, however, since each involves significant training time for
staff engineers. Data are provided in the table. Each option has a lifetime of seven years,
and the firm sets a MARR at 15%.
Option
A B C D E
Capital cost ($ million) 2.713 0.375 1.650 0.088 0.950
Annual cost ($ million/yr 0.093 0.275 0.132 0.147 0.228
Annual benefit ($ million/yr) 0.890 0.288 0.841 0.312 0.505
a) Solve by present worth analysis.

b) Solve by annual cash flow analysis.
c) Solve by incremental benefit-cost ratio analysis.
d) Solve by an incremental rate of return analysis using the full detailed procedure
4. A contractor is considering the purchase of an earthmover to avoid the cost of a rental unit.
The earthmover costs $350,000 initially and will cost $7000 per year to store and maintain.
When used, the operating cost is $300 per day to the contractor. A rental unit costs $500
per day to rent and operate. The contractor estimates that he would keep the earthmover
for 20 years and could then sell it at salvage for $20,000. He requires a 12% rate of return
on any investment.
Determine how many days per year he would have to operate the earthmover to make it a
worthwhile purchase. Sketch the breakeven chart for this situation.
5. A city is planning a new pipeline to supply water from distant mountains. The planning
horizon chosen is 50 years, and the city uses an interest rate of 7%. For $250 million, the
city can build a pipeline now that would supply its needs for 50 years, or it could build the
project in two stages: $150 million now and $200 million in Year 25. Annual operation
and maintenance for the first stage of the two-stage project are $3.0 million through Year
25 followed by $6.0 million for the combined first and second stage project after Year 25
and through Year 50.
a) Form the cash flow table for the two alternatives and the incremental investment,
showing the correct signs for all entries.
b) Using present worth analysis, determine the best project.
c) Using annual cash flow analysis, determine the best project.
d) Using the incremental rate of return analysis, determine the best project. Check at the
MARR only; do not try to find the incremental ROR itself.
e) Using incremental benefit-cost ratio analysis, determine the best project.
6. A highway department must select one of two pavement repair options for a 10-mile
section of a four-lane highway. The analysis period is 8 years, and the interest rate is 8%.
Option 1 Option2
Initial cost $5,300,000 $3,000,000
Annual cost 300,000 400,000
Lifetime 8 years 4 years
a) Form the cash flow table for the alternatives and the incremental investment, using standard
sign convention.
b) Using present worth analysis, find the best repair option.
c) Using annual cash flow analysis, find the best repair option.
d) Using the incremental rate of return analysis, find the best repair option.
e) Using incremental benefit-cost ratio analysis, find the best repair option

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Financial Management in Construction

Assignment (20 points)

a) Solve by present worth analysis.

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