EEE - Assignment 2 Sanjeev 16001174 PDF

GDB3023: Engineering Economics and Entrepreneurship- May
2020
Assignment 2
Name:
Sanjeev Nehru Jawahar Nehru
ID:
16001174
Submission Deadline:
16/6/2020
Course Coordinator:
Pn Zazilah Bt May
PIC for Assignment:

Lakshmi
Cost Concepts and Design Economics- Chapter 2
Problem 2-3
A group of enterprising engineering students has developed a process for extracting combustible
methane gas from cow manure (don’t worry, the exhaust is odorless).With a specially adapted
internal combustion engine, the students claim that an automobile can be propelled 15 miles per
day from the “cow gas” produced by a single cow. Their experimental car can travel 60 miles per
day for an estimated cost of $5 (this is the allocated cost of the methane process equipment—the
cow manure is essentially
free) (2.1)
a. How many cows would it take to fuel 1,000,000 miles of annual driving by a fleet of cars? What
is the annual cost?
b. How does your answer to Part (a) compare to a gasoline-fueled car averaging 30 miles per gallon
when the cost of gasoline is $3.00 per gallon?
Solutions:
Annual requirement: 1 000 000 miles
a) Required miles of driving per day
𝑀𝑖𝑙𝑒𝑠 𝑜𝑓 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑟𝑖𝑣𝑖𝑛𝑔

=
𝐷𝑎𝑦𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
1000000 𝑚𝑖𝑙𝑒𝑠
=
365𝑑𝑎𝑦𝑠
2739.73 𝑚𝑖𝑙𝑒𝑠
=
𝑑𝑎𝑦
No of Cows Needed
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑀𝑖𝑙𝑒𝑠 𝑜𝑓 𝑑𝑟𝑖𝑣𝑖𝑛𝑔 𝑝𝑒𝑟 𝑑𝑎𝑦

=
𝑀𝑖𝑙𝑒𝑠 𝐺𝑒𝑛𝑒𝑟𝑎𝑡𝑒𝑑 𝑏𝑦 1 𝑐𝑜𝑤 𝑖𝑛 𝑎 𝑑𝑎𝑦
𝑚𝑖𝑙𝑒𝑠
2739.73
𝑑𝑎𝑦
= 𝑚𝑖𝑙𝑒𝑠
15
𝑐𝑜𝑤.𝑑𝑎𝑦
= 182.65 ~~ 183 cows
Estimated Annual cost for Cow Gas Utilization
Cost of 60 Miles travel per day

= Miles of annual driving X
60 Miles
$5
= 1 000 000 x
60
= $ 83,333.33
b) Estimated Annual cost for Gasoline Utilization
Cost of 30 Miles travel per day

= Miles of annual driving X
30 Miles
$3
= 1 000 000 x
30
= $ 100 000
A gasoline fuelled car would cost extra $16666.67 when compared to the cow gas
Problem 2-4
A municipal solid-waste site for a city must be located at Site A or Site B. After sorting,
some of the solid refuse will be transported to an electric power plant where it will be
used as fuel. Data for the hauling of refuse from each site to the power plant are shown in
Table P2-4.
If the power plant will pay $8.00 per cubic yard of sorted solid waste delivered to the
plant, where should the solid-waste site be located? Use the city’s viewpoint and assume
that 200,000 cubic yards of refuse will be hauled to the plant for one year only. One site
must be selected. (2.1)
Solutions:
Cost Type Fixed Variable Site A Site B

Rent X $5000 $100 000
Hauling X = (1.5)(4)(200,000) = (1.5)(3)(200,000)
= $1 200 000 = $ 900 000
Cost/Year = $5000 + $1200 000 = $100 000 + $900 000
=$1 205 000 = $1 000 000
Equation to estimate $ 5000 + 6X = $8X $100 000 + 4.5X= $8X
profit start
How many yards X= 2500 yd3 X= 28 571.42 yd3
needed to make
profit
Revenue and Profit Revenue=$8.00 X 200 000 Revenue=$8.00 X 200 000
=$1 600 000 =$1 600 000
Profit = $1600 000- $1205 000 Profit= $1600 000- $1000 000
=$395 000 = $600 000
Conclusion:
Although Site A may generate profit faster compared to Site B , the profit gained by Site B is
higher. Site B has a larger fixed cost and this fixed cost would later be traded off for a reduced
variable cost compared to Site A. So, the solid waste should be placed at Site B.
Problem 2-13
A large company in the communication and publishing industry has quantified the relationship
between the price of one of its products and the demand for this product as Price = 150 − 0.01 × Demand for
an annual printing of this particular product. The fixed costs per year (i.e., per printing) = $50,000 and the
variable cost per unit=$40. What is the maximum profit that can be achieved if the maximum expected
demand is 6,000 units per year? What is the unit price at this point of optimal demand? (2.2)
Solution:
Relation of price and demand: P = 150 – 0.01D

Fixed cost (CF) = $50, 000
Variable cost per unit (cv) = $40
Maximum Expected demand = 6, 000 unit/year
Profit = Total revenue- Total costs
= (aD-bD2) – (CF + cvD )
= (150D -0.01D2) – (50 000 + 40 D)
=110D-0.01D2 -50 000
Since profit occur due to:
(a - cv ) >0 & TR > CT for the period involved
Maximum anticipated profit:
= (150(6, 000) – (0.01) (6, 000)2) – ((50, 000) + (40) (60, 000))
= $ 250, 000
Optimal Demand, D*:
𝑑(𝑃𝑟𝑜𝑓𝑖𝑡)
= a- cv – 2bD = 0
𝑑𝐷
150-40 – 2(0.01)D = 0
D*= 5500 units/year
Actual Maximum profit
= (150( 5500) – (0.01) (5500)2) – ((50, 000) + (40) (5500))
= $ 252, 500
The actual Maximum profit gained is $2500 lesser than the expected ones due to its optimal
demand at 5500 units/year. So even at expected 6000 units/year, the maximum profit would be
$252 500.
Unit Price at Optimal Demand:
p= 150 – 0.01 (5500)

p = 150 – 0.01 (5500)
= $95/unit
Problem 2-15
A company produces and sells a consumer product and is able to control the demand for the
product by varying the selling price. The approximate relationship between price and demand is
2700 5000
𝑝 = $38 + − , 𝑓𝑜𝑟 𝐷 > 1
𝐷 𝐷2
where p is the price per unit in dollars and D is the demand per month. The company is seeking to
maximize its profit. The fixed cost is $1,000 per month and the variable cost (cv) is $40 per unit.
(2.2)
a. What is the number of units that should be produced and sold each month to maximize profit?
b. Show that your answer to Part (a) maximizes profit.
Solutions:
a)
Profit = Total revenue - Total costs
= (price . demand)- Total costs

= (a-bD)D - (CF + cvD )
2700 5000
= (38 + − ) 𝐷 − 1000 − 40𝐷
𝐷 𝐷2
5000
= -2D - +1700
𝐷
Optimal Demand, D*:
𝑑(𝑃𝑟𝑜𝑓𝑖𝑡) 5000
= -2 + 𝐷2
=0
𝑑𝐷
D* = 50 units/ month
b)
𝑑2 (𝑃𝑟𝑜𝑓𝑖𝑡) −10000
= <0 for D>1
𝑑 𝐷2 𝐷3
Therefore, Optimal Demand D* =50 units per month is a point of maximum profit
Problem 1-29
One component of a system’s life-cycle cost is the cost of system failure. Failure costs can be reduced
by designing a more reliable system. A simplified expression for system life-cycle cost, C, can be written
as a function of the system’s failure rate:
𝐶𝐼
𝐶= + 𝐶𝑅 ∙ λ ∙ 𝑡
λ
Here,
𝐶𝐼 = investment cost ($ per hour per failure),

𝐶𝑅 = system repair cost,
λ = system failure rate (failures/operating hour),
t = operating hours.
a. Assume that 𝐶𝐼 , 𝐶𝑅 , and t are constants. Derive an expression for λ, say λ∗, that optimizes C. (2.3)
b. Does the equation in Part (a) correspond to a maximum or minimum value of C? Show all work to
support your answer.
c. What trade-off is being made in this problem?
Solutions:
a)
dC 𝐶𝐼
=- + 𝐶𝑅 𝑡 = 0
d𝜆 𝜆2
𝐶𝐼
Or, 𝜆2 =
𝐶𝑅 𝑡
𝐶𝐼
And, 𝜆∗ = ( )1/2 ; taking into account only the positive root
𝐶𝑅 𝑡
𝑑2 C 2𝐶𝐼
b) =- >0 for 𝜆 > 0
d 𝜆2 𝜆3
Therefore, 𝜆∗ 𝑟𝑒𝑠𝑢𝑙𝑡𝑠 𝑖𝑛 𝑎 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑙𝑖𝑓𝑒 − 𝑐𝑦𝑐𝑙𝑒 𝑐𝑜𝑠𝑡 𝑣𝑎𝑙𝑢𝑒
c) Investment cost versus total repair cost

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GDB3023: Engineering Economics and Entrepreneurship- May

PIC for Assignment:

Annual requirement: 1 000 000 miles

a) Required miles of driving per day

𝑀𝑖𝑙𝑒𝑠 𝑜𝑓 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑟𝑖𝑣𝑖𝑛𝑔

𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑀𝑖𝑙𝑒𝑠 𝑜𝑓 𝑑𝑟𝑖𝑣𝑖𝑛𝑔 𝑝𝑒𝑟 𝑑𝑎𝑦

= 182.65 ~~ 183 cows

Estimated Annual cost for Cow Gas Utilization

Cost of 60 Miles travel per day

Cost of 30 Miles travel per day

Cost Type Fixed Variable Site A Site B

Relation of price and demand: P = 150 – 0.01D

Profit = Total revenue- Total costs

= (aD-bD2) – (CF + cvD )

= (150D -0.01D2) – (50 000 + 40 D)

=110D-0.01D2 -50 000

Since profit occur due to:

(a - cv ) >0 & TR > CT for the period involved

Maximum anticipated profit:

Actual Maximum profit

= (150( 5500) – (0.01) (5500)2) – ((50, 000) + (40) (5500))

Unit Price at Optimal Demand:

p= 150 – 0.01 (5500)

= (price . demand)- Total costs

Optimal Demand, D*:

𝐶𝐼 = investment cost ($ per hour per failure),

Therefore, 𝜆∗ 𝑟𝑒𝑠𝑢𝑙𝑡𝑠 𝑖𝑛 𝑎 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑙𝑖𝑓𝑒 − 𝑐𝑦𝑐𝑙𝑒 𝑐𝑜𝑠𝑡 𝑣𝑎𝑙𝑢𝑒

c) Investment cost versus total repair cost

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