Posted: September 15th, 2015

Engineering Economy.

Cases in Engineering Economy, Case #51
Upon successful completion of this case you will demonstrate that you can
 Read and interpret the facts of a realistic case
 Create a spreadsheet to analyze the project options and appropriately annotate the spreadsheet
 Evaluate the various economic options using appropriate economic analysis techniques
 Synthesize the information to make recommendations for funding of capital budget projects
 Prepare a memo for management which clearly explains the rational for the recommendations.
When reading the case, consider the following questions:
A) Which regulatory required project is obligatory (no choice, must do)?
B) Which other regulatory projects are mutually exclusive where one of the two must be funded?
Hint: Rate of return on the incremental investment must be performed since these are mutually exclusive. Put the lower cost alternative on the list, then put an incremental option (the difference between the two) then when you sort by IRR, if the increment is justified it will be above the MARR on the list.
C) Which project is needed to support current product growth? Are you assuming these “must” be done or are discretionary?
D) Which projects have dependencies? What are the dependencies?
Hint: Analyze all three projects of these independently to begin with and see how they compare to the IRRs of the other projects.
Hint: Remember that you cannot get the benefits of the dependent project without the independent project. So once you have determined a dependent project to be worthwhile, the IRR you need for comparison in the budgeting process is the IRR for both the dependent and independent combined.
E) What is the total capital budget that has been allocated by the board? How much of this must be set aside for small unforeseen problems or opportunities during the year.
F) Knowing that projects typically overrun the budgets, how will you account for this in the budget?

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