ENGINEERING ECONOMY STUDY IN THE TRANSPORT INDUSTRY
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Transcript of ENGINEERING ECONOMY STUDY IN THE TRANSPORT INDUSTRY
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ENGINEERINGECONOMYSTUDYINATRANSPORTINDUSTRY
BY
ENGRCHIMAONYEJEKWE,MNSE,MIET,AcostE,AvalE
ENGINEERINGCONSULTANTANDPROJECTMANAGER
INSTITUTEOFAPPRAISERSANDCOSTENGINEERS
ADIVISIONOFNIGERIANSOCIETYOFENGINEERS
2011NATIONAL
CONFERENCE
SEPTEMBER2011
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INSTITUTEOFAPPRAISERS&COSTENGINEERS
ADIVISIONOFNIGERIANSOCIETYOFENGINEERS
2011National
Conference:
Valuation
and
Cost
Engineering
ApplicationsinTransportation
ENGINEERINGECONOMYSTUDYINATRANSPORTINDUSTRY
By
EngrChimaOnyejekwe,MNSE,MIET,AcostE,AvalE
EngineeringConsultantandProjectManager
SEPTEMBER2011
Appreciation:
..With
all
protocol
observed,
Iwish
to
thank
the
executive committee of the Institute of Appraisers and Cost
Engineers, a division of Nigerian Society of Engineers, for the
opportunity to havewords/expose on this lessunderstoodbut
importantarmoftheInstitute.
Introduction:
EngineeringEconomyasastudycame tobebecause thereare
always alternatives to any decision, solution, goal, process,
business, from which a studied choice has to be made. The
choicecouldbebasedontechnicalandnontechnical,economic
and noneconomic, tangible and intangible factors. But the
concern of engineering economy study is determining and
selectingthe
most
economic
option/alternative,
considering
the
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prevailing economic factors. In other words, engineering
economy study involves determining the economic factors
concerning the alternatives to a decision or choice and
subjectingthe
factors
to
the
applicable
mathematical
processes
andprinciplesinordertoselectthemosteconomic.
Engineeringeconomystudyprocess:Followingproblemsolutionapproach, theprocess involves the
followingsteps:
1.Identifytheproblemandthegoalofthestudy2.Collectrelevantdatatowardsachievingthegoal3.Definethealternativesolutions4.Evaluateeachalternative5.Selectthebesteconomicalternativebasedonsomecriteria6.Implementthesolutionandmonitortheoutcomes
StudyCase:Going by the topic, Engineering Economy Study in a transport
Industry, Iwant to focuson tyremanufacturing industry for its
relevance inroadtransportationand Ishalldrawacase froma
typicaltyre
manufacturing
industry
in
Nigeria
like
Dunlop
Nig
Plc.
Thecase isthatthecompanywasexperiencing frequent failure
ofthecontrolsystemofoneoftheircuringpressmachines.The
companywasconsidering replacing thepresswithmodernone
which offers the following advantages: reduced frequency and
cost of maintenance because it has solid state control system
instead
of
electromechanical
system
of
the
former;
higher
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productive capacity of about 5%, reduced operation and
maintenance cost, Reduced scrap and rework cost. In other
words,thecompanywantedtheproposedreplacementtohave
steadyproduction
at
more
or
full
capacity
at
reduced
Total
Cost.
ProblemandGoalIdentificationThe problem here, as proposed by the company, was taking
studied decision to either replace the press (designated the
defender for the purpose of the study) with the modern
equivalent(the
challenger),
or
maintain
the
status
quo.
So
the
goalofthestudywasreplacementanalysistohelpthecompany
takeinformeddecisiononthematter.
AlternativeSolutionsDefinitionThetwoalternativedecisionquestionsthecompanyputforward
are(1)Buythemodernpress,(2)Retaintheexistingpress.Butin
the analysis, I identified and defined another alternative: (3)
Retrofittheexistingpresswithnewcontrolsystem.
DatacollectionTo carry out the assignment, there are veritable economic
data/estimatesabout thedefenderand the challengerneeded.
Thedata
include
1.EstimatedFirstCostof themachines (purchaseprice,costofdelivery andinstallation)
2.EstimatedOperationandmaintenancecostinayear3.Estimatedlifeofthenewmachineandtheremaininglifeof
theexistingmachine
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4.Operating interestrateorrateofreturnovertheplanninghorizon in form of Minimum Attractive Rate of
Return(MARR)estimate
5.Estimatedannualincomefromthemachines6.Projectedsalvagevalueofthemachines
Thegatheredinformationwasasfollows:
Description Defender Challenger
InitialInvestment Fair Market Value =
N1.25M
Firstcost=N5M
AnnualO&MCost Asrecordedinuse=
N0.5M
5% of First Cost in
first 5yrs; 7.5% in
thelast
5yrs
Estimated Economic
life
Residuallife=5yrs Estimated economic
life=10yrs
Rate of Return or
InterestRate
estimated MARR =
15%
estimated MARR =
15%
Study
period/horizon
10yrs as the new
press
Life of the new
press=10yrs
Estimated
Salvage
value
N0.25M
20%of
First
Cost
=
N1.0M
EvaluationofthealternativesolutionsThis is the crux of engineering economy study. The process
involvesthefollowing:
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(1) Decide on the approach to adopt: opportunity costapproachorcashflowapproach
(2) Drawthecashflowforeachalternativeoverthestudyperiod
(3) Elect the most convenient measure of worthcomputation models: Present worth (PW), Annual
Worth(AW), Future Worth(FW), Rate of Return(ROR) and
CapitalisedCost(CC)
(4) Formulate the mathematical equations for therespective
cash
flows
of
the
alternatives,
applying
the
electedmeasureofworthcomputationmodel
(5) SolvetheequationsforthealternativesFor the study, I used opportunity cost approach and annual
worthanalysisbecause theprojected lifeof thenewpressand
remaininglifeoftheolderonearenotequal.Itisthepracticeto
havethe
alternatives
analysed
on
equal
terms.
In
the
analysis,
it
isassumedthattheservicesofthedefenderareavailableforthe
sameAWvalueintheextra5yrsaboveitsresiduallife.
SelectionoftheBestAlternativeThe solution to the equations resulted in values, which,
compared,indicated
the
most
economical
of
the
alternatives.
Thebasisfortheselectionwaswhichalternativehadthehighest
numericalvalue(highestnetincomeorleastexpenses).
The result of the study favoured Alternative1 (purchase the
modernpress)asagainstAlternative2(retaintheexistingpress).
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ConsiderationofotherFactorsThe above analysis that favoured the aternative1 was based
purely on the economic factors inherent in the machines; the
economicenvironmentwasnot considered. So it mightnotbe
absolutelysaidthatalternative1wasthebestuntilweconsider
theexternalfactors.
The new machine had the capacity to produce 5% more. The
relevantquestions Iaskedwere:was thedemand there topick
up the additional production? If not, what was the cost of
storagefortheadditionalproduction?Thestudywascarriedout
when,as isnow, therewas fragrant importationcheaper tyres,
both new and second hand ones. So the data was updated to
havethecostofstoragechargedonthechallenger.
With the additional output considered, the alternatives were
evaluated and the computation showed that alternative1 was
notsignificantlybetter.
Then I redefined an alternative solution to test alternative1
againstalternative3:
retrofit
the
control
system
of
the
existing
press.
Thedataforthisisasbelow:
Description Defender(option3) Challenger(0ption1)
InitialInvestment Retrofit cost =
N0.75M
Firstcost=N5M
Estimated
AnnualAs
recorded
in
use
=5%
of
First
Cost
in
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O&MCost N0.5M first 5yrs; 7.5% in
thelast5yrs
Estimated Economic
life
Residuallife=5yrs Estimated economic
life=10yrs
Rate of Return or
interestRate
the companys
MARR=15%
the companys
MARR=15%
Study
period/horizon
10yrs Life of New press =
10yrs
Estimated Salvage
value
N0.25M 20% of First Cost =
N1.0M
Costof
storage
per
annum N0.25M
Theresultofthecomputationsshowedthealternative3wasthe
bestoptionandreportwassodelivered.However,theultimate
decision was then left with the company. It might find non
economicfactors
more
impelling
to
take
alternative
one.
Conclusion:Engineeringeconomystudyisaveritabletoolindecisionmaking.
It provides a background to consider other factors as non
economic,social,andenvironmentalonesthatbearonselecting
a projects or investment. If Nigerian governments and
organisationswillappreciatetheimportofengineeringeconomy
andengagetheservicesofaccreditedEngineeringeconomistsin
conception of projects, lots money will be saved. Engineering
economystudyisrelevantinthefollowingchoices:
1.Which technology to adopt for a particular activity orproject?
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2.Which manufacturing process holds more economicpromiseforaproposedplant?
3.This new building project with new technology andmaterial,
what
is
the
maintenance
cost
especially
of
the
expertise isnotthere?Lookingatthemaintenancecost, is
economical? The First Cost is not only the issue in
engineeringeconomybuttheentirelifecycle.
4.Whatare theeconomiesof rail transportation to road, tomarine,toair?
5.In Electricity generation, what are the economies of coalfiredplanttogasfired,thermalplanttohydroplant?Fora
mixgeneration,whatistheoptimum?
6.InBuildoperateandtransfer(BOT)agreements,howmanyyears will the lease transfer the facility from
commencement?Atwhatannualcharge? Atwhatrateof
return?7.OreBeninroad failsyearly intherainingseason.Sowould
thefederalgovernmentdoremedialworksontheroadon
thepublicoutcry.Whatistheeconomyofdoingtherepairs
for,say5,yearstodoingtheroadafresh?Thewastewillbe
obvious.
Theseare
samples
of
questions
that
engineering
economy
studyanswers.
ThanksandGodbless.
References:
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LelandT.BlankandAnthonyJ.Tarquin,EngineeringEconomy,4th
edition,McGrawHill,1998
Newman,
D.G
Engineering
Economic
Analysis,
6
th
ed
Engineering
Press,SanJose,1996
JamesS,Fredrick,TyreManufacturing,paper
Appendix:Tyremanufacturingprocesses:1.Compounding and Banbury Mixing: Banbury mixer
combines rubber stock, carbon black and other chemical
ingredients(compounds which act as accelerators, anti
oxidants, antiozonants, extenders, vulcanizers, pigments,
plasticizers, reinforcing agents and resins) to create a
homogeneousrubbermaterial(compoundedrubber).Time,
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heat and raw materials are factors utilized to engineer
materialcomposition.
2.Milling:Shapingofrubberbeginsinthemillingprocess.Thecompounded
rubber
is
placed
onto
adrop
mill.
The
milling
processshapestherubberintoflat,longstripsbyforcingit
through two set rolls rotating in different directions at
differentspeeds.
3.Calendering and Extruding: The calender operationcontinues to shape rubber.Thecalendermachineconsists
ofone
or
more
(often
four)
rolls,
through
which
the
rubber
sheets are forced to prepare compounded rubber as a
uniform sheetofdefinite thicknessandwidth, toplacea
thin coatof rubberona fabric (coating or skimming),
to force rubber into the interstices of fabric by friction
(frictioning). The rubber sheets coming off the calender
arewound
on
drums,
called
shells,
with
fabric
spacers,
calledliners,topreventsticking.
The extruder creates tubelike rubber components by
forcing rubber through dies of appropriate shape. The
extruder consists of a screw, barrel or cylinder, head and
die.A core or spider is used to form thehollow insideof
tubing. The extruder makes the large, flat section of tyre
treads.
4.Tyrecomponentassemblyandbuilding:Thetyreassemblymachine consists of a rotating drum, on which the
componentsareassembled,and feedingdevicestosupply
the tyre builder with the components to assembl. The
componentsof
atyre
include
beads,
plies,
side
walls
and
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treads. After the components are assembled, the tyre is
oftenreferredtoasagreentyre.
5.CuringandVulcanising: After being assembled, the greentyre
is
sprayed
with
asolvent
or
water
based
material
to
keepitfromadheringtothecuringpress.Thepressutilizes
steam to heat or cure the green tyre. Rubber curing or
vulcanizationtransformsthetackyandpliablematerialtoa
nontacky,lesspliable,longlastingstate.
To these processes, there are different technologies for the
machineryused.Whichisbetterineconomicsense,isoneofthe
questions engineering economy study can answer? But that is
notthecaseofourstudyinthislecture.