Project: The streets and roads maintained by the government have not had an adequate maintenance program. The Public Works Department’s Civil Engineers have recommended the establishment of a dedicated team for the rapid and efficient accomplishment of the repair of potholes and other paving failures. The accomplishment of this recommendation is expected to require the services of a full-time, dedicated crew of four (4) field personnel: one (1) Crew Foreman and three (3) Maintenance Workers. The efforts of this group will be the constant execution of a job-order report from the Public Works Department’s current Road Inventory computer software’s Repair Report List. They will accomplish their scheduled work using an automated asphalt patching system for the repair of potholes in major roadways that will be purchased for this purpose. Purchase price estimated @ $175,000. The purchase price includes training of three (3) individuals in the operation and maintenance of the equipment. The cost of the crew’s year 1 annual salaries and benefits are expected to conform to the following schedule:Position Individual Cost Total CostSupervisor 1 (1) $51,000 $51,000Maintenance Worker II (3) $38,500 115,500Total: $166,500Note that salary & benefit costs can be expected to increase approximately 2.5% per year.Presently, the annual budget for maintaining and refurbishing failing roadways is $750,000. This amount has historically (over the most recent 10 years) increased by an average 8% annually. The Public Works Engineers estimate that the proposed maintenance program will reduce that budgetary item’s cost annually by the following proportions:Progr CostYear Reduction1 7%2 10%3 10%4 10%5 8%6 6%7 4%8 4%9 3%10 2%The Public Works Engineers also estimate program operating costs for materials, equipment maintenance, repairs, and fuel as follows:Roadway EquipYr Materials Maint. Fuel1 100,000 10,000 5002 110,000 10,000 5003 115,000 10,000 5004 120,000 10,000 5255 125,000 10,000 5256 125,000 12,000 5257 120,000 12,000 5258 120,000 12,000 5509 110,000 14,000 55010 100,000 14,000 550Analyze the project using both the Net Present Value (NPV) method and the Internal Rate of Return (IRR) method.

Question
Asked Jun 4, 2019

Project: The streets and roads maintained by the government have not had an adequate maintenance program. The Public Works Department’s Civil Engineers have recommended the establishment of a dedicated team for the rapid and efficient accomplishment of the repair of potholes and other paving failures. The accomplishment of this recommendation is expected to require the services of a full-time, dedicated crew of four (4) field personnel: one (1) Crew Foreman and three (3) Maintenance Workers. The efforts of this group will be the constant execution of a job-order report from the Public Works Department’s current Road Inventory computer software’s Repair Report List. They will accomplish their scheduled work using an automated asphalt patching system for the repair of potholes in major roadways that will be purchased for this purpose. Purchase price estimated @ $175,000. The purchase price includes training of three (3) individuals in the operation and maintenance of the equipment. The cost of the crew’s year 1 annual salaries and benefits are expected to conform to the following schedule:
Position Individual Cost Total Cost
Supervisor 1 (1) $51,000 $51,000
Maintenance Worker II (3) $38,500 115,500
Total: $166,500

Note that salary & benefit costs can be expected to increase approximately 2.5% per year.
Presently, the annual budget for maintaining and refurbishing failing roadways is $750,000. This amount has historically (over the most recent 10 years) increased by an average 8% annually. The Public Works Engineers estimate that the proposed maintenance program will reduce that budgetary item’s cost annually by the following proportions:

Progr Cost
Year Reduction
1 7%
2 10%
3 10%
4 10%
5 8%
6 6%
7 4%
8 4%
9 3%
10 2%

The Public Works Engineers also estimate program operating costs for materials, equipment maintenance, repairs, and fuel as follows:

Roadway Equip
Yr Materials Maint. Fuel
1 100,000 10,000 500
2 110,000 10,000 500
3 115,000 10,000 500
4 120,000 10,000 525
5 125,000 10,000 525
6 125,000 12,000 525
7 120,000 12,000 525
8 120,000 12,000 550
9 110,000 14,000 550
10 100,000 14,000 550
Analyze the project using both the Net Present Value (NPV) method and the Internal Rate of Return (IRR) method.

check_circleExpert Solution
Step 1

The initial investment for the project is $175000 as patching system has to be purchased so that work can be completed on time and efficiency of project can be increased.

Step 2

First, we need to find out annual cost saving. Annual budget for maintenance and refurbishing is $750,000 which increases with an annual growth rate of 8%.

The following table shows the estimate for annual budget for 10 years:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The formula for calculating budgets for respective years is:

Estimated Budget before program launch = Annual Budget Amount*(1+ Growth Rate)^N

Where

Annual Budget Amount = $750,000

Growth Rate = 8%

N= years (1,2,3,4…respectively)

 

Estimated Budget after New program launch = Annual Budget*(1 – Cost reduction)

 

For Annual Saving, we have to subtract the budget after launching program from budget before launching the program.

A
Annual
1Budget
750000
Rate
0.08
Estimated Budget before new programe
Estimated Budget After New
Year
Reduction Cost
Annual Saving
launched
Program Launched
3
= B1 * ( 1+ $E$ 1 )*A4
=B1*(1-C4)
=D4* ( 1-C5)
=D5* ( 1-C6)
0.07
-B4-D4
1
5 2
0.1
=B5-D5
=B4* ( 1+$ES 1)
-B5*(1+SES1)
=B6* (1+ $ES1 )
-B7* ( 1+ SES 1 )
-B8* ( 1 + $E$ 1)
- B9 * ( 1 + $E$ 1)
- B10 * ( 1+ SES1)
= B11 * ( 1 + SES 1)
0.1
=B6-D6
6 3
0.1
=D6 " ( 1- C7 )
-B7-D7
-B8 -DS
7 4
D7 ( 1-CS)
=D8* ( 1-C9 )
D9* ( 1-C10)
D10* (1-C11)
=D11* (1-C12)
=D12 (1-C13)
0.08
8 5
=B9 - D9
- B10- D10
- B11- D11
=B12-D12
B13- D13
0.06
9 6
0.04
10 7
0.04
11 8
0.03
12 9
0,02
13 10
= B12 ( 1 + SES 1)
E
Annual
1 Budget
750000
Rate
8%
2
Estimated
Estimated Budget Reduction Budget After
Annual
Year
before new
New Program
Cost
Saving
programe launched
Launched
3
$$10,000
$874,800
$944,784
7%
$697,500
$112,500
$247,050
1
2
10%
$627,750
5
3
10%
$564,975
$379,809
$1,020,367
10%
4
$508,478
$511,889
n o7
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Image Transcriptionclose

A Annual 1Budget 750000 Rate 0.08 Estimated Budget before new programe Estimated Budget After New Year Reduction Cost Annual Saving launched Program Launched 3 = B1 * ( 1+ $E$ 1 )*A4 =B1*(1-C4) =D4* ( 1-C5) =D5* ( 1-C6) 0.07 -B4-D4 1 5 2 0.1 =B5-D5 =B4* ( 1+$ES 1) -B5*(1+SES1) =B6* (1+ $ES1 ) -B7* ( 1+ SES 1 ) -B8* ( 1 + $E$ 1) - B9 * ( 1 + $E$ 1) - B10 * ( 1+ SES1) = B11 * ( 1 + SES 1) 0.1 =B6-D6 6 3 0.1 =D6 " ( 1- C7 ) -B7-D7 -B8 -DS 7 4 D7 ( 1-CS) =D8* ( 1-C9 ) D9* ( 1-C10) D10* (1-C11) =D11* (1-C12) =D12 (1-C13) 0.08 8 5 =B9 - D9 - B10- D10 - B11- D11 =B12-D12 B13- D13 0.06 9 6 0.04 10 7 0.04 11 8 0.03 12 9 0,02 13 10 = B12 ( 1 + SES 1) E Annual 1 Budget 750000 Rate 8% 2 Estimated Estimated Budget Reduction Budget After Annual Year before new New Program Cost Saving programe launched Launched 3 $$10,000 $874,800 $944,784 7% $697,500 $112,500 $247,050 1 2 10% $627,750 5 3 10% $564,975 $379,809 $1,020,367 10% 4 $508,478 $511,889 n o7

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Step 3

Now we calculate the Operating Cost in the following manner:

 

 

 

...
A
C
Operating Cost
Year
Marterials
Maint.
Fuel
1
-B2+C2+D2
ЕВ3+С3+D3
ЕB4+C4+D4
2 1
100000
10000
500
3 2
110000
|500
500
10000
4 3
115000
120000
10000
B5+C5+D5
|ЕВ6+Cб+D6
5 4
525
10000
6 5
10000
525
125000
525
-B7+C7+D7
6
125000
12000
7
B8+C8 +DS
-B9+C9+ D9
8 7
120000
12000
525
550
550
9 8
120000
12000
|-B10+C10+D10
=B11+C11+D11
110000
10 9
14000
11 10
100000
14000
550
A
Maint
Year
Marterials
Fuel
Operating Cost
1
1
100000
110000
10000
500
110500
2
120500
125500
2
10000
500
3
3
115000
10000
500
4
120000
5
10000
525
130525
6
5
125000
10000
525
135525
125000
6
525
137525
7
12000
8
7
120000
120000
12000
525
132525
12000
550
132550
110000
14000
550
124550
10
100000
10
14000
550
114550
11
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Image Transcriptionclose

A C Operating Cost Year Marterials Maint. Fuel 1 -B2+C2+D2 ЕВ3+С3+D3 ЕB4+C4+D4 2 1 100000 10000 500 3 2 110000 |500 500 10000 4 3 115000 120000 10000 B5+C5+D5 |ЕВ6+Cб+D6 5 4 525 10000 6 5 10000 525 125000 525 -B7+C7+D7 6 125000 12000 7 B8+C8 +DS -B9+C9+ D9 8 7 120000 12000 525 550 550 9 8 120000 12000 |-B10+C10+D10 =B11+C11+D11 110000 10 9 14000 11 10 100000 14000 550 A Maint Year Marterials Fuel Operating Cost 1 1 100000 110000 10000 500 110500 2 120500 125500 2 10000 500 3 3 115000 10000 500 4 120000 5 10000 525 130525 6 5 125000 10000 525 135525 125000 6 525 137525 7 12000 8 7 120000 120000 12000 525 132525 12000 550 132550 110000 14000 550 124550 10 100000 10 14000 550 114550 11

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