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.

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.

Step 3

Now we calculate the Operating Cost in the following manner:

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