CHAPTER 3 - Educators

108 CHAPTER 3/COST-ESTIMATION TECHNIQUES
3.7 Summary
Problems
cost savings is $7.33 for a 62.6% reduction over the per unit cost for the outside
contractor.
This case illustrates that developing creative solutions for internal demanufacturing
methods not only results in cost savings of approximately 63% from
current practices for the case company, but proper demanufacturing methods will
minimize the number of computer residuals entering the waste stream. What makes
economic sense is also good for the environment!
Developing the cash flow for each alternative in a study is a pivotal, and usually the
most difficult, step in the engineering economic analysis procedure. An integrated
approach for developing cash flows includes three major components: (1) a WBS
definition of the project, (2) a cost and revenue structure that identifies all the
cost and revenue elements involved in the study, and (3) estimating techniques
(models).
Estimating techniques (models) are used to develop the cash flows for the
alternatives as they are defined by the WBS. Thus, the estimating techniques form
a bridge between the WBS and detailed cost and revenue data and the estimated
cash flows for the alternatives.
The results of the cost-estimating process are a set of cash flows for a proposed
engineering project. Since these cash flows will occur at different points in time
over the life cycle of the project, Chapter 4 will demonstrate how to account
for the time value of money in our analysis. Then, in Chapter 5, we will
learn procedures for determining the profitability, or economic feasibility, of the
proposed project.
The number in parentheses that follows each problem
refers to the section from which the problem is taken.
3-1. Develop an estimate for the cost of washing and
drying a 12-pound load of laundry. Remember to
consider all the costs. Your time is worth nothing unless
you have an opportunity to use it for making (or saving)
money on other activities. (3.2)
3-2. You are planning to build a new home with
approximately 2,000–2,500 gross square feet of living
space on one floor. In addition, you are planning
an attached two-car garage (with storage space) of
approximately 450 gross square feet. Develop a cost
and revenue structure for designing and constructing,
operating (occupying) for 10 years, and then selling the
home at the end of the 10th year. (3.2)
3-3. Estimate the cost of an oil change (5 quarts of oil)
and a new oil filter for your automobile at a local service
station. It takes a technician 20 minutes to do this job.
Compare your estimate with the actual cost of an oil
change at the service station. What percent markup is
being made by the service station? (3.3)
3-4. A large electric utility company spews 62 million
tons of greenhouse gases (mostly carbon dioxide)
into the environment each year. This company has
committed to spending $1.2 billion in capital over the
next five years to reduce its annual emissions by 5%.
More will be spent after five years to reduce greenhouse
gases further. (3.3)
a. What is the implicit cost of a ton of greenhouse gas?
b. If the United States produces 3 billion tons of
greenhouse gases per year, how much capital
must be spent to reduce total emissions by 3%
over the next five years based on your answer in
Part (a)?