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A contractor operates a rock crusher and stores the material until needed in an adjacent stockpile area. The stockpile area is unpaved, and some of

A contractor operates a rock crusher and stores the material until needed in an adjacent stockpile area. The stockpile area is unpaved, and some of the produced material is contaminated by the sub-grade and cannot be used. The estimated stockpile losses are shown in the Table 1. This equates to a combined loss of 8% each year.

The contractor is considering paving the stockpile area to reduce the loss of material. Paving the stockpile area would reduce the losses due to contamination to about 2%. The crusher produces 250,000 tons/year at a cost of $1.50/ton. The new paving should last 10 years, and there is no salvage value.

The paving will cover 4.56 acres. The previous stockpile losses will serve as sub-grade and base courses for the new surfacing. A 3? thick surface will require 3700 tons of asphaltic concrete, which costs $20/ton installed. The engineering and site work involve a one-time cost of about $5000. The surface requires routine maintenance costing about $1000/year.

Table 2 shows the uncertainty (lower and upper limits) of the data estimated by the contractor to evaluate the feasibility of paving the stockpile area. Assuming the contractor has a minimum accepted rate of return (MARR) of 12%, answer the following questions.

1. Determine the internal rate of return (IRR) on the stockpile area paving.

2. For each of the 7 variables in Table 2, use IRR to graph NPV vs. the value of this variable, as the variable ranges between the limits you derive from the table (use 10% intervals).

3. Based on your answer to question 2, which of the factors in Table 2 is riskier for the decision about whether to pave the stockpile area?

4. Estimate the IRR for the "worst-case" and "best-case" scenarios for all 7 variables in Table2.

5. What is the NPV of the "worst-case" and "best-case" scenarios using the contractor's MARR?

6. Apply some other analyses, of your choice other than the ones listed above, you deem could help the contractor make their decision about paving the stockpile area.

7. Based on your answers to questions 1 through 5, what is your recommendation for paving the stockpile area? Explain your reasoning.

image text in transcribedimage text in transcribed
\fTable 2 Lower and Upper Limits on Estimated Data Factor Lower Limit Upper Limit Economic life (years) -50% +100% Aggregate price ($/ton) -20% +40% Annual production (tons/year) -40% +20% Loss with paving (%) -20% +20% Design cost for paving ($) -10% +10% Maintenance cost ($/year) -10% +20% First cost for paving ($) -5% +10%

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