About Engineering Economics

NPV and IRR

Question 3. ENGINEERING ECONOMICS (25 POINTS) O 3.1. Describe the main differences between public and private goods and provide two examples of private goods and public good (5 pts). [1.3.2. An engineering company has to evaluate the economic feasibility to build and operate two wastewater treatment systems for a local community of 2500 p.e. The first one is based on a conventional activated sludge (CA5) system and the second on a membrane bioreactor (M BR). - In year zero, the investment costs of the CAS project is $500,000 and the costs of the MBR project are $750,000. In year one, the benefits (from tax collection minus maintenance and operational costs) of the CAS project are expected to be $150,000 and $140,000 for the MBR project. - However, in the four subsequent years, the benefits of the CA5 alternative will slowly increase at a 1% yearly rate (due to a slightly higher population served and tax increases) but those of the MBR project at 20% yearly rate since the higher effluent quality and water scarcity will allow to sell the treated water to the local communities and farms located nearby. Answer: (13.2.1. At a 7% discount rate, what are the net present values (NPV) of the CAS and MBR treatment systems? (5 pts) (13.2.2. Based on a Benefit-Cost Ratio (BCR) analysis for the rst 5 years of operation of the plants, which treatment system will you recommend if a 7% discount rate is applied? (5 pts) (13.2.3. What will be the Internal Rate of Return (IRR) of the best economic alternative (treatment system)? (5 pts) (13.2.4. If both sewage plants are planned and designed to operate for 10 years and the economic and nancial schemes are assumed to remain stable and constant (e.g. a constant discount rate of 7% and the same trends of 1% increase in benets for the CAS system and 20% for the MBR system), what treatment system will you suggest to be built? (5 pts) 7/12