Question:

Given that the engineer would receive a lump sum payment at the end of the project, what amount should he request in order to earn his desired ten percent profit on all costs?

Suppose that the following ten activities were agreed upon in a contract between an owner and an engineer. --- Original Work Plan Information Activity Duration (months) Predecessors Estimated Cost ($ thousands) A 7 B 9 B 8 D C E B F 7 G EF 6 H 4 E, F 5 I 11 B 10 J E,F 7 Original Contract Information Total Direct Cost $64 Overhead 64 Total Direct and Overhead 128 Profit 12.8 Total Contract Amount $140.8 First Year Cash Flow Expenditures S56,000 Receipts S60,800 The markup on the activities' costs included 100% overhead and a profit of 10% on all costs (including overhead). This job was suspended for one year after completion of the first four activities, and the owner paid a total of $60,800 to the engineer. Now the owner wishes to re-commence the job. However, general inflation has increased costs by ten percent in the intervening year. The engineer's discount rate is 15 percent per year (in current year dollars). For simplicity, you may assume that all cash transactions occur at the end of the year in making discounting calculations in answering the following questions: Suppose that the following ten activities were agreed upon in a contract between an owner and an engineer. --- Original Work Plan Information Activity Duration (months) Predecessors Estimated Cost ($ thousands) A 7 B 9 B 8 D C E B F 7 G EF 6 H 4 E, F 5 I 11 B 10 J E,F 7 Original Contract Information Total Direct Cost $64 Overhead 64 Total Direct and Overhead 128 Profit 12.8 Total Contract Amount $140.8 First Year Cash Flow Expenditures S56,000 Receipts S60,800 The markup on the activities' costs included 100% overhead and a profit of 10% on all costs (including overhead). This job was suspended for one year after completion of the first four activities, and the owner paid a total of $60,800 to the engineer. Now the owner wishes to re-commence the job. However, general inflation has increased costs by ten percent in the intervening year. The engineer's discount rate is 15 percent per year (in current year dollars). For simplicity, you may assume that all cash transactions occur at the end of the year in making discounting calculations in answering the following questions