# Engineering cost analysis

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Homework Assignment #1:

The answers to selected problems are in the back of the text, you must clearly present all work in order to obtain full credit.

All homework should be presented in Excel format with appropriate comments and documentation.
➢ In addition, all homework files (Word & Excel 2003) need to be submitted electronically (including the term project).
➢ There should beno more than 1 word and / or 1 Excel file per homework assignment. In Excel use separate worksheets for each problem properly labeled.
➢ The file should be named: Last Name First Name Homework number using spaces or underscores between words.

Homework #1: Chapter 2: 5, 9, 43

Homework # 1 Due 10/20

CHAPTER 2

Problem 2-5: Stan Moneymaker presently owns a 10-year-old automobilewith low mileage (78,000 miles). The NADA “blue book” value of the car is \$2,500. Unfortunately, the car’s transmission just failed, and Stan decided to spend \$1,500 to have it repaired. Now, six months later, Stan has decided to sell the car, and he reasons that his asking price should be \$2,500 + \$1,500 = \$4,000. Comment on the wisdom of Stan’s logic. If he receives an offer for \$3,000, should heaccept it? Explain your reasoning.

According to his logic, he thinks that his car’s value should be \$4,000, the \$2,500 that he was supposed to earn by selling his car plus the \$1,500 that he spent by repairing the car’s transmission. His thought will probably be that if he was going to earn \$2,500 by selling his car, he needs to get \$4,000 once he repaired his car. From my point of view therewould be two reasoning. First, if the fact of repairing and getting a new car’s transmission is considered that has occurred in the past and has no relevance to estimate a new value of the car, I would say that the \$1,500 expense is a sunk cost and the cost should be the same. Therefore, the car’s owner should accept the offer for \$3,000, \$500 more than the value given by the NADA ‘blue book”. Onthe other hand there would other reasoning, being aware that the car is a old car, it is ten years old, I would say that the fact of repairing the car’s transmission has relevance to estimate a new value of the car; therefore, this expense should not be considered as a sunk cost and the car would have to be valued again. Anyway, I think that the fact of getting a new transmission does not increasethe value of the car \$1,500 (+ 60%). We are talking about a car whose transmission is only a small part of the whole car and the owner wants to increase the price a 60 percent, so I do not think he is right. From my point of view, the money the owner spend by repairing the transmission should be considered a sunk cost, so I think he should accept the offer for \$3,000 because he would earn evenmore money than the previous valuation. Moreover, we should be aware that the car is 6 months older, so a new valuation could value his car for less money.

Problem 2-9: Suppose your wealthy aunt has given you a gift of \$25,000. You have come up with three options for spending (or investing) the money.
- First, you would like (but do not need) a new car to brighten up your home and sociallife.
- Second, you can invest the money in a high-tech firm’s common stock. It is expected to increase in value by 20% per year, but this option is fairly risky.
- Third, you can put the money into a three/year certificate of deposit with a local bank and earn 6% per year. There is little risk in the third option.

a) If you decide to purchase the new car, what is the opportunity costof this choice? Explain your reasoning.

If I would choose the second choice:

\$25,000 + \$25,000*0.20 = \$25,000 + \$5,000/year = \$30,000 (fairly risky)

If I would choose the third choice:

\$25,000 + \$25,000*0.06 = \$25,000 + \$1,500/ year = \$26,500

So, if I would decide to purchase a new car, which it would cost \$25,000, instead of choosing either the second or third choice, the...