ENGINEERING ECONOMY STUDY IN THE TRANSPORT INDUSTRY

7/30/2019 ENGINEERING ECONOMY STUDY IN THE TRANSPORT INDUSTRY

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ENGINEERINGECONOMYSTUDYINATRANSPORTINDUSTRY

BY

ENGRCHIMAONYEJEKWE,MNSE,MIET,AcostE,AvalE

ENGINEERINGCONSULTANTANDPROJECTMANAGER

[email protected]

INSTITUTEOFAPPRAISERSANDCOSTENGINEERS

ADIVISIONOFNIGERIANSOCIETYOFENGINEERS

2011NATIONAL

CONFERENCE

SEPTEMBER2011


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INSTITUTEOFAPPRAISERS&COSTENGINEERS

ADIVISIONOFNIGERIANSOCIETYOFENGINEERS

2011National

Conference:

Valuation

and

Cost

Engineering

ApplicationsinTransportation

ENGINEERINGECONOMYSTUDYINATRANSPORTINDUSTRY

By

EngrChimaOnyejekwe,MNSE,MIET,AcostE,AvalE

EngineeringConsultantandProjectManager

SEPTEMBER2011

Appreciation:

..With

all

protocol

observed,

Iwish

to

thank

the

executive committee of the Institute of Appraisers and Cost

Engineers, a division of Nigerian Society of Engineers, for the

opportunity to havewords/expose on this lessunderstoodbut

importantarmoftheInstitute.

Introduction:

EngineeringEconomyasastudycame tobebecause thereare

always alternatives to any decision, solution, goal, process,

business, from which a studied choice has to be made. The

choicecouldbebasedontechnicalandnontechnical,economic

and noneconomic, tangible and intangible factors. But the

concern of engineering economy study is determining and

selectingthe

most

economic

option/alternative,

considering

the


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prevailing economic factors. In other words, engineering

economy study involves determining the economic factors

concerning the alternatives to a decision or choice and

subjectingthe

factors

to

the

applicable

mathematical

processes

andprinciplesinordertoselectthemosteconomic.

Engineeringeconomystudyprocess:Followingproblemsolutionapproach, theprocess involves the

followingsteps:

1.Identifytheproblemandthegoalofthestudy2.Collectrelevantdatatowardsachievingthegoal3.Definethealternativesolutions4.Evaluateeachalternative5.Selectthebesteconomicalternativebasedonsomecriteria6.Implementthesolutionandmonitortheoutcomes

StudyCase:Going by the topic, Engineering Economy Study in a transport

Industry, Iwant to focuson tyremanufacturing industry for its

relevance inroadtransportationand Ishalldrawacase froma

typicaltyre

manufacturing

industry

in

Nigeria

like

Dunlop

Nig

Plc.

Thecase isthatthecompanywasexperiencing frequent failure

ofthecontrolsystemofoneoftheircuringpressmachines.The

companywasconsidering replacing thepresswithmodernone

which offers the following advantages: reduced frequency and

cost of maintenance because it has solid state control system

instead

of

electromechanical

system

of

the

former;

higher


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productive capacity of about 5%, reduced operation and

maintenance cost, Reduced scrap and rework cost. In other

words,thecompanywantedtheproposedreplacementtohave

steadyproduction

at

more

or

full

capacity

at

reduced

Total

Cost.

ProblemandGoalIdentificationThe problem here, as proposed by the company, was taking

studied decision to either replace the press (designated the

defender for the purpose of the study) with the modern

equivalent(the

challenger),

or

maintain

the

status

quo.

So

the

goalofthestudywasreplacementanalysistohelpthecompany

takeinformeddecisiononthematter.

AlternativeSolutionsDefinitionThetwoalternativedecisionquestionsthecompanyputforward

are(1)Buythemodernpress,(2)Retaintheexistingpress.Butin

the analysis, I identified and defined another alternative: (3)

Retrofittheexistingpresswithnewcontrolsystem.

DatacollectionTo carry out the assignment, there are veritable economic

data/estimatesabout thedefenderand the challengerneeded.

Thedata

include

1.EstimatedFirstCostof themachines (purchaseprice,costofdelivery andinstallation)

2.EstimatedOperationandmaintenancecostinayear3.Estimatedlifeofthenewmachineandtheremaininglifeof

theexistingmachine


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4.Operating interestrateorrateofreturnovertheplanninghorizon in form of Minimum Attractive Rate of

Return(MARR)estimate

5.Estimatedannualincomefromthemachines6.Projectedsalvagevalueofthemachines

Thegatheredinformationwasasfollows:

Description Defender Challenger

InitialInvestment Fair Market Value =

N1.25M

Firstcost=N5M

AnnualO&MCost Asrecordedinuse=

N0.5M

5% of First Cost in

first 5yrs; 7.5% in

thelast

5yrs

Estimated Economic

life

Residuallife=5yrs Estimated economic

life=10yrs

Rate of Return or

InterestRate

estimated MARR =

15%

estimated MARR =

15%

Study

period/horizon

10yrs as the new

press

Life of the new

press=10yrs

Estimated

Salvage

value

N0.25M

20%of

First

Cost

=

N1.0M

EvaluationofthealternativesolutionsThis is the crux of engineering economy study. The process

involvesthefollowing:


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(1) Decide on the approach to adopt: opportunity costapproachorcashflowapproach

(2) Drawthecashflowforeachalternativeoverthestudyperiod

(3) Elect the most convenient measure of worthcomputation models: Present worth (PW), Annual

Worth(AW), Future Worth(FW), Rate of Return(ROR) and

CapitalisedCost(CC)

(4) Formulate the mathematical equations for therespective

cash

flows

of

the

alternatives,

applying

the

electedmeasureofworthcomputationmodel

(5) SolvetheequationsforthealternativesFor the study, I used opportunity cost approach and annual

worthanalysisbecause theprojected lifeof thenewpressand

remaininglifeoftheolderonearenotequal.Itisthepracticeto

havethe

alternatives

analysed

on

equal

terms.

In

the

analysis,

it

isassumedthattheservicesofthedefenderareavailableforthe

sameAWvalueintheextra5yrsaboveitsresiduallife.

SelectionoftheBestAlternativeThe solution to the equations resulted in values, which,

compared,indicated

the

most

economical

of

the

alternatives.

Thebasisfortheselectionwaswhichalternativehadthehighest

numericalvalue(highestnetincomeorleastexpenses).

The result of the study favoured Alternative1 (purchase the

modernpress)asagainstAlternative2(retaintheexistingpress).


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ConsiderationofotherFactorsThe above analysis that favoured the aternative1 was based

purely on the economic factors inherent in the machines; the

economicenvironmentwasnot considered. So it mightnotbe

absolutelysaidthatalternative1wasthebestuntilweconsider

theexternalfactors.

The new machine had the capacity to produce 5% more. The

relevantquestions Iaskedwere:was thedemand there topick

up the additional production? If not, what was the cost of

storagefortheadditionalproduction?Thestudywascarriedout

when,as isnow, therewas fragrant importationcheaper tyres,

both new and second hand ones. So the data was updated to

havethecostofstoragechargedonthechallenger.

With the additional output considered, the alternatives were

evaluated and the computation showed that alternative1 was

notsignificantlybetter.

Then I redefined an alternative solution to test alternative1

againstalternative3:

retrofit

the

control

system

of

the

existing

press.

Thedataforthisisasbelow:

Description Defender(option3) Challenger(0ption1)

InitialInvestment Retrofit cost =

N0.75M

Firstcost=N5M

Estimated

AnnualAs

recorded

in

use

=5%

of

First

Cost

in


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O&MCost N0.5M first 5yrs; 7.5% in

thelast5yrs

Estimated Economic

life

Residuallife=5yrs Estimated economic

life=10yrs

Rate of Return or

interestRate

the companys

MARR=15%

the companys

MARR=15%

Study

period/horizon

10yrs Life of New press =

10yrs

Estimated Salvage

value

N0.25M 20% of First Cost =

N1.0M

Costof

storage

per

annum N0.25M

Theresultofthecomputationsshowedthealternative3wasthe

bestoptionandreportwassodelivered.However,theultimate

decision was then left with the company. It might find non

economicfactors

more

impelling

to

take

alternative

one.

Conclusion:Engineeringeconomystudyisaveritabletoolindecisionmaking.

It provides a background to consider other factors as non

economic,social,andenvironmentalonesthatbearonselecting

a projects or investment. If Nigerian governments and

organisationswillappreciatetheimportofengineeringeconomy

andengagetheservicesofaccreditedEngineeringeconomistsin

conception of projects, lots money will be saved. Engineering

economystudyisrelevantinthefollowingchoices:

1.Which technology to adopt for a particular activity orproject?


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2.Which manufacturing process holds more economicpromiseforaproposedplant?

3.This new building project with new technology andmaterial,

what

is

the

maintenance

cost

especially

of

the

expertise isnotthere?Lookingatthemaintenancecost, is

economical? The First Cost is not only the issue in

engineeringeconomybuttheentirelifecycle.

4.Whatare theeconomiesof rail transportation to road, tomarine,toair?

5.In Electricity generation, what are the economies of coalfiredplanttogasfired,thermalplanttohydroplant?Fora

mixgeneration,whatistheoptimum?

6.InBuildoperateandtransfer(BOT)agreements,howmanyyears will the lease transfer the facility from

commencement?Atwhatannualcharge? Atwhatrateof

return?7.OreBeninroad failsyearly intherainingseason.Sowould

thefederalgovernmentdoremedialworksontheroadon

thepublicoutcry.Whatistheeconomyofdoingtherepairs

for,say5,yearstodoingtheroadafresh?Thewastewillbe

obvious.

Theseare

samples

of

questions

that

engineering

economy

studyanswers.

ThanksandGodbless.

References:


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LelandT.BlankandAnthonyJ.Tarquin,EngineeringEconomy,4th

edition,McGrawHill,1998

Newman,

D.G

Engineering

Economic

Analysis,

6

th

ed

Engineering

Press,SanJose,1996

JamesS,Fredrick,TyreManufacturing,paper

Appendix:Tyremanufacturingprocesses:1.Compounding and Banbury Mixing: Banbury mixer

combines rubber stock, carbon black and other chemical

ingredients(compounds which act as accelerators, anti

oxidants, antiozonants, extenders, vulcanizers, pigments,

plasticizers, reinforcing agents and resins) to create a

homogeneousrubbermaterial(compoundedrubber).Time,


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heat and raw materials are factors utilized to engineer

materialcomposition.

2.Milling:Shapingofrubberbeginsinthemillingprocess.Thecompounded

rubber

is

placed

onto

adrop

mill.

The

milling

processshapestherubberintoflat,longstripsbyforcingit

through two set rolls rotating in different directions at

differentspeeds.

3.Calendering and Extruding: The calender operationcontinues to shape rubber.Thecalendermachineconsists

ofone

or

more

(often

four)

rolls,

through

which

the

rubber

sheets are forced to prepare compounded rubber as a

uniform sheetofdefinite thicknessandwidth, toplacea

thin coatof rubberona fabric (coating or skimming),

to force rubber into the interstices of fabric by friction

(frictioning). The rubber sheets coming off the calender

arewound

on

drums,

called

shells,

with

fabric

spacers,

calledliners,topreventsticking.

The extruder creates tubelike rubber components by

forcing rubber through dies of appropriate shape. The

extruder consists of a screw, barrel or cylinder, head and

die.A core or spider is used to form thehollow insideof

tubing. The extruder makes the large, flat section of tyre

treads.

4.Tyrecomponentassemblyandbuilding:Thetyreassemblymachine consists of a rotating drum, on which the

componentsareassembled,and feedingdevicestosupply

the tyre builder with the components to assembl. The

componentsof

atyre

include

beads,

plies,

side

walls

and


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treads. After the components are assembled, the tyre is

oftenreferredtoasagreentyre.

5.CuringandVulcanising: After being assembled, the greentyre

is

sprayed

with

asolvent

or

water

based

material

to

keepitfromadheringtothecuringpress.Thepressutilizes

steam to heat or cure the green tyre. Rubber curing or

vulcanizationtransformsthetackyandpliablematerialtoa

nontacky,lesspliable,longlastingstate.

To these processes, there are different technologies for the

machineryused.Whichisbetterineconomicsense,isoneofthe

questions engineering economy study can answer? But that is

notthecaseofourstudyinthislecture.

ENGINEERING ECONOMY STUDY IN THE TRANSPORT INDUSTRY

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