economic project
Final Project – Engineering Economic Analysis Guidelines: 1. Your work should be submitted in the format of a report, including tables, graphics, and any calculations performed (in the case of Excel calculations, show the result and the formulas used) 2. Language & Tone: Use formal academic language. Avoid slang and jargon unless it’s industryspecific. 3. Clarity: Ensure your arguments are logical and clear. 4. Consistency: Use consistent terminology, units, and notations throughout the report. 5. Citation: Always cite your sources. Do not plagiarize. 6. Proofreading: Proofread your report for spelling, grammar, and punctuation errors before submission. 7. Formatting: Use a standard font (e.g., Times New Roman or Arial, size 12), maintain a consistent heading structure, and ensure appropriate spacing and margins. For your convenience, use the template that will be provided. 8. Graphics: All diagrams, tables, and charts should be clearly labeled, captioned, and referenced in the text. A Hospital Dilemma The community of Rivertown has a single public hospital, Rivertown General, which has been serving its residents for over 50 years. With the advancements in medical technology and the growing population, the hospital’s current facilities and equipment are becoming outdated, causing patients to seek medical care in neighboring cities. In response to this, the hospital board has proposed the construction of a new wing, dedicated to state-of-the-art surgical facilities and patient rooms. Rivertown General Hospital is considering two primary options: Option A: Build a brand-new wing dedicated primarily to surgeries, including state-of-the-art operation theaters, recovery rooms, and necessary facilities. This would cater to a larger patient demographic and potentially draw patients from neighboring towns, making the hospital a regional healthcare hub. Option B: Upgrade the existing infrastructure, which includes renovating some parts of the current structure and purchasing new medical equipment. This approach is less disruptive to current operations but may not cater to the growing population in the long run. The estimated costs and benefits associated with each project are (for the next 20 years): Option A: Building a New Wing 1. • • • • • One-Time Costs: Land & site preparation: $10 million (Year 0) Construction: $100 million ($50 million in Year 0 and $50 million in Year 1) Medical equipment: $25 million (Year 0) Licensing and consulting: $15 million (spread across Years 0 and 1) Initial marketing campaign: $5 million (Year 2) 2. Annual Values: • Operations & staff: $11 million/year (Year 2 onwards) • Maintenance: $2.5 million/year (Year 2 onwards) • 3. • • 4. • • • Technology updates: $1.5 million/year (Year 4 onwards) Overhauls: Equipment repairs: $18 million (Year 10) Facility upgrades: $25 million (Year 15) Revenue: From Year 3 to 10: Starting at $60 million and increasing by $5 million annually. From Year 11 onward: Stabilizing at $100 million annually. Salvage Value of existing equipment: $25 million (Year 20) Option B: Upgrading Existing Infrastructure 1. • • • • 2. • • • 3. • • 4. • • • One-Time Costs: Renovations: $35 million (Year 0) Medical equipment: $20 million (Year 0) Licensing & consulting: $5 million (Year 0) Initial marketing campaign: $2 million (Year 1) Annual Values: Operations & additional staff: $7 million/year (Year 2 onwards) Maintenance: $2 million/year (Year 2 onwards) Technology updates: $1.2 million/year (Year 3 onwards) Overhauls: Equipment repairs: $13 million (Year 10) Facility upgrades: $20 million (Year 15) Revenue: From Year 2 to 9: Starting at $18 million and increasing by $5 million annually. From Year 10 onward: Stabilizing at $58 million annually. Salvage Value: $15 million (Year 20) Part 1 Question 1 – In order to better compare the options, summarize the collected data into a table. Additionally, identify each type of cost and benefit associated with each investment option. Part 2 Question 2 – Draw the cash flow diagram associated to each option. Question 3 – Assuming an interest rate of 3% per year (effective), calculate the feasibility of each option. You can use either Present Worth Analysis or Equivalent Uniform Worth Analysis. In this part, your calculation should be done without the use of Excel. Show your equations and the results. Part 3 Question 4 – Using linear interpolation, calculate the rate of return for each option. Here, your calculation should be implemented using Excel. Plot the results for different interest rate values and identify the rate of return in your plot. Question 5 – Assuming that the initial equipment can be depreciated over the course of 20 years and using Double Decline Balance Depreciation, calculate the depreciation schedule for the equipment. Question 6 – Assume a state income tax of 5%. Calculate the after-tax cashflow for each option assuming the depreciation used. Assume as only taxable income the ones described in part 4 – Revenue. Use only the depreciation on question 4. An ethical issue While analyzing the project’s feasibility from a financial perspective, an additional layer of complexity arises. The hospital recently received an anonymous donation of $100 million. The donor’s only condition is that the funds are used to provide free surgeries for the underprivileged for the next five years, regardless of which option the hospital chooses. However, if the hospital goes with Option A, they will need to divert some of this donation towards construction, thereby reducing the number of surgeries they could offer for free. Alternatively, with Option B, they could maximize the number of free surgeries while also improving the current facilities, though not to the extent of Option A. Part 4 Question 7 – Describe the ethical issues associated with this project. What are the related conflicts? Part 5 Question 8 – Identify and explain which relevant regulations from the Code of Ethics of the National Society of Professional Engineers are associated with this ethical dilemma. Part 6 Question 9 – Is there any other ethical issues that can arise from adopting each option over the other? Propose solutions and ways to reduce the negative impact of the presented ethical issues. Conclusion The last part of your project should be a conclusion statement with your advising to the manager of the project on how to proceed based on your observations and calculations.
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