Engineering Economics (Ilustrative Problem): A tunnel through a mountain is being considered as a replacement for an existing stretch of highway in southern Mindanao. The existing road is a steep, narrow, winding two-lane highway that has been the site of numerous fatal accidents. The accidents average to 2.05 fatalities and 3.35 “serious injuries” per year. It has been projected that the tunnel will significantly reduce the frequency of accidents, with estimates of not more than 0.15 fatalities and 0.35 “serious injuries” per year. Initial capital investment requirements, including land acquisition, tunnel excavation, lighting, roadbed, and preparation, are estimated to be Php45 M. Annual upkeep costs for the tunnel will be significantly less than for the existing highway, resulting in an annual savings of Php85,000. For purposes of this analysis, a “value per life saved” of Php1 M will be applied, along with an estimate of Php750,000 per “serious injury” for medical costs. Apply the benefit-cost ratio method, with an anticipated life of the tunnel project of 50 years and an interest rate of 8% per year, to determine whether the tunnel should be constructed. Upload a photo of your answer sheet showing your solution.
A tunnel through a mountain is being considered as a replacement for an existing stretch of highway in southern Mindanao. The existing road is a steep, narrow, winding two-lane highway that has been the site of numerous fatal accidents. The accidents average to 2.05 fatalities and 3.35 “serious injuries” per year. It has been projected that the tunnel will significantly reduce the frequency of accidents, with estimates of not more than 0.15 fatalities and 0.35 “serious injuries” per year. Initial capital investment requirements, including land acquisition, tunnel excavation, lighting, roadbed, and preparation, are estimated to be Php45 M. Annual upkeep costs for the tunnel will be significantly less than for the existing highway, resulting in an annual savings of Php85,000. For purposes of this analysis, a “value per life saved” of Php1 M will be applied, along with an estimate of Php750,000 per “serious injury” for medical costs.
Apply the benefit-cost ratio method, with an anticipated life of the tunnel project of 50 years and an interest rate of 8% per year, to determine whether the tunnel should be constructed.
Upload a photo of your answer sheet showing your solution.
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