Feasibility of Paving Contractor's Aggregate Stockpile Area

Methodology

A contractor operates a rock crusher and stores the material until needed in an adjacent stockpile area. The stockpile area is unpaved, and some of the stockpiled aggregate is contaminated by the sub-grade and cannot be used. The estimated stockpile losses are shown in the Table 1. This equates to a combined loss of 8% each year.

Current Stockpile Losses Material Size Loss ¼? minus 12% – 20% ¾? minus & ¾? × #4 8% – 15% 1½? minus & 1½? × ¾? 4% – 10% The contractor is considering to pave the stockpile area to reduce the loss of aggregate. Paving the stockpile area would reduce the losses due to contamination to about 2%. The crusher produces 250,000 tons/year at a cost of $1.50/ton. The new paving should last 10 years, and there has no salvage value.

Lower and Upper Limits on Estimated Data Factor Lower Limit Upper Limit Economic life (years) –50% +100% Aggregate price ($/ton) –20% +40% Annual production (tons/year) –40% +20% Loss with paving (%) –20% +20% Design cost for paving ($) –10% +10% Maintenance cost ($/year) –10% +20% First cost for paving ($) –5% +10% The paving will cover 4.56 acres.

The previous stockpile losses will serve as sub-grade and base courses for the new surfacing. A 3? thick surface will require 3700 tons of asphaltic concrete, which costs $20/ton installed. The engineering and site work involve a one-time cost of about $5000. The surface requires routine maintenance costing about $1000/year.

Table 2 shows the uncertainty (lower and upper limits) of the data estimated by the contractor to evaluate the feasibility of paving the stockpile area. Assuming the contractor has a minimum accepted rate of return (MARR) of 12%.

Answer the Following Questions (the use of Microsoft Excel to solve this case study is strongly recommended. Excel charts and functions (e.g. RATE and PV) can speed up your calculations, make your solution more accurate, and facilitate neater submission):

1. Determine the internal rate of return (IRR) of the stockpile area paving. For each of the 7 variables in Table 2, use IRR to graph NPV vs. the value of this variable, as the variable ranges between the limits you derive from the table (use 10% intervals).

(hint: for each graph, use estimated values of the other factors, e.g., use values ranging between 5 to 20 years for the economic life on x-axis versus the NPV on the y-axis assuming average values for the other variables).

2. Based on your answer to question 2, which of the factors in Table 2 is riskier for the decision about whether to pave the stockpile area?

(hint: examine the variance of NPV between upper and lower limits)

3. Estimate the IRR for the “worst-case” and “best-case” scenarios for all 7 variables in Table 2.

(hint: for the best-case scenario assume all variables will have their best possible outcome and vice versa for the worst-case scenario).

4. What is the NPV of the “worst-case” and “best-case” scenarios using the contractor’s MARR? Apply some other analyses, of your choice other than the ones listed above, you deem could help the contractor make their decision about paving the stockpile area. 

5. What is your recommendation for paving the stockpile area? Explain your reasoning.

Your submission will be in the form of a Technical report, which should be well written and properly organized. The report shall include, at minimum, the following parts/sections (in order):

Cover page;

table of contents;

executive summary;

brief project description;

and one section for each of the seven questions above. If you use any references in preparing this report, please list them in a separate section at the end of the report but before the appendices (if any).

The Case Study Grade is out of 150 points and will be based on the following rubric: Grading Criteria Grading Component Score

1. Executive Summary 10

2. Project Description 10 Question

3. (IRR) 20 Question

4. (NPV graphs) 35 Question

5. (Risky factors) 10 Question

6. (IRR for best case and worst-case scenarios) 10 Question

7. (NPV for best case and worst-case scenarios) 10 Question

8. (Other Analyses – selected by student) 15 Question

9.  Recommendations and Conclusions 10

10. Report Organization and Writing Style 10

11. Report Neatness and Presentability 10