Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 4

Cross-Sectional Regression Analysis WasteTec is a large construction company that specializes in the construction of large wastewater treatment plants and recycling plants. A major cost driver in either type of facility is the capacity of the plant. For example, the capacity of a recycling plant is measured by the number of tons of water per day (TPD) that the plant can process. These plants can vary in size from a few hundred TPD to as many as several thousand TPD. Regression analysis is a useful method to estimate the cost of a new plant by using a regression equation developed from prior plant construction projects. The dependent variable of the regression is the actual construction cost of each project, while the independent variable is the TPD for the plant. Below is a sample of some recent projects and the related construction costs (in thousands).
Required
1. Develop a regression model using Excel or an equivalent system to predict the cost of a proposed new plant in Babylon, New York, which will have a required capacity of 750 TPD. What is the predicted cost for the Babylon plant, using your regression
2. Evaluate the precision and reliability of the regression you have developed. How could it be improved