MENG 300

Final Test collection

__________________________________________________________________________
Notes:
 Sketch the cash flow diagram for each question.
 Show all your work.
_____________________________________________________________________________
Formulas
(1  i) n  1
P  A[ ] i≠0
i (1  i) n

i (1  i) n
A  P[ ]
(1  i) n  1

G (1  i) n  1 n
P [  ]
i i(1  i) n
(1  i) n
1 n
A  G[  ]
i (1  i) n  1

1 g n
1 ( )
Pg  A1 [ 1  i ] g≠i
ig
nA1
Pg  g=i
1 i

1
Q1)
Al-Dana Resorts are considering marketing their services and properties through a permanent
exhibition centre. Al-Dana can construct the exhibition center or rent a hall. The construction
option costs initially BD175,000 with BD2,000 annual maintenance cost. The center needs to be
redecorated every 3 years at a cost of BD10,000 starting after 5 years from now. The rental
option will cover all aspects of maintenance and redecoration of the center through an annual
rental payment of BD25,000 with rent renewal charges of BD4,000 every 6 years. At an interest
rate of 10% per year compounded quarterly, determine:
a. Which option do you recommend Al-Dana Resorts to choose? Why?
b. Interpret your answer?

0 1 2 3 4 5 ---------8--- ----11 -------14------

A1 = 2000

P =175000 A2 = 10000

Solution:

[1] Ia effective

Ia effective = (1+10%/4)^4 -1 = 10.38%

[6] a) Constructing the exhibition centre

( 0.5 )CC1 = $ -175000

( 2) CC2 = A1/I= 2,000 / 10.38%= $-19267.82

( 3 ) CC3 = [A2(A/F, 10.38%,3) / I]( (P/F, 10.38%,2)

CC3 = [-10,000(A/F, 10.38%,3) / 10.38 %](P/F, 10.38%,2) = $ -23801.18

2
( 0.5 ) CCT =– -175000 – 19267.82- 23801.18= $ -21806.9

0 1 2 3 6 ------------ --------12----------

P = 25000

A1 = 25000 A2 = 4000

[2] b) Renting the exhibition centre

CC1= -25000
A1 = -25000
A2= – 4000(A/F, 10.38%,6)
CC2 = A/ I
CC2 = -25000 -513.48 / 10.38% = $ - 245794.61

CCT =– -25000–245794.61= $ -270794.61

[1] b) I would select option A which is to Construct the exhibition centre because the
capitalised cost of this option in today’s value is less than renting the exhibition centre.

3
Q2)
Alfred construction is considering the purchase of dumpsters and a transport truck
to store and transfer construction waste from building sites. The entire rig is
estimated to have an initial cost of $125,000, a life of 8 years, a $5000 salvage
value, an operating cost of $40 per day, and an annual maintenance cost of $2000.
Alternatively, Alfred can obtain the same services from the city as needed at each
construction site for an initial delivery cost of $125 per dumpster per site and a
daily charge of $20 per dumpster. An estimated 45 construction sites will need
wastage storage throughout the average year. The minimum attractive rate of
return is 12% per year. [Mark 14]

a) How many days per year must the equipment be required to just
breakeven?
b) If the expected usage is 75 days per year, which option buy or lease
should be selected based on this economic analysis?
c) Determine the expected annual cost of this decision.

(a) Let x = breakeven days per year. Use annual worth analysis.

-125,000(A/P,12%,8) + 5,000(A/F,12%,8) - 2,000 - 40x = -45(125 +20x)

-125,000(0.2013) + 5,000(0.0813) - 2,000 - 40x = -5625 –900x
-26,756 – 40x = -5625 – 900x
-21,131 = -860x
x = 24.6 days per year

(b) Since 75 > 24.6 days, select the buy. Annual cost is

(c) -26,756 – 40(75) = $-29,756

4
Q3)
Nasser Pharmaceuticals purchased a drug sorting machine in 2006 for BD 750,000.
They planned to use the machine for 10 years, but because of new technology
advancement it should be replaced now (2010). Determine the amount of capital
investment lost if the machine is sold this year for BD75,000, using Straight Line
depreciation? [Mark 8]

(a) BV4 = BD450,000

(b) Loss = BV4 - selling price = 450,000 – 75,000 = BD 375,000

5
Q4)
Compare the alternatives shown below on the basis of present worth analysis,
using an interest rate of 12% per year, compounded quarterly? [Mark 8]

Alternative Alternative Alternative

E F G
First cost, $ -200,000 -300,000 -900,000
Quarter Income, $ 30,000 10,000 40,000
Increase after - 3% -
quarter 1,$
Salvage, $ 50,000 70,000 100,000
Life, years 2 4 ∞

5.33 CCE = [-200,000(A/P,3%,8) + 30,000 + 50,000(A/F,3%,8)]/0.03

= [-200,000(0.14246) + 30,000 + 50,000(0.11246)]/0.03
= $237,700

CCF = [-300,000(A/P,3%,16) + 10,000 (Pg/A,3%,3%,16)(A/P,3%,16) +

70,000(A/F,3%,16)]/0.03
= [-300,000(0.07961) + 155339.8 (0.07961)+ 70,000(0.04961)]/0.03
= $-268,123.27

CCG = -900,000 + 40,000/0.03

= $433,333

Select alternative G.

6
MEG 300 – Engineering Economics SI 07/08

Final Exam

Q1.
The independent project estimates below have been developed by the engineering and finance
managers. The corporate MARR is 15% per year and the capital investment limit is $4 million.

Project Cost Life Annual Income

Project
$ Millions Years $/Year
A 1.5 8 360,000
B 1.9 5 520,000
C 2.0 4 820,000

a. Are all projects worth to consider (profitable)?

b. How many possible combinations of sets of projects to investigate?
c. Use the NPV method to select the economically best projects.
d. Are you going to use the total $4 million budget? Determine the budget remainder left-
over.

Solution:

[8] a. NPVA = -1,500,000 + 360,000(P/A,15%,8) = $115,435.74

NPVB = -1,900,000 + 520,000(P/A,15%,5) = -$156,879.35
NPVC = -2,000,000 + 820,000(P/A,15%,4) = $341,082.26
Not all projects are profitable. Project B is a non profitable project.

[2] b. Out of the 2 profitable projects (A and C) excluding option (Do Nothing):
No. of possible combinations = 2m – 1 = 22 – 1 = 4 – 1 = 3

[8] c.

Bundles of FC, $
Projects Project/s Million NPV, $
1 A 1.5 $115,435.74
3 C 2 $341,082.26
5 A,C 3.5 $456,518.00 Best Bundle
8 DN 0 0

[2] d. No, there will be a left over = 4 – 3.5 = $0.5 million

MEG 300 – Engineering Economics SI 07/08

Q2.
The selling price (P) for a product is given by P = $100 – 0.0015Q, where Q is sales volume. The
product will require purchase of a machine that will cost $500,000 and will last for 5 years with
no salvage value. The company wants to earn 20% on its money.
The variable cost of the product is: Variable Cost = 4Q + 0.005Q2.
a. Determine the fixed cost.
b. Write down the formula for the profit.
c. Calculate the breakeven point(s) for this product.
d. Determine the sales volume that maximizes profit.

Solution:

[2] a. Fixed Cost = 500,000(P/A,20%,5) = $167,189.85

[6] b. Profit = Revenue – Total Cost

Revenue = P.Q = 100Q – 0.0015Q2
Total Cost = Fixed Cost + Variable Cost
Variable Cost = 4Q + 0.005Q2
Profit = 100Q – 0.0015Q2 – 167,189.85 – 4Q – 0.005Q2
= 96Q – 0.0065Q2 – 167,189.85

[6] c. At Breakeven:
Profit = 0
100Q – 0.0015Q2 – 167,189.85 – 4Q – 0.005Q2 = 0
96Q – 0.0065Q2 – 167,189.85 = 0
Solving the previous quadratic equation for roots of Q:
(a,b,c) = (-0.0065, 96, -167189.85)
− b ± b 2 − 4ac
Q1, 2 =
2a
Q1 = 2,017.02 units
Q2 = 12,752.21 units

[6] b. Maximum Profit exists at:

∂Profit
=0
∂Q

∂
(96Q – 0.0065Q2 – 167,189.85) = 96 – 0.013Q
∂Q

96 – 0.013Q = 0
Q = 96/0.013 = 7,384.62 units
MEG 300 – Engineering Economics SI 07/08

Q3.
Two mutually exclusive alternatives are under consideration. The following data apply:
Project A B
First cost, $ 31,000 49,000
Annual revenues, $ 9,000 9,000
Annual maintenance, $ 2,000 500
Life, years 25 25

a. If the MARR is 15%, use the NPV criterion to make a recommendation.

b. Use the IRR criterion to make a recommendation.
c. Would you use NPV criterion to select between alternatives if the life of alternative A is
20 years? Why?

Solution:

[1] Units

[8] a. NPVA = -31,000 + (9,000 – 2,000)(P/A,15%,25) = $14,249.04

NPVB = -49,000 + (9,000 – 500)(P/A,15%,25) = $5,945.27
NPVA > NPVB Select Project A

[8] b. NPVA = -31,000 + (9,000 – 2,000)(P/A,IRRA,25) = 0

IRRA = 22.44%
NPVB = -49,000 + (9,000 – 500)(P/A,IRRB,25) =0
IRRB = 17%
IRRA > IRRB Select Project A

[3] c. No, I will prefer to use Annual Worth criterion.

As I won’t need to find the LCM which is going to be a lot of calculations.
MEG 300 – Engineering Economics SI 07/08

Q4.
AirCo is considering an air handling equipment purchase. Two alternative equipments are
available. Equipment A costs BD12,000 and has a life of 7 years with a BD2,000 salvage value.
Equipment B costs BD10,000 and has a life of 5 years with a BD3,000 salvage value. The annual
operating cost (AOC) of equipment A is BD500 while AOC of equipment B is BD BD180.
a. Calculate the straight line depreciation amount per year for both equipments.
b. Determine the book value after 3 years for equipment A.
c. For an 11% MARR and 10 years study period, use NPV criterion to select between
equipments? Assume market value equals book value.

°@°@=π
Solution: 2000 E 3000
A B

[2] Cash flow diagrams 1 500 7 1 180 5

12000 10000

[4] a. DA = (12,000 – 2,000)/7 = BD1,428.57

DB = (10,000 – 3,000)/5 = BD1,400

[4] b. BVA3 = FC – Dt.n = 12,000 – 1,428.57(3) = BD7,714.29

S
[10] c. Study Period = 10 years A 2000 BV3

NPVA = -12,000 – (12,000 – 2,000)(P/F,11%,7)

1 500 7 10 14
– 500(P/A,11%,10) + 7,714.29(P/F,11%,10) 12000 12000

= -12000 – 4,816.58 – 2,944.62 + 2,716.85

= -BD17,044.35

NPVB = -10,000 – (10,000 – 3,000)(P/F,11%,5) B 3000 3000

– 180(P/A,11%,10) + 3,000(P/F,11%,10) 1 180 5 10

= -10,000 – 4,154.16 – 1,060.06 + 1,056.55 10000 10000

= -BD14,157.67

Since, NPVB > NPVA Select equipment B.

MEG 300 – Engineering Economics SI 07/08

Q5.
Carlton Real Estate Company is planning to lease apartments in one of its newly built buildings.
The building consists of 5 levels each with 4 apartments. Each apartment can be rented –surely–
for BD300 per month. The building costs BD600,000 with annual maintenance cost expected to
be BD1500 for next 2 years, increasing by BD100 thereafter. The apartments can be rented a
year from now. The expected market value of the building after 10 years is BD1,000,000. For
12% per year interest rate, compounded monthly: What is the minimum price that Carlton should
be willing to sell the building after 4 years from now?

Solution:

[2] ieffective Per Month = 12%/12 = 1%

[2] ieffective Per Year = (1+12%/12)12 – 1 = 12.7%
[2] P1 = -600,000
[6] P2= -1500 (P/A,12.7%,10) – 100 (P/G,12.7%,9) (P/F,12.7%,1) =
[2] P3= 5x4x300 (P/A,1%,12x10) = 6000(P/A,1%,120) =
[2] P4= 1,000,000 (P/F, 12.7%,10) =
[2] PTotal = -600,000 –8,237.897 –1,481.455 + 418,203.132 + 302,524.700 = BD111,008.480

Minimum Selling Price at year 4:

[2] F4 = 111,008.480 (F/P, 12.7%,4) = BD179,081.195
MEG 300 – Engineering Economics SI 07/08

Q6.
The following table represents the estimated annual cash flows in (BD) of two mutually
exclusive investment opportunities.

Year A B
0 -1,500 -4,000
1 300 1,000
2 300 1,000
3 300 1,000
4 300 5,000
5 300 5,000
6 300
7 300
8 300
a. Calculate the payback period for each investment opportunity.
b. In you own words, translate your findings in part a.
c. Calculate the discounted payback period for each investment opportunity for i = 10% per
year, compounded semiannually.

Solution:

[10] a. Payback Period:

Opportunity A: P = A*nA
nA = 300 x 5/1500 = 5 years

Opportunity B: P = [Link]
4000 = 1000 nB => n = 4
4000 - 3(1000) = 5000 (n-3)
1000/5000= nB-3 nB = 3.2 yrs (or by interpolation)

[2] b. Investment A would recover its initial cost in 5 years.

Investment B would recover its initial cost in 3.2 years.

[8] c. ieffective Per Year = (1+10%/2)^2 – 1 = 10.25%

Opportunity A: -1500 + 300 (P/A,10.25%, nA) = 0

300 (P/A,10.25%, nA) = 1500
nA = 7.363 Yrs

Opportunity B:
-4000 + 1000(P/A,10.25%,3) + 5000 (P/A,10.25%, nB-3).(P/F,10.25%,3) = 0
5000(P/A,10.25%, nB-3).(P/F,10.25%, 3) + 2475.947 = 4000
5000(P/A,10.25%, nB-3).(P/F,10.25%, 3) = 1524.053
3731.077(P/A,10.25%, nB-3) = 1524.053
nB-3 = 0.438 yrs
nB = 3.438 yrs
MEG 300 – Engineering Economics SI 07/08

Final Exam

Q1.
The independent project estimates below have been developed by the engineering and finance
managers. The corporate MARR is 15% per year and the capital investment limit is $4 million.

Project Cost Life Annual Income

Project
$ Millions Years $/Year
A 1.5 8 360,000
B 1.9 5 520,000
C 2.0 4 820,000

a. Are all projects worth to consider (profitable)?

b. How many possible combinations of sets of projects to investigate?
c. Use the NPV method to select the economically best projects.
d. Are you going to use the total $4 million budget? Determine the budget remainder left-
over.

Solution:

[8] a. NPVA = -1,500,000 + 360,000(P/A,15%,8) = $115,435.74

NPVB = -1,900,000 + 520,000(P/A,15%,5) = -$156,879.35
NPVC = -2,000,000 + 820,000(P/A,15%,4) = $341,082.26
Not all projects are profitable. Project B is a non profitable project.

[2] b. Out of the 2 profitable projects (A and C) excluding option (Do Nothing):
No. of possible combinations = 2m – 1 = 22 – 1 = 4 – 1 = 3

[8] c.

Bundles of FC, $
Projects Project/s Million NPV, $
1 A 1.5 $115,435.74
3 C 2 $341,082.26
5 A,C 3.5 $456,518.00 Best Bundle
8 DN 0 0

[2] d. No, there will be a left over = 4 – 3.5 = $0.5 million

MEG 300 – Engineering Economics SI 07/08

Q2.
The selling price (P) for a product is given by P = $100 – 0.0015Q, where Q is sales volume. The
product will require purchase of a machine that will cost $500,000 and will last for 5 years with
no salvage value. The company wants to earn 20% on its money.
The variable cost of the product is: Variable Cost = 4Q + 0.005Q2.
a. Determine the fixed cost.
b. Write down the formula for the profit.
c. Calculate the breakeven point(s) for this product.
d. Determine the sales volume that maximizes profit.

Solution:

[2] a. Fixed Cost = 500,000(P/A,20%,5) = $167,189.85

[6] b. Profit = Revenue – Total Cost

Revenue = P.Q = 100Q – 0.0015Q2
Total Cost = Fixed Cost + Variable Cost
Variable Cost = 4Q + 0.005Q2
Profit = 100Q – 0.0015Q2 – 167,189.85 – 4Q – 0.005Q2
= 96Q – 0.0065Q2 – 167,189.85

[6] c. At Breakeven:
Profit = 0
100Q – 0.0015Q2 – 167,189.85 – 4Q – 0.005Q2 = 0
96Q – 0.0065Q2 – 167,189.85 = 0
Solving the previous quadratic equation for roots of Q:
(a,b,c) = (-0.0065, 96, -167189.85)
− b ± b 2 − 4ac
Q1, 2 =
2a
Q1 = 2,017.02 units
Q2 = 12,752.21 units

[6] b. Maximum Profit exists at:

∂Profit
=0
∂Q

∂
(96Q – 0.0065Q2 – 167,189.85) = 96 – 0.013Q
∂Q

96 – 0.013Q = 0
Q = 96/0.013 = 7,384.62 units
MEG 300 – Engineering Economics SI 07/08

Q3.
Two mutually exclusive alternatives are under consideration. The following data apply:
Project A B
First cost, $ 31,000 49,000
Annual revenues, $ 9,000 9,000
Annual maintenance, $ 2,000 500
Life, years 25 25

a. If the MARR is 15%, use the NPV criterion to make a recommendation.

b. Use the IRR criterion to make a recommendation.
c. Would you use NPV criterion to select between alternatives if the life of alternative A is
20 years? Why?

Solution:

[1] Units

[8] a. NPVA = -31,000 + (9,000 – 2,000)(P/A,15%,25) = $14,249.04

NPVB = -49,000 + (9,000 – 500)(P/A,15%,25) = $5,945.27
NPVA > NPVB Select Project A

[8] b. NPVA = -31,000 + (9,000 – 2,000)(P/A,IRRA,25) = 0

IRRA = 22.44%
NPVB = -49,000 + (9,000 – 500)(P/A,IRRB,25) =0
IRRB = 17%
IRRA > IRRB Select Project A

[3] c. No, I will prefer to use Annual Worth criterion.

As I won’t need to find the LCM which is going to be a lot of calculations.
MEG 300 – Engineering Economics SI 07/08

Q4.
AirCo is considering an air handling equipment purchase. Two alternative equipments are
available. Equipment A costs BD12,000 and has a life of 7 years with a BD2,000 salvage value.
Equipment B costs BD10,000 and has a life of 5 years with a BD3,000 salvage value. The annual
operating cost (AOC) of equipment A is BD500 while AOC of equipment B is BD BD180.
a. Calculate the straight line depreciation amount per year for both equipments.
b. Determine the book value after 3 years for equipment A.
c. For an 11% MARR and 10 years study period, use NPV criterion to select between
equipments? Assume market value equals book value.

Solution: 2000 3000

A B

[2] Cash flow diagrams 1 500 7 1 180 5

12000 10000

[4] a. DA = (12,000 – 2,000)/7 = BD1,428.57

DB = (10,000 – 3,000)/5 = BD1,400

[4] b. BVA3 = FC – Dt.n = 12,000 – 1,428.57(3) = BD7,714.29

S
[10] c. Study Period = 10 years A 2000 BV3

NPVA = -12,000 – (12,000 – 2,000)(P/F,11%,7)

1 500 7 10 14
– 500(P/A,11%,10) + 7,714.29(P/F,11%,10) 12000 12000

= -12000 – 4,816.58 – 2,944.62 + 2,716.85

= -BD17,044.35

NPVB = -10,000 – (10,000 – 3,000)(P/F,11%,5) B 3000 3000

– 180(P/A,11%,10) + 3,000(P/F,11%,10) 1 180 5 10

= -10,000 – 4,154.16 – 1,060.06 + 1,056.55 10000 10000

= -BD14,157.67

Since, NPVB > NPVA Select equipment B.

MEG 300 – Engineering Economics SI 07/08

Q5.
Carlton Real Estate Company is planning to lease apartments in one of its newly built buildings.
The building consists of 5 levels each with 4 apartments. Each apartment can be rented –surely–
for BD300 per month. The building costs BD600,000 with annual maintenance cost expected to
be BD1500 for next 2 years, increasing by BD100 thereafter. The apartments can be rented a
year from now. The expected market value of the building after 10 years is BD1,000,000. For
12% per year interest rate, compounded monthly: What is the minimum price that Carlton should
be willing to sell the building after 4 years from now?

Solution:

[2] ieffective Per Month = 12%/12 = 1%

[2] ieffective Per Year = (1+12%/12)12 – 1 = 12.7%
[2] P1 = -600,000
[6] P2= -1500 (P/A,12.7%,10) – 100 (P/G,12.7%,9) (P/F,12.7%,1) =
[2] P3= 5x4x300 (P/A,1%,12x10) = 6000(P/A,1%,120) =
[2] P4= 1,000,000 (P/F, 12.7%,10) =
[2] PTotal = -600,000 –8,237.897 –1,481.455 + 418,203.132 + 302,524.700 = BD111,008.480

Minimum Selling Price at year 4:

[2] F4 = 111,008.480 (F/P, 12.7%,4) = BD179,081.195
MEG 300 – Engineering Economics SI 07/08

Q6.
The following table represents the estimated annual cash flows in (BD) of two mutually
exclusive investment opportunities.

Year A B
0 -1,500 -4,000
1 300 1,000
2 300 1,000
3 300 1,000
4 300 5,000
5 300 5,000
6 300
7 300
8 300
a. Calculate the payback period for each investment opportunity.
b. In you own words, translate your findings in part a.
c. Calculate the discounted payback period for each investment opportunity for i = 10% per
year, compounded semiannually.

Solution:

[10] a. Payback Period:

Opportunity A: P = A*nA
nA = 300 x 5/1500 = 5 years

Opportunity B: P = [Link]
4000 = 1000 nB => n = 4
4000 - 3(1000) = 5000 (n-3)
1000/5000= nB-3 nB = 3.2 yrs (or by interpolation)

[2] b. Investment A would recover its initial cost in 5 years.

Investment B would recover its initial cost in 3.2 years.

[8] c. ieffective Per Year = (1+10%/2)^2 – 1 = 10.25%

Opportunity A: -1500 + 300 (P/A,10.25%, nA) = 0

300 (P/A,10.25%, nA) = 1500
nA = 7.363 Yrs

Opportunity B:
-4000 + 1000(P/A,10.25%,3) + 5000 (P/A,10.25%, nB-3).(P/F,10.25%,3) = 0
5000(P/A,10.25%, nB-3).(P/F,10.25%, 3) + 2475.947 = 4000
5000(P/A,10.25%, nB-3).(P/F,10.25%, 3) = 1524.053
3731.077(P/A,10.25%, nB-3) = 1524.053
nB-3 = 0.438 yrs
nB = 3.438 yrs