engineering economics

EM 652 Engineering Economy & Decision Making – Fall 2020 Take Home Mid-term Exam (42 pts. Total, +3 pts. extra credit possible)

Exam Due: Friday, October 16, 2020 11:59 pm CST

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Instructions: 1. You must show proper work to get full/partial credit. 2. Each question is worth 3 points. 3. The last question on the exam for 3 pts. extra credit. 4. Save your answers as: LastName EM652MidTerm.doc/xls/pdf and upload in “Mid-Term Exam” drop box on D2L. You may submit your handwritten work as pdf.

Questions

1) (Ch2) Draw the cash flow diagrams for: a) A manufacturing company buys a piece of equipment that costs $10,000 that

they will retire at the end of 5 years and will have a salvage value of $2,000. The equipment will have annual operating costs of $1,000 each year. (Note: No calculations are needed, just show the cash flows).

b) You take out a business loan for $12,000 at an interest rate of 6%. You will pay off the loan and interest at the end of year 3. (3 pts.)

2) (Ch3) Mary Smith took out a car loan of $23,000 to pay back in 72 monthly

installments at a nominal interest rate of 6%. Compute: a) The monthly payment for Mary. b) The loan balance immediately after the 24th payment. Note: 48 remaining

payments. (3 pts.) 3) (Ch3) HiTek Manufacturing is purchasing a large tract of land for a new facility. Its

loan is for $6 million, and it will be paid off in 20 equal annual year-end payments. If the interest rate is 4%, how much is each payment? (3 pts.)

4) (Ch5) You have saved $2,500 towards the down payment of a new car and you

believe you can afford monthly payments of $400. (3 pts.) a) If your bank offers financing terms of 60 months at a nominal 6% interest rate,

what is the most you can pay for the car? b) The dealer offers 3% financing, but the loan is only for 48 months. What is the

most you can pay for the car on this basis?

5) (Ch6) Henry is looking to add a new conveyor system to his assembly plant. The

conveyor costs $249,000 and the annual operating costs will be $14,000. The

expected life of the conveyor is 10 years after which there will be no salvage value. If

Henry’s interest rate is 7%, what is the EAC for the new conveyor? (3 pts.)

EM 652 Engineering Economy & Decision Making – Fall 2020 Take Home Mid-term Exam (42 pts. Total, +3 pts. extra credit possible)

Exam Due: Friday, October 16, 2020 11:59 pm CST

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6) (Ch6) What is the equivalent annual cost of two hydraulic systems required to

provide 30 years service? Assume the interest rate is 7%.

The first hydraulic system has an initial cost of $37,000 and it has a salvage value of

$8000 at the end of its useful life of 15 years. It requires annual operating costs of

$1000.

The second hydraulic system has an initial cost of $18,000 and is expected to have

a 10-year useful life with zero salvage value. It requires $500 annual operating

costs. (3 pts.)

7) (Ch7) Given the costs and benefits shown below determine the IRR. (3 pts.)

Year Cash Flow

0 -23,000

1 4000

2 4000

3 6000

4 6000

5 8000

6 3000

7 -2000

8) (Ch7) Grayson’s Bike Company is conducting its annual strategic planning session.

Executives are planning on expanding operations which will cost $250,000 now and

$100,000 more at the end of year 5. Grayson’s executives believe the added

capacity will result in $40,000 of revenue in year one and that revenue will grow by

$5,000 a year through year 10. What is the IRR for this opportunity? If Grayson’s

could invest their money and receive a 15% return instead, should they expand? (3

pts.)

9) (Ch8) A new ATV park will cost $550,000 to build and $50,000 a year to operate.

The park has no salvage value at the end of its 25 year life. The benefit riders at the

park will gain is estimated at $250,000 per year and the disbenefits neighbors will

endure from the added noise is estimated at $50,000 per year. Using PW, calculate

the benefit/cost ratio at an interest rate of 7%. Should the park be created? (3 pts.)

10) (Ch9) You are faced with a choice between Options A or B below. Each option has a first cost and one revenue at the end of its life. Assume that both alternatives may be replaced at the end of their useful lives. For the analysis, you will be using a MARR of 8%. (3 pts.) (a) Compare each alternative's PW with a 10 year horizon. (b) Compare each alternative's EAW.

EM 652 Engineering Economy & Decision Making – Fall 2020 Take Home Mid-term Exam (42 pts. Total, +3 pts. extra credit possible)

Exam Due: Friday, October 16, 2020 11:59 pm CST

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Year Option A Year Option B

0 -$10,000 0 -$10,000

5 +$24,880 10 +$45,000

Life, Years

5 Life, Years

10

11) (Ch9) Two designs have been proposed for lighting your parking lot. The two options are similar except in the type of pole that will be used. Option 1 uses wood poles which will cost $6800 each and will last for twelve years with no salvage value. Option 2 uses steel poles which cost $9,500 each, will last 24 years and will have $250 salvage value. Use an interest rate of 8% and determine whether the increased life of the steel pole justifies its increased cost. (3 pts.)

12) (Ch9) You will be buying one new piece of equipment for your plant. You have researched three options. Your boss has asked you to make a recommendation based on IRR. This will require you to use Defender/Challenger Analysis (incremental analysis). All options have a five-year life and no salvage value. The company uses an MARR of 10% . (3 pts.)

Option A has first cost of $11,000 and will generate revenues of $3,300 annually. Option B has a first cost of $16,000 and will generate revenues of $4,400 annually. Option C has a first cost of 19,000 and will generate revenues of $5,500 annually. 13) (Ch10) You are planning for the purchase of a new piece of equipment for your

plant that will cost $12,000 (including installation). You have been provided with the following estimates of the salvage values if sold at various years. Maintenance costs are expected to increase each year. Salvage value and Maintenance Costs are assumed to occur at year end. The firm’s interest rate is 9%. (3 pts.) (a) Determine the equivalent annual cost if the equipment is kept for 1 year, 2 years,

3 years, 4 years, 5 years or 6 years. (b) What is the economic life of the equipment?

Year Salvage Value (including removal costs)

Maintenance Cost

1 $8,500 $600

2 $7,200 $850

3 $5,300 $1,200

4 $3,500 $1,700

5 $1,000 $2,350

6 $-1000 $2,600

EM 652 Engineering Economy & Decision Making – Fall 2020 Take Home Mid-term Exam (42 pts. Total, +3 pts. extra credit possible)

Exam Due: Friday, October 16, 2020 11:59 pm CST

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14) (Ch10) A company is considering replacing an existing piece of equipment. The company uses an interest rate of 6.5%. They have identified a lease option for similar equipment that will have an EAC of $8,000 (which includes the annual maintenance costs). The current salvage value of the equipment they own is $15,000 and will decline to the following over the next 4 years: $12,500, $9,500, $6,500, and $3,500. The maintenance cost is $2,000 for Year 1, $3,000 for year 2, $4,000 for year 3, and $5,000 for year 4. Maintenance costs are assumed to occur at year end. (3 pts.)

a) What is the marginal cost to extend service for the first year? b) What is the marginal cost to extend service from the end of year 1 to the end of

year 2? c) What is the marginal cost to extend service from the end of year 2 to the end of

year 3? d) What is the marginal cost to extend service from the end of year 3 to the end of

year 4? e) When should the equipment be sold, and the company move to leasing?

15) (3 pts. Extra Credit) (Ch10) A plant has a piece of old equipment that has 9 identical parts that routinely fail and must be replaced. Analysis has shown the following trend. No parts fail before three months. Assume five parts will have lives of 4 months. Assume three parts will have lives of 6 months. Assume one part will have a life of 8 months. The cost to replace one part before it fails is $8,900 (which includes part and labor). If the part fails it costs $15,000 to replace. If the plant uses a monthly interest rate of 1%, is it better to replace all of the parts every three months (before any failures) or replace the parts as they fail? Assume parts were new at the beginning of year one and base your analysis on 24 months of equipment operation and parts replacement.