Economics Questions

RENSSELAER POLYTECHNIC INSTITUTE TROY, NY

FINAL EXAM ENGINEERING ECONOMICS (ENGR-4760)

NAME: ______________________________

RIN: _______________________________

Due: Wednesday, December 16, 2015 at noon. CII-5009

Problem Points Score

1 10

2 20

3 20

4 20

5 20

6 20

Total 100*

*You can score 110 / 100.

By my signature below, I attest that I completed this test on my own. I did not have the assistance of another person (student or other), copy the solution from an answer key or from a test completed by another, or offer assistance to others in the class.

_________________________________________________________ Signature

Note: You need to print out this test and have your answers written on it. You need to e-mail an Excel file with your work to me. The subject line of the e-mail should read “ENGR-4760 Final”. The Excel file should be saved as “YourLastName-YourFirstName.xls”

“Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man or order of man.”

(Adam Smith, 1723-1790, Wealth of Nations, vol. II, bk. IV, ch.7, pt. 3)

Problem 1 (10 points)

A man want to deposit $50,000 now and $60,000 at the end of six years in a bank that pays 12% interest compounded semiannually. He wants to withdraw an amount every year for the first six years and to withdraw exactly $1,500 more for the following four years. Determine the maximum amount he could withdraw in year 1?

Problem 2 (20 points)

To purchase a house for $80,000, a new couple has $12,000 available for down payment. They are considering two options:

Option 1: get a new standard mortgage with 10% APR interest compounded monthly for a 30-year term

Option 2: assume the seller’s old mortgage that has an interest rate of 8.5% APR compounded monthly, a remaining term of 25 years (from an original 30 years), a remaining balance of $35,394. You can obtain a second mortgage for the remaining balance from your credit union, at 12% APR compounded monthly, with a 25-year repayment period.

a) What is the effective rate for option 2 per year? (6) b) Compute the monthly payments for each option over the life of the mortgage (8) c) What APR charged by the credit union would make the two financing options equivalent?(6)

Problem 3 (20 points)

Some new production machinery has a first cost of $100,000 and a useful life of 10 years. Its estimated O&M costs are $10,000 the first year, which will increase annually by $4,000. The asset’s before tax market value will be $50,000 at the end of the first year and then will decrease by $5,000 annually. This property is a 7-year MACRS property. The company uses a 6% after-tax MARR and is subject to a combined federal/state tax rate of 40% Determine:

a) The after-tax cash flows. b) The property’s economic service life after tax

Show your calculations.

Problem 4 (20 points)

In the tree shown below, you are given the probability of each chance node and the PW for each terminal node. What decision should be made? What’s the EV of that decision?

Show your work.

Problem 5 (20 points)

Two costs of construction of a small, remote mine are for labor and transportation. Labor costs are expected to be $120,000 the first year, with inflation of 6% annually for 4 years. Unit transportation costs are expected to inflate at 5% annually, but the volume of material of material being moved changes each year. In today’s dollars, the transportation costs are estimated to be $40,000, $60,000, $50,000, and $30,000 in years 1 through 4. The inflation rate for the value of the dollar is 3%. If the firm uses an inflation free MARR of 7%, calculate the equivalent annual cost for this 4-year project.

Problem 6 (20 points)

Five engineering projects are being considered for the upcoming capital budget period. The interrelationships among the projects and the estimated net cash flows of the projects are summarized in the following table:

Project Cash Flow ($1,000) for end of year

0 1 2 3 4

B1 -50 20.5 22.8 24.3 26.1

B2 -30 12.6 13.9 14.8 16.2

C1 -14 4.0 4.6 5.0 5.3

C2 -15 4.8 5.4 5.8 6.1

D -10 5.6 5.8 5.9 6.0

Projects B1 and B2 are mutually exclusive. Projects C1 and C2 are mutually exclusive and contingent on B2. Finally project D is contingent on C1. The company has a budget of $70,000

Using the PW method, and assuming MARR=10%:

a) Develop an LP for this problem. b) Solve the LP and identify the best portfolio of projects c) Determine the expected value of the chosen bundle