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Seem 2440A/B - Engineering Economics First Term (2011 - 2012)

1. The document provides details on an engineering economics assignment that includes 7 problems analyzing capital budgeting decisions. Students must submit their assignment by the due date and time by dropping it in the specified collection box. 2. The problems cover topics like calculating equivalent uniform annual cost, comparing equipment purchase options, present worth analysis of actual and real cash flows, comparing project alternatives using present worth, analyzing a leasing alternative, and using benefit-cost analysis to evaluate mutually exclusive public projects. 3. Students must use engineering economic concepts like present worth, equivalent uniform annual cost, and benefit-cost analysis to evaluate the capital budgeting problems and recommend the best alternative based on the analysis.

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248 views3 pages

Seem 2440A/B - Engineering Economics First Term (2011 - 2012)

1. The document provides details on an engineering economics assignment that includes 7 problems analyzing capital budgeting decisions. Students must submit their assignment by the due date and time by dropping it in the specified collection box. 2. The problems cover topics like calculating equivalent uniform annual cost, comparing equipment purchase options, present worth analysis of actual and real cash flows, comparing project alternatives using present worth, analyzing a leasing alternative, and using benefit-cost analysis to evaluate mutually exclusive public projects. 3. Students must use engineering economic concepts like present worth, equivalent uniform annual cost, and benefit-cost analysis to evaluate the capital budgeting problems and recommend the best alternative based on the analysis.

Uploaded by

Sun Kelvin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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SEEM 2440A/B - ENGINEERING ECONOMICS

First term (2011 2012)


Assignment 6
Due: 5:00 p.m., 2-Dec-2011 (Friday)
Important notes:
1. You must submit your assignment on time. No late assignment will be accepted.
2. You must drop your assignment into the assignment collection box A18. Dont
hand in your assignment to instructor and TAs.
3. Unless otherwise stated, each question carries 4 points.
The number in the parentheses is the problem number in the textbook (Engineering
Economy, by William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling, 15th
edition, Pearson Education, Inc.).
1. (7-29) Your company has just signed a three-year nonrenewable contract with the
city of New Orleans for earthmoving work. You are investigating the purchase of
heavy construction equipment for this job. The equipment costs $200,000 (adjusted
cost basis) and qualifies for five-year MACRS depreciation. At the end of the
three-year contract, you expect to be able to sell the equipment for $70,000. If the
project operating expense for the equipment is $65,000 per year, what is the after
tax equivalent uniform annual cost (EUAC) of owning and operating this
equipment under this three-year contract? The effective income tax rate is 40%,
and the after-tax MARR is 12% per year.
2. (7-44) A firm is considering buying a new machine and has to choose between two
options. The specifications of each are given below:
Machine I
cost 100,000

Initial cost (Adjusted


basis) at time 0 ($)
Operating cost at the end of 20,000
year k (1 k useful life) ($)
Useful life (years)
5
Market value at the end of the 40,000
useful life ($)

Machine II
80,000
25,000
5
15,000

For each machine, assume a three-year MACRS (GDS) recovery property and
depreciation class (i.e. recovery period = 3 years), with an effective income tax rate
of 50% and after tax MARR of 15% per year. Based on the after-tax PW analysis,
find the alternative that should be selected.

3. Assume the base period b is at the end of year 1 (i.e. b = 1). Let Ak and Rk be the
actual dollar and real dollar at the end of year k where 1 k N respectively.
Define the PW of the actual dollar and real dollar cash flows at the end of year 1 as
follows:
N

PWA ic %1 Ak P / F , ic %, k 1 ;
k 1

PWR ir %1 Rk P / F , ir %, k 1 .
k 1

Prove that PWA(ic%) = PWR(ir%).


4. (8-6) Assuming today is time 0. Annual expenses for two alternatives have been
estimated a project manager as follows:
EOY
1
2
3
4

Project A
(Estimated in Actual Dollars)
$100,000
112,000
136,000
150,000

Project B
(in todays purchasing power)
$ 80,000
100,000
120,000
140,000

If the average general price inflation rate is expected to be 4% per year and the real
rate of interest is 9% per year, show which alternative has the least negative
present worth in the base period.
5. (8-40) Your company must obtain some laser measurement devices for the next six
years and is considering leasing. You have been directed to perform an actualdollar after-tax study of the leasing approach. The pertinent information for the
study is as follows:
Lease costs: First year, $80,000; second year, $60,000; third through sixth years,
$50,000 per year. Assume that a six-year contract has been offered by the lessor
that fixes these costs over the six-year period.
Other costs (not covered under contract): $4,000 in year-zero dollars, and the total
increase rate is estimated to be 10% each year.
Effective income tax rate: 40%.
a. Develop the actual-dollar ATCF for the leasing alternative.
b. If the real MARR (ir) after taxes is 5% per year and the annual inflation rate (f)
is 9.524% per year, what is the actual-dollar after-tax equivalent annual cost for
the leasing alternative?

6. (10-13) A nonprofit government corporation is considering two alternatives for


generating power (must choose one of them):
Alternative A
Build a coal-powered generating facility at a cost of $20,000,000. Annual power
sales are expected to be $1,000,000 per year. Annual operating and maintenance
costs are $200,000 per year. A benefit of this alternative is that it is expected to
attract new industry, worth $500,000 per year, to the region.
Alternative B
Build a hydroelectric generating facility. The capital investment, power sales, and
operating costs are $30,000,000, $800,000, and $100,000 per year, respectively.
Annual benefits of this alternative are as follows:
Food-control savings
Irrigation
Recreation
Ability to attract new industry

$600,000
$200,000
$100,000
$400,000

Suppose that the facilities in both Alternatives A and B have the zero salvage value.
The useful life of both alternatives is 50 years. Using an interest rate of 5%,
determine which alternative (if either) should be selected according to the AW
version of the conventional B-C ratio method. Include DN as one of the possible
alternatives in your analysis.
7. (10-20) The city of Oak Ridge is evaluating three mutually exclusive landscaping
plans for refurbishing a public greenway. Benefits to the community have been
estimated by a landscaping committee, and the costs of planting trees and
shrubbery, as well as maintaining the greenway, are summarized below. The citys
discount rate is 8% per year, and the planning horizon is 10 years.

Initial planting cost at time 0 ($)


Annual maintenance expense at the
end of year k (1 k useful life) ($)
Annual community benefits at the
end of year k (1 k useful life) ($)

A
75,000
4,000

Plan
B
50,000
5,000

C
65,000
4,700

20,000

18,000

20,000

a. Assume the city also considers DN as one of the possible alternatives. Use the
PW version of the modified B-C ratio method to recommend the best plan.
b. Repeat (a) with the AW version of the conventional B-C ratio method. Which
plan is the best?
c. Should the recommendation in (a) and (b) be the same? Why or Why not?

End

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