EGR 312 ENGINEERING ECONOMY PRACTICE FINAL EXAM

Transcription

1 EGR 312 ENGINEERING ECONOMY PRACTICE FINAL EXAM PART A: MULTIPLE CHOICE. Circle the one best answer for each question (5 points each.) 1. A piece of equipment that was purchased 2 years ago for $45,000 was expected to have a useful life of 5 years with a $5000 salvage value. Its performance was less than expected, and it was upgraded for $19,000 one year ago. Increased demand now requires that the equipment be upgraded again for another $12,000 or replaced with new equipment that will cost $65,000. If replaced, the existing equipment will be sold for $6000. In conducting a replacement study, the value of P that should be used for the presently owned machine is: a. $45,000 b. $12,000 c. $18,000 d. $ The Wefixit Machine Shop must purchase a new CNC lathe. The cost of the lathe is $17,500 and the owner estimates it will cost $3500 per year in maintenance and upgrades. If Wefixit plans to keep the lathe for 10 years, what is the present value of this lathe at an interest rate of 8%? a. $37,949 b. $52,500 c. $39,006 d. $40,985 e. $78, The duties of a project manager include: a. Identifying resource and budget requirements. b. Supervising crews to ensure that the work is done right. c. Identifying potential risks and finding ways to alleviate them. d. a & c e. all of the above 4. You have been asked to decide which of four independent projects your company should invest in. You have determined the following: n Project P Project Q Project R Project S 0 $ (10,000) $ (12,000) $ (15,000) $ (20,000) 1 $ 1,500 $ 1,700 $ 2,800 $ 3,000 2 $ 1,500 $ 1,700 $ 2,800 $ 3,000 3 $ 1,500 $ 1,700 $ 2,800 $ 3,000 4 $ 1,500 $ 1,700 $ 2,800 $ 3,000 5 $ 1,500 $ 1,700 $ 2,800 $ 3,000 6 $ 1,500 $ 1,700 $ 2,800 $ 3,000 7 $ 1,500 $ 1,700 $ 2,800 $ 3,000 8 $ 3,500 $ 3,700 $ 4,800 $ 5,000 ROR = 7.28% 5.64% 11.49% 5.86%

2 If the company s MARR is 7%, which of these projects should be chosen? a. All of them b. Q and S c. R only d. P and R e. None of them 5. For a market interest rate of 12% per year and an inflation rate of 7% per year, the real interest rate per year is closest to: a. 4.7% b. 7% c. 12% d. 19.8% 6. An interest rate of 15% per year compounded monthly is nearest to: a. 1% per month b % per year c % per year d % per year PART B: Solve each of the following problems. Show all work. (Point values as assigned.) 7. The management of a plant must decide whether to keep an outdated milling machine purchased 12 years ago for $75,000 with a newer, automated system. If the outdated machine is sold now, the company can get $20,000 for it. A new machine will cost $100,000 and will last 6 years. The market values and estimated annual operating costs for the remaining life of the old milling machine and for the life of the replacement are shown below: Current Milling Machine Challenger Year Market Value, $ AOC, $ Market Value, $ AOC, $ 0 20, , ,000 14,000 85,000 12, ,000 18,000 70,000 14, ,000 26,000 60,000 18, ,000 22, ,000 27, ,000 30,000

3 a. (15 points) The table below shows partial results of the replacement analysis. Using an interest rate of 15%, complete the table and identify the economic service life (ESL) of the current milling machine and the challenger. Year Current Milling Machine Challenger Total AW, $ Total AW, $ 1-25,000-42, ,442-41, ,388-40, , , ,755 2 yrs. 3 yrs. ESL: b. (5 points) What is your recommendation regarding replacing the old machine? Keep the current machine 1 more year 8. Assume that at some point you will replace the machine described in problem 7. The challenger described in the problem is to be depreciated using MACRS with a 3-year recovery period. The milling machine, purchased for $100,000, is expected to remain in service for 6 years and then sold for $15,000. a. (10 points) Complete the MACRS depreciation schedule in the table below. Year PV & SV, $ AOC, $ d t D t 0-100, , , , , , ,000 30,

4 b. (10 points) An advantage of the new machine will be an increase in revenue due to increased quality and productivity. Complete the following table for the after-tax cash flows for purchasing the milling machine. Assume an effective tax rate of 40%. Year PV & SV, $ Revenues, $ AOC, $ D TI TAX CFAT 0 100, , , , , , , , , , , , , , ,000 1, ,000 30, ,000 6,000 9,000 c. (10 points) Alternatively, the company could purchase the milling machine for $15,000 per year for 5 years with lease payments due at the beginning of each year. Projected revenues would be the same as for a purchased machine, but the lease maintenance agreement will cut the annual operating cost in half. Lease payments are not tax deductible. In the space below, show how you would evaluate these two alternatives using Excel. The MARR remains at 15%. Individual solutions may vary. 9. (20 points) If the company decides to purchase a particular accessory for their new milling machine, they will be able to make a certain part in house that they currently must outsource at a flat fee of $27 per part. The accessory will cost $12,000. You anticipate that you will be making the part for 3 more years, after which the product design will change and the part will no longer be needed. At that time you will sell the machine accessory for $2000. Additional costs (material, labor, etc.) to make the part in-house will be about $45,000 per year. (These costs are summarized below.) MAKE BUY First Cost, $ 12, AOC, $ 45,000 27/part Salvage Value, $ 2000 Life, years 3 3 a. (10 points) What does the yearly demand for the part have to be each year in order for the two alternatives (make vs buy) to break even? Assume an interest rate of 15% parts b. (10 points) Actual demand for these parts is expected to be 5000 per year. Assuming the interest rate in part a is a real interest rate and an inflation rate of 3%:

5 i. What will be the actual accumulated savings at the end of 3 years for the company if it makes the part in-house rather than buying them? $296, ii. What will be the purchasing power of those savings in future dollars? $271,133.14