CE 22 MWX - Engineering Economy 2nd Semester AY 2015-2016

HW#4
Due: April 18, 2016, start of class

GENERAL INSTRUCTIONS:
1. Solve the following questions individually.
2. Use only a blue or black ink pen.
3. Kindly use a blue book as answer sheets. Solve each problem/part on a separate page of your blue book.
4. Answer the review questions in uvle to check your answers. You may consult me regarding your solution.
5. Show all your steps/solution to receive full score. State any necessary assumptions made.
6. You are encouraged to start your solution by setting up equations in terms of the equivalence factors in
standard notation first, then plug-in numbers and calculate the final answer. Assume end-of-the-period (EOP)
cash flows unless stated otherwise.
7. BOX your final answers.

Problem 1.
Southern Cement plans to open a new rock-mining site. Two plans are suggested. Plan A requires the
purchase of two earthmovers and an unloading pad at the plant. Plan B calls for the construction of a
conveyor from mining site to the plant. MARR is 15% per year compounded annually, and costs are given:

Plan A Plan B
Two Movers Pad Conveyor
First Cost, $ -90,000 -28,000 -175,000
Annual Operating Cost, $ -12,000 -300 -2,500
Salvage value at EO Useful Life 10,000 2,000 25,000
Useful Life, years 8 12 12

(a) Assuming repeatability (LCM Method), what is the planning horizon?

(b) Compare the two plans using AW Method over the LCM period.
(c) Decide which plan to choose using AW method over a study period of 8 years. Use the Imputed
Market Value (IMV) technique to estimate the salvage value of the alternatives when useful life
study period.

Problem 2.
Baby Doll Shop currently manufactures wooden parts for dollhouses using handsaws. The shop is
considering the purchase of a power band saw with associated fixtures in order to improve the productivity
of this operation. Three models of power saw could be purchased: Model A (economy version), Model B
(high-powered version), and Model C (deluxe high-end version). The major operating difference between
these models is their speed of operation. The investment costs, including the required fixtures and other
operating characteristics are summarized as follows: You may treat labor savings as revenues.

Category Model A Model B Model C

Annual labor savings (vs. handsaw) $1,296 $1,725 $1,944
Annual power cost $400 $420 $480
Initial investment $4,000 $6,000 $7,000
Salvage Value $400 $600 $700
Service life (years) 20 20 20
Internal Rate of Return (IRR, %) 22.023 21.34 20.46

If the MARR = 10%,

A) Which model is most economical based on the rate of return principle?
B) Which model is most economical based on the modified benefit-cost analysis on annual worth?

mddiola