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Sample/practice exam February 2016, questions and answers

- This is a practice midterm from February 2016

Engineering Economics (Memorial University Of Newfoundland)

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Student Name: _______________________________

Student Number: _______________________________

ENGINEERING ECONOMICS
ENGINEERING 4102
Midterm
February 11, 2016
7-8:30 PM

General Instructions: Answer all questions in the answer booklet(s) provided. All
questions have equal value. State all assumptions. Return examinations with answer
books.
Please note that there are four questions in this exam.

Question 1

A metal company is examining two options – Machine A and Machine B - for a core-
cutting machine.

Machine A Machine B
Initial Cost $ 300,000 $ 200,000
Annual Savings $25,000 $ 23,000
Annual M9590aintenance $12,000/year + $0.05/unit $22,000 + $0.01/widget
Cost
Labor 1.25/widget 0.50/widget
Life 5years 10 years
Salvage Value $20,000 18,000

MARR is 10 percent and the company’s sale projection is 20,000 widgets/year. Which
machine should be purchased? Use the present worth comparison.

LCM = 10 years
Yearly Cost = 12000+20000*1.25+20000*0.05=38000

PW (Machine A) = -300,000 - 38000(P/A,10%,10) + 20000(P/F,10%,5) –

300000(P/F,10%,5) + 20000(P/F,10%,10)+ 25,000(P/A, 10%, 10)
= -546026.6

PW – Machine B
For Yearly Costs: 22,000 + (0. 5)* 20000 + 0.01*20000=32,200

PW = - 200,000 – 32200 (P/A, 10%,10) + 18,000 (P/F, 10%,10) +23000(P/A,10%,10)

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= -249590.6

So, Machine B must be purchased.

Question 2

Sarah wants to buy a house for $325 000. She paid 20% as a down payment and obtained
a bank loan for the rest. The loan has a nominal interest rate of 10% compounded
monthly with a 10-year amortization period. The loan term is 10 years. What are the
firm's monthly payments to the bank?

Down-payment is $65 000 (20% of $325 000). Subtract down-payment from the total
truck costs to get the amount that should be borrowed from a bank: $325 000 - $65 000 =
$260 000. The amortization period is the duration over which the bank loan should be
paid back to the bank. Therefore: A = $260 000 x (A/P, 10/12%, [10 x 12]) = $3435.9

Question 3

The maintenance cost of a machine is approximately $300 per year. With age the costs
increase by $50 a year. What is the future worth of the maintenance costs in four years'
time if the interest rate is 5% compounded monthly?

Ie= (1+0.05/12)12-1=5.1%

The maintenance costs are an arithmetic gradient series. The arithmetic gradient to
annuity conversion factor is (A/G, 5.1%, 4). This means that the geometrically-increasing
annuity of $300 per year is equivalent to a uniform annuity of $300 + $50 x 1.4378=
$371.89 per year over the four-year period. So the future worth of the maintenance costs
is $371.89 x (F/A, 5.1%,4) = $1605.28

Question 4

A metal company is considering buying one of two pieces of equipment. Data for the
equipment is shown below:

Piece 1 Piece 2
Life 15 years 10 years
Initial Cost $ 250,000 $ 170,000
Annual Savings $28,000 $ 20,000
Annual Maintenance Cost $1500, increasing by 15% $1000
each year thereafter
Salvage Value $32,500 23,000

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If MARR is 12 percent and the relevant information is as given above, which one should
be purchased? Use the annual worth comparison.

AW- Piece 1

g = 0.15
iϒ = (1 + i)/(1 + g) − 1 = 1.12/1.15 − 1 = −0.026
AW(hydraulic)
= −250 000(A/P, 12%, 15) + 28 000 - 32,500(A/F, 12%, 15)
-1500[(P/A, iϒ, 15)/(1 + g)](A/P, 12%, 15)
= −250 000(0.14682) + 28 000 + 32500 (0.02682) − 3573.15
= -11406.5

AW- Piece 2

= −170 000(A/P, 12%, 10) + 20,000 − 1000 + 23000(A/F,12%,10)

= −170 000(0.17698) + 20,000 – (1000 )+ 23,000(A/F,12%,10)=
=-9776.06

So, Piece 2 must be purchased.

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