Você está na página 1de 649

Contents 25 Kenesi+M 138 50 Maraba+TJ 256

1 Africa+BB 2 26 Kgosi+TD 147 51 Mariba+FN 277

2 Baloyi+LN 11 27 Khumalo+TR 151 52 Maseko+MB 283

3 Bambo+LE 15 28 Khwela+NC 155 53 Masetlane+LJ 288

4 Beetge+WG 20 29 Kudumela+FP 159 54 Masunungure+I 293

5 Beya+MM 32 30 Kumalo+AP 163 55 Mathebula+NP 302

6 Biyela+KL 36 31 Lavagna+J 167 56 Mathopo+NS 308

7 Chiremba+IF 41 32 Legoabe+KA 173 57 Matlala+HN 315

8 Croucamp+PL 44 33 Lentsoane+MA 181 58 Matsaung+M 321

9 Daya+YS 50 34 Lubisi+SM 185 59 Mayoyo+AR 325

10 Dipela+MS 53 35 Madede+BK 190 60 Mazibuko+D 329

11 Ditsele+SSM 56 36 Magae+TO 195 61 Mazibuko+S 335

12 Dlodlo+MS 60 37 Maharaj+RR 200 62 Mhlanga+XM 339

13 Dos Santos+AAC 64 38 Makabate+CT 206 63 Mkhaliphi+VK 344

14 Dube+SP 72 39 Makgale+NS 211 64 Mlotywa+FM 350

15 Dzoro+M 79 40 Makhafola+MR 214 65 Mnguni+NC 353

16 Gama+SS 85 41 Makhoba+CS 217 66 Moche+TM 357

17 Govender+D 91 42 Makhuvele+A 223 67 Mofokeng+JT 363

18 Govender+L 96 43 Makibelo+CP 227 68 Mohajane+TD 368

19 Govender+N 104 44 Makuleka+JM 234 69 Mohlabi+MH 371

20 Govender+T 109 45 Malatji+M 236 70 Mohono+T 378

21 Ilemobade+OO 116 46 Malatji+WL 239 71 Mokhele+LM 382

22 Jenner+GW 121 47 Malomane+MP 243 72 Mokoena+PV 386

23 Kasenge+JM 126 48 Mamburu+R 248 73 Mokuwe+PKW 390

24 Kawayongo+JM 132 49 Mangena+NL 252 74 Moshaba+SM 394


75 Mosoane+SJ 398 90 Nyamande+G 481 105Silaule+C 573

76 Motjoadi+V 405 91 Nzamba+P 488 106Sincadu+MZB 577

77 Mouchou Tchatchou+A 411 92 Oshokoya+TJ 496 107Sombane+MN 580


78 Mthembu+N 415 93 Oshungade+OO 501
108Sondlane+R 584
79 Munyai+TT 419 94 Phetlhu+GL 508
109Stadler+CR 596
80 Mutai+DK 425 95 Ramagaga+TS 515
110Taruvinga+TP 606
81 Mwabi+J 430 96 Rambani+AE 520
111Thobela+M 610
82 Ndika+N 438 97 Ramohlale+NG 523
112Tlomatsana+LE 615
83 Ndlovu+BM 445 98 Reddy+K 528
113Tortumlu+F 620
84 Nekhwevha+R 448 99 Rikhotso+C 537
114Tshabalala+S 624
85 Ngonyama+CN 453 100Rooplall+N 542
115Van Vuuren+DJ 626
86 Ngwenya+G 459 101Senga+EA 549

87 Nkabinde+CS 462 102Shaku+NA 553 116Yusuf+AS 634

88 Nkgoeng+RM 470 103Sheane+PA 561 117Zondi+HF 641

89 Novela+MB 475 104Shiburi+N 568 118Zwane+KC 644


1 Africa+BB
• 2014ASS2AFRICA+BB.pdf
Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


Africa, BB Africa, BB Africa, BB Africa, BB

Africa, BB Africa, BB Africa, BB Africa, BB


2 Baloyi+LN
• 2014Ass2Baloyi-LN.pdf
Baloyi, LN Baloyi, LN Baloyi, LN Baloyi, LN

BALOYI LN 200900086 BALOYI LN 200900086

Problem 1 Problem 2

(a) Capital cost = P+15000 (P/A, 8.5%, 15) Normalised weight score between 0-10

= -250 000+15000(8.304) Score weight


Flexibility (f) the most important factor 10.000 0.364
= - R125 437 50% as important as up time 2.500 0.091
Safety (s)
PW< 0 therefore it’s not worthwhile to get money from personal investment Uptime (u) one-half as important as 5.000 0.182
flexibility
Speed (v) as important as uptime 5.000 0.182
Rate of return ( r) twice as important as safety 5.000 0.182
(b) WACC= (debt fraction)(debt earing rate)+( equity fraction)(equity earing rate) 27.500 1.000
= (0.85) (0.4) + (0.9)(0.6)
=8.8%

Loan amount = 250 000 (60%) = R150000

Loan payment= 150000(A/P, 9%, 15)


Problem 3
= 150000(0.1241)
(a) Capital recovery = - P (A/P,i,n)+ S(A/F,i,n)
=R18615
year salvage value capital recovery annual operating cost AW
Net profit = profit-debt
1.00 85000.00 -33000.00 75000.00 -108000.00
=15000-18615 2.00 72250.00 -30728.93 79588.09 -110317.01
3.00 61412.50 -28800.64 83902.00 -112702.64
=R -3615
4.00 52200.63 -27163.14 87947.00 -115110.14
PW = P+A (P/A,8.8.15) 5.00 44370.53 -25777.00 91728.00 -117505.00
6.00 37714.95 -24595.99 95252.00 -119847.99
= -100000+ (-3615)(8.1567)

= -100000-29486.5
Economic service life (ESL) is at year 1
= R-129486.5
Corresponding annual worth (AW) = -R108000
PW< 0 it’s not worthwhile to get the money from the loan

(b ) P’’ = -P+ P*0.856 +S (A/F,I,n)-[(sum of PW of AOC1,AOC,,,AOC6)](A/P,18.6)


(C) Option A, (personal investment) is a better option relative to the loan value closer to zero
108000=-P+P*0.856 +(37714.95)-((7500+79588+83902+87947+91728)

P=R51821.13

Baloyi, LN Baloyi, LN Baloyi, LN Baloyi, LN


Baloyi, LN Baloyi, LN Baloyi, LN Baloyi, LN

BALOYI LN 200900086 BALOYI LN 200900086

Annual operating cost (AOP) = hourly cost + material cost+ direct labour cost

AOP= 525 000+ 300 000+ 500 000

Problem 4 AOP=R 1325 000

(a) r: revenue per unit : FC= fixed cost : V = Variable cost : P= Profit :Q = quantity

(r- V)Q – FC= P Alternative annual

For breakeven point: profit = 0 AW= -P (A/P,i,n) + S(A/F,I,n)- AOC

Fixed cost Variable cost = 2000000(A/P,15%,10)+50000(A/F,15%,10)-1325000


administrative 30000 material 2500
salaries 70000 labour 200 AW= -R1721 135
equipment 100000 indirect labour 2000 Current R1500000 AW1
space, etc. 55000 subcontract 600
computers 33333.33 misc. cost 200 It’s cheaper to buy compare to manufacture
288333.3 5500

R=FC/Q +V

Revenue per unit (r) = (288333.33/5000) +5500 Problem 6

Revenue per unit r =R 5557.67per unit Provided information value units

phase I at 1.8 mega tons


(b) (r- V) Q – FC= P
phase II 3.6 mega tons
But mow the quantity (Q) is 8000m3
phase III 5.4 mega tons
R= (P+FC/Q) +V production cost 150.0 per ton
= (500000+288333.33)/(8000) +5500 production revenue 500.0 per ton
Decrease rate of revenue -3% per year
Revenue per unit (r) = R5598.54 per unit
Increase rate of cost) 3.% per year
Fixed cost phase 1 40.0 million
Problem 5 Fixed cost phase 2 80.0 million
Department A: (25 000) (10) = R250 000 Remediation cost 90.0 million
Investment rate 15% per year
Department B: (50 000) (5) = R125 000
Borrowing rate 16% per year
Department C: (50 000) (15) = R150 000
Period 11.0
Total hourly cost for various department = R525 000

Baloyi, LN Baloyi, LN Baloyi, LN Baloyi, LN


Baloyi, LN Baloyi, LN

BALOYI LN 200900086

years Investment Revenue Production Revenue Production Production CF FV 15 % PV 16% FW+ PW-
(m) price per cost per ton cost (investment rate) (borrowing)
ton
2 011
2 012 -266.6667 -266.6667 4.6524 1.0000 -266.6667
2 013 -266.6667 -266.6667 4.0456 0.8621 -229.8933
2 014 -266.6667 -266.6667 3.5179 0.7432 -198.1867
2 015 500.0000 150.0000 900.0000 270.0000 590.0000 590.0000 3.0590 0.6407 1 804.8100
2 016 485.0000 154.5000 873.0000 278.1000 554.9000 554.9000 2.6600 0.5523 1 476.0340
2 017 470.4500 159.1350 846.8100 286.4430 520.3670 520.3670 2.3131 0.4761 1 203.6609
2 018 -700.0000 456.3365 163.9091 821.4057 295.0363 486.3694 -213.6306 2.0144 0.4104 -87.6740
2 019 -700.0000 442.6464 168.8263 796.7635 303.8874 452.8762 -247.1238 1.7490 0.3538 -87.4324
2 020 429.3670 173.8911 1 545.7212 626.0080 839.7132 839.7132 1.5209 0.3050 1 277.1199
2 021 416.4860 179.1078 2 249.0244 967.1824 1 201.8421 1 201.8421 1.3225 0.2630 1 589.4361
2 022 403.9914 184.4811 2 181.5537 996.1978 1 105.3558 1 105.3558 1.1500 0.2267 1 271.1592
2 023 -90.0000 391.8717 190.0155 2 116.1071 1 026.0838 1 010.0233 920.0233 1.0000 0.1954 920.0233 0.0000
9 542.2434 -869.8531

ERR = (FW/-PW) ^ (1/n) = (9542.2434/-(-869.8351))-1 = 0.2433 = 24.33%

ERR>MARR of 18%.therefore the project is accepted

Formulas used

Revenue price = revenue per ton* quantity of production in ton

Production cost = production cost per ton* quantity of production in tons

Production cost= Revenue - Production cost –fixed cost

Baloyi, LN Baloyi, LN
3 Bambo+LE
• 2014Ass2BamboLE.pdf
Bambo, LE Bambo, LE Bambo, LE Bambo, LE

Bambo, LE Bambo, LE Bambo, LE Bambo, LE


Bambo, LE Bambo, LE Bambo, LE Bambo, LE

Bambo, LE Bambo, LE Bambo, LE Bambo, LE


Bambo, LE Bambo, LE Bambo, LE Bambo, LE

Bambo, LE Bambo, LE Bambo, LE Bambo, LE


Bambo, LE Bambo, LE

Bambo, LE Bambo, LE
4 Beetge+WG
• 2014Ass2Beetge+WG.pdf
Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG Beetge, WG Beetge, WG

Beetge, WG Beetge, WG Beetge, WG Beetge, WG


Beetge, WG Beetge, WG

Beetge, WG Beetge, WG
5 Beya+MM
• 200704431 Ass2 BEYA-MM.pdf
Beya, MM Beya, MM Beya, MM Beya, MM

PROBLEM 1

Net Cash Flow/annum


Year Cash Inflows (R) Cash Outflows (R) Net Cash Flow (R)
0 0 250 -250
1 15 0 15
2 15 0 15
3 15 0 15
4 15 0 15
5 15 0 15
6 15 0 15
7 15 0 15

ASSIGNMENT 2 8
9
10
11
15
15
15
15
0
0
0
0
15
15
15
15
12 15 0 15
STUDENT NUMBER: 200704431 13 15 0 15
14 15 0 15
SURNAME: BEYA 15 15 0 15

INITIALS: MM a) It’s not worthwhile to get the money from the personal investment as WACC = 8.8% >
8.5% (investment rate)
b) Borrow 60% for 15 years at 9%/year and the remaining 40% will be at 8.5%
60% of R250 000 = R100 000
40% of R250 000 = R150 000
WACC = 0.4 x 8.5% + 0.6 x 9%
= 8.8%
c) The better option is to borrow 60% for 15 years at 9%

PROBLEM 2
Normalised weight of an attribute = Score of an attribute / SUM of scores of all attributes
Attributes Scores Normalised weights
Flexibility [f] 10 0.364
Safety [s] 2.5 0.090
Uptime [u] 5 0.182
Speed [v] 5 0.182
Rate of Return [r] 5 0.182
SUM 27.5 1

Beya, MM Beya, MM Beya, MM Beya, MM


Beya, MM Beya, MM Beya, MM Beya, MM

PROBLEM 3 b)
n
Given: P = R100 000, S = P x 0.85 , n = Number of years after purchase Increase in production of 3 000m3, Q = 5 000 + 3 000 = 8 000m3 and P = R500 000
AOC = (65 + 10 x n) x 1 000, n≥1 Assumptions: v = 5 500 R/unit and FC = R288 330
MARR = 18% P = Revenue – Total Cost
a) Economic Service Life (ESL) and Corresponding Annual Worth (AW) This implies, Revenue = Profit + Total Cost
𝑃+𝐹𝐶
r= 𝑄
+v
n S (A/P,18%, n) P(A/P, 18%, n) A/F, 18%, n S(A/F, 18%, n)
= (500 000 + 288 330 / 8 000) + 5 500
1 85000 1.18 118000 1 85000
2 72250 0.63872 63872 0.45872 33142.52 r = 5 598. 541 R/unit
3 61412.5 0.45992 45992 0.27992 17190.587
4 52200.63 0.37174 37174 0.19174 10008.94784
5 44370.53 0.31978 31978 0.13978 6202.112858 PROBLEM 5
6 37714.95 0.28591 28591 0.10591 3994.39052
n = 10 years, MARR = 15%, first cost = R2 m, Salvage = R50 000
Department Material Cost Direct Cost
n MV AOC CR AW of AOC Total AW A Labour 10 x 25 000 = R250 000 200 000 200 000
1 85000 -75000 -33000 -75003.75 -108003.75 B Machine 5 x 25 000 = R125 000 50 000 200 000
2 72250 -85000 -30729.5 -79590.58 -110320.06 C Labour 15 x 10 000 = R 150 000 50 000 100 000
3 61412.5 -95000 -28801.4 -83901.596 -112703.01 SUM R 525 000 R300 000 R500 000
4 52200.63 -105000 -27165.1 -87948.294 -115113.35
5 44370.53 -115000 -25775.9 -91729.53 -117505.42
AOC = R525 000 + R300 000 + R500 000
6 37714.95 -125000 -24596.6 -95251.488 -119848.1
= R1 325 000
The ESL = 1 year and this corresponds to the Annual Worth AW = -108003.75 Make
b) PWMAKE = -2 000 000 – 1 325 000(P/A, 15%, 10) + 50 000(P/F, 15%, 10)
𝑆(𝐴/𝐹,𝑖,𝑛) 37714.95(0.10591) = -2 000 000 – 1 325 000(5.0188) + 50 000(0.2472)
P= (𝐴/𝑃,𝑖,𝑛)
= 0.28591
= -2 000 000 – 6 649 910 + 12 360
PWMAKE = - R8 637 550
P = R13 970. 796
Buy
A = R1.5m
PROBLEM 4
PWBUY = -A (P/A, 15%, 10)
a)
𝐹𝐶
= -1 500 000(5.0188)
rQ = FC + VC, this implies that: r = +v
𝑄
PWBUY = - R7 528 200
FC = 30 + 0.2(350) + 100 + 55 + 100/3 = R288 330 Decision: As seen, PWBUY < PWMAKE , then the better option is to buy.
Q = 5 000 m3
r = (288330/5000) + 5500
r = 5 557.666 R/unit

2 3

Beya, MM Beya, MM Beya, MM Beya, MM


Beya, MM Beya, MM Beya, MM Beya, MM

PROBLEM 6 FV at 15% PV at 16% FW+ PW-


5.3503 1
Borrowing rate: k = 16%, Investment rate: r = 15%, MARR = 18%
4.6524 0.8621 -229.894
Cost: 1.8Mt corresponds to R150, this implies that: 1Mt corresponds to R83.3m 4.0456 0.7432 -198.187
3.5179 0.6407 -170.854
Knowing that the cost increases by 3% annually,
3.059 0.5523 2171.908
Cost Factor = 83.3 (1+3%)n ; Cost = Cost Factor x Production 2.66 0.4761 1804.826
Revenues are R500/t; knowing that revenues are to decrease 3% annually, 2.3131 0.4104 1498.152
2.0114 0.3538 -29.1874
Revenue Factor = 500 (1-3%)n ; Revenue = Revenue Factor x Production 1.749 0.305 -34.1771
The table below summarizes all the above. 1.5209 0.263 1700.295
1.3225 0.2267 2157.953
1.15 0.1954 1780.352
n year Production Cost Factor Revenue Factor Cost (m) Revenue (m) 1 0.1685 1376.083
0 2015 1.8 83.33 500 -149.994 900
1 2016 1.8 85.8299 485 -154.494 873 Total FW+ = 12 489.57
2 2017 1.8 88.404797 470.45 -159.129 846.81 Total PW- = -662.299
3 2018 1.8 91.0569409 456.3365 -163.902 821.4057
ERR = 44.36 %
4 2019 1.8 93.7886491 442.646405 -168.82 796.763529
5 2020 3.6 96.6023086 429.3670129 -347.768 1545.721246 As seen ERR > MARR, and also ERR > r (investment rate), hence the phase investment
6 2021 5.4 99.5003779 416.4860025 -537.302 2249.024413 should be considered.
7 2022 5.4 102.485389 403.9914224 -553.421 2181.553681
8 2023 5.4 105.559951 391.8716797 -570.024 2116.10707

Year CF+ CF- Total CF- NCF


0 2011 0 0
1 2012 -266.667 -266.667 -266.667
2 2013 -266.667 -266.667 -266.667
3 2014 -266.667 -266.667 -266.667
4 2015 900 -149.994 -40 -189.994 710.006
5 2016 873 -154.494 -40 -194.494 678.5062
6 2017 846.81 -159.129 -40 -199.129 647.6814
7 2018 821.4057 -163.902 -40 -700 -903.902 -82.4968
8 2019 796.7635 -168.82 -40 -700 -908.82 -112.056
9 2020 1545.721 -347.768 -80 -427.768 1117.953
10 2021 2249.024 -537.302 -80 -617.302 1631.722
11 2022 2181.554 -553.421 -80 -633.421 1548.133
12 2023 2116.107 -570.024 -80 -90 -740.024 1376.083

FW+ = (CF+) x FV and PW- = (CF-) x PV

4 5

Beya, MM Beya, MM Beya, MM Beya, MM


6 Biyela+KL
• 2014Ass2Biyela+KL.pdf
Biyela, KL Biyela, KL Biyela, KL Biyela, KL

KL Biyela 201493396

Assignment 2: Advanced Engineering Management: 14GIE4058/14M6MAE19

Problem 2

Problem 1 Attribute Score Weights


Flexibility (f) 10 10/27.5 = 0.36
a) For 100% equity scenario: Safety (s) 2.5 2.5/27.5 = 0.0909
P= R250 000 Uptime (u) 5 5/27.5 = 0.1818
A= 15 000 Speed (v) 5 5/27.5 = 0.1818
MARR = 8.5% Rate of Return (r) 5 5/27.5 = 0.1818
Sum of scores & weight 27.5 1
250 000 15 000 ⁄ , 8.5%, 15

250 000 15 000 8.3042


Problem 3
125 437
Year MV AOC Capital AW of AOC Total AW
0 ∴ ! ! "# $# !# % #& ' % !# (# )" *# %# Recovery
1 85 000 75 000 -33 000 -75 003.75 -108 003.75
b) 60- 40 D-E Financing
2 72 250 85 000 -30 728.92 -79 590.58 -110 319.5
3 61 412.5 95 000 -28 800 -83 897.95 -112 697.5
WACC = (equity fraction)(cost of equity) + (debt fraction)(cost of debt) 4 52 200.6 105 000 -27 163.26 -87 938.83 -115 102.09
= (0.4x0.085) + (0.6x 0.09) 5 44 370.5 115 000 -25 777.3 -91 735.27 -117 512.57
= 0.088 = 8.8% 6 37 714.95 125 000 -24 595 -95 248 -119 843

Borrowed amount = R250 000x 0.6 = R150 000


Equity amount = 250 000 -150 000 = 100 000
P = 100 000 MARR = 18%
Loan repayment = 150 000(A/P,9%,15)
= 150 000x 0.1241
= R18615 per year
Total AW1= CR – AW of AOC

+ )" , - ' .-
Net Cash Flow = Estimated cash flow – Loan repayment
- ⁄ , , / ⁄0 , ,
=15000 – 18615
- , 100 000 ⁄ , 18%, 1 85 000 ⁄ , 18%, 1
= - 3615
- , 100 000 1.18 72 250 1
PW = -100 000 – 3615(P/A,8.8%, 15)
- , 33 000
= -100 000 - (3615x8.1567)

= - 129 486.47
- 1 100 000 0.6387 72 250 0.4587 30 728.92
PW < 0 not worthwhile to get money through the loan
- 4 100 000 0.4599 61412.5 0.2799 28 800
c) Both options are not economically attractive or justifiable (both, PW<0) . However, option A is a
CR 7 100 000 0.3717 52 200 0.1917 27 163.26
better option when compared to B.

Biyela, KL Biyela, KL Biyela, KL Biyela, KL


Biyela, KL Biyela, KL Biyela, KL Biyela, KL

CR 8 100 000 0.3198 44 370.5 0.1398 25 777 286 852 0.3198

CR 9 100 000 0.2859 37 714.95 0.1398 24 595 => ?@ =ABE IC DGE. HD

' .-, : ' .-, ; ⁄ , ,

: 75 000 ⁄0 , 18%, 1 ; ⁄ , 18%, 1

75 000 ∗ 0.8475 1.18 ' .-9 : ' .-9 ; ⁄ , ,

63562.5 1.18 : 286 852 125 000 ⁄0 , 18%, 6 ; ⁄ , 18%, 6

=> ?@ =ABC DE FFG. DE :286 852 125 000 ∗ 0.3704 ; 0.2859

333 152 0.2859

' .-1 : ' .-1 ; ⁄ , , => ?@ =ABL IE HKJ. CEL

: 75 003.75 85 000 ⁄0 , 18%, 2 ; ⁄ , 18%, 2

:75 003.75 85 000 ∗ 0.7182 ; 0.63872 Therefore;

124 609.5 0.63872 ESL is year 1 (ESL = 1)

=> ?@ =ABH DI EIF. EJ For year 1, AW = R 108 003.75

' .-4 : ' .-4 ; ⁄ , ,

: 124 609.5 95 000 ⁄0 , 18%, 3 ; ⁄ , 18%, 3 b) Solve for P


:124 609.5 95 000 ∗ 0.6086 ; 0.4599 To calculate the reduced the first cost, P, AW1 is made equivalent to the annual cost for year 6
182 426.5 0.4599 To solve for P, AW for year 6, is
=> ?@ =ABG JG JID. IE ⁄ , 18%, 6 ⁄M , 18%, 6 9 ⁄0 , 18%, 6
, 75 000 10 000 0.85

108 003.75 0.28591 75 000 10 000 2.0252 0.37715 0.10591


' .-7 : ' .-7 ; ⁄ , , 108 003.75 0.24596 95 252
: 182 426.5 105 000 ⁄0 , 18%, 4 ; ⁄ , 18%, 4
51 844
:182 426.5 105 000 ∗ 0.5158 ; 0.3717 Therefore reduced first cost is R51 844
236 585.5 0.3717

=> ?@ =ABK JD IGJ. JG


Problem 4

Fixed Cost FC = R 30 000 + (350 000*0.2) + 100 000+ 55 000 + (100* 1/3) = R288 333
' .-8 : ' .-8 ; ⁄ , ,
Variable Cost per unit v= R5500
: 236 585.5 115 000 ⁄0 , 18%, 5 ; ⁄ , 18%, 5
Revenue per unit r =?
:236 585.5 115 000 ∗ 0.4371 ; 0.3198
a) Production volume of 5000 m3 per year

Biyela, KL Biyela, KL Biyela, KL Biyela, KL


Biyela, KL Biyela, KL Biyela, KL Biyela, KL

Alternative annual worth is


0-
NOP ⁄ , , / ⁄0 , , .-
Q
= 2000 000 ⁄ , 15%, 10 50 000 ⁄0 , 15%, 10 – 1 325 00

288 333 = -R 1 721 037


5000
5500
Carefes are currently purchased for R 1.5 m
5557.67
Therefore it is cheaper to purchase

b)
QBE = 5000 + 3000 = 8 000 m3
Profit = R – TC = rQ – (FC + vQ) = 500 000
Problem 6

Find r MARR 18%

500 000 = r8000 – (288 333 + 5500*8000) Investment rate R 15%


r=R5598. 54
Borrowing rate S 16%

Problem 5 Year Tons Revenue Revenue Unit Costs Fixed Investment Cash Flow (CF)
per ton (A) (B) Costs (D) CF = A-B-C -D
Indirect Costs (C)
Department Basis Hours Rate/Hour Allocated Material Costs Direct Labour 2012 - -266.66 m -266.66 m
Hours Costs 2013 - -266.66 m -266.66 m
A Labour 10 25 000 200 000 200 000 2014 - -266.66 m -266.66 m
B Machine 5 25 000 50 000 200 000 2015 1.8 Mt 500 m 900 m -270 m -40 m 590 m
C Labour 15 10 000 50 000 100 000 2016 1.8 Mt 485 m 873 m -278.1 m -40 m 554.9 m
300 000 500 000 2017 1.8 Mt 470.45 m 846.81 m -286.43 m -40 m 520.38 m
2018 1.8 Mt 456.33 m 821.39 m -295.02 m -40 m -700 m -213.64 m
2019 1.8 Mt 442.65 m 796.77 m -303.88 m -40 m -700 m -247.11 m
Indirect Cost Allocation 2020 3.6 Mt 429.36 m 1545.69 m -625.97 m -80 m 839.72 m
2021 5.4 Mt 416.48 m 2248.99 m -967.14 m -80 m 1201.85 m
Department A: 25 000 (10) = R250 000
2022 5.4 Mt 403.99 m 2181.55 m -996.14 m -80 m 1105.41 m
Department B: 25 000 (5) = R125 000 2023 5.4 Mt 391.87 m 2116.1 m -1026 m -80 m -90 m 920.1 m

Department C: 10 000 (15) = R150 000


Step 1. Finding T of all negative NCF at S 16%
R 525 000
T 266.66 266.66 ⁄0 , 16%, 1 266.66 ⁄0 , 16%, 2 213.64 ⁄0 , 16%, 6
247.11 ⁄0 , 16%, 7

AOC = 500 000 + 300 000 + 525 000 T 266.66 266.66 .. 8621 266.66 0.7432 213.64 0.4104 247.11 0.3538

T 869.69 %
= R 1 325 000

Biyela, KL Biyela, KL Biyela, KL Biyela, KL


Biyela, KL Biyela, KL

Step 2. Find FW of all positive NCF at R 15%

0 ,, 920.1 1105.41 0 ⁄ , 15%, 1 1201.85 0 ⁄ , 15%, 2 839.72 0 ⁄ , 15%, 3


520.38 0 ⁄ , 15%, 6 554.9 0 ⁄ , 15%, 7 490 0 ⁄ , 15%, 8

0 ,, 920.1 1105.41 1.15 1201.85 1.3225 839.72 1.5209 520.38 2.3131


554.9 2.6600 590 3.0590

0 ,, 9542.4 U

Step 3

Find the rate at which the ) V 0 are equivalent

T 0 ⁄ , , 11 0 ,, 0
,,
869.96 1 9542.4 0
,
9542.4 ,,
W X 1
869.96

0.2432 24.32%

>U of 18%, therefore the project is economically justified using the ERR approach

Biyela, KL Biyela, KL
7 Chiremba+IF
• 2014Ass2Chiremba+IF.pdf
Chiremba, IF Chiremba, IF Chiremba, IF Chiremba, IF

Chiremba, IF Chiremba, IF Chiremba, IF Chiremba, IF


Chiremba, IF Chiremba, IF

Chiremba, IF Chiremba, IF
8 Croucamp+PL
• Assignment 2.pdf
Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL


Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL


Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL
Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL


Croucamp, PL Croucamp, PL

Croucamp, PL Croucamp, PL
9 Daya+YS
• 2014Ass2Daya+YS.pdf
Daya, YS Daya, YS Daya, YS Daya, YS

Yatish Daya Question 3a

201491472 All values are in R’000

Assignment 2 For AW of cost

Question 1a Year Cost A/P(I,n,MARR) A/P(FC)


0 -100 0 0
Cash flow over 15 years 1 1.18 -118
2 0.6387 -63.87
A(F/A,8.5,15) = 15000(82.2323) = R423484.50 3 0.4599 -45.99
4 0.3717 -37.17
Interest earned if money kept in investment 5 0.3198 -31.98
6 0.2859 -28.59
P(F/P, 8.5,15) = 250000(3.3997) = R849925.00

Deduct the initial investment to determine the interest earned = R599925.00 For AW of market value (taking salvage into account)
More money would be earned by the owner from earning interest on the investment than earning Year Salvage A/F(I,n,MARR) A/F(SV)
from cash flow in the same period. I think it would not be worthwhile to use the money from the 0
investment for the project 1 85 1 85
2 72.25 0.4587 33.141
Question 1b 3 61.41 0.2799 17.189
4 52.20 0.1917 10.007
Determine WACC 5 44.37 0.1398 6.203
6 37.71 0.1059 3.994
%.
WACC =

= 8.8%

P(F/P, 8.8,15) = 250000(3.5435) = R 885875.00 Calculate capital recovery

Deduct the initial investment to determine the interest earned = R 635875.00 Year Cost Salvage CR
0 -100 -100
A(F/A,8.8,15) = 15000(28.9035) = R 433552.50 1 85 85
2 72.25 72.25
More money would be earned by investing the money. I think it would not be worthwhile to use the 3 61.41 61.41
loan option for the project. 4 52.20 52.20
5 44.37 44.37
Question 1c 6 37.71 37.71

Based on the values found in 1a and 1b, I would choose the investing from capital option as it has
the lowest difference between potential interest from saving and earnings from cash flow. For Annual operating cost, including total present worth of total cost

Question 2 Year AOC P/F(I,n,MARR) P/F(AOC) PWT(AOC,n)


0
Assume F = 10 1 -75 0.8475 -63.56 -63.56
2 -65 0.7182 -46.68 -110.25
Attribute Relationship Value Normalised 3 -55 0.6068 -33.37 -143.62
F 10 0.363636364 4 -45 0.5158 -23.21 -166.83
S 0.5U 2.5 0.090909091 5 -35 0.4371 -15.30 -182.13
U 0.5F 5 0.181818182 6 -25 0.3704 -9.26 -191.39
V U 5 0.181818182
R 2S 5 0.181818182
Annual worth of PWT(AOC,n)

Daya, YS Daya, YS Daya, YS Daya, YS


Daya, YS Daya, YS Daya, YS Daya, YS

Year A/P(I,n,MARR) PWT(AOC,n) A/P(PWT) Then total costs = R 44288333.33


0 0
1 1.18 -63.56 -75.0038 Profit = revenue – total costs, then revenue = profit + total costs
2 0.6387 -110.25 -70.4138
Cost per unit = (profit + total costs)/total units = (500000 + 44288333.33)/8000 = R5598.54
3 0.4599 -143.62 -66.0506
4 0.3717 -166.83 -62.0109
5 0.3198 -182.13 -58.2449
6 0.2859 -191.39 -54.7181 Dear Mr Kruger.

I have done as much of the assignment as I can. Due to my current work load and schedule, I have
Calculate AW per year been unable to keep up with the lecture content and as a result, I was having trouble completing the
assignment, as can be seen by me not completing questions 3b, 5 and 6. I will attempt to catch up
Year CR A/P(PWT) AW(total)
and be better prepared for the examination. I apologise for this.
0 -100.00 0.00 -100.00
1 85.00 -75.00 10.00
2 72.25 -70.41 1.84
3 61.41 -66.05 -4.64
4 52.20 -62.01 -9.81
5 44.37 -58.24 -13.87
6 37.71 -54.72 -17.00

The ESL = 3 years

Question 3b

Question 4a

Assume 1 year

For fixed costs:

Salaries and benefits = 20% of R350000 = R70000

Computers = 1/3 of R100000 = R33333.33

Total fixed costs = R 288333.33

Variable costs = R5500/m³

If production = 5000m³, then Variable costs = R 27500000

Total costs = variable costs + fixed costs = R 27788333.33

Profit = revenue – total costs

If profit = 0, Revenue = total costs

To break even, revenue per unit =    ⁄    = R 27788333.33⁄5000 = R 5557.67

Question 4b

If production = 8000m³, then variable costs = R 44000000

Daya, YS Daya, YS Daya, YS Daya, YS


10 Dipela+MS
• 2014GIE4058Ass2Dipela-MS.pdf
Dipela, MS Dipela, MS Dipela, MS Dipela, MS

Dipela, MS Dipela, MS Dipela, MS Dipela, MS


Dipela, MS Dipela, MS

Question 6

PhaseI(Pcap) 1.8 Mton


Phase IIA 5.4 Mton

PhaseIIB 4.5 Mton


Production cost (PC) 150 per ton
P Revenue (PR) 500 per ton
gR(revenues) -3% per year
gR(Costs) 3% per year
FC Phase I 40 million
FC Phase II 90 million
Remediation cost 90 million
Inverstement rate® 15% per year
Borowing rate (k) 16% per year
Periods 17 Years

Year Investement Revenues Costs Production CF FV@r PV @k FW+ PW-


2011 0 0 0.0000 0 0 0.0000
2012 -266.7 -266.7000 5.0545 1.0000 -266.7000
2013 -266.7 -266.7000 4.5950 0.8696 -231.9223
2014 -266.7 -266.7000 4.1772 0.7561 -201.6519
2015 500.000 150.0000 590.0000 590.0000 3.7975 0.6575 2240.5250
2016 427.500 124.8000 504.8600 504.8600 3.4523 0.5718 1742.9282
2017 406.125 129.7920 457.3994 457.3994 3.1383 0.4972 1435.4565
2018 -700 385.819 134.9837 411.5031 -288.4969 2.8531 0.4323 -124.7172
2019 -700 366.528 140.3830 367.0606 -332.9394 2.5937 0.3759 -125.1519
2020 348.201 145.9983 1001.8966 1001.8966 2.3579 0.3269 2362.3720
2021 330.791 151.8383 715.2888 715.2888 2.1436 0.2843 1533.2931
2022 314.252 157.9118 613.5299 613.5299 1.9487 0.2472 1195.5856
2023 298.539 164.2283 514.3991 514.3991 1.7716 0.2149 911.3094
2024 283.612 170.7974 417.6667 417.6667 1.6105 0.1869 672.6522
2025 269.432 177.6293 323.1104 323.1104 1.4641 0.1625 473.0659
2026 255.960 184.7345 230.5150 230.5150 1.3310 0.1413 306.8155
2027 243.162 192.1239 139.6718 139.6718 1.2100 0.1229 169.0029
2028 231.004 199.8088 50.3780 50.3780 1.1000 0.1069 55.4158
2029 -90 219.454 207.8012 -37.5634 -127.5634 1.0000 0.0929 -11.8506
13098.4221 -961.9939

FW/-PW = 13.615909
ERR = 16.60%
The project should not be implemented because MRR = 18%

Dipela, MS Dipela, MS
11 Ditsele+SSM
• 2014Ass2DitseleSSM.pdf
Ditsele, SSM Ditsele, SSM Ditsele, SSM Ditsele, SSM

Samuel Ditsele The weights are therefore as follows:


200704119
Advanced Engineering Economics Assignment 2 f = 3.63
s = 0.91
u = 1.82
Problem 1 v = 1.82
r = 1.82
a)
For Equity financing;
WACC = 1(8.5%) Problem 3
= 8.5% therefore MARR = 8.5%
a)
Assess MARR against ROI of Project:
n = 9 years P= 100000
i =?
A = R15 000
Year S/MV AOC CR AW of AOC tot AW
P = -R250 000
1 85000 -75000 -33000 -75000 -108000
i = 6% therefore, it is not worthwhile to get money from the personal investment since i<MARR 2 72250 -85000 -30729 -79587 -110316
3 61412.5 -95000 -28801 -83901 -112702
b) 4 52200.63 -105000 -27165 -87947 -115112
WACC = 0.6(9%) + 0.4(8.5%) 5 44370.53 -115000 -25776 -91728 -117504
= 8.8% 6 37714.95 -125000 -24596 -95252 -119848

WACC = MARR > 6%, therefore it is not worthwhile to get money from the loan Therefore, the ESL of the machine is 1 year and the corresponding AW is -R108 000
c) b)
The best option would be to do nothing since the capital would cost more but if something definitely Tot AW = CR + AW of AOC
had to be done, Equity Financing would be better because it costs less For year 6, make Tot AW = -R108 000
AW remains the same therefore, CR = -R12 748
Problem 2 CR = -P(A/P) + S(A/F)
-12 748 = -x(0.286) + 0.04x
Let flexibility = x 0.246x = 12 748
Therefore, X = 51 821
f=x P = R51 821
s = x/4
u = x/2 Therefore the initial investment needs to be R51 821, meaning that it would have to reduce by R48 179
v = x/2
r = x/2
Problem 4
f + s + u + v + r = 10
therefore, x + x/4 + 3(x/2) = 10 a)
therefore, x = 3.63 To break even, Revenue = Cost
Fixed = 30 000 + 70 000 + 10 000 + 55 000 + 33 333 = 198 333
Variable = 2500x + 200x + 2000x + 600x + 200x = 5500x
Total Cost = 5500x + 198 333

1 2

Ditsele, SSM Ditsele, SSM Ditsele, SSM Ditsele, SSM


Ditsele, SSM Ditsele, SSM Ditsele, SSM Ditsele, SSM

Problem 6
R=C
Therefore
Revenue = 5500x + 198 333
= 5500(units) + 198 333

Rev/unit = (5500(units) + 198 333)/no. of units

b)
Revenue = Profit + Cost
= 500 000 + 5500x + 198 333
Total Revenue = 500 000 + 5500(total units) + 198 333

Rev/unit = (500 000 + 5500(total units) + 198 333)/no. of units

Problem 5

Rate/h Hrs Cost (R


A Labour 10 25000 250 000
B Machine 5 25000 125 000
C Labour 15 10000 150 000

Total Material Cost = R300 000/Year


Total Direct Labour Cost = R 500 000/Year

Total Annual Cost = 300 000 + 500 000 + 150 000 + 125 000 + 250 000
= R1 325 000

n = 10
I = 15%
P = -P1 - A(P/A) + F(P/F)
= -2 000 000 – 1325 000 (5.02) + 50 000 (0.25)
= -R 8 639 000

P(A/P) = 8 639 000 (0.2)


= R 1 721 000

Therefore make alternative costs more than the buy alternative

3 4

Ditsele, SSM Ditsele, SSM Ditsele, SSM Ditsele, SSM


Ditsele, SSM Ditsele, SSM

15% 16%
Year Year no. CF + CF - NCF FV @ r PV @ k FW + PW -
2012 0 0 266.6 -266.6 4.6523914 1 0 -266.6
2013 1 0 266.6 -266.6 4.04555774 0.86206897 0 -229.8276
2014 2 0 266.6 -266.6 3.51787629 0.7431629 0 -198.1272
2015 3 900 310 590 3.05902286 0.64065767 1804.8235 0
2016 4 873 318 555 2.66001988 0.5522911 1476.311 0
2017 5 847 326.4 520.6 2.31306077 0.47611302 1204.1794 0
2018 6 0 740 -740 2.01135719 0.41044225 0 -303.7273
2019 7 0 740 -740 1.74900625 0.35382953 0 -261.8339
2020 8 1544 706 838 1.520875 0.30502546 1274.4933 0
2021 9 2246 1046.6 1199.4 1.3225 0.26295298 1586.2065 0
2022 10 2182 1073.6 1108.4 1.15 0.2266836 1274.66 0
2023 11 0 170 -170 1 0.1954169 0 -33.22087
sum = 8620.6737 -1293.337

ERR= 18.82%
ERR > MARR therefore the phased investment should be considered

Ditsele, SSM Ditsele, SSM


12 Dlodlo+MS
• 2014Ass2Dlodlo+MS.pdf
Dlodlo, MS Dlodlo, MS Dlodlo, MS Dlodlo, MS

Dlodlo, MS Dlodlo, MS Dlodlo, MS Dlodlo, MS


Dlodlo, MS Dlodlo, MS Dlodlo, MS Dlodlo, MS

Dlodlo, MS Dlodlo, MS Dlodlo, MS Dlodlo, MS


Dlodlo, MS Dlodlo, MS Dlodlo, MS Dlodlo, MS

Dlodlo, MS Dlodlo, MS Dlodlo, MS Dlodlo, MS


13 Dos Santos+AAC
• 2014Ass2dosSantos+AAC.pdf
Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC


Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC


Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC


Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC


Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC


Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC Dos_Santos, AAC


Dos_Santos, AAC Dos_Santos, AAC

Dos_Santos, AAC Dos_Santos, AAC


14 Dube+SP
• 2014GIE4058Ass2Dube-SP.pdf
Dube, SP Dube, SP Dube, SP Dube, SP

Dube, SP Dube, SP Dube, SP Dube, SP


Dube, SP Dube, SP Dube, SP Dube, SP

Dube, SP Dube, SP Dube, SP Dube, SP


Dube, SP Dube, SP Dube, SP Dube, SP

Dube, SP Dube, SP Dube, SP Dube, SP


Dube, SP Dube, SP Dube, SP Dube, SP

Dube, SP Dube, SP Dube, SP Dube, SP


Dube, SP Dube, SP Dube, SP Dube, SP

Dube, SP Dube, SP Dube, SP Dube, SP


Dube, SP Dube, SP

Dube, SP Dube, SP
15 Dzoro+M
• 2014Ass2Dzoro + M.pdf
Dzoro, M Dzoro, M Dzoro, M Dzoro, M

Moses Dzoro 201305313 Assignment 2 Moses Dzoro 201305313 Assignment 2

Problem 1

Table of Options
Problem 2

Option 1 Option 2 Weighted Attribute Evaluation


100% Equity financing, R250,000 @ 8.5%/year Debt Finance: 60% x R250, 000 = R150, 000 @ 9%
Number of people in committee = 4
Annual Cash Flow = R15000 Equity Finance: 40% xR250,000 = R100, 000 @8.5%
N=15 years Period, n=15 years Weights range from 0-10

1. Flexibility [f], Importance score1– The most important factor =10


2. Safety [s], Importance score2 - 50% of Uptime = 0.5 x 5 = 2.5
Cash Flow Table
3. Uptime [u], Importance score3 – One-half x Flexibility = 0.5 x 10 = 5
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 4. Speed [v], Importance score4 – As important as uptime = 5
Cash -250 15 15 15 15 15 15 15 15 15 15 15 15 15 15 5. Rate of Return [r], Importance score5 = Twice as safety = 2 x 2.5 = 5
Flow
R(000) Normalised weights: ∑ = 1.0
NCF -250 15 15 15 15 15 15 15 15 15 15 15 15 15 15

Weight Calculation = Wi =

=
a) Option 1: Personal Investment

Cost of Capital = 8.5% Where Wi = Weights for each attribute, S=Sum of all Attributes

A =R15, 000. The Present Worth in year 0 needs to be determined. From above:

Capital, P0= -250, 000 + A (P/A, i,n) S= 10 + 2.5 + 5 + 5 + 5 = 27.5

= -250, 000 +15000(P/A, 8.5%,15) Attribute Score Normalised Weights


Flexibility [f] 10 10/27.5 = 0.3636
=-250,000 +15000(8.3042) Rate of Return [r] 5 5/27.5 = 0.1818
Uptime [u] 5 5/27.5 = 0.1818
= -250000 +124, 563 Speed [v] 5 5/27.5 = 0.1818
Rate of Return [r] Safety [s] 2.5 2.5/27.5 = 0.0909
= -R125 437 Sum of Scores and Weights 27.5 1.0000
It is not worthwhile to get money from personal investment because of the negative cashflow.

b) Option 2: Loan

WACC = 0.6 x 9% + 0.4 x 8.5% = 8.8%

Capital = -R250000 + 15000(P/A, 8.8%,15%)= -R250000 + 15000(8.1567)

= -R127 649.5

It is not worthwhile to get money from loan because of the negative cashflow.

c) None of the 2 options are worthwhile.

1 2

Dzoro, M Dzoro, M Dzoro, M Dzoro, M


Dzoro, M Dzoro, M Dzoro, M Dzoro, M

Moses Dzoro 201305313 Assignment 2 Moses Dzoro 201305313 Assignment 2

Problem 3 Capital Recovery Calculations

Economic Service Life The Capital recover is now sum the sum of the Annual Worths for the years:
CR = A/P(FC) +A/F(MV )
Salvage Value Calculation Annual Operating Cost (AOC) Calculations
S=P x n= number of years=6 AOC= (65+10xn) x1000, n≥1 Year Cost MV A/P(FC) A/F(MV) CR
0 -100, 000
S1=100, 000 x = R85, 000.0000 AOC1= 75, 000 1 85, 000.0000 -118, 000 85, 000.0000 -33, 000.0000
S2=100, 000 x = R72, 250.0000 AOC2= 85, 000 2 72, 250.0000 -63, 870 33, 141.0750 -30, 728.9250
S3=100, 000 x = R61, 412.5000 AOC3= 95, 000 3 61, 412.5000 -45, 990 17, 189.3588 -28, 800.6412
S4=100, 000 x = R52, 200.625 AOC4 = 105, 000 4 52, 200.6250 -37, 170 10, 006.8598 -27, 163.1402
S5=100, 000 x = R44, 370.5313 AOC5 =115, 000 5 44, 370.5313 -31, 980 6, 203.0003 -25, 776.9997
S6= 100, 000 x = R37, 714.9516 AOC6=125, 000 6 37, 714.9516 -28, 590 3, 994.0134 -24, 595.9866

MARR=18% AOC Calculations

Capital Recovery Calculations Present Worth of AOC

AW of non-recurring costs calculations P/F(1;n;MARR) is from the tables and P/F(AOC) = AOC × P/F(AOC).

A/P(1; n;MARR) is from the tables and A/P(FC) =A/P(1; n;MARR) × Cost The different AOCs are Future Values that need to be converted to Present Worth

Year Cost A/P(1;n;MARR) A/P(First Cost) Year AOC P/F(1;n;MARR) P/F(AOC)


0 -100,000 0.0000 0.0000 0 1.000 0000
1 1.1800 -118, 000 1 -75, 000 0.8475 -63, 562.5000
2 0.6387 -63, 870 2 -85, 000 0.7182 -61, 047.0000
3 0.4599 -45, 990 3 -95, 000 0.6086 -57, 817.0000
4 0.3717 -37, 170 4 -105, 000 0.5158 -54, 159.0000
5 0.3198 -31, 980 5 -115, 000 0.4371 -50, 266.5000
6 0.2859 -28, 590 6 -125, 000 0.3704 -46, 300.0000

AW of the Market Value (MV) Total PW of the PW(AOC)

A/F(1;n;MARR) is from the tables and A/F(MV ) = AW(1; n;MARR) ×MV . PWT(AOC;n) is the total PW of the AOC from the beginning till the year in question

Year MV = S A/F(1;n;MARR) A/F(MV)


Year P/F(1;n;MARR) P/F(AOC) PWT(AOC;n)
0
0 1.000 0000
1 85, 000.0000 1.0000 85, 000.0000
1 0.8475 -63, 562.5000 -63, 562.5000
2 72, 250.0000 0.4587 33, 141.0750
2 0.7182 -61, 047.0000 -124, 609.5000
3 61, 412.5000 0.2799 17, 189.3588
3 0.6086 -57, 817.0000 -182, 426.5000
4 52, 200.6250 0.1917 10, 006.8598
4 0.5158 -54, 159.0000 -236, 585.5000
5 44, 370.5313 0.1398 6, 203.0003
5 0.4371 -50, 266.5000 -286, 852.0000
6 37, 714.9516 0.1059 3, 994.0134
6 0.3704 -46, 300.0000 -333, 152.0000

3 4

Dzoro, M Dzoro, M Dzoro, M Dzoro, M


Dzoro, M Dzoro, M Dzoro, M Dzoro, M

Moses Dzoro 201305313 Assignment 2 Moses Dzoro 201305313 Assignment 2

Problem 4
AW of PWT(AOC) Fixed Cost and Variable Cost Calculations
A/P(1;n;MARR) is from the tables and A/P(PWT) = PWT(AOC; n) × A/P(1; n;MARR) Description Fixed Cost, R’000 Description Variable Cost, R/Unit
Administrative 30 Materials 2500
Year A/P(1;n;MARR) PWT(AOC;n) A/P(PWT)
Sal and benefits: 20% of 70 Labour 200
0 0000
350
1 1.1800 -63, 562.5000 -75, 003.7500
Equipment 100 Indirect Labour 2000
2 0.6387 -124, 609.5000 -79, 588.0877
Space, etc 55 Subcontractors 600
3 0.4599 -182, 426.5000 -83, 897.9474
Computers 1/3 of 100 33.3333 Misc cost 200
4 0.3717 -236, 585.5000 -87, 938.8304
TOTAL 288.3333 TOTAL 5500
5 0.3198 -286, 852.0000 -91, 735.2696
6 0.2859 -333, 152.0000 -95, 248.1568
Profit (P) = Revenue(R)− Total Cost (TC)
Revenue = Unit revenue(r) × Quantity(Q)
AW per year of the system Total Cost(TC) = Fixed Cost(FC) + Variable Cost(VC)
Variable Cost(VC) = Unit Cost(v) × Quantity(Q)
AW(Total) = CR + A/P(PWTAOC)
Profit = R - TC = rQ - (FC - vQ)
Year CR A/P(PWT) AW(Total)
= (r -v)Q – FC
0
1 -33, 000.0000 -75, 003.7500 -108, 003.7500 If Profit=0,
2 -30, 728.9250 -79, 588.0877 -110, 317.0127
3 -28, 800.6412 -83, 897.9474 -112, 698.5886 0 = (r -v)Q – FC, then (r -v)Q = FC
4 -27, 163.1402 -87, 938.8304 -115, 101.9706
5 -25, 776.9997 -91, 735.2696 -117, 512.2693 Q=
6 -24, 595.9866 -95, 248.1568 -119, 844.1434

a) From the above calculations the ESL is in year 1 where we have the lowest AW(Total) of
-R108 003.7500 a) r = = = R 5 557.6667/Unit

b) The required value of P will be the one where AW1=AW6

AW1=AW6, S6 = 37, 714.9516, AW1 = -108, 003.7500, A/P(PWT) b) P = R500, 000, v=R5500, r=?, FC = R288, 333.3, Q = 3000
R= P + TC
From S=P x , S6=P x
R=500000 +TC
AW1 = - P (A/P, 18%,6) + S6 (A/F, 18%,6) - A/P(PWT) yr6
TC=8000x5500 +288333.3 = 44, 288, 333.3
-108, 003.7500= - 0.2859P + P x (0.1059) - 95, 248.1568
R= 500, 000 + 44, 288, 333.3=R44, 788, 333.3
-108, 003.7500 + 95, 248.1568 = -0.2859P + (0.37715) (0.1059) P

-0.24596xP = -12 755.5932 r= = R5, 598.5417/Unit

P = 51 860.4765

You need to reduce by (100 000-51 860.4765) = 48 139.5625

5 6

Dzoro, M Dzoro, M Dzoro, M Dzoro, M


Dzoro, M Dzoro, M Dzoro, M Dzoro, M

Moses Dzoro 201305313 Assignment 2 Moses Dzoro 201305313 Assignment 2

Problem 6
Problem 5
Calculations
Economic Analysis
Construction Cost: R800m spread from 2012 -2014 = - = -R266.6666m
Indirect Costs Revenue: 2015 revenue R500/ton against per unit costs of R150m
Department Basis Hrs Rate/hr Allocated Hrs Material Cost Direct Labour
Cost  For 1.8Mt, revenue = 500 x 1.8 x = R900m
A Labour 10 25 000 200 000 200 000  2016 Revenue with decrease of 3%/year = 0.97 x 900 = R873m
B Machine 5 25 000 50 000 200 000  Subsequent decrease to 2019 is by a factor of 0.97 as shown in table
C Labour 15 10 000 50 000 100 000  2020 Revenue = 3.6Mt x 500 = R1800m which is decreased by a factor of
300 000 500 000  2021 revenue =5.4Mt x 500 = R2700m which is decreased by a factor of
.
 2022 & 2023 revenue is R2700m reduced by factors of and
Indirect Cost Allocation Calculations respectively.

Department A: 25 000(10) = 250 000 Costs/unit: Increase is 3%

Department B: 25 000(5) = 125 000 Cash flow

Department C: 10 000 (15) =150 000 Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Construction -266.6666 -266.6666 -266.6666
Cost
Total Indirect Costs R 525 000 Revenue 900 900(0.97) (900) (900) (900) (1800) (2700) (2700) (2700)

The AOC is comprised of direct labor, direct material, and indirect costs. Cost/Unit -150 -(150) -(150) -(150) -(150) -(300) -(450) -(450) -(450)

Material Cost = 300 000, Direct Labour = 500 000, Idirect Costs = 525 000
Annual -40 -40 -40 -40 -40 -80 -80 -80 -80
Fixed Costs
AOC = 300 000 + 500 000 + 525 000 = R1 325 000 Expansion -700 -700
Cost
Remediation -90
The Make Alternative Analysis Cost

P= 2m, S=50 000, n = 10, i=15% Plant remediation cost = R90m, Borrowing Rate, i=16%, Investment rate, Ir=15%, MARR=18% n=11years

AWmake = -P(A/P,i,n) + S(A/F,i,n) - AOC Net Cash Flow Calculations


Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Construction -266.6666 -266.6666 -266.6666
= -2000 000(A/P, 15%, 10) + 50 000(A/F,15%,10) – 1 325 000 Cost
Revenue 900 873 846.81 821.4057 796.7635 1545.7212 2249.0244 2181.5537 2116.1071

= -2000 000(0.1993) + 50 000(0.0493) – 1 325 000

= - R1 721 135 Cost/Unit -150 -154.5 -159.135 -163.9091 -168.8263 -347.7822 -537.3235 -553.4432 -570.0465

The Buy Alternative Annual -40 -40 -40 -40 -40 -80 -80 -80 -80
Fixed Costs
Expansion -700 -700
AWbuy = -R 1 500 000 Cost
Remediation -90
Cost
It is cheaper to Buy than Make NCF -266.6666 -266.6666 -266.6666 710 678.5 647.675 -82.5034 -112.0628 1117.939 1631.7009 1548.1105 1846.0916

7 8

Dzoro, M Dzoro, M Dzoro, M Dzoro, M


Dzoro, M Dzoro, M

Moses Dzoro 201305313 Assignment 2

PWb at Borrowing rate, 16% of all negative NCF

PWb = -266.6666 – 266.6666(P/F,16%,1) – 266.6666(P/F,16%,2) -82.5034(P/F,16%,6) -


112.0628(P/F,16%,7)

=-266.6666– 266.6666(0.8621) -266.6666(0.7432) -82.5034(0.4104) – 112.0628(0.3538)

= - 768.2537

FWi of all positive NCF at investment rate, 15%

FWi = 710 (F/P,15%,8) + 678.5(F/P,15%, 7) + 647.675 (F/P,15%,6) + 1117.939(F/P,15%,3) +


1631.7009(F/P,15%,2) + 1548.1105(F/P,15%,1) + 1846.0916

= 710(3.0590) +678.5(2.6600) + 647.675(2.3131) + 1117.939(1.5209) + 1631.7009(1.3225)


+1548.1105(1.1500) +1846.0916

= 12 959.4535

Find the rate i' at which the PW and FW are equivalent.

PWb (F/P, i', 11) +FWi =0

-768.2537 + 12959.4536 = 0

=1.353548

= 0.5335 (5.3%)

Since is less than MARR (18%), the project is not economically justifiable

Dzoro, M Dzoro, M
16 Gama+SS
• 2014 Ass 2 Gama-SS.pdf
Gama, SS Gama, SS Gama, SS Gama, SS

Problem 1
Calculations leading to decision making:

Fw1 = -R250 000 x (F/P,8.5%,15) + R15 000 x (F/A,8.5%,15)

= -R250 000 x 3.3997 + R15 000 x 28.2323

= -R426 440.50

MARR = WACC = (0.6 x 9%) + (0.4 x 8.5%)

= 8.8%

ADVANCED 26 May Fw2 = -R250 000 x (F/P,8.8%,15) + R15 000 x (F/A,8.8%,15)

= -R250 000 x 3.5435 + R15 000 x 28.9035

= -R452 322.50
ENGINEERING
MANAGEMENT 2014 Solution

(a) The personal investment is not worthwhile since the MARR as confirmed by the negative
Net Present Value
(b) The loan amount is worthwhile as the return on investment is more than the MARR
(c) The loan investment is a better option

Student No. 200830234 Student: SS Gama

Problem 2
ADVANCED ENGINEERING
Calculations leading to decision making:
MANAGEMENT 1.Flexibility [f] The most important factor

2.Safety [s] 50% as important as uptime


ASSIGNMENT#2
3.Uptime [u] One-half as important as flexibility

4.Speed [v] As important as uptime

5.Rate of Return Twice as important as safety


[r]

0|Page 1

Gama, SS Gama, SS Gama, SS Gama, SS


Gama, SS Gama, SS Gama, SS Gama, SS

Solution Y6 = R100 000 x 0.856 = R37 714.95

Scores Normailsed Weights 3.Recovery Costs (-P*(A/P,18%,n) + Sn * (A/F,18%, n)

1.Flexibility [f] 10 0.3636 Y1 = (-R100 000 x 1.1800) + (R85 000.00 x 1.0000) =

2.Safety [s] 2.5 0.0909 Y2 = (-R100 000 x 0.6387) + (R72 250.00 x 0.4587) =

3.Uptime [u] 5 0.1818 Y3 = (-R100 000 x 0.4599) + (R61 412.50 x 0.2799) =

4.Speed [v] 5 0.1818 Y4 = (-R100 000 x 0.3717) + (R52 200.63 x 0.1917) =

5.Rate of Return [r] 5 0.1818 Y5 = (-R100 000 x 0.3198) + (R44 370.53 x 0.1398) =

Total 27.5 1 Y6 = (-R100 000 x 0.2859) + (R37 714.95 x 0.1059) =

Problem 3 4.AW of AOC = AOC*(P/F,18%,n)

Calculations leading to decision making: Y1 = -R75 000.00*0.8475 = -R63 562.50

a). Y2 = -R85 000.00*0.7182 = -R61 047.00

1.AOC Y3 = -R95 000.00*0.6086 = -R57 817.00

Y1 = -R75 000 Y4 = -R105 000.00*0.5156 = -R54 159.00

Y2 = -R75 000-R10 000 = -R85000 Y5 = -R115 000.00*0.4371 = -R50 266.50

Y3 = -R85 000-R10 000 = -R95 000 Y6 = -R125 000.00*0.3704 = -R46 300.00

Y4 = -R95 000-R10 000 = -R105 000

Y5 = -R105 000-R10 000 = -R115 000 5.Accummulative AOC

Y6 = -R115 000-R10 000 = -R125 000 Y1 = -R63 562.50

Y2 = -R63 562.50-R61 047.00 = -R124 609.50

2.Salvage Value Y3 = -R63 562.50-R61 047.00-R57 817.00 = -R182 426.50

Y1 = R100 000 x 0.851 = R85 000.00 Y4 = -R63 562.50-R61 047.00-R57 817.00-R54 159.00 = -R236 585.50
2
Y2 = R100 000 x 0.85 = R72 250.00 Y5 = -R63 562.50-R61 047.00-R57 817.00-R54 159.00-R50 266.50= R-2876 852.00

Y3 = R100 000 x 0.853 = R61 412.50 Y6 = -R63 562.50-R61 047.00-R57 817.00-R54 159.00-R50 266.50-R46 300.00

Y4 = R100 000 x 0.854 = R52 200.63 -R133 152.00

Y5 = R100 000 x 0.855 = R44 370.53

2 3

Gama, SS Gama, SS Gama, SS Gama, SS


Gama, SS Gama, SS Gama, SS Gama, SS

b).

6.AW = (AW of AOC)NJ * (A/P,18%,n) AW = R108 003.75

Y1 = -R63 562.50 x 1.1800 = -R75 003.75 MARR = 18%

Y2 = -R124 609.50 x 0.6387 = -R79 588.09 Length of Business =6 years

Y3 = -R182 426.50 x 0.4599 = -R83 897.95 = R108 003.75 * (A/P,18%,6)

Y4 = -R236 585.50 x 0.3717 = -R87 938.83 = R108 003.75 * 0.2859

Y5 = -R286 852.00 x 0.3198 = -R91 735.27 = R30 878.27

Y6 = -R133 152.00 x 0.2859 = -R95 248.16 Reduced cost investment = R100 000 - 30 878.27 = R69 121.73

7.Total AW= Capital Recovery + AW Problem 4

Y1 = -33 000-R75 003.75 = -R108 003.75 Solution:

Y2 = -R79 588.09-R30 728.93 = -R110 317.01 Variable Cost: R/Unit Fixed Cost, R’000

Y3 = -R28 800.64-R83 897.95 = -R112 698.59 Materials R2500 Administrative 30


Y4 = -R27 163.14-R87 938.83 = -R115 101.97 Labour R200 Salaries 70
Y5 = -R25 777.00-R91 735.27 = -R117 512.27 Indirect Labour R2000 Equipment 100
Y6 = -R24 595.99-R95 248.16 = -R119 844.14 Subcontractors R600 Space 55
As per the book definition of the ELS, it is the number of years n at which the equivalent uniform Miscellaneous Cost R200 Computors 100x0.3333 = 33.33
annual worth of cost is the minimum. Therefore from the list above Year 1 is the ELS as the AW
is R108 003.75 Total R5500 288.33

Year Invest AOC Salvage Capital AW of AOC Acc of PW AW Total of AW


Recovery
NB: Revenue must equal to total cost
0 -R100 000

1 -R75000 R85000.00 - R33000.00 -R63562.50 -R63562.50 -R750003.75 -R108003.75


Therefore:

2 -R85000 R72250.00 - R30728.93 -R61047.00 -R124609.50 -R79588.09 -R110317.01 R (revenue) = Total Cost

3 -R95000 R61412.50 - R28800.64 -R57817.00 -R182426.50 -R83897.95 -R112698.59 R = Total cost (Fixed Cost plus Variable cost)
4 -R105000 R52200.63 - R25777.00 -R54159.00 -R236585.50 -R87938.83 -R115101.97
R = FC+VC
5 -R115000 R44370.53 - R24595.99 -R50266.50 -R286852.00 -R91735.27 -R117512.27
rQ = (FC+vQ)
6 -R125000 R37714.95 - R27163.14 -R46300.00 -R333 52.00 -R95248.16 -R119844.14
r = ((FC+vQ))/Q

r = FC/Q + V

4 5

Gama, SS Gama, SS Gama, SS Gama, SS


Gama, SS Gama, SS Gama, SS Gama, SS

r = ((288.33*1000)/(5000m3)) + 5500 Problem 6

r = 57.667 + 5500 Available information


3
r = R5 557.67/ m Investment Value units

Phase I (Pcap) 1.8 Mega ton


b). Phase IIA 3.6 Mega ton
Profits = Revenue – TC Phase IIB 5.4 Mega ton
= R – (FC+VC) Production Cost (PC) 150 Per ton
3
R500000 =R- ((5500*8000m )+288 333.3) Production Revenue (PR) 500 Per ton
=R- (44 000 000 + 288 333 .3) gr(Revenues) -3% Per year
R =-R500 000-R44 288 333.3 gc(Costs) 3% Per year
= -44 788 333.33 FC Phase I 40 million
3
r = 44 788 333.33 / 8000m FC Phase II 80 million
3
= R5 598.54/m Remediation 90 million

Investment Rate (r) 15% Per year


Problem 5 Borrowing Rate (k) 16% Per year
Department A: 25 000*10 = R250 000.00 Periods in Years 11 Years
Department B: 25 000*05 = R125 000.00

Department C: 10 000*15 = R150 000.00 Solution


Total = R525 000.00 Year investments Production Cash Flow FV@r PV@k FW+ FW-
AOC = 500 000+300 000+525 000 = R1 325 000.00
2012 -266.67 -266.67 4.6524 1.0000 -266.67

2013 -266.67 -266.67 4.0456 0.8621 -229.89


Annual Worth Make = -P(A/P,i,n)+S(A/F,i,n)-AoC
2014 -266.67 -266.67 3.5179 0.7432 -198.18
= -R2 000 0000.00 (A/P,15%,10)+50 000(A/F,15%,10) – R1 325 000
2015 590.00 590.00 3.0590 0.6407 1804.82
= -R1 721 037.00
2016 554.90 554.90 2.6600 0.5523 1476.05
The carafe are currently purchased with -R2 200 000. This therefore means it is cheaper to
make because it cost less 2017 520.37 520.37 2.3131 0.4761 1203.64

2018 -700 486.37 -486.37 2.0114 0.4104 -87.68

6 7

Gama, SS Gama, SS Gama, SS Gama, SS


Gama, SS Gama, SS

2019 -700 452.88 -247.12 1.7490 0.3538 -87.44

2020 839.71 839.71 1.5209 0.3050 1277.10

2021 1201.84 1201.84 1.3225 0.2630 1589.44

2022 1105.36 1105.36 1.1500 0.2267 1271.16

2023 1010.02 920.02 1.0000 0.1954 920.02

Sum 9542.23 -869.85

10.97

FW/-PW 0.2433

ERR 24.33%

Gama, SS Gama, SS
17 Govender+D
• 2014Ass2Govender-D.pdf
Govender, D Govender, D Govender, D Govender, D

Govender, D Govender, D Govender, D Govender, D


Govender, D Govender, D Govender, D Govender, D

Govender, D Govender, D Govender, D Govender, D


Govender, D Govender, D Govender, D Govender, D

Govender, D Govender, D Govender, D Govender, D


Govender, D Govender, D

Govender, D Govender, D
18 Govender+L
• 2014Ass2GovenderL.pdf
Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


Govender, L Govender, L Govender, L Govender, L

Govender, L Govender, L Govender, L Govender, L


19 Govender+N
• 2014Ass2GovenderN.pdf
Govender, N Govender, N Govender, N Govender, N

Govender, N Govender, N Govender, N Govender, N


Govender, N Govender, N Govender, N Govender, N

Govender, N Govender, N Govender, N Govender, N


Govender, N Govender, N Govender, N Govender, N

Govender, N Govender, N Govender, N Govender, N


Govender, N Govender, N Govender, N Govender, N

Govender, N Govender, N Govender, N Govender, N


20 Govender+T
• 2014Ass 2Govender+T.pdf
Govender, T Govender, T Govender, T Govender, T

Govender, T Govender, T Govender, T Govender, T


Govender, T Govender, T Govender, T Govender, T

Govender, T Govender, T Govender, T Govender, T


Govender, T Govender, T Govender, T Govender, T

Govender, T Govender, T Govender, T Govender, T


Govender, T Govender, T Govender, T Govender, T

Govender, T Govender, T Govender, T Govender, T


Govender, T Govender, T Govender, T Govender, T

Govender, T Govender, T Govender, T Govender, T


Govender, T Govender, T

Govender, T Govender, T
21 Ilemobade+OO
• 2014Ass2Ilemobade-O.O.pdf
Ilemobade, OO Ilemobade, OO PROBLEM
Ilemobade, OO 1: Ilemobade, OO

BORROW OR NOT?

The Faculty of Engineering and the Built Environment

14GIE4058/14M6MAE19

Advanced Engineering Economics

2014Ass2Ilemobade-O.O
(Assignment 2)

Name: ILEMOBADE O. O.

Student number: 201461808

26 May 2014

Ilemobade, OO Ilemobade, OO Ilemobade, OO Ilemobade, OO


PROBLEM
Ilemobade, OO 2: Ilemobade, OO Ilemobade,Capital
OO Recovery (CR) Ilemobade, OO
CR [A/P(FC)
COMMITTEE ON THE SCALE YEAR First Cost [R] A/P(FC) [R] A/F(SV)[R] +A/F(SV)]
0 -100,000.0000
NO ATTRIBUTES EXTENT OF IMPORTANCE SCORES 1 -118,000.0000 85,000.0000 -33,000.0000
1 FLEXIBILITY THE MOST IMPORTANT FACTOR 10 2 -63,870.0000 33,141.0750 -30,728.9250
2 SAFETY 50% AS IMPORTANT AS UPTIME 50% x ½ x 10 = 2.5 3 -45,990.0000 17,189.3588 -28,800.6413
3 UPTIME ONE-HALF AS IMPORTANT AS FLEXIBILITY ½ x 10 = 5 4 -37,170.0000 10,006.8598 -27,163.1402
4 SPEED AS IMPORTANT AS UPTIME 5 5 -31,980.0000 6,203.0003 -25,776.9997
5 RATE OF RETURN TWICE AS IMPORTANT AS SAFETY 2 x 2.5 = 5 6 -28,590.0000 3,994.0134 -24,595.9866
Present Worth of AOC
PW Total (AOC)
NO ATTRIBUTES SCORES NORMALISED WEIGHT
YEAR AOC [R] P/F (1, n, 18%) P/F (AOC) [R] [R]
1 FLEXIBILITY 10 10/207.5 = 0.364
2 SAFETY 2.5 2.5/27.5 = 0.091 0
3 UPTIME 5 5/27.5 = 0.182 1 -75,000.0000 0.8475 -63,562.5000 -63,562.5000
4 SPEED 5 5/27.5 = 0.182 2 -85,000.0000 0.7182 -61,047.0000 -124,609.5000
5 RATE OF RETURN 5 5/27.5 = 0.182 3 -95,000.0000 0.6086 -57,817.0000 -182,426.5000
TOTAL 27.5 1 4 -105,000.0000 0.5158 -54,159.0000 -236,585.5000
5 -115,000.0000 0.4371 -50,266.5000 -286,852.0000
6 -125,000.0000 0.3704 -46,300.0000 -333,152.0000
PROBLEM 3:
– ECONOMIC SERVICE LIFE (ESL) Annual Worth of PWT
(AOC)
(a) NEW MACHINE PW Total (AOC) A/P
FIRST COST (P) = R100 000 YEAR [R] A/P(1,n,18%) (PWT/AOC) [R]
EXPECTED LIFE = 6 YEARS 0
SALVAGE VALUE ( 1 -63,562.5000 1.1800 -75,003.7500
2 -124,609.5000 0.6387 -79,588.0877
YEAR AOC [R] S = P X 0.85^n [R) 3 -182,426.5000 0.4599 -83,897.9474
1 -75,000.0000 85,000.0000 4 -236,585.5000 0.3717 -87,938.8304
2 -85,000.0000 72,250.0000 5 -286,852.0000 0.3198 -91,735.2696
3 -95,000.0000 61,412.5000 6 -333,152.0000 0.2859 -95,248.1568
4 -105,000.0000 52,200.6250
5 -115,000.0000 44,370.5313 YEAR CR [R] A/P (AOC) [R] AW (Total) [R]
6 -125,000.0000 37,714.9516 0
1 -33,000.0000 -75,003.7500 -108,003.7500
AW of non-recurring cost 2 -30,728.9250 -79,588.0877 -110,317.0127
YEAR First Cost [R] A/P(1,n,18%) A/P(FC) [R] 3 -28,800.6413 -83,897.9474 -112,698.5886
0 -100,000.0000 0.0000 0.0000 4 -27,163.1402 -87,938.8304 -115,101.9705
1 1.1800 118,000.0000 5 -25,776.9997 -91,735.2696 -117,512.2693
2 0.6387 -63,870.0000 6 -24,595.9866 -95,248.1568 -119,844.1434
3 0.4599 -45,990.0000
4 0.3717 -37,170.0000
5 0.3198 -31,980.0000
6 0.2859 -28,590.0000

AW of the Salvage Value


YEAR SV [R] A/F(1,n,18%) A/F(SV)[R]
0 100,000.0000 0.0000 0.0000
1 85,000.0000 1.0000 85,000.0000
2 72,250.0000 0.4587 33,141.0750 AOC(j)(P/F,I,j)}(A/P,i,k)
3 61,412.5000 0.2799 17,189.3588
4 52,200.6250 0.1917 10,006.8598 AOC(PW(Total)(A/P,18%,6)
5 44,370.5313 0.1398 6,203.0003
Ilemobade, OO
6 37,714.9516 0.1059 3,994.0134 Ilemobade, OO Ilemobade, OO 37,714.9516 -333,152.0000) (0.2859)}
Ilemobade, OO
Ilemobade, OO 3,994.0134 Ilemobade, OO PROBLEM
Ilemobade, OO 5: Ilemobade, OO

BUY OR MAKE?

PROBLEM 4:

WHAT PRICE IS RIGHT?


(a)

(b) :

Ilemobade, OO Ilemobade, OO Ilemobade, OO Ilemobade, OO


PROBLEM
Ilemobade, OO 6 Ilemobade, OO Ilemobade, OO Ilemobade, OO

WHAT PERCENTAGE? n Year Invest Production CF FW @ r PW @ k FW + PW-


A B C D E E F
INFORMATION GIVEN (B – C) (A + D) (F/P, r%, (P/F, k% ,n)
N-n) (k=16%)
ZMC Ltd (r=15%)
0 2012 -266.667 -266.667 -266,667
CONSTRUCTION OF ALUMMINIUM REFINERY TO PRODUCE ALUMINIA
1 2013 -266.667 -266.667 -229,893
YEAR VALUE UNIT 2 2014 -266.667 -266.667 -198,187
INITIAL CONSTRUCTION (PHASE 1) 2012 – 2014 800 MILLION (R) 3 2015 900,000 310,000 590,000 590,000 1804,810
EXPANSION (PHASE 2A) 2018 – 2019 700 MILLION (R) 4 2016 873,000 318,100 554,900 554,900 1476,034
EXPANSION (PHASE 2B) 2018 – 2019 700 MILLION (R) 5 2017 846,810 326,443 520,367 520,367 1203,661
PRODUCTION CAPACITY (PHASE 1) 2015 – 2019 1,8 MEGA TON 6 2018 -700 821,406 335,036 486,370 -213,63 -87,674
PRODUCTION CAPACITY (PHASE 2A) 2020 3,6 MEGA TON 7 2019 -700 796,764 343,887 452,877 -247,123 -87,432
PRODUCTION CAPACITY (PHASE 2B) 2021 – 2023 5,4 MEGA TON 8 2020 1545,721 706,008 839,713 839,713 1277,120
PRODUCTION COST 150 (R) PER TON 9 2021 2249.024 1047,18 1201,842 1201,842 1589,436
PRODUCTION REVENUE 500 (R) PER TON 2
REVENUES (DECREASE) -3% PER YEAR
10 2022 2181,554 1076,19 1105,357 1105,357 1271,159
UNIT COSTS (INCREASES) 3% PER YEAR
7
FIXED COSTS (1) 2015 – 2019 40 MILLION (R)
FIXED COSTS (2) 2020 -2023 80 MILLION (R)
11 2023 -90 2116,107 1106,08 1010,024 920.024 920,023
INVESTMENT RATE ( r) 15% PER YEAR 3
BORROWING RATE ( K) 16% PER YEAR  9542,234 869,853
REMEDIATION COST 2023 90 MILLION (R) 10,970
PERIODS 11 YEARS
MARR 18% PER YEAR


( )
- Should the phased investment be considered if ERR method of analysis is used and MARR is ∑
18%?
( )

ERR ≥ MARR, all proposals must offer at least MARR to be considered and a project is not
economically viable unless it is expected to return at least the MARR.
Since the phased investment ERR of 24.32% is higher than MARR of 18% then it should be
considered as a viable project.

Ilemobade, OO Ilemobade, OO Ilemobade, OO Ilemobade, OO


22 Jenner+GW
• 2014Ass2JennerGW.pdf
Jenner, GW Jenner, GW Jenner, GW Jenner, GW

Jenner, GW Jenner, GW Jenner, GW Jenner, GW


Jenner, GW Jenner, GW Jenner, GW Jenner, GW

Jenner, GW Jenner, GW Jenner, GW Jenner, GW


Jenner, GW Jenner, GW Jenner, GW Jenner, GW

Jenner, GW Jenner, GW Jenner, GW Jenner, GW


Jenner, GW Jenner, GW Jenner, GW Jenner, GW

Jenner, GW Jenner, GW Jenner, GW Jenner, GW


23 Kasenge+JM
• 2014Ass2Kasenge J.M.pdf
Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM

Problem 1 [10] Problem 2 [8]

Borrow or not? The committee on the scale

Funky Industries primarily relies on 100% equity financing to fund projects. A good opportunity is A committee of four people submitted the following statements about the attributes to be used in a
available that will require R250 000 in capital. The Funky owner can supply the money from personal weighted attribute evaluation.
investments that currently earn an average of 8.5%/year. The annual cash-flow from the project is
estimated to be R15 000. It is also possible to borrow 60% for 15 years at 9%/year. 1. Flexibility[f] The most important factor
2. Safety[s] 50% as important as uptime
If the MARR is the Weighted Average Cost of Capital (WACC), determine which is the better option? 3. Uptime[u] One-half as importnt as flexibility
(The analysis is done before tax.) 4. Speed[v] As important as uptime
5. Rate of Return[r] Twice as important as safety
(a) (4 marks) is it worthwhile to get the money from the personal investment?
Use these statements to determine the normalised weights if scores are assigned between 0 and 10.
(b) (4 marks) is it worthwhile to get the money from the loan?

(c) (2 marks) which is the better option?


Solution

Scores Normalised Weight


Solution
1. Flexibility[f] 10 0.3636
FW (1) = -R 250 000.00 * (F/P, 8.5%, 15) + R 15 000.00 *(F/A, 8.5%, 15) = 2. Safety[s] 2.5 0.0909
3. Uptime[u] 5 0.1818
FW (1) =-R250 000.00*3.3997 + R15 000.00*28.2323 = -R 426 440.50 4. Speed[v] 5 0.1818
5. Rate of Return[r] 5 0.1818
MARR = WACC = (0.6 * 9%) + (0.4 * 8.5%) = 8.8%
Total 27.5 ∑ 1.0000
FW (2) = -250 000.00 * (F/P, 8.8%, 15) + R 15 000.00*(F/A, 8.8%, 15) =

FW (2) = -250 000.00 * 3.5435 + 15 000.00 * 28.9035 = -452 322.5

(a) The Personal investment is not a good option since the return on investment is less than the
MARR (8.5% < MARR 8.8%)

(b) The loan is a good option since the return on investment is more than the MARR (9% >MARR
8.8%)
(c) The personal investment is not an option to consider since repayment is less than the
repayment on the loan.

Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM


Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM

Problem 3 [8] Year (4) =-R95 000.00 - R10 000.00 = -R105 000.00

Economic service life Year (5) = -R105 000.00 - R10 000.00 = -R 115 000.00

A new machine has a first cost of P=R100 000 and can be used up to 6 years. Its salvage value is Year (6) = -R115 000.00 - R10 000.00 =- R125 000.00
estimated to be:
Salvage
S = P × 0,85n
Year (1) =R 100 000.00*0.851 = R 85 000.00
n = Number of years after purchase
Year (2) = R 100 000.00*0.852 = R 72 250.00
The operating cost will be R75 000 and increase by R10 000 per year after the first year. [AOC =
(65+10×n) ×1 000, n≥1] Year (3) = R 100 000.00*0.853 = R 61 412.50

Using MARR=18% determine Year (4) = R 100 000.00*0.854 = R 52 200.63

(a) (4 marks) determine the Economic Service Life (ESL) and corresponding Annual worth (AW) of the Year (5) = R 100 000.00*0.855 = R 44 370.53
machine. Year (6) = R 100 000.00*0.856 = R 37 714.95
(b) (4 marks) How much would the first cost have to reduce to make the equivalent annual cost for a full Capital Recovery {-P*(A/P, 18%, n) + Sn*(A/F,18%,n)}
6 years numerical equal to the AW estimated in the previous part (at ESL). Assume all the other
estimates remain the same and neglect the fact that this lower P value will still not make a newly Year (1) = (-R100 000.00*1.1800) + (R85 000.00*1.0000) = -R33 000.00
calculated ESL equal to 6 years.
Year (2) = (-R100 000.00*0.6387) + (R72 250.00*0.4587) = -R30 728.93

Year (3) = (-R100 000.00*0.4599) + (R61 412.50*0.2799) = -R28 800.64


Solution
Year (4) = (-R100 000.00*0.3717) + (R52 200.63*0.1917) = -R27 163.14
(a)
Year (5) = (-R100 000.00*0.3198) + (R44 370.53*0.1398) =- R25 777.00
Years First Cost AOC Salvage Capital AW of AOC Accumulative AW Total of AW
Recovery of PW Year (6) = (-R100 000.00*0.2859) + (R37 714.95*0.1059) = -R24 595.99

0 R 100 000.00 AW of AOC = AOC*(P/F, 18%, n)


1 -R 75 000.00 R 85 000.00 -R 33 000.00 -R 63 562.50 -R 63 562.50 -R 75 003.75 -R 108 003.75
Year (1) = -R75 000.00*0.8475 =- R63 562.50
2 -R 85 000.00 R 72 250.00 -R 30 728.93 -R 61 047.00 -R 124 609.50 -R 79 588.09 -R 110 317.01
Year (2) = -R85 000.00*0.7182 = -R61 047.00
3 -R 95 000.00 R 61 412.50 -R 28 800.64 -R 57 817.00 -R 182 426.50 -R 83 897.95 -R 112 698.59
Year (3) = -R95 000.00*0.6086 = -R57 817.00
4 -R 105 000.00 R 52 200.63 -R 27 163.14 -R 54 159.00 -R 236 585.50 -R 87 938.83 -R 115 101.97
Year (4) = -R105 000.00*0.5156 = -R54 159.00
5 -R 115 000.00 R 44 370.53 -R 25 777.00 -R 50 266.50 -R 286 852.00 -R 91 735.27 -R 117 512.27

6 -R 125 000.00 R 37 714.95 -R 24 595.99 -R 46 300.00 -R 333 152.00 -R 95 248.16 -R 119 844.14 Year (5) = -R115 000.00*0.4371 = -R50 266.50

The ELS is the number of years n at which the equivalent uniform annual worth of cost is the Year (6) = R125 000.00*0.3704 = R46 300.00
minimum. Year 1 is our ELS as its annual worth is R 108 003.75 Accumulative AOC
AOC Year (1) = -R63 562.50
Year (1) =R 75000.00 Year (2) = -R63 562.50 - R61 047.00= -R124 609.50
Year (2) =-75000.00 - R10 000.00 =- R85 000.00 Year (3) = -R63 562.50 - R61 047.00 - R57 817.00= -R182 426.50
Year (3) =-R85 000.00-R10 000.00 =- R95 000.00 Year (4) = -R63 562.50 - R61 047.00 - R57 817.00 - R54 159.00 = -R236 585.50

Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM


Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM

Year (5) = -R63 562.50 - R61 047.00 - R57 817.00 - R54 159.00 - R50 266.50 =- R286 852.00 Problem 4 [8]

Year (6) = -R63 562.50 - R61 047.00 - R57 817.00 - R54 159.00 - R50 266.50 - R46 300.00= When is the price right?

-R333 152.00 After graduation (and some experience) you earn a promotion to manager of engineered public
systems. One of the systems under your supervision is an emergency intercept pump system for potable
(safe to drink; drinkable). water. If the tested water quality or volume varies by a percentage, the system

AW= (AW of AOC) NJ *(A/P, 18%, n) automatically switches to preselected options of treatment or water sources. The manufacturing
process for the pump system had the following fixed and variable costs over a 1 year period.
Year (1) = -R63 562.50*1.1800 = -R75 003.75
Fixed Cost, R' 000 Variable Cost, R/Unit
Year (2) = -R124 609.50*0.6387 = -R79 588.09 Administrative 30 Materials 2500
Salaries and Benefits: 20% of 350 Labour 200
Year (3) = -R182 426.50*0.4599 = -R83 897.95 Equipment 100 Indirect Labour 2000
Space, etc 55 Subcontractors 600
Year (4) = -R236 585.50*0.3717 = -R87 938.83 Computers: ⅓ of 100 Misc cost 200

Year (5) = -R286 852.00*0.3198 =- R91 735.27 (a) (4 marks) Determine the minimum revenue per unit to break even at the current production volume
of 5 000m3 per year.
Year (6) = -R333 152.00*0.2859 =- R95 248.16
(b) (4 marks) If selling internationally and to large corporations is pursued, an increased production of 3
000m3 will be necessary. Determine the revenue per unit required if a profit goal of R500 000 is set for
Total AW = Capital Recovery +AW the entire system. Assume the cost estimates above stay the same.

Year (1) = -R33 000.00 - R75 003.75 = -R108 003.75

Year (2) = -R30 728.93 - R79 588.09 = -R110 317.01 Solution

Year (3) = -R28 800.64 - R83 897.95 = -R112 698.59 (a)

Year (4) = -R27 163.14 - R87 938.83 = -R115 101.97 Fixed Cost, R' 000 Variable Cost, R/Unit
Administrative 30 Materials 2500
Year (5) = -R25 777.00 - R91 735.27 = -R117 512.27 Salaries and Benefits: 350*(20/100) = 70 Labour 200
Equipment 100 Indirect Labour 2000
Year (6) = -R24 595.99 - R95 248.16 = -R119 844.14 Space, etc 55 Subcontractors 600
Computers: 100*(1/3) = 33.333333 Misc cost 200
Total 288.3333 5500
The ELS is the number of years n at which the equivalent uniform annual worth of cost is the
To reach the minimum revenue, the Profit should be equal to the revenue minus the total cost.
minimum. Year 1 is our ELS as its annual worth is R 108 003.75
Therefore, revenue is equal to the total cost.
(b)
R(revenue) = Total cost
With annual worth of R108 003.75
R = Total cost (Fixed Cost + Variable cost)
MARR 18%
R = (FC + VC)
Period of six (6) years
rQ= (FC +vQ)
P = 108 003.75 * (P/F, 18%, 6) =
r = {(FC + vQ)}/Q
=108 003.75 *0.3704 = 40 004.58
r = FC/Q + V
The first cost will be reduced by: 100000.00 – 40 004.58 = R59 995.42

Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM


Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM

r = {(288.333*1000)/ (5000m3)} + 5500 Problem 5 [8]

r = 57.6666 + 5500 = R5 557.6666/m3 Buy or make?

(b) For several years the Cuisinart Corporation has purchased the carafe assembly of its major coffee-maker
line at an annual cost of R1, 5m. The suggestion to make the component in-house has been made. For
Profit = revenue – Total cost the three departments involved the annual indirect cost rates, estimated material, labour, and hours are
= R- TC found in the table below. The allocated hours column is the time necessary to produce the carafes for a
year. Equipment must be purchased with the following estimates: first cost of R2m, salvage value of R50
= R-(FC +VC) 000 and life of 10 years. Perform an economic analysis for the make alternative, assuming that a market
rate of 15%/year is the MARR.
R500 000 = R - [(R5500* 8000m3) + (288 333.3)]
Indirect Costs
R500 000 = R – [44 000 000 + 288 333.3]
Department Basis Allocated Material Direct
R500 000 = R – 44 288 333.3 Rate/h
Hours Hours Cost Labour Cost
R = -R500 000 – R44 288 333.3 A Labour 10 25 000 200 000 200 000
B Machine 5 25 000 50 000 200 000
rQ = 44 788 333.3
C Labour 15 10 000 50 000 100 000
r = 44 788 333.3/8000m3 300 000 500 000

r = R5 598.5417/m3
Solution

Department A: 25 000 *10 = R250 000.00

Department B: 25 000 *05 = R125 000.00

Department C: 10 000 *15 = R150 000.00

Total =R525 000

AOC = 500 000 + 300 000 + 525 000 = R1 325 000

The make alternative annual worth is

AW make = -P (A/P, I, n) + S (A/F, I, n) – AOC

= -R2 000 000.00 (A/P, 15%, 10) + 50 000 (A/F, 15%, 10) – R1 325 000

=R-1 721 037

Currently, the carafe are purchased with an AW of AW (buy) R -1 500 000

It is cheaper to buy, because the AW of costs is less

Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM


Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM

Problem 6 [18] Cash


Year Investment Production FV @r PV @k FW+ PW -
Flow
What percentage?
2012 -266.66667 -266.67 4.6524 1.0000 -266.67
In late 2011, ZMC, Ltd., approved the construction of an Alumina Refinery with a capacity of 1,8Mt †of 2013 -266.66667 -266.67 4.0456 0.8621 -229.89
alumina per year at the cost of about R800m ‡. The plant was constructed so that it could be expanded 2014 -266.66667 -266.67 3.5179 0.7432 -198.18
to an annual capacity of 5,4Mt, and in November of 2013 ZMC announced that it was considering 2015 590.00 590.00 3.0590 0.6407 1 804.82
expanding due to market conditions. 2016 554.90 554.90 2.6600 0.5523 1 476.05
2017 520.37 520.37 2.3131 0.4761 1 203.64
Make the following assumptions: Consider this problem as a phased expansion problem with the cost to 2018 -700 486.37 -213.63 2.0114 0.4104 -87.68
construct the original facility (R800m) spread evenly over years 2012 through 2014. First year (2015)
2019 -700 452.88 -247.12 1.7490 0.3538 -87.44
revenues are R500/t against per unit costs of R150m with a production of 1,8Mt. The per ton revenues
2020 839.71 839.71 1.5209 0.3050 1 277.10
are expected to decrease 3% annually due to worldwide increases in capacity, while per unit costs are
2021 1 201.84 1 201.84 1.3225 0.2630 1 589.44
expected to increase 3% annually. Assume that expansion to 5,4Mt of annual capacity is to commence in
2022 1 105.36 1 105.36 1.1500 0.2267 1 271.16
2018 and 2019 at the cost of R700m each year. This results in a capacity of 3,6Mt in 2020 and 5,4Mt in
2023 -90 1 010.02 920.02 1.0000 0.1954 920.02
2021 through the remaining plant life (ending in 2023). The plant carries an expected remediation cost
∑ 9 542.23 -869.85
of R90m. Finally, annual fixed costs of R40m are expected to begin in 2015 and extend through 2019,
10.96995
increasing to R80m for the life of the project.
FW/-PW- 0.24327
Assuming a borrowing rate of 16% and investment rate of 15%, should the phased investment be ERR 24.33%
considered if one uses ERR as method of analysis and MARR is 18%?

Solution

Given information

Investment Value Units


Phase I (PCap) 1.8 Mega ton
Phase IIA 3.6 Mega ton
Phase IIB 5.4 Mega ton
Production Cost (PC) 150 per ton
Production Revenue (PR) 500 per ton
gR (Revenues) -3% per year
gC (Costs) 3% per year
FC Phase I 40 million
FC Phase II 80 million
Remediation Cost 700 million
Investment Rate (r) 15% per year
Borrowing Rate (k) 16% per year
Periods 17 years 11 years

Kasenge, JM Kasenge, JM Kasenge, JM Kasenge, JM


24 Kawayongo+JM
• 2014Ass2Kawayongo+JM.pdf
Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM

Problem 1

If the MARR is equal to the weighted Average Cost of Capital ( ) which is:

In analysing for a debt-equity mix on investment, if 60% of the required capital may be
borrowed then 40% of the required capital may be funded on equity financing. Therefore,

Then,

In order to chose or select the best alternative for investments, the decision must be based on
the following criterion:

Faculty of Engineering and the Built Environment (a) NO, it is not worthwhile to get the money from the personal investment because the
average return of 8.5% does not exceed the (8.8%).
(b) Yes, it is worthwhile to get from the loan because the return of 9% each year is
greater than the (8.8%).
(c) The better option is (b).
Ming: Engineering Management

Problem 2
Advanced Engineering Economics
In order to determine the normalized weights if scores are assigned between 0 and 10, let us

Assignment 2 use one of the method which is more practical. This method is called Weighted Rank Order.
It is actually based on placing the entire attribute in order of increasing importance and thus
Student Number: 201183291 giving to the most important attribute a higher score. Also we need to use the following
formula to determine the normalized weights.

Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM


Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM

Problem 3

,
Where, ,

,
,

We should demonstrate that the normalized weights are equal to 1 after all calculation which
is:

,
Now the following table will show all the calculation which includes the score, the weights as
Since the operating cost will be and increase by per year after the first
well as the sum of scores and weights.
year, one would refer at this following table:
Attribute Score Weights Normalized weights
(a)

Flexible (f) 10 The most important factor

Uptime (u) One-half as important as


flexibility

Speed (s) 5 As important as uptime:

Rate of Return (r) Twice as important as


safety

Safety (s) 50% as important as


uptime

Sum of scores 27.5

In order to determine the Economic Service Life and corresponding Annual worth ( ) of
the machine, the following formula should be used:

Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM


Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM

Then,

Therefore, P would have to be reduced up to:

13969.9660

Problem 4

(a) The minimum revenue at the break even point can be determined as follow:

Where,

Thus,

It can be seen that the smallest Annual Worth of costs is and occurs at year 1 or
,
. Therefore:

The current production volume of revenue is at

(b)

We know that,

In order to make the equivalent annual cost for a full 6 years equal to the estimated
in the previous part which implies , then the capital recovery must equal
(b)
to zero. Thus,

Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM


Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM

Buy Option:

Problem 5 (buy or make ?)

Given,
Therefore, the buy option should be preferable because is less costly on an annual
equivalent basis.

Problem 6

Solution 0.0000
Let us calculate the annual equivalent cost of each as follows:

Make option:

,
2,6600

Let us first calculate the annual equivalent worth: we know that

Thus,

Kawayongo, JM Kawayongo, JM Kawayongo, JM Kawayongo, JM


Kawayongo, JM Kawayongo, JM

Since the expansion has been consider, the

Kawayongo, JM Kawayongo, JM
25 Kenesi+M
• Enegineering Economics assignment 2.pdf
Kenesi, M Kenesi, M Kenesi, M Kenesi, M

Q1

A.

Alternative 1

100% personal funding at 8.5%

WACC = 1 (0.085) = 0.085 MARR

The marr is the same as the wacc there is no factoring of interest for project risk, limited capital tax structure the rate is too low its not wise
to use money from personal investments to finance the project.

The annual loan expenses = P(i)= 250000 (0.085)=21250

Revenue = 15000
STUDENT NAME: MCDONALD KENESI
Net annual return = 15000 -21250 = - 6250
STUDENT NO 201417305
Which provides return on equity of - 6250/250000 = - 0.025 (-2.5%)
ENGINEERING Economics Assignment 2
B.
11 May 2014
Alternative 2

Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M Kenesi, M Kenesi, M

60% financing from loan at 9% 40% personal funding at 8.5%

40% personal funding at 8.5% WACC = 0.6(0.09) + 0.4(0.085) = 0.088

Using 15 year study period

Annual equity expense = 250000(A/P,0.088,15)= 250 000 (0.1226) = 30650 Financing from personal funds has a lower cost of capital and its economically justified.

Considering the equity mix of 40 -60

Personal investment = 0.4 x 250 000 =100 000

The expense on 0.4 *30650 = 12260

Which provides return on equity of= - 12260/100 000 = - 0.1226 (-12.26%)

c. WACC = (equity fraction)(cost of equity capital) + (debt fraction)(cost of debt capital)

Alternative 1

100% personal funding at 8.5%

WACC = 1 (0.085) = 0.085

Alternative 2

60% financing from loan at 9%

Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M Kenesi, M Kenesi, M

Q2Let Preferred Eigen vector

Fl – flexibility 0.5171

Sf – safety 0.2295

Up – Uptime 0.1725

Sp – speed 0.0802

RoR – rate of return 0.2507

fl sf up sp ror λmax = 0.5171(1/0.4615) 0.2295(1/0.1319) + 0.1725(1/0.1053) + 0.0802(1/0.0667) + 0.2507(1/0.1172)


fl 1 4 2 6 4
sf 1/4 1 1/2 4 3 λmax = 7.7625
up 1/2 2 1 1 1/5
CI = (λmax-n)/(n-1)
sp 1/6 1/4 1 1 1/3
ror 1/4 1/3 5 3 1 CI =(7.7625-5)/(5-1)
Total 2 1/6 7 7/12 9 1/2 15 8 8/15
CI =0.69

fl sf up sp ror total Avg pv RI = 1.12


Fl 0.4615 0.5275 0.2105 0.4000 0.4688 2.0683 0.5171 1.933967
Thus CR= CI/RI = (0.69/1.12)=0.59 59.7% greater than 10%
Sf 0.1154 0.1319 0.0526 0.2667 0.3516 0.9181 0.2295 4.35676
Up 0.2308 0.2637 0.1053 0.0667 0.0234 0.6899 0.1725 5.79817
Sp 0.0769 0.0330 0.1053 0.0667 0.0391 0.3209 0.0802 12.46562
Ror 0.1154 0.0440 0.5263 0.2000 0.1172 1.0028 0.2507 3.988656
1.0000 1.0000 1.0000 1.0000 1.0000 Λmax 28.54318

Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M Kenesi, M Kenesi, M

Q3 AE (2) = (100000-72250) (A/P, 18%, 2) + 72250 (0.18) + 65000 +10000(A/G, 18%, 2)


n
P= 100 000 s = 0.85 x P, MARR =18% =27750(0.6387) +13005+65000+10000(0.4587)

AOC = (65+10n) x 1000 =100315.925

end of year salvage value AOC when retired in n year Annual equivalent
N=3
1 85 000.00 75 000.00 108 000.00 AE (3) = (100000- 61412.50)(A/P, 18%, 3) + 61412.50(0.18) + 65000 +10000(A/G, 18%, 3)
2 72 250.00 85 000.00 100 315.93
3 61 412.50 95 000.00 102 702.64 =38587.50(0.4599)+11054.25+65000+10000(0.8902)
4 52 200.63 105 000.00 105 110.14
=102702.64
5 44 370.53 115 000.00
6 37 714.95 125 000.00
7 32 057.71 135 000.00
N=4
AE (4) = (100000- 52200.63)(A/P, 18%, 4) + 52200.63(0.18) + 65000 +10000(A/G, 18%, 4)
Annual equivalent worth= (P-S) (A/P, I, n) + Si +annual equivalent of maintenance and operation. Note (65+10n) x 1000 is an arithmetic
=47799.37(0.3717)+9396.1134+65000+10000(1.2947)
gradient function thus (A/G,i,n) factor will be used.
=105110.14
N=1
Economic service life thus becomes two years i.e. year with least value of cost.
AE (1) = (100000-85000) (A/P, 18%, 1) +85000(0.18) + 65000 +10000
Q3.b annual worth = 100315.925 calculated in (a).
=15000(1.1800) +15300+65000+10000

S=0.85n P= 0.85 6 P= 0.377149515 P approx. = 0.37715 P


N=2

Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M Kenesi, M Kenesi, M

Q4

If annual worth is to be equivalent to that calculated then: fixed costs R’000 variable cost
administrative 30.00 materials 2500
100315.925 = (P-S)(A/P,i,6) + Si + 65000 + 10000(A/G,i,n)
salaries and benefits 70.00 labour 200
100315.925 = (P-0.37715 P)(02859) + (0.37715 P)(0.18) + 65000 + 10000(2.0252)
equipment 100.00 indirect labour 2000
100315.925 = P {(0.62285)(0.2859)+(0.37715)(0.18)}+65000 + 20252
space etc. 55.00 subcontractors 600
100315.925 = P {0.178073+ 0.067887} + 85252
Computers 33.33 misc. cost 200
100315.925 - 85252 = P (0.246617) Total Fixed cost 288.33 5500.00

15063.925 = 0.246617 P
F – fixed cost = 288 330
Then P= 15063.925/0.246617 = 61082.2652
V- variable cost =5500 N
Solution: First cost has to reduce to 61082.27 to make annual cost to be equivalent for 6 years.
TC - Total cost = 288330 + 5500 N

r- revenue received

N - number of units

For break-even RN = TC thus

RN = 288330 + 5500 N

for production volume 5000m3, n=5000, then

5000 R = 288330 +5500(5000)

R = (288330/5000+5500 = 57.666 + 5500 = 5557.666

Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M Kenesi, M Kenesi, M

Revenue per unit is to be at least 5557.67 for break even at production of 5000m3. Q5

b. 500 000 = RN –(288330 + 5500N) annual worth for the challenger n=10, P= R2m, S = 50000

where capital recovery (P-S)(A/P,I,n)- S(i)


I - Income = RN
(2 000 000 - 50 000)( A/P, 15%, 10)
P – profit ( A/P, 15%, 10) = 0.1993 from tables
1950000(0.1993)-50000(0.15) 381 135.00
P = I -TC cost
Given target profit 500 000 it follows department A
indirect labour cost rate x allocated hours 250 000.00
with increased production of 3000, N = 3000+5000=8000 direct labour costs 20 000.00
material cost 200 000.00
500 000 = 8000 N –{288330 + 5500(8000)} 470 000.00
500 = 8N –(288.33+5500(8)) department B
indirect machine cost rate x allocated hours 125 000.00
500 = 8N -44288.33 direct labour costs 200 000.00
material cost 50 000.00
500 + 44288.33 =8N 375 000.00
44788.33 = 8 N department C
indirect labour cost rate x allocated hours 150 000.00
N =5598.54125 direct labour costs 100 000.00
material cost 50 000.00
Revenue per unit has to be 5598.54 to realise profit of 500 000. 300 000.00
total annual costs for 3
departments 1 145 000.00
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M Kenesi, M Kenesi, M

Q6.
Equivalent Annual Cost = annual equivalent of P- annual equivalent of Maintenance and
Operation + annual equivalent of salvage value year
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0 1 2 3 4 5 6 7 8 9 10 11 12
fixed cost 0 0 0 0 40 40 40 40 40 80 80 80 80
1 526 135.00
cost per t 0 0 0 0 150 154.5 159.14 163.91 168.83 347.78 358.22 368.96 380.03
defender = annual worth R1.5m
Cost per
produced 0 0 0 0 190 194.50 199.13 203.909 208.826 427.782 438.215 448.962 460.031
thus annual worth is in favour of the defender by -26 135.00 capital 266.67 266.67 266.67 700 700
the decision to buy is economically viable remediation 90
TOTAL
OUTFLOWS 0 266.670 266.670 266.670 380.00 389.00 398.27 1107.81 1117.65 855.564 876.431 897.924 1011.32

rate of decline of
unit price 1 0.97 0.9409 0.91267 0.88529 0.85873 0.83297 0.80798 0.78374
production 0 0 0 0 1.8 1.8 1.8 1.8 1.8 3.6 5.4 5.4 5.4
revenue/ton 500.00 485.00 470.45 456.336 442.646 429.36 416.486 403.991 391.871
TOTAL REVENUE 900.00 873.00 846.81 821.405 796.763 1545.7 2249.02 2181.55 2116.10

NCF 0 -266.667 -266.667 -266.667 520.00 484.00 448.54 -286.412 -320.889 690.156 1372.593 1283.629 1104.77

Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M Kenesi, M Kenesi, M


Kenesi, M Kenesi, M

PW Negative NCF = 266.667 (P/F,16%,1) +266.667 (P/F,16%,2) + 266.667(P/F,16%,3) + 286.412 (P/F,16%,7) + 320.889 (P/F,16%,8)

= 266.667 (0.8621) +266.667 (0.7432) + 266.667(0.6407) + 286.412 (0.3538) + 320.889 (0.3050)

= 798.1447

Positive NCF = 520.00 (F/P,15%,8)+484(F/P,15%,7)+448.54(F/P,15%,6)+690.156(F/P,15%,3)+1372.593(F/P,15%,2)+1283.629


(F/P,15%,1)+1104.77

Positive NCF = 520.00 (3.0590)+484(2.660)+448.54(2.3131)+690.156(1.5209)+1372.593(1.3225)+1283.629 (1.15)+1104.77


= 9361.5037
Now

PWo = FWn

798.1447 (P/F, i’,11) = 9361.5037


798.1447 (1+i’)11 = 9361.5037

(1+i’)11 = 11.729
(1+i’) = 1.2508
i’= 0.25085=25,085%

Interest rate is 25,085% is greater than 18%. MARR of 18% is not justified.

Engineering economics assignment 2 MKenesi201417305 May 2014

Kenesi, M Kenesi, M
26 Kgosi+TD
• 2014Ass2KgosiTD.pdf
Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD

PROBLEM 1
Given:

Capital R250 000


Personal loan interest 8.50%
Loan 9%
Annual Cash flow R15000
Debt fraction 60%
Equity fraction 40%
N 15 years
Principal loan @ 60% R150 000
Loan payment @MARR 9% R18 615

Cost of 60% debt capital is 9% for the loan:


ASSIGNMENT 2 WACC = (0.4)(8.5%) + (0.6)(9%) = 8.8%

a) PW @ 8.5% = -250 000 + 15 000(P/A, 8.5%, 15)


= -250 000 + 15 000(8.3042)
= -R250 000 + R24 563
ENGINEERING ECONOMICS (GIE4058) = -R125 437

Annual NCF = ACF – loan payment


= R15 000 – R 18 615
= -R3 615

Amount of equity invested = R250 000 – R150 000


=R100 000

b) MARR @ 8.8%

PW @ 8.8% = -100 000 + (-3615)(P/A, 8.8%,15)


NAME: TSHEPO KGOSI = -100 000 + (-3615)(8.1567)
= -R250 000 + R24 563
STUDENT NO.: 820413193 = -R129 486.5

DUE DATE: 26 May 2014


c) Getting money from the personal loan is the better option in this case.

Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD


Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD

PROBLEM 2 PROBLEM 4

Committee Members a) Q = 5000 m3


NO. Attribute 1 2 3 4 SUM Average Weight (W)
Total Fix Cost = 30 + 70 + 100 + 55 + 33.33
1 Flexibility (F) 5 6 7 8 26 6.5 0.363636364
2 Safety (s) 1.25 1.5 1.75 2 6.5 1.625 0.090909091 =R288.33
3 Uptime (u) 2.5 3 3.5 4 13 3.25 0.181818182
4 Speed (V) 2.5 3 3.5 4 13 3.25 0.181818182
Total variable cost = 2500 + 200 + 2000 + 600 + 200
5 Rate of Return ( r) 2.5 3 3.5 4 13 3.25 0.181818182
= R5500
Totals 71.5 17.875 1

rQ = FC + VQ

PROBLEM 3
r = R5 500/unit
Yr. First Cost Salvage Capital Recovery AOC AC PW (AC) AW (AOC+RC) Total AW
0 100000
1 85000 33000 75000 75000 63562.5 75003.75 108000
2 72250 30728.93 85000 85000 124609.5 79590.03 110318.96
3 61412.5 28800.64 95000 95000 182426.5 83902.3 112702.94
b) Profit = R500 000
4 2200.63 27163.14 105000 105000 236585.5 87947.98 115111.12
5 44370.53 25777 115000 115000 286852 91728.91 117505.91 Q = 8000m3
6 37714.95 24595.99 125000 125000 333152 95251.53 119847.52
Profit = rQ – (FC +vQ) = (r – v)Q - FC

a) * Economic Service Life = 1 year

* Annual worth = 108000

b) The equivalent of AW1 and AW6 is R108000


Lower First Cost (P)= ?
AW6 = P(A/P,18%,6) + 75000+10000(A/G,18%,6) - P(0.85)6(A/F,18%,6)
108000 = P(0.28591) + 75000 + 10000(2.0252) - P(0.37715)(0.10591)
108000 - 95252 = 0.28591P - 0.03994P
0.24597P = 12748
P = R51827.5

Reduction cost = R48 172.5

Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD


Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD

PROBLEM 5 PROBLEM 6
Data: Given:
Annual cost = R1.5m
Investment Value Units
First cost = R2m Phase I (P Cap) 1.8 Mega ton
Phase IIA 3.6 Mega ton
Salvage value = R50 000
Phase IIB 5.4 Mega ton
N= 10 years Production Cost 150 per ton
Production Revenue 500 per ton
MARR = 15% gR (Revenue) -3% per year
gC (Costs) 3% per year
Fixed Cost I 40 million
Indirect costs Fixed Cost II 80 million
Department Basis hours Rate/hr Allocated Material Direct Remediation Cost 90 million
hr cost labour Investment Cost ( r) 15% per year
cost Borrowing Rate (k) 16% per year
A Labour 10 25 000 200 000 200 000 Periods 11 years
B Machine 5 25 000 50 000 200 000
C Labour 15 10 000 50 000 100 000
Total 300 000 500 000 Calculations:

PV @ 16
Year Invest Production CF FV @ 15% % FW + PW -
Indirect cost allocation calculations: 2012 -266.67 -266.67 4.6524 1 -266.67
2013 -266.67 -266.67 4.0456 0.8621 -229.89
Department A1CA 10 x 25 000 R 250 000 2014 -266.67 -266.67 3.5179 0.7432 -198.18
A1Cb 5 x 25 000 R 125 000 2015 590 590 3.059 0.6407 1804.82
2016 554.9 554.9 2.66 0.5523 1476.05
A1Cc 15 x 10 000 R 150 000 2017 520.37 520.37 2.3131 0.4761 1203.65
Total R 525 000 2018 -700 486.37 -213.63 2.0114 0.4104 -87.68
2019 -700 452.88 -247.12 1.749 0.3538 -87.44
2020 839.71 839.71 1.5209 0.305 1277.09
AOC = 500 000 + 300 000 + 525 000 = R1 325 000 2021 1201.84 1201.84 1.3225 0.263 1589.43
2022 1105.36 1105.36 1.15 0.2267 1271.16
2023 -90 1010.02 920.02 1 0.1954 920.02
AW = FC x (A/P,I,N) + S(A/F,I,N) – AOC
Σ 9542.22 -869.86
AW = -2 000 000 (A/P,15%,10) + 50 000(A/F,15%,10) – 1 325 000

AW = -2 000 000 (0.19925) + 50 000(0.04925) – 1 325 000


= 10.97
= -R1 721 037.5
ERR ( ) ⁄ -1
The carafes is bought with an AW of R1 500 000 ( ) ⁄ -1
= (1.243 - 1)
There it’s expensive to produce because the AW cost is more. = 0.24326
= 24.33%

Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD


27 Khumalo+TR
• 2014Ass2Khumalo-TR 920311149.pdf
Khumalo, TR Khumalo, TR Khumalo, TR Khumalo, TR

Student number: 920311149 Problem 2

Engineering economy Assignment 2 Logic: *(f) = 10

------------------------------------------------------------------------------------------------------------------------------------------ *(s) = (0.5) (u) = (0.5) (5) =2.5

Problem 1 * (u) = (0.5) (f) = (0.5) (10) = 5

MARR=8.5% Present Worth (Marr) =? * (v) = (1) (u) = 5

a) PW=-250 000 + (15000) (P/A; 8.5%; 15) * (r) = 2(s) = (2) (2.5) = 5

=-250 000 + (15000) (8.3042) Attribute Importance Attribute Weighting


1 10 1 10/27.5=0.36
=-250 000 + 125563 = R 125 437 2 2.5 2 2.5/27.5=0.09
3 5 3 5/27.5=0.072
It’s worthwhile getting money from personal investment 4 5 4 5/27.5=0.072
5 5 5 5/27.5=0.072
b) Since PW>0, 100% financing meets the MARR requirements ∑ = .
Thus for loan financing 60% and equity Financing 40% Weighting Wi = Score /27.5
Principal Loan= (250 000)(0.60)=R 150 000

Therefore - Loan Payment = 150 000(A/P; 9%; 15) Problem 3


=150 000(0.1241) = R 18.615 per year

Cost of debt capital is 9% for loan Capital recovery = Present value ((A/P; 18%; n) + Salvage value (A/F; 18%; n)
WACC= (0.4) (8.5%) + (0.6) (9%) =8.8% therefore MARR = 8.8% a) AW1 = [-100 000 (A/P; 18%; 1) + 85000 (A/F; 18%; 1)] –AOC1 -10000(A/G;18;1)
Annual Ne t Cash flow (NCF) = Project NCF – loan Payment = -100 000 (1.1800) + 85000 (1 – 75000) = R -108 000
= 15000 – 18.615 = R-3615 AW2 = [-100 000 (A/P; 18%; 2) + 85000 (A/F; 18%; 2)] –AOC1 - 10000(A/G;18;2)
It’s not worthwhile getting money from the loan. = [-100 000 (0.6387) + 72250 (0.4587)] – 75000 -10000(0.4587) = R -110315.93
c) Amount of equity invested = 250 000 – 150 000 = R100 000 AW3 = [-100 000 (A/P; 18%; 3) + 61412.5 (A/F; 18%; 3)] -AOC1 - 10000(A/G;18;3)
Thus By calculating PW at the MARR on committed equity capital = [-100 000 (0.4599) + 61412.5 (0.2799)] - 75000 - 10000(0.8902) = R -127 702.64
PW= -100 000 – 3615(P/A; 8.8; 15) AW4 = [-100 000 (A/P; 18%; 4) + 52200.63 (A/F; 18%; 4)] - AOC1 - 10000(A/G;18;4)
= -100 000 – 3615(8.1567) = [-100 000 (0.3717) + 52200.63 (0.1917)] – 75000 – 10000(1.2947) = R – 115 110.14
= R-129486.47 AW5 = [-100 000 (A/P; 18%; 5) + 44370.53 (A/F; 18%; 5)] -AOC1 - 10000(A/G;18;5)
Because of the above 100% investing is a better option. = [- 100 000 (0.3198) + 44370.53 (0.1398)] – 75000 – 10000(1.6728) = R -117 504.99

Khumalo, TR Khumalo, TR Khumalo, TR Khumalo, TR


Khumalo, TR Khumalo, TR Khumalo, TR Khumalo, TR

AW6 = [-100 000 (A/P; 18%; 6) + 37774.95 (A/F; 18%; 6)] - AOC1 - 10000(A/G; 18; 6) Problem 5

= [-100 000 (0.2859) + 37774.95 (0.1059)] – 75000 – 10000(2.0252) = R -119 841.63 To make components in house, the AOC is comprised of direct labor, direct material and indirect
costs.
ESL is in year 1 = R108 000
The provided table is used to calculate indirect cost allocation:

b) Present worth for year 1

P: AW = - P (A/P; 18%; 6) + S (A/F; 18%; 6) - AOC1 - 10000(A/G;18;6)

-108000 = -P (0.2859) + P x 0.856(0.1059) – 75000 – 10000(2.0252)

-108000 + 75000 + 20252 = -P(0.246)

P = -12748/-0.246= R 51821.14
Department A : 25 000(10) = R 250 000

Department B : 25 000(5) = R125 000


Problem 4
Department C : 10 000(15) = R150 000
Fixed cost = 288 333 Variable Cost /unit = 5500

a) QB = Fixed Cost / r-v
AOC = 500 000 + 300 000 + 525 000 = R 1,325 000.00
QB(r-v) = Fixed Cost
The make alternative annual worth is calculated as follows:
r = (FC/ QB) + VC
AWmake = -P (A/P; r; n) + S (A/ F; r; n) – AOC
= (288333/5000) + 5500 = R 5557.67
= -2 000 000(A/P; 15; 10) + 50000(A/F; 15; 10) – (1325000)
b) Profit (P) = (r – VC) (QB) – FC
= -2 000 000(0.1993) + 50000(0.0493) - 1325000
r = ((P + FC)/ QB) + VC
= R -1,721,037.00
= ((500000 + 288333)/8000) + 5500 =R 5598.54
Presently the carafes are purchased with an Annual Worth of

AWpurchase = R – 2 200 000.00.

Comparing the two options, it is cheaper to make, since AW cost to make is lower than buying.

Khumalo, TR Khumalo, TR Khumalo, TR Khumalo, TR


Khumalo, TR Khumalo, TR Khumalo, TR Khumalo, TR

Problem 6 Prod(phase1)= ProCap(phase1)x (Prod(1+ Rev_rate)(year-2015) – Prod(1+Cost_rate) (year-2015)


– Fixed Cost(phase1)
Given information:
Prod(2016)= 1.8(500(1-0.03)( 2016-2015) – 150(1+0.03) ( 2016-2015) ) – 40 = 554.9
Expansion in Phases Value Units

Phase 1- Capacity 1.8 Mt Prod(phase2)= ProCap(phase1)x (Prod(1+ Rev_rate)(year-2015) – Prod(1+Cost_rate) (year-2015)


Phase 2A-expanding 3.6 Mt – Fixed Cost(phase2)
Phase2B-Full capacity 5.4 Mt
Production Cost 150 Per ton Prod(2020)= 3.6(500(1-0.03)( 2020-2015) – 150(1+0.03) ( 2020-2015) ) – 80 = 839.71
Production Revenue 500 Per ton
Revenue -3% Per year Prod(2021)= 5.4(500(1-0.03)( 2021-2015) – 150(1+0.03) ( 2021-2015) ) – 80 = 1201.84
Cost 3% Per year
Expansion Phase 1 3.6 million Therefore with the above calculation applied for all the years to get the Net cash flow , Present Worth
Expansion Phase 2 5.4 million and Future Worth , ERR is then:
Remediation Cost 90 million
Investment Rate (r%) 15% Per year =( +/− ) (1/N) - 1
Borrowing Rate(k%) 16% Per year
= (9542.244/-869.86) (1/11) - 1
Period 11 year
= 24.34 %
(1/N)
Equation: =( +/− ) –1
Comparing with MARR 18 % ,investment should be considered since ERR is higher than MARR

year Investment Production Remediation Cash flow (CF) Future Value at rate 15% (FV@r) Present Value @ borrowing rate 16%_(PW@k) FW+ PW-
2012 -266.67 -266.67 4.6524 1.0000 -266.67
2013 -266.67 -266.67 4.0456 0.8621 -229.896
2014 -266.67 -266.67 3.5179 0.7432 -198.189
2015 590 590 3.059 0.6407 1804.81
2016 554.9 554.9 2.6600 0.5523 1476.034
2017 520.37 520.37 2.3131 0.4761 1203.668
2018 -700 486.36 -213.64 2.0114 0.4104 -87.6779
2019 -700 452.88 -247.12 1.7490 0.3538 -87.4311
2020 839.71 839.71 1.5209 0.3050 1277.115
2021 1201.84 1201.84 1.3225 0.2630 1589.433
2022 1105.36 1105.36 1.1500 0.2267 1271.164
2023 1010.02 -90 920.02 1.0000 0.1954 920.02 179.7719
Total sum= 9542.244 -869.864

In order to calculate Production at each Phase, the following equation is used:

Khumalo, TR Khumalo, TR Khumalo, TR Khumalo, TR


28 Khwela+NC
• 2014Ass2KhwelaNC.pdf.pdf
Khwela, NC Khwela, NC Khwela, NC Khwela, NC

Question 1 Question 2

Capital required: R250 000

Annual cash flow: R15 000 Given Logic Importance Weighting w i


score
a) Minimum rate of return (MARR) = 8.5%
Flexibility [f] The most important 100 0.3636
The Present Worth PW = -250 000 + (15 000) * (P/A, 8.5%, 15)
factor
= -250 000 + (15 000 * 8.3042)

= -R125 437 Safety [s] 50% as important as uptime s=0.5*u=0.25f 25 0.0909

Present Worth PW = -R125 435, where PW is below 0 Uptime [u] One-half as important as u=0.5*f 50 0.1818
important
b) 60% loan for 15 years at 9% per year
Speed [v] As important as uptime v=u=0.5*f 50 0.1818
MARR = WACC = (60 * 9%) + (40 * 8.5%) = 8.8%
Rate of return [r] Twice as important as safety r=2*s=0.5*f=u 50 0.1818
Loan principal P loan = R250 000 * 0.6 = R150 000
Total 275 1.0000
Annual payment of the loan for 15 years = P loan * (A/P, 9%, 15)

= R150 000 * 0.1241


Question 3
= R18 615
a) Salvation=P*0,85n with n: number of years
The amount of equity invested = R250 000 – R150 000
S 1 =R100 000*0.85=R85 000
= R100 000
S 2 =R100 000*0.852=R72250
Annual NFC = R18 615 – R15 000 = -R3 615
S 3 =R100 000*0.853=R61 412.5
MARR = 8.8%, PW = -R100 000 + (-R3 615) * (P/A, 9%, 15)
S 4 =R100 000*0.854=R52 200.625
= -R100 000 + (-R3 615 * 8.1567)
S 5 =R100 000*0.855=R44 370.5313
= -R129 486.4705 < 0
S 6 =R100 000*0.856=R37 714,9516
c) None of the above answers meet the MARR requirements, therefore there is no solution
AW 1 =-100 000(A/P, 18%, 1)-75 000+85 000(A/F, 18%, 1)=R-108 000

AW 2 =-100 000(A/P, 18%, 2)-85 000+72 250(A/F, 18%, 2)=R-115 728.9250

AW 3 =-100 000(A/P, 18%, 3)-95 000+61 412.5 (A/F, 18%, 3)=R-123 800.6412

AW 4 =-100 000(A/P, 18%, 4)-105 000+52 200.625 (A/F, 18%, 4)=R-132 163.1402

AW 5 =-100 000(A/P, 18%, 5)-115 000+44 370.5313 (A/F, 18%, 5)=R-140 776.9997

Khwela, NC Khwela, NC Khwela, NC Khwela, NC


Khwela, NC Khwela, NC Khwela, NC Khwela, NC

AW 6 =-100 000(A/P, 18%, 6)-125 000+37 714,9516 (A/F, 18%, 6)=R-149 595.9866 The alternative annual worth is

ESL is 1 year with AW=R-108 000 per year. AW make = P (A/P, i, n) +S (A/F, i, n)-AOC

=2,000,000(A/P, 15%, 10) +50,000(A/F, 15%, 10)-1,325,000

Question 4 =R1 721 037

Carafes are purchased with an AW buy =R1 500 000

a) P = R-TC with P: Profit, R: revenue (R=r*Q BE ) and TC: Total cost (TC=Fixed cost + Variable cost) Carafes is the cheapest option to buy than making it , because making it costs more than buying it.

Break even P=0 thus R=TC

r*Q BE = FC + VC

(r-v) *Q BE = FC

r-v= 288 333.3333/5000=57.6667

Minimum revenue per unit r=R5557.6667

b) Q BE =5000+3000=8000m3 and P Goal =R500 000

P=R-TC=R-(FC+VC)=rQ-FC-vQ

Thus r=(P+FC+vQ)/Q BE =(500 000+288 333.3333+44 000 0000)/8000

r=R5598.541/m3

Question 5

Department A: 25 000 x 10 =R250 000

Department B: 25 000 x 5 =R125 000

Department C: 10 000 x 15 =R150 000

Total R525 000

AOC= 500 000+300 000+525 000=R1 325 000

Khwela, NC Khwela, NC Khwela, NC Khwela, NC


Khwela, NC Khwela, NC

Question 6

Year Investment Production CF FV @ r PV @ k FW+ PW-

2012 -266.667 -266.667 4.6524 1.000 -266.667

2013 -266.667 -266.667 4.0456 0.8621 -231.894

2014 -266.667 -266.667 3.5179 0.7432 -201.627

2015 590 590 3.0590 0.6407 2118.1

2016 554.90 554.90 2.6600 0.5523 1476.034

2017 520.3670 520.3670 2.3131 0.4761 1203.661

2018 -700 486.3740 -213.626 2.0114 0.4104 -92.351

2019 -700 452.8733 -247.127 1.7490 0.3538 -92.895

2020 879.6542 879.6542 1.5209 0.3050 1337.866

2021 1241.839 1241.839 1.3225 0.2630 1642.332

2022 1145. 351 1145.351 1.1500 0.2267 1317.154

2023 -90 1050.014 960.014 1.000 0.1954 206.307

Total 9095.147 -679.127

13.39

ERR 26.6 %

520.367= PCap Phase I × (PR(1 + gR)(yr−2015) − PR(1 + gC )(yr−2015)) − F C Phase I


= 1, 8(500(1 − 0, 03)^(2017−2015) − 150(1 + 0.03)^(2017−2015)) − 40

1145. 351= PCap Phase IIB × (PR(1 + gR)(yr−2015) − PR(1 + gC )(yr−2015)) − F C Phase II
= 5, 4(500(1 − 0, 03)^(2017−2015) − 150(1 + 0.03)^(2017−2015)) − 80

ERR = 26.6%

Khwela, NC Khwela, NC
29 Kudumela+FP
• 2014Ass2KudumelaFP.pdf
Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP

Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP


Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP

Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP


Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP

Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP


30 Kumalo+AP
• 2014Ass2Kumalo+AP.pdf
Kumalo, AP Kumalo, AP Kumalo, AP Kumalo, AP

Kumalo, AP Kumalo, AP Kumalo, AP Kumalo, AP


Kumalo, AP Kumalo, AP Kumalo, AP Kumalo, AP

Kumalo, AP Kumalo, AP Kumalo, AP Kumalo, AP


Kumalo, AP Kumalo, AP Kumalo, AP Kumalo, AP

Kumalo, AP Kumalo, AP Kumalo, AP Kumalo, AP


31 Lavagna+J
• 2014Ass2Lavagna+J.pdf
Lavagna, J Lavagna, J Lavagna, J Lavagna, J

Jenna Lavagna endure a little less risk if the capital was generated from its own resources,
rather than owing an external party money that could possibly not be generated.
201464989
Question 2:
Advanced Engineering Economics
Table 1. Table indicating the weighted attribute evaluation of the committee.
Assignment 2
Attribute Description Score Weights Normalised
Question 1: Calculation Weight
Flexibility (f) = max 10 = 10/27.5 = 0.3636
A: Safety(s) = 0.5u 2.5 = 2.5/27.5 = 0.0909
Uptime(u) = 0.5s 5 = 5/27.5 = 0.1818
Speed(v) =u 5 = 5/27.5 = 0.1818
Rate of Return(r) = 2s 5 = 5/27.5 = 0.1818
Because with the 100% equity option the WACC = MARR = 8.5% this would Total =27.5 =1
not be an option for the company due to the expected return being lower than
the cost of capital. Question 3:
B: a.)

Or (gives same answer)

( )( )
( ( )

( )( ) ( )( )

Again due to the WACC = MARR = 8.8% being higher than the expected return
on Investment the investment would not be advised.

C:

If the option of “Do Nothing” Exists this would be the one to go for or
perhaps an alternative investment. However if one of the options had to be
selected, it would be Option A because the cost of equity is less than the cost of
borrowing, therefore it would be cheaper to finance the investment with Option
A. It would be advisable to have a look at the noneconomic attributes of the The calculations in the excel spreadsheet above indicate the ESL is 1 year at an
two options. In this case the company would own more of itself and perhaps annual worth of -R 108 000.00.

Lavagna, J Lavagna, J Lavagna, J Lavagna, J


Lavagna, J Lavagna, J Lavagna, J Lavagna, J

The theory calculations (to make the result easier to interpret are as follows for - 108 000.00= ( ) ( )( )
the first 3 years) . ( ) ∑( ( ) ( ) ( )
Note: the values differ slightly from the ones in the table due to the rounding ( ) ( ) ( ))
error introduced by the table look up values. - 108 000.00= (( ) ( )) ( ) ∑( )

( ) ( ) - 108 000.00= ( )

- 12748.5117 = ( )
( ) ∑( ( ))
P = 51830.3818
( ) ( ) Therefore the initial investment would be adjusted to R 51830.3818
which is R48 169.6182 less than the original initial investment.
( )∑( ( ) ( )) Approximately 48.16% lower!

( ) ( )

( )∑( ( ) ( )

( ))

Etc until year 6.

b.)

AW in year 1 = - 108 000.00

( ) ( )( )

( )∑( ( ) ( )
Question 4:
( ) ( )
a.)
( ) ( ))

Lavagna, J Lavagna, J Lavagna, J Lavagna, J


Lavagna, J Lavagna, J Lavagna, J Lavagna, J

Question 6:

I have included two solutions here, due to the poor wording of the question. To
obtain the answers posted on Ulink one would have to assume the cost are
R150/tonne and not R150 million per 1.8 million tonnes as is indicated in the
question. 6.1 indicates the solution that the lecturer expects. 6.2 however uses
the wording of the question on the actual question paper.

6.1 Calculations pertaining to Table 2 below which is the solution that the
lecturer expects.
Therefore a revenue of R 5 557.67 for 5000m3 will be required to break even.

b.) ( )
( )

( )

( ) ( )

Therefore a revenue of R 5 598.5417 per unit would be required for a profit of


R 500 000 at 8000m3.

Question 5:

Make AW:

( ) ( ) ∑

Table values were obtained from the relevant interest tables. For negative cash
( ) ( ) flows the P/F table value was obtained for 16% counting the number of years to
get to the present values. For positive cash flows the F/P value was obtained for
15% interest counting the number of years to get to the future value:

Therefore due to the lower cost in buying the carafae assembly on an annual
basis, Cuisinart Corporation should select the option of buying it at R 1.5m
compared to the option of making it at R1.721m. The Corporation will save
R 221 037.5

Lavagna, J Lavagna, J Lavagna, J Lavagna, J


Lavagna, J Lavagna, J

Lavagna, J Lavagna, J

6.2 Calculations pertaining to Table 3 below using the actual wording of the
question paper

( )

Table 2. Table displaying the calculations towards positive Future Worth and negative Present Worth Values

Table values Adjusted Cash Flows

Cash flow
Construction Revenue Total Per unit Fixed Remed. FV @ PV @
Year MTons for the +FW -PW
Costs Factor Revenues costs Costs Cost 15% 16%
year
2012 0 -266.67 -266.67 1 -266.67 ∑
2013 0 -266.67 -266.67 0.8621 -229.8962
2014 1.8 -266.67 -266.67 0.7432 -198.1891
2015 1.8 0 500 900 -270 -40 590 3.059 R 1 804.81
Table values were obtained from the relevant interest tables. For negative cash
2016 1.8 0 485 873 -278.1 -40 554.9 2.66 1476.034 flows the P/F table value was obtained for 16% counting the number of years to
2017 1.8 0 470.45 846.81 -286.443 -40 520.367 2.3131 1203.6609
2018 1.8 -700 456.3365 821.4057 -295.0362 -40 -213.6305 0.4104 -87.6739 get to the present values. For positive cash flows the F/P value was obtained for
2019 1.8 -700 442.6464 796.7635 -303.8873 -40 -247.1238 0.3538 -87.4324 15% interest counting the number of years to get to the future value:
2020 3.6 429.3670 1545.7212 -626.0080 -80 839.7132 1.5209 1277.1198
2021 5.4 416.4860 2249.0244 -967.1823 -80 1201.8420 1.3225 1589.4361
2022 5.4 403.9914 2181.5536 -996.1978 -80 1105.3558 1.15 1271.1592
2023 5.4 391.8716 2116.1070 -1026.083 -80 -90 920.0233 1 920.0233
9542.2434 -869.8617
The sum of the positive cash flows at FW: R 9 542.24 million

The sum of the negative cash flows at PW: R -869.86 million


Therefore: (∑ ) ( ( )
)

Thus the investment should be considered due to the EROR > MARR at 18%.

Lavagna, J Lavagna, J

Lavagna, J Lavagna, J
Lavagna, J Lavagna, J

Table 3. Table displaying the calculations towards positive Future Worth and negative Present Worth Values

Table values Adjusted Cash Flows

Construction Revenue Total Per unit Per unit Per unit Fixed Remed. Cash flow for FV @ PV @
Year MTons Costs Factor Revenues amount factor costs Costs Cost the year 15% 16% +FW -PW
2012 0 -266.67 -266.67 1 -266.67
2013 0 -266.67 -266.67 0.8621 -229.89620
2014 1.8 -266.67 -266.67 0.7432 -198.18914
2015 1.8 0 500 900 150 83.333333 -150 -40 710 3.059 2171.89
2016 1.8 0 485 873 154.5 85.833333 -154.5 -40 678.5 2.66 1804.81
2017 1.8 0 470.45 846.81 159.135 88.408333 -159.135 -40 647.675 2.3131 1498.137
2018 1.8 -700 456.3365 821.4057 163.90905 91.060583 -163.90905 -40 -82.50335 0.4104 -33.859374
2019 1.8 -700 442.646405 796.763529 168.826321 93.792400 -168.826322 -40 -112.062792 0.3538 -39.647815
2020 3.6 429.3670129 1545.721246 173.891111 96.606172 -347.782222 -80 1117.939024 1.5209 1700.273
2021 5.4 416.4860025 2249.024413 179.107844 99.504358 -537.323533 -80 1631.70088 1.3225 2157.924
2022 5.4 403.9914224 2181.553681 184.481079 102.48948 -553.443239 -80 1548.110441 1.15 1780.327
2023 5.4 391.8716797 2116.10707 190.015512 105.56417 -570.046537 -80 -90 1376.060534 1 1376.061

The sum of the positive cash flows at FW: R 12 489.42 million

The sum of the negative cash flows at PW: R -768.2654 million


Therefore: (∑ ) ( (
)
)

Thus the investment should be considered due to the EROR > MARR at 18%.

Lavagna, J Lavagna, J
32 Legoabe+KA
• 2014ASS2LEGOABEKA.pdf
Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA

Problem 1:

Option 1(100% equity)

a) PW = -250 000 + A (P/A, i, n)

= -250 000+15 000(P/A, 8.5%, 15)

= -250 000 + 15 000(8.3042)

= R-125437

Since PW˂0, it means that the 100% equity financing doesn’t agree with the required MARR

Therefore, it is not worthwhile to get money from the personal investment.


THE FACULTY OF ENGINEERING AND THE BUILT
ENVIRONMENT
Option 2 (D-E mix: 60-40%)

b) Loan present amount =250 000(60%)


ADVANCED ENGINEERING ECONOMICS = R150 000

ASSIGNMENT 2 Loan payment: 150 000(A/P, i, n)

GIE4058: ADVANCED ENGINEERING ECONOMICS = 150 000(A/P, 9%, 15)

= 150 000(0.1241)

Initials and Surname: K.A. Legoabe = R 18 615 per year

Cost for the borrowed 60% capital is at 9% per year for the loan
Student Number: 200571399
WACC = (equity fraction) (cost of equity capital) + (debt fraction) (cost of debt capital)
Lecture: L.S.J.Krüger
= (0.4) (8.5%) + (0.6) (9%)
Due Date: 26 May 2014
= 0.088

= 8.8%

But MARR = WACC

= 8.8%

Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA


Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA

Problem 2:
The Annual Net cash flow = Project NCF –loan payment amount
Allocate a score of 10 for the most important attribute
= 15 000-18 615 Therefore, the most important attribute is F
= R-3615 F = 10
Equity amount invested = 250 000- 150 000 S = 0.5 ×U
= R 100 000 = 0.5 × 5
PW at MARR of 8.8% on the basis of the committed equity capital = 2.5

U = ½ (F)
PW = -100 000- 3615(P/A, MARR, 15)
= ½ (10)
= -100 000- 3615 (8.1567)
=5
= -129486.47
But :
= R -129486.47
V= U=5
Therefore since PW˂0, the 60:40 D-E mix doesn’t meet the required MARR. R= 2×S
Therefore it is not worthwhile to get money from loan =2×2.5

=5
c) Therefore in conclusion both financing plans and options don’t make the project
economically attractive, but PW for the personal investment option is closer to zero,
Attributes Important score
thus making it the better option.
F 10
S 2.5
U 5
V 5
R 5
Sum 27.5

Weighting

Wi = Score
Total Score

S= 2.5
27.5

= 0.1

3 4

Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA


Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA

Problem 3:
U= 5
27.5
Year Salvage Value (R) AOC Per year (R)
= 0.18
1 85000 75000
2 72250 85000
F= 10 3 61412.5 95000
27.5 4 52200.625 105000
5 44370.53125 115000
= 0.36 6 37714.95156 125000

V= 5
27.5 AOC per year = (65+10×n) ×1000

= 0.18 Year 1:

AOC per year = (65+10×n) ×1000


R= 5
27.5 = (65+10×1) ×1000

= 0.18 =R 75 000
Year 2:
Therefore
AOC per year = (65+10×n) ×1000
∑ F+S+U+V+R = 0.36+0.1+0.18+0.18+0.18
= (65+10×2) ×1000
= 1.00
=R 85 000
Year 3:

AOC per year = (65+10×n) ×1000

= (65+10×3) ×1000

=R 95 000
Year 4:

AOC per year = (65+10×n) ×1000

= (65+10×4) ×1000

=R 105 000
Year 5:

AOC per year = (65+10×n) ×1000

= (65+10×5) ×1000

5 6

Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA


Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA

=R 115 000
Year 6: =R 44370.53

AOC per year = (65+10×n) ×1000 Year 6

= (65+10×6) ×1000 S = P×0.85n

=R 125 000 =100 000×0.856

The Salvage Value is given by: =R 37714.95

S = P×0.85n Annual Worth is given by:

Year 1 AW1 = -100 000 (A/P, 18%, 1) -75000 +85000(A/F, 18%, 1)

S = P×0.85n = -100 000(1.18) -75 000+85000(1)

=100 000×0.851 = R-108 000

=R 85 000 AW2 = -100 000 (A/P, 18%, 2) – ((75 000 +10 000(A/F, 18%, 2)) + 72250(A/F, 18%, 2)

Year 2 = -100 000(0.6387) – ( (75 000+10 000(0.4587)) +72250(0.4587)

S = P×0.85n = R-110315.9

=100 000×0.852 AW3 = -100 000 (A/P, 18%, 3) – ((75 000 +10 000(A/F, 18%, 3)) + 61412.5(A/F, 18%, 3)

=R72250 = -100 000(0.4599) – ((75 000+10 000(0.8902)) +61412.5(0.2799)

Year 3 = R-112702.6

S = P×0.85n
AW4 = -100 000 (A/P, 18%, 4) – ((75 000 +10 000(A/F, 18%,4)) + 52200.6(A/F, 18%,4)
=100 000×0.853
= -100 000(0.3717) – ((75 000+10 000(1.2947)) +52200.6(0.1917)
=R 61412.5
= R-115110.1
Year 4
AW5 = -100 000 (A/P, 18%, 5) – ((75 000 +10 000(A/F, 18%,5)) + 44370.5(A/F, 18%,5)
S = P×0.85n
= -100 000(0.3198) – ((75 000+10 000(1.6728)) +44370.5(0.1398)
=100 000×0.854
= R-117505
=R 52200.63
AW6 = -100 000 (A/P, 18%, 6) – ((75 000 +10 000(A/F, 18%, 6)) + 37714.95(A/F, 18%, 6)
Year 5
= -100 000(0.2859) – ((75 000+10 000(2.0252)) +37714.95 (0.1059)
S = P×0.85n
= R-119847.99
=100 000×0.855

7 8

Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA


Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA

(a) ESL is year 1 , AW = R-108 000 Problem 4:


(b) AW6= AW1 Total fixed costs= Administrative + (salaries +benefits)+equipment+ space
-P (A/P, 18%, 6) – ((75 000 +10 000(A/F, 18%, 6)) + 37714.95(A/F, 18%, 6) =-108 000 +computers

-P (0.2859) – ((75 000+10 000(2.0252)) +37714.95 (0.1059) =-108 000 = 30+ (20% of 350) +100+55+(1/3 of 100)

-0.2859P = -108 000 -3994.01+95252 =R288.33

Total Variable cost = material +labour + Indirect labour + subcontractors +Misc cost
Therefore P= R 58558.98
= 2500+200+2000+600+200
But the original first cost amount was 100 000, therefore: = R5500/m3
Preduced= P original –Pequivalent AW QBE = FC
r-v

=100 000- 58558.98


r-v = FC
QBE
Therefore Preduced = R41441.02
(a) Therefore r = (288.33/50000)+5500

r = R5500.01 per m3

(b) Total production = Current production + increase production

=5000 m3+3000 m3

= 8000 m3

Profit = R-TC

But: Profit = rQ-(FC+VQ)

500000= r (8000) – ((288.33+5500(8000))

Thus r = R5562.53/m3

9 10

Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA


Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA

Problem 5: Problem 6:

Indirect cost per department: Investment Value Units


Phase1 1.8 Mton
Department A = (allowed hours) (rate per hour, R)
Phase 2A 5.4 Mton
= (25000) (10) Phase2B 7.2 Mton
Production cost 150 per ton
= R250 000 Product Revenue 500 per ton
Revenues -3% per year
Department B = (allowed hours) (rate per hour, R) Costs 3% per year
Phase 1- Full
= (25000) (5)
capacity 3.6 million
Phase 2- Full
= R125 000
Capacity 5.4 million
Department C = (allowed hours) (rate per hour, R) Remediation cost 90 million
Inverstement rate® 15% per year
= (10000) (15) Borowing rate (k) 16% per year
Periods 11 Years
= R150 000

Total indirect cost for all departments = 250 000+ 125000+150000


Net cash flow for each year.
= R 525 000
CF= - Investment spent in that year + Production Revenue – Product Cost – Fixed Cost.
AOC = (Direct labour cost, R)+( Material costs, R)+ ( Total Indirect costs)
Fixed
= 500 000+300 000+525 000 Investment Revenues Cost Costs Production CF FV@r PV @k FW+ PW-
0 0 0.0000 0 0 0.0000
= R 1325000 -
-266.7 -266.6600 4.6524 1.0000 266.6600
The make alternative annual worth: -
-266.7 -266.6600 4.0456 0.8621 229.8876
AWmake = -P (A/P, i, n) +S (A/F, i, n) -AOC -
-266.7 -266.6600 3.5179 0.7432 198.1817
= -2000000(A/P, 15%, 10) +50 000(A/F, 15%, 10) 500.000 -40.000 150.0000 626.4000 626.4000 3.0590 0.6407 1916.1576
485.000 -40.000 154.5000 591.3000 591.3000 2.6600 0.5523 1572.8580
= - 2000000 (0.19925) +50000(0.04925) -1325000 470.450 -40.000 159.1400 556.7580 556.7580 2.3131 0.4761 1287.8369
-700 456.330 -40.000 163.9100 520.9560 -179.0440 2.0114 0.4104 -73.4797
= R-172 1037.5
-700 442.640 -40.000 168.8300 487.4580 -212.5420 1.7490 0.3538 -75.1974
The carafe’s current AW 429.370 -80.000 173.8900 1375.9920 1375.9920 1.5209 0.3050 2092.7462
416.490 -80.000 179.1100 1703.7360 1703.7360 1.3225 0.2630 2253.1909
AWbuy = R1.5m 403.990 -80.000 184.4800 1575.0720 1575.0720 1.1500 0.2267 1811.3328
-90 391.870 -80.000 190.0100 1447.9920 1357.9920 1.0000 0.1954 265.3516
-
The best alternative is to buy, due to the reason that AW cost to buy is less than that to
9501.0530 855.2560
make.

11 12

Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA


Legoabe, KA Legoabe, KA

ERR={(Fw+/-Pw-)^1/n} -1

ERR is 24.49%

13

Legoabe, KA Legoabe, KA
33 Lentsoane+MA
• 2014Ass2Lentsoane+MA.pdf.PDF
Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA

QUESTION 2
Assignment No 2 2014/05/26
No. Attributes Score Normanisation of Score
QUESTION 1 1 Flexibility (f) 10 = 10/27.5 0.363636364
2 Safety (s) 2.5 = 2.5/27.5 0.090909091
Borrow or not Borrow 3 Uptime (u) 5 = 5/27.5 0.181818182
a) 4 Speed (s) 5 = 5/27.5 0.181818182
5 Rate of Return (r ) 5 = 5/27.5 0.181818182
P = R -250000 Total Score = 27.5 SUM =
MARR= = 85% 1

Calculating PW for the 100% equity financing QUESTION 3

PW = P + A(P/A, MARR,15) Economic Service Life (ESL)


= -250000+15000*8.3042
= R -125437 a) ESL is the year at which the smallest total Annual Worth (AW) is recorded.
It is not worthwhile to get money from the personal investment as the project returns below MARR. Total AW = Capital Recovery (CR) - AW of Annual Operating Cost (AOC)
= CR - AW of AOC
b)
Capital Recovery (CR)
P = 250000
R
WACC = 0.6 x 9% + 0.4*8.5% Calculating the AW of the Initial Investment (P)
MARR = 8.8% P = R100 000
Calculating PW for the 60% loan financing The machine is useful for 6 years.
MARR = 18%
Loan Value = 250 000 *0.6
= R 150 000.00 Yr Initial Investment A/P (1;n;MARR) A/P (Initial Investment ) ( R)
0 -100000 0 0
Calculating loan repayments 1 1.18 -118000
AW = P(A/P, MARR,15) 2 0.6387 -63870
= 150000*0.1241 3 0.4599 -45990
= R 18615 4 0.3717 -37170
5 0.3198 -31980
The total cash flow per annum = 15000 -18615 6 0.2859 -28590
=R -3615
Calculating the AW of the Market Value (MV)
40% Equity Financing250000
= * 0.4 Salvage (S) = P x 0.85^n
= R 100000 P = R 100 000

Calculating PW for the 40% equity financing n S (R ) A/F (1;n;MARR) A/F (MV) ( R)
0
PW = P + A(P/A, MARR,15) 1 85 000 1 85 000
= -100000+(-3615)(8.1567) 2 72 250 0.4587 33 141
= R -129486.4705 3 61 413 0.2799 17 189
It is also not worthwhile to get money from the loan. 4 52 201 0.1917 10 007
5 44 371 0.1398 6 203
c) There is no better option. 6 37 715 0.1059 3 994

Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA


Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA

Calculating the Total Recovery Cost b) n=6


AW (ESL) =R -108 004 = CR - AW of AOC
n Initial Investment (R ) MV (R ) A/P (Initial Investment ) (R ) A/F (MV) (R ) CR (R ) = A/P (Initial Investment ) + A/F (MV) - AW/TPW (AOC)
0 -100000 = 0.2859*P + 0.1059*0.85^6 *P - 95248.1568
1 85 000 -118000 85 000 -33 000 -12 755.5932 = 0.32584*P
2 72 250 -63870 33 141 -30 729 P= R -39146.79966
3 61 413 -45990 17 189 -28 801
4 52 201 -37170 10 007 -27 163 QUESTION 4
5 44 371 -31980 6 203 -25 777
6 37 715 -28590 3 994 -24 596 Fixed Cost, R'000 Variable Cost, R/Unit
Administrative 30 Material 2500
Calculating the AW of the Annual Operating Cost Salaries and Benefits 70 Labour 200
Equipment 100 Indirect Labour 2000
n AOC (R ) P/F (1;n;MARR) P/F(AOC) (R ) TPW (AOC) (R ) Space 55 Subcontractor 600
0 Computers 33.33333333 Misc Cost 200
1 -75000 0.8475 -63562.5 -63562.5 Total Fixed Cost = 288.3333333 Total Variable Cost = 5500
2 -85000 0.7182 -61047 -124609.5
3 -95000 0.6086 -57817 -182426.5
4 -105000 0.5158 -54159 -236585.5 a) Calculating minimum revenue per unit @ production volume of 5000m3/year
5 -115000 0.4371 -50266.5 -286852
6 -125000 0.3704 -46300 -333152 Q(BE) = FC
(r - v)
Calculating the AW of TPW r= FC + Q(BE) x v
Q(BE)
n TPW (AOC) (R ) AW/TPW(1;n;MARR) AW/TPW (AOC) (R ) = 288333 + (5000 x 5500)
0 5000
1 -63562.5 1.18 -75003.75 = R 5557.666667
2 -124609.5 0.6387 -79588.08765
3 -182426.5 0.4599 -83897.94735 b) Profit = R500 000
4 -236585.5 0.3717 -87938.83035
5 -286852 0.3198 -91735.2696 Profit = Revenue - Cost
6 -333152 0.2859 -95248.1568 = rQ - (FC + vQ)
r = Profit + FC + vQ
Calculating Economic Service Life (ESL) Q
= 500 000 + 288333 + 5500*8000
n CR (R ) AW/TPW (AOC)(R ) Total AW(R ) 8000
0 = R 5598.541667
1 -33 000 -75003.75 -108003.75
2 -30 729 -79588.08765 -110317.0127
3 -28 801 -83897.94735 -112 699
4 -27 163 -87938.83035 -115 102
5 -25 777 -91735.2696 -117 512
6 -24 596 -95248.1568 -119 844

Economic Service Life (ESL) = 1


AW (ESL) = R -108 004

Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA


Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA

QUESTION 5 QUESTIONAluminiam
6 Refinery Project (Expandable)

Purchase Price = - R1.5m PHASE 1 Given information:


Capacity 1.8Mt Investment Value Units
Indirect Costs Initial Cost R 800 000 000 Phase I (PCap) 1,4 Mega ton
Department Basis Hours Rate/h Allocated Hours Material Cost (R ) Direct Labour Cost (R ) Years = 3
A Labour 10 25 000 200 000 200 000
B Machine 5 25 000 50 000 200 000 For Evenly distributed R800m over a three years period, R800/3 is the money spent each year.
C Labour 15 10 000 50 000 100 000 Note: Money below is in R"000 000"
300 000 500 000 Profit =
Revenue + Cost
First Cost = R 2 000 000 where Cost = Fixed
Salvage = R 50 000 Cost + Variable Total Cash Flow =
Years (n) = 10 Year Investment Fixed Cost Capacity (Mt) Cost Investment + Profit PV at 16%FV at 15% FW PW
MARR = 15% 2012 -R 266.67 R 0.00 R 0.00 -R 266.67 R 1.00 4.6524 -R 266.67
2013 -R 266.67 R 0.00 R 0.00 -R 266.67 0.8621 4.0456 -R 229.89
Calculating Indirect Cost 2014 -R 266.67 R 0.00 R 0.00 -R 266.67 0.7432 3.5179 -R 198.19
2015 R 40.00 1.8 R 590.00 R 590.00 0.6407 3.059 R 1 804.81
Department A - Labour Cost = Rate/h x Number of hours 2016 R 40.00 1.8 R 554.90 R 554.90 0.5523 2.66 R 1 476.03
= 10 x 25 000 2017 R 40.00 1.8 R 520.37 R 520.37 0.4761 2.3131 R 1 203.66
= R 250000 2018 -R 700.00 R 40.00 1.8 R 486.37 -R 213.63 0.4104 2.0114 -R 87.67
2019 -R 700.00 R 40.00 1.8 R 452.88 -R 247.12 0.3538 1.749 -R 87.43
Department A - Machine Cost Rate/h x Number of hours 2020 R 80.00 3.6 R 839.71 R 839.71 0.305 1.5209 R 1 277.12
= 5 x 25 000 2021 R 80.00 5.4 R 1 201.84 R 1 201.84 0.263 1.3225 R 1 589.44
= R 125000 2022 R 80.00 5.4 R 1 105.36 R 1 105.36 0.2267 1.15 R 1 271.16
2023 -R 90.00 R 80.00 5.4 R 1 010.02 R 920.02 0.1954 1 R 179.77
Department A - Labour Cost Rate/h x Number of hours SUM 8622.2201 -690.0807943
= 15 x 10 000
= R 150000 FW/-PW = 12.494508
ERR (%) = (((FW/-PW )^1/N) -25.81%
1)*100
Total Indirect Cost for make= R 525000

Calculating Total Annual Cost

Total Annual Operating Cost = Direct Labour Cost + Direct Material Cost + Inderect Cost
= 500 000 + 300 000 + 525 000
= R 1 325 000

Annual Cost to make = - P (A/P; 15%;10) + S (A/F;15%; 10) - AOC


= - 2 000 000 (0.2472) + 50 000 (0.0493) -1 550 000
= R -1721135

The price to purchase is currently, - R1,5 000 000

Due to the Make Price being higher than the current purchase price, it is then cheaper to parchase than to make.

Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA


34 Lubisi+SM
• 2014Ass2Lubisi+S.M.pdf
Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM

Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM


Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM

Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM


Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM

Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM


Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM

Lubisi, SM Lubisi, SM Lubisi, SM Lubisi, SM


35 Madede+BK
• 2014Ass2Madede+BK.pdf
Madede, BK Madede, BK Madede, BK Madede, BK

Advanced engineering economics Name: BK Madede Problem 2

Assignment 2 St No.: 200624832 Ratings by attractive with 100 for most important

Logic: F = 100

Problem 1 1 1
U= F =  100 = 50
2 2
a. 100% of equity financing
S = 0.5  50 = 25
MARR is 8.5%
R = 2S = 2  25 = 50
PW = -250 000 + 15 000 (P/A, 8.5%, 15)
Attribute Importance Scores:
PW = -250 000 + 15 000 (8.3042)
F 100
PW = $ -125 437 S 25
U 50
 PW < 0, 100% percent finance does not meet the MARR requirement.
V 50
R 50
Total 275
b. With 60:40 Normalized weights, W = Score
275
Loan Principal = 250 000  0.6 = 150 000
F 0.36
Loan payment = 150 000 (A/P, 9%, 15) S 0.10
U 0.18
 Loan payment = 150 000 (0.1241) = $ 18615 per year V 0.18
R 0.18
At WACC = 0.4  8.5% + 0.6  9% = 8.8% Total 1.00

Annual Net Cash Flow = Project NCF – loan payment

= 15 000 – 18615

 Annual NCF = $ -3615

Borrowing is not a good idea.

c. Amount of equity invested = 250 000 – 150 000 = $ 100 000

PW = -100 000 + (-3615) (P/A, 8.8%, 15)

PW = -100 000 + (-3615) (8.1567)

 PW = $-129 486.47

 PW < 0, 60:40 does not meet MARR requirement. In both financial plans, the project is not
economically viable.

1 2

Madede, BK Madede, BK Madede, BK Madede, BK


Madede, BK Madede, BK Madede, BK Madede, BK

Problem 3 Problem 4

S = P  0.85 n
Fixed cost, R’000 Fixed cost, R’000 Variable cost, R/Unit
Administrative 30 30 Materials 2500
a. For n = 1, Salaries and benefits: 20% of 350 70 Labour 200
Equipment 100 Indirect labour 2000
AW1 = -100 000 (A/P, 18%, 1) – 75 000 + 100 000 (0.85)2  (A/F, 18%, 1) 100
Space, etc. 55 Sub-contractors 600
AW1 = $-108 000 55
Computers : 0.33 of 33.33 Misc. cost 200
And for n = 2,
100
AW2 = -100 000 (A/P, 18%, 1) – 75 000 – 100 000 (A/G, 18%, 2) + 100 000(0.85)2  (A/F, 18%, 2) Total R288,33
R5500/Unit
AW2 = $-110 316
a. Profit = (r – v)Q – FC
ESL in 1 year with AW1 is $-108 000 0 = (r-5500)  5000 – 288 330
288330
 (r – 5500) =
5000
b. Where n = 6 288330
r =  5500  R5557.67/u nit
5000
AW6 = -108 000 = -P(A/P, 18%, 6) – 75 000 – 100 000(A/G, 18%, 6) + P  (0.37715)(0.10591)

0.24597P = -95 252 + 108 000


b. Profit = (r – v)Q – FC
P = $51828 500 000 = (r – 5500) (8000) – 288 330
500000  288330
r =  5500  5598/unit
8000

3 4

Madede, BK Madede, BK Madede, BK Madede, BK


Madede, BK Madede, BK Madede, BK Madede, BK

Problem 5 Problem 6

Dept. Rate/h Allocated hrs Dept. cost Material cost Direct labour 800
A 10 25 000 250 000 200 000 200 000 Annual Investment =  266.67
3
B 5 250 000 125 000 50 000 200 000
C 15 10 000 150 000 50 000 100 000 annual Capacity
Total 525 000 300 000 500 000 Investment (Rm)
investment (Mt)
AOC = 525 000 + 300 000 + 500 000
Phase 1 (2012 - 2014) 800 266.67 1.8
 AOC = R1 325 000 Phase 2 (2018 -2019) 1400 700 3.6 to 5.4
Remediation Cost 90 0
AWmake  -P (A/P, i, n) + S (A/F, i, n) – AOC Production Cost
Production Revenue 500
= -2 000 000 (A/P, 15%, 10) + 50 000(A/P, 15%, 10) – 1 325 000 annual decrease 3%
= -2 000 000(0.1993) + 50 000(0.1993) – 1 325 000 Unit cost 150
Annual increase 3%
= -356 000 + 8900 – 1 325 000

 AWmake = -1 672 100 Revenue per ton = Initial revenue/ton – (annual percentage decrease  annual revenue/ton)

It is therefore cheaper to make Carafes because AW of costs is less. Unit cost/ton = initial unit cost + (annual percentage increase  annual unit cost/ton)

Unit Fixed
Years n investment Capacity Revenue/ton
Cost/ton Cost
2012 1 266.667
2013 2 266.667
2014 3 266.667
2015 4 1.8 500.000 150.000 40
2016 5 1.8 485.000 154.500 40
2017 6 1.8 470.450 159.135 40
2018 7 700 1.8 456.337 163.909 40
2019 8 700 1.8 442.646 168.826 40
2020 9 3.6 429.367 173.891 80
2021 10 5.4 416.486 179.108 80
2022 11 5.4 403.991 184.481 80
2023 12 90 5.4 391.872 190.016 80

Total revenue = Capacity  Revenue per ton

Total cost = Fixed cost + (Unit cost/ton  Capacity)

Cash flow = Total revenue – Total cost –Investment

5 6

Madede, BK Madede, BK Madede, BK Madede, BK


Madede, BK Madede, BK

1
 FWT ( NCF  )  N
ERR    
 1
  PWT ( NCF ) 

F/P,15% P/F,16%
Total Total Cash
n factor FW (+) n factor PW (-)
Revenue Cost Flow
-266.667 11 0 1 -266.667
-266.667 10 1 0.862 -229.893
-266.667 9 2 0.743 -198.187
900.00 310.000 590.000 8 3.059 1804.810 3
873.000 318.100 554.900 7 2.660 1476.034 4
846.810 326.443 520.367 6 2.313 1203.661 5
821.406 335.036 -213.631 5 6 0.410 -87.674
796.764 343.887 -247.124 4 7 0.354 -87.432
1545.721 706.008 839.713 3 1.521 1277.120 8
2249.024 1047.182 1201.842 2 1.323 1589.436 9
2181.554 1076.198 1105.356 1 1.150 1271.159 10
2116.107 1106.084 920.023 0 1.000 920.023 11
9542.243431 -869.8531
FW(+)/-PW(-) 10.9699
ERR 24.327%

 ERR  25%

Madede, BK Madede, BK
36 Magae+TO
• 2014Ass2Magae+TO.pdf
Magae, TO Magae, TO Magae, TO Magae, TO

Magae, TO Magae, TO Magae, TO Magae, TO


Magae, TO Magae, TO Magae, TO Magae, TO

Magae, TO Magae, TO Magae, TO Magae, TO


Magae, TO Magae, TO Magae, TO Magae, TO

Magae, TO Magae, TO Magae, TO Magae, TO


Magae, TO Magae, TO Magae, TO Magae, TO

Magae, TO Magae, TO Magae, TO Magae, TO


37 Maharaj+RR
• 2014Ass2Maharaj+RR.pdf
Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR

Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR


Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR

Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR


Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR

Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR


Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR

Maharaj, RR Maharaj, RR Maharaj, RR Maharaj, RR


Maharaj, RR Maharaj, RR

Maharaj, RR Maharaj, RR
38 Makabate+CT
• 2014Ass2MakabateCT.pdf
Makabate, CT Makabate, CT Makabate, CT Makabate, CT

CHOEU TSHEPISHO MAKABATE PROBLEM 1


SOLUTION
200802025
MPHIL: ENGINEERING MANAGAMENT A) PW= -250 000 + 15 000 (P/A, 8.5%, 15)
= -250 000 + 15 000 (0, 3042)
ADVANCED ENGINEERING MANAGAMENT = -250 000 + 124563
= -R 125437
DUE DATE: 26 MAY 2014
LOAN AMOUNT = R 250 000 (60%)
2014Ass2MakabateCT.pdf
= R 150 000
LOAN PAYMENT = R 150 000 (A/P, 9%, 15)
= R 150 000 (0, 1241)
= R 18615 PER YEAR
WACC = 40 %( 8, 5%) + 60 %( 9%)
= 0, 4 (8, 5%) + 0, 6 (9%)
= 0, 034 + 0, 054
= 0, 088
= 8, 8%

B) ANNUAL NCF = PAYMENT – LOAN AMOUNT


= R 15 000 – R 18615
= -R 3615

PW= -R 100 000 + 3615 (P/A, 8, 8%, 15)


= -R 100 000 + (- 3615) (8, 1567)
= -R 100 000 – 29486, 4705
= -R 129486, 4705

C) I would recommend taking money from his own pocket as to taking a loan.

1 2

Makabate, CT Makabate, CT Makabate, CT Makabate, CT


Makabate, CT Makabate, CT Makabate, CT Makabate, CT

PROBLEM 2 PROBLEM 3
SOLUTION SOLUTION
A) AW1 = -100 000 (A/P,18%,1) -75000+37714,9515 (A/F,18%,1)
= -R 155285, 0485
Flexibility = 10
Safety = 5/2 = 2, 5 AW2 = - 100 000 (A/P, 18%, 2) -75000 (P/A, 18%, 2) (A/P, 18%, 2) -85000
(P/F, 18%, 2)(A/P, 18%, 2)
Uptime = 10/2 = 5 = -R 528773, 8729
Speed = same importance as uptime = 5
AW3 = - 100 000 (A/P, 18%, 3) -75000 (P/A, 18%, 3) (A/P, 18%, 3) -95000
Rate of return = 2* 2, 5 = 5 (P/F, 18%, 3) (A/P, 18%, 3)
= -R 147577, 081

AW4 = - 100 000 (A/P, 18%, 4) -75000 (P/A, 18%, 4) (A/P, 18%, 4) -105000
(P/F, 18%, 4) (A/P, 18%, 4)
ATTRIBUTE SCORE WEIGHT = -R 132411, 2485
FLEXIBILITY 10 0, 37

SAFETY 2, 5 0, 09
AW5 = -100 000 (A/P, 18%, 5) -75000 (P/A, 18%, 5) (A/P, 18%, 5) – 115000
UPTIME 5 0, 18 (P/F, 18%, 5) (A/P, 18%, 5)
= -R 123061, 1187
SPEED 5 0, 18

RATE OF RETURN 5 0, 18 AW6 = -100 000 (A/P, 18%, 6) -75000 (P/A, 18%, 6) (A/P, 18%, 6) – 125000
(P/F, 18%, 6) (A/P, 18%, 6)
27, 5 1 = -R 149885, 6137

Economic Service Life is year 5


WEIGHTING W1 = SCORE/ TOTAL Annual worth is (-R 123061, 1187)

B) EAC =i (NPV)/1 – (1 + i) –n
= i (100 000) / 1 – (1 + 0, 18) -6
= 0, 18 (100 000) / 1- (1, 18) -6
= 18 000 / 1 – 0, 3704
= R 26102, 0881
The first cost would have to be reduced by R 26102, 0881

3 4

Makabate, CT Makabate, CT Makabate, CT Makabate, CT


Makabate, CT Makabate, CT Makabate, CT Makabate, CT

PROBLEM 4 PROBLEM 5
SOLUTION SOLUTION
A) QBE = FC/ R-V
= 635 000/ R- 5500 DEPARTMENT A = 25000 (10)
= 250 000
R+ 5500= 635 000
R = 635 000/5500 DEPARTMENT B = 25000 (5)
= 125 000
R = 115, 4545
DEPARTMENT C = 10000 (15)
= 150 000
B) Profit Goal = R 500 000
Production volume = 5000m + 3000m AOC = -P (A/P, I, n) + S (A/F, I, n) – AOC
= 200 000 (A/P, 15%, 10) + 50 000 (A/F, 15%, 10) – 525 000
rQ – (FC + VQ) = 500 000 = 200 000 (0, 1993) + 50000 (0, 0493) – 525 000
r (8000) – (635 000 + 115, 4545(8000) = 500 000 = 398 600 + 2465 – 525 000
r (8000) – (635 000 + 923636) = 500 000 = - 123935
r (8000) = 500 000 + 635 000 – 923636
r (8000) = 211364
r (8000) / 8000 = 211364 / 8000 The Annual cost is –R 1500 000 (AW)
r = 26, 4205
Therefore…it is cheaper to make, as the annual cost is less.

5 6

Makabate, CT Makabate, CT Makabate, CT Makabate, CT


Makabate, CT Makabate, CT

PROBLEM 6
SOLUTION

PW0 = - 800 - 90 (P/F, 16%, 3)


= - 800 –90 (0, 6407)
= - 800 – 57, 663
= - 857, 663

FW0 = 485 (F/A, 15%, 2) (F/P, 15%, 8) + 485 (F/A, 15%, 7)


= 485 (2, 1000) (3, 0590) + 485 (11, 0668)
= 3115, 5915 + 5367, 398
= 8482, 9895

PW0 (F/P, I, 3) + FW3 = 0


-857, 663 (1 + I) + 8482, 9896 = 0
I = 8482, 9895/ 857, 663 1/n – 1
I = 8482, 9895/ 857, 663 1/3 -1
I = 1, 9887
I = 19, 88%

Therefor the required rate of return is 19, 88% as it is better than the MARR of 18%.

Makabate, CT Makabate, CT
39 Makgale+NS
• 2014Ass2Makgale-NS.pdf
Makgale, NS Makgale, NS Makgale, NS Makgale, NS

Problem 1 Problem 2
a) Personal investment Member Member Member Member Norm.
1 2 3 4 Sum Average weight
MARR = 8.5% Fexibility
[f] 4.5 6 8 9 27.5 6.875 0.16
PW = -250 000 + 15 000(P/A, 8.5%, 15) safety [s] 3.375 4.5 6 6.75 20.625 5.15625 0.12
Uptime
= -250 000 + 15 000(8.3042) [u] 6.75 9 12 13.5 41.25 10.3125 0.24
Speed
[v] 6.75 9 12 13.5 41.25 10.3125 0.24
= R-125 437 Rate of
Return
b) 60% -40% financing [r] 6.75 9 12 13.5 41.25 10.3125 0.24
171.875 42.96875 1
Loan principal = 250 000(0.60) = R150 000

Loan payment = 150 000(A/P, 9%) = 150 000(0.1241)


Problem 3
= R18 615 per year
a)
WACC = 0.4(8.5) + 0.6(9%)
Year First Cost Capital Rec AOC PW (AOC) A/P (PWT) Salvage Total AW
= 8.8% 0 100000 0.0000 0.0000 0.000 0.000 0.000
1 118000 75000 63562.500 75003.750 193003.750
MARR = 8.8%
2 63870 85000 124609.500 79588.088 143458.088

Annual NCF = project NCF – loan payment 3 45990 95000 182426.500 83897.947 129887.947
4 37170 105000 236585.500 87938.830 125108.830
= 15 000 – 18 618 = -R3 618 5 31980 115000 286852.000 91735.270 123715.270
6 28590 125000 333152.000 95248.157 37714.952 161553.108
Amount of equity invested = 250 000 – 150 000 = R100 000

PW = -100 000 + (-3618)(P/A, 8.8%, 15) ESL is at year 5

= -100 000 – 3618(8.1567)


b)
= R-126 510.94
Year First Cost Capital Rec AOC PW (AOC) A/P (PWT) Salvage Total AW
c) Since PW<0, both financing methods do not meet MARR requirements. Both methods are not 0 75000 0.0000 0.0000 0.000 0.000 0.000
recommended. 1 88500 75000 63562.500 75003.750 163503.750
2 47902.5 85000 124609.500 79588.088 127490.588
3 34492.5 95000 182426.500 83897.947 118390.447
4 27877.5 105000 236585.500 87938.830 115816.330
5 23985 115000 286852.000 91735.270 115720.270
6 21442.5 125000 333152.000 95248.157 28286.214 144976.870

ESL is at year 5

Even when first cost is reduced to R75 000, the ESL remain in year 5.

Makgale, NS Makgale, NS Makgale, NS Makgale, NS


Makgale, NS Makgale, NS Makgale, NS Makgale, NS

Problem 4 AOC = 525 000 + 300 000 + 500 000

a) = R1 325 000

Profit = Revenue – Total Costs (TC) Buying

TC = Fixed Costs (FC) + Variable Costs (VC) AW = R-1 500 000

Profit = Revenue – (FC + VC) Making

FC = 30 + 70 + 100 + 55 + 33.33 AW = -P(A/P,15%,10) + S(A/F,15%,10) – AOC

= R 288.33 X 103 = -2 000 000(0.1993) + 50 000(0.0493) – 1 325 000

VC = 2500 + 200 + 2000 + 600 + 200 = R-1 721 135

= 5500 R/Unit X 5000 m2 It is cheaper to purchase based on the AW calculations.

= R 27.5 X 106

Breakeven profit = 0 Problem 6


Profit = Revenue – (FC + VC)

0 = Revenue – 27788330
FV @ r PV @ k FW+ @ r PW- @ k

Revenue = R 27.79 x 106 Unit Unit Prod. Prod. Total F/P (1; P/F
n year Investment Revenue Cost Fix. Cost Rev Cost cost Income NCF n;15%) (1;n;16%)
b) 0 2012 -266.667 -266.667 -266.667

1 2013 -266.667 -266.667 -231.894


Profit = R500 000
2 2014 -266.667 -266.667 -201.627

Production volume = 8 000 m2 3 2015 500.000 150.000 40 900.000 270.000 310.000 590.000 590.000 1804.810

4 2016 485.000 154.500 40 873.000 278.100 318.100 554.900 554.900 1476.034


500 000 = revenue – 44 288 330 5 2017 470.450 159.135 40 846.810 286.443 326.443 520.367 520.367 1203.661

6 2018 -700 456.337 163.909 40 821.406 295.036 335.036 486.370 -213.631 -92.352
Revenue = R44 788 330
7 2019 -700 442.646 168.826 40 796.764 303.887 343.887 452.877 -247.123 -92.894

Per Unit Revenue = 44788330/8000 8 2020 429.367 173.891 80 1545.721 626.008 706.008 839.714 839.714 1277.120

9 2021 416.486 179.108 80 2249.024 967.182 1047.182 1201.842 1201.842 1589.436


= R5598.54 (R/Unit)
10 2022 403.991 184.481 80 2181.551 996.197 1076.197 1105.354 1105.354 1271.157

11 2023 -90 391.872 190.016 80 2116.107 1026.084 1106.084 1010.023 920.023 920.023

Sum 9542.242 -885.434

Problem 5
FW+ / -
PW- = 10.77691
Department A: 25 000(10) = R250 000
ERR = 0.241261
Department B: 25 000(5) = R125 000
24.13%

Department C: 10 000(15) = R150 000

Total indirect costs = A+B+C = R525 000 i’ > MARR of 18%, therefore the phase investment should be considered using EROR approach.

Makgale, NS Makgale, NS Makgale, NS Makgale, NS


40 Makhafola+MR
• 2014Ass2Makhafola+Maye.pdf
Makhafola, MR Makhafola, MR Makhafola, MR Makhafola, MR

ANSWER 1 c) Both financing options should be rejected; they are not economically attractive because
their PW is less than zero.
NCF: R15, 000
ANSWER 2
a) Personal Investment – 100% Equity
Attribute Logic Score Wi
PW = - 250, 000 + 15, 000(P/A, 8.5%, 15) 1. Flexibility (f) 7 7 0.3636
2. Uptime (u) ½ (f) 3.5 0.1818
= - 250, 000 + 15, 000(8.3042) 3. Safety (s) 50%(u) 1.75 0.0909
4. Speed (s) s=u 3.5 0.1818
= - R125, 437
5. Rate of Return (r) 2(s) 3.5 0.1818
Conclusion: PW <, 100% equity doesn’t meet the MARR requirement, therefore it is not 19.25 1
worthwhile. ANSWER 3

b) 60% Loan – 40% Equity a) AW 1 = -100, 000(A/P, 18%, 1) – 75, 000 + 100, 000(0.85)¹ (A/F, 18%, 1)
Principal Loan = R250, 000(0.6) AW 1 = -100, 000(1.18) – 75, 000 + 100, 000(0.85) (1.0)
= R150, 000 AW 1 = - R108, 000

AW 2 = -100, 000(A/P, 18%, 2) – 75, 000 – 100, 000(A/G, 18%, 2)


Loan Payment = 150, 000(P/A, 9%, 15)
+ 100, 000(0.85)² (A/F, 18%, 2)
= 150, 000(0.1241)
AW 2 = -R110, 316
= R18, 615
AW 3 = -R112, 703

AW 4 = -R115, 703
WACC = 0.4(85%) + 0.6(9%)
AW 5 = -R117, 505
= 8.8%
AW 6 = -R119, 848

The ESL for the machine is one year at AW of - R108, 000


Annual NCF = Project NCF – loan repayment

= 15, 000 - 18, 615 b) If AW 6 = - R108, 000, then

= -R3, 615 108,000 = -P(A/P,18%,6) – 75,000 - 10,000(A/G,18%,6)

+ P(0.85)6(A/F,18%,6)

Equity invested = 250, 000 – 150, 000 -108,000 = -P(0.28591) – 75,000 – 10,000(2.0252) + P(0.37715)(0.10591)

= R100, 000 0.24597P = -95,252 + 108,000

P = R51, 828
PW@MARR based on committed equity capital

PW = -100, 000 – 3, 615(P/A, 8.8%, 15)


ANSWER 4
= -100, 000 – 3, 615(8, 1567)
a) Profit = (r-v)Q – FC
= -R129, 486
0 = (r – 5,500)5,000 – 288, 333
Conclusion: PW < 0, 100% equity is not worthwhile investment ‘cos it doesn’t meet MARR
requirements (r – 5,500) = 288, 333 / 5,000

b) 60% Loan and 40% Equity mix doesn’t meet the MARR requirement, therefore it is r =57.6666 + 5, 500
not worthwhile.
r = R5. 557 per unit
Makhafola, MR Makhafola, MR Makhafola, MR Makhafola, MR
Makhafola, MR Makhafola, MR

b) Profit = (r-v)Q – FC Makhafola, MR Makhafola, MR

500, 000 = (r – 5,500)8, 000 -288, 333


(r – 5,500) = (500, 000 + 288, 333) / 8, 000
r = R5, 598 per unit

ANSWER 5

Total Hours Material Cost Direct Labour


Dept. A Labour 250, 000 200, 000 200, 000
Dept. B Machine 125, 000 50, 000 200, 000
Dept. C Labour 150, 000 50, 000 100, 000
525, 000 300, 000 500,000

AOC = 525, 000 + 300, 000 + 500,000

= 1, 325, 000 ANSWER 6

AW (make) = P(A/P, 15%, 10) + S(A/F15%, 10) –AOC F/P,15% P/F,16%

Unit
AW (make) = -2, 000, 000(0.1993) + 50, 000(0.0493) Annual Revenue Fixed Total Total Cash
Year Capacity Cost per n factor FW (+) n factor PW (-)
investment per ton Cost Revenue Cost Flow
Ton

AW (make) = -R1, 721, 135 -


2012 266.667 -266.667 11 0 1 266.667
It costs R1, 721, 135 to make which is more than R1, 500, 000 if we buy. -
2013 266.667 -266.667 10 1 0.862 229.893
-
2014 266.667 -266.667 9 2 0.743 198.187
2015 1.8 500.000 150.000 40 900.000 310.000 590.000 8 3.059 1804.810 3
2016 1.8 485.000 154.500 40 873.000 318.100 554.900 7 2.660 1476.034 4
2017 1.8 470.450 159.135 40 846.810 326.443 520.367 6 2.313 1203.661 5
2018 700 1.8 456.337 163.909 40 821.406 335.036 -213.631 5 6 0.410 -87.674
2019 700 1.8 442.646 168.826 40 796.764 343.887 -247.124 4 7 0.354 -87.432
2020 3.6 429.367 173.891 80 1545.721 706.008 839.713 3 1.521 1277.120 8
2021 5.4 416.486 179.108 80 2249.024 1047.182 1201.842 2 1.323 1589.436 9
2022 5.4 403.991 184.481 80 2181.554 1076.198 1105.356 1 1.150 1271.159 10
2023 90 5.4 391.872 190.016 80 2116.107 1106.084 920.023 0 1.000 920.023 11
9542.2434 -869.8531

FW(+)/-PW(-) 10.9699
ERR 24.327%

Conclusion:
The project may be considered because the ERR of 24.327% is more than the MARR of 18%

Makhafola, MR Makhafola, MR

Makhafola, MR Makhafola, MR
41 Makhoba+CS
• 2014GIE4058Ass2Makhoba-SC.pdf
Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS

Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS


Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS

Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS


Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS

Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS


Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS

Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS


Makhoba, CS Makhoba, CS

Makhoba, CS Makhoba, CS
42 Makhuvele+A
• 2014Ass2Makhuvele+A.pdf
Makhuvele, A Makhuvele, A Makhuvele, A Makhuvele, A

ASSIGNMENT 2 –MAKHUVELE A-200729269 (C.) PW personal Investment > PW loan


R–125437 >R–129486.471
PROBLEM 1
Therefore, the better option is to get money from personal investment
(A) PW personal Investment = –P +A(P/A,8.5%,15 )
= –250000 + 15000(8.3042)
= R–125437
PW<0 therefore, it is not worthwhile to get money from personal investment

PROBLEM 2
(B) Loan Amount = 60% of project cost
= (250000)(60%)
= R150000 ATTRIBUTE EQUAL TO SCORE (Wi) WEIGHT (Wi)/ Total
Flexibility (F) F 10 10/27.5 =0.3636
Loan Annual Payment at 9% = P(A/P,9%,15) Safety[s] 0.5U 2.5 2.5/27.5 =0.0909
=(150000)(0.1241) Uptime[u] 0.5F 5 5/27.5 =0.1818
=R18615 Speed[v] U 5 5/27.5 =0.1818
Rate of Return[r] 2S 5 5/27.5 =0.1818
Debt-Equity Mix (60% – 40%): Total 27.5 1
WACC = (equity fraction) (cost of equity capital)+(debt fraction)(cost of debt
capital)
=(0.85)(0.4)+(0.9)(0.6)
=0.088
=8.8% PROBLEM 3
But MARR = WACC
Therefore MARR =8.8%
A)
Net Annual Net Cash flow = Annual Cash flow –Annual Loan Amount
Capital Recovery AW of Total AW
= 15000 – 18615 Year Salvage(S) AOC
CR = A/P(FC) +A/F(S )
A/G
AOC AW(Total) = CR + A/P(AW)
=R –3615 1 85000 -75000 -33000 -75000 -108000
Anticipated Equity investment = Project cost – Total loan amount
2 72250 -85000 -30727.48 0.4587 -79587 -110315.93
= 250000 – 150000
3 61412.5 -95000 -28800.64125 0.8902 -83902 -112702.6413
=R100 000
Therefore PW @ 8.8% =Initial Investment +Net Annual Cash flow 4 52200.625 -105000 -27163.14019 1.2947 -87947 -115110.1402
= P + A(P/A, 8.8%,15) 5 44370.5313 -115000 -25776.99972 1.6728 -91728 -117504.9997
= –100 000 + (–3615) (P/A, 8.8%,15) 6 37714.9516 -125000 -24595.98663 2.0252 -95252 -119847.9866
= –100 000 –(3615)(8.1567)
=R–129486.471
Economic Service Life is 1 year with Annual worth of R-108000
PW < 0 therefore, it is not worthwhile to get money from loan
B)

AW1 =-108000
But AW6 = CR + A/P(PWTAOC)
-108000 = -P(A/P,18%,6) + S(A/F,18%,6)+ AOC+ G(A/G,18%,6)

Makhuvele, A Makhuvele, A Makhuvele, A Makhuvele, A


Makhuvele, A Makhuvele, A Makhuvele, A Makhuvele, A

-108000 = -P(0.2859)+ P(0.3771)(0.1059)-75000-(10000*2.0252) PROBLEM 5


0.2460P =12748
Department A =Allocated Hours * Rate of production per hour
P =R51821.1382 =(25000)(10)
=R 250 000
Investment cost has to be reduced from R100 000 to R 51821.1382 Department B = Allocated Hours * Rate of production per hour
= (25000)(5)
= R 125 000
PROBLEM 4
Department C = Allocated Hours * Rate of production per hour
A) Profit =0 =(10000)(15)
= R 150 000
r
Total Indirect cost = Department A + Department B + Department C
=250 000 + 125 000 + 100 000
= R 525 000

= R 5557.67 per unit AOC = + +

= R 1 325 000
B) Profit = 500 000
AW make = – Initial Investment + Salvage – AOC
– – = –P(A/P,i,n) + S(A/F,i,n) – AOC
= –2 000 000(A/P,15%,10) + 50 000(A/F,15%,10) – 1325000
– – = –2 000 000(0.1993) + 50 000 (0.0493) – 1325000
= R –1721135

– AW buy = R – 1500000

AW make > AW buy

Therefore, Cuisinart Corporation must consider buying since the AW buy is


lesser than AW make

Makhuvele, A Makhuvele, A Makhuvele, A Makhuvele, A


Makhuvele, A Makhuvele, A

Makhuvele, A Makhuvele, A

( )
PROBLEM 6

Net Cash Flow


Revenue per
Per unit cost
investment

( ) -1
Fixed cost

Tonnage

FV PV
ton

Year CF- CF+ @r @k PW- FW+


0 2012 -266.667 0.000 0.000 0.000 0.000 -266.667 0.000 -266.667 4.6524 1.0000 -266.667
1 2013 -266.667 0.000 0.000 0.000 0.000 -266.667 0.000 -266.667 4.0456 0.8621 -229.893
2 2014 -266.667 0.000 0.000 0.000 0.000 -266.667 0.000 -266.667 3.5179 0.7432 -198.187
3
4
2015
2016
0.000
0.000
-40.000
-40.000
1.800
1.800
-150.000
-154.500
500.000
485.000
-310.000
-318.100
900.000
873.000
590.000
554.900
3.0590 0.6407
2.6600 0.5523
1804.810
1476.034 ( ) -1
5 2017 0.000 -40.000 1.800 -159.135 470.450 -326.443 846.810 520.367 2.3131 0.4761 1203.661
6 2018 -700.000 -40.000 1.800 -163.909 456.337 -1035.036 821.406 -213.631 2.0114 0.4104 -87.674
7 2019 -700.000 -40.000 1.800 -168.826 442.646 -1043.887 796.764 -247.124 1.7490 0.3538 -87.432
8 2020 0.000 -80.000 3.600 -173.891 429.367 -706.008 1545.721 839.713 1.5209 0.3050 1277.120
9 2021 0.000 -80.000 5.400 -179.108 416.486 -1047.182 2249.024 1201.842 1.3225 0.2630 1589.436
10 2022 0.000 -80.000 5.400 -184.481 403.991 -1076.198 2181.554 1105.356 1.1500 0.2267 1271.159
11 2023 -90.000 -80.000 5.400 -190.016 391.872 -1196.084 2116.107 920.023 1.0000 0.1954 920.023
Total -869.853 9542.243

ERR>MARR

Therefore, Phased investment can be considered


Makhuvele, A Makhuvele, A

Makhuvele, A Makhuvele, A
43 Makibelo+CP
• 2014Ass2Makibelo C.P.pdf
Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP

Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP


Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP

Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP


Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP

Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP


Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP

Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP


Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP

Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP


Makibelo, CP Makibelo, CP

Makibelo, CP Makibelo, CP
44 Makuleka+JM
• 2014Ass2MakulekaJM.pdf
Makuleka, JM Makuleka, JM Makuleka, JM Makuleka, JM

Assignment: 2 Advance Economics: 14GIE4058 Student ID: 809750365 Student Name: JM Makuleka Date: 25-05-2014 Q5.

Q1. Indirect Costs


A) 100% equity financing Department Basis Hours Rate/hour Allocated hours Material cost Direct labour costs
MARR = 8.5% is known. Determine PW at the MARR A Labour 10 25000 200000 200000
PW = -250,000 + 30,000(P/A,8.5%,15) B Machine 5 25000 50000 200000
= -250000 + 30000x(8.3042) C Labour 15 10000 50000 100000
= 250000 + 249126 300000 500000
= -R874
Therefore The PW < 0, 100% equity financing does not meet the MARR requirement Salvage value = R50000
60%-40% D-E financing n = 10
Loan Principal = 250000x(0.60) = 150000 i = 15%@MARR
Loan payment = 150,000(A/P,9%,15) Department A 25000(10) 250000
= 150000(0.1241) Department B 25000(5) 125000
= R18615 per year Department C 10000(15) 150000
Cost of 60% debt capital is 9% for the loan. total sum 525000 50000
WACC = 0.4(8.5%) + 0.6(9%) = 8.8% 0.1993
Therefore MARR = 8.8% AOC = 500000 + 300000 + 525000 0.0493
Annual NCF = project NCF - loan payment AOC = 1325000
= 15000 - 18615
= -R3615 For making:
Amount of equity invested = 250,000 - 150,000 = R 100,000 AW = -P(A/P,i,n) + S(A/F,i,n) - AOC

Calculate PW at the MARR on the basis of the committed equity capital. = -2000000(A/P,15%,10) + 50000(A/F,15%,10) - 132500
PW = -100,000 -3615(P/A,8.8%,15) = -2000000(0.1993) + 50000( 0.0493) - 1325000
= -100,000 -3615 x (8.1567) = -R1721135.00
= -R132294.96
Since PW < 0; a 60-40 D-E mix does not meet the MARR requirement.
Both do not meet MARR requirement. For buying:
AW = - R1500000
Therefore both buying and making are not viable to invest due to loses already.
Q2.
Normalised Q6.
weighted P/F @ k of F/P @ r
Flexibility Safety Uptime Speed Rate of return Total Average 16%(-) 15% (+) -ve +ve
Flexibility (f) 1 2 9 9 4 24 0.1818 Annual
Safety(S) 0.5 1.5 6.75 6.75 3 18 0.1364 revenue per Capacity Fixed Total Annual Present
Uptime(U) 1.5 3 13.5 13.5 6 36 0.2727 Yrs Investment ton Unit cost (Mt) Cost Revenue Total Annual Cost Cash Flow Borrowing PW n Investing FW Worth Future Worth
Speed(V) 1.5 3 13.5 13.5 6 36 0.2727 2012 266.6667 0 266.6667 -266.6667 0 1 11 4.6524 -266.6667
Rate of Return(S) 1 1.5 6.75 6.75 3 18 0.1364 2013 266.6667 0 266.6667 -266.6667 1 0.8621 10 4.0456 -229.8933
TOTAL 132 1 2014 266.6667 0 266.6667 -266.6667 2 0.7432 9 3.5179 -198.1867
2015 500 150.000 1.800 40 900.0000 310.0000 590.0000 3 0.6407 8 3.059 1804.8100
2016 485 154.500 1.800 40 873.0000 318.1000 554.9000 4 0.5523 7 2.66 1476.0340
Q3. 2017 470.45 159.135 1.800 40 846.8100 326.4430 520.3670 5 0.4761 6 2.3131 1203.6609
a) 2018 700 456.3365 163.909 1.800 40 821.4057 1035.0363 -213.6306 6 0.4104 5 2.0114 -87.6740
P = 100000 2019 700 442.646405 168.826 1.800 40 796.7635 1043.8874 -247.1238 7 0.3538 4 1.749 -87.4324
n = 6 years 2020 429.367013 173.891 3.600 80 1545.7212 706.0080 839.7132 8 0.305 3 1.5209 1277.1199
2021 416.486002 179.108 5.400 80 2249.0244 1047.1824 1201.8421 9 0.263 2 1.3225 1589.4361
S = P x0.85^(n) yr First cost Salvage cost AOC A/P P/F A/F AW 2022 403.991422 184.481 5.400 80 2181.5537 1076.1978 1105.3558 10 0.2267 1 1.15 1271.1592
= 100000x (0.85^(6) 0 100000 0 0 0 0 0 2023 90 391.87168 190.016 5.400 80 2116.1071 1196.0838 920.0233 11 0.1954 0 1 920.0233
= 37714.9516 1 0 85000 75000 1.1800 0.8475 1.000 -108003.7500 -869.8531 9542.2434
2 0 72250 85000 0.63872 0.7182 0.45872 -69721.4198
MARR = 18% 3 0 61412.5 95000 0.45992 0.6086 0.27992 -55392.6076 ERR =0.243265989
4 0 52200.625 105000 0.37174 0.5158 0.19174 -47298.1188 ERR = ERR = ((FW+)/( −PW))^(1/N) -1 =24.32659894
AOC = (65 +10 x n) 5 0 44370.53125 115000 0.31978 0.4371 0.13978 -41850.1085 = ((9542.2434)/(869.8531))^(1/11) -1
6 0 37714.95156 125000 0.28591 0.3704 0.10591 -37834.2425 ESL = 24.33%

Using formula: n =1 AW = -P(A/P,I,n) +S x(A/F,I,n)-[AOCxP/F,I,n)xA/P,i,n)


= -100 000 x 1.18+85000x1x1.000 -75000x0.8475x1.18
= -1080000

n =2 AW = P(A/P,I,n)+S(A/F,I,n)-[AoCx(P/F,I,n)](A/P,I,n)
= -100 000 x 0.63872 + 72250 x 0.45872 -85000 x 0.4182 x 0.6382
= - 69721

Therefore n =6 AW = P(A/P,I,n)+S(A/F,I,n)-[AoCx(P/F,I,n)](A/P,I,n)
= 37834
Therefore ESL is at year 6 at AW = R37834

b) AW = P(A/P,I,n) + 85x (A/F),I,n)+75x(P/F,i,n)xA/F,n,i)


Calculating P -37834 = P(1.1800) + 85000(1.0000)- 75000 x(0.8475)(1.18)
P = -R40534.110

Q4.
a) Profit = Revenue- Total Cost
= R-TC
= Revenue-(FC+VC)

FC(R) = 30 +70 + 100 + 55 + 33.33


= R288330
VC = 2500 + 200 + 2000 + 600 + 200
= 5500 R/unit x 5000 units
VC (R) = R27500000

Revenue = 288330+ 27500000


= R27788330

b) Profit = Revenue - Total Cost


500000 = Revenue-(TC)

but TC = FC+VC
TC = 288330 + (5500 x 8000)
= 44288330

= 44288330 +500000
Therefore TC ( R) = R4928830

Makuleka, JM Makuleka, JM Makuleka, JM Makuleka, JM


45 Malatji+M
• 2014GIE4058Ass2Malatji-M.pdf
Malatji, M Malatji, M Malatji, M Malatji, M

MALATJI M, 201175765: ASSIGNMENT 2

2. The computation is as follows:


1. Required for project = R250 000; MARR = 8.5%; Annual Cash Flow = R15 000, for Attribute Score Weight
15 years; F 10 10/27.5 = .3636
(a) PW = -250 000 + 15 000 (P/A, 8.5%, 15) S = 50% (U) = 2.5 2.5/27.5 = 0.0909
= -250 000 + 15 000 (8.3042) U = 0.5 (F) = 5 5/27.5 = 0.1818
= -R125 437. V =U=5 5/27.5 = 0.1818
It is not worthwhile to get money from personal investments because the R =2xS=5 5/27.5 = 0.1818
MARR requirements are not met. Sum of Score and Weight 27.5 0.9999 = 1.0000
3. By using the given salvage S and annual operating costs AOC formulas, then:
(b) If 60% of loand and 40% equity, then (a)
Loan Amount = 250 000 x 0.6 = R150 000 Year AOC Salvage, S
Loan Payment = 150 000 (A/P, 9%, 15) 1 -75 000 85 000
= R18 615, per year for 15 years. 2 -85 000 72 250
3 -95 000 61 413
Furthermore, WACC = 0.4 (8.5%) + 0.6 (9%) = 8.8% 4 -105 000 52 201
Annual Project NCF = NCF of Project – Loan Amount
5 -115 000 44 371
= 15 000 – 18 615
6 -125 000 37 715
= - R3 615.

AW1 = -100 000(A/P, 18%, 1) – 75 000 + 85 000(A/F, 18%, 1) = 108 000,


Amount of Equity invested = 250 000 x 0.4 = R100 000,
AW2 = - 100 000 (A/P, 18%, 2) -75 000(P/F, 18%, 2)(A/P, 18%, 2) + (72 250 -
Then WACC PW = -100 000 + (-3 615)(P/A, 8.8%, 15)
85 000)(A/F, 18%, 2) = -26 143,
= -100 000 – 3 615(8.1567)
AW3 = - 100 000 (A/P, 18%, 3) – [ (75 000)(P/F, 18%, 1) + 85 000(P/F, 18%, 2) +
= -R129 438.
95 000(P/F, 18%, 3) ] (A/P, 18%, 4) + (61 413 – 95 000)(A/F, 18%, 3) = -59 518,
The 60%-40% Debt Equity mix does not meet the MARR requirements either.
AW4 = - 100 000 (A/P, 18%, 4) – [ (75 000)(P/F, 18%, 1) + 85 000(P/F, 18%, 2) +
95 000(P/F, 18%, 3) ] (A/P, 18%, 4) + (52 201 – 105 000)(A/F, 18%, 4) = -74 843,
(c) The better option would, therefore, be the 100% debt financing.
AW5 = - 100 000 (A/P, 18%, 4) – [ (75 000)(P/F, 18%, 1) + 85 000(P/F, 18%, 2) +
95 000(P/F, 18%, 3) + 105 000(P/F, 18%, 4)] (A/P, 18%, 5) + (44 371 – 115 000)(A/F,
18%, 5) = -85 360,

Malatji, M Malatji, M Malatji, M Malatji, M


Malatji, M Malatji, M Malatji, M Malatji, M

AW6 = - 100 000 (A/P, 18%, 4) – [ (75 000)(P/F, 18%, 1) + 85 000(P/F, 18%, 2) + 6. Given the following:
95 000(P/F, 18%, 3) + 105 000(P/F, 18%, 4) + 115 000(P/F, 18%, 5)] (A/P, 18%, 6) + Borrowing rate k = 16%, investment rate r = 15%, MARR = 18%, then
(37 715 – 125 000)(A/F, 18%, 6) = -78 998, Revenue = R500/t x 1.8 = R900M/t
The ESL is 2 years with AW = -R26 143.
For the external rate of return the following formula is widely used:

(b) For AW6 = -26 143,


-P (A/P, 18%, 6) - – [ (75 000)(P/F, 18%, 1) + 85 000(P/F, 18%, 2) + 95 000(P/F, ∑ ( ) ∑ ( )
18%, 3) + 105 000(P/F, 18%, 4) + 115 000(P/F, 18%, 5)] (A/P, 18%, 6) + (37 715
– 125 000)(A/F, 18%, 6)
-P(0.2859) = -26 143 + 64 779
P = -R135 140. Receipts Rn = P0 is:

The first cost P will have to be reduced by R114 860 (R250 000 – R135 140).

∑ ( )
4. Given the following
(a) Total fixed costs FC = R568 000, Total variable costs v = R5 500,
Rn = P0 = 900(P/G, -3%, 9)(P/F, 15%, 2), where
At break-even, the Profit = 0 = (r – v)Q – FC
(P/F, 15%, 2) = [1 – (1–0.03)/(1+0.15)]/(0.15+0.03) = 4.3550
Then, r = FC/Q + v = 568 000/5000 + 5 500
Then P0 = 900(4.3550)(0.7561) = R2 964
r = R5 614 per year, per m3 of volume.
Therefore FW+ = 2694(F/P, 15%, 12) = R15 856.

(b) For profit goal of R500 000 at an additional capacity of 3000 m3, Expenditure En is:
Then, revenue per unit cost r is: 500 000 = (r – 5 500)8000 – 568 000
(r – 5 500) = (500 000 + 568 000)/8000
∑ ( )
r = R5 634 per year, per m3 of volume.

5. For making the equipment in-house, P0 = -40(P/A, 16%, 5)(P/F, 16%, 3) – 80(P/A, 16%, 4)(P/F, 16%, 8) – 700(P/A,
Total AOC = R525 000 + R300 000 + R500 000 = R1 325 000, 16%, 2)(P/F, 16%, 6) – 150(P/G, 3%, 9)(P/F, 16%, 2) - 90, where
(P/G, 3%, 9) = [1 – (1+0.03)/(1+0.16)]/(0.16-0.03)
AWmake = -2 000 000(A/P, 15%, 10) + F(A/F, 25%, 10) – AOC Then PW- = -R1 264
= -2 000 000(0.1993) + 50 000(0.0493) – 1 325 000
= -R1 721 135 To compute ERR,
1264(F/P, ERR, 12) = 15 856
AWbuy = -R1 500 000 Therefore (F/P, ERR, 12) = 15 856/1264 = 12.5443
It is cheaper to buy since AWmake > AWbuy Then the approximate ERR 23%

Malatji, M Malatji, M Malatji, M Malatji, M


46 Malatji+WL
• 2013GIE4058Ass2MalatjiWL.pdf
Malatji, WL Malatji, WL Malatji, WL Malatji, WL

Advanced Engineering Management: GIE4058                   Assignment 2  Problem 2 

Lucky Malatji (200606648)  Factors  Person 1  Person  Person  Person    Normalized 


2  3  4  Total  Weighted 
  Factors  attribute 
Flexibility (f)  8  6  9  7  30  0.3636 
Problem 1   Safety (S)  2  1.5  2.25  1.75  7.5  0.0909 
Uptime (u)  4  3  4.5  3.5  15  0.1818 
 
Speed (v)  4  3  4.5  3.5  15  0.1818 
(a) Personal inverstment 100% equity financing  Rate of return  4  3  4.5  3.5  15  0.1818 
(r) 
 
Total          82.5  1 
MARR = 8.5 % 
 
Present worth (PW) = ‐250 000 + 15 000 (P/A,MARR,n) 
From the table at 8.5 %   
PW = ‐250 000 + 15 000 (8.3042) 
       = ‐ R 125 437     
PW< 0 , 100% financing does not meet the MARR requirements.   
 
(b) Money from Loan, D‐E financing (60% ‐ 40%)   
Debt = 250 000 (0.6) = 150 000 (borrowed) 
 
Equity = 100 000 of R 250 000 of capital 
Loan payment = 150 000 (A/P,9%,15)   
                           = 150 000 (0.1241)                A/P from table at 9% 
                           =  R18 615   
 
 
WACC = 0.4(0.85) + 0.6 (0.9) 
            = 0.088   
            =  8.8% 
Therefore MARR =8.8%   
Net cash flow annual = 15 000 – 18 615 
 
                                        = ‐ R3 615 
   
PW of Equity = ‐ 100 000 ‐3 615(P/A,8.8%,15) 
                        = ‐ 100 000 – 3 615 (8.1567)   
   PW              =  ‐R129 486.4705 
 
 
PW<0, therefore loan financing does not meet the MARR   
 
(c) PW(a) > PW (b), therefore 100% equity is a better option.   

   

   

Malatji, WL Malatji, WL Malatji, WL Malatji, WL


Malatji, WL Malatji, WL Malatji, WL Malatji, WL

Problem 3  Problem 4 

Yr  FR  A/P(18%)  A/P(FC)  Salvage  CR  AOC  P/F (18%)  P/F(AOC)  PWT(AOC)  AW(PWT)  AW total  (a) Fixed costs(FC) = (30 + 0.2 x 350 + 100 + 55 +100/3) x 1000 
(1000)  (1000) 
                            = (30 + 70 + 100 + 55 + 33.3333) x 1000 
0  ‐100  0.0000  0.0000  0.0000  0.0000  0.0000  1.0000  0.0000  0.0000  0.0000  0.0000                             = R 288 333.333 
1     1.1800  ‐118.0000  0.0000  ‐118.0000  ‐75.0000  0.8475  ‐63.5593  ‐63.5593  ‐75.0000  ‐193.0000  Variable cost ( VC)/Unit = 2500 + 200 + 2 000 + 600 + 200 
2     0.6387  ‐63.8700  0.0000  ‐63.8700  ‐85.0000  0.7182  ‐61.0457  ‐124.6050  ‐79.5852  ‐143.4552                                   = 5 500/Unit 
3     0.4599  ‐45.9900  0.0000  ‐45.9900  ‐95.0000  0.6086  ‐57.8199  ‐118.8656  ‐54.6663  ‐100.6563   
4     0.3717  ‐37.1700  0.0000  ‐37.1700  ‐105.0000  0.5158  ‐54.1578  ‐111.9778  ‐41.6221  ‐78.7921 
5     0.3198  ‐31.9800  0.0000  ‐31.9800  ‐115.0000  0.4371  ‐50.2676  ‐104.4254  ‐33.3952  ‐65.3752 
                         Q =   
6     0.2859  ‐28.5900  37.7150  9.1250  ‐125.0000  0.3704  ‐46.3039  ‐96.5715  ‐27.6098  ‐18.4848 

 
                       Revenue  r/unit  =   + v 
FR is first cost = R100 000 

A/P (18%) is from the table at 18%                                                =(   + 55) x 1000 

A/P (FC) is the annual worth of the first cost                                             r   = R 112 666/Unit 

Salvage = 100 000 (0.85)^6 = R 37 715  (b) Profit (P) = Revenue (r) – Total cost (TC) 


Total cost = Fixed cost (FC) + variable cost (VC) = (288.3333/8 + 55) x 1000 
Capital Recovery (CR) = A/P(FC) + Salvage 
            TC  = R 91 041.66/Unit 
Annual operating cost(AOC) = is R75 000 for the first year and   Profit (P)/Unit = (500/8) x 1000 = R62 500/Unit 
 
                                                  = (65 +10n) x 1000 for year 2 and above,  r = p + TC 
  = 62 500 + 91 041.66 
                                                      where n represent the number of years , n>1 
r = R 153 541.66/Unit 
P/F (18%) is a factor from the table at 18% to calculate present worth of AOC, P/F(AOC)   
 
Present worth total PWT (AOC)of year 2 = P/F(AOC) of year 1 + P/F(AOC) of year 2…..e.t.c   
 
AW(PWT) = TPW x A/P(18%) 
 
AW Total = CR + AW(PWT)   
 
(a) The ESL is 6 years, The lowest Annual Worth (AW) total.   
 
 
 
(b) AW = P(A/P,MARR,n) + AOC(A/P,MARR,n) + S(A/P,MARR,n)    
 
 
      = P (A/P,18%,6)+ AOC(A/P,18%,6) + S  (P/F,18%,6)   
 
‐18.4848 = P(0.2859) – 125(0.2859) + 37.715    

                    P = 20.4623/0.2859 = R71 571.528   

Malatji, WL Malatji, WL Malatji, WL Malatji, WL


Malatji, WL Malatji, WL Malatji, WL Malatji, WL

Problem 5  Problem 6 
To make the components in – house the Annual Operating Cost (AOC) includes indirect costs + 
material costs + Direct labour costs.  FV@r  PV @ k 
   Year  Costs  Production CF  (15%)  (16%)  FW+  PW‐ 
Therefore: 
2012  0  ‐266.6666  0.0000 ‐266.6666 4.6524 1.0000  0.0000 ‐266.6666
Indirect costs = 10 x 25 000 + 5 x 25 000 + 15 x 10 000, for department A,B and C 
2013  1  ‐266.6666  0.0000 ‐266.6666 4.0456 0.8621  0.0000 ‐229.8850
                         = R 525 000 
2014  2  ‐266.6666  0.0000 ‐266.6666 3.5179 0.7432  0.0000 ‐198.1767
Material costs = R 300 000, total of department A,B and C from the given table 
2015  3     590.0000 590.0000 3.0590 0.6407  1804.8235 0.0000
Direct labour cost = R 500 000 , total of department A,B and C from the given table  2016  4     554.9000 554.9000 2.6600 0.5523  1476.0450 0.0000
AOC = 525 000 + 300 000 + 500 000  2017  5     520.3670 520.3670 2.3131 0.4761  1203.6405 0.0000
        = R 1 325 000  2018  6  ‐700.0000  486.3694 ‐213.6306 2.0114 0.4104  0.0000 ‐87.6830
To make:  2019  7  ‐700.0000  452.8762 ‐247.1238 1.7490 0.3538  0.0000 ‐87.4397
Annual worth (AW) = First Cost (A/P,MARR,n) + Salvage (A/F,MARR,n) + AOC  2020  8     839.7132 839.7132 1.5209 0.3050  1277.0989 0.0000
                                    = ‐ 2 000 000 (A/P,15%,10 years)  + 50 000 (A/F, 15%,10 years) – 1 325 000   2021  9     1201.8421 1201.8421 1.3225 0.2630  1589.4361 0.0000
From the table at 15 %  2022  10     1105.3558 1105.3558 1.1500 0.2267  1271.1592 0.0000
                                    = ‐2 000 000 (0.1993) + 50 000 (0.0493) ‐  1 325 000  2023  11  ‐90.0000  1010.0233 920.0233 1.0000 0.1954  920.0233 0.0000
                                    = ‐R 1 721 135                    Total  9542.2265 ‐869.8511
The Cuisinart Corporation was purchased at an annual cost of ‐ R 1 500 000.                    ERR  0.2433 24.33
Buy or Make?   
Answer is buy, AW of buying < AW of making. 
ERR = 24.33 % 
 
  Where : 
 
  Production = 1.8 (capacity) x 500 (revenue)(1‐0.03)n ‐ 1.8(capacity) x 150(production 
  cost)(1+0.03)n ‐ 40 (fixed cost), where  n(number of year) = 1,2,3etc. n start in year 4. 
 
In year 10: 
 
  Production = 5.4 (capacity) x 500 (revenue)(1‐0.03)n – 5.4(capacity) x 150(production 
  cost)(1+0.03)n ‐ 80 (fixed cost), where  n(number of year) = 1,2,3etc. n start in year 4. 
 
   
 
ERR = (FW+/‐PW‐)1/n = (9542.2265/‐( ‐869.8511))1/11x 100% = 24,33 % 
 
   
 
  The phased investment should  be considered as the External Rate of Return is higher than the MARR 
  18%. 
   
 
                             
                
   
 

Malatji, WL Malatji, WL Malatji, WL Malatji, WL


47 Malomane+MP
• 2014Ass2MalomaneMP.pdf
Malomane, MP Malomane, MP Malomane, MP Malomane, MP

Malomane, MP Malomane, MP Malomane, MP Malomane, MP


Malomane, MP Malomane, MP Malomane, MP Malomane, MP

Malomane, MP Malomane, MP Malomane, MP Malomane, MP


Malomane, MP Malomane, MP Malomane, MP Malomane, MP

Malomane, MP Malomane, MP Malomane, MP Malomane, MP


Malomane, MP Malomane, MP Malomane, MP Malomane, MP

Malomane, MP Malomane, MP Malomane, MP Malomane, MP


48 Mamburu+R
• 2014Ass2MamburuR.pdf
Mamburu, R Mamburu, R Mamburu, R Mamburu, R

Question 1

(a).WACC=( equity fraction)(cost of equity capital) +(debt fraction)(cost of debt fraction)

= (1)(8.5%)+(0)(9%)

=8.5%

ROI or ROR≥MARR>cost of capital

ROR=R15000/R25000(100)= 6%

ROR< MARR therefore not worthwhile

FACULTY OF ENGINEERING AND THE BUILD ENVIRONMENT (b). WACC= (equity fraction)(cost of equity capital)+(debt fraction)(cost of debt capital)
ENGINEERING MANAGEMENT =(0.4)(8.5%)+(0.6)(9%)

=8.8%
ASSIGNMENT 2 MARR=88%

ROR <MARR therefore not worthwhile

(c). Better option is to finance the opportunity with 100% personnel investment because in (a)
MARR-ROR= 2.5% at (b) MARR-ROR=2.8 % so it is cheaper to finance it with option (a).

GIE4058: ADVANCED ENGINEERING ECONOMICS

Student names: Rooi Mamburu

Student number: 201141090

Date: 23 May 2014

Mamburu, R Mamburu, R Mamburu, R Mamburu, R


Mamburu, R Mamburu, R Mamburu, R Mamburu, R

QUESTION 2 (b). AW6=-58560(A/p,18%,6)+37714.95(A/P,18%,6)-


75 000(P/F,18%,1)+85000(P/F,18%,2)+95000(P/F,18%,3)

AW6=R-108 003.77
Wi=Si/S, where Wi is weight, Si is score for each attribute and S is the total score.

Let’s flexibility =100


Question 4
Attribute Score, Si Weight , Wi Score 0-10
F 100 100/275=0.3636 3.64 At break-even point, Total cost= Total revenue
S 25 25/275=0.0909 0.91
U 50 50/275=0.1818 1.82 Total cost= Fixed cost +Variable costs
V 50 50/275=0.1818 1.82
R 50 50/275=0.1818 1.82 Fixed costs=R30 000+R70 000+R100 000+R55 000+R33 333
Total 275 0.9999<1 10.01≈10
= R288 333/5000m3

= R57.6666/m3

Variable costs R/unit


Question 3
materials 2500
(a) Labour 200
Indirect labour 2000
Year 0 1 2 3 4 5 6 subcontractors 600
Salvage 100 000 85 000 72 250 61 412.5 52 200.63 44 370.5 37 714.95 Mist cost 200
value Total R5500/unit
AOC 75 000 85 000 95 000 105 000 115 000 12 5000
MARR=18%
(a) Minimum revenue per unit=R 57.6666+R5500
First cost Capital AOC F/P @18% PW of AOC AW of AOC
recovery = R5557.6666 m3
0 R100 000 1.0000 0
(b) Fixed costs=R288 333/8000m3= R36.0416
1 33 000 75 000 1.1800 88 500 75 000
2 30 729.48 85 000 1.3924 206 854 85 000
Total costs per unit = R 36.0416+R5500
3 28 804.413 95 000 1.6430 36 2939 95 000
4 27 165.052 105 000 1.9388 566 513 105 000 =R 5536.0416/unit
5 257 775.8873 115 000 2.2878 829 610 115 000
6 245 596.609 125 000 2.6996 1167 060 125 000 Break-even point = R2236.0416/unit

Profit per unit =R500 000/8000m3=R625/unit


Total AW P/F @ 18% A/P @18% A/F%118%
Minimum revenue per unit =R 5536.0416+R625
108 000 0.8475 1.18000 1.0000
115 729.48 0.7162 0.63872 0.45872 =R 6161.0416/unit
123 804.413 0.6086 0.45992 0.27992
132 165.052 0.5158 0.37174 0.19174
140 775.887 0.4371 0.31978 0.13978
149 596.6097 0.3704 0.28591 0.10591
Smallest total AW value is the ESL. ESL is 1 year @ total AW1 of R108 000

Mamburu, R Mamburu, R Mamburu, R Mamburu, R


Mamburu, R Mamburu, R Mamburu, R Mamburu, R

Question 5 year Investment Production CF FV@r PV@k FW+ PW-


2012 -266.6667 0 -266.6667 4.6524 1 0 -
Department Rate per hour x allocated hours 266.6667
A R25 000/hr x 10hr= R 250 000 2013 -266.6667 0 -266.6667 4.0456 0.8621 0 -
B R 25 000/hr x 5hr = R 125 000 266.6667
C R 10 000/hr x 15hr = R 150 000 2014 -266.6667 0 -266.6667 3.5179 0.7432 0 -
Total R 525 000 198.1768
2015 590.0000 590.0000 3.0590 0.6407 1804.8235 0
2016 554.9000 554.9 2.6600 0.5523 1476.0450 0
Annual operating cost+ indirect costs+directing material cost+direct labour costs. 2017 520.3670 520.367 2.3131 0.4761 1203.6405 0
2018 -700 486.3694 -213.631 2.0114 0.4104 -87.6830
AOC= R525 000+R300 000+R500 000= R1 325 000 2019 -700 452.8762 -247.124 1.7490 0.3538 -87.4397
2020 839.7132 839.7132 1.5209 0.3050 1277.0989
Initial cost (P)= -R2m , S=salvage value + R 50 000
2021 1201.8421 1201.842 1.3225 0.2630 1589.4361
AWoption= -p(A/p,I,n)+ S( A/p,I,n)-AOC 2022 1105.3558 1105.356 1.1500 0.2267 1271.1592
2023 -90 1010.0233 920.0233 1.0000 0.1954 920.0233
=-2 000 000(A/P, 15%, 10) +R 50 000(A/f, 15%, 10)-R 1 325 000 9542.227 -869.851

=-R2 000 000(0.19925)+R50 000(0.04925)-R1 325 000 PW- 10.9700


ERR 24.3361
=-R1721 037.5

Option 2=-R1500.000

Buy cost is less than make cost therefore it is best to buy.

Question 6

Given information

Investment Value Units


PhaseI(Pcap) 1.8 Mton
Phase IIA 3.6 Mton

PhaseIIB 5.4 Mton


Production cost (PC) 150 per ton
P Revenue (PR) 500 per ton
GR(revenues) -3% per year
GR(Costs) 3% per year
FC Phase I 40 million
FC Phase II 80 million
Remediation cost 90 million
Inverstement rate® 16% per year
Borowing rate (k) 15% per year
Periods 11 Years

Mamburu, R Mamburu, R Mamburu, R Mamburu, R


49 Mangena+NL
• 2014Ass2MangenaNL .pdf
Mangena, NL Mangena, NL Mangena, NL Mangena, NL

Advanced Engineering Management: Assignment 2 2014 Advanced Engineering Management: Assignment 2 2014

NOMPUMELELO MANGENA
Problem 2
201284323
The committee of the scale

Problem 1

Borrow or not

(a) 100 % Equity financing


Committee members
PW = - Capital + Annual Cash Flow ( P/A;8.5%,15) m1 m2 m3 m4 sum weighted Ave=
= - 250 000 + 15 000 (8,3042) Flexibility - 8 6 10 4 28 0.4000
= R -125,437 Safety 0.5 2 1.5 2.5 1 7 0.1000
Uptime 0.5 4 3 5 2 14 0.2000
PW is < 0 therefore 100% equity financing does not meet MAAR requirements. Speed 4 3 5 2 14 0.2000
It not worth it to get money from the personal investment Rate of Return 2 2 1.5 2.5 1 7 0.1000
Total 70 1
(b) Money from the loan

Loan capital = 250 000 (0.60) = R150 000 Problem 3


Loan Payment = 150 000 ( A/P;9%;15) = R 18 615
Economics Service Life
Amount of equity investment = 250 000 – 150 000 = R100 000
a) For n = 1: AW1 = -100,000(A/P,18%,1) – 75,000 + 100,000(0.85)1(A/F,18%,1)
= - 100 000( 1.1800) – 75,000 +85,000(1.000)
WACC = Weight of equity x Cost of Equity + Weight of Debt X Cost of Debt = R -108,000
WACC = 0.4 * 8.5 + 0.6 * 9
= 8.8% For n = 2: AW2 = -100,000(A/P,18%,2) – 75,000 - 10,000(A/G,18%,2)
+ 100,000(0.85)2(A/F,18%,2)
NCF= Balance remaining after deducting cash outflow from cash inflow = 100 000 ( 0,6387) – 75,000 + 72,250 ( 0,4587) – 10 000( 0,4587)
= Project cost – loan payment = R - 110,316
= 15 000 – 18 615
= R – 3 615 For n = 3: AW3 = -100,000(A/P,18%,3) – 75,000 - 10,000(A/G,18%,3)
+ 100,000(0.85)3(A/F,18%,3)
PW = - 100 000 – 3 615 ( P/A;8.8%;15) = -100 000( 0.4599) – 75 000 – 10 000 ( 0,8902) + 61413( 0,02799)
= R – 112,703
= - 100 000 – 3 615 ( 8,1567)
= R- 129,486.47 For n = 4: AW4 = -100,000(A/P,18%,4) – 75,000 - 10,000(A/G,18%,4)
+ 100,000(0.85)4(A/F,18%,4)
Borrowing money from the bank is not worthwhile seeing that PW is also < 0, it too does not = - 100 000 ( 0,3717) – 75 000 – 10 000 ( 1,2947) + 52201 ( 0,1917)
met MARR requirements = R – 115,110

(c ) Funky Industries/ owner should let this opportunity pass as it is not worthwhile to For n = 5: AW5 = -100,000(A/P,18%,5) – 75,000 - 10,000(A/G,18%,5)
invest money in it whether borrow or not , Opportunity not so good after calculations + 100,000(0.85)5(A/F,18%,5)
= = - 100 000(0,3198) – 75 000 – 10 000 ( 1,6728) + 44371 ( 0,1398)
= R – 117,505

1 2

Mangena, NL Mangena, NL Mangena, NL Mangena, NL


Mangena, NL Mangena, NL Mangena, NL Mangena, NL

Advanced Engineering Management: Assignment 2 2014 Advanced Engineering Management: Assignment 2 2014

For n = 6: AW6 = -100,000(A/P,18%,6) – 75,000 - 10,000(A/G,18%,6)


+ 100,000(0.85)6(A/F,18%,6)
= - 100 000 ( 0,2859) – 75 000 – 10 000( 2,0252) + 37715 ( 0,1059)
= R - 119,848
Problem 5
Buy or Make
ESL is 1 year with AW1 = R-108,000. Department A: R 25,000 *10 = R250,000
Department B: R 25,000 *5 = R 125,000
(b) AW relation for year 6 equal = AW1 = R-108,000
Department C: R 10,000 * 15 = R 125,000
P = the required lower first cost.
Total Indirect costs = R 525,000
AW6 = -108,000 = -P(A/P,18%,6) – 75,000 - 10,000(A/G,18%,6)
AOC = 500, 000 + 15,000 + 525,000 =
+ P(0.85)6(A/F,18%,6)
AWmake = - P ( AP;15%,10) + S ( A/F;15%, 10 ) – AOC
-108,000 = -P(0.28591) – 75,000 – 10,000(2.0252) + P(0.37715)(0.10591)
= -2,000,000 ( 0,1993) + 50 000 ( 0.0493) – 1,325,000
= R – 1,721,037
0.24597P = -95,252 + 108,000
AWbuy =R - 1,5m
P = R51,828 The first cost would have to be reduced from R100,000 to
R51,828 . It is better to buy

Problem 4

When is the price right

(a) Fixed cost= 70+30+100+55+33,33 Variable costs = R5500


= R 288,333 Q= 5000m3

Profit = (r – v) Q – FC

rQ = FC + vQ

r 5000 = 288,333 x 103 + 27500 x103

r 5000= 27,788 x103


r= R5557 per unit

(b) Q= 8000 m3
Profit = (r – v) Q – FC
500,000 = ( r – 5500)8000 – 288,333
(r – 5500) = ( 500,000 + 288,333) / 8000

r = R5598 per unit

3 4

Mangena, NL Mangena, NL Mangena, NL Mangena, NL


Mangena, NL Mangena, NL Mangena, NL Mangena, NL

Advanced Engineering Management: Assignment 2 2014 Advanced Engineering Management: Assignment 2 2014

Problem 6

P/F @ k of 16%(-) F/P @ r 15% (+) (-)value (+) value


Annual Total
revenue Capacity Fixed Annual Total Present Future
Yrs Investment per ton Unit cost (Mt) Cost Revenue Annual Cost Cash Flow n Borrowing PW n Investing FW Worth Worth
-
2012 266.6667 0 0.0000 -266.6667 0 1 11 4.6524 266.6667
-
2013 266.6667 0 0.0000 -266.6667 1 0.8621 10 4.0456 229.8933
-
2014 266.6667 0 0.0000 -266.6667 2 0.7432 9 3.5179 198.1867
2015 500.0000 150.0000 1.8 40 900.0000 310.0000 590.0000 3 0.6407 8 3.059 1804.8100
2016 485.0000 154.5000 1.8 40 873.0000 318.1000 554.9000 4 0.5523 7 2.66 1476.0340
2017 470.4500 159.1350 1.8 40 846.8100 326.4430 520.3670 5 0.4761 6 2.3131 1203.6609
2018 700 456.3365 163.9091 1.8 40 821.4057 335.0363 -213.6306 6 0.4104 5 2.0114 -87.6740
2019 700 442.6464 168.8263 1.8 40 796.7635 343.8874 -247.1238 7 0.3538 4 1.749 -87.4324
2020 429.3670 173.8911 3.6 80 1545.7212 706.0080 839.7132 8 0.305 3 1.5209 1277.1199
2021 416.4860 179.1078 5.4 80 2249.0244 1047.1824 1201.8421 9 0.263 2 1.3225 1589.4361
2022 403.9914 184.4811 5.4 80 2181.5537 1076.1978 1105.3558 10 0.2267 1 1.15 1271.1592
2023 90 391.8717 190.0155 5.4 80 2116.1071 1106.0838 920.0233 11 0.1954 0 1 920.0233
-
869.8531 9542.2434

ERR 0.2433
24.3266

5 6

Mangena, NL Mangena, NL Mangena, NL Mangena, NL


50 Maraba+TJ
• 2014Ass2Maraba+TJ.pdf
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

Cell no. 061 2600 206/ Work tel. no. 011 3604 424
Course: Advanced Engineering Economics (GIE4058)
ADVANCED Submission Date: 22 May 2014

ENGINEERING ECONO
MICS
ASSIGNMENT 2

Name: Thabachueu Joseph Maraba


Student number: 200836938

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

(1 + 0.085)15 − 1
𝑃𝑊 = −𝑅 250000 + 15000
QUESTION 01 0.085(1 + 0.085)15

(1.085)15 − 1
𝑃𝑊 = −𝑅 250000 + 15000
GIVEN INFORMATION: 0.085(1.085)15

a) Funky Industries primarily relies on 100% equity financing to fund projects. 3.3997 − 1
𝑃𝑊 = −𝑅 250000 + 15000
b) A good opportunity is available that will require R250 000 in capital. 0.085(3.3997)
c) The Funky owner can supply the money from personal investments that currently earn
2.3997
an average of 8,5%/year. 𝑃𝑊 = −𝑅 250000 + 15000
0.085(3.3997)
d) The annual cash-flow from the project is estimated to be R15 000.
e) It is also possible to borrow 60% for 15 years at 9%/year. 𝑃𝑊 = −𝑅 250000 + 15000 8.3042
f) If the MARR is the Weighted Average Cost of Capital (WACC), determine which is the
better option? (The analysis is done before tax.) 𝑃𝑊 = −𝑅 125437.1060

QUESTION: According to the calculation above, 100% equity financing does not meet the MARR
requirement because PW ˂ 0. Therefore it is not worth while to get the money from personal
a) Is it worthwhile to get the money from the personal investment? investment.
b) Is it worthwhile to get the money from the loan?
c) Which is the better option? b) Scenario 02:60% of the capital is borrowed for 15 years at 9%/year. The other 40% still
comes from equity.
ANSWER:
Therefore the amount of money coming from a loan is:
a)Scenario 01: The Funky owner decides to continue with 100% equity financing for projects.
𝐿𝑜𝑎𝑛 = (𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑) × (60%)
If the Funky owner decides to continue with 100% equity financing for projects:
𝐿𝑜𝑎𝑛 = 250000 × 60%
 MARR = 8.5%.
𝐿𝑜𝑎𝑛 = 𝑅 150000
 We determine PW at the MARR, assuming the life of the project to be 15-years.
The loan payment though is at 9%/ annum for the 15-years, therefore the loan cost per annum is:
Therefore:
𝐿𝑜𝑎𝑛 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 = 𝐿𝑜𝑎𝑛 × (𝐴 𝑃 , 9%, 15)
𝑃𝑊 = −𝑅 250000 + 15000(𝑃 𝐴 , 8.5%, 15)

(1 + 𝑖)𝑛 − 1 𝐿𝑜𝑎𝑛 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 = 150000 × 0.12406


𝑃𝑊 = −𝑅 250000 + 15000
𝑖(1 + 𝑖)𝑛 𝐿𝑜𝑎𝑛 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 = 𝑅 18609
Where: The cost of the loan is 9%, and that of the equity is 8.5%. Therefore the Weighted Average Cost
of Capital (WACC) is:
 i = interest rate
 n = period 𝑊𝐴𝐶𝐶 = 0.6 × 9% + (0.4 × 8.5%)
Therefore substituting the given information into the formula above: 𝑊𝐴𝐶𝐶 = 5.4% + 3.4%

𝑊𝐴𝐶𝐶 = 8.8%

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

Therefore the MARR is 8.8%, since it is given that the two are the same.
QUESTION 02
𝑀𝐴𝑅𝑅 = 8.8%

There the amount of money coming from equity is: GIVEN INFORMATION and ANSWER:

𝐸𝑞𝑢𝑖𝑡𝑦 = (𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑) × (40%) The ratings by attribute are presented below, with 100 for most important.

𝐿𝑜𝑎𝑛 = 250000 × 40%  Flexibility [f] = 10


 Safety [s] = (½)×Uptime [u] = 2.5
𝐿𝑜𝑎𝑛 = 𝑅 100000
 Uptime [u] = (½)×Flexibility [f] = 5.0
The annual net cash flow (NCF):  Speed [v] = (1)×Uptime [u] = 5.0
 Rate of return = (½)×Safety [s] = 5.0
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝐶𝐹 = 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑁𝐶𝐹 − 𝑙𝑜𝑎𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
Therefore the information above is presented in table 1.1 below
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝐶𝐹 = 15000 − 18609
Table 1: Attributes and their respective scores
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝐶𝐹 = −𝑅 3609 Attribute Score
Flexibility [f] 10
Calculating the PW at the MARR on the basis of the committed equity capital: Safety [s] 2.5
Uptime [u] 5.0
𝑃𝑊 = −100000 − 3609(𝑃 𝐴 , 8.8%, 15)
Speed [v] 5.0
(1 + 𝑖)𝑛 − 1 Rate of return 5.0
𝑃𝑊 = −100000 − 3609 Sum of scores (∑) 27.5
𝑖(1 + 𝑖)𝑛

(1 + 0.088)15 − 1
𝑃𝑊 = −100000 − 3609 The normalised weights are determined according to the following formula:
0.088(1 + 0.088)15
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒
3.5435 − 1 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑠𝑒𝑑 𝑊𝑒𝑖𝑔𝑕𝑡𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 = 𝑁𝑊𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 =
𝑃𝑊 = −100000 − 3609 𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠
0.088 × 3.5435
Therefore, the normalised weights of the attributes are determined as follows:
2.5435
𝑃𝑊 = −100000 − 3609
0.088 × 3.5435 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 10
𝑁𝑊𝐹𝑙𝑒𝑥𝑖𝑏𝑖𝑙𝑖𝑡𝑦 = = = 0.3636
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
𝑃𝑊 = −100000 − 3609 8.1575
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 2.5
𝑃𝑊 = −𝑅 129440.4175 𝑁𝑊𝑆𝑎𝑓𝑒𝑡𝑦 = = = 0.0909
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
According to the calculation above, 60%-40% loan-equity financing also does not meet the
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 5.0
MARR requirement because PW ˂ 0. Therefore it is also not worth while to get the money from 𝑁𝑊𝑈𝑝𝑡𝑖𝑚𝑒 = = = 0.1818
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
loan-equity investment.
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 5.0
c)The better option is 100% equity investment because its PW is greater. 𝑁𝑊𝑆𝑝𝑒𝑒𝑑 = = = 0.1818
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 5.0


𝑁𝑊𝑅𝑜𝑅 =
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠
=
27.5
= 0.1818 QUESTION 03
Therefore the sum of the normalized weights is:
GIVEN INFORMATION:
∑𝑁𝑊′𝑠 = 𝑁𝑊𝐹𝑙𝑒𝑥𝑖𝑏𝑖𝑙𝑖𝑡𝑦 + 𝑁𝑊𝑆𝑎𝑓𝑒𝑡𝑦 + 𝑁𝑊𝑈𝑝𝑡𝑖𝑚𝑒 + 𝑁𝑊𝑆𝑝𝑒𝑒𝑑 + 𝑁𝑊𝑅𝑜𝑅
a) A new machine has a first cost of P = R 100 000 and can be used up to 6 years.
∑𝑁𝑊′𝑠 = 0.3636 + 0.0909 + 0.1818 + 0.1818 + 0.1818 b) Its salvage value is estimated to be 𝑺 = 𝑷 × 𝟎. 𝟖𝟓𝒏 , where n = Number of years after
purchase.
∑𝑁𝑊 ′ 𝑠 = 0.9999 ≃ 1 c) The operating cost will be R 75 000 and increase by R 10 000 per year after the first year.
𝐴𝑂𝐶 = [65 + 10 × 𝑛] × 1000, where 𝑛 ≥ 1.
d) Use MARR=18%

QUESTION:

a) Determine the Economic Service Life (ESL) and corresponding Annual Worth (AW) of
the machine.
b) How much would the first cost have to be reduced to make the equivalent annual cost for
thebe equivalentfor a full 6 years numerical equal to the AW estimated in the previous
part (at ESL). Assume all the otherestimates remain the same and neglect the fact that this
lower P value will still not make a newly calculated ESLequal to 6 years.

ANSWER:

a)The AW is given formula 3.1 below.

𝐴𝑊𝑛 = − 𝑃 × 𝐴 𝑃 , 𝑖, 𝑛 − 𝐴𝑊𝐴𝑂𝐶 + [𝑆] × (𝐴 𝐹, 𝑖, 𝑛) [3.1]

𝐴𝑊𝑛 = − 100000 × 𝐴 𝑃 , 𝑖, 𝑛 − [(65 + 10 × 𝑛) × 1000] + [𝑃 × 0.85𝑛 ] × (𝐴 𝐹, 𝑖, 𝑛)

For year 1, n = 1, therefore:

𝐴𝑊1 = − 100000 × 𝐴 𝑃 , 18%, 1 − [(65 + 10 × 1) × 1000] + [100000 × 0.851 ] × (𝐴 𝐹, 18%, 1)

𝐴𝑊1 = − 100000 × 1.18 − [(75) × 1000] + [100000 × 0.851 ] × (1)

𝐴𝑊1 = −118000 − 75000 + 85000

𝐴𝑊1 = −𝑅 108000

For year 2, n = 2, therefore:

𝐴𝑊𝑛 = − 𝑃 × 𝐴 𝑃 , 𝑖, 𝑛 − 𝐴𝑊𝐴𝑂𝐶 + [𝑆] × (𝐴 𝐹, 𝑖, 𝑛) [3.1]

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

𝐴𝑊2 = − 100000 × 𝐴 𝑃 , 18%, 2 − [75000 + 10000(𝐴 𝐺 , 18%, 2)] + [100000 × 0.852 ] × (𝐴 𝐹, 18%, 2) The Economic service life (ESL) is 1 year and the Annual worth (AW) =-R108000 per annum.
2
𝐴𝑊2 = − 100000 × 0.63872 − [75000 + 10000(0.4587)] + [100000 × 0.85 ] × (0.45872)

𝐴𝑊2 = −63872 − 75000 − 4587 + 33142.52 b)Answer for question b) is as follows:


𝐴𝑊2 = −𝑅 110316
𝐴𝑊𝐸𝑆𝐿 = −108000

The ESL annual worth has to be equated to the equivalent annual cost for a full 6-years. The
For year 3, n = 3, therefore: equivalent annual cost for a full 6-years is as follows;

𝐴𝑊3 = − 100000 × 𝐴 𝑃 , 18%, 3 − [75000 + 10000(𝐴 𝐺 , 18%, 3)] + [100000 × 0.853 ] × (𝐴 𝐹, 18%, 3) 𝐴𝑊6 = 𝐴𝑊𝐶𝑜𝑠𝑡 = −28591 − [𝑥 + 10000(𝐴 𝐺 , 18%, 6)]

𝐴𝑊3 = − 100000 × 0.45992 − [75000 + 10000(0.8902)] + [100000 × 0.853 ] × (0.27992) 𝐴𝑊𝐶𝑜𝑠𝑡 = −28591 − 𝑥 − 20252

𝐴𝑊3 = −45992 − 75000 − 8902 + 17190.5870 But,

𝐴𝑊3 = −𝑅 112703 𝐴𝑊𝐸𝑆𝐿 = 𝐴𝑊𝐶𝑜𝑠𝑡

For year 4, n = 4, therefore: Therefore:

𝐴𝑊4 = − 100000 × 𝐴 𝑃 , 18%, 4 − [75000 + 10000(𝐴 𝐺 , 18%, 4)] + [100000 × 0.854 ] × (𝐴 𝐹, 18%, 4) 𝐴𝑊𝐸𝑆𝐿 = 𝐴𝑊𝐶𝑜𝑠𝑡

𝐴𝑊4 = − 100000 × 0.37174 − [75000 + 10000(1.2947)] + [100000 × 0.854 ] × (0.19174) −108000 = 𝐴𝑊𝐶𝑜𝑠𝑡

𝐴𝑊4 = −37174 − 75000 − 12947 + 10008.9478 Substituting for AWCost

𝐴𝑊4 = −𝑅 115112 108000 = 28591 + 𝑥 + 20252

For year 5, n = 5, therefore: Therefore:

𝐴𝑊5 = − 100000 × 𝐴 𝑃 , 18%, 5 − [75000 + 10000(𝐴 𝐺 , 18%, 5)] + [100000 × 0.855 ] × (𝐴 𝐹, 18%, 5) 𝑥 = 59157

𝐴𝑊5 = − 100000 × 0.31978 − [75000 + 10000(1.6728)] + [100000 × 0.855 ] × (0.13978) Therefore the initial cost would have to be reduced by:

𝐴𝑊5 = −31978 − 75000 − 16728 + 6202.113 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 75000 − 59157

𝐴𝑊5 = −𝑅 117504 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 𝑅15843

For year 6, n = 6, therefore:

𝐴𝑊6 = − 100000 × 𝐴 𝑃 , 18%, 6 − [75000 + 10000(𝐴 𝐺 , 18%, 6)] + [100000 × 0.856 ] × (𝐴 𝐹, 18%, 6)

𝐴𝑊6 = − 100000 × 0.28591 − [75000 + 10000(2.0252)] + [100000 × 0.856 ] × (0.10591)

𝐴𝑊6 = −28591 − 75000 − 20252 + 3994.3905

𝐴𝑊6 = −𝑅 119849

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

a. The total fixed cost and the total variable cost per unit are presented in table 4.2 below:
QUESTION 04
Table 4.2: Total fixed costs and total variable per unit costs
Fixed Cost, Variable Cost, R/Unit
GIVEN INFORMATION: Administrative 30000 Materials 2500
Salaries and benefits: 20% of 350000 Labour 200
a) Manager of engineered public systems. Equipment 100000 Indirect Labour 2000
b) One of the systems under your supervision is an emergency intercept pump system for Space,etc. 55000 Subcontractors 600
potable* water. Computers: 1/3 of 100000 Misc. cost 200
c) If the tested water quality or volume varies by a preset percentage, the system TOTAL 288333.3333 TOTAL 5500
automatically switches to preselected options of treatment or water sources.
d) The manufacturing process for the pump system had the following fixed and variable
Therefore, from table 4.2 above, the total fixed cost per year is R 288 333.333 and the
costs over a 1 year period.
total variable cost per year per unit is R/U 5500.
Table 4.1: fixed costs and variable costs
Fixed Cost, ‘000 Variable Cost, R/Unit According to formula 4.1 below, profit is given by:
Administrative 30 Materials 2500
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 [4.1]
Salaries and benefits: 20% of 350 Labour 200
Equipment 100 Indirect Labour 2000 Where:
Space,etc. 55 Subcontractors 600
Computers: 1/3of 100 Misc. cost 200 𝐶𝑜𝑠𝑡𝑇𝑜𝑡𝑎𝑙 = 𝐶𝑜𝑠𝑡𝐹𝑖𝑥𝑒𝑑 − 𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 [4.1]

i.e.
QUESTION:
𝑃 =𝑅−𝐶
a) Determine the minimum revenue per unit to break even at the current production volume 𝑃 = 𝑅 − 𝐶𝑉 + 𝐶𝐹 [4.2]
of 5000m3 per year.
b) If selling internationally and to large corporations is pursued, an increased production of
3000m3 will be necessary. Determine the revenue per unit required if a profit goal of
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡
R500 000 is set for the entire system. Assume the cost estimates above stay the same.
The total variable cost per year is given by:
ANSWER:
𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 = 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 × 𝑈𝑛𝑖𝑡𝑠
Assumptions:
Therefore:
 Assume that the fixed costs are given in Rands.
 Assume that, 1Unit = 1 m3 𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 = 5500 × 5000

𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 = 𝑅 27500000

Therefore the total variable cost is R 27 500 000, and the total fixed cost is R 288
333.3333.

To breakeven, profit must be equal to 0. Therefore:

𝑅 = (𝐶𝑉 + 𝐶𝐹 )

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

𝑟𝑄𝐵𝐸 = (𝐶𝑉 + 𝐶𝐹 )
QUESTION 05
(𝐶𝑉 + 𝐶𝐹 )
𝑟=
𝑄𝐵𝐸
GIVEN INFORMATION:
(27 500 000 + 288 333. 3333)
𝑟=
5000 a) Cuisinart Corporation has been purchasing thecarafe assembly of its major coffee-
maker line at an annual cost of R1,5m.
𝑟 = 5557.667 𝑅𝑎𝑛𝑑𝑠/𝑈𝑛𝑖𝑡
b) Now a suggestion has been made to make the component in-house.
b. Increased production of 3000m3 implies a total production of 8000m3. The profit is given c) There are three departments involved.
R 500 000. d) The departments’ annual indirect cost rates, estimated material, labour, and hours are
presented in table 5.1 below.
Therefore substituting the given information into equation 4.2 above: e) The equipment must be purchased with the following estimates:
𝑃 = 𝑅 − 𝐶𝑉 + 𝐶𝐹 [4.2] i. First cost of R2m.
ii. Salvage value of R50 000.
i.e. iii. Life of 10 years.
𝑃 = 𝑟𝑄 − 𝐶𝑉 + 𝐶𝐹 [4.2] QUESTION:
500 000 = 𝑟 × 8000 − 𝑣𝑄𝑁𝑒𝑤 + 288333.333 a) Perform an economic analysis for the make alternative, assuming that a market rate of
500 000 = 𝑟 × 8000 − 5500 × 8000 + 288333.333 15%/year is the MARR.

500 000 + 44288333.333 = 𝑟 × 8000 Department Indirect Costs


Basis Hours Rate/h Allocated Hours Material Cost Direct Labour Cost
44788333.333 A Labour 10 25000 200000 200000
=𝑟 B Machine 5 25000 50000 200000
8000
C Labour 15 10000 50000 100000
Therefore Total 300000 500000

𝑟 = 5598.5417 𝑅𝑎𝑛𝑑𝑠/𝑈𝑛𝑖𝑡
ANSWER:

 Assume that the rate is given in R/h


 Assume that the costs in the table are given in R

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

Indirect costs: Annual operating cost (AOC):

If the components are going to be made in house, the annual operating cost (AOC) consistsof: The annual operating costs is therefore:

 Indirect costs. 𝐴𝑂𝐶 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡
 Direct labour.
𝐴𝑂𝐶 = 525000 + 300000 + 500000
 Direct material.
𝐴𝑂𝐶 = 𝑅 1325000
The indirect costs are calculated according to the following formula:

𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝑥 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑕𝑜𝑢𝑟𝑠𝑥 × 𝑅𝑎𝑡𝑒𝑥


WORTH OF THE MAKE ALTERNATIVE:
Where x = Indirect cost component
The worth of the make alternative is:
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑕𝑜𝑢𝑟𝑠𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴 × 𝑅𝑎𝑡𝑒𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴

𝐴𝑊𝑀𝑎𝑘𝑒 = −𝑃 𝐴 𝑃 , 𝑖, 𝑛 + 𝑆 𝐴 𝐹 , 𝑖, 𝑛 − 𝐴𝑂𝐶
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴 = 25000 × 10
𝐴𝑊𝑀𝑎𝑘𝑒 = −2000000 𝐴 𝑃 , 15%, 10 + 50000 𝐴 𝐹 , 15%, 10 − 1325000
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴 = 𝑅 250000
𝐴𝑊𝑀𝑎𝑘𝑒 = −2000000 0.19925 + 50000 0.04925 − 1325000
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑕𝑜𝑢𝑟𝑠𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 × 𝑅𝑎𝑡𝑒𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵
𝐴𝑊𝑀𝑎𝑘𝑒 = −𝑅 1721038
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 = 25000 × 5
Therefore it is cheaper to continue buying because:
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 = 𝑅 125000
−𝑅 1,500,000 > −𝑅 1,721,038 = 𝐴𝑊𝑀𝑎𝑘𝑒
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑕𝑜𝑢𝑟𝑠𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶 × 𝑅𝑎𝑡𝑒𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶

𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶 = 10000 × 15

𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶 = 𝑅 150000

Therefore the total indirect department cost is:

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑑𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡𝑠 𝑐𝑜𝑠𝑡 = 250000 + 125000 + 150000

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑑𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡𝑠 𝑐𝑜𝑠𝑡 = 𝑅 525000

Material cost and direct labor cost:

The totals of the material cost and direct labour cost for the departments are given as:

 Total material cost = R 300000


 Total direct labour cost = R 500000

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ

SECTION 6.2: INITIAL INVESTMENT

The initial investment is displayed by the three –R266.6667 millionin years 2012, 2013 and
2014,which are represented in the figure by 12, 13 and 14 respectively. In these years there is no
productions and therefore no revenues and costs.

SECTION 6.3: REVENUES, REVENUES PER TON AND TONNES PRODUCED


In year 2015(i.e. 15), the first revenue of +R900 millionis displayed in the figure. This revenue
is calculated according to the given information in the following manner:

QUESTION 06 Given information

 1.8Mtper annum produced from year 2015 to year 2019


SECTION 6.1: CASH FLOW DIAGRAM
 The revenue per ton per annum is +R500/ton,decreasing at -3% annually due to
The diagram in figure 6.1 displays all the cash flows (CF) that are present in ZMC, Ltd.’s construction, upgrade and other business worldwide increase in capacity
dealings. The net cash flows (NCF) are computed from these displayed cash flows, and presented in figure 6.2 below. Figure 6.1
below assumes that 2012, displayed on the horizontal axis as 12, is year-0.
Therefore, according to formula 6.1 below, the 2015 revenue is calculated as follows:

Cash Flows 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =


𝑅𝑒𝑣𝑒𝑛𝑢𝑒
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]
𝑡𝑜𝑛
2500

𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
2000 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
1500
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟗𝟎𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
1000 Investment
Production Revenue Revenues in years 2016 – 2019 are also calculated with the same formula 6.1 above, at the same
500
Production Cost 1.8 Mt tonnes per year, but the only difference being that the initial revenue per ton of
0 Annual Fixed Costs +R500/ton decreasesby -3%annually.
0 12 13 14 15 16 17 18 19 20 21 22 23
-500 Therefore, the revenue in 2016 is:
-1000 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]
-1500
(0.97) × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Figure 6.1: Cash flows 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟖𝟕𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Maraba, TJ Maraba, TJ
In year 2017, the revenue is:
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]

(0.97)2 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛

Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟖𝟒𝟔. 𝟖𝟏𝟎𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 From here onwards, the revenue is given by formula 6.2 below:

In year 2018, the revenue is: 0.97𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒


𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑛
× (5.4 𝑡𝑜𝑛𝑛𝑒𝑠) [6.2]
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1] Where n = 7, 8 for the years 2022 and 2023respectively. The computed revenues, the tonnes
𝑡𝑜𝑛
produced per annum and the revenues per ton are presented in table 6.1 belowfor their
(0.97)3 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠) corresponding years.
𝑡𝑜𝑛
Table 6.1: Revenue, tonnes produced per annum and the revenues per ton
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟖𝟐𝟏. 𝟒𝟎𝟓𝟕 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 n Year Rev./(Tons) Prod.(Tons) Revenue (R. million)
And in year 2019, the revenue is: 0 2012 0 0 0
1 2013 0 0 0
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (𝑡𝑜𝑛𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1] 2 2014 0 0 0
𝑡𝑜𝑛
3 2015 500 1.8 900
(0.97)4 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛 4 2016 485 1.8 873
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 5 2017 470.4500 1.8 846.8100
6 2018 456.3365 1.8 821.4057
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟕𝟗𝟔. 𝟕𝟔𝟑𝟓 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
7 2019 442.6464 1.8 796.7635
The revenue per ton per annum continues to decrease by -3% annually, throughout all the years. 8 2020 429.3670 3.6 1545.7212
But, in year 2020the tonnes produced increase from 1.8Mt to 3.6Mt due to expansion in capacity, 9 2021 416.4860 5.4 2249.0244
which is effective as from 2020. 10 2022 403.9914 5.4 2181.5536
11 2023 391.8717 5.4 2116.1071
Therefore in 2020 the revenue is:
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (𝑡𝑜𝑛𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]
𝑡𝑜𝑛

(0.97)5 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (3.6 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟏𝟓𝟒𝟓. 𝟕𝟐𝟏𝟐 𝒎𝒊𝒍𝒍𝒊𝒐𝒏

Again the tonnes produced per annum increase from 3.6Mt to 5.4Mt in 2021 due to expansion in
capacity. The tonnes produced per annum remain at 5.4Mt from this point onwards.

Therefore in 2021, the revenue is:


𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]

(0.97)6 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (5.4 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟐𝟐𝟒𝟗. 𝟎𝟐𝟒𝟒 𝒎𝒊𝒍𝒍𝒊𝒐𝒏

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

SECTION 6.4: PRODUCTION COST, ANNUAL FIXED COSTS AND COST PER TONNES In year 2018, the cost is:

Once again, the initial investment is represented by the three –R266.6667 million in years 2012, 𝐶𝑜𝑠𝑡 =
𝐶𝑜𝑠𝑡
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛
2013 and 2014, represented in the figure by 12, 13 and 14 respectively. In these years there is no
productions and therefore no revenues and costs. (1.03)3 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
In year 2015(i.e. 15), the first production cost of –R270 millionis displayed in the figure 6.1.
This production cost is calculated according to the given information in the following manner: 𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟗𝟓. 𝟎𝟑𝟔𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏

Given information And in year 2019, the cost is:

 1.8Mt per annum produced from year 2015 to year 2019 𝐶𝑜𝑠𝑡 =
𝐶𝑜𝑠𝑡
× (𝑡𝑜𝑛𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛
 The cost per ton per annum is R150/ton,increasing at +3% annually
(1.03)4 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Therefore, according to formula 6.3 below, the 2015cost is calculated as follows: 𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3] 𝐶𝑜𝑠𝑡 = 𝑹𝟑𝟎𝟑. 𝟖𝟖𝟕𝟒 𝒎𝒊𝒍𝒍𝒊𝒐𝒏

𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛 The cost per ton per annum continues to increase by 3% annually, throughout all the years. But,
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 in year 2020 the tonnes produced increase from 1.8Mt to 3.6Mt due to expansion in capacity,
which is effective as from 2020.
𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟕𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Therefore in 2020 the cost is:
Costs in years 2016 – 2019 are also calculated with the same formula 6.3 above, at the same 1.8
Mt tonnes per year, but the only difference being that the initial cost per ton of 𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
R150/tonincreases by +3% annually.
(1.03)5 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Therefore, the cost in 2016 is: 𝐶𝑜𝑠𝑡 = × (3.6 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3] 𝐶𝑜𝑠𝑡 = +𝑹𝟔𝟐𝟔. 𝟎𝟎𝟖𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏

(1.03) × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛 Again the tonnes produced per annum increase from 3.6Mt to 5.4Mt in 2021 due to expansion in
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 capacity. The tonnes produced per annum remain at 5.4Mt from this point onwards.
𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟕𝟖. 𝟏 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 Therefore in 2021, the revenue is:
In year 2017, the cost is: 𝐶𝑜𝑠𝑡 =
𝐶𝑜𝑠𝑡
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛
𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = × (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛 (1.03)6 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 = × (5.4 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
(1.03)2 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 𝐶𝑜𝑠𝑡 = +𝑹𝟗𝟔𝟕. 𝟏𝟖𝟐𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟖𝟔. 𝟒𝟒𝟑𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ

From here onwards, the cost is given by formula 6.4 below:


1.03 𝑛 ×𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (5.4 𝑡𝑜𝑛𝑛𝑒𝑠) [6.4]

Where n = 7, 8 for the years 2022 and 2023respectively. The computed costs, the tonnes
produced per annum and the revenues per ton are presented in table 6.2 belowfor their
corresponding years.

Annual fixed costs are also presented in figure 6.2 below. The annual fixed costs are presented
from 2015 (15) at–R40 million. The –R40 millionremains constant from 2015 (15)through to
SECTION 6.5: INVESTMENT, PRODUCTION COST/ ANNUM, TOTAL COSTS/ ANNUM, REVENUES AND THE CASH FLOWS
2019 (19). In 2020 (20), the annual fixed cost value increases to –R80 millionfor the life of the
The total costs are the sums of the annual fixed costs and the corresponding production cost. These are presented in table 6.3 below
project. These values are also presented in table 6.2 below.
together with the investments, the revenues and the cash flows for the respective years.

Table 6.3: Investment, total costs, revenues and the cash flows
n Year Investment (R. million) Prod.Cost (R. million) Annual FC (R. million) Total Costs (R. million) Revenue(R. million) CF (Combined)

Table 6.2: Revenue, tonnes produced per annum and the revenues per ton 0 2012 -266.6667 0 0 0 0 -R266.6667

N Year Prod.Cost/(Tons) Prod.(Tons) Prod. Cost (R. million) Annal FC 1 2013 -266.6667 0 0 0 0 -R266.6667
2 2014 -266.6667 0 0 0 0 -R266.6667
0 2012 0 0 0 0 3 2015 0 -270 -40 -310 900 R 590.00
1 2013 0 0 0 0 4 2016 0 -278.10 -40 -318.10 873 R 554.90
2 2014 0 0 0 0 5 2017 0 -286.4430 -40 -326.443 846.8100 R 520.37
6 2018 -700 -295.0363 -40 -335.036 821.4057 R -213.63
3 2015 150 1.8 270 -40
7 2019 -700 -303.8874 -40 -343.887 796.7635 R -247.12
4 2016 154.5 1.8 278.1 -40 8 2020 0 -626.0080 -80 -706.008 1545.7212 R 839.71
5 2017 159.135 1.8 286.4430 -40 9 2021 0 -967.1824 -80 -1047.18 2249.0244 R 1201.84
10 2022 0 -996.1978 -80 -1076.2 2181.5536 R 1105.36
6 2018 163.9091 1.8 295.0363 -40
11 2023 -90 -1026.0838 -80 -1106.08 2116.1071 R 920.02
7 2019 168.8263 1.8 303.8874 -40
8 2020 173.8911 3.6 626.0080 -80
9 2021 179.1078 5.4 967.1824 -80
10 2022 184.4811 5.4 996.1978 -80
11 2023 190.0155 5.4 1026.0838 -80

Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ

Table 6.3 above presents the following:

 Investments.
 The production costs per annum.
 The annual fixed costs per annum
 The total costs per annum.
 The revenues per annum.
 The complete cash flows per annum.

Investment - As presented in table 6.3 above, the initial investment is represented by the three –
R266.6667 million in years 2012, 2013 and 2014. In the years 2018 and 2019, there is a further
investment of –R700 million per yearfor the plant upgrade; and then there is aplant remediation + and - Nett Cash Flows vs. Year
cost of -R90millionat the end of the plant’s lifetime in 2023. 1400

Production cost per annum–Production costs begin in 2015 when operations start. The 1200

production cost increases from –R270 million in 2015 to –R1026.0838 million in the 2023 at the 1000
end of the plant’s lifetime. The increase is brought about by the annual +3% increase in
800
production cost per ton produced throughout the plant’s lifetime, and the increase in tonnes
produced, from 1.8Mt to 3.6Mt in 2020 and eventually to 5.4Mt in 2021 onwards, after the plant 600 + Nett Cash Flow
upgrade in 2018 and 2019. 400 - Nett Cash Flow

Annual fixed costs – Annual fixed costs also begin in 2015 when operations start. The fixed costs 200

are constant from2015 to 2019, at –R40 million. In 2020 the annual fixed per annum costs 0
increase from -R40 million to -R80 million because of plant upgrades. The annual fixed costs 0 12 13 14 15 16 17 18 19 20 21 22 23
-200
remain at -R80 million from 2020 for the life of the plant which ends in 2023.
-400
Total costs – The total costs are given by the sum of the production costs and the annual fixed
Figure 6.2: Positive and negative net cash flows.
costs for each year. And they increase from -R310 million in 2015, to –R1106.08 million in
2023.

Cash flow per annum – The cash flow for every year is given by the sum of the investments, the
revenues and the total costs for every year. The nettcash flow for each year can be seen in figure
6.2 below, and it ranges from –R266.6667 million to +R1201.84 million.

Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

SECTION 6.6: FUTURE WORTH FACTOR AND PRESENT WORTH FACTOR The future worth factor (FWf) for year 2017

The future worth factors and the present worth factors presented in table 6.4below are calculated
for the investment rate of 15% and the borrowing rate of 16% respectively. They are calculated 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛
in the following ways:
𝐹𝑊𝑓2017 = (1 + 0.15)6

Future worth factor(FWf) for 15%investment rateaccording to formula 6.5 below: 𝐹𝑊𝑓2017 = (1.15)6

𝐹𝑊𝑓 = (1 + 𝑟)𝑛 [6.5] Therefore:

Where: 𝐹𝑊𝑓2017 = 2.313

 FWf = Future worth factor


 r = Investment rate The future worth factor (FWf) for year 2020
 n = The number of year into the future, i.e. the end of the plant life

𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛
Calculation of the FWffor years 2015, 2016, 2017 and 2020, 2021, 2022 and 2023
𝐹𝑊𝑓2020 = (1 + 0.15)3
Therefore, the future worth factor (FWf) for year 2015
𝐹𝑊𝑓2020 = (1.15)3
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛 [6.5] Therefore:
𝐹𝑊𝑓2015 = (1 + 0.15)8 𝐹𝑊𝑓2020 = 1.521
8
𝐹𝑊𝑓2015 = (1.15)

Therefore: The future worth factor (FWf) for year 2021


𝐹𝑊𝑓2015 = 3.0590
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛

𝐹𝑊𝑓2021 = (1 + 0.15)2
The future worth factor (FWf) for year 2016
𝐹𝑊𝑓2021 = (1.15)2
𝑛
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟) Therefore:
7
𝐹𝑊𝑓2016 = (1 + 0.15) 𝐹𝑊𝑓2021 = 1.323
7
𝐹𝑊𝑓2016 = (1.15)

Therefore:

𝐹𝑊𝑓2016 = 2.660

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

The future worth factor (FWf) for year 2022 Present worth factor(PWf) for 16%investment rate:
1
𝑃𝑊𝑓 = (1+𝑘)𝑛 [6.6]
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛

𝐹𝑊𝑓2022 = (1 + 0.15)1 𝑃𝑊𝑓 = (1 + 𝑘)−𝑛

𝐹𝑊𝑓2022 = (1.15)1

Therefore: Where:

𝐹𝑊𝑓2022 = 1.150  PWf = Present worth factor


 k = Borrowing rate
 n = The number of years back into the present
The future worth factor (FWf) for year 2023
Calculation of the PWffor years 2012, 2013, 2014 and 2018, 2019
𝑛
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟) Therefore, the present worth factor (PWf) for year 2012
𝐹𝑊𝑓2022 = (1 + 0.15)0 The present worth factor (PWf) for year 2012
0
𝐹𝑊𝑓2022 = (1.15) 1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛
Therefore:
1
𝐹𝑊𝑓2022 = 1.000 𝑃𝑊𝑓2018 =
(1 + 0.16)0

1
𝑃𝑊𝑓2018 =
(1.16)0

Therefore:

𝑃𝑊𝑓2018 = 1.0000

The present worth factor (PWf) for year 2013

1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛

1
𝑃𝑊𝑓2013 =
(1 + 0.16)1

1
𝑃𝑊𝑓2013 =
(1.16)1

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

Therefore: 1
𝑃𝑊𝑓2019 =
(1.16)7
𝑃𝑊𝑓2013 = 0.8621
Therefore:

𝑃𝑊𝑓2019 = 0.3538
The present worth factor (PWf) for year 2014

1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛

1
𝑃𝑊𝑓2014 =
(1 + 0.16)2

1
𝑃𝑊𝑓2014 =
(1.16)2

Therefore:

𝑃𝑊𝑓2014 = 0.7432

The present worth factor (PWf) for year 2018

1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛

1
𝑃𝑊𝑓2018 =
(1 + 0.16)6

1
𝑃𝑊𝑓2018 =
(1.16)6

Therefore:

𝑃𝑊𝑓2018 = 0.4104

The present worth factor (PWf) for year 2019

1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛

1
𝑃𝑊𝑓2019 =
(1 + 0.16)7

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ

SECTION 6.7: FW+ and PW- CALCULATION, AND SUMMATION (∑)

Going back to table 6.4 above, the FW+ and PW-values are determined according to formulas
[6.7] and [6.8] respectively.

𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 ) [6.7]

For the years: 2015, 2016, 2017 and 2020, 2021, 2022 and 2023

Table 6.4: Cash flows,


n Year CF (Combined) Future worth factor Present worth FW+ PW- While,
for r = 15% factor for k = 16%
0 2012 -R266.6667 0 1 -266.67
1 2013 -R266.6667 0 0.862069 -229.89 𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 ) [6.8]
2 2014 -R266.6667 0 0.743163 -198.18
3 2015 R 590.00 3.059023 0 1804.82 For the years: 2012, 2013, 2014 and 2018, 2019
4 2016 R 554.90 2.66002 0 1476.05
5 2017 R 520.37 2.313061 0 1203.64
6 2018 R -213.63 0 0.410442 -87.68
7 2019 R -247.12 0 0.35383 -87.44
8 2020 R 839.71 1.520875 0 1277.10
9 2021 R 1201.84 1.3225 0 1589.44
10 2022 R 1105.36 1.15 0 1271.16
11 2023 R 920.02 1 0 920.02

Maraba, TJ Maraba, TJ

Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )


Positive net cash flows occur in the years 2015, 2016, 2017 and 2020, 2021, 2022 and 2023
𝐹𝑊2020 + = 𝐹𝑊𝑓2020 × (+𝐶𝐹2020 )
Therefore formula 6.7 is used to determine the FW+values in the following way:
𝐹𝑊2020 + = 1.5210 × 839.7100
For year-2015
Therefore:
𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )
𝐹𝑊2020 + = 1277.1989
𝐹𝑊2015 + = 𝐹𝑊𝑓2015 × (+𝐶𝐹2015 )

𝐹𝑊2015 + = 3.0590 × 590.0000


For year-2021
Therefore:
𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )
𝐹𝑊2015 + = 1804.82
𝐹𝑊2021 + = 𝐹𝑊𝑓2021 × (+𝐶𝐹2021 )

𝐹𝑊2021 + = 1.3230 × 1201.84


For year-2016
Therefore:
𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )
𝐹𝑊2021 + = 1590.0343
𝐹𝑊2016 + = 𝐹𝑊𝑓2016 × (+𝐶𝐹2016 )

𝐹𝑊2016 + = 2.660 × 554.90


For year-2022
Therefore:
𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )
𝐹𝑊2016 + = 1476.0340
𝐹𝑊2022 + = 𝐹𝑊𝑓2022 × (+𝐶𝐹2022 )

𝐹𝑊2022 + = 1.1500 × 1105.36


For year-2017
Therefore:
𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )
𝐹𝑊2022 + = 1271.1640
𝐹𝑊2017 + = 𝐹𝑊𝑓2017 × (+𝐶𝐹2017 )

𝐹𝑊2017 + = 2.313 × 520.37


For year-2022
Therefore:
𝐹𝑊𝑌𝑒𝑎𝑟 + = 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 × (+𝐶𝐹𝑌𝑒𝑎𝑟 )
𝐹𝑊2017 + = 1203.6158
𝐹𝑊2023 + = 𝐹𝑊𝑓2023 × (+𝐶𝐹2023 )

𝐹𝑊2023 + = 1 × 920.02
For year-2020
Therefore: 𝐹𝑊2023 + = 920.02

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

Negative net cash flows occur in the years 2012, 2013, 2014 and 2018, 2019 For year-2018

Therefore formula 6.8 is used to determine the PW-values in the following way: 𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 )

For year-2012 𝑃𝑊2018 − = 𝑃𝑊𝑓2018 × (𝐶𝐹2018 )

𝑃𝑊2018 − = −213.6300 × 0.4104

𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 ) [6.8] Therefore:

𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 ) 𝑃𝑊2018 − = −87.6738

𝑃𝑊2012 − = 𝑃𝑊𝑓2012 × (𝐶𝐹2012 )

𝑃𝑊2012 − = −266.6667 × 1 For year-2019

Therefore: 𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 )

𝑃𝑊2012 − = −266.6667 𝑃𝑊2019 − = 𝑃𝑊𝑓2019 × (𝐶𝐹2019 )

𝑃𝑊2019 − = −247.1200 × 0.3538

For year-2013 Therefore:

𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 ) 𝑃𝑊2019 − = −87.4311

𝑃𝑊2013 − = 𝑃𝑊𝑓2013 × (𝐶𝐹2013 )

𝑃𝑊2013 − = −266.6667 × 0.8621

Therefore:

𝑃𝑊2013 − = −229.8934

For year-2014

𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 )

𝑃𝑊2014 − = 𝑃𝑊𝑓2014 × (𝐶𝐹2014 )

𝑃𝑊2014 − = −266.6667 × 0.7432

Therefore:

𝑃𝑊2014 − = −198.1867

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ

SECTION 6.8: FW+ and PW- SUMMATIONS (∑) Where: n = the number of years, i.e. n = 11

Table 6.5 below, displays the calculated FW+ and PW-values and their respective summations Therefore substituting into the above equation,
(∑)
1
𝐸𝑅𝑅 = −1 + 10.9298 11 × 100
Table 6.5:FW+ and PW- valuesand their respective summations
FW+ PW-
Therefore:
-266.67
-229.89 𝐸𝑅𝑅 = 24.2852%
-198.18
1804.82 Therefore:
1476.05
𝐸𝑅𝑅 = 24.2852% > 𝑀𝐴𝑅𝑅 = 18 ∗
1203.64
-87.68 Therefore the phased investment should be considered.
-87.44
1277.10
1589.44
1271.16
920.02
∑ = 9542.23 ∑ = - 869.86

Therefore:

𝐹𝑊 + = 9542.23

and,

𝑃𝑊 − = − 869.86

And therefore:

∑ 𝐹𝑊 + 9542.23
=
− ∑ 𝑃𝑊 − −(−869.86)

∑ 𝐹𝑊 +
= 10.9298
− ∑ 𝑃𝑊 −

And therefore:
1
∑ 𝐹𝑊 + 𝑛
𝐸𝑅𝑅 = −1 + × 1000
− ∑ 𝑃𝑊 −

Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ


51 Mariba+FN
• 2014Ass2Mariba+FN.pdf
Mariba, FN Mariba, FN Mariba, FN Mariba, FN

Mariba, FN Mariba, FN Mariba, FN Mariba, FN


Mariba, FN Mariba, FN Mariba, FN Mariba, FN

Mariba, FN Mariba, FN Mariba, FN Mariba, FN


Mariba, FN Mariba, FN Mariba, FN Mariba, FN

Mariba, FN Mariba, FN Mariba, FN Mariba, FN


Mariba, FN Mariba, FN Mariba, FN Mariba, FN

Mariba, FN Mariba, FN Mariba, FN Mariba, FN


Mariba, FN Mariba, FN Mariba, FN Mariba, FN

Mariba, FN Mariba, FN Mariba, FN Mariba, FN


52 Maseko+MB
• 2014GIE4058Ass2Maseko MB.pdf
Maseko, MB Maseko, MB Maseko, MB Maseko, MB

Maseko, MB Maseko, MB Maseko, MB Maseko, MB


Maseko, MB Maseko, MB Maseko, MB Maseko, MB

Maseko, MB Maseko, MB Maseko, MB Maseko, MB


Maseko, MB Maseko, MB Maseko, MB Maseko, MB

Maseko, MB Maseko, MB Maseko, MB Maseko, MB


Maseko, MB Maseko, MB Maseko, MB Maseko, MB

Maseko, MB Maseko, MB Maseko, MB Maseko, MB


53 Masetlane+LJ
• 2014Ass2Masetlane+LJ.pdf
Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ

Problem 1

Given: Equity Financing of 100%; MARR = 8.5%

PW at MARR:
UNIVERSITY OF JOHANNESBURG
(a). PW = -250, 000 + P(P/A,8.5%,15)
MPhil Engineering Management
= -2500, 000 + 15, 000(8.3042)

ADVANCED ENGINEERING ECONOMICS: GIE4058 = -250, 000 + 124.563

= R-125437

PW<0 and 100% equity does not meet requirements of MARR.

Assignment 2 D-E Financing of 60% - 40%

Loan Principal = 250, 000 (0.60 )


Name: Legase Masetlane (Mr)
= R 150 000
Student No: 820431864
Loan payment = 150, 000(A/P,i,n)
Submission: 26 May 2014
= 150, 000(A/P,9%,15)

= 150, 000 (0.1241)

= R18.615 per annum

Lecturer: Louis LSJ Kruger (Mr)

Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ


Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ

WACC = 0.4(8.5) + 0.6(9%) Problem 2

= 8.8% and therefore MARR = 8.8%

NCF = Project-NCF – Loan payment

= 15, 000 – 18, 615 Available Data:

= R-3615

Equity Invested = 250 000 – 150 000 1. Flexibility (f) The most important factor
2. Safety (s) 50% as important as uptime
= R100 000
3. Uptime (u) One half as important as flexibility
Now find PW for committed equity capital at new MARR
4. Speed (s) As important as uptime
PW = -100 000 + A(P/A,i,n) 5. Rate of return (r) Twice as important as safety

= -100 000 + 3615(P/A,8.8%,15)

= -100 000 + 3615(8.1567)

= -70 513 Answer:

There is no better option as all PW<0 and 60% / 40% combination


does not compensate the MARR needs. Member of Committee
Attribute 1 2 3 4 Sum Average Wj
1. Flexibility 8 10 8 6 32 8 0.3636
2. Safety 2 2.5 2 1.5 8 2 0.0909
3. Uptime 4 5 4 3 16 4 0.1818
4. Speed 4 5 4 3 16 4 0.1818
Rate of
return 4 5 4 3 16 4 0.1818
88.000 1.000

Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ


Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ

Problem 3 Problem 4

a. AW equations for 1 to 6 years solving by hand where P = 100 000


Let’s find Fixed cost

Therefore: FC = 30 + (350 x 0.2) + 100 + 55 + (100 x 1/3)


AW1 = -P(A/P,MARR,n) – 75 000 + P(0.85)(A/F;MARR;n) = 30 + 70 + 155 + 33.33
= -100 000(A/P,18%,1) – 75 000 + 100 000(0.85)(A/F;18%;1) = R 288.33
= - 100 000(1.1800) – 75 000 + 100 000(0.85)(1) V =5500/unit
= -108 000
ESL is 1 year at AW1 = R-108 000
At the break even Profit = 0,
a. Profit = (r-v)Q-FC
b. AW equations for 1 to 6 years solving by hand where AW1 = R-108 000
0 = (r-5500)5000-288.33
and solve for P
AW6 = -108 000 288.33 = 5000(r-5500)
= -P(A/P,18%;6) – 75 000 – 100 000(A/G;18%;6) + (0.85)(A/F,18%,6) – 108 000
r-5500 = 288.33/5000 = 0.05766
=
r = 5500 + 0.05766

r = R5500.058

b. Profit = (r-v)Q + FC (Q = 5000 + 3000 for an increased production)

500, 000 = (r-5500)8000 – 288.33

(r-5500)8000 = 500, 000 + 288.33

r-5500 = 500, 288.33/8000

r = 62.536 + 5500

r = 5562.54 = 5563

Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ


Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ

Problem 5 Problem 6

Provided: Provided:

Revenue
Indirect Costs Year Cost Unit Cost Fixed Cost Capacity
Basic
2012
Department Hours Rate/hour Allocated hours Material Cost Direct Labour Cost
2013
A Labour 10 25 000 200 000.00 200 000.00
2014
B Machine 5 25 000 50 000.00 200 000.00
2015 500 150 40 000 000.00 1 800 000.00
C Labour 15 10 000 50 000.00 100 000.00
2016 485 154.5 40 000 000.00 1 800 000.00
Total 300000.000 500000.000 2017 470.45 159.14 40 000 000.00 1 800 000.00
2018 456.34 163.91 40 000 000.00 1 800 000.00
2019 442.65 168.83 40 000 000.00 1 800 000.00
Let’s allocate indirect cost: 2020 429.37 173.89 80 000 000.00 3 600 000.00
2021 416.49 179.11 80 000 000.00 5 400 000.00
Departments Costs 2022 403.99 184.48 80 000 000.00 5 400 000.00
2023 391.87 190.01 80 000 000.00 5 400 000.00
A 10 x (25 000) = R250 000
B 5 x (25 000) = R125 000
C 15 x (10 000) = R150 000 Workings:
TOTAL R 525 000
Year Production Investment CF FV at r PV at k FW+ PW-
2012 -266666666.7 -266666666.7 4.6524 1 -266666667
2013 -266666666.7 -266666666.7 4.0456 0.8621 -229893333
AOC = 500 000 + 525 000+ 300 000 2014 -266666666.7 -266666666.7 3.5179 0.7432 -198186667
2015 590000000 590000000 3.059 0.6407 1804810000
= R1 325 000 2016 554900000 554900000 2.66 0.5523 1476034000
2017 520358000 520358000 2.3131 0.4761 1203640090
Have, 2018 486374000 -700000000 -213626000 2.0113 0.4104 -87672110
2019 452876000 -700000000 -247124000 1.749 0.3538 -87432471
AW = -P(A/P,i,n) + S(A/F;i;n) – AOC 2020 839728000 839728000 1.5208 0.305 1277058342
2021 1201852000 1201852000 1.3225 0.2629 1589449270
= -1 500 000(A/P,15%,10) + 50 000(A/F;15%;10) – 1 325 000 2022 1105354000 1105354000 1.15 0.2267 1271157100
2023 101004400 -90000000 920044000 1 0.1954 179776598
= -1 500 000 (0.1993) + 50 000 (0.0493) – 1 325 000 Total 8622148802 -690074651

= -298 950 + 2465 – 1 325 000


Calculations:
= R- 1 621 485

Presently we buy at AW = R -1 500 000 which is more than AW MARR; therefore buying Production = (Capacity x Revenue cost) – (Capacity x Unit Cost) – FC
is cheaper than making.
CF = Investment + CF

Masetlane, LJ Masetlane, LJ Masetlane, LJ Masetlane, LJ


54 Masunungure+I
• 2014GIE4058Ass2MASUNUNGURE-I.pdf
Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I Masunungure, I Masunungure, I

Masunungure, I Masunungure, I Masunungure, I Masunungure, I


Masunungure, I Masunungure, I

Masunungure, I Masunungure, I
55 Mathebula+NP
• 2014Ass2MATHEBULA+NP.pdf
Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP

Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP


Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP

Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP


Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP

Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP


Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP

Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP


Mathebula, NP Mathebula, NP

Mathebula, NP Mathebula, NP
56 Mathopo+NS
• 2014Ass2Mathopo+NS.pdf
Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS

PROBLEM 1

1(a)

100% Equity Financing


P= R 250 000, A = R 15 000, n = 15 years, MARR = 8.5% per year

P = A (P/A, 8.5%, 15)


P = 15 000 x ( 8.3042)
P = R 124 563

ADVANCED ENGINEERING ECONOMICS


PW = -P + A (P/A, 8.5%, 15)
PW = -250 000 + 124 563
ASSIGNMENT 2
PW = - R 125 437

26 May 2014

1 (b

60% Debt Financing


P = 60% of R250 000 = (250 000 x 0.6) = R 150 000, i = 9% per year, n = 15 yrs., NCF = R 15 000

Initials & Surname: N.S. MATHOPO 40% Equity Financing


P (invested) = 40% of 250 000 = (250 000 x 0.4) = R100 000, i = 8.5% per year, n = 15 yrs.

Student no.: 201140780

WACC = (Equity fraction) (cost of equity capital) + (debt fraction) (cost of debt capital)
WACC = (40 /100) (8.5%) + (60 / 100) (9%)
WACC = (0.4) (8.5%) + (0.6) (9%)
WACC = 3.4 + 5.4
FACULTY OF ENGINEERING AND THE BUILT ENVIRONMENT
WACC = MARR = 8.8%

UNIVERSITY OF JOHANNESBURG

Page 1 of 12 Page 2 of 12

Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS


Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS

60% - 40% Debt-Equity Financing PROBLEM 2

A = P (A/P, 9%, 15) ATTRIBUTE IMPORTANCE SCORE WEIGHT


A = 150 000 x (0.1241) (i) (Si) (Wi)
1. Flexibility The most important factor 10 0.4
A (loan payment) = 18 615 per year

2. Safety 50 % as important as 2.5 0.1


Annual NCF = Project NCF – A (loan payment)
uptime
Annual NCF = 15 000 – 18 615
A (Annual NCF) = - 3 615
3. Uptime One –half as important as 5 0.2

P = A (P/A, i, n) flexibility

P = - 3 615 x ( P/A, 8.8%, 15)


4. Speed As important as uptime 2.5 0.1
P = - 3 615 x ( 8.1567)
P(loan) = - 29 486.47
5. Rate of return Twice as important as 5 0.2

PW = -P(invested) + A (P/A, 8.8%, 15) safety

PW = -100 000 + (- 29 486.47) Sum of S =i 25

PW = -129 486.47
Wi = Si / Si

1) W i = 10 / 25 = 0.4
2) W i = 2.5 /25 = 0.1
3) W i = 5 / 25 = 0.2
4) W i = 2.5 / 25 = 0.1
5) W i = 5 / 25 = 0.2

Normalised Weight = Wi = 1.0000


Normalised weight = (0.4 + 0.1 + 0.2 + 0.1 + 0.2) = 1.0000

Page 3 of 12 Page 4 of 12

Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS


Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS

PROBLEM 3 Increasing cost AW of annual operating cost


Total AWi = -P(A/P, i, k) + Sk (A/F,I, k) – [ AOCj (P/F, i, j)](A/P, i, k)

P = = R 100 000, n = 6 years, MARR = 18%, AOC = (65 + 10 x n) x 1000, n 1) AW 1 = [-118 000 + 8500] – [ (63563) (1.1800)]
AW 1 = -184 504

AW 2 = [-63 870 + 3314] – [ (124 610) (0.6387)]


Salvage value (S) = P x 0.85n AW 2 = -140 144
Year 1 = S1 = R 10 000 x (0.85)1 = R 10 000 x (0.85) = R 8 500
AW 3 = [-45 990 + 1719] – [ (182 427) (0.4599)]
Year 2 = S2 = R 10 000 x (0.85)2 = R 10 000 x (0.7225) = R 7 225 AW 3 = -128 169

Year 3 = S3 = R 10 000 x (0.85)3 = R 10 000 x (0.6141) = R 6 141 AW 4 = [-37 170 + 1001] – [ (236 586) (0.3717)]
4 AW 4 = -124 108
Year 4 = S5 = R 10 000 x (0.85) = R 10 000 x (0.5220) = R 5 220

Year 5 = S5 = R 10 000 x (0.85)5= R 10 000 x (0.4437) = R 4 437 AW 5 = [-31 980 + 620] – [ (286 853) (0.3198)]
AW 5 = -123 096
6
Year 6 = S6 = R 10 000 x (0.85) = R 10 000 x (0.3772) = R 3 772
AW 6 = [-28 590 + 400] – [ (333 153) (0.2859)]
AW 6 = -123 438
AOC = (65 + 10 x n) x 1000, n 1

Year 1 = (65 +10 x 1) x 1000 = R 75 000


3(b)
Year 2 = (65 +10 x 2) x 1000 = R 85 000

Year 3 = (65 +10 x 3) x 1000 = R 95 000


Total AWi = -P(A/P, i, k) + Sk (A/F,I, k) – [ AOCj (P/F, i, j)](A/P, i, k)

Year 4 = (65 +10 x 4) x 1000 = R 105 000 AW 6 = AW 1 = -184 504


-184 504 = [ - P(0.2859) + 400] – [ (333 153) (0.2859)]
Year 5 = (65 +10 x 5) x 1000 = R 115 000

Year 6 = (65 +10 x 6) x 1000 = R 125 000 -184 504 = [ - P(0.2859) + 400] – (95 248.44)

3(a) -184 504 + (95 248.44) = [ - P(0.2859) + 400]


n S SK AOC AOC(P/F,18%,n) AOC -P (A/P, 18%,n) AW
-89 255.56 – 400= - P(0.2859)
1 8 500 8 500 75 000 63 563 63 563 -118 000 -184 504
-89 655. 56 = - P(0.2859)
2 7 225 3314 85 000 61 047 124 610 -63 870 -140 144
3 6 141 1719 95 000 57 817 182 427 -45 990 -128 169 -89 655. 56 / (0.2859) = -P
4 5 220 1001 105 000 54 159 236 586 -37170 -124 108
P = 313 590.63
5 4 437 620 115 000 50 267 286 853 -31 980 -123 096
6 3 772 400 125 000 46 300 333 153 -28 590 -123 438

ESL = minimum total annual worth at n = 5

Page 5 of 12 Page 6 of 12

Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS


Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS

PROBLEM 4

4(a) PROBLEM 5

Alternative 1 : make decision


FC = (30 000 + 70 000 +100 000 + 55 000 + 33 000) = R288 000

v = ( 2500 + 200 + 2000+ 600 +200) = R5 500 per unit Equipment must be purchased with the following estimates:

Q(current production volume) = 5000 m3 per year P = first cost = R 2 M = 2, 000, 000, S = R 50 000, n = 10 years, MARR = 15% / year

when Profit = 0, R = TC = rQ = FC + vQ Indirect Cost = Allocated hours x Rate per hour

r = (FC + vQ) /Q Indirect Cost (Department A) = 25 000 x 10 = 250 000

r = [288 000 + (5 500 x 5000)] / (5000) Indirect Cost (Department B) = 25 000 x 5 = 125 000

r = R 5557.6 per unit Indirect Cost (Department C) = 10 000 x 15 = 150 000

4(b) Total

Q(increased production) = 8000 m3 per year, P = R500 000, FC = R288 000, v = R5 500 per unit Indirect Cost = 250 000 + 125 000 +150 000 = 525 000

r = revenue per unit =? Material Cost = 300 000

Direct labour cost = 500 0000


P = rQ - FC + vQ; P = (r – v)Q – FC

P + FC = (r – v) Q
AOC = 525 000 + 300 000 +500 000
(P + FC) / Q = r – v
AOC = 1’ 325’000
(500 000 + 288 000) / 8000 = r - 5 500

r = 98.5 + 5 500
AW (make) = [-P (A/P, i, n) + S (A/F, i, n)] – AOC
r = R5 598.5 per unit
AW (make) = [-2, 000, 000 (A/P,15%, 10) + 50 000 (A/F, 15%, 10)] – AOC

AW (make) = [-2, 000, 000 (0.1993) + 50 000 (0.0493)] – 1’325’000

AW (make) = [-398 600 + 2465] – 1’325’000

AW (make) = [-396 135] – 1’325’000 = - R 1’721’135

Page 7 of 12 Page 8 of 12

Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS


Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS

PROBLEM 6
Alternative 2 : Buy Decision
+ -
n Year P(Investment) Production NCF FV at PV at FW PW
Annual Cost = The AW of buy = R 1.5 M 15% 16%

Decision: It is cheaper to buy because the annual worth of buy (R 1.5 M) is less 0 2012 -266.67 -266.67 4.6524 1.000 0.00 -266.67
1 2013 -266.67 -266.67 4.0456 0.8621 0.00 -229.90
than the AW for make (R 1’721’135). 2 2014 -266.67 -266.67 3.5179 0.7432 0.00 -198.19
3 2015 590.00 590.00 3.0590 0.6407 1804.81 0.00
4 2016 554.90 554.90 2.6600 0.5523 1476.03 0.00
5 2017 520.37 520.37 2.3131 0.7461 1203.67 0.00
6 2018 -700 486.37 -213.63 2.0114 0.4104 0.00 -87.67
7 2019 -700 452.88 -247.12 1.7490 0.3538 0.00 -87.43
8 2020 839.71 839.71 1.5209 0.3050 1277.12 0.00
9 2021 1201.84 1201.84 1.3225 0.2630 1589.43 0.00
10 2022 1105.36 1105.36 1.1500 0.2267 1271.16 0.00
11 2023 -90 1010.02 920.02 1.0000 0.1954 920.02 0.00
Sum 9542.24 -869.86

ERR = (FW+ / - PW-) 1/n – 1

ERR = [9542.24 / - (-869.86)] 1/11– 1

ERR = [9542.24 / 869.86)] 1/11 – 1

ERR = (10.9699) 0.0909 – 1

ERR = 1.2433 – 1

ERR = 0.2433 x 100

ERR = 34.33%

Assumption 1 R800m spread evenly over 2012 to 2014

P(investment) = R800 / 3 = 266.67

Assumption 2 r = R 500 per ton, v = R150 m, Q = 1.8 Mt, FC = 40m


P(2015) = (r – v)Q –FC

P(2015) = (500 – 150)1.8 – 40


P(2015) = 630 – 40
P(2015) = 590.00

Assumption 3 r = R 500 per ton, v = R150 m, Q = 1.8 Mt, FC = 40m


per ton revenue (r) : decrease per year = -3%,

Page 9 of 12 Page 10 of 12

Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS


Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS

per unit cost (v) : increase per year = +3% P(2020) = (429.3705 – 173.8949) 3.6 – 80
P(2020) = 919.71 – 80
r(2016) = 500 (0.03) = 15 ; 500 – 15 = 485 P(2020) = 839.71
r(2017) = 485 (0.03) =14.55; 485 -14.55 = 470.45
P(2021) = (416.4894 – 179.1117) 5.4 – 80
v(2016) = 150 (0.03) = 4.5; 150 + 4.5 = 154.5 P(2021) = 1281.84 – 80
v(2017) = 154.5 (0.03) = 4.635; 154.5 + 4.635 = 159.135 P(2021) = 1201.84
P(2016) = (485 – 154.5)1.8 – 40 P(2022) = (403.9953 – 184.4851) 5.4 – 80
P(2016) = 594.9 – 40 P(2022) = 1185.36 – 80
P(2016) = 554.90 P(2022) = 1105.36
P(2017) = (470.45 – 159.135)1.8 – 40 P(2023) = (391.8754 – 190.0197) 5.4 – 80
P(2017) = 560.367 – 40 P(2023) = 1090.02 – 80
P(2017) = 520.37 P(2023) = 1010.02

Assumption 4 P(investment) = R700m, r = R 470.45 per ton, v = R159.135 m, Q = 1.8 Mt, FC =


40m, per ton revenue (r) : decrease per year = -3%,
per unit cost (v) : increase per year = +3%

r(2018) = 470.45 (0.03) = 14.1135 ; 470.45 – 14.1135 = 456.3365


r(2019) = 456.34 (0.03) = 13.6901; 456.34 -13.6901= 442.6464

v(2018) = 159.135 (0.03) = 4.7741; 159.135 + 4.7741= 163.9091


v(2019) = 163.909 (0.03) = 4.9173; 163.909 + 4.9173 = 168.8264

P(2018) = (456.3365 – 163.9091)1.8 – 40


P(2018) = 526.37 – 40
P(2018) = 486.37

P(2019) = (442.6464– 168.8264)1.8 – 40


P(2019) = 492.88 – 40
P(2019) = 452.88

Assumption 5 P(remediation cost) = R90m, r = R 442.65 per ton, v = R168.83 m, Q2020 = 3.6, Q2021
= 5.4 Mt, Mt FC = 80m, per ton revenue (r) : decrease per year = -3%,
to 2023
per unit cost (v) : increase per year = +3%

r(2020) = 442.65 (0.03) = 13.2795 ; 442.65 – 13.2795 = 429.3705


r(2021) = 429.37 (0.03) = 12.8811 ; 429.3705 – 13.2795 = 416.4894
r(2022) = 416.49 (0.03) = 12.4947 ; 416.49 – 12.4947 = 403.9953
r(2023) = 404.00 (0.03) = 12.1199 ; 404.00 – 12.1199 = 391.8754

v(2020) = 168.83 (0.03) = 5.0649; 168.83 + 5.0649 = 173.8949


v(2021) = 173.90 (0.03) = 5.2169; 173.90 + 5.2169 = 179.1117
v(2022) = 179.11(0.03) = 5.3734; 179.11+ 5.3734 = 184.4851
v(2022) = 184.49 (0.03) = 5.5346; 184.49 + 5.5346= 190.0197

Page 11 of 12 Page 12 of 12

Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS


57 Matlala+HN
• 2014GIE4058Ass2Matlala-HN.pdf
Matlala, HN Matlala, HN Matlala, HN Matlala, HN

Matlala, HN Matlala, HN Matlala, HN Matlala, HN


Matlala, HN Matlala, HN Matlala, HN Matlala, HN

Matlala, HN Matlala, HN Matlala, HN Matlala, HN


Matlala, HN Matlala, HN Matlala, HN Matlala, HN

Matlala, HN Matlala, HN Matlala, HN Matlala, HN


Matlala, HN Matlala, HN Matlala, HN Matlala, HN

Matlala, HN Matlala, HN Matlala, HN Matlala, HN


Matlala, HN Matlala, HN Matlala, HN Matlala, HN

Matlala, HN Matlala, HN Matlala, HN Matlala, HN


58 Matsaung+M
• 2014Ass2Matsaung+M.pdf
Matsaung, M Matsaung, M Matsaung, M Matsaung, M

2014Ass2Matsaung+M 2014Ass2Matsaung+M

Assignment 2: Advanced Engineering Economy: GIE4058 Date: 07-05-2014 Conclusion: 60% debt-40% equity mix does not meet the MARR requirement, PW< 0.

Problem 01 (c) Overall, both financing plans make the project economically unattractive. However,
60% debt-40% equity mix is a better option as R150 000 of the funky owner’s personal
Borrow or not? investment will still be making a return averaging 8.5% per year.
Funky Industries primarily relies on 100% equity financing to fund projects. A good opportunity is
available that will require R250 000 in capital. The Funky owner can supply the money from personal Problem 02
investments that currently earn an average of 8,5%/year. The annual cash-flow from the project is
estimated to be R15 000. It is also possible to borrow 60% for 15 years at 9%/year. 1. Flexibility[f] The most important factor
If the MARR is the Weighted Average Cost of Capital (WACC), determine which is the better 2. Safety[s] 50% as important as uptime
option? (The 3. Uptime[u] One-half as important as flexibility
analysis is done before tax.) 4. Speed[v] As important as uptime
(a) (4 marks) Is it worthwhile to get the money from the personal investment? 5. Rate of Return[r] Twice as important as safety
(b) (4 marks) Is it worthwhile to get the money from the loan?
(c) (2 marks) Which is the better option?

Answer 01 Answer 2:
(a) For 100% equity financing when MARR = 8.5%, Present Worth is determined as follows: Committee Members
Attributes 1 2 3 4 Sum Average Wj
PW = -R250 000 + R15 000 (P/A,8.5%,15)
Flexibility 10 8 6 6 30 7.50 0.3636
= -R250 000 + R15 000 (8,3042) Safety 2.5 2 1.5 1.5 7.5 1.88 0.0909
Uptime 5 4 3 3 15 3.75 0.1818
= -R125 437 Speed 5 4 3 3 15 3.75 0.1818
Rate of Return 5 4 3 3 15 3.75 0.1818
Conclusion: 100% equity does not meet the MARR requirement since PW is less than 0. Totals 82.5 20.63 1

(b) 60%-40% Debt-Equity financing


Problem 3
Cost of 60% debt capital is 9% for the loan.
Economic Service Life
Loan principal = R250,000 (0.60) = R150,000
A new machine has a first cost of P=R100 000 and can be used up to 6 years. Its salvage value is
Loan payment = R150,000 (A/P,9%,15) estimated to be:
= R150,000(0.1241) S = P × 0,85n
= R18,615 per year n = Number of years after purchase
WACC = 0.4(8.5%) + 0.6(9%) = 8.8% The operating cost will be R75 000 and increase by R10 000 per year after the first year. [AOC =
MARR = 8.8% (65+10×n)×1 000, n>1]

Annual Net Cash Flow = Project NCF - loan payment Using MARR=18% determine

= R15,000.00 – R18,615.00 = -R3,615.00 (a) (4 marks) Determine the Economic Service Life (ESL) and corresponding Annual Worth (AW) of
the machine.
Equity invested = R250,000 – R150,000 = R100, 000
(b) (4 marks) How much would the first cost have to reduced to make the equivalent annual cost for
PW = -R100,000 –R3,615.00(P/A,8.8%,15) the be equivalent for a full 6 years numerical equal to the AW estimated in the previous part (at ESL).
= -R100,000 – R3,615.00(8.1567) = -R129,486.47 Assume all the other estimates remain the same and neglect the fact that this lower P value will still
not make a newly calculated ESL equal to 6 years.

1 2

Matsaung, M Matsaung, M Matsaung, M Matsaung, M


Matsaung, M Matsaung, M Matsaung, M Matsaung, M

2014Ass2Matsaung+M 2014Ass2Matsaung+M

Answer 3: FC = 288 330 v = R5500/unit

(a) Year 1: AW1 = -100 000 (A/P,18%,1) – 75 000 + 100 000 (0.85)1(A/F,18%,1) Profit = (r – v) Q – FC

= - R 108 000 0 = (r – 5500)5000 – 288330

Year 2: AW2 = -100 000 (A/P,18%,2) – 75 000 – 10 000(A/G,18%,2) + 100 000 (0.85)2(A/F,18%,2) (r – 5500) = 288330 / 5000

= - R 110 316 r = R5557.67 per unit

Year 3: AW3 = -100 000 (A/P,18%,3) – 75 000 – 10 000(A/G,18%,3) + 100 000 (0.85)3(A/F,18%,3) b) Profit = R500 000 Q = 8000m3

= - R 112 703 Profit = (r – v)Q – FC

Year 4: AW4 = -100 000 (A/P,18%,4) – 75 000 – 10 000(A/G,18%,4) + 100 000 (0.85)4(A/F,18%,4) 500,000 = (r – 5500)8000 – 288330

= - R 115 112 (r – 5500) = (500,000 + 288330) / 8000

Year 5: AW5 = -100 000 (A/P,18%,5) – 75 000 – 10 000(A/G,18%,5) + 100 000 (0.85)5(A/F,18%,5) r = R5598.54 per unit

= - R 117 504 Problem 5

Year 6: AW6= -100 000 (A/P,18%,6) – 75 000 – 10 000(A/G,18%,6) + 100 000 (0.85)6(A/F,18%,6) Buy or make?
For several years the Cuisinart Corporation has purchased the carafe assembly of its major coffee-
= - R 119 849 maker line at an annual cost of R1,5m. The suggestion to make the component in-house has been
made. For the three departments involved the annual indirect cost rates, estimated material, labour,
ESL is at Year AW1 = - R 108 000 and hours are found in the table below. The allocated hours column is the time necessary to produce
the carafes for a year. Equipment must be purchased with the following estimates: first cost of R2m,
(b) Answer for b.: salvage value of R50 000 and life of 10 years. Perform an economic analysis for the make alternative,
assuming that a market rate of 15%/year is the MARR.
Equate AW for Year 6 with AW1= - R108 000, solve for P

AW6= -108 000=-P (A/P,18%,6) – 75 000 – 10 000(A/G,18%,6) + P(0.85)6(A/F,18%,6

-R108 000 = -P(0.28591) – 75 000 – 10 000(2. 0252)+P(0.37715)(0.10591)

P = -95 252+108 000

= R51 827.46

The first cost has to be reduced significantly from R100 000 to R51 827.46

Problem 4
Answer 5
a) Q = 5000 m3
Annual cost = R1,5 million First cost = R2 million
Total Fixed Cost = R30 000 + R70 000+ R100 000+ R55 000+ R33 330 Salvage Value = R 50 000

= R288 330 n = 10 years

Total Variable Cost = R2500 + R200 + R2000 + R600 + R200 MARR = 15% per year

= R5500.00 Department A = 25 000 hours x R10 = R250 000

Department B = 25 000 hours x R5 = R125 000

3 4

Matsaung, M Matsaung, M Matsaung, M Matsaung, M


Matsaung, M Matsaung, M Matsaung, M Matsaung, M

2014Ass2Matsaung+M 2014Ass2Matsaung+M

Department C = 10 000 hours x R15 = R150 000 Table Solution:

Total = R525 000 n Year Revenue Unit Costs Capacity Fixed Invest Production CF FV @ r PV @ k FW+ PW-
Costs costs
0 2012 - 4.6524 1.0000 -
AOC = 525 000 + 300 000 + 500 000 = R 1,325,000.00 R266,6 266.667
66,700
AWmake= first cost x (A/P,i,n) + S (A/F,i,n) – AOC 1 2013 - 4.0456 0.8621 -
R266,6 229.893
66,700
= -2000 000 x(A/P,15%,10) + 50 000(A/F,15%,10) – 1,325,000.00 2 2014 - 3.5179 0.7432 -
R266,6 198.187
66,700
= -2000 000(0.1993) + 50 000(0.0493) - 1,325,000.00 3 2015 R500.00 R150.00 1.8Mt R40m R900 310 3.0590 0.6407 1804.81
4 2016 R485.00 R154.50 1.8Mt R40m R873 318.1 2.6600 0.5523 1476.03
= -398600 + 2465 - 1,325,000.00 5 2017 R470.45 R159.1350 1.8Mt R40m R846.81 326.4430 2.3131 0.4761 1203.66
6 2018 R456.3365 R163.9091 1.8Mt R40m - R821.4057 335.0364 2.0114 0.4104 -87.674
R700m
= -R 1,721,135 7 2019 R442.6464 R168.8264 1.8Mt R40m - R796.7635 343.8873 1.7490 0.3538 -87.432
R700m
The curefes are purchased with an AW of R1500 000 8 2020 R429.3670 R173.8912 3.6Mt R80m R1545.7212 706.0080 1.5209 0.3050 1277.12
9 2021 R416.4860 R179.1079 5.4Mt R80m R2249.0244 1047.1821 1.3225 0.2630 1589.43
10 2022 R403.9914 R184.4811 5.4Mt R80m R2181.5356 1076.1979 1.1500 0.2267 1271.16
It is cheaper to purchase than to make because the AW of costs of making is more. 11 2023 R391.8717 R190.0155 5.4Mt R80m -R90m R2116.1072 1106.0837 1.0000 0.1954 920.0234

Problem 6 ∑ 9542.23 -869.85

What percentage?
In late 2011, ZMC, Ltd., approved the construction of an Alumina Refinery with a capacity of 1,8Mt ERR = (∑FW+/-∑PW-)1/N- 1
†of alumina per year at the cost of about R800m ‡. The plant was constructed so that it could be
expanded to an annual capacity of 5,4Mt, and in November of 2013 ZMC announced that it was = (9542.23/-(-869.85))1/11-1
considering expanding due to market conditions.
Make the following assumptions: Consider this problem as a phased expansion problem with the = (1.24-1) x 100%
cost to construct the original facility (R800m) spread evenly over years 2012 through 2014. First year
(2015) revenues are R500/t against per unit costs of R150m with a production of 1,8Mt. The per ton =24.06%
revenues are expected to decrease 3% annually due to worldwide increases in capacity, while per
unit costs are expected to increase 3% annually. Assume that expansion to 5,4Mt of annual capacity Calculations:
is to commence in 2018 and 2019 at the cost of R700m each year. This results in a capacity of 3,6Mt
Revenue Cost2016 = R500 – (R500x3/100) = R485
in 2020 and 5,4Mt in 2021 through the remaining plant life (ending in 2023). The plant carries an
expected remediation cost of R90m. Finally, annual fixed costs of R40m are expected to begin in Unit Cost2016 = R150 + (R150x3/100) = R154.50
2015 and extend through 2019, increasing to R80m for the life of the project.
Assuming a borrowing rate of 16% and investment rate of 15%, should the phased investment be Production2016 = Revenue Cost x Capacity
considered if one uses ERR as method of analysis and MARR is 18%?
= R485 x 1.8 = 873.00
Given Information
Cash Flow2016 = (Unit cost x Capacity) + Fixed cost
Value Units
Initial Capacity 1,8 Mega ton = (R154.50 x 1.8) + R40 m
After Expansion Capacity 5,4 Mega ton
Cost of original facility 800 million
2015 Production Revenue R500 Per ton
= R318.10
2015 Production Costs R150 Per unit cost
Revenues -3% Per year Future Value2016 = Production – Cash Flow
Costs +3% Per year
Remediation Cost 90 million = 873 – 318.10
Periods 12 Years
= 554.90

Present Value2016 = Investment + Future Value

5 6

Matsaung, M Matsaung, M Matsaung, M Matsaung, M


59 Mayoyo+AR
• 2014Ass2Mayoyo+AR.pdf
Mayoyo, AR Mayoyo, AR Mayoyo, AR Mayoyo, AR

AR MAYOYO(802052953)

ASSIGNMENT 2:

Problem 1

a) PW = 250 000 + 15 000(P/A, n, i) Problem 2

=-250 000 + 15 000(P/A, 8.5%, 15)

= -250 000 + 15 000 x 8.3042

= R -125 437 Importance Weight =Score/27.5


Flexibility[f] Most Important 10 0.3636
Conclusion: 100% equity does not meet the MARR requirement because is less than zero. Safety[s] 50% as uptime 2.5 0.0909
Uptime [u] 1/2 as flexibility 5 0.1818
b) Loan principal = 250 000(0.60) Speed[v] As important as Uptime 5 0.1818
Rate of Return[r] Twice as safety 5 0.1818
= R150 000 Totals 27.5 1

Loan payment = 150 000(A/P, 9%, 15)

= 150 000 x 0.1241

= R18 615 per year

Cost of 60% debt capital is 9% for the loan, Cost of 40% equity capital is 8.5% at MARR.

WACC = (Equity Fraction) (Cost of Equity Capital) + (Debt Fraction)*(Cost of Debt Capital)
WACC = 0.4(8.5%) + 0.6(9%)

= 8.8%

NEW MARR = 8.8%

Annual NCF = Project NCF - Loan payment

= 15 000 – 18 615

= R-3 615

Amount of equity invested = 250 000 – 150 000

= R100 000

PW = -100 000 + 3 615 (P/A, 8.8%, 15)

= -100 000 + 3 615 x 8.1567

= R -70 513.53

Conclusion: 60% debt-40% equity mix does not meet the MARR requirement

c) The better option is to get the money from the loan.

Mayoyo, AR Mayoyo, AR Mayoyo, AR Mayoyo, AR


Mayoyo, AR Mayoyo, AR Mayoyo, AR Mayoyo, AR

Problem 3

(a) Given P= R100 000


S = P × 0,85n. Where n = Number of years after purchase
Problem 4
AOC=
S= A/P,18% A/F,18% P/F,18% A/G,18 Capital AW of (a) Variable cost = R5500/unit
Years OC (65+10×n) Total AW
P×0.85n ,n ,n ,n %,n Recovery AOC Fixed cost = R288 333.33
×1000
1 -75 000 85 000 -75 000 1.18 1 0.8475 -33000 -75 000 -R108 000 Profit = (r – v) Q – FC
2 -85 000 72 250 -85 000 0.6387 0.4587 0.7182 0.4587 -30728.9 -79 587 -R110 316 0 = (r – 5500)5000 – R288 333.33
3 -95 000 61 412.5 -95 000 0.4599 0.2799 0.6086 0.8902 -28800.6 -83 902 (r – 5500) = R288 333.33 / 5000
-R112 703
r = R5557.67 per unit
4 -105 000 52 200.6 -105 000 0.3717 0.1917 0.5158 1.2947 -27163.1 -87 947 -R115 110
5 -115 000 44 370.5 -115 000 0.3198 0.1398 0.4371 1.6728 -25777 -91 728 -R117 505
6 -125 000 37 714.9 -125 000 0.2859 0.1059 0.3704 2.0252 -24595.9 -95 252 -R119 848
1
Annual Worth1 = -100 000(A/P, 18%, 1) + 100 000(0.85) (A/F, 18%, 1) – 75 000 (b) Profit = (r – v) Q – FC
= -100 000(1.18) + 100 000(0.85)1(1) – 75 000 500 000 = (r – 5500)8000 – R288 333.33
= - R 108 000 (r – 5500) = (500 000 + R288 333.33) / 8000
r = R5598.54 per unit
Annual Worth2 = -100 000(A/P, 18%, 2) + 100 000(0.85)2(A/F, 18%, 2) – 75 000 - 10 000(A/G, 18%, 2)
= -100 000(0.6387) + 100 000(0.85)2(0.4587) – 75 000 - 10 000(0.4587) Problem 5
= – R 110 316
Indirect Costs
Annual Worth3 = -100 000(A/P, 18%, 3) + 100 000(0.85)3(A/F, 18%, 3) – 75 000 - 10 000(A/G, 18%, 3)
Department Basis Allocated Cost Material
= -100 000(0.4599) + 100 000(0.85)3(0.2799) – 75 000 - 10000(0.8902) Rate/h Direct Labour Cost
Hours Hours Cost
=– R 112 703
A Labour 10 25 000 250 000 200 000 200 000
Annual Worth4 = -100 000(A/P, 18%, 4) + 100 000(0.85)4(A/F, 18%, 4) – 75 000 - 10 000(A/G, 18%, 4) B Machine 5 25 000 125 000 50 000 200 000
= -100 000(0.3717) + 100 000(0.85)4(0.1917) – 75 000 - 10 000(1.2947) C Labour 15 10 000 150 000 50 000 100 000
= – R 115 110 TOTAL COST R525 000 R300 000 R500 000

Annual Worth5 = -100 000(A/P, 18%, 5) + 100 000(0.85)5(A/F, 18%, 5) – 75 000 - 10 000(A/G, 18%, 5)
= -100 000(0.3198) + 100 000(0.85)5(0.1398) – 75 000 - 10 000(1.6728) Given MARR = 15%
=– R 117505
AOC = R500 000 + R300 000 + R525 000
Annual Worth6 = -100 000(A/P, 18%, 6) + 100 000(0.85)6(A/F, 18%, 6) – 75 000 - 10 000(A/G, 18%, 6)
= -100 000(0.2859) + 100 000(0.85)6(0.1059) – 75 000 - 10 000(2.0252) = R1 325 000
= – R 119 848
ESL is 1 year with AW1 = R-108 000 AW = -P (A/P, 15%, 10) + S (A/F, 15%, 10) – AOC

(b) Set the AW relation for year 6 equal to AW1 = R-108 000 and solve for P the required lower first cost. = -2 000 000 x 0.1993 + 50 000x 0.0493 - 1 325 000

Annual Worth6 = -108 000 = -P (A/P, 18%, 6) + P (0.85)6(A/F, 18%, 6) – 75 000 - 10 000(A/G,18%,6) AW = -R1 721 135
-108 000 = -P (0.28591) + P (0.37715)(0.10591)– 75 000 – 10 000(2.0252)
0.24597P = -95 252 + 108 000 The annual worth to buy, AW = -R1 500 000
P = R51 828
It is cheaper to purchase, because the AW of costs is less.

The first cost would have to be reduced from R100 000 to R51 828.

Mayoyo, AR Mayoyo, AR Mayoyo, AR Mayoyo, AR


Mayoyo, AR Mayoyo, AR Mayoyo, AR Mayoyo, AR

Problem 6

Information

Investment Value Units


Phase 1 1.8 Mega tons
Phase 2a 3.6 Mega tons
Phase 2b 5.4 Mega tons
Production cost 150 Per ton
Production revenue 500 Per ton
Revenues -3% Per year
Costs 3% Per year
FC phase 1 40 million
FC phase 2 80 million
Remediation 90 million
Investment rate 15% Per year
Borrowing rate 16% Per year
Calculations

Production = (capacity x revenue cost)-(capacity x unit cost) - fixed cost

FC=Fixed cost, UC = Unit cost, RC= Revenue cost

N Year Production Investment RC UC Capacity CF FV @ r PV @ k FW+ PW- FC


1 2012 -266666666.7 -266666667 4.6524 1 -266.66667
2 2013 -266666666.7 -266666667 4.0456 0.8621 -229.89333
3 2014 -266666666.7 -266666667 3.5179 0.7432 -198.18667
4 2015 590000000 500 150 1800000 590000000 3.059 0.6407 1804.81 40000000
5 2016 554900000 485 154.5 1800000 554900000 2.66 0.5523 1476.034 40000000
6 2017 520358000 470.45 159.14 1800000 520358000 2.3131 0.4761 1203.64009 40000000
7 2018 486374000 -700000000 456.34 163.91 1800000 -213626000 2.0113 0.4104 -87.67211 40000000
8 2019 452876000 -700000000 442.65 168.83 1800000 -247124000 1.749 0.3538 -87.432471 40000000
9 2020 839728000 429.37 173.89 3600000 839728000 1.5208 0.305 1277.058342 80000000
10 2021 1201852000 416.49 179.11 5400000 1201852000 1.3225 0.2629 1589.44927 80000000
11 2022 1105354000 403.99 184.48 5400000 1105354000 1.15 0.2267 1271.1571 80000000
12 2023 1010044000 -90000000 391.87 190.01 5400000 920044000 1 0.1954 920.044 80000000
Sum(total) 9542.192802 -869.85125
FW=Cah Flow *Fv
PW=Cash flow*Pv@K
FW/-PW 10.969913

ERR = 22.09%

ERR = 22.09%

Mayoyo, AR Mayoyo, AR Mayoyo, AR Mayoyo, AR


60 Mazibuko+D
• 2014Ass2Mazibuko+D.pdf.pdf
Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D

Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D


Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D

Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D


Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D

Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D


Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D

Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D


Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D

Mazibuko, D Mazibuko, D Mazibuko, D Mazibuko, D


61 Mazibuko+S
• 2014Ass2MazibukoS.docx.pdf
Mazibuko, S Mazibuko, S Mazibuko, S Mazibuko, S

Mazibuko, S Mazibuko, S Mazibuko, S Mazibuko, S


Mazibuko, S Mazibuko, S Mazibuko, S Mazibuko, S

Mazibuko, S Mazibuko, S Mazibuko, S Mazibuko, S


Mazibuko, S Mazibuko, S Mazibuko, S Mazibuko, S

Mazibuko, S Mazibuko, S Mazibuko, S Mazibuko, S


62 Mhlanga+XM
• 2014Ass2Mhlanga+XM[1].pdf
Mhlanga, XM Mhlanga, XM Mhlanga, XM Mhlanga, XM

Problem 1

a) 𝑃𝑊0 = −250000 + 15000(𝑃/𝐴, 8.5%, 15)


−250000 + 15000 8,3042 = −125436
𝑃𝑊0 < 0
Equity Financing not worthwhile.

b) 60%-40% D-E mix

For 60% Financing from loan


250000 0.6 = 150 000
𝐴 = 150000(𝐴/𝑃, 9%, 15)
150000 0,1241 = 18615

Advanced Engineering Economics 𝑊𝐴𝐶𝐶 = 0.6 9% + 0.4 8.5% = 8.8%

15000 − 18615 = −3615


Assignment 2
𝑀𝐴𝑅𝑅 = 8.8%
26 May 2014

Marthel Mhlanga 𝑃𝑊0 = −100000 − 3615(𝑃/𝐴, 8.8%, 15)


−100000 − 3615 8.15674 = −129486.615
201461809 𝑃𝑊0 < 0
60%-40% D-E mix not worthwhile

c) The personal investment option is the better option

Mhlanga, XM Mhlanga, XM Mhlanga, XM Mhlanga, XM


Mhlanga, XM Mhlanga, XM Mhlanga, XM Mhlanga, XM

Problem 2 Problem 3

𝐹 = 10 a) Economic service life

𝑢 = 0.5𝐹 = 5 𝑃 = 100 000

𝑆 = 0.5𝑢 = 2.5 𝑛=6

𝑣=𝑢=5 𝑆 = 𝑃 × 0.85𝑛

𝑟 = 2𝑆 = 2 2.5 = 5 𝑀𝐴𝑅𝑅 = 18%

𝑇𝑜𝑡𝑎𝑙 = 𝐹 + 𝑆 + 𝑢 + 𝑣 + 𝑟 = 27.5 k Salvage Value AOC AWk

Normalized weighted Average scores 𝑊𝑖 = 𝑡𝑜𝑡𝑎𝑙/27.5 1 85000 75000 -108000

𝐹 = 4/11 2 72250 85000 -113718.175

𝑢 = 2/11 3 61412 95000 -123800.781

4 52200 105000 -132163.26


𝑆 = 1/11
5 44370 115000 -140777.07
𝑣 = 2/11
6 37714 125000 -149596.08
𝑟 = 2/11

𝑇𝑜𝑡𝑎𝑙(𝑛𝑜𝑟𝑚𝑎𝑙𝑖𝑠𝑒𝑑 𝑠𝑐𝑜𝑟𝑒𝑠) = 𝐹 + 𝑆 + 𝑢 + 𝑣 + 𝑟 = 1
𝐴𝑊𝑘 = −𝑃(𝐴/𝑃, 𝑖, 𝑘) + 𝑆𝑘 (𝐴/𝐹, 𝑖, 𝑘) − 𝐴𝑂𝐶

𝐴𝑊1 = −𝑃(𝐴/𝑃, 18%, 1) + 𝑆1 (𝐴/𝐹, 18%, 1) − 75000

𝐴𝑊1 = −100000 1.18 + 85000 1 − 75000 = −108000

ESL = 1 and 𝐴𝑊 = −108000

b)

𝐴𝑊 = −108000

−108000 = −𝑃(𝐴/𝑃, 18%, 6) + 37714(𝐴/𝐹, 18%, 1) − 125000

−108000 = −𝑃(0.2859) + 37714(0.1059) − 125000

Solve for P

𝑃 = 45491.73

The first cost must be reduced by R 45491.73

Mhlanga, XM Mhlanga, XM Mhlanga, XM Mhlanga, XM


Mhlanga, XM Mhlanga, XM Mhlanga, XM Mhlanga, XM

Problem 4 Problem 5

a) 𝐴: 25000(10)

𝑄𝐵𝐸 = 5000 𝑚3 𝐵: 25000(5)

1 𝐶: 10000(15)
𝐹𝐶 = [30 + 350 0.2 + 100 + 55 + 100 ] × 1000 = 288333.33
3
𝑇𝑜𝑡𝑎𝑙 = 525000
𝑣 = 2500 + 200 + 2000 + 600 + 200 = 5500
𝐴𝑂𝐶 = 300000 + 500000 + 525000 = 1325000
𝐹𝐶 288333.33
𝑟= +𝑣 = + 5500 = 𝑅 5557.67 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 𝑃 = 𝑅 2𝑚
𝑄𝐵𝐸 5000
𝑆 = 500000

b) 𝑛 = 10

𝑄 = 5000 𝑚3 + 3000 𝑚3 = 8000 𝑚3 𝑀𝐴𝑅𝑅 = 15%

𝑃𝑟𝑜𝑓𝑖𝑡 = 500000 AW for Make option:

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑟𝑄 − 𝑇𝐶 = 𝑟𝑄 − 𝐹𝐶 + 𝑣𝑄 𝐴𝑊 = −𝑃(𝐴/𝑃, 15%, 10) + 𝑆(𝐴/𝐹, 15%, 10) − 𝐴𝑂𝐶

𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐹𝐶 + 𝑣𝑄 500000 + 288333.33 + 5500 × 8000 = −2000000(0.1993) + 50000(0.0493) − 1325000


𝑟= =
𝑄 8000
= 𝑅 − 1 721 135
𝑟 = 𝑅 5598.54 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
AW for Buy option

𝐴𝑊 = 𝑅 − 1 500 000

The Annual worth cost for purchasing the Carafe is less than for when making them.

Therefore it’s cheaper to purchase.

Mhlanga, XM Mhlanga, XM Mhlanga, XM Mhlanga, XM


Mhlanga, XM Mhlanga, XM

Problem 6

Nominal Cash flow

Per Ton Cost per Ton


Tons Produced Revenue per tons
Year n Revenue (Assumed initial Per Unit Cost Cost to Construct Expansion Costs remediation Annual fixed
(MT) produced
(R/unit) R150/t cost) cost costs NCF
2012 0 -R 266 666 666.67 -R 266 666 666.67
2013 1 -R 266 666 666.67 -R 266 666 666.67
2014 2 -R 266 666 666.67 -R 266 666 666.67
2015 3 R 500.00 R 150.00 1 800 000.00 R 900 000 000.00 -R 270 000 000.00 -R 40 000 000.00 R 590 000 000.00
2016 4 R 485.00 R 154.50 1 800 000.00 R 873 000 000.00 -R 278 100 000.00 -R 40 000 000.00 R 554 900 000.00
2017 5 R 470.45 R 158.62 1 800 000.00 R 846 810 000.00 -R 285 516 000.00 -R 40 000 000.00 R 521 294 000.00
2018 6 R 456.34 R 162.74 1 800 000.00 R 821 405 700.00 -R 292 932 000.00 -R 700 000 000.00 -R 40 000 000.00 -R 211 526 300.00
2019 7 R 442.65 R 167.62 1 800 000.00 R 796 763 529.00 -R 301 719 960.00 -R 700 000 000.00 -R 40 000 000.00 -R 244 956 431.00
2020 8 R 429.37 R 172.65 3 600 000.00 R 1 545 733 800.00 -R 621 534 960.00 -R 80 000 000.00 R 844 198 840.00
2021 9 R 416.49 R 177.83 5 400 000.00 R 2 249 040 060.00 -R 960 279 300.00 -R 80 000 000.00 R 1 208 760 760.00
2022 10 R 404.00 R 183.16 5 400 000.00 R 2 181 574 620.00 -R 989 090 460.00 -R 80 000 000.00 R 1 112 484 160.00
2023 11 R 391.88 R 188.65 5 400 000.00 R 2 116 152 000.00 -R 1 018 735 920.00 -R 90 000 000.00 -R 80 000 000.00 R 927 416 080.00

Calculate PW:
Negative cashflow: i=16%
Positivecashflow: i=15%

𝑃𝑊𝑛𝑒𝑔 = −266 666 666 − 266 666 666 (𝑃/𝐴, 16%, 2) − 211 526300(𝑃/𝐹, 16%, 6)
− 244956431 (𝑃/𝐹, 16%, 7)

=
−266666666 − 266666666 (1,6052) − 211 526300(0,4104) −
244956431 (0,3538)
= −868195977

𝑃𝑊𝑝𝑜𝑠 = 590000000(𝑃/𝐹, 15%, 3) + 554900000(𝑃/𝐹, 15%, 4)


+ 521294000(𝑃/𝐹, 15%, 5) + 844198840(𝑃/𝐹, 15%, 8)
+ 1208760760(𝑃/𝐹, 15%, 9) + 1112484160(𝑃/𝐹, 15%, 10)
+ 927416080(𝑃/𝐹, 15%, 11)
= 590000000(0,6575) + 554900000(0,5718) + 521294000(0,4972)
+ 844198840(0,3269) + 1208760760(0,2843)
+ 1112484160(0,2472) + 927416080(0,2149)

= 4143512134

𝑃𝑊 = 𝑃𝑊𝑝𝑜𝑠 + 𝑃𝑊𝑛𝑒𝑔

FW at MARR = 18%
𝐹𝑊 = 𝑃𝑊(𝐹/𝑃, 18%, 11)

Mhlanga, XM Mhlanga, XM
63 Mkhaliphi+VK
• 2014Ass2Mkhaliphi+VK.pdf
Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK

UNIVERSITY OF JOHANNESBURG
Contents

1. Problem 1……………………………………………………………………….. 1

2. Problem 2 ……………………………………………………………………….1

3. Problem 3 ………………………………………………………………………..2

4. Problem 4 …………………………………………………………………………4
Assignment 2

14GIE4058/14M6MAE19 – Advanced Engineering Economics 5. Problem 5 …………………………………………………………………………5

at the
6. Problem 6…………………………………………………………………………..6
UNIVERSITY OF JOHANNESBURG

7. References ………………………………………………………………………..7
Student Name: V.K Mkhaliphi

Student Number: 200619659

Date: 26th May 2014

Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK


Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK

Problem 1 Problem 3

a) Debt fraction = 60% and equity fraction = 40% - Step 1: Determine operating costs for each year. First operating cost is R75000 and it will
WACC = (equity fraction)(cost of equity capital) + (debt fraction)(cost of debt capital) increase by R10 000 each year after the first year. (See table below for all calculated operating
WACC = (0.4)(0.085) + (0.6)(0.09) costs)
WACC = 0.088 (8.8%) - Step 2: Determine salvage value for each year, using the given formula of S = P x 0.85ᵑ. P is given
as R100 000 and n is the corresponding year number. (See table below for all calculated Salvage
To determine cost of equity capital (Rₑ), the following formula is used: values)

Rₑ = [(First-year dividend)/Price of stock] + Expected dividend rate Year Cost Operating Cost (AOC) Salvage (S)
0 -R100 000
=[15000/250000] + 0.085 1 R75 000 R85000
2 R85 000 R72250
Rₑ =0.145 (14.5%) 3 R95 000 R61412.5
4 R105 000 R52200.625
Since Rₑ (14.5%) is bigger than WACC, which is MAAR (8.8%), it is worthwhile to get money from
5 R115 000 R44370.53
Personal investment 6 R125 000 R37714.95

- Step 3: Calculate the total AW for each year using the formula:
b) Cost of Capital = [(cost of debt x Debt) + (Expected return on investment x dividend)] / Total AW = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n).
Capital
Cost of Capital = [(9% x 150000) + (8.5% x 15000)] / 250000 Year 1
Cost of Capital = 0.0591 (5.91%) AW₁ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
AW₁ = -100000(A/P,18%,1) + 85000(A/F,18%,1) – [75000(P/F,18,1)](A/P,18%,1)
Since the cost of capital for debt (5.91%) is less than MARR, which is WACC calculated above AW₁ = -100000(1.1800) + 85000(1.000) – [75000(0.8475)](1.1800)
(8.8%) it is not worthwhile to get money from loan. AW₁ = -108003.75

Year 2
AW₂ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
c) Getting money from the personal loan is the better option. AW₂ = -100000(A/P,18%,2) + 72250(A/F,18%,2) – [85000(P/F,18,2)](A/P,18%,2)
AW₂ = -100000(0.6387) + 72250(0.4587) – [85000(0.7182)](0.6387)
AW₂ = -69719.64
Problem 2 Year 3
AW₃ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
No. Attributes Score Weight
AW₃ = -100000(A/P,18%,3) + 61412.5(A/F,18%,3) – [95000(P/F,18,3)](A/P,18%,3)
1. Flexibility [F] 10 0.3636 AW₃ = -100000(0.4599) + 61412.5(0.2799) – [95000(0.6086)](0.4599)
2. Safety [S] 2.5 0.0909 AW₃ = -55390.68
3. Uptime [U] 5 0.1818
4. Speed [S] 5 0.1818 Year 4
5. Rate of Return [R] 5 0.1818 AW₄ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
TOTAL 27.5 1 AW₄ = -100000(A/P,18%,4) + 52200.625(A/F,18%,4) – [105000(P/F,18,4)](A/P,18%,4)

Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK


Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK

AW₄ = -100000(0.3717) + 52200.625(0.1917) – [105000(0.5158)](0.3717)


AW₄ = -47294.04
Problem 4
Year 5
AW₅ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n) a) Total Fixed Cost = 30000 + 350000(20%) + 100000 + 55000 + 100000(1/3)
AW₅ = -100000(A/P,18%,5) + 52200.625(A/F,18%,5) – [115000(P/F,18,5)](A/P,18%,5) Total fixed costs = 30000 + 70000 + 100000 + 55000 +
AW₅ = -100000(0.3198) + 44370.53(0.1398) – [115000(0.4371)](0.3198) Total fixed cost = 288333.33
AW₅ = -41852.23
Total Variable cost = 25000 + 200 + 2000 + 600 + 200
Year 6 Total Variable cost = 5500
AW₆ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
AW₆ = -100000(A/P,18%,6) + 37714.95(A/F,18%,6) – [125000(P/F,18,6)](A/P,18%,6) Assume 1 unit = 1 mᶟ
AW₆ = -100000(0.2859) + 37714.95(0.1059) – [125000(0.3704)](0.2859) 5000 mᶟ = 5000 units
AW₆ = -37833.16 Qbe = FC/(r-v)
5000 = 288333.33/(r-5500)
Year Cost Operating Cost (AOC) Salvage (S) Capital Recovery (CR) Total AW 5000r – 27500000 = 288333.33
0 -R100 000 r=R5557.67
1 R75 000 R85000 -33000 -108003.75
2 R85 000 R72250 -30728.93 -69719.64 b) Profit = Revenue – (FC+VC)
3 R95 000 R61412.5 -28800.64 -55390.68
500000 = Revenue – (288333.33+5500)
4 R105 000 R52200.625 -27163.14 -47294.04
Revenue = 793833.33
5 R115 000 R44370.53 -25777 -41852.23
6 R125 000 R37714.95 -24596 -37833.16
*Note: Capital Recovery is calculated using the formula: CR = -P(A/P,i,n) + S(A/F,i,n) Increased Production = 8000 (5000+3000)
r= 793833.33/8000
- Step3: Identify the lowest AW, which represents ELS r= R99.23/unit

ELS is 1 year

b) AOC(P/F,i,n) = AW₁
108003.75(P/F,18%,6) = 108003.75
108003.75 (0.3704) = 108003.75
Therefore P =67999.16

Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK


Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK

Problem 5 Question 6

AW for purchasing is given as R1.5m. To make a comparison for making, AW for making must be Assumptions
calculated. - The capacity of 1.8 remains constant at 1.8 until the capacity expansion in 2020 to 3.4, and
another expansion in 2021 to 5.4 and it remains 5.4 throughout the life cycle.
Department Basis Hours Rate/Hour Allocated Hours Total cost for - Cost of construction, which is R800m is evenly spread with in 3 year (from 2012 to 2014), which
Hours makes the cost to be R266.67m (800/3)
A Labour 10 25000 250000 - First revenues are expected in 2015, which are R500/t. The capacity in 2015 is 1.8 Revenues per
B Machine 5 25000 125000 year are calculated by multiplying the expected revenues with the capacity.
C Labour 15 10000 150000
- The per ton revenue is expected to decrease by 3% every year, starting in 2016. That is, revenue
TOTAL 525000
of R500/t will decrease by 3% to R485/t in 2016, and the R485/t will decrease by 3% in 2017 and
so on. For every year. Revenues for each year are calculated by multiplying the actual
Annual Operating Cost = Material cost + Direct labour cost + Total cost for hours
revenue/ton by the capacity.
AOC = 525 000 + 300 000 + 500 000
- The per unit cost (which is R150m) increase by 3% with a production of 1.8. (to get total,
AOC = R1325000
multiply unit cost by capacity)
- Fixed cost is R40m from 2015 and after 2019, it increases to R80m
Calculate the AW for make:
- Remediation cost: R90 m
Year Capacity Cost to Fixed Cost Revenue Unit Cost NCF
AW = -P (A/P,i,n) + S(A/F,i,n) – AOC
construct
AW = -2000000 (A/P,15%, 10) + 50000 (A/F, 15%,10) – 1325000
2011 (0)
AW = -2000000 (0.1993) + 50000 (0.0493) – 1325000 2012 (1) 1.8 -266.67 -266.67
AW = -1721136 2013 (2) 1.8 -266.67 -266.67
2014 (3) 1.8 -266.67 -266.67
Comparing the AW for making (-1721136) to the AW for purchasing, (1500000), 2015 (4) 1.8 -40 900 -278.1 581.9
It is cheaper to purchase because AW cost is less. 2016 (5) 1.8 -40 873 -278.1 554.9
2017 (6) 1.8 -40 846.81 -286.45 520.36
2018 (7) 1.8 -700 -40 821.41 -295.04 -213.63
2019 (8) 1.8 -700 -40 796.77 -303.89 -247.12
2020 (9) 3.6 -80 1545.73 -626 839.73
2021 (10) 5.4 -80 2249.05 -967.19 1201.86
2022 (11) 5.4 -80 2181.6 -996.19 1105.41
2023 (12) 5.4 -80 2116.15 -1026 1010.15

Step 1: Determine PWₒ of all negative NCF at the borrowing rate of 16%:
PWₒ = -266.67(P/F,16%,1) – 266.67(P/F,16%,2) – 266.67(P/F,16%,3) – 213.63(P/F,16%,7) –
247.12(P/F,16%,8)
PWₒ = -266.67(0.8621) – 266.67(0.7432) – 266.67(0.6407) – 213.63(0.3538) – 247.12(0.3050)
PWₒ = -R749.89m

Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK


Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK

Step 2: Determine FW for all positive NCF at an investment rate of 15%:


FW = 581.9(F/P,15%, 4) + 554.9(F/P,15%, 5) + 520.36(F/P,15%,6) + 839.73(F/P,15%,9) +
1201.86(F/P,15%, 10) + 1105.41(F/P,15%, 11) + 1010.15(F/P,15%,12) + 90 References

FW = 581.9(1.7490) + 554.9(2.0114) + 520.36(2.3131) + 839.73(3.5179) + 1201.86(4.0456) + 1. L. Blank & A. Tarquin, “Engineering Economy: 7th Edition”, New York: McGraw-Hill Companies
1105.41(4.6524) + 1010.15(5.3503) Inc, 2012
FW = 18095.68

Step3: Find i (rate) at which PW and FW are equivalent:

PW + FW = 0
PW (F/P, i, n) + FW = 0
-749.89(1+r) ¹² + 18095.68 = 0
-749.89(1+r) ¹² = -18095.65

(1+r) ¹² = (-18095.65)/(-749.89)
(1+r) ¹² = 24.131

1+r = 1.3038
r= 0.3038 (30.38%)

Since the rate (30.38%) is bigger than MARR of 18%, the investment should be considered.

Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK


64 Mlotywa+FM
• MlotywaFM201381928 Assignment 2 2014.pdf
Mlotywa, FM Mlotywa, FM Mlotywa, FM Mlotywa, FM

10-4.3.3 Calculate Capital Recovery (CR)


PROBLEM 1
WACC = MARR = 0.6 X 9% + 0.4 X 8.5% = 8.8 Yr A/P(FC) A/F(MV) CR
Multiply every figure by 1000 0
CAPITAL FW 1 -250.0000 3.5435 -885.8770 1 -118.0000 85.0000 -33.0000
CASH FLOW 2 -63.8700 33.1411 -30.7289
for Project @ TOTAL (AW) 15.0000 28.9035 433.5525 3 -45.9900 17.1894 -28.8006
MARR 8.8% 4 -37.1700 10.0069 -27.1631
PROJECT 5 -31.9800 6.2030 -25.7770
-452.3245
PROFIT 6 -28.5900 3.9940 -24.5960

The project is running at a loss of R 452 324.53


(a) The project is not worthwhile 10-4.4 Solution Part 2: Annual Operating Costs

CAPITAL FW 2 -100.0000 3.5435 -354.3508 10-4.4.1 Present Worth of the AOC


LOAN @ 9% FW 3 -150.0000 3.6425 -546.3724
CASH FLOW P/F(1;n;M
Yr AOC P/F(AOC)
for Project @ TOTAL (AW) 15.0000 28.9035 433.5525 ARR)
MARR 8.8% 0
PROJECT 1 -75.0000 0.8475 -63.5625
-467.1707 2 -85.0000 0.7182 -61.0470
PROFIT
3 -95.0000 0.6086 -57.8170
The project is running at a loss of R 467 170.68 4 -105.0000 0.5158 -54.1590
(b) The project is not worthwhile 5 -115.0000 0.4371 -50.2665
(c Keep your money in your personal investment, better option 6 -125.0000 0.3704 -46.3000

PROBLEM 2 10-4.4.2 Total PW of the PW(AOC)


Weights =
Weighted PWT(AOC;
Yr P/F(AOC)
Weighted Attribute/TOTA n)
Attribute L 0
Flexibility[f] The most important factor = 10 0.3636 1 -63.5625 -63.5625
Safety[s] 50% as important as uptime = 2.5 0.0909 2 -61.0470 -124.6095
Uptime[u] One-half as important as flexibility = 5 0.1818 3 -57.8170 -182.4265
Speed[v] As important as uptime = 5 0.1818 4 -54.1590 -236.5855
Rate of 5 -50.2665 -286.8520
Twice as important as safety = 5 0.1818
Return[r] 6 -46.3000 -333.1520
TOTAL = 27.5 1.0000

PROBLEM 3 (a) 10-4.4.3 AW of PWT(AOC)


Multiply every figure by 1000
A/P(1;n;MA PWT(AOC;
Yr CR MV AOC Yr A/P(PWT)
RR) n)
0 -100.0000
0 0
1 85.0000 -75.0000
1 1.1800 -63.5625 -75.0038
2 72.2500 -85.0000
2 0.6387 -124.6095 -79.5881
3 61.4125 -95.0000
3 0.4599 -182.4265 -83.8979
4 52.2006 -105.0000
4 0.3717 -236.5855 -87.9388
5 44.3705 -115.0000
5 0.3198 -286.8520 -91.7353
6 37.7150 -125.0000
6 0.2859 -333.1520 -95.2482

10-4.5 AW per year of the system


10-4.3 Solution Part 1: Capital Recovery

10-4.3.1 Calculate the AW of the non-recurring costs Yr CR A/P(PWT) AW(Total)


0
A/P(1;n;M 1 -33.0000 -75.0038 -108.0038
Yr Cost A/P(FC) 2 -30.7289 -79.5881 -110.3170
ARR)
0 -100.0000 0.0000 0.0000 3 -28.8006 -83.8979 -112.6986
1 1.1800 -118.0000 4 -27.1631 -87.9388 -115.1020
2 0.6387 -63.8700 5 -25.7770 -91.7353 -117.5123
3 0.4599 -45.9900 6 -24.5960 -95.2482 -119.8441
4 0.3717 -37.1700
5 0.3198 -31.9800 PROBLEM 4
6 0.2859 -28.5900
Total Fixed Cost = 30 + 20% (350) + 100 + 55 + 1/ Profit = R - TC
= 288,3333 x 1000 Profit = R - (RC + CV)
10-4.3.2 Calculate the AW of the Market value (MV) = R 288 333.33 Profit = rQ - (FC + CV)
Profit = r (5000 + 3000) - (288 333.33 + 5500 x (5000 + 3000))
Total Fixed Cost = R 288 333.33 r= 5598.5416/Quibic Meter
A/F(1;n;M
Yr MV A/F(MV)
ARR)
Total Variable Cost = 2500 + 200 + 2000 + 600 + 200 (b)= R 5 437.50
0 = R 5 500.00
1 85.0000 1.0000 85.0000
2 72.2500 0.4587 33.1411 Total Variable Cost = R 5 500.00
3 61.4125 0.2799 17.1894
4 52.2006 0.1917 10.0069 R= TC
5 44.3705 0.1398 6.2030 rQ= FC + vQ
6 37.7150 0.1059 3.9940 r x 5000 = 288 333.33 + 5500 x 5000
r= R 5 557.66/Quibic Meter

Mlotywa, FM Mlotywa, FM Mlotywa, FM Mlotywa, FM


Mlotywa, FM Mlotywa, FM Mlotywa, FM Mlotywa, FM

4 0.3717 -63.1890
(a) r = R 5 557.67 5 0.3198 -54.3660
6 0.2859 -48.6030

PROBLEM 5
Multiply every figure by 1000 000 10-4.3.2 Calculate the AW of the Market value (MV)
PURCHASED ASSEMBLE LINE AT AN ANNUAL COST OF R 1.5M
Years 0 1 2 3 4 5 6 7 8 9 10 Yr MV
A/F(1;n;M
A/F(MV)
Purchased 0.0000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 ARR)
PW Ratios @ 0
1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 1 144.5000 1.0000 144.5000
15%
2 122.8250 0.4587 56.3398
Annual PW 1 0.0000 -1.3043 -1.1342 -0.9863 -0.8576 -0.7458 -0.6485 -0.5639 -0.4904 -0.4264 -0.3708 3 104.4013 0.2799 29.2219
4 88.7411 0.1917 17.0117
5 75.4299 0.1398 10.5451
Total Annual
-7.5282 6 64.1154 0.1059 6.7898
PW 1
Multiply every figure by 1000 000
MAKE THE COMPONENT FOR THE ASSEMBLE LINE IN HOUSE 10-4.3.3 Calculate Capital Recovery (CR)
First Cost -2.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Salvage Yr A/P(FC) A/F(MV) CR
0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0500 0
Value
AOC 0.0000 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 1 -200.6000 144.5000 -56.1000
NCF -2.0000 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.2750 2 -108.5790 56.3398 -52.2392
3 -78.1830 29.2219 -48.9611
Annual PW 2 -2.0000 -1.1522 -1.0019 -0.8712 -0.7576 -0.6588 -0.5728 -0.4981 -0.4331 -0.3766 -0.3152 4 -63.1890 17.0117 -46.1773
5 -54.3660 10.5451 -43.8209
Total Annual 6 -48.6030 6.7898 -41.8132
-8.6375
PW 2

10-4.4 Solution Part 2: Annual Operating Costs


Continue Purchasing the assemble line will be an option
10-4.4.1 Present Worth of the AOC
PROBLEM 6
Multiply every figure by 1000 000 P/F(1;n;M
Total Yr AOC P/F(AOC)
ARR)
Production Annual Production Production FW
No of Years Year Invest Production NCF FW+ PW PW- 0
Income Fixed Cost per unit Costs Cash Flow Ratios
Costs 1 -75.0000 0.8475 -63.5625
0 2012 -266.6667 -266.6667 1.0000 -266.6667 2 -85.0000 0.7182 -61.0470
1 2013 -266.6667 -266.6667 0.8621 -229.8851 3 -95.0000 0.6086 -57.8170
2 2014 -266.6667 -266.6667 0.7432 -198.1768 4 -105.0000 0.5158 -54.1590
3 2015 900.0000 -40.0000 -270.0000 -310.0000 590.0000 590.0000 3.0590 1804.8235 5 -115.0000 0.4371 -50.2665
4 2016 873.0000 -40.0000 -278.1000 -318.1000 554.9000 554.9000 2.6600 1476.0450 6 -125.0000 0.3704 -46.3000
5 2017 846.8100 -40.0000 -286.4430 -326.4430 520.3670 520.3670 2.3131 1203.6405
6 2018 -700.0000 821.4057 -40.0000 -295.0363 -335.0363 486.3694 -213.6306 0.4104 -87.6830
7 2019 -700.0000 796.7635 -40.0000 -303.8874 -343.8874 452.8762 -247.1238 0.3538 -87.4397
10-4.4.2 Total PW of the PW(AOC)
8 2020 1545.7220 -80.0000 -626.0080 -706.0080 839.7140 839.7140 1.5209 1277.1000
9 2021 2249.0260 -80.0000 -967.1820 -1047.1820 1201.8440 1201.8440 1.3225 1589.4387
PWT(AOC;
10 2022 2181.5552 -80.0000 -996.1975 -1076.1975 1105.3578 1105.3578 1.1500 1271.1614 Yr P/F(AOC)
n)
11 2023 -90.0000 2116.1086 -80.0000 -1026.0834 -1106.0834 1010.0252 920.0252 1.0000 920.0252
0
Total 9 542.2343 -869.8512 1 -63.5625 -63.5625
2 -61.0470 -124.6095
ERR 24.33% 3 -57.8170 -182.4265
4 -54.1590 -236.5855
MARR 18.00% 5 -50.2665 -286.8520
6 -46.3000 -333.1520
ERR>MARR Consider the Phased Investment

PROBLEM 3 (b) 10-4.4.3 AW of PWT(AOC)


Multiply every figure by 1000
Yr CR MV AOC A/P(1;n;MA PWT(AOC;
Yr A/P(PWT)
0 -170.0000 RR) n)
1 144.5000 -75.0000 0 0
2 122.8250 -85.0000 1 1.1800 -63.5625 -75.0038
3 104.4013 -95.0000 2 0.6387 -124.6095 -79.5881
4 88.7411 -105.0000 3 0.4599 -182.4265 -83.8979
5 75.4299 -115.0000 4 0.3717 -236.5855 -87.9388
6 64.1154 -125.0000 5 0.3198 -286.8520 -91.7353
6 0.2859 -333.1520 -95.2482

10-4.3 Solution Part 1: Capital Recovery 10-4.5 AW per year of the system

10-4.3.1 Calculate the AW of the non-recurring costs Yr CR A/P(PWT) AW(Total)


0
A/P(1;n;M 1 -56.1000 -75.0038 -131.1038
Yr Cost A/P(FC) 2 -52.2392 -79.5881 -131.8273
ARR)
0 -170.0000 0.0000 0.0000 3 -48.9611 -83.8979 -132.8590
1 1.1800 -200.6000 4 -46.1773 -87.9388 -134.1162
2 0.6387 -108.5790 5 -43.8209 -91.7353 -135.5562
3 0.4599 -78.1830 6 -41.8132 -95.2482 -137.0613

Mlotywa, FM Mlotywa, FM Mlotywa, FM Mlotywa, FM


65 Mnguni+NC
• 2014MNGUJNINC200571552.pdf
Mnguni, NC Mnguni, NC Mnguni, NC Mnguni, NC

Mnguni, NC Mnguni, NC Mnguni, NC Mnguni, NC


Mnguni, NC Mnguni, NC Mnguni, NC Mnguni, NC

Mnguni, NC Mnguni, NC Mnguni, NC Mnguni, NC


Mnguni, NC Mnguni, NC

Mnguni, NC Mnguni, NC
66 Moche+TM
• 2014Ass2MocheTM.pdf
Moche, TM Moche, TM Moche, TM Moche, TM

809904969 Annual NCF= 15 000 – 18615

T.M. Moche = -3 615

ASSIGNMENT 2 Amount of equity invested: 250 000 – 150 000

PROBLEM 1 PW = - 100 000 + (-3 615)(P/A, 8,8%, 15)

A-From personal investment = -100 000 + (-3 615)(8,1567)

n=15 years = -100 000 + (-29 486,471)

MARR@8,5% = -129 486,471


PW = -250 000 + 15 000(P/A, 8,5%, 15) The Loan borrowed, does not meet the MARR
= -250 000 + 15 000(8,3042)

= -250 000 + 124 563

= -125 437 PROBLEM 2


The personal investment does not meet the MARR

B- From loan payment


ATTRIBUTES SCORE WEIGHTS
Loan browed= 250 000(0,60)= 150 000 Flexibility 10 0.3636
Safety 2.5 0.0909
Loan payment= 150 000(A/P, 9%, 15) Uptime 5 0.1818
Speed 5 0.1818
= 150 000(0,1241)
Rate of Return 5 0.1818
= 18 615 Totals 27.5 1

WACC 0,4(8,5%)+0,6(9%)=8,8%

Moche, TM Moche, TM Moche, TM Moche, TM


Moche, TM Moche, TM Moche, TM Moche, TM

PROBLEM 3
A/P CUM
n First cost Factor MAAR CR AOL Factor(P/F) (P/F)AOL Total Factor(A/P) CR(A/P)
0 -100 000 0
-118
1 1,18000 000 85 000 85 000 -75 000 0,8475 63 560 -63 560 1,1800 -75 000
-124
2 0,6387 -63 870 72 223 33 140 -85 000 0,7182 61 050 610 0,6387 -79 588
-182
3 0,4599 -45 999 61 412 17 190 -95 000 0,6086 57 820 436 0,4599 -83 899
-105 -236
4 0,3717 -37 170 52 200 10 010 000 0,5158 54 160 590 0,3717 -87 941
-115 -286
5 0,3198 -31 980 44 370 6 200 000 0,4371 50 270 860 0,3198 -91 738
-125 -333
6 0,2859 -28 590 37 715 3 990 000 0,3704 46 300 166 0,2859 -95 250

Moche, TM Moche, TM Moche, TM Moche, TM


Moche, TM Moche, TM Moche, TM Moche, TM

PROBLEM 4 Q

A)Q,BE = 5000m^3 = 500 000 + 288 333,33 + 5 500

FC = R288 333,33 8 000

V= R 5 500 = 5 5982,54

Q,BE = FC

W–C

W = FC + (VQ,BE)

Q,BE PROBLEM 5

= 288 333,33 + ( 5 500 X 5 000) Making the components in-house

5 000 Department A: 25 000(10) = 250 000

= 27 788 333,33 Department B : 25 000(5) = 125 000

5 000 Department C : 10 000(15) = 150 000

W = 5 557,67 525 000

AOC = 500 000 + 300 000 + 525 000 = 1 325 000

B) The make alternative

Profit = R-Tc AW = -P(A/P, i, n) + S(A/F, i, n ) – AOC

Profit = (W-V)Q – FC = - 2 000 000(A/P,15%,10) + 50 000(A/F 15%,10) – 1 325 000

W = Profit + FC + V = - 2 000 000(0,1993) + 50 000(0,0493) – 1 325 000

Moche, TM Moche, TM Moche, TM Moche, TM


Moche, TM Moche, TM Moche, TM Moche, TM

= -398 600 + 2465 – 1 325 000 PROBLEM 6

= - 1 721 135 Multiply every figure by 1000 000

Buying components -1 500 000 No Annual Production Total


Production Production FW
of Year Invest Fixed per unit Production NCF FW+ PW PW-
Income Cash Flow Ratios
Therefore, the carafes are currently purchased with an AW of AW (buy) = -1 500 000 Years Cost Costs Costs
-
It’s cheaper to buy than to make because the AW of the cost is less. 0 2012 -266.6667 1.0000 -266.6667
266.6667
-
1 2013 -266.6667 0.8621 -229.8851
266.6667
-
2 2014 -266.6667 0.7432 -198.1768
266.6667
3 2015 900.0000 -40.0000 -270.0000 -310.0000 590.0000 590.0000 3.0590 1804.8235
4 2016 873.0000 -40.0000 -278.1000 -318.1000 554.9000 554.9000 2.6600 1476.0450
5 2017 846.8100 -40.0000 -286.4430 -326.4430 520.3670 520.3670 2.3131 1203.6405
-
6 2018 821.4057 -40.0000 -295.0363 -335.0363 486.3694 -213.6306 0.4104 -87.6830
700.0000
-
7 2019 796.7635 -40.0000 -303.8874 -343.8874 452.8762 -247.1238 0.3538 -87.4397
700.0000
8 2020 1545.7220 -80.0000 -626.0080 -706.0080 839.7140 839.7140 1.5209 1277.1000
-
9 2021 2249.0260 -80.0000 -967.1820 1201.8440 1201.8440 1.3225 1589.4387
1047.1820
-
10 2022 2181.5552 -80.0000 -996.1975 1105.3578 1105.3578 1.1500 1271.1614
1076.1975
- -
11 2023 -90.0000 2116.1086 -80.0000 1010.0252 920.0252 1.0000 920.0252
1026.0834 1106.0834

NCF Total 9 542.2343 -869.8512


NCF+FW
(f/p,r%N-
ERR 24.33%
n) (r%=15)

Moche, TM Moche, TM Moche, TM Moche, TM


Moche, TM Moche, TM

FW+
NCF(-)(PW) MARR 18.00%
(p/f,k%n)(k=16%)
SumNCF(FW+)
SumNCF(PW-) ERR>MARR Consider the Phased Investment

Moche, TM Moche, TM
67 Mofokeng+JT
• 2014Ass2Mofokeng+T.J..pdf
Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT

Name: T.J.MOFOKENG Pw at the MARR of 8.8%

Pw = -100,000 – 10,650(P/A, 8.8%, 15)


Student Number: 201493757
= R- 86, 969
Advanced Engineering Economics-Assignment 2
Since Pw < 0 it is not worthwhile to get money from the loan.
Problem 1
(c) There is no better option
(a) 100% Equity Financing
Problem 2
P = R250, 000
Importance Logic
MARR = 8.5%
1. Flexibility 10 Most important (10)
Annual Cash Flow = R15, 000
2. Safety 2.5 0.5(5)
Pw = -250,000+15,000 (P/A, 8.5%, 15)
3. Uptime 5 0.5(10)
= -250,000+15,000(8,3042)
4. Speed 5 2(2.5)
= R-125,437
5. Rate of Return 5 2(2.5)
Since Pw < 0 it is not worthwhile to get money from personal investment
Total = 27.5
(b) 60% Financing (Borrowing)
Wi =
P=

= R150, 000 1= = 0.364

Loan payment = 150,000(A/P, 9%, 15)


2= = 0.090
= 150,000 (0.1710)

=R 25,650 3= = 0.182
WACC = 0.4 (8.5%) + 0.6 (9%)

= 8.8% 4= = 0.182

Annual Net Cash Flow = Project NCF – Loan Payment


5= = 0.182
= R 15,000-R 25,650

= R-10,650 Total = 0.364 + 0.090 + 0.182 + 0.182 + 0.182 = 1.000

Amount invested from Equity = 250,000-150,000

= R100, 000

Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT


Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT

Problem 3 = R-115,112

P= R100 000 For n = 5: Aw = -100, 000 (A/P, 18%, 5) - 75,000 -10, 000 (A/G, 18%, 5) +100,000
( ) (A/F, 18%, 5)
i = 18%

n= 6 = -100,000 (0.3198) - 75,000 - 10,000 (1.6728) + 100, 000 ( ) (0.1398)

S = 100 000 X = - 31,980 - 75, 000 - 16,728 + 6,203

= R-117,504
= R 37 317, 951
For n = 6: Aw = -100, 000 (A/P, 18%, 6) - 75,000 -10, 000 (A/G, 18%, 6) +100, 000
Operating cost = R75 000
( ) (A/F, 18%, 6)
AOC = [65 + 10(6)] 1000
= -100, 000 (0.2859) - 75, 000 - 10, 000 (2.0252) + 100, 000 ( ) (0.1059)
= R125 000
= - 28,590 - 75,000 - 20,252 + 3,994
For n=1: Aw1 = -100, 000 (A/P, 18%, 1)-75, 000+100, 000 ( ) (A/F, 18%, 1)
=R-119,848
= -100, 000 (1.1800) - 75, 000 + 100, 000 (0.85) (1, 0000)
ESL is year1 with Aw1 = R108, 000
= - 118, 000 – 75, 000 + 85, 000
(b) AW6 = -108,000 = -P (A/P, 18%, 6) - 75, 000 -10, 000 (A/G, 18%, 6) + P ( )
= R- 108, 000
(A/F, 18%, 6)
For n=2: Aw2 = -100,000 (A/P, 18%, 2) – 75,000 - 10, 000 (A/G, 18%, 2) + 100,000
-108,000 = -P (0.2859) - 75, 000 - 10, 000 (2.0252) + P (0.3772) (0.1059)
( ) (A/F, 18%, 2)
0, 2459 P = -95,252 + 108,000
= -100,000(0.6387)-75,000-10,000(0.4587) + 100,000( ) (0.4587)
P = R51, 828
= - 63,870-75,000-4,587+33,141
The first cost must be reduced by R48, 172 to give R51, 828
= R- 110, 316
PROBLEM 4
For n=3: Aw3 = -100, 000(A/P, 18%, 3) - 75,000 -10,000 (A/G, 18%, 3) + 100,000
( ) (A/F, 18%, 3)
Fixed Cost, R’000 Variable Cost, R/unit
= - 100, 000(0.4599)-75, 000-10,000(0.8902) + 10,000( ) (0.2799)

= - 45,990-75000-8,902+17,189 Administrative 30 Materials 2500


= R-112,703
Salaries and benefits 20% of 350 Labour 200
For n = 4: Aw = -100 (A/P, 18%, 4) - 75,000 - 10,000 (A/G, 18%, 4) + 100,000
( ) (A/F, 18%, 4)
Equipment 100 Indirect labour 2000
=-100,000 (0.3717) - 75,000 - 10,000 (1.2947) + 100,000 ) (0.1917)
= -37,170 - 75,000 - 12,947+10,007

Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT


Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT

Space, etc 55 Subcontractors 600 Carafes was purchased for R1, 500000. Therefore it is cheaper to purchase because
of low cost.

PROBLEM 6
Computers: 1/3 of 100 Misc cost 200
Information supplied

INVESTMENT VALUE UNITS

FC = R288, 333 Phase I 1.8 Mega tons


V= R5500/unit
Phase II A 3.6 Mega tons
(a) Profit = (r - v) Q - FC
Phase III B 5.4 Mega tons
0 = (R - 5500) (5000) - 288,333
Production Cost(PC) R150 Per ton
(r - 5500) =
Production Revenue (PR) R500 Per ton
r = R5, 558 per unit
gR (Revenues) -3% Per year
(b) Profit = (r - v) Q - FC
gC (Costs) 3% Per year
500,000 = (r - 5500) 8000 - 288,333
FC Phase I R40 Million
r = R5, 599 per unit
FC Phase II R80 Million
PROBLEM 5

Calculating the indirect cost Remediation Cost R90 Million

Department A: 25, 000(10) = R250, 000


Investment Rate (r) 15% Per year
Department B: 25, 000(5) = R125, 000

Department C: 10, 000(15) = R150, 000 Borrowing Rate 16% Per year

Total = 250, 000 + 125, 000+150,000 = R525, 000


Periods 11 Years
AOC= 500, 000 + 300, 000 + 525, 000 = R1, 325000

The make alternative Annual worth is the total of capital recovery and AOC

AW = -P (A/P, i, n) + S (A/F, i, n) - AOC


MARR= 18%
= -2, 000000 (0.1993) + 50,000(0.0493) - 1,325000
Production
= R-1, 721037
= [PR - PR ]-

Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT


Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT

Year 2015 = 1.8(500-150)-40 = 590 2023 -90 1010,026 919,9 1,000 0,1954 919,9

Year 2016 = 1.8[500( - 150 ] – 40 = 554.9


𝜮 9542.09 -869,849
Year 2017 = 1.8[500 - 150 ] - 40 = 520.37
10,9698
Year 2018 = 1.8 [500 - 150 ] – 40 = 486.374

Year 2019 = 1.8 [500( - 150 ] – 40 = 452.876

= [PR - PR ]-
ERR -1

Year 2020 = 3.6 [500 - 150 ] – 80 = 839.69


-1
Year 2021 = 5.4 [500 - 150 ] – 80 = 1201.85
= 24,0560%
Year 2022 = 5.4 [500 - 150 ] – 80 = 1105.35
Yes, phased investment should be considered because ERR is 24,056% which is
Year 2023 = 5.4 [500 - 150 ] – 80 = 1009.9
higher than MARR=18%.

Yr Investment Production CF FV@r PV@k FW+ PW--

2012 -266,667 -266,67 4,6524 1,0000 -266,667 [END]

2013 -266,667 -266,67 4,0456 0,8621 -229,89

2014 -266,667 -266,67 3,5199 0,7432 -198,189

2015 590 590 3,0590 0,6407 1804,81

2016 555,08 555,08 2,660 0,5523 1476,03

2017 520,37 520,37 2,3131 0,4761 1203,67

2018 -700 486,374 -213,63 2,0114 0,4104 -87.672

2019 -700 452,876 -247,124 1,7490 0,3538 -87,432

2020 839,69 839,69 1,5209 0,3050 1277,08

2021 1201,85 1201,85 1,3225 0,2630 1589,45

2022 1105,35 1105,35 1,1500 0,2267 1271,15

Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT


68 Mohajane+TD
• 2014Ass2Mohajane-TD.pdf
Mohajane, TD Mohajane, TD Mohajane, TD Mohajane, TD

Problem 1 Problem 2
a) Personal investment Member Member Member Member Norm.
1 2 3 4 Sum Average weight
MARR = 8.5% Fexibility
[f] 4.5 6 8 9 27.5 6.875 0.16
PW = -250 000 + 15 000(P/A, 8.5%, 15) safety [s] 3.375 4.5 6 6.75 20.625 5.15625 0.12
Uptime
= -250 000 + 15 000(8.3042) [u] 6.75 9 12 13.5 41.25 10.3125 0.24
Speed
[v] 6.75 9 12 13.5 41.25 10.3125 0.24
= R-125 437 Rate of
Return
b) 60% -40% financing [r] 6.75 9 12 13.5 41.25 10.3125 0.24
171.875 42.96875 1
Loan principal = 250 000(0.60) = R150 000

Loan payment = 150 000(A/P, 9%) = 150 000(0.1241)


Problem 3
= R18 615 per year
a)
WACC = 0.4(8.5) + 0.6(9%)
Year First Cost Capital Rec AOC PW (AOC) A/P (PWT) Salvage Total AW
= 8.8% 0 100000 0.0000 0.0000 0.000 0.000 0.000
1 118000 75000 63562.500 75003.750 193003.750
MARR = 8.8%
2 63870 85000 124609.500 79588.088 143458.088

Annual NCF = project NCF – loan payment 3 45990 95000 182426.500 83897.947 129887.947
4 37170 105000 236585.500 87938.830 125108.830
= 15 000 – 18 618 = -R3 618 5 31980 115000 286852.000 91735.270 123715.270
6 28590 125000 333152.000 95248.157 37714.952 161553.108
Amount of equity invested = 250 000 – 150 000 = R100 000

PW = -100 000 + (-3618)(P/A, 8.8%, 15) ESL is at year 5

= -100 000 – 3618(8.1567)


b)
= R-126 510.94
Year First Cost Capital Rec AOC PW (AOC) A/P (PWT) Salvage Total AW
c) Since PW<0, both financing methods do not meet MARR requirements. Both methods are not 0 75000 0.0000 0.0000 0.000 0.000 0.000
recommended. 1 88500 75000 63562.500 75003.750 163503.750
2 47902.5 85000 124609.500 79588.088 127490.588
3 34492.5 95000 182426.500 83897.947 118390.447
4 27877.5 105000 236585.500 87938.830 115816.330
5 23985 115000 286852.000 91735.270 115720.270
6 21442.5 125000 333152.000 95248.157 28286.214 144976.870

ESL is at year 5

Even when first cost is reduced to R75 000, the ESL remain in year 5.

Mohajane, TD Mohajane, TD Mohajane, TD Mohajane, TD


Mohajane, TD Mohajane, TD Mohajane, TD Mohajane, TD

Problem 4 AOC = 525 000 + 300 000 + 500 000

a) = R1 325 000

Profit = Revenue – Total Costs (TC) Buying

TC = Fixed Costs (FC) + Variable Costs (VC) AW = R-1 500 000

Profit = Revenue – (FC + VC) Making

FC = 30 + 70 + 100 + 55 + 33.33 AW = -P(A/P,15%,10) + S(A/F,15%,10) – AOC

= R 288.33 X 103 = -2 000 000(0.1993) + 50 000(0.0493) – 1 325 000

VC = 2500 + 200 + 2000 + 600 + 200 = R-1 721 135

= 5500 R/Unit X 5000 m2 It is cheaper to purchase based on the AW calculations.

= R 27.5 X 106

Breakeven profit = 0 Problem 6


Profit = Revenue – (FC + VC)

0 = Revenue – 27788330
FV @ r PV @ k FW+ @ r PW- @ k

Revenue = R 27.79 x 106 Unit Unit Prod. Prod. Total F/P (1; P/F
n year Investment Revenue Cost Fix. Cost Rev Cost cost Income NCF n;15%) (1;n;16%)
b) 0 2012 -266.667 -266.667 -266.667

1 2013 -266.667 -266.667 -231.894


Profit = R500 000
2 2014 -266.667 -266.667 -201.627

Production volume = 8 000 m2 3 2015 500.000 150.000 40 900.000 270.000 310.000 590.000 590.000 1804.810

4 2016 485.000 154.500 40 873.000 278.100 318.100 554.900 554.900 1476.034


500 000 = revenue – 44 288 330 5 2017 470.450 159.135 40 846.810 286.443 326.443 520.367 520.367 1203.661

6 2018 -700 456.337 163.909 40 821.406 295.036 335.036 486.370 -213.631 -92.352
Revenue = R44 788 330
7 2019 -700 442.646 168.826 40 796.764 303.887 343.887 452.877 -247.123 -92.894

Per Unit Revenue = 44788330/8000 8 2020 429.367 173.891 80 1545.721 626.008 706.008 839.714 839.714 1277.120

9 2021 416.486 179.108 80 2249.024 967.182 1047.182 1201.842 1201.842 1589.436


= R5598.54 (R/Unit)
10 2022 403.991 184.481 80 2181.551 996.197 1076.197 1105.354 1105.354 1271.157

11 2023 -90 391.872 190.016 80 2116.107 1026.084 1106.084 1010.023 920.023 920.023

Sum 9542.242 -885.434

Problem 5
FW+ / -
PW- = 10.77691
Department A: 25 000(10) = R250 000
ERR = 0.241261
Department B: 25 000(5) = R125 000
24.13%

Department C: 10 000(15) = R150 000

Total indirect costs = A+B+C = R525 000 i’ > MARR of 18%, therefore the phase investment should be considered using EROR approach.

Mohajane, TD Mohajane, TD Mohajane, TD Mohajane, TD


69 Mohlabi+MH
• 2014GIE4058Ass2Mohlabi MH.pdf
Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH

Problem 1

Equity 100% = loan 60% @ 9% of R250 000


= Equity 40% @ 8.5%
n= 15 years @ 9% year @ MARR=8.5% /year

MARR = 8.5

R 250 000

Capital = R250 000


2014
ACF = R15 000
MOHLABI MH: 200583007
Debt Fraction = 60/100 = 0.6
ASSIGNMENT 2
Equity fraction = 40/ 100 = 0.4
PW = -250 000 + 15 000 (P/A, 8.5%, 15)
@85 = -250 000 + 15 000 98.3042)

ADVANCED ENGINEERING = -250 000 + 124563


= -R125 437

ECONMICS
W<0 MARR requirements are not met by 100% equity because we get

Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH


Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH

PW of -125 437 which is negative. Problem 2


60% - 40% D-E financing Scale: between 0 & 10
Loan principal = 250 000 (0, 6) = 150 000 Committee members
Loan payment = 150 000 (A/P, 9%, 15 = 150 000 (0, 1241) = 18615

1) Attribute 1 2 3 4 Sum Avg Wj


Cost of 60% debt capital is 9% for the loan 2) Flexibility (f) 9 8 7 10 34 8,5 0,3550
3) Safety (s) 3 2 1,75 2,5 9,25 2,3 0,966
WACC = 0.4 (8, 5%) + 0, 6 (9%) = 8.8% 4) Uptimu (u) 4,5 4 3,5 5 17 4,25 0,1775
5) Speed (v) 4,5 4 3,5 5 17 4,25 0,1775
6) Rate of return 6 4 3,5 5 18,5 4,62 0,1932
Annual NCF = project NCF – loan payment (r)
Ʃ95,75 Ʃ0,9998
= R15 000 – R18 615 = -R3615
Amount of equity inverted = 250 000 – 150 000
= R100 000 NB: If we remove flexibility factor because is the highest, and the normalized should not be more than one.

Calculations: PW at MARR of 8, 8%
PW = -100 000 + (-3615) (P/A, 8.8, 15)
= -100 000 + (-3615 x 8.1567)
= - R129 486, 5

PW < 0, a 60% debt and – 40% equity mix does not meet the MARR requirement

Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH


Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH

Problem 3 Problem 4 (1)


ESL=? S = P x 0.85n; MARR = 18% a) Total VC = 5500 V=5500 Q= 5000m3
CR = - P (A/P, i, n) + S (A/F, i, n); AOC = (65 + 10 x n) x 1000 n>1 Total FC = 288, 3333

F.C CR A/F 5. CR AOC AC


P/F PW(AC) AW AW rQ = FC + VQ
18%
r (5000) = 288,3333 + (5500x5000)
0 100000 1.0000
1 1.8 1,000 85000 33000 75000 75000 0,8475 63562,5 75003.75 108,000 r = R5500/unit
2 0.63872 0,4587 72250 30728,9250 85000 85000 0,7182 124609,5 579590,0311 110,316
3 0,45992 0,2799 61412.5 28800,6413 95000 95000 0,6086 182426,5 83902,3002 112,703
4 0.37174 0,1979 52200,625 27163.1402 105000 105000 0,5158 236585,5 87947,9793 115,112 b) P = R500 000 Q = 800 m3
5 0,31978 0,1398 44370,5313 25776,9997 115000 115000 0,4371 286852 91728,9135 117,504
6 0.28591 0,1059 37714,9516 24595,9866 125000 125000 0,3704 333152 95251,5314 119,849 Profit (P) = (r-v) Q-FC
5000 000 = (r-5500)8000-288, 3333
ESL = 1 year at AW total of R108 000
r-5500 = 500 000+ 288, 3333
Consider equivalent of AW1, and AW6 to be R108 000
8000
AW1 =AW6 =R108 000
r= 5500+62.5360 = 5562.5360
Lower first cost (P) =?
AW6 = 108 000 = P (A/P, 18%, 6) + 75 000 + 10 000 (A/G, 18%, 6) – P (0, 85)6 (A/F, 18%, 6)
Problem 4 (2)
108 000 = P (0.28591) + 75 000 + 10 000 (2, 0252) – P (0, 37715) (0, 10591)
a) Q = 5000m3
108 000 – 95252 = 0, 28591 P – 0,03994P
Total F.C = R30 +R70+100 + 55 + 33, 33 = R 288.3333
0.24597P = 12 748
Total V.C = 2500 + 200 + 2000 + 600 + 200 = R5500
P= R51827, 5
NB: The first cost is decreased from R100 000 to R51827, 5 therefore, the difference is R48172, 5 which is the high reduction.

Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH


Mohlabi, MH Mohlabi, MH Mohlabi, MH Mohlabi, MH

rQ + FC + VC Problem 5
r = FC + VC = R288, 3333 + R5500 Annual cost = R1, 5 m

Q 5000 m3 First cost = R2m


= R1, 1577 S.V = R50 000
N = 10 Years
MARR = 15%
b) Profit =R500 000 Q= 8000m3 ER=?
Profit = rQ – (FC + VQ) = rQ-TC

Total cost (TC) = FC + VC = 288, 33 + 5500 = 5788, 33 Basis level = indirect allocated cost
QBE = FC_
Rate
r-V
rV = 288,33 = 0, 0360 Indirect cost allocation calculation:
8000
Department: ACA = 25000x R10/h =R250 000
1, 1577 – V = 0, 0360
V = R1.1217/m3 : ACB = 5 x 25 000 = R125 000

500 00 = r (8000) – 5788, 33