CEEN 3317 Engineering Economy Name:

CEEN 3317 Engineering Economy

Name: ____________________ K number: 2

1. True or false

(a) The MARR is the interest rate at which a firm can always earn or borrow money.
True
(b) If IRR>MARR, reject the project.
False

2. Circle the correct answer

(a)
Option: c) $600 < PW(10%) ≤ $650

(b)
Option: b) $438.6

(c)
Option: b) The project is a nonsimple investment.

Question 3

Solution:

NPV of project A

= -1000000+700000/ (1+12%) ^1+700000/ (1+12%) ^2

= -1000000+700000/ (1.12) ^1+700000/ (1.12) ^2

= -1000000+625000 +558035.71

= $183,035.71

NPV of project B
= -1200000+700000/ (1+12%) ^1+1000000/ (1+12%) ^2

= -1200000+700000/ (1.12) ^1+1000000/ (1.12) ^2

= -1200000+625000 + 797193.88

= $222,193.88

Project A NPV is $183035.7 and NPV of project B is $222193.9. Hence the NPV of Project B is greater
than the NPV of project A so our project B is more profitable, and we will select he Project B.
CEEN 3317 Engineering Economy Name:

Question 4

Solution:

We need to do an incremental cash flow analysis between the two lighting systems.

Incremental initial cost = $55,000

Annual cost saving = (30,000 - 8,000)

= $22,000

Annual incremental cost = $4,000

Incremental Net annual benefit = (22,000 - 4,000)

= $18,000

So,

Net Annual Benefit (NAB) ($) = - 55,000 + 18,000 x PVIFA (12%, 20 years)

= - 55,000 + 18,000 x 7.4694 (Using PVIFA table)

= - 55,000 + 134,449.2

NAB = $79,449.2

Question 5

Solution:

MARR = 10%

Calculate IRR.

Calculating IRR using trial and error method.

Calculate the PW of the cash flows at MARR of 10%

PW at 10% = -5,000 + 0 + 4,840 (1 + 0.10) -2 + + 1,331 (1 + 0.10) -3

PW at 10% = 0

Therefore IRR = 0

IRR is the rate of interest where the Net Present Worth will be zero. At 10%, the NPW is zero. Hence,
MARR = IRR.

Alternatively, we can calculate IRR using the TRIAL AND ERROR METHOD.
CEEN 3317 Engineering Economy Name:

Let the interest is 9%. Calculate PW at 9%

PW = -5,000 + 0 + 4,840 (1 + 0.09) -2 + + 1,331 (1 + 0.09) -3

= 101.51

PW is positive. Increase the rate of interest to 11% and calculate the PW at 11%

PW = -5,000 + 0 + 4,840 (1 + 0.11) -2 + + 1,331 (1 + 0.11) -3

= -98.53

By using interpolation

IRR = 9% + [101.51 – 0 ÷ 101.51 – (-98.53)] * 2% = 10%

Question 6

Benefit cost is calculated as = B/I+C

So for A1 Benefit cost = 400/100+100 = 2

A2 Benefit cost = 700/200+300 = 1.4

A1 Benefit cost = 500/200+150 = 1.43

Now will go for the Incremental B/C ratio analysis = Bk-Bj/Ck-Cj

Incremental B/C ratio analysis for proposal A3 = 500-400/(200+150)-(100+100)

=0.66

As this incremental B/C ratio is less than 1 so we will select the proposal A1.

A1 versus A2 incremental cost benefit ratio = 700-400/(300+200)(100+100)

=1

As the calculated ratio is equal to 1 so we can go for A1 or for A2.

Question 7

Solution:

(a)

Straight-line method (SLM) annual depreciation = (Cost - salvage value) / Useful life

= $(32,000 - 5,000) / 6 = $27,000 / 6 = $4,500

Annual depreciation, year 1 = $4,500

CEEN 3317 Engineering Economy Name:

Annual depreciation, year 2 = $4,500

(b)

SLM depreciation rate = 1/Useful life = 1/6

150% depreciation rate = 150% x SLM depreciation rate = 150% x (1/6) = 25%

This method ignores salvage value. Therefore,

Annual depreciation, year 1 = $32,000 x 25% = $8,000

Book value at end of year 1 = Book value at beginning of year 2 = $(32,000 - 8,000) = $24,000

Annual depreciation, year 2 = $24,000 x 25% = $6,000

Question 8

Solution:

MACRS ignores salvage value. Depreciation schedule as follows.

Yea Depreciation Annual

r Cost ($) Rate (%) Depreciation ($)

(A) (B) (C) = (A) x (B)

1 2,20,000 20 44,000

2 2,20,000 32 70,400

3 2,20,000 19.2 42,240

4 2,20,000 11.52 25,344

5 2,20,000 11.52 25,344

6 2,20,000 5.76 12,672

Question 9

Solution:

Taxable Income: $34,000,000 - $5,000,000 - $4,000,000 - $1,000,000 - $210,000

= $23,790,000
CEEN 3317 Engineering Economy Name:

It is greater than the $18,333,334 in the corporate rate table. So the marginal tax rate is 35%.

Tax = $6,416,666 + 35%*($23,790,000 - $18,333,334)

= $8,326,499

Average tax rate= $8,326,499/$23,790,000 = 35%

Net Income = Taxable Income - Tax

= $23,790,000 - $8,326,499

= $15,463,501