THE INTERNATIONAL UNIVERSITY (IU) Course: Engineering Economy

School of Industrial Engineering and Management

FINAL EXAMINATION
Question 1:
MARR = 8% per year
Net profit = Revenues - Expenses
Year Revenue ($) Year Expenses ($) Net Profit ($)
1 5,000 1 12,006 -7,006
2 5,200 2 3,300 1,900
3 5,300 3 3,500 1,800
4 5,400 4 3,700 1,700
5 5,500 5 3,900 1,600
6 5,600 6 5,100 500
7 5,700 7 4,300 1,400
8 5,800 8 4,500 1,300
9 5,900 9 4,700 1,200
10 6,000 10 4,900 1,100

FW(8%) = 1,900(F/A,8%,10) - 100(F/G,8%,9) + (-7,006-1,900)(F/P,8%,9) +

(-1,000)(F/P,8%,4) = 1,900*14.487 - 100*43.6 - 8,906*1.999 -1,000*1.36 = $4,002.206
Note: (F/G,8%,9) = ((F/A,8%,9) - N)/I = (12.488-9)/0.08 = 43.6
Thus, the project is good investment because its future worth is positive.

Question 2:
Useful life N = 7 years
MARR of 8% per year
Machine A Machine B Machine C
Investment costs $55,000 $45,000 $87,990
Annual expenses $6,250 $8,550 $3,200
Annual revenue $18,250 $16,750 $20,200
Market value $18,000 $3,750 $22,000
IRR 15.9% 7.9% 14.6%

According to IRR of each machine, the machine B should be rejected because its IRR
is not satisfied (IRR = 7.9% < MARR = 8%)
Since Revenues > Expenses => Net annual profit = Revenue - Expense
Machine A Machine C
Investment costs $55,000 $87,990
Net annual $12,000 $17,000
profit
Market value $18,000 $22,000
IRR 15.9% 14.6%

 Present Worth method

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 THE INTERNATIONAL UNIVERSITY (IU) Course: Engineering Economy
School of Industrial Engineering and Management

PWA = -55,000 + 12,000(P/A,8%,7) +18,000(P/F,8%,7) = -55,000 + 12,000*5.206

+18,000*0.5835 = $17,975
PWC = -87,990 + 17,000(P/A,8%,7) +22,000(P/F,8%,7) = -87,990 + 17,000*5.206
+22,000*0.5835 = $13,349
=> PWA > PWC
Thus, following the present worth method, the machine A should be selected.

Question 3:
Basis cost B = $58,956
Seven-year GDS property class
Market value MV = $10,000
Net annual value = $15,000
Effective income tax rate t = 40%
The after-tax MARR equals 15% per year
a. The value of the company’s before-tax MARR
 Before-tax MARR
After−tax MARR 0.15
Before - tax MARR ≈ = =0.25=25 %
1−effective income tax rate 1−0.4

b. The GDS depreciation amounts in years one through eight

EOY,k rk dk BVk
0 - - $58,956
1 0.1429 $8,424.81 $50,531.19
2 0.2449 $14,438.32 $36,092.86
3 0.1749 $10,311.40 $25,781.46
4 0.1249 $7,363.60 $18,417.85
5 0.0893 $5,264.77 $13,153.08
6 0.0892 $5,258.88 $7,894.21
7 0.0893 $5,264.77 $2,629.44
8 0.0446 $2,629.44 $0.00

c. The taxable income at the end of year eight

Based on the table below, the taxable income at the end of year eight is $10,000 + $12,370.56
= $22,370.56
d. A table and calculate the ATCF for this machine
Cash flow After-tax
Before-tax Depreciation Taxable
for income cash flow
EOY,k cash flow deduction dk income (C)
taxes (D) = - ATCF (E) =
BTCF (A) (B) = (A) - (B)
t*(C) (A)+(D)
0 -$58,956 - - - -$58,956
1 $15,000 $8,424.81 $6,575.19 -$2,630.08 $12,369.92
2 $15,000 $14,438.32 $561.68 -$224.67 $14,775.33
3 $15,000 $10,311.40 $4,688.60 -$1,875.44 $13,124.56
4 $15,000 $7,363.60 $7,636.40 -$3,054.56 $11,945.44
5 $15,000 $5,264.77 $9,735.23 -$3,894.09 $11,105.91
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 THE INTERNATIONAL UNIVERSITY (IU) Course: Engineering Economy
School of Industrial Engineering and Management

6 $15,000 $5,258.88 $9,741.12 -$3,896.45 $11,103.55

7 $15,000 $5,264.77 $9,735.23 -$3,894.09 $11,105.91
8 $15,000 $2,629.44 $12,370.56 -$4,948.22 $10,051.78
8 $10,000 0 $10,000 -$4,000.00 $6,000.00
IRR 20.5% 14.04%
PW(25%) -$7,344.61 PW(15%) -$1,823.37

e. Should a recommendation be made to purchase the machine?

According to the IRR calculated above, IRR after-tax cash flow is 14.04% is lower than the
after-tax MARR. Therefore, the project is NOT recommended to be purchased.

Question 4:
Defender: Initial purchasing = $65,000
Current MV (after 4 years) = $35,000
Challenger: Replace purchasing = $50,000
MARR =10%

Defender Challenger
Year Market Value ($) Operating and Market Value ($) Operating and
maintenance cost ($) maintenance cost ($)
1 25,000 18,500 40,000 13,000
2 21,000 21,000 32,000 15,500
3 17,000 23,500 24,000 18,000
4 13,000 26,000 16,000 20,500
a. The economic life of the challenger
(3)=(2)k-1-
(1) (2) (4)=i%*(2)k-1 (5) (6)=(3)k+(4)k+(5)k
(2)k
EOY, MV at EOY Cost of Annual Total (Marginal) cost at
Loss in MV
k k capital expenses EOY k
0 $50,000 - - - -
1 40,000 10,000 5,000 13,000 28,000
2 32,000 8,000 4,000 15,500 27,500
3 24,000 8,000 3,200 18,000 29,200
4 16,000 8,000 2,400 20,500 30,900

(6)=(3)k+(4)k+(5 (8)=(6)k*(7 (11)=(9)k*(1

(1) (7) (9) (10)
)k )k 0)
k
EOY, Total (Marginal)
k cost at EOY k
P/F PW of TC ∑ PW i A/P EUACk
i=1
0.909
1 28,000 25,454.8 25,454.8 1.1 28,000
1
0.826 48,180.8 0.576
2 27,500 22,726 27,761.78
4 0 2
0.751 70,118.7 0.402
3 29,200 21,937.96 28,194.75
3 6 1
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 THE INTERNATIONAL UNIVERSITY (IU) Course: Engineering Economy
School of Industrial Engineering and Management

91,223.4 0.315
4 30,900 0.683 21,104.7 28,781
6 5
The challenger economic life, Nc* = 2
b. Determine when the defender should be replaced.
(3)=(2)k-1-
(1) (2) (4)=i%*(2)k-1 (5) (6)=(3)k+(4)k+(5)k
(2)k
EOY, MV at EOY Cost of Annual Total (Marginal) cost at
Loss in MV
k k capital expenses EOY k
0 $35,000 - - - -
1 25,000 10,000 3,500 18,500 32,000
2 21,000 4,000 2,500 21,000 27,500
3 17,000 4,000 2,100 23,500 29,600
4 13,000 4,000 1,700 26,000 31,700

(6)=(3)k+(4)k+(5 (8)=(6)k*(7 (11)=(9)k*(1

(1) (7) (9) (10)
)k )k 0)
k
EOY, Total (Marginal)
k cost at EOY k
P/F PW of TC ∑ PW i A/P EUACk
i=1
0.909
1 32,000 29,091.2 29,091.2 1.1 32,000
1
0.826 0.576
2 27,500 22,726 51,817.2 29,857.07
4 2
0.751 74,055.6 0.402
3 29,600 22,238.48 29,777.79
3 8 1
95,706.7 0.315
4 31,700 0.683 21,651.1 30,195.49
8 5

The total cost of defender exceeds the minimum EUAC of the challenger and the economic
life of the challenger is year 2 with $27,761.78 of EUAC which is smaller than the minimum
EUAC of the defender $29,777.79 leading to this replacement becomes more urgent. Thus,
the defender should be replaced immediately.

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 THE INTERNATIONAL UNIVERSITY (IU) Course: Engineering Economy
School of Industrial Engineering and Management

Question 5:
PW (benefit )
B-C =
PW (TC)

Machines
EOY A B C
0 -$160,000 -$245,000 -$191,300
1 80,000 120,000 80,000
2 70,000 100,000 80,000
3 60,000 80,000 80,000
4 50,000 60,000 80,000
PW of cost $160,000 $245,000 $191,300
PW of benefits $209,808.1 $292,821.53 $253,589.24
B-C ratio 1.3113 1.1951 1.3256
Accepted? Yes Yes Yes
MARR = 10%
The incremental analysis:
Ranking order by increasing equivalent worth of cost. A < C < B
Alternative A should be the baseline for the upcoming incremental analysis.
The incremental analysis:
PW Conventional
Alternative Justified?
Costs Benefits B-C ratio
C-A $31,300 $43,781.14 1.3987 Yes
B-C $53,700 $39,232.29 0.73 No
→ Alternative C should be selected to be invested into because the increment is justified.

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