University of Bahrain

College of Engineering
Mechanical Engineering Department

Engineering Economy – MENG 300

Midterm Test (Model Answer)

SEM II - 2021/2022 9.4.2022

Student Name Student No.

Tick your Section

Section 1 Dr. Bader Al Mannai 9:30 – 10:45 
Section 2 Dr. Bader Al Mannai 13:00 – 14:15 
Section 3 Dr. Osama Al-Jamal 13:00 – 14:15 
Section 4 Dr. Osama Al-Jamal 14:30 – 15:45 
Section 5 Dr. Venu Parameswaranpillai 9:30 – 10:45 
Section 6 Dr. Venu Parameswaranpillai 14:00 – 15:15 
Section 7 Dr. Venu Parameswaranpillai 13:00 – 14:15 
Section 8 Dr. Venu Parameswaranpillai 14:30 – 15:45 

Instructions:

• Answer all questions to the nearest currency decimals while stating the currency unit.
• Show all your work clearly.

Question No. 1 2 3 Total Marks

CILO,s 1,2,4 1,2,4 1,2
Max. Marks 20 12 18 50

Marks Scored

Model Answer Guidelines:

- Mistake in units 0.25 mark (one time deduction in a question)
Formulas:

1 n
A = G[ − ]
i (1 + i ) n − 1

G (1 + i) n − 1 n
P= [ − ]
i i(1 + i) n
(1 + i) n

(1 + i ) n − 1
F = G[( )( ) − n]
1
i i

1+ g n
1− ( )
Pg = A1 [ 1+ i ] , gi
i−g

nA1
Pg = , g=i
1+ i

1
æ S ön
d = 1 - çç ÷÷
èB ø
Dt = dBVt -1 = dB(1 - d )t -1
BVt = BVt -1 - D = B(1 - d )t

impS = BV n = B(1 -d )n

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 Q1) [20 marks]

Determine the most economical machine, based on Present Worth Analysis and
5-year study period. Using 10% per year interest rate, and a Straight-Line
deprecation technic to determine the Market Value.

Machine X Machine Y
First cost, BD -80,000 - 150,000
Annual operating, BD per year -20,000 -15,000
Salvage value, BD 10,000 30,000
Life, years 2 6

Cash flow required ( 2.5 MARK) each input = 0.25

Machine X i= 10%

F= BD10,000 F= BD10,000 F= BD10,000

0 1 2 3 4 5 6

A= BD 20,000
F= BD30,000
P= BD80,000 F= BD80,000 F= BD80,000

Machine Y
0 1 2 3 4 5 6

A= BD15,000

P= BD 150,000

Note: if the student draws the cash flows with exact 5 year period, it is accepted

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 Machine X
SL
Dt= (80,000 - 10,000)/2 = 35,000 (2 Mark)
MVyr5 = (B- txDt) = (80,000 – 1 X 35000) = 45,000 (2 Mark)

PWX = -80,000 (0.5 Mark) - 70,000(P/F, 10%, 2) (1 Mark) - 70,000(P/F,

10%, 4) (1 Mark) +45,000(P/F, 10%, 5) (1 Mark) - 20,000(P/A, 10%, 5) (1
Mark)

Answer = BD -233536.456 (0.5 Mark)

Machine Y

SL
Dt= (150,000 - 30,000)/6 = 20,000 (2 Mark)
MVyr5 = (B- t x Dt) = (150,000 - 5 X 20,000) =50,000 (2 Mark)

PWX = -150,000 (0.5 Mark) + 50,000(P/F, 10%, 5) (1 Mark) – 15,000 (P/A,

10%, 5) (1 Mark)

Answer = BD – 175,815.795 (0.5 Mark)

Best Choice (0.5 Mark) Why? (1 Mark)

Machine Y Lower Present Worth (least cost)

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Q2) [12 marks]

To improve the recovery of highly brackish groundwater, the engineer at Clean Water
Engineering has established two alternatives for this project. Using 9% per year MARR
and present worth analysis, which alternative would you recommend to the management
for this project? And why?

Alternative A Alternative B
First Cost, $ 500,000 250,000
Annual operating cost, $ 70,000 80,000
Annual income, $ 175,000 155,000

Major Maintenance, $ 50,000 every 5 years ---

Salvage, $ - 40,000

Life, Year ∞ 15

Alternative A

PWA / CCA = -500,000 (0.5 Mark) – (70000/0.09) (1 Mark) +

(175,000/0.09) (1 Mark) – (50,000 (A/F,9%,5))/0.09) (2 Marks)
= $ 573,837.52 (1 Mark)

Considering $50,000 as income

= $ 759,495.77 (1 Mark)

Alternative B

AT = -250,000 (A/P, 9%, 15) (1 Mark) – 80,000 (0.5 Mark) + 155,000 (0.5
Mark) + 40,000 (A/F, 9%, 15) (1 Mark)

PWB / CCB = (AT/i) (1 Mark) = $503,870.61 (1Mark)

OR

[PWB / CCB = [(-250,000 (A/P, 9%, 15) – 80,000 + 155,000 + 40,000

(A/F, 9%, 15)]/(i)]

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 (Best Choice) (0.5 Mark) Your Reason Why? (1 Mark)

Alternative A Higher present worth (highest profit)

Q3) [18 marks]

Four projects are to be evaluated, at a MARR of 12.5% per year. No more than $3.2
million can be invested. Using the specified MARR and the following independent
projects, determine:

i. Which projects are to be selected based on NPV

ii. Left-over if any? What to do with it?

Estimated NCF,
Investment, Life,
Project $/Year Salvage, $ NPV Comment
$ Years
Starting year 1

250,000, then
A -900,000 6 increasing by $5,000 50,000
thereafter

B -2,100,000 10 485,000 65,000

200,000, then
C -1,100,000 5 increasing by 10% 40,000
thereafter

680,000, then
D -3,300,000 10 decreasing by 10% 125,000
thereafter

Project A:
(0.5 Mark) (1 Mark) (1 Mark) (1 Mark)
-900,000 + 250,000 (P/A, 12.5%, 6) + 5000 (P/G, 12.5%, 6) + 50,000 (P/F,
12.5%, 6)

Project B:
(0.5 Mark) (1 Mark) (1 Mark)
-2,100,000 + 485,000 (P/A, 12.5%, 10) + 65,000 (P/F, 12.5%, 10)

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 Project C:
(0.5 Mark) (1 Mark) (1 Mark)
-1,000,000 + 200,000 (P/A, 10%, 12.5%, 5) + 40,000 (P/F, 12.5%, 5)

Life, Estimated
Investment, NCF, $/Year Salvage,
Project Year NPV Comment
$ $
s Starting year 1

250,000, then
$181,891.84
increasing by
A -900,000 6 50,000
$5,000 (0.5 Mark)
thereafter

$605,185.45
B -2,100,000 10 485,000 65,000
(0.5 Mark)

Drop -
200,000, then $-227,551.91
NPV
C -1,100,000 5 increasing by 40,000
10% thereafter (0.5 Mark)
(1 Mark)

Drop
680,000, then beyond
D -3,300,000 10 decreasing by 125,000 budget
10% thereafter
(1 Mark)

$742,397.28 Select
AB -3,000,000 6, 10 MAX
(0.5 Mark) NPV

DN
0 0 0
(1 Mark)

No. of bundles = 22 = 4 (0.5 Marks, display in table)

i. Select Bundle AB, since it has the maximum NPV 1 + 1 (2

Marks)

ii. Leftover = $200,000, Re-invest at MARR for 10 years. 1 + 1 (2

Marks)
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