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UNIVERSITI
TEKNOLOGI
PETRONAS
FINAL EXAMINATION
JANUARY 2012 SEMESTER
COURSE GCB3173 / GBB3173 — ENGINEERING ECONOMICS
AND ENTREPRENEURSHIP
DATE : 40" MAY 2012 (THURSDAY)
TIME £ 2.30 PM — 5.30 PM (3 hours)
INSTRUCTIONS TO CANDIDATES
SECTIONA —: Answer ALL questions in the Answer Booklet
SECTIONB =: 4. — Answer ALL questions in the Answer Booklet
Begin EACH answer on a new page.
2
3. Indicate clearly answers that are cancelled, if any.
4. Where applicable, show clearly steps taken in arriving at
the solutions and indicate ALL assumptions, if any.
5. Do not open this Question Booklet until instructed.
6. Discrete Compounding Table is available in the
Engineering Data & Formulae Booklet.
Note : |. There are SIX (6) pages in this Question Booklet including
the cover page.
ii, Graph Paper & Engineering Data & Formulae Booklet will be
provided4
GBB 3173
SECTION A
[30 Marks]
Explain the importance of sensitivity analysis in economic evaluation of
engineering projects.
[10 marks]
“For a particular amount of capital investment in a cost reduction project, the
amount ($) of annual cost savings required for breakeven should be lower when
the minimum attractive rate of return (MARR) is lower". Do you agree with this
statement? Explain
[8 marks]
Two mutually-exclusive investment alternatives with an internal rate of return
(IRR) of 10% are shown in TABLE Q3. The incremental rate of return between
Altemative B and Alternative A (AIRRe.a) is 10%. Which is the preferred
alternative given the minimum attractive rate of return (MARR) is 9% per year?
Explain,
TABLE Q3
Altemative A | Altemative B
“Investment | $500 $700
IRR 10% 10%
Incremental IRR (AIRRe.a) 10%
[6 marks]
“Depreciation deductions result in income tax savings’. Discuss
[6 marks)GBB 3173
SECTION B
[70 Marks]
Power Coal Mine Bhd is considering a new mining pit to increase its production
output, The company will have to pay $25 million for the rights to mine on the
government land, The infrastructure development costs will amount to another
$12 million. It is anticipated that the mine should generate annual net revenue of
$10 million for 15 years. When the mine is closed at the end of the fifteenth year,
$10 million will be spent for reclamation work. The company’s MARR is 10% per
year.
a. Draw a cash flow diagram for the above proposal
[2 marks]
b. Compute the equivalent present worth (PW) of the proposal.
[4 marks]
c. Calculate the external rate of return (ERR) of the proposal if the rate of
external re-investment (¢) is 10% per year.
[8 marks]
¢. Determine the minimum annual net revenue required for the proposal to
breakeven. Assume that costs of rights to mine, development and
reclamation remain the same.
[6 marks]GBB 3173
A team of production engineers is evaluating an investment proposal for their
plant's capacity expansion to meet the potential increase in demand. Three
mutually exclusive design alternatives are considered as shown in TABLE 2. The
company will accept the plan if the proposal can meet the minimum attractive rate
of return (MARR) of 10% per year.
TABLE 2: Three Mutually Exclusive Design Alternatives
Design Alternatives
Design A | Design B | Design C
| Investment (S) 77000 62000 57000 _|
Annual Revenue (: 20000 18000 16500
Annual Cost (S) 3000 | 2000 4500
| Salvage Value (§) | 41000 | 9000 6000
Useful Life (years) 8 I 7 6
a Calculate the equivalent annual worth (AW) of every design alternative.
[9 marks]
b. Determine the most preferred design alternative based on your economic
analysis in Q2a. Justify your answer.
[2 marks]
c. Plot a sensitivity graph and examine the sensitivity of the AW of the
preferred design alternative determined in Q2b over a range of + 30%
changes in the estimates of the annual revenue.
[9 marks]GBB 3173
One of the four large electric ovens at a bakery is being considered for
replacement. Record shows that its yearly maintenance expenses are
escalating. This oven can be sold now for $20,000. If the oven is kept for
four more years, the yearly maintenance costs for the next four years will
be $9,500, $9,600, $9,700, and $9,800 respectively. Its salvage value at
the end of the fourth year will be $7,000.
A new electric oven of similar capacity costs $80,000 and its salvage value
at the end of the fourth year is anticipated at $62,000. The maintenance
costs for the first two years are free. However, for the third and fourth year,
the maintenance costs are estimated ai $1,000 and $3,000 respectively.
The company's minimum attractive rate of return is 10% per year.
Determine the equivalent annual worth (AW) of the old
electric oven
[4 marks]
it Calculate the equivalent annual worth (AW) of the new
electric oven.
[4 marks]
iii Should the old electric oven be replaced? Justify,
[2 marks]GBB 3173
b. Determine the economic life of the new electric oven if its year-end market
value (MV) and annual maintenance costs are as shown in TABLE 3a
Use the format shown in TABLE 3b for your calculation.
TABLE 3a: MV and Annual Maintenance Costs
L New Electric Oven
EOY | My, end of year | Annual Maintenance
Costs ($)
o | 80000 -
1 | 75000 0
2 70000 0
3 66000 “4000
4 62000 3000
TABLE 3b: Format of Calculation of Economic Life
End of | MV, | Lossin | Costof Annuai Total | EUAG™
Year,k | End of | Market | Capital= | Maintenance | Marginal | through
Year,k | Value | 10% of Costs | Cost for | Yeark
(MV) | Beginning Year,
during | of Year TCr
year k MV
EVAC, =[UTC,(P/F 10%, f)\A/P.10%,k)
(20 marks}
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