ENGINEERING ECONOMY

Take Home Exam 3

Name(Type Your Name): ___________________________________ Class Schedule: ____________ Score: _________
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Solve the following problems. (you must show all your computations)
Write your solution on the space provided
Late submission will not be accepted.
Due Date: On or before 5pm of March 15,2016

1)
a. Determine the IRR of the project. Is it
acceptable if MARR = 20%?
b. What is the ERR for this project? Assume that
= 20% per year.
Proposal A
Investment cost

$10,000

Expected life

5 years

Market (salvage) value

$1,000

Annual receipts

$8,000

Annual expenses

$4,000

roof repairs. At the end of five years (now), you sell

the building for $120,000. During the period of
ownership, you rented out the building for $10,000 per
year paid at the beginning of each year. Use the AW
method to evaluate this investment when your MARR
is 8% per year.

A negative market value means that there

is a net cost to dispose of an asset.

2) You purchased a building five years ago for $100,000.

Its annual maintenance expense has been $5,000 per
year. At the end of three years, you spent $9,000 on

3. A computer call center is going to replace all

of its incandescent lamps with more energy-

efficient lighting fixtures. The total energy

savings are estimated to be $1,875 per year,
and the cost of purchasing and installing the
fluorescent fixtures is $4,900. The study period
is five years, and terminal market values to the
fixtures are negligible.
a) What is the PW of the investment when
MARR = 8%?
b) What is the IRR of this investment?
c) What is the simple payback and the
discounted payback of the investment?

At the conclusion of the useful life, the investment will be

sold
A
B
C
Capital
$28,000
$55,000
$40,000
Investment
Annual
15,000
13,000
22,000
Expenses
Annual
23,000
28,000
32,000
Revenues
MV at EOY
6,000
8,000
10,000
10
Useful life
10 years
10 years
10 years
A. Evaluate all alternatives using PW method and
determine which alternative is preferable.
Use incremental analysis to determine the best
alternative on the basis of PW method

4.Three mutually exclusive design alternatives are being

considered. The estimated cash flows for each
alternative are given next. The MARR is 20% per year.

5. Three alternative designs are being considered for a

potential improvement project related to the operation of
your engineering department. The prospective net cash
flows for these alternatives are shown in the following
table, and the MARR is 15% per year.

End of
Year, k
0
1
2
3
4
5
6

Alternative Net Cash Flows

A
B
C
-$200,000 -$230,000 -$212,500
90,000
108,000
-$15,000
90,000
108,000
122,500
90,000
108,000
122,500
90,000
108,000
122,500
90,000
108,000
122,500
90,000

108,000

122,500

Show that the same capital investment decision results

from the IRR method and the PW method applied by
using the incremental investment analysis procedure.