(MS291) Engineering Economy

Instructor: Dr. M. Sabir

ASSIGNMENT# 1

INSTRUCTIONS:
This assignment is for both sections (A & B) students.
Plagiarized (copied) assignments will not be accepted and will be marked zero.
Submission date is February 3rd 2017 (Friday) during class timings. No assignment
will be accepted after deadline.
Clearly mention your name, Reg No and Section on the title page.
Assignment should be on A4 size pages; assignments on pages tear out from note
books will not be accepted.
There is no need to give assignments in folder.
Answer all questions.

1. Using given information of Quantity, fixed costs and variable costs, calculate:
MC= marginal cost
AFC= average fixed cost
AVC= average variable cost
ATC= average total cost

Quantity Fixed Variable Total MC AFC AVC ATC

Cost Cost Cost
0 100 0 100 - - - -

1 100 40 140 40 100.00 40.00 140.00

2 100 70 170 30 50.00 35.00 85.00

3 100 120 220 50 33.33 40.00 73.33

4 100 180 280 60 25.00 45.00 70.00

5 100 250 350 70 20.00 50.00 70.00

6 100 330 430 80 16.67 55.00 71.67

2. A company borrowed $900,000 for installing energy-efficient lighting and safety

equipment in one of its manufacturing facility. The terms of the loan were such that
the company could pay interest only at the end of each year for up to 5 years, after
which the company would have to pay the entire amount due. If the interest rate on
the loan was 12% per year and the company paid only the interest for 4 years,
determine the following:

1
a) The amount of each of the four interest payments
Amount paid first four years = 900,000(0.12) = $108,000
b) The amount of the final payment at the end of year 5
Final payment = 900,000 + 900,000(0.12) = $1,008,000

3. During a recession, the price of goods and services goes down because of low
demand. A company that makes Ethernet adapters is planning to expand its
production facility at a cost of $1,000,000 one year from now. However, a contractor
who needs work has offered to do the job for $790,000 if the company will do the
expansion now instead of 1 year from now. If the interest rate is 15% per year, how
much of a discount is the company getting?
Equivalent present amount = 1,000,000/(1 + 0.15) = $869,565
Discount = 790,000 869,565
= $79,565.
OR
Future value of 790K =790K (1.15) = 908,500
1000K 908,500= 91,500
Present value of 91,500
91,500/1.15 = 79,565.

4. Which of the following 1-year investments has the highest rate of return?

a) $12,500 that yields $1125 in interest,

i = (1125/12,500)*100 = 9%
b) $56,000 that yields $6160 in interest,
i = (6160/56,000)*100 = 11%
c) $95,000 that yields $7600 in interest.
i = (7600/95,000)*100 = 8%

5. As a principal in the consulting firm where you have worked for 20 years, you have
accumulated 5000 shares of company stock. One year ago, each share of stock was
worth $40. The company has offered to buy back your shares for $225,000. At what
interest rate would the firms offer be equivalent to the worth of the stock last year?
5000 (40) (1 + i) = 225,000
1 + i = 1.125
i = 0.125 = 12.5% per year