CE 22 THU - Engineering Economy First Semester AY 2018-2019

nd
2 Problem Set
Due date: November 5, 2018, right before exam at ICE 306
GENERAL INSTRUCTIONS:
1. Answer this problem set on a blue book. Use only a blue or black ink pen. BOX your final answers.
2. You may consult me regarding the solution.
3. Collaboration with your classmates/friends is extremely prohibited. You may exhaust all your possible resources
(books, notes etc.) but not your friends/classmates. Learn to answer things on your own for your own benefit!
4. Solve each problem/part on a separate sheet of yellow pad.
5. Show all your steps/solution to receive full score. State any necessary assumptions made.
6. You are encouraged to start your solution by setting up equations in terms of the equivalence factors in standard notation
first, then plug-in numbers and calculate the final answer. Assume end-of-the-period (EOP) cash flows unless stated
otherwise.

Problem 1. Harvey Dent plans to open a new quarrying site. Two plans are suggested. Plan A requires the
purchase of two earthmovers and an unloading pad at the plant. Plan B calls for the construction of a
conveyor from mining site to the plant. MARR is 15% per year compounded annually, and costs are given:

Plan A Plan B
Two Movers Pad Conveyor
First Cost, ₱ 4,900,000 1,520,000 9,500,000
Freight Cost, ₱ 100,000 84, 000 1,800,000
Annual Operating Cost, ₱ 650,000 17,000 140,000
Salvage value at EO Useful 500,000 100,000 1,500,000
Life, ₱
Useful Life, years 9 12 12

(a) Assuming repeatability (LCM Method), what is the planning horizon?

(b) Compare the two plans using AW Method over the LCM period. Which plan is better?

Using the better plan, you received a yearly revenue of ₱ 17,000,000.

(c) What is the IRR of the project?
(d) Is the project acceptable?
(e) What type of investment does Harvey have?

Problem 2.
Edward Nygma is assessing the feasibility of constructing an oil well in the petroleum rich region of the
Arctic tundras. Based on initial estimates, an amount of ₱ 25B will be used to construct the oil well and
jumpstart the operations. Further, an annual amount of ₱250M is needed to sustain the yearly operation of
the facility, about half of which will be spent for the thawing, heating and insulation of the facility. The
well is expected to generate ₱8.5B worth of oil every year. At this rate, the oil reservoir is expected to last
for 15 years. Upon closure of the operations, the company expects to sell the project with a market value
of ₱4B. ₱500M is needed to clean up the area after the project closes. The company sets its hurdle rate at
20% and expects to liquidate its capital investment within the first 6 years. Draw the Cash Flow Diagram
of the project. Evaluate the acceptability of the project using:
(a) No-return Payback Period Method
(b) Discounted Payback Period Method (Simplify your solution by formulating an equation calculating
the DPBP)
(c) Annual Worth Method
(d) Is IRR Method applicable to this project? Explain. If yes, is the project acceptable based on IRR
method?
(e) Modified Benefit Cost Ratio Method on PW (Treat the revenues as benefits)
CE 22 THU - Engineering Economy First Semester AY 2018-2019
nd
2 Problem Set
Due date: November 5, 2018, right before exam at ICE 306
Problem 3.
Harley Quinn’s Doll Shop currently manufactures wooden parts for dollhouses using handsaws. The shop
is considering the purchase of a power band saw with associated fixtures in order to improve the
productivity of this operation. Three models of power saw could be purchased: Model A (economy version),
Model B (high-powered version), and Model C (deluxe high-end version). The major operating difference
between these models is their speed of operation. The investment costs, including the required fixtures and
other operating characteristics are summarized as follows: You may treat labor savings as revenues.

Category Model A Model B Model C

Annual labor savings (vs. handsaw), ₱ 69,984 93,150 104,976
Annual power cost , ₱ 21,600 22,680 25,920
Initial investment, ₱ 216,000 324,000 378,000
Salvage Value, ₱ 21,600 32,400 37,800
Service life (years) 20 20 20

If the MARR = 15%,

A) Find the Internal Rate of return in % for each model.
B) Which model is most economical based on the rate of return principle?
C) Which model is most economical based on the modified benefit-cost analysis on annual worth?

Problem 4.
Jack Napier owns an industrial machine, which he bought for P1,200,000. If the machine is
to be sold for P20,000 after 10 years, calculate the book value and depreciation charge
PER year using:
a. Straight-Line Method [10 points]
b. Sum-of-Years Digit Method [10 points]
c. Double Declining Balance Method [10 points]

Present your answers in table form.