1

UNlVERSITl
TEKNOLOGI
PETRONAS

COURSE GCB3173/GDB3023- ENGINEERING ECONOMICS AND

ENTREPRENEURSHIP
DATE 5 MAY 2018 (SATURDAY)
TIME 09.00 AM -12.00 NOON (3 HOURS)

INSTRUCTIONS TO CANDIDATES

1. Answer ALL questions in the Answer Booklet.

2. Begin EACH answer on a new page in the Answer Booklet.
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~

Note
i. There are SEVEN (7) pages in this Question Booklet including the cover page.
11. DOUBLE-SIDED Question Booklet.

Un±versiti Teknologi PETRONAS

 GCB3173/GDB3023

1. a. Describe the annual worth concept. Justify why you calculate the annual
worth (AW) of the alternatives over their respective life cycles. Illustrate your
answer.
[5 marks]

~ The world's largest carpet maker has just completed a feasibility study of
"what to do with the 16,000 tons of overruns, rejects and remnants it
produces every year. The company's CEO launched the feasibility study by
asking, why pay someone to dig coal out of the ground and then pay
someone else to put our waste into a landfill. Why not just burn our own
waste? The company is proposing to build a USD 10 million power plant to
burn its waste as fuel, thereby saving usp 2.8 mil_lign a year in coal
purchases. Company engineers. have determined that the waste-burning
plant will be environmentally sound, and after its four-year study period the
plant can be sold to a local electric utility for USD 5 million.
Calculate the IRR of this proposed power plant
[6 marks]
~ If the firm's MARR is 15% per year, should this project be
undertaken? Please justify.
[4 marks]

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c. Each year in USA nearly 5 billion pounds of discarded carpet end up in the
land fill. The carpet manufacturer has decided to start a take-back program

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where the obsolete carpet is reclaimed at the end of its useful life (7 years).
The remanufactured carpet will then be recycled into the company's supply
chain. The variable cost of recycling is USD1 per square yard of carpet, and
the remanufactured carpet can be sold at USD 3 per square yard. If the
recycling equipment costs USD 1 million ~market value at the
end of its eight-year life, please calculate the volume of the carpet to be
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remanufactured annually in order to make this, a profitable undertakio.g. The -6(

company's MARR is 15% per year. ----- D
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[5 marks] ,
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2. a. Environmentally conscious companies are looking for ways to be less <Jf!
damaging to the environment and the same time, saving money with
innovative investments in capital equipment. DuPont is sponsoring a project
to recover much of the energy presently being lost in the primary stage of
one their chemical reactor vessels. Three mutually exclusive designs are
being considered for implementation. The estimated capital requirements
and annual savings in operating expenses are given in TABLEQ2a below.
Assume a MARR = 15% per year, and the study period is 6 years. Salvage
values of the three designs are negligible. Propose the design that should
be selected. Show the workings.
[15 marks]

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TableQ2b: Estimated capital requirements and annual savings

EOY ER1 ER2 ER3
0 -$ 110,000 -$ 115,000 -$81,200
1-6 $25,800 $29,000 $ 19,750
In year 1, In year 1, per year
Growing at 6% Growing at
per year $250 per year

f- What are the fundamental principles of engineering economics? Discuss.

[5 marks]

f li. Demonstrate how the depreciation deduction is different from other

production or service expenses such as labour; material and
electricity.
[3 marks]

I Discuss the condition that must be satisfied in order for the property
to be considered as depreciable.
[2 marks]

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 GCB3173/GDB3023

b. The expected annual maintenance expense for a new equipment,

Alternative A is $10,000. Alternatively, it is possible to perform the
maintenance every fifth year at a cost of $50,000 (Alternative B). In either
case, maintenance will be performed in the fifth year so that the equipment
can be sold for $100,000 at that time. If the MARR =15% per year, propose
the alternative that should be recommended in each of the followings.
i. Before income taxes are considered.
[5 marks]
ii. After income taxes are considered when t = 40%.
[5 marks]
iii. Differentiate any difference before and after income taxes are
considered.
[5 marks]

4. ~ ~Explain the need to replace the equipment or facility at your

workplace.
\ [2 marks]
~emonstrate the factors that must be considered for the replacement
activity. [3 marks]

~I
II
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b. Below are the estimated costs of Alternative A and B. Use the PW method
to select the better alternative.
..--------=
Annual Expenses Alternative A($) Alternative B ($)
Labour 300,000 250,000
Material 250,000 100,000
Insurance & 4% of initial capital None
property taxes investment
Maintenance 8,000 None
Leasing cost None 100,000

Additional information for Alternative A:

Cost five years ago $500,000
Current book value (BV) $111,550
Estimated MV eight years from now $50,000
Present MV $150,000

Assume the Alternative A was installed five years ago. The MARR is 10%
per year.
Definition of alternatives:
Alternative A: Retain an already owned machine {Alternative A) in service
for eight more years; Alternative B: Sell the Alternative A and lease the new
one (Alternative B) for eight years.
Which alternative should be selected? Give your justification.
[15 marks]

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\_a~xplain the various degrees of dependency among two or more projects. If

one or more projects seem desirables and are complementary to a given
project, should those complementary projects be included in a proposal
package or kept separate for review by management? Evaluate.
[5 marks]

~the development of a publicly owned, commercial waterfront area, three

possible independent plans are being considered. Their costs and
estimated benefits are shown in TABLE Q5b below:

Table Q5b: Costs and Estimated Benefits

Present Worth (PW) ($000s)
Plan Costs($) Benefits ($)
A 123,000 139,000
B 135,000 150,000
c 99,000 114,000

Evaluate the plan(s) that should be adopted, if any, if the local council

\ wishes to invest any amount required, provided that the B-C ratio on the
required investment is at least 1.0.
[5 marks]
ii. Suppose that 10% of the costs of each plan are reclassified as
disbenefits. Calculate the percentage change in the B-C ratio of each
plan results from the reclassification.
\ [5 marks]
iii. \ YV_hy the rank-offerings in Part Q5b(i) above are unaffected by the
~ange in Part Q5b (ii). Examine.
[5 marks]

-END OF PAPER-