Tutorial Sheet for Engineering Economics

Question 1

a) At what SI interest must $ 8000 be invested for a period of 11 months to

accumulate to $8730.

b) X mine borrows $1500 on 10 March 2001.How much interest is the mine

paying back if it has to pay back the loan on 02 July 2001 and SI of 21%

per year is charged on the loan?

c) A miner needs to make the following payments against a loan on his lorry

as follows $20 000 after 6 months, $ 30 000 after 8 months $45 000 due

after 3 years. He fails to pay, then after 15 months he manages to pay $40

000. What single payment should he make 3 years from now to settle the

debt if simple interest of 15% is charged on all amounts?

d) Suppose you deposit $1,000 in an account pays simple interest. What will

be the future value of the account if:

i. (a)the annual simple interest rate is 7% for the first 5 years, 10% for the

next 10 years, and 12% for the last 5 years?

ii. (b) 5% for the first 10 years, 10% for the next 10 years, 15% for the last

10 years?
Question 2

a) ADNX mine invests $50 000 in new machines to be depreciated at $ 5000

per year. The firm has $ 15000 in earnings before depreciation and taxation

is 40%. Determine the cash flow

b) Dewbrack Mine has $ 4000 debt at 20% in its capital structure. The firm

has revenue expectations of $2500 earning before interest and tax. The

WACC, the overall capitalization rate for the firm is 25%.Dewbrack Mine

allocated $500 to dividends to shareholders. Calculate the value of equity

, net income , required rate of return and ROIC

Question 3

Assume a company wants to analyze the predicted profitability of a project

that requires an initial outlay of $10,000. Over the course of three years, the

project is expected to generate revenues of $2,000, $7,000 and $11,000,

respectively. The anticipated discount rate is 4.5%. At first glance, it seems

the returns are nearly double the investment. However, a dollar earned in three

years is not as valuable as a dollar earned today, so the company's accountant

calculates the NPV as follows to determine profitability while accounting for

the discounted time value of the projected revenues:

Question 4

Redwing Mine can invest $20m in equipment to open a new mine. Demand is

expected to be such that there is an even chance that the project will produce

either $2m or $20m in the first year. Cash flows are partially correlated over

time. If demand is low in the first year, there is a 75% chance that cash flows

in the 2nd year will be $2m and 25% chance that cash flows will be $10m. If

demand in the first year is high, there is a 35% chance that cash flows in the

2nd year will be $15m and 65% chance that cash flow will be $30m. Cost of

capital is 10%.

Question 5

A company is considering investing $4.5m in a project to achieve an annual

increase in revenues over the next five years of $2m. The project will lead to an

increase in wage costs of $0.4m pa and will also require expenditure of $0.3m pa

to maintain the level of existing

Additional investment in working capital equivalent to 10% of the increase in

revenue will need to be in place at the start of each year.

The following forecasts are made of the rates of inflation each year for the next

five years: The real cost of capital of the company is 8%. All cash flows are in

real terms. Ignore tax. Find the free cash flows of the project and determine

whether it is worthwhile.
Question 6

Net Present Value – Campbell Industries has a project with the following

projected cash flows:

Initial Cost, Year 0: $468,000

Cash flow year one: $135,000

Cash flow year two: $240,000

Cash flow year three: $185,000

Cash flow year four: $135,000

a. Using an 8% discount rate for this project and the NPV model should this

project be accepted or rejected?

b. Using a 14% discount rate?

c. Using a 20% discount rate?

Question 7

A project requires an initial investment of $24,000 and will generate annual cas

h flows as follows:

The cost of capital is 10%.

Year Cash flow $

1 7,800

2 6,000

3 4,200

4 7,400

5 9,200

Find the NPV and the IRR of the project.

Question 8

2. Net Present Value – Swanson Industries has four potential projects all with an

initial cost of $2,000,000. The capital budget for the year will only allow Swanson

industries to accept one of the four projects. Given the discount rates and the

future cash flows of each project, which project should they accept?

Cash Flows Project M Project N Project O Project P

Year one $500,000 $600,000 $1,000,000 $300,000

Year two $500,000 $600,000 $800,000 $500,000

Year three $500,000 $600,000 $600,000 $700,000

Year four $500,000 $600,000 $400,000 $900,000

Year five $500,000 $600,000 $200,000 $1,100,000

 Discount 6% 9% 15% 22%

Rate

Question 9

Net Present Value – Campbell Industries has four potential projects all with an

initial cost of $1,500,000. The capital budget for the year will only allow Swanson

industries to accept one of the four projects. Given the discount rates and the

future cash flows of each project, which project should they accept?

Cash Flows Project Q Project R Project S Project T

Year one $350,000 $400,000 $700,000 $200,000

Year two $350,000 $400,000 $600,000 $400,000

Year three $350,000 $400,000 $500,000 $600,000

Year four $350,000 $400,000 $400,000 $800,000

Year five $350,000 $400,000 $300,000 $1,000,000

Discount 4% 8% 13% 18%

Rate

Question 10

What are the IRRs of the four projects for Campbell Industries in problem #9?
Questions 11

A company has identified the following independent investment projects, all of

which are divisible

and exhibit constant returns to scale. No project can be done more than once.

Project

Cash flows at time: 0 1 2 3 4

A -1,500 -500 1,200 600 300

B -2,000 -1,000 2,500 2,500 2,500

C -1,750 500 1,100 1,400 1,000

D -2,500 700 900 1,300 300

E -1,600 - 500 200 2,800 2,300

There is only $3,000 of capital available at T0 and at T1, only $200 plus the cas

h inflows from the projects undertaken at T0. In each time period thereafter, ca

pital is freely available. The appropriate discount rate is 15%.

Formulate the NPV linear programmes.

Question 12

Perth mining company operates two mines for the purpose of extracting gold and

silver. The Saddle Mine costs $14,000/day to operate, and yields 50 oz of gold

and 3000 oz of silver each day. The Horseshoe Mine costs $16,000/day to operate,

and yields 75 oz of gold and 1000 oz of silver each day. Company management

has set a target of at least 750 oz of gold and 24,000 oz of silver. How many days

should each mine be operated so that the target can be met at a minimum cost to

the company? What is the minimum cost?

Question 13

Describe, or show an example of, a network diagram used in project

planning. Explain its supposed usefulness. Describe, or show an example of a

Gantt chart. Describe how Gantt charts are used in project planning and project

management.

Question 14

Your Project Manager, Alex Midway, has produced the following network

diagram for a programming project. Alex has specified the duration for each

activity in Table below, and has asked you to complete the table and network

diagram by doing the following:

(a)Using the Duration from Table I below, calculate the Earliest Event Time

(EET), the Latest Event Time (LET) and the float or slack associated with each

activity. (15 marks)

(b)Identify the critical path for Alex's network diagram. (3 Marks)

Note

Question 15

Your Project Manager, Chas Mildwood, has produced the following network

diagram for a programming project. Chas has specified the duration for each

activity in Table I below, and has asked you to complete the table and network

diagram by doing the following:

a) Using the Duration from Table I below, calculate the Earliest Event Time

(EET), the Latest Event Time (LET) and the float or slack associated with

each activity (10 marks)

 b) Identify the activities on the critical path for Chas's network diagram. (3

Marks)

Question 16
(a) Analyse the Discounted Cash Flow (DCF) technique for appraising large
investment decisions. (10 marks)

(b) A car manufacturer has decided to make a significant investment into

expanding its presence in Africa by setting up a large assembly
facility in Kenya. It has estimated its initial set up costs to be in the
region of Kenya Shillings 6,398M.
Forecast net income from the project is detailed below:
Year 1 Kenya Shilling 1,400M
Year 2 Kenya Shilling 1,450M
Year 3 Kenya Shilling 1,550M
Year 4 Kenya Shilling 1,625M
Year 5 Kenya Shilling 1,480M.
(i) Calculate the projected payback time for the project to the nearest month.
(3 marks)
(ii) Calculate the Net Present Value of the project using a discount factor of 5%
and comment on the attractiveness of the project.
Discount factors at 5% are;
Yr 1 = 0.952, Yr 2 = 0.907, Yr 3 = 0.864, Yr 4 = 0.823, Yr 5 = 0.784 (12marks)

Question 17

(a) Compare and contrast the project evaluation and review technique (PERT)
with the critical path method (CPM). (15 marks)
(b) Using the information in Table 1, assuming that the project team will work a
standard working week (5 working days in 1 week) and that all tasks will start as
soon as possible

(i) Determine the critical path of the project (3 marks)

(ii) Calculate the planned duration of the project in weeks (3 marks)
(iii) Identify any non-critical tasks and the float (free slack) on each. (4 marks)
Question 18

Discuss the tools and techniques that project managers can use to ensure
knowledge and lessons learned from previous projects are not lost, and can be
shared for the benefit of future projects. 20marks