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Anthony’s College Midterm

San Angel, San Jose Examination
Antique First Semester
Engineering and AY 2021 - 2022
Technology Dept.

ENGINEERING ECONOMY

I. Essay (15 pts.)

Direction: Answer the following questions briefly.

1. State the rules of Annual Worth Method and the Internal Rate of Return Method whether to accept or
reject the investment.

The AW method is commonly used for comparing alternatives, AW means that all incomes and disbursements (irregular
and uniform) are converted into an equivalent uniform annual (end-of-period) amount, which is the same each period
and the IRR rule states that if the IRR on a project or investment is greater than the minimum RRR typically the cost of
capital, then the project or investment can be pursued.if the IRR on a project or investment is lower than the cost of
capital, then the best course of action may be to reject it.

2. State the rule of Benefit/Cost Ratio Method whether to accept or reject the investment.

If a project has a BCR greater than 1.0, the project is expected to deliver a positive net present value to a firm and its
investors. If a project's BCR is less than 1.0, the project's costs outweigh the benefits, and it should not be considered.

3. In your own words, explain the Minimum Attractive Rate of Return.

The minimum attractive rate of return (MARR) of a company is just that: the lowest internal rate of return that the
company considers to be a worthwhile investment. The MARR is a declaration that a company believes it can achieve at
least that rate of return.

4. State the rules of Present Worth Method and the Future Worth Method whether to accept or reject the
investment.

The net present value rule is the idea that company managers and investors should only invest in projects or engage in
transactions that have a positive net present value (NPV). They should avoid investing in projects that have a negative
net present value. It is a logical outgrowth of net present value theory and the future worth method If you deposit $100,
at the end of one year with the interest rate of 5% and if the number of years is 1 year, then you can read the formula as
follows: "The future value (FV) at the end of one year equals the present value ($100) plus the value of the interest at
the specified interest rate (5% of $100 or $5).

5. State the rules of External Rate of Return Method and Payback Period Method whether to accept or
reject the investment.

The external rate of return (ERR) is the rate of return on a project where any “excess” cash from a
project is assumed to earn interest at a pre-determined explicit rate — usually the MARR and The
payback period is the number of months or years it takes to return the initial investment. To calculate a
more exact payback period: payback period = amount to be invested / estimated annual net cash flow.
II. Problem Solving (50 pts.)
Direction: Solve the following problems.
Write your answers on your answer sheets including your solutions.

1. An investment of 80,200 returned 20,000 per year over a five year useful life and then have a salvage value
equal to its annual revenue. Annual operations and maintenance cost is 16,500 and the company is expecting a
20% MARR. Determine the payout period and the rate of return on the investment.

2. The management of VGA Textile Company is considering of constructing a plant to manufacture a proposed
new product. The land costs 15 million pesos, the building costs 30 million pesos, the equipment costs 12.5
million pesos, and 5 million working capital is required. At the end of 12 years, the land can be sold for 25
million, building for 12 million, equipment for 250,000 pesos, and all of the working capital recovered. The
total annual expenses are estimated to cost 23,750,000. If the company requires a minimum return of 25% and
the annual sales is 39,748,560, determine if the investment is desirable using the annual worth method.

3. An engineer is planning to purchase a CHB machine worth 180,000 that can produce a uniform annual
revenue of 25,500 with a salvage value of 5,000 after 6 years. If the engineer is expecting to earn at least 15%
of his capital, should he invest? Show your conclusion using present worth method and future worth method.

4. What is the minimum attractive rate of return if one third of the capital of a firm is borrowed at 6% and the
remainder of its capital is equity earning 12%?

5. The Department of Public Works and Highways is considering the construction of new highway through a
scenic rural area. The road is expected to cost 67 million pesos with annual upkeep estimated at 670 thousand
pesos. The improved accessibility is expected to result in additional income from tourists of 6.7 million pesos
per year. The road is expected to have a useful life of 25 years. If the rate of interest is 18%, should the road be
constructed? Solve using B/C ratio method.

End and Goodluck…

Prepared by: Engr. Esmar
A. Pido
Instructor