LEBANESE Dept.

: Civil engineering
UNIVERSITY Semester : 5
ENGINEERING Date : 07 Mars 2022
FACULTY Prof. : Dr T. Al-Bittar
BRANCH I
Documents Forbidden Duration : 1h:30min
Final Exam

ENGINEERING ECONOMICS
Question 1: (25 points)
Renault S.A. is considering two different types of motors to operate a large assembly line.
The motors are scheduled to be in service for 10 years, and both will deliver the same
operational characteristics for the assembly line. At the end of the tenth year, the equipment
will be returned to the manufacturer, with a predetermined salvage value. An interest rate of
7.771% compounded quarterly is to be used. Determine the equivalent annualized lifetime
operating cost of each motor, including maintenance, electricity and salvage value, and then
determine the cheapest motor. The purchase prices of both motors are equal, so that does not
need to be considered.

Question 2: (20 points)

The Housing Bank (HB) offers home loans to Lebanese professionals. Borrowers receive the
loan immediately upon buying a home, and pay back in equal monthly installments for 20
years. To encourage low-income applicants, a fixed interest rate of 6% compounded monthly
is offered on loans not exceeding $120,000. A loan above $120,000 is subject to the 6%
compounded monthly on the first $120,000, and the remainder part is subject to a higher
interest of 8% compounded monthly. (E.g., for a $130,000 loan, the interest is 6% on the first
$120,000 and 8% on the remainder $10,000). Furthermore, to help the borrower covering the
many expenses associated with the purchase (e.g., taxes, fees, commissions, etc.), a 3-month
“grace period” is offered. (That is, the first monthly payment is made at the end of the fourth
month after receiving the loan.) However, interest at the rates above is applied to the loan
during the grace period.
(a) Samir, a successful civil engineering graduate working for a growing consulting firm,
applied for a $150,000 loan from HB to buy a small flat. How much is Samir’s monthly
payment? (10 points)
(b) Samir decided to go for a bigger home and now requires more money than in (a).
However, HB has a stated policy that the monthly payment should not exceed one third of the
borrower income. If Samir’s salary is $3,600 per month, what is the maximum loan he can
get from HB? (10 points)

Question 3: (20 points)

A manufacturer of auto parts, is considering purchasing a set of machine tools at a cost of
$30,000. The purchase is expected to generate increased sales of $24,500 per year and
increased operating costs of $10,000 per year in each of the next four years. The project has a
four-year life with zero salvage value. (All dollar figures represent constant dollars.)
(a) What is the expected internal rate of return IRR?
(b) What is the expected IRR if the general inflation rate is 10% during each of the next four
years?
(c) If the company requires an inflation-free MARR of 20%, should the company invest in
the equipment?

Question 4: (20 points)

You are considering a luxury apartment building project that requires an investment of
$12,500,000. The building has 50 units. You expect the maintenance cost for the apartment
building to be $250,000 the first year and $300,000 the second year. The maintenance cost
will continue to increase by $50,000 in subsequent years. The cost to hire a manager for the
building is estimated to be $80,000 per year. After five years of operation, the apartment
building can be sold for $14,000,000.
What is the annual rent per apartment unit that will provide a return on investment of 15%?
Assume that the building will remain fully occupied during its five years of operation

Question 5: (15 points)

You are considering two types of automobiles. Model A costs $18,000 and model B costs
$15,624. Although the two models are essentially the same, after four years of use model A
can be sold for $9,000, while model B can be sold for $6,500. Model A commands a better
resale value because its styling is popular among young college students. Determine the rate
of return on the incremental investment of $2,376. For what range of values of your MARR is
model A preferable?
Effective Interest Rate per Payment Period
Discrete compounding i = [(1 + r/(CK)]C - 1
Continuous compounding i = er/K - 1
where i =effective interest rate per payment period
r = nominal interest rate or APR
C = number of interest periods per payment period
K = number of payment periods per year

Market Interest Rate i =i' + f + i'f

where i = market interest rate
i’= inflation-free interest rate
f = general inflation rate