PAKISTAN INSTITUTE OF ENGINEERING

& APPLIED SCIENCES

Course Title: Engineering Economics Quiz/Assignment: Second Assignment
Instructor: Dr. Syed Kashif Saeed Total Marks: 15
Date: Dec 19, 2022 Due Date: Dec 26, 2022
Reg No: Student Name:

Solve the assignment on these pages using print out and submit. Students are allowed to
annex page(s) if necessary.

Question 1:

An industrial coal-fired boiler for process steam is equipped with a 10-year-old electrostatic precipitator
(ESP). Changes in coal quality have caused stack emissions to be in noncompliance with federal standards
for particulates and also causing inefficiency in Labour and Maintenance. Two mutually exclusive
alternatives have been proposed to rectify this problem (doing nothing is not an option).

New KHY New ESP

Capital Investment $1,140,000 $ 992,500
Salvage Value of Capital Investment 140,000 92,500
Annual Operating Expenses 115,500 $73,200
Annual Savings in Labour & Maintenance 240,000 154,000

The life of both alternatives is 10 years, the effective income tax rate is 40%, and the after-tax MARR is 9%
per year. Company uses straight line method for depreciation. Make a recommendation regarding which
alternative to select based on an after-tax analysis.

Solution:
PAKISTAN INSTITUTE OF ENGINEERING
& APPLIED SCIENCES

Question 2:

A Plastic manufacturer has under consideration the proposal of production of high-quality plastic
glasses. The necessary equipment to manufacture the glasses would cost Rs 180,000. The production
equipment would last five years with salvage value of Rs 20,000. It is also estimated that an additional
investment in working capital would be required at start of project amounted to Rs 150,000. The glasses
can be sold at Rs 6.50/- each. Regardless of level of production, the manufacturer will incur cash cost of
Rs 67,000 each year. The variable cost is estimated at Rs 3.0 per glass. The manufacturer estimates it will
sell about 75000 glasses in first year and there will be increase of 10% per year for next four years. Fixed
cost is also expected to increase 10% per year but no change in variable cost is expected. FBR allows
150% Declining balance method for tax purposes. The cost of capital for the project is 12%. The ordinary
tax rate is 29%. Should the proposed equipment be purchased?

Solution: