3P04 Assignment III Student name

Assignment III – Engineering Economy

Ch 2: Time value of Money

AIII-1
Perk Biomedical needs a new microscope for their new drug discovery team. For these types of capital
projects, Perk usually get a loan from the TG Bank at a rate of 12%, compounded monthly. Neiss
Biosystems is selling a microscope at $1M which includes a 5-year service plan. At the end of the five
years, Perk plans to pay off the loan. It also has three options: 1) trade in the microscope valued at
$200k towards a new system purchase from Ness; 2) sell it to a used microscope distributor Hamilton
Microscopes for $150,000; and 3) continue to use the microscope, which has an expected working life
of 10-years, if maintained well. Although most of its components will be obsolete by the end of 10
years, the objective lenses are expected to retain some value at $10,000 and the rest of the microscope
may be sold to a metal recycler for $500.

Identify book value, market value, salvage value, and scrap value of the microscope.

In option 2, what is the rate of depreciation if decline balance method is used?

What is the cost to Perk Biomedical for each one of the three options; and discuss the pros and cons of
each option.

AIII-2: 2.47
You are comparing two investments. The first pays 1 percent interest per month, compounded monthly,
and the second pays 6 percent interest per six months, compounded every six months.
(a) What is the effective semi-annual interest rate for each investment?
(b) What is the effective annual interest rate for each investment?
(c) Based on interest rates, which investment do you prefer? Does your decision depend on whether you
make the comparison based on an effective six-month rate or an effective one-year rate?

AII-3: 2.53
Adventure Airline’s new baggage handling conveyor costs $250 000 and has a service life of 10 years.
For the first six years, depreciation of the conveyor was calculated using the declining-balance method
at a rate of 30 percent. During the last four years, the straight- line method was used for accounting
purposes (in order to have a book value of zero at the end of the service life). What was the book value
of the conveyor after seven, eight, nine, and ten years?

Ch 3: Cash Flow Analysis

AIII-2
Perk Biosystems decided to upgrade an existing microscope instead. The upgrade cost would be
$240,000 with an expect lifetime of 5-years and the objectives are expected to retain the same value of
$10,000 at the end of the 5-years.
a) Draw the cash flow diagram (0.5pt).
2) How much money must be saved every year to justify the investment at an interest rate of 12 percent
(1.5pt)?

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3P04 Assignment III Student name

AIII-3:
Perk Biosystem needs a new type of microscope for its drug discovery applications but nobody on the
market has an instrument that will meet its needs. Perk and Neiss decided to collaborate together to
develop a new microscope in this market. They made a 10-year plan in which both will invest an
annual payment at the beginning of each year and a final payment at the end of the last year. For Perk,
their share of the salary cost is $50,000/year. The rest of the cost is equipment purchase and
maintenance. The first year’s equipment cost is $50,000. For each subsequent year, the equipment cost
will drop by $5,000 till it reaches $30,000/yr, then it will remain constant @$30,000/yr.
A) draw a cash flow diagram (1pt)
B) At an interest rate of 7%, what is the total future worth of Perk’s cost at the end of the 10 years?
(3pt)

AII-3:3.27
Seema is looking at an investment to upgrade an inspection line at her plant. The initial cost would be
$140 000 with a salvage value of $37 000 after five years. Use the capital recovery formula to
determine how much money must be saved every year to justify the investment at an interest rate of 14
percent.

AII-4: 3.33
A new wave-soldering machine is expected to save Burnaby Circuit Boards $15 000 per year through
reduced labour costs and increased quality. The device will have a life of eight years and will have no
salvage value after this time. If the company can generally expect to get 12 percent return on its capital,
how much could it afford to pay for the wave-soldering machine?

AII-5: 3.49
Coastal Shipping is setting aside capital to fund an expansion project. Funds earmarked for the project
will accumulate at the rate of $50 000 per month until the project is completed in two years. Once the
project starts, costs will be incurred at a rate of $150 000 per month over 24 months. Coastal currently
has $250 000 saved. What is the minimum number of months it will have to wait before it can start if
money is worth 18 percent nominal, com- pounded monthly? Assume that:
1. Cash f lows are all at the ends of months. 2. The first $50 000 savings occurs one month from today.
3. The first $150 000 payment occurs one month after the start of the project. 4. The project must start
at the beginning of a month.

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3P04 Assignment III Student name

Assignment submission:

1. All assignments should be submitted through the assignment dropbox on Avenue to Learn.
2. Use a Word processor (e.g., MS Word) for the written part of the assignment is required.
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b. Margin 1” all four sides;
c. Header: 3P04, title of the assignment, Student name
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7. This assignment is Pass/Fail for completion. A failed submission before the deadline will result in
a 1% total grade penalty for this course.

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