Engineering Economics Final Exam Fall 2015

Model Answer

Question 1: (10)
1. The types of economy are:
Traditional economy, market economy, command economy and mixed economy

2. Manufacturing companies’ objectives are:

 Minimize manufacturing costs.
 Maximize customer service.
 Minimize distribution costs.

3. i = (1125/12,500)100 = 9%
i= (6160/56,000)100 = 11%
i = (7600/95,000)100 = 8%
The $56,000 investment has the highest rate of return.

4. (a) Early-bird payment = 10,000 – 10,000(0.10) = $9000

(b) Equivalent future amount = 9000(1 + 0.10) = $9900
Savings = 10,000 – 9900 = $100

Question 2: (10)
FC = $40,000, v = $50/unit, p = $70/unit
FC $ 40,000
a) To breakeven: pQBE = FC + vQBE  QBE = = = 2000 units
p−v 70−50
b) In case of selling 3000 units,
The profit = R – TC = pQ – (FC + vQ)
= 703000 – (40,000 + 50  3000) = 210,000 – 190,000 = $20,000

c) New: FC= $60,000, v = $25/unit, p = $70/unit

$ 60,000
New QBE = = 1333 units
70−25

Two equipment’s breakeven:

FC1 + v1 Q = FC2 + v2 Q
(v1 – v2) Q = FC2 – FC1
60,000−40,000
Q = = 20,000/25 = 800 units
50−25

For 0 – 800 units choose the old system

> 800 units choose the new one.
 Question 3: (10)

1.
a) F = 1,800,000(1 + 0.10) (1 + 0.10) = $2,178,000 (3)
b) Interest = 2,178,000 – 1,800,000 = $378,000

2. Since only single amounts are involved, i can be determined directly from the P / F factor.
1
P=F (P/F,i, n)=F n
(1+i)
1
3 0,000 = 50,000 5
(1+i)
1
0 .600 = 5
(1+i)
1 0.2
i = ( ¿ −1 = 0.1076= (10.76%) (5)
6

Alternatively, the interest rate can be found by setting up the standard P/F relation, solving
forthe factor value, and interpolating in the tables.
P =F ( P/F , i, n )
30,000 = 50,000(P/F,i,5)
(P/F,i,5) = 0.60
From the interest tables, a P/F factor of 0.6000 for n = 5 lies between 10% and 11%.
Interpolatebetween these two values to obtain i= 10.76%.

3. P= $150,000 n= 7years i=11% F=?

F = P(1+i)n = $150,000 (1 + 0.11)7 = $150,000  2.076 = $311424 (2)

Question 4 (10)

1. 86,400 = 50,000(1 + 0.20)n

log (86,400/50,000) = n(log 1.20)
0.23754 = 0.07918n
n = 3 years (4)

2. Depreciation is a tax allowed deduction included in tax calculations in virtually all

industrialized countries. (2)
3. F value in year 8 is found by using the F/A factor.
F = 1000( F/A, 10%,8) = 1000(11.436) = $11,436 (3)

4. (a) D3 = 26,000 (4)

 BV3 = 62,000 = B – 3(26,000)
B = $140,000
(b) 26,000 = (140,000 – S)/5
S = $10,000

Question 5: (10)

A = $600, i= 10%, and n = 9. Thepresent worth is

P =600(P/A, 10%,9) = 600(5.759) = $3455.40 (5)

The cash flows follow diagram:

A=600

P=? 1 2 3 4 5 6 7 8 9 i= 10

year Costs($) Benefits ($) Benefits- costs ($

Payback period is 8 years (5)