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    Engineering Management 3000/5039: Tutorial Set 6

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    Sahan
    This document contains a tutorial for an engineering management course. It includes 13 questions related to capital budgeting techniques like discounted payback period, net present value, internal rate of return, capital recovery, and annual equivalent cost. The questions provide cash flow information for various projects and ask students to calculate metrics like payback period, NPV, IRR, and determine if projects should be accepted based on a required minimum rate of return.

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    Engineering Management 3000/5039: Tutorial Set 6

    Uploaded by

    Sahan
    72 views4 pages
    This document contains a tutorial for an engineering management course. It includes 13 questions related to capital budgeting techniques like discounted payback period, net present value, internal rate of return, capital recovery, and annual equivalent cost. The questions provide cash flow information for various projects and ask students to calculate metrics like payback period, NPV, IRR, and determine if projects should be accepted based on a required minimum rate of return.

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    Management 3000 tutorial 6

    Original Title

    6EM3000 Tute Set 6 2019 - (Final V2)

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    This document contains a tutorial for an engineering management course. It includes 13 questions related to capital budgeting techniques like discounted payback period, net present value, internal rate of return, capital recovery, and annual equivalent cost. The questions provide cash flow information for various projects and ask students to calculate metrics like payback period, NPV, IRR, and determine if projects should be accepted based on a required minimum rate of return.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    72 views4 pages

    Engineering Management 3000/5039: Tutorial Set 6

    Uploaded by

    Sahan
    This document contains a tutorial for an engineering management course. It includes 13 questions related to capital budgeting techniques like discounted payback period, net present value, internal rate of return, capital recovery, and annual equivalent cost. The questions provide cash flow information for various projects and ask students to calculate metrics like payback period, NPV, IRR, and determine if projects should be accepted based on a required minimum rate of return.

    Copyright:

    © All Rights Reserved
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    of 4

    September 2019

    ENGINEERING MANAGEMENT 3000/5039

    TUTORIAL SET 6

    Q1. Discounted Payback Period – Given the following two projects and their cash flows,
    calculate the discounted payback period with a 5% discount rate. What would you
    expect to notice about the payback period as the discount rate rises? Explain this
    relationship.

    Projects A B
    Initial Cost $10,000 $25,000
    Cash Flow Year One $4,000 $2,000
    Cash Flow Year Two $4,000 $8,000
    Cash Flow Year Three $4,000 $14,000
    Cash Flow Year Four $4,000 $20,000
    Cash Flow year Five $4,000 $26,000

    Q2. You have decided to buy a brand new Rocket to Pocket 911 car for $95,000. You’ve
    noticed in the paper that the same model but 3 years older, is selling for $55,000.
    What is the ownership cost (or Capital Recovery) for this car?
    (Assume i = 10%) (ANS: $21,584 pa)

    Q3. The Ace Steel Pty. Ltd. considers buying a super high precision laser operating machine
    to eliminate wastage of the machined material. The company anticipates spending
    $3m for the machinery. The system will save $1.2m in labour and materials but will
    incur additional operating and maintenance costs of $0.25m per year. Annual
    income taxes will also be increased by $150,000. The machinery is expected to have a
    10 year life and a salvage value of $200,000. If the company’s MARR is 18%,
    calculate if the company should make the purchase.

    Q4. A project has the following cash flow. Assuming that the project’s IRR is 10%,

    n Cashflow
    0 -$2,000
    1 $800
    2 $900
    3 X

    a) Find the value of X (ANS: $704)


    b) Is this project acceptable at MARR = 8% (ANS: Yes)

    ENGINEERING MANAGEMENT 3000/5039 1 Tutorial 6


    Q5. A company decides to save $50k annually for a one off upgrade of plant equipment
    expected to occur in ten years time. The savings are invested in a high yielding bank
    account which earns an inflation free amount of 7% per annum.

    Calculate the future value of the saving annuities in actual dollars ten years from now
    given that the average expected inflation rate is 3%. (Ans: $801,470.92)

    Q6. Consider the precedence (order of importance or urgency) relations for a plant set up
    project in a manufacturing industry given in the following table:

    a) Draw the AOA network for this project


    b) Generate possible paths for this network and calculate their duration
    c) Calculate the slacks.

    Activity Predecessors Weeks


    A - 1
    B A 4
    C A 3
    D A 7
    E B 6
    F C,D 2
    G E,F 7
    H D 9
    I G,H 4

    {ANS: b) 22, 17, 21, 21 c) slacks to be calculated}

    Q7. Each year several departments in a corporation propose projects with different
    investment amounts, annual net incomes and project duration. The corporation must
    choose from the proposals.
    The corporation's MARR is 25%. Using the information captured in the Table Q7:

    a) Prioritise the 10 projects below and state which ones you would you select?

    b) Given a budget constraint of $5000 which of the 10 projects would you select?

    Project Proj 1 Proj 2 Proj 3 Proj 4 Proj 5 Proj 6 Proj 7 Proj 8 Proj 9 Proj 10

    Investment $500 $1250 $1500 $1800 $800 $700 $1800 $1500 $2000 $1400
    IRR 10% 45% 33% 28% 17% 68% 78% 20% 40% 44%
    Select Y/N ? ? ? ? ? ? ? ? ? ?
    Table Q7

    Q8. You set up a five year bank loan to borrow $12,000 at a nominal interest rate of 12%
    compounded annually. If the average general inflation rate is expected to be 3% per
    annum, calculate what are the expected annual repayments in constant dollars?
    (Ans = $3061.1)

    ENGINEERING MANAGEMENT 3000/5039 2 Tutorial 6


    Q9. A contractor purchased a refurbished 5MVA transformer for $15,000. His
    operating and maintenance costs will be $2500 per year, and he expects to
    sell it for $5000 five years from now. What is the annual equivalent
    cost of the transformer at an interest rate of 10%? (Ans: $5640 / year)

    Q10. Calculate the Annual Worth for the following cash flow.
    Assume the MARR is 12% per year. (Ans: $3.75m / year)

    Year Amount
    Initial investment (part 1) 0 $10 million
    Initial investment (part 2) 1 $ 6 million
    Annual operating cost 1-8 $0.7 million
    Salvage value 8 $0.5 million

    Q11. The following are the estimated costs for two refurbished gas powered 20KW
    generators. You have been asked by your manager to evaluate which would be
    the better option to pursue. Calculate the annual equivalent costs for each
    generator given that the IRR is 15% per year?

    Generator A Generator B
    Initial Purchase cost $19,000 $25,000
    Refurbishing Costs $7,000 $11,000
    Annual Maintenance Cost $1,200 $ $700
    Annual Labour Costs $12,000 $6,000
    Annual Income Taxes nil 3600
    Salvage value $2,000 $3000
    Life, Years 6 10
    (ANS: AEGen A = $19.84k / year & AEGen B = $17,325.3 / year)

    Q12. The following information is supplied to compare Desalination Plant project with the
    Kimberley Perth Water Canal Project. Use Capital recovery analysis to select the project
    which gives better cost per kilolitre of water. (ANS: $1.17 per kL and $0.995 per kL)

    New Desalination Plant Kimberley to Perth Water Canal

    • Supplies 50GL water pa


    • Supplies 200GL water pa
    • 25 year life
    • 50 year life
    • $400m CAPEX to build
    • $2.2b CAPEX to build
    • $30m OPEX pa
    • $70m OPEX pa
    • Assume interest rate of 5.5%
    • Assume interest rate of 5.5%
    • Assume salvage value = $50m
    • Assume salvage value = $200m

    ENGINEERING MANAGEMENT 3000/5039 3 Tutorial 6


    Q13. For an initial investment of $300 you purchase a device that you expect
    will generate a cash flow revenue of $80 at the end of the first year which will
    grow by an annual additional increment of $20 for each subsequent year. Thus
    at the end of year two the revenue will be $100, $120 at the end of the third
    year and so on. The device has an operational life of 6 years. The expected
    salvage value of the device is $100 at the end of the sixth year.

    To operate and maintain the device you expect it will cost $50 on an annual
    basis.

    a) Draw the applicable cash flow diagram that represents the above
    situation.

    b) Calculate the annual equivalent worth given a MARR of 5%. (Ans: $32.79)

    c) Do you accept or reject the project? (Yes Accept) Why?

    ENGINEERING MANAGEMENT 3000/5039 4 Tutorial 6

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