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SEEM 2440A/B - ENGINEERING ECONOMICS First term (2011 2012)

Assignment 5 Due: 5:00 p.m., 24-Nov-2011 Important notes: 1. You must submit your assignment on time. No late assignment will be accepted. 2. You must drop your assignment into the assignment collection box A18. Dont hand in your assignment to instructor and TAs. 3. Unless otherwise stated, each question carries 4 points. Problem 1 to 10 are taken from the textbook (Engineering Economy, by William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling, 15th edition, Pearson Education, Inc. 2009.). The number in the parentheses is the problem number in the textbook. 1. (6-2) A company is analyzing three project proposals. All the projects are mutually exclusive. Each projects capital investment and annual operating expenses are shown in the following table. Capital Investment ($) Useful life (years) Annual revenue at the end of year k (1 k useful life) ($) Annual expenses at the end of year k (1 k useful life) ($) Market value at the end of the useful life ($) 1 800,000 10 450,000 200,000 100,000 2 600,000 10 400,000 180,000 80,000 3 400,000 10 300,000 150,000 60,000

Using the desired MARR of 10% per year, and for the study period of 10 years, determine which project should be adopted on the basis of PW method. Confirm your selection using the AW methods. Include do-nothing as one of the possible alternatives in your analysis. 2. (6-5) An airport needs a modern material handling system for facilitating access to and from a busy maintenance hanger. A second-hand system will cost $75,000. A new system with improved technology can decrease labor hours by 20% compared to the used system. The new system will cost $150,000 to purchase and install. Both systems have a useful life of five years. The market value of the used system is expected to be $20,000 in five years, and the market value of the new system is anticipated to be $50,000 in five years. Current maintenance activity will require the used system to be operated 8 hours per day for 20 days a month. The study period is 5 years. If labor costs $40 per hour and the MARR is 1% per month, which system should be recommended based on the incremental PW analysis?

3. (6-52) A firm is considering three mutually exclusive alternatives as part of an upgrade to an existing transportation network. I Installed cost ($) Net annual revenue at the end of year k (1 k useful life) ($) Salvage value ($) Useful life (years) IRR (%) 40,000 6,400 0 20 15.0 II III 30,000 20,000 5,650 5,250 0 20 18.2 0 10 22.9

At EOY 10, alternative III would be replaced with another alternative III having the same installed cost and net annual revenues. Suppose that do-nothing alternative is one of the possible alternatives. If MARR is 10% per year and the study period is 20 years, which alternative (if any) should be chosen based on the incremental IRR analysis? If the IRR cannot be solved analytically, use the trial and error and linear interpolation method in P.17 of Chapter 5 to determine the corresponding IRR and state clearly all your trials. 4. (6-55) Refer to Problem 3. Suppose the study period is changed to 10 years. Use the PW method, which alternative (if any) should be chosen? 5. (6-54) Use the incremental ERR method to decide whether project A or project B should be recommended. These are two mutually exclusive cost alternatives, and one of them should be selected. The MARR is 5% per year and the study period is 20 years. Assume repeatability is appropriate for this comparison. Capital investment ($) Annual operating expenses at the end of year k (1 k useful life) ($) Useful life (years) Market value ($) Project A 15,000 8,000 20 0 Project B 25,000 6,500 10 0

6. (7-8) An asset for drilling was purchased and placed in service by a petroleum production company. Its adjusted cost basis is $60,000, and it has estimated MV of $12,000 at the end of an estimated useful life of 14 years. Compute the depreciation amount in the third year and the BV at the end of the fifth year of life by each of these methods: a. The SL method depreciable life: 14 years; salvage value: $12,000. b. The 200% DB method with switchover to SL depreciable life: 14 years; salvage value: $12,000. c. The GDS recovery period: 7 years. d. The ADS recovery period: 14 years.

7. (7-12) A construction company is considering changing its depreciation from the MACRS (GDS) method to the historical SL method for a general purpose hauling truck. The adjusted cost basis of the truck is $100,000, and the expected salvage value for depreciation purposes is $8,000. The company will use the truck for 8 years and will depreciate it over this period of time with the historical SL method. What is the difference in the amount of depreciation that would be claimed in year five? The GDS recovery period = 5 years. 8. (7-17) A concrete and rock crusher for demolition work has been purchased for $60,000 (adjusted cost basis), and it has an estimated SV of $10,000 at the end of its five-year life. Engineers have estimated that the following units of production (in m3 of crushed material) will be contracted over the next five years. EOY m3 1 16,000 2 24,000 3 36,000 4 16,000 5 8,000

Using the units of production depreciation method, what is the depreciation allowance in year three, and what is the BV at the end of year two?

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