Student Name:_______________________ Student Number:_________________

Instructor Use
Serial
Number

UNIVERSITY OF WINDSOR

FACULTY OF ENGINEERING

85-313-(01 & 02)

Engineering Economy
MIDTERM EXAMINATION
Saturday, November 7th, 2009 Dr. Fouzia Baki & Dr. Amr Shabaka
Closed Book Total Marks: 100

Student Name:

Student ID.:

Section No.:

Instructor’s Name:

Notes:

* The time allocated for this examination is 2:00 hours

* Attempt ALL Questions
* Draw Cash Flow Diagrams Whenever Applicable
* Be Neat & Precise
* Show All Computations and/or Assumptions
* There are 10 pages in total.
* If you are running out of space for a specific problem than write at the back of the sheet
containing that problem (an extra blank sheet (page 9)has been provided for extra space if
needed)

Total Mark

___________________________________________________________________

Question Marks Remarks

1 /10

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2 /15
3 /25
4 /25
5 /15
6 /10
Total / 100

QUESTION 1 - 10marks

For each of the following problems indicate on the figure at which point in time you are doing the
equivalence

P
01234n $50
$1000
$50

(a) What is the value of n that makes the disbursements equivalent to the receipts, based on a 3%
interest rate?
Solution

P = A (P/A, 3%, n)
$1,000 = $50 (P/A, 3%, n)

(P/A, 3%, n) = 20

From the 3% interest table, n = 31

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(b) Assuming a 12% interest rate, find the value of J that makes the disbursements equivalent to

6012345 $ J3
5J 2500
46J
JJJ $500

Solution
0P
$500
G
$500
6G
5G
4G
3G
2G

Present Worth P of the two $500 amounts (at year -1):

P = $500 (P/F, 12%, 2) + $500 (P/F, 12%, 3)
= $500 (0.7972) + $500 (0.7118)
= $754.50

Also:

P = G (P/G, 12%, 7)
$754.50 = G (P/G, 12%, 7)
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= G (11.644)

G = $754.50/11.644
= $64.80

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QUESTION 2 - 15 marks

John bought a car at a local used car lot. Including tax and insurance, the total price was $3000. He
is to pay for the car in 12 equal monthly payments using a Nominal interest of 12% compounded
monthly on the loan, with the first payment due immediately. After six payments, he decides to sell
the car. A buyer agrees to pay a cash amount to payoff the loan in full at the time the next payment is
due and also to pay John $1000. If there are no penalty charges for this early payment of the loan,
how much will the car cost the new buyer? [Cash flow diagram  3Marks]

Solution

10
11
0123456789 Pay
A = off
$3,000
? loan

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Compute monthly payment:

$3,000 = A + A (P/A, 1%, 11)

= A + A (10.368)
= 11.368 A
A = $3,000/11.368
= $263.90

Car will cost new buyer:

= $1,000 + 263.90 + 263.90 (P/A, 1%, 5)

= $1263.90 + 263.90 (4.853)
= $2,544.61

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QUESTION 3 - 25 marks

Chrysler wants to build a spare parts storage facility in Windsor. A plant engineer has identified four
different location options. Initial cost and annual net cash flow estimates are detailed in the Table
below. If the MARR is 15%, use the IRR analysis to select the economically best location.
Estimates for Four Alternative Building Locations
A B C D
Initial cost, $ -130,000 -150,000 -170,000 -100,000
Annual cash flow, $ +25,000 +30,000 +33,000 +20,000
Life, years 15 15 15 15
P
0123415 $100Project
000
$20 000(D)

Solution
Sort projects in order of least initial cost DABC

Compare D to Do Nothing (DN)

100,000 = 20,000(P/A, i*%,15) (P/A, i*%,15) = 5
if i=20%  (P/A,20%,15)= 4.6755
if i=15%  (P/A,15%,15)= 5.8474

P
0123415 $30Project
000
$5 000
(A-D)

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15%< i* < 20% D is current best because i* >MARR
------------------------
Incremental Comparison from DA
A is Challenger

30,000 = 5,000(P/A, i*%,15) (P/A, i*%,15) = 6

if i=14%  (P/A,14%,15)= 6.1422
if i=15%  (P/A,15%,15)= 5.8474

P
0123415 $50Project
000
$10 000
(B-D)

because i* <MARR
-------------------------
Incremental Comparison from DB
B is Challenger
50,000 = 10,000(P/A, i*%,15) (P/A, i*%,15) = 5
if i=20%  (P/A,20%,15)= 4.6755
if i=15%  (P/A,15%,15)= 5.8474
15%< i* < 20% B is current best because i* >MARR
-------------------------------------

P
0123415 $20Project
000
$3 000
(C-B)
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C is Challenger
20,000 = 3,000(P/A, i*%,15) (P/A, i*%,15) = 6.67
if i=12%  (P/A,12%,15)= 6.8109
if i=13%  (P/A,13%,15)= 6.4624
12%< i* < 13% C fails test & B is still current best
because i* <MARR

B is the Best Alternative

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QUESTION 4 - 20 marks

11
234567890110
$1500
$3000
$1000
$2000
$4000
Years
1$500
$5000
2
PW
P
+31 5

A mechanical engineering student is going to deposit money into her bank account for the following
five years using the pattern shown in figure. She is then planning to withdraw part of her money for
the following 7 years as shown. If she is investing her money at an interest rate of 7% per year, find
net present worth and equivalent annual worth for the shown cash flow diagram.

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11
234567890110
$1000
$5000
$2000
$2500
$4000
$3500
$3000
Years
12

P1 = present worth of deposits

= - [2 000 + 500 (A/G, 7%,5)] (P/A, 7%,5)
= - [2 000 + 500 (1.86505)] (4.1002)= - $12,023.84

Add 5000 +ve and 5000 –ve annuity from end

of year 6 until end of year 10
Let PW5= The PW at end of year 5 for all payments from end of year 6 until end of year 10
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PW5 = [5 000 – 1 000 (A/G, 7%,5)] (P/A, 7%,5)

= [5 000 + 1000 (1.86505)] (4.1002)
=12 853.9

P2 = present worth of PW5

= PW5(P/F, 7%, 5)
= 12 853.9 (0.71299) = $9 164.72

P3 = present worth for payments at end of year 11 and 12

= 1000 (P/A, 7%,2) (P/F, 7%, 10)
= 1000 (1.8080) (0.50835) = $919.15
Total PW P = P1 + P2 + P3 = -12,023.84 + 9 164.72 + 919.15 = - $1 939.97
--------------------------------------

AW =P(A/P,7%,12)= 919 (0.12590) = -244.24

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QUESTION 5 - 15 marks

ABC Automotive has $100 000

to invest in internal projects. The Project Cost
choices are: A. Line Improvements $20 000
B. New Manual Tester $30 000
C. New Automated Tester $60 000
C. Overhauling Press $50 000

Only one tester may be bought and the press will not need overhauling if the line improvements are not made. What
mutually exclusive project combinations are available if ABC Auto will invest in at least one project?
[For each infeasible alternative: indicate the reason why you think that the alternative is infeasible]

Solution

Possible Testers Press Total Cost Feasible?

combinations
Do nothing OK OK 0 No
A OK OK OK Yes
B OK OK OK Yes
C OK OK OK Yes
D OK No Need to OH OK
AB OK OK OK Yes
AC OK OK OK Yes
AD OK OK OK Yes
BC >1 OK OK
BD OK No Need to OH OK
CD OK No Need to OH >100 000
ABC >1 OK >100 000
ABD OK OK OK Yes
ACD OK OK >100 000
BCD >1 No Need to OH >100 000
ABCD >1 OK >100 000

There are 7 mutually exclusive projects: {A, B, C, AB, AC, AD, ABD}

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QUESTION 6 - 10 marks

(a) What is the difference in annual worth between an investment of $100, 000 per year for 100
years and an investment of $100 000 per year forever at an interest rate of 10% per year?
Solution:

For the infinit life project

PW∞= A/i = [100 000]/0.1= $1 000 000

The equivelant Annuity over 100 years is:
AW∞ for 100 yrs= 1000 000 (A/P,10%,100) =1000000
i (1 + i ) 0.1(1 + 0.1)
N 100
= 1000000 = 100007.26
(1 + i ) N −1 (1 + 0.1) 100 − 1
The differnce in Annual worth is $7.26

Other way
For 100 year project
PW100 =100 000 (P/A,10%,100)=100 000
(1 + i ) N − 1 = 100000(1 + 0.1) 100 − 1 = 999927.43
i (1 + i ) 0.1(1 + 0.1)
N 100

Equivelent Annual worth for an infinit project

AW100 for ∞ yrs= PWi= *0.1= 99992.74
999927.43
Difference = 100 000 -99992.74 = $7.26

(b) Consider alternatives A & B:

A B
Initial cost, $ -60,000 -65,000
Annual cash flow, $ +25,000 +25,000
Life, years 8 8
If the two projects are mutually exclusive and the MARR = 5% which alternative should be taken.

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P
012348 $65 000
$60 $25A
B000

Solution

Since both investments are of equal life and bring an equal +ve cash, than the project with the
smaller investment is the desired one (Select A)

By Calculation
PW(A)= -60 000 +25 000(P/A, 5%, 8) = -60 000 + 25 000 (6.4632) = 101 580
PW(B)= -65 000 +25 000(P/A, 5%, 8) = -65 000 + 25 000 (6.4632)= 96580
Select A

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