KNC 3262 ENGINEERING ECONOMIC ANALYSIS

CASE STUDY

Case Study: Application of Money-Time Relationships

SCENARIO:

New equipment has been proposed by process engineers to increase the productivity of a certain manual welding operation. The
investment cost is RM 25,000, and the equipment will have a market value of RM 5000 at the end of a study period of five years.
Increased productivity attributable to equipment will amount to RM 8000 per year after extra operating costs have been subtracted from
the revenue generated by the additional production. A cash-flow diagram for this investment opportunity is given in Figure 1.1. Noted,
the firms MARR is 20% per year.

RM 5000

RM RM RM RM 8000 RM 8000
8000 8000 8000

1 2 3
4 5
Years
 RM

Figure 1.1: Cash Flow Diagram for the investment of new equipment

As process engineers you must prepare an analysis to the investment of new equipment to convince the Managing Director (MD) whether
this is economically feasible or not by using different methods as mentioned below:

a) By using the Present Worth (PW) method.

b) Evaluate the Future Worth (FW) of the potential improvement project.
c) By using the Annual Worth (AW) method
d) Use a spreadsheet and by hand to evaluate the Internal Rate of Return (IRR) of the proposed equipment
e) What is the projects External Rate of Return (ERR), if = MARR = 20% per year.
f) Calculate the payback period (PP) of the new equipment by using conventional payback period and discounted payback period
(DPP) (for DPP, take discount rate = 7%).

You are advised to use Investment Balance Diagram to make an accept-reject decision on this project.
The report should have the following characteristics:

a) FONT 11; Century Schoolbook; Double Spacing

b) Your report should sufficiently document the case, your approach, and your conclusions.

The body of the report (maximum are 10 pages):

a) Overview of the case

b) Problem statement
c) Solution Methodology (Formula)
d) Recommendations and Conclusions

Make use of graphs or charts as appropriate in analysing the case.

An individuals grade for the case study will be based on an overall evaluation of the report, presentation PLUS peer evaluations.

You must be able to list or write the learning outcomes after you completed this task. (On the last page after References)