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(ECON115)[2010](s)midterm~kchungaa^_29129.pdf
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Econ 115 Engineering Economics and Finance Name:______________
Spring, 2010 ID:_________________
Midterm Exam
Instructor: YU, Yan Lecture #:____________

General instruction: This is a closed-book exam. You may use calculators. Steps of
calculation must be shown, including functional symbol of factors (such as (P/A, 10%, 6))
and its value (here 4.3553). Draw cash flow diagram whenever possible (it counts for
10% of total marks). You have 120 minutes for this exam.

(2.3) Question 1 (20 points)
An electronic device is available that will reduce this years labor costs by $10,000. The
equipment is expected to last for eight years. If labor costs increase at an average rate of
7% per year and the interest rate is 12% per year.

a.
What is the maximum amount that we could justify spending for the device? (15 points)

b.
What is the uniform annual equivalent value (A) of labor costs saved by the
device over the eight-year period? (5 points)



(3.5) Question 2 (20 points) Swagelok Enterprises is a manufacturer of miniature fittings and valves. Over a 5-year period, the costs associated with one product line were as follows: first cost of $30,000 and annual costs of $18,000. Annual revenue was $27,000, and the used equipment was salvaged for $4,000. What rate of return did the company make on this product? (Must use linear interpolation and draw a relevant graph. Use the interest tables provided.)
(3.7, 4.4) Question 3(20 points) In the Rawhide Company (a leather products distributor), decisions regarding approval of proposals for capital investment are based upon a stipulated MARR of 18% per year. The five packaging devices listed in following table were compared, assuming a 10-year life and zero salvage value for each at that time. Which one (if any) should be selected? Make any additional calculations that you think are needed to make a comparison, using the ERR method. Let =18%.
Packaging Equipment
A B C D E
Capital Investment $38,000 $50,000 $55,000 $60,000 $70,000
Annual net revenue 11,000 14,100 16,300 16,800 19,200
External Rate of Return 21.1% 20.8% 21.4% 20.7% 20.5%

(4.5, 4.6, 4.8, 4.9) Question 4 (30 points)
Two mutually exclusive alternatives are being considered for the environmental
protection equipment at a petroleum refinery. One of these alternatives must be selected.
The firms MARR is 20% per year. The estimated cash flows for each alternative are as
follows:

Alternative A Alternative B
Capital investment $25,000 $43,000
Annual expenses 6,000 4,500
Salvage value 1,500 4,700
Useful life 5 years 10 years

a.
Which environmental protection equipment alternative should be selected? Assume the equipment will be needed indefinitely and use Capitalized Worth method. (15 points)

b.
Assume the study period is shortened to five years. Use imputed market value technique to calculate the adjusted market value of Alternative B at t