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(ECON115)[2010](s)quiz~kchungaa^_27394.pdf
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Econ 115 Engineering Economics and Finance Name:______________
Spring, 2010 ID:_________________
Final 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 about 10% of total marks). You have 180 minutes for this exam.

1. (30 points) A new steam-.ow monitoring device must be purchased immediately by a local municipality. These most likely (best) estimates have been developed by a group of engineers:


Capital investment
$140,000

Annual savings
$25,000

Useful life
12 yr

Market value (end of year 12)
$40,000

MARR
10%yr



Because considerable uncertainty surrounds these estimates, it is desired to evaluate the sensitivity of PW to changes in the most likely estimates of (a) annual savings, (b) useful life, and (c) interest rate (MARR). .50%

(1) Graph the results (spiderplot) (For non-linear relationship, you may try 5 values for each factor: when the factor value changes by 0%, 25%, 50%) (You may use the following values: (P/A, 7.5%,12)=7.7353, (P/F, 7.5%,12)=0.4199; (P/A, 12.5%, 12)=6.0535, (P/F, 12.5%, 12)=0.2433)
(2) Calculate the sensitivity of decision reversal to (a) annual savings, (b) useful life, (c) interest rate (MARR), and determine which factor the project is most sensitive to. (If you need to calculate IRR, you must use linear interpolation.)

Answer:
(1)

% Change in Factor



-50
-25
0
25
50

(a)
Annual Savings
$12,500
$18,750
$25,000
$31,250
$ 37,500


PW(10%)
- 42,084
501
43,086
85,672
128,257









(b)
Life
6
9
12
15
18


PW(10%)
- $8,539
$20,940
$43,086
$59,728
$72,229









(c)
MARR
5%
7.5%
10%
12.5%
15%


PW(i%)
$103,855
$70,176
$43,086
$21,070
$2,991



At the most likely estimates:
PW(10%) = - $140,000 + $25,000 (P/A, 10%, 12) + $40,000 (P/F, 10%, 12)
= $43,086

At a -50% change in life (example):
PW(10%) = - $140,000 + $25,000 (P/A, 10%, 6) + $40,000 (P/F, 10%, 6)
= - $140,000 + $25,000 (4.3553) + $40,000 (0.5645)
= - $8,538
-$60,000-$40,000-$20,000$0$20,000$40,000$60,000$80,000$100,000$120,000$140,000-50-40-30-20-1001020304050Percent Change in FactorPW(10%)


MARR

Annual Savingss


Useful
Life


$43,086



The graph indicates that the decision is most sensitive to the estimate of annual savings.

(2) (a) Annual saving: (P/A, 10%, 12)=6.8137 x*6.8137=-43086 x =-43086/6.8137=-6323.44 sensitivity of decision reversal to annual saving is -6323.44/25000=-25.3%

(b) Useful life. PW(10%, n=6)=-8539,