University of Business and Technology
Master of Engineering Management
Advanced Engineering Economy ENGM-515
Assignment 3 – Evaluating Economic Alternatives / Investing in Financial
Assets
1.For the following cash ows
(a)Calculate the payback period for each project
(b)Assuming a MARR of 10%, calculate the discounted payback period
Project Cash Flow ($)
nAB
0-$3 000-$5 500
12 0002 000
21 5002 000
31 5002 000
45005 000
55005 000
61 500
2.You need to know whether the building of a new warehouse is justi ed under the following
conditions: The proposal is for a warehouse costing $200,000. The warehouse has an expected
useful life of 35 years and a net salvage value (net proceeds from sale after tax adjustments)
of $35,000. Annual receipts of $37,000 are expected, annual maintenance and administrative
costs will be $8,000/year, and annual income taxes are $5,000. Given the foregoing data, which
of the following statements are correct?
(a)The proposal is justi ed for a MARR of 9%.
(b)The proposal has a net present worth of $152,512 when 6% is used as the interest rate.
(c)The proposal is acceptable, as long as MARR <= 11.81%.
(d)All of the preceding are correct.
3.Cable television companies and their equipment suppliers are on the verge of installing new
technology that will pack many more channels into cable networks, thereby creating a potential
programming revolution with implications for broadcasters, telephone companies, and the
consumer electronics industry. Digital compression uses computer techniques to squeeze 3 to
10 programs into a single channel. A cable system fully using digital compression technology
would be able to oer well over 100 channels, compared with about 35 for the average cable
television system now used. If the new technology is combined with the increased use of optical
bers, it might be possible to oer as many as 300 channels. A cable company is considering
installing this new technology to increase subscription sales and save on satellite time. The
company estimates that the installation will take place over 2 years. The system is expected
to have an 8-year service life and produce the following savings and expenditures:
Digital Compression
Investment
Now$500,000
First year$3,200,000
Second year$4,000,000
Annual savings in satellite time$2,000,000
Incremental annual revenues due
to new subscriptions$4,000,000
Incremental annual expenses$1,500,000
Incremental annual income taxes$1,300,000
Economic service life8 years
Net salvage value$1,200,000
Note that the project has a 2-year investment period, followed by an 8-year service life (a total
10-year life for the project). This implies that the rst annual savings will occur at the end of
year 3 and the last will occur at the end of year 10.
(a)If the rm’s MARR is 15%, use the Annual Equivalent (AE) method to justify the economic
worth of the project.
(b)If the rm’s MARR is 12%, use the Net Present Worth (NPW) method to justify the
economic worth of the project
(c)Compute the Rate of Return (ROR) for this project
4.You borrowed $15,000 for buying a new car from a bank at an interest rate of 12% compounded
monthly. This loan will be repaid in 48 equal monthly installments over four years. Immediately
after the 20th payment, you desire to pay the remainder of the loan in a single payment.
Compute this lump-sum amount of that time.
5.The AirJet Service Company’s bonds have four years remaining to maturity. Interest is paid
annually, the bonds have a $1,000 par value, and the coupon interest rate is 8.75%.
(a)What is the yield to maturity at a current market price of $1,108?
(b)Would you pay $935 for one of these bonds if you thought that the market rate of interest
was 9.5%?
6.A $1,000, 9.50% semiannual bond is purchased for $1,010. If the bond is sold at the end of
three years and six interest payments, what should the selling price be to yield a 10% return
on the investment?
7.Flint Metal Shop purchased a stamping machine for $147,000 on March 1, 2006. The machine
is expected to have a useful life of 10 years, a salvage value of $27,000, a production of 250,000
units, and working hours of 30,000. During 2006, Flint used the stamping machine for 2,450
hours to produce 23,450 units. From the information given, compute the book depreciation
expense for 2006 under each of the following methods:
(a) Straight line.
(b) Units-of-production method.
(c) Declining Balance method using a depreciation rate,α, of 16%.
Good Luck
