Voorbeeldtentamen Engineering Economy (1A350) Tijdsduur 3 uur

Voorbeeldtentamen
Engineering Economy
(1A350)
Tijdsduur 3 uur
1

Problem 1 (financieel management)
Measur Enterprise produces standardized telephone keypads and operates in a
highly competitive market in which the keypads are sold for $ 4 each. Because of
the nature of the production technology, the firm can produce only between
10,000 and 13,000 units per month, in fixed increments of 1,000 units. Measur
has the following cost structure (in $):
# units 10,000 11,000 12,000 13,000
Variable factory cost 37,000 41,600 44,600 48,400
Fixed factory cost 9,000 9,000 9,000 9,000
Variable selling cost 6,000 6,900 7,400 8,200
Fixed administration cost 6,000 6,000 6,000 6,000
Total cost 58,000 63,500 67,000 71,600
Average unit cost 5.80 5.72 5.58 5.51
At which output level should the firm operate?
a. 10,000 units
b. 11,000 units
c. 12,000 units
d. 13,000 units
# units 10,000 11,000 12,000 13,000
Revenue 40,000 44,000 48,000 52,000
Cost 58,000 63,500 67,000 71,600
Losses 18,000 18,500 19,000 19,600
2

Problem 2 (financieel management)
CLIC manufactures two types of cigarette lighters: Basic and Super. A new plant
began producing both lighter models this year. The following variable costing
statement summarizes the first year of operations:
Product Basic Super Total
# units produced 200,000 160,000
# units sold 180,000 110,000
Selling price $0.50 $0.70
Sales Revenue $90,000 $77,000 $167,000
Cost of goods sold $18,000 $22,000 $40,000
Manufacturing margin $72,000 $55,000 $127,000
Fixed Overhead $103,000
Income from manufacturing $24,000
For internal control purposes, variable costing is used. Management also wants
income from manufacturing calculated using absorption costing. Fixed overhead
is allocated to the two lighters using actual machine minutes. Each Basic lighter
requires 1.1 machine minutes and each Super lighter requires 1.2 machine
minutes.
Calculate the plants income from manufacturing for the Basic lighter using
absorption costing.
a. $ 10,200
b. $ 17,000
c. $ 22,000
d. $ 22,500
200,000 * 1.1 + 160,000 * 1.2 = 412,000 minutes
103,000/412,000 = 0.25 per minute
Super: 180,000 * 1.1 * 0.25 = 49,500
Profit is $ 72,000 – 49,500 = $ 22,500
3

Problem 3 (appendix A1)
Brickley Chains produces five different styles of silver chains: A, B,C, D and E.
The following table summarizes the production and cost data for the five
products.
Product Annual Volume Direct Labour per Direct Material per unit
Unit
A 5,000 $2 $4
B 3,000 $2. 50 $4.50
C 1,000 $3 $5
D 800 $4 $6
E 500 $5 $7
Annual overhead is $ 80,000. This overhead consists entirely of the automated
machining process. Each chain is produced in batches with chains of the same
type. Each batch requires the same amount of machine time. That is, producing
a batch of 100 style A chains requires the same amount of machine time as a
batch of 25 style E chains. The following table summarizes the batch size for
each type of chain:
Product Batch size
A 100
B 100
C 50
D 40
E 25
Compute the unit cost of D using Activity Based Costing
a. $ 12.70
b. $ 22.21
c. $ 22.70
d. $ 24.29
# batches voor D is 800/40 = 20. Total # batches is 140. Total cost 80,000.
Price per batch is 80,000/140 = 571.428. For D.. 20 * 571.428 = 11,429.
Unit D cost: 4 + 6 + 11,429/800 = 24.29
4

Problem 4 (3.38, moderated)
A loan of $ 4,000 is to be repaid over a period of eight years. During the first four
years, exactly $ 1,000 of the loan principal is to be repaid (along with
accumulated compound interest) by a uniform series of payments of A1 dollars
per year. The other $ 3,000 of the loan principal is to be repaid over four years
with accumulated interest by a uniform series of payments of A2 dollars per year.
If i = 9% per year, what are A1 and A2?
a. A1 = $ 656 and A2 = $ 542
b. A1 = $ 1,016 and A2 = $ 926
c. A1 = $ 656 and A2 = $ 926
d. A1 = $ 1,016 and A2 = $ 542
A1 = [ 4000 (F/P, 9%, 4) – 1000] [A/F, 9%,4] = 1016
A2 = 3000 (A/P, 9%,4) = 926
5

Problem 5 (2.27)
An automatic machine can be operated at three speeds, with the following
results:
Speed Output
Time between Tool Grinds
(pieces per hour) (hours)
A 400 15
B 480 12
C 540 10
A set of unsharpened tools costs $ 150 and can be ground 20 times. The cost of
each grinding is $ 25. The time required to change and reset the tool is 1.5 hour,
and a tool–setter who is paid $ 8 dollar per hour, makes such changes. Variable
overhead on the machine is charged at the rate of $ 3.75 per hour, including toolchanging
time.
At which speed should the machine be operated to minimize total cost per
piece?
a. A
b. B
c. C
Relevant costs:
Cycletime Costs per piece
c 11.5 11.5 * 3.75/10 *540 = 0.00798
b 13.5 13.5 * 3.75/12 *480 = 0.00879
a 16.5 16.5 * 3,75/15 *400 = 0.0103
6

Problem 6 (4.47)
The prospective exploration for oil in the outer continental shelf by a small
independent drilling company has produced a rather curious pattern of cash
flows, as follows:
End of Year Net Cash Flow
0 - $ 520,000
1-10 + $ 200,000
10 - $ 1,500,000
The $ 1,500,000 expenses at the end of the year 10 will be incurred by the
company in dismantling the drilling rig.
The company expects to earn at least 20% per year on invested capital before
taxes. Use the ERR method (ε = 20%).
Is the project economically acceptable?
a. No, because ERR is 0.5 %
b. Yes, because ERR is 21.15%
c. Yes, because ERR is 21.65%
d. Yes, because ERR is 28.8 %
[-520,000 – 1,500,000(P/F, 20%,10)] [F/P, i%, 10] = 200,000 (F/A, 20%,10)
762,250 (1+i) ↑ 10 = 5,191,740
i = 21.15%
or: (not the best answer, but ...)
[-520,000] [F/P, i%, 10] = 200,000 (F/A, 20%,10) – 1,500,000
520,000 (1+i) ↑ 10 = 3,691,740
i = 21.65%
7

Problem 7 (5.19)
As the supervisor of a facilities engineering department, you consider mobile
cranes to be critical equipment. The purchase of a new medium-sized, truckmounted
crane is being evaluated. The economic estimates for the two
alternatives are shown in the table:
Alternatives A B
Investment $ 272,000 $346,000
Annual expenses $28,800 $19,300
Useful life (Years) 6 9
Market Value (at end of life) $25,000 $ 40,000
You have selected the longest useful life for the study period and would lease a
crane for the final three years under alternative A. At that time the leasing cost
will be $ 66,000 per year (plus the annual expenses of $28,800 per year). The
MARR is 15%.
Which alternative you prefer?
a. A, because PW (A) < PW (B)
b. A, because PW (A) > PW (B)
c. A, because A requires the least capital investment
d. B, because the ERR of the differences in cash flow between A and B
is greater than MARR.
Year Differences between A-B
0 - 74,000
1-5 9,500
6 -15,500
7-8 75,500
9 115,500
[-74,000 – 15,500(P/F,15%,6)] [F/P, i, 9]=9,500(F/A,15%,5)(F/P, 15%,4) +
75,500(F/A,15%,3) + 40,000
80,701 (1 + i) ↑ 9 = 404,202 i = 19.9 % > MARR
8

Problem 8 (9.13, moderated)
Consider a piece of equipment that initially cost $8,000 and has these estimated
annual expenses and market values:
End of Year, k Annual Expenses MV at End of Year
1 -$3,000 $4,700
2 - 3,000 3,200
3 - 3,500 2,200
4 - 4,000 1,450
5 - 4,500 950
6 - 5,250 600
7 - 6,250 300
8 - 7,750 0
If the before-tax MARR is 10 % per year, determine the economical life of
this equipment.
a. 3 year
b. 4 year
c. 5 year
d. 6 year
Year Costs (incl intrest) EUAC
1 7100 7100
2 4970 4141
3 4820 3621
4 4970 3395
5 5145 3195
6 5695 3215
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Problem 9 (7.29, moderated)
If 846.2 labour hours are required for the third production unit, and 783 labour
hours are required for the fifth production unit, determine the learning curve
parameter s.
a. 0.95
b. 0.9
c. 0.85
d. 0.8
846.2 = (3/5) ↑ n
783
1.0807 = (6/10) ↑ n
log 1.0807 = n log (0.6)
n = - 0.1520
n = log s = - 0.1520
log 2
log s = -0.04576
s = 0.9
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Problem 10 (10.10)
A nationwide motel chain is considering locating a new motel in big town, USA.
The cost of the 150-room motel (excl. furnishings) is $ 5 million. The firm uses a
15-year planning horizon to evaluate investments of this type. The furnishings for
this motel must be replaced every five years at an estimated cost of $ 1,875,000
(at moment k = 0, k = 5 and k = 10). The old furnishings have no market value.
Annual operating and maintenance expenses are estimated to be $ 125,000. The
market value of the motel after 15 years is estimated to be 20% of the original
building cost.
Rooms at the motel are projected to be rented at an average rate of $ 45 per
night. On the average, the motel will rent 60% of its rooms each night. The motel
will be open 365 days per year. The MARR is 10% per year.
The project is economically feasible, because the AW is $ 232,625.
Investigate sensitivity to decision reversal for the following three factors:
a. Occupancy Rate (average percent of rooms rented per night)
b. MARR
c. Capital investment
To which of these factors is the decision most sensitive?
Capital Investment: 232,625 – 5,000,000 (A/P,10%,15) X = 0
X = 0.3538 or 35.38%
Marr: IRR = 14.3% (by trial and error), therefore, the Marr must increase by
14.3/10 –1 = 43%
Occupancy Rate: 232,625 + (45(150)(365)(0,6) X = 0
X = - 0.15.74 or 15.74%
The decision is most sensitive to changes in occupancy rate (requires the
smallest percent change to reverse te decision)
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Problem 11 (11.5)
A non profit government corporation is considering two alternatives for generating power:
A:
Build a coal-powered generating facility at a cost of $20,000,000. Annual power sales are
expected to be $ 1,000,000 per year. Annual operating and maintenance costs are $ 200,000 per
year. A benefit of this alternative is that it is expected to attract new industry, worth $ 500,000 per
year, to the region.
B:
Build a hydroelectric generating facility. The capital investment, power sales and operating costs
are $ 30,000,000; $ 700,000; and $ 100,000 per year, respectively. Annual benefits of this
alternative are as follows:
• Flood-control savings $ 600,000
• Irrigation $ 200,000
• Recreation $ 100,000
• Ability to attract new
Industry $ 400,000
The useful life of both alternatives is 50 years.
Using an interest rate of 5% determine which alternative should be selected according to
the conventional B-C ratio method.
a. A, because B/C-ratio of A > B/C-ratio of B
b. A, because B/C-ratio of A > 1
c. B, because B/C-ratio of B > B/C-ratio of A
d. B, the incremental analysis of (A,B) shows ∆ B/ ∆C is greater than 1
Incremental analysis B-A:
Investment; 10,000,000
O&M: 1,000,000
Power Sales: - 200,000
Other: 800,000
∆ B/ ∆C = 800,000 – 200,000 = 600,000 = 1.34 > 1, select B
10,000,000 (A/P,5%, 50) – 100,000 448,000
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Problem 12 (9.7a, moderated)
The replacement of a planning machine is being considered by the Reardorn
Furniture Company. (There is an indefinite future need for this type of machine).
The best challenger will cost $ 30,000 installed, and will have an estimated
economic life of 12 years and a $ 2,000 MV at that time. It is estimated that
annual expenses will average $ 17,000 per year. The defender has a present BV
of $ 6,000 and a present MV of $ 4,000. Data for the defender for the next
three years are as follows (in dollars):
Year MV at end year BV at end of year Expenses during the year
1 3,000 4,500 20,000
2 2,500 3,000 25,000
3 2,000 1,500 30,000
Using a rate of 15% per year, make a comparison to determine whether it is
economical to make the replacement now.
a. No, because the economic life of the defender is 1 year
b. No, the EUAC of the defender is less than the EUAC of the
challenger
c. Yes, the EUAC of the challenger is less than $21,600.
d. Yes, the EUAC of the defender is $ 21,600 and is less than the
EUAC of the challenger
Defender:
Year CR amount Expenses Total EUAC
1 4000(0.15) + (4000-3000)= 1600 20000 21600 21600
2 3000(0.15) + (3000-2500)= 950 25000 25950 23622
3 2500(0.15) + (2500-2000) = 875 30000 30875 25713
Challenger:
EUAC= 30,000 (A/P,15%,12) – 2,000 (A/F, 15%,12) + 17,000 = 22,466
The EUAC of the defender is less than the EUAC of the challenger.
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Problem 13 (9.6)
A present asset (defender) has a current market value of $87,000 (MV0). Based
on the used equipment market, the estimated market values at the end of the
next three years are MV1 = $76,000, MV2 = $60,000, MV3 = $40,000. The
annual expenses are $18,000 in the present year, and are growing 4,1% each
year. The MARR is 10% per year. The best challenger available has an
economic life of six years, and its EUAC over this period is $44,210.
Based on this information and before-tax analysis, when should you plan
to replace the defender with the challenger?
Defender:
a. Immediately
b. After 1 year
c. After 2 year
d. After 3 year
EOY Market Loss in Cost of Annual Total EUAC
Value Value Capital Expenses Cost
0 87,000 - - - - -
1 76,000 11,000 8,700 18,738 38,438 38,438
2 60,000 16,000 7,600 19,506 43,106 40,661
3 40,000 20,000 6,000 20,306 46,306 42,364
Annual expenses for year k = $18,000 (1.041) K
The defender should be replaced after two years. Although the EUAC for
the defender through year three is less than the EUAC of the challenger,
the marginal cost of keeping the defender for the third year is greater than
the EUAC of the challenger ($46,306>$44,210)
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