Managerial Engineering Economics Midterm Exam
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 What are the common types of Engineering Economic Decisions? Give an example of each. Briefly describe the fundamental principles of Engineering Economics.
Answer:
Engineering economic decision is a decision for all investment that are relating to the engineering projects. There are five main economic decision are
 Equipment replacement and selection process: replacing the old munchies and equipment with new technology
 Cost Reduction in Operations: Eliminate the extra process or nonvalue added process
 Selection of new economical machine: New machinery is purchase from different alternatives
 Service or quality improvement: to improve the efficiency and effectiveness of process
 Product expansion: a new product is build up for existing market.
Fundamental principal of engineering economics is
 A nearby dollar has more value than distant dollar
 Marginal revenue must be greater than marginal cost
 Additional risk is not taken without expected additional return
 All the alternative must be different types.
 What is the minimum amount of positive cash flow required in year 6 for you to be indifferent to doing the project.
Answer:
Minimum amount of positive cash Flow required in year 6 for you to be indifferent to doing the project
= $3500 +$3000 – ($4000 + $2500 + $4500 + $2000)
 What report is used to describe a company’s financial position at the end of a reporting period? Briefly describe its contents
Answer:
Balance sheet report is prepared for reporting period to show the financial position.
Following are the contents of balance sheet
Performa Balance sheet  
Name of company
Balance sheet As on Dec 31, 2016 

Assets  Amount 
Cash  Xx 
Account Receivable  Xx 
Inventories  Xx 
Plant and Equipment  Xx 
Land  Xx 
Total Assets  Xxx 
Liabilities  
Account Payable  Xx 
Notes Payable  Xx 
Total Liabilities  Xx 
Stockholders’ Equity  Xx 
Capital  Xx 
Retained Earnings  Xx 
Total Stockholder’s Equity  Xx 
Total Liabilities and Stockholder’s equity  Xxx 
 You have just purchased 1000 shares of stock at $70 per share. Your analysis indicates that the stock price will increase 10% per year. How much will your investment be worth in 5 years? When will the market price have doubled? Assume no dividend payments for this calculation.
Answer:
FV = PV (1 + g)^{n}
= 70 ( 1 + 10%)^{5}
The price per share after 5 years will be 112.7357 and the total value of stock will be (112.7357* 1000) = 112735.70.
Market Price will be double:
FV = PV (1 + g)^{n}
140 /70 = (1.10)^{n}
2 = (1.10)^{n}
Apply log both side
log 2 = log (1.10)^{n}
log 2 = n log (1.10)
0.693147 = n (0.0953102)
Price will be double in 7.27 year
 Suppose you make an annual contribution of $5000 to your investment account at the end of each year for 5 years. If the account earns 10% annually, how much can be withdrawn early in the 11^{th} year.
Answer:
The value of investment after 5 year annual contribution
FV _{Ordinary Annuity} = C x ((1+i)^{n} 1) /i
= $ 5000 x ((1 + 0.1)^{5} 1) / 0.1
The value of investment when it is further invested for 5 year but no contribution
FV = PV (1 + i)^{n}
= 30525.5 x (1 + 10%)^{5}
In the end 10^{th} but in early of 11^{th} year the value of investment will be $ 49161. 62
 What will be the amount accumulated by each of these present investments?
 $5000 in 7 years at 7% compounded annually
FV = PV (1 + i/m)^{n x m}
= 5000 x (1 +0.07/1)^{7×1}
= 5000 x (1.07)^{7}
 $7250 in 15 years at 8% compounded quarterly
FV = PV (1 + i/m)^{n x m}
= 7250 x (1 +0.08/4)^{15×4}
 $9000 in 30 years at 6% compounded monthly
FV = PV (1 + i/m)^{n x m}
= 9000 x (1 +0.06/12)^{30×12}
= 9000 x (1.005)^{360}
 $12000 in 8 years at 5% compounded continuously
FV= PV e^{rn}
= 12000 x (2.7183)^{0.05×8}
= 12000 x (2.7183)^{0.4}
 If a bank advertises a savings account that pays a 7% nominal interest rate compounded continuously, what is the effective annual percentage rate?
Answer:
Effective annual percentage rate = e^{r} – 1
= (2.7182818284)^0.07 – 1
 If the interest rate is 8% compounded continuously, what is the required quarterly payment to repay a loan of $10,000 in five years.
Answer:
FV/continuous Com = CF x [(e^{rt} 1) / (e^{r}1)]
10000 = CF x [(2.7180^{0.08×5}1)/ (2.7180^{0.08}1)]
10000 = CF x [(1.49176 1) / (1.083278)]
10000 = CF x [(0.49176 1) / (0.083278)]
 You are considering two types of machines for a manufacturing process.
 Machine A has a first cost of $75,000 and its salvage value at the end of 6 years of estimated service life is $20,000. The operating cost of this machine are estimated to be $6,000 per year. Extra income taxes are estimated at $2400 per year.
 Machine B has a first cost of $40,000 and its salvage value at the end of 6 years of estimated service life is estimated to be negligible. The annual operating cost will be $11,000.
Compare these two mutually exclusive alternatives by the present worth method ar I = 13%.
Answer:
Machine A  
Discount Rate  13%  
Year  0  1  2  3  4  5  6 
Cash Flow  75000  3600  3600  3600  3600  3600  23600 
Discounting Factor  1  1.13  1.277  1.443  1.630  1.842  2.082 
Discounted cash Flow  75000  3185.841  2819.328  2494.981  2207.947  1953.936  11335.517 
NPV  51002.45 
Machine B  
Discount Rate  13%  
Year  0  1  2  3  4  5  6 
Cash Flow  40000  11000  11000  11000  11000  11000  11000 
Discounting Factor  1  1.13  1.277  1.443  1.630  1.842  2.082 
Discounted cash Flow  40000  9734.513  8614.614  7623.552  6746.506  5970.359  5283.504 
NPV  3972.05 
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Choose the project B because NPV is positive
 How many years will it take an investment to triple if the interest rate of 8% compounded annually.5. You are the CEO of Blue and Gold Furniture Company (a small household goods manufacturing firm) and have just been briefed on some promising new production machinery which will enable 3D printing of numerous types of personalized furniture.
Projected cash flows detailed below. The 3D printer has a 5 year life cycle, with no scrap value. Discuss your assessment of this project’s viability and profitability. Calculate net cash flow for each year, payback period, total return on investment, internal rate of return, and net present worth. State any assumptions (i.e. Minimal attractive rate of return). Explain your reasoning behind those assumptions.
Year  Revenue  Capital Expenditures 
Initial Investment  $10,000,000  
2016  $4,250,000  $250,000 
2017  $5,100,000  $100,000 
2018  $10,100,000  $100,000 
2019  $11,500,000  $500,000 
2020  $11,000,000 
Answer:
Year  Revenue  Capital Expenditure  Net Cash Flow  Cumulative net Cash Flow 
2015  10000000  10000000  10000000  
2016  4250000  250000  4000000  6000000 
2017  5100000  100000  5000000  1000000 
2018  10100000  100000  10000000  9000000 
2019  11500000  500000  11000000  20000000 
2020  11000000  11000000  31000000  
41950000  10950000  31000000  43000000 
Payback Period = 3 years + (cumulative cash flow of recoverable / next year net cash flow) x 12
= 3 year + (1000000 /10000000) x 12
Return on investment = Net Cash flow x 100 / capital expenditure
= 31000000 x 100 / 10950000
= 2.83%
IRR
Factor at 68%  10000000  
1/ (1+i)^n  
4000000  0.595238  2380952.381 
5000000  0.354308  1771541.95 
10000000  0.210898  2108978.512 
11000000  0.125534  1380878.788 
11000000  0.074723  821951.6593 
31000000  0.044478  1378815.013 
NPV  156881.697 
Factor at 67%  10000000  
1/ (1+i)^n  
4000000  0.598802  2395209.581 
5000000  0.358564  1792821.543 
10000000  0.214709  2147091.668 
11000000  0.128568  1414251.997 
11000000  0.076987  846857.4831 
31000000  0.0461  1429100.815 
NPV  25333.08602 
The value more close to zero at 67%, so IRR near to 67%.
Net Present Value
8%  
Factor at 8%  1E+07  
4000000  0.925926  3703704 
5000000  0.857339  4286694 
10000000  0.793832  7938322 
11000000  0.73503  8085328 
11000000  0.680583  7486415 
31000000  0.63017  19535258 
NPV  41035722 
EXTRA CREDIT (up to 10 additional points):
There is much debate over whether or not fast food restaurants could bear the impacts of an increase from a $7.25/hour to a $15/hour minimum wage. In the context of this class, evaluate the statement: “If McDonalds were to double the salaries and benefits of all of its employees, from the CEO down to the minimum wage cashiers, it would still only cost an extra 68 cents for a Big Mac.”
What information would you need to perform this analysis?
Answer: For the analysis of huge amount of information is required, because it is not easy to task and it required huge amount of information. There is need to cost of production report which tell about clear picture about the cost of each item of production in the particular period. For cost of production report there must be a cost accountant that record data accordingly because normally data is managed for financial purpose not for cost purpose.
What assumptions would you have to make?
Answer: To double the salaries and benefits of the employees, and cost will be 68 cents it should be in the particular assumptions.
 The input cost will remain the same
 Technological will remain the same
 Number of employees will remain the same
 Cost of capital will remain the same
 Customer behavior will remain the same
Without having the data readily available, do you believe it is a true statement?
Answer: This statement will be true only in particular assumption otherwise it is not possible to double the salaries the cost will be 68 cents, the cost is not only the once factor that need to consider, there is also need to understand the profit policy of the organization.
How about if the minimum wage tripled?
Answer: if the minimum wage are tripled then there is difficult to exist for the company in the market, there would be huge competition and cost of production will increases so the profits will convert into losses. Second dark point is that the product cost will increase and if the sale price is increase it will be negative impact on the sale.
Would that change your answer?
Minimum wage law has its own pros and cons but there is need to understand the other factor that is inflation. If inflation is in control then less increase in wages will be suitable for both. But if inflation is not control then triple wages will not satisfy the employees. So rather focus on one part there is need to focus on other part more than the increase in prices with inflation.
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