COEB442 Engineering Economics

Semester 2, 2015/2016
ASSIGNMENT 2
Name:__________________________________

ID# ___________________ Section: _____

Due Date: 26 January 2016 9 (Tuesday, 5.00PM)

QUESTION 1 [10 marks]
Suppose your rich father decided to give you RM2 Million as a birthday gift in the form of 20 annual
installments of RM100,000. And suppose that you are considering the following two options.
Option 1:
You save your gift for the first 7 years and then spend every cent of the
gift in the remaining 13 years.
Option 2:
You do the reverse, spending for 7 years and then saving for 13 years.
(a) If you can save the gift at 7% interest and for each of the above options, how much would you have at the end of
20 years?
(b) What interest rate on your savings will make these two options equivalent?

QUESTION 2 [10 Marks]

XYZ company is enthusiastic about a newly design processing system that will bring in RM45, 000
per year. The total cost for the new system is RM60, 000. It is expected that the operating costs,
including income taxes, will be about RM5, 000 per year. The system will have a five-year useful life.
The expected net salvage value of the system is estimated to be zero.
(a) Construct a cash flow statement.
(b) How long does it take to recover the investment (conventional payback period)?
(c) If the firm interest rate is 15% after taxes, what would be the discounted payback period for this project?