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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Dear students,

Majority of the questions here are taken from previous examinations. Plus

few from textbook and past tests.

All the best ya.

Chapter 2

Page | 1

(Q3.a) Final Examination Semester 1, 2015/2016

  • (a) Below is information gathered from the Financial Statements of Akookeye Sdn Bhd for financial year end July 2015.

ITEM

RM

Building

1,200,000

Cash

86,000

Inventories

34,000

Revenues from sales

2,435,000

Computer equipment

34,000

Salary expenses

795,500

Vehicles

250,000

Prepaid rental expenses

12,000

Account receivables/ Debtors

52,000

Revenues from investments (other than sales)

350,000

Account payables/ Creditors

78,500

Administration expenses

187,600

Marketing and selling expenses

235,000

Long-term Payables

580,000

Cost of goods sold

1,080,000

Accrued insurance expense

21,000

To assess Akookeye’s financial performance, the accountant wants few analysis using the data provided.

Required:

  • i. Is the company utilizing its assets efficiently in generating its sales, given that the industry’s average is 3? Support your answer with calculation. [6 marks] A: assets turnover= RM1.46 sales per RM1 asset. Not efficient compared to industry which is 3.

ii. Prepare the Profit or Loss/Income Statement for Akookeye Sdn Bhd. with company tax

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

A: Income Statement with Gross profit=RM1,355,000, operating profit =RM486,900,

profit after tax of RM365,175

rate at 25%.

[8 marks]

Items

RM

Inventories

25,500

Land, Buildings, Plant and Machinery

57,000

Cost of sales

85,000

Long term liabilities

33,000

Accounts payable and Short Term Borrowings

45,000

Distribution, selling and marketing expenses

20,000

Interest Expenses

1,000

Taxation

1,000

Dividends

2,000

The acid test ratio and the asset turnover ratio is 0.5 and 1.1 respectively.

Give ONE example of financing activities in a company.

  • (a) Give a short definition for the following terms: Corporation for year 2013 (in RM thousands).

Final Examination Semester 1, 2014/2015

the retained earnings = RM6,500

  • i. Income Statement Net Cash Flow

Calculate the following:

  • i. the total assets the sales the operating profits

Manufacturing

= RM105,000 = RM115,500 = RM 10,500

statements

  • (b) The

[2 marks]

[2 marks]

[3 marks]

[5 marks]

financial

[1 mark]

[1 mark]

[1 mark]

below

based

were

data

Top

the

on

iii.

iii.

iv.

of

ii.

ii.

taxable income during the accounting period. Briefly explain what the corporation will decide to do with this net income. [2 marks]

A corporation net income is derived by subtracting income taxes from the

What is a cash flow statement and why it is important to a company?

Final Examination Semester 2, 2013/2014

  • (a) i.

ii.

Page | 2

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Accounts Payable Prepaid taxes and insurance Accounts receivable Inventory The data below were based on the
Accounts Payable
Prepaid taxes and insurance
Accounts receivable
Inventory
The data below were based on the financial statements of Megah Manufacturing
Corporation for year 2012 (in RM thousands).
510
Sales revenue
30,000
940
Cash and cash equivalents
Prepaid taxes and insurance
60
Income taxes payable
700
Notes Payable
Accounts receivable
470
RM
Land, Buildings and Machines
Cost of sales
Net Revenue
Working capital
Total equity
Calculate the following:
the current liabilities
the long-term liabilities
the gross margin
= RM460k
= RM690k
= RM3080k
the quick ratio and interpret your answer
=RM2.99
The income statement is one of the most common financial statements in a
company’s annual report. Describe the following items in the income statement:
Briefly explain the difference between “preferred stock” and “common stock”of
a corporation. How do they relate to a corporation’s retained earnings?
The data below are taken from the financial statements of Beranang Hardware
Manufacturing Corporation. (in RM1,000’s)
5,560
iv.
(b)
i.
ii.
iii.
[2 marks]
[2 marks]
1,910
940
85
350
2,480
235
RM
[2 marks]
Items
1,150
2,370
[2 marks]
[2 marks]
(12 marks, Q1, FE Sem 1 13/14)
Earnings per share
Cost of sales
i.
iii.
ii.
2.
1.
(a)
Cash
880

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

Selling expenses

2,000

Long term debt

2300

Cost of goods sold

20,000

Inventory

1,400

Land

1,640

Plant and Equipment

 

2,850

Calculate :

  • 1. the current assets

= 2,810

 
  • 2. the current liabilities

= 2,150

  • 3. the shareholders’ equity

= 2,850

  • 4. the working capital

= 660

  • 5. the debt ratio and interpret your answer

 

= 60.95%

- High proportion of financing through borrowing from creditors

  • 6. the acid test ratio and interpret your answer

= 0.656 times

- The company depends heavily on inventories to meet its obligation

 
 

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 8

Rinching Furniture Sdn Bhd operates a factory at the Beranang Industrial Zone that manufacture ergonomic rattan chair. The data given below are for costs in year 2014 for producing 3,000 units of the rattan chairs. Currently, each rattan chair is been sold at RM120.

(a) Given that the manufacturing cost per unit is RM80, calculate the variable portion value of the manufacturing overhead costs in year 2014. [Hint: Fill in the missing value in the table] A=RM36,000

(b) Using the answer that you have calculated in part (a), compute the following:

(c) Based on the current selling price set by the company, answer the following:

iii. Prove that the profit per unit plus the average fixed costs is equal to the contribution margin value as calculated in part c(ii). [2 marks]

Units Produced

Costs (RM)

Direct labor

90,000

Direct raw materials

60,000

Manufacturing overhead:

 

Variable portion

-------------

Fixed portion

54,000

Selling and administrative costs:

 

Variable portion

24,000

Fixed portion

30,000

  • i. What is the company’s profit per unit for the sale of 3,000 units of rattan

ii. Calculate the contribution margin per unit of the rattan chair when sales

are at 3,000 units. Interpret the meaning of your answer.

Determine the break-even volume and sales.

Q.4 (a-c) Final Examination Semester 1, 2015/2016

ii. Total variable costs per unit

A=vol 1680, sales RM201,600

  • i. Total variable costs

chairs? A=RM22

A=RM294,000

A=RM210,000

iii. Total costs

A= RM50

A=RM70

A=RM50

[2 marks]

[4 marks]

[3 marks]

[3 marks]

[3 marks]

[2 marks]

[1 mark]

iv.

The following are the data for LightSys Software Corporation per month.

Final Examination Semester 2, 2014/2015

40,000 units of pendrives RM560, 000

Units Sold Total Variable Costs

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Contribution Margin Per unit

RM6

   

Profit

RM70, 000

  • (a) What is the price per unit of the pendrive? = RM20

 

[4 marks]

Page | 6

  • (b) How much sales value can the company generate?

=RM800k

[2 marks]

  • (c) Do you agree that the average fixed cost per unit is RM1.75? Calculate to answer. = AFC= RM4.25, NO

[5 marks]

  • (d) How many units of pendrive must LightSys sell in order to break even? (round to the nearest whole unit) = 28,334 units

[4 marks ]

  • (e) Given the variable production cost per unit increases by RM 2, but no change in fixed costs, can the company maintain the same level of profit if it sells 50,000 units of pendrive per month?

Calculate to answer.

=NO, profit declined by RM40k

 

[5 marks]

 

Final Examination Semester 1, 2014/2015

Toys N Fun Company sells transformer toys imported from Taiwan. The toys are sold to customers in Klang Valley area. Salespersons are paid basic salary plus commission on sales made by them. Details data concerning sales and expenses made by the company is shown below.

Selling price per toy

RM

75

Variable expenses per toy:

Invoice cost (variable manufacturing cost)

RM

RM

RM

33

Sales Commission

12

Total

45

Annual fixed expenses:

Rent

RM120,000

Marketing

RM300,000

Salaries

RM180,000

Total

RM600,000

Required:

(a) Calculate the contribution margin per unit. Explain the meaning of your answer

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

= RM30

[4 marks]

  • (b) Compute breakeven number in units.

[2 marks]

=20,000 units

  • (c) Based on your answer in (b), draw a cost-volume-profit graph (break-even chart). Show the break-even point; profit and loss area; fixed cost, variable cost; and revenues.

The graph below is a cost-volume-profit graph.

Revenue line √ RM Profit √ Break-even point √ Variable cost √ Loss √ Fixed cost
Revenue line √
RM
Profit √
Break-even point √
Variable cost √
Loss √
Fixed cost √

Volume

20,000 units√√

[4 marks]

  • (d) If the company target to achieve RM150,000 profit this year, how many toys should

the company sells? = 25,000 units

[3 marks]

  • (e) The company is thinking to pay RM7 commission to manager on each toy sold in excess of break-even point. What will be the effect of these changes on the net operating income or loss for the company if 23,500 toys were sold in year.

Net income= RM80,500

[5 marks]

  • (f) Refer to the original data. The Sales Manager is recommending for sales commission is eliminated entirely and salaries are increased by RM214,000?

    • i. Calculate the new contribution margin per unit.

= RM42

[1

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

ii.

mark] Calculate the new total fixed costs. mark]

= RM814,000

[1

 

iii.

What will be the new breakeven point (in units)? = 19,381 units marks]

[2

Page | 8

iv.

Should the company accepts this recommendation? Compare with your answer in (b)

With the new system, the company will starts making profit after selling 19,381 units

compare to the old system 20,000 units . Should implement the suggestion given by

 

the manager

[3 marks]

 

Final Examination Semester 2, 2013/2014

IT Excel Sdn. Bhd., a manufacturing company that produces a computer component leases a building for RM250,000 per year for its manufacturing facilities. In addition, the machinery in this building is being paid for in installments of RM50,000 per year. Each unit of the product produced costs RM40 in labor and RM20 in materials. The variable costs are estimated at 60 percent of total revenue.

  • (a) Determine the price per unit of the product. = RM100

[2 marks]

  • (b) Calculate the quantity at which the manufacturer will cover the fixed costs.

 

= 3,000 units

 

[2 marks]

  • (c) How many units per year must be sold for the company to breakeven?

i.

 
 

= 7,500 units

[2 marks]

ii.

Show that at breakeven point contribution margin is equal to average fixed costs.

= CM=RM40; AFC at BE = RM40; therefore MC=AFC=RM40

[2 marks]

iii.

Can an increase in the overtime rate paid to staff lower down the breakeven

point? Briefly explain.

[2 marks]

= No, it would increase fixed costs, more should be produced and sold to breakeven.

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

ii. To increase profit further, the sales manager is recommending a 10% reduction in selling price which he believes will produce a 25% increase in the number sold each year.

sales by 16,500 units above the breakeven quantity. Calculate the annual profit

(1) What is the change in average fixed costs? = decrease by RM2.50 [2 marks]

(3) Should this suggestion be implemented? Calculate to explain. = Decision: Should not reduce price, √ because profit will decline by RM60,000.

Assuming demand is high and there is an increase in production and

Calculate the percentage change in labor costs. = 25%

per unit. = RM27.50

[7 marks]

[2 marks]

[4 marks]

  • (d) i.

(2)

Eponvessemson Sdn Bhd. sells toys handphones. Below is information for the first 6-month sales in

in RM x RM8.40 = RM365,710.8

If the company wants to earn a profit of RM80,000 instead of breaking even, what would be the new selling price be is the units sold is still 50,000 units? SP = RM9.62 [5 marks]

Fixed Expenses

Rent

RM26,000

Salaries

RM90,000

Depreciation

RM12,000

Variable Expenses

Cost of Goods manufactured and sold

RM252,000

Sales Commissions

RM21,000

Sales revenue

Units sold 50,000

RM420,000

  • i. What is the company's contribution margin per unit? What is the break-even point in RM?

[Q1, FE Sem 1 12/13]

CM = RM2.94 = 43, 537 units

[5 marks]

[5 marks]

2012.

BEQ

iii.

ii.

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 3

 

QUESTION 1 [25 marks] Final Examination Semester 1, 2015/2016

 

The Q is a combination of Ch 3 & Ch 5

 
  • (a) Upin and Ipin are twins. Upin is planning for his retirement 19 years from now. He plans to invest RM5,800 per year for the first 8 years and RM8,300 per year for the following

11 years (assume all cash flows occur at the end of each year). If both Upin and Ipin can invest in saving account with 9% interest rate, how much Ipin has to deposit each year in equal amount into his account so that after 19 years, the total amount in his account is the same as his brother Upin? (Note: all cash flows occur at the end of the year).

A:RM6,752.34

[7 marks]

 
  • (b) Ali just purchased a brand new machine worth RM40,000. He estimates that the maintenance cost for the machine during the first year will be RM2,800. The maintenance cost is expected to increase by RM800 per year throughout its’ seven years useful life. Ali wants to set up an account and all future maintenance expenses will be paid out of this account. Assuming the maintenance cost occur at the end of year, how much does Ali has to deposit in the account now at 10% interest rate? [4 marks]

A: RM23,842

  • (c) The management of Titans Electronics Company is considering to purchase an equipment to be attached with the main machine use to manufacture a product. The company has two options, A and B. Information on both equipment is given below.

 

Option A

 

Option B

 
 

Initial outlay (RM)

6,000

8,000

 

Annual Cash flow (RM)

Year 1 -

2,300

Year 1 -

1,700

 
 

Year 2 - 2,300

 

Year 2 -

1,900

 

Year 3 -

2,300

Year 3 -

2,500

 

Year 4 - 2,300

 

Year 4 - 2,900

 
 

Salvage value at end year 4 (RM)

0

1,500

 

The management of Titans Electronics Company wants a 12% return on all investments. Using Present Worth method, which equipment should the company purchase? (Note: Except for initial outlay, all cash flows occur at the end of the year). A: Option A PW= +985.79; Option B PW= -391.70. thus Choose Option A [14 marks]

 

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

Final Examination Semester 2, 2014/2015

  • (a) Hoojane wants to invest portions of her yearly bonuses in Amanah Saham Wawasan 2020 (ASW 2020) that has an annual return of 4%. Her investment plan is to invest

 

RM4,500 now, RM6,000 two years from now, and RM8,000 four years from now. What will be the total amount in her ASW2020 account after 8 years?

 

[5 marks]

 

ANSWER: = 23,109.7

  • (b) Amintoo has been working for Ti-En-Bi for 5 years. On Ti-En-Bi Annual Dinner Night, Amintoo won cash prize of RM20,000. Amintoo, such a good man he is, wants to expedite his payment back to PTPTN using the cash he won.

 

He plans to put the whole RM20,000 now in an investment scheme with 8% return that allow him to withdraw equal amount annually for 5 years, starting from first year. How much is Amintoo’s annual payment to PTPTN?

 

[5 marks]

 

ANSWER:= 5,010 per year

 

Final Examination Semester 1, 2014/2015

  • (a) i.

Compare the interest earned from an investment of RM1,000 for 15 years at 8% per annum of simple interest, with the amount of interest that could be earned if these funds were invested for 15 years at 8% per year, compounded annually. Explain why the interest amounts that you have calculated are not the same.

 

[5 marks]

 

(a)

i.

Simple Interest:

Compound Interest:

 

= $1,200

= $2172.17

ii.

Miss Anita, a talented singer won the recent Akademi Fantasia singing competition and was awarded the first cash prize of RM500,000. She decided to save the amount in a fixed deposit account that give returns of 10% interest compounded yearly. How long would it take for Anita to have one million (RM1,000,000) from her savings?

 

[3marks]

 

N =7.27 years

 
  • (b) Mr James, Mr Messi and Mr Neymar are three good friends whom are about to retire soon. Answer the following questions based on different scenarios of retirement planning given for each person. Assume that the savings account for all of them earn 6% annual interest.

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

i.

Suppose Mr James has accumulated RM400,000 in his savings account upon his retirement. He wishes to withdraw a fixed sum of money at the end of each year for 15 years. What is the maximum amount that can be withdrawn for each year? [2 marks]

ii. Mr Messi expects to withdraw RM76,500 from his savings account at the end of each retirement year to maintain his normal lifestyle. How much money must Mr Messi

 

have in the bank at the start of his retirement considering that year retirement period?

he is planning a 12- [2 marks]

iii. Mr Neymar though is planning a 16-year retirement. In order to supplement his pension and offset the expected effects of inflation, he intends to withdraw RM85,300

 

at the end of the first year, and to increase the withdrawals by RM10,000 at the end of each successive year. How much money must Mr Neymar have in his savings account

at the start of his retirement?

[4 marks]

iv. Assuming that Mr Neymar has decided to extend his retirement to another four more years. Due to this longer retirement period, he intends to withdraw at a lower

 

amount of RM74,800 at the end of the first year, and decrease it by RM 5,000 at the end of each successive year. Calculate the amount of savings that he must now have

at the start of his retirement.

[4 marks]

(b)

i. A = $41,200

 

ii. P = $641,360.70

iii.

P = $1,496,625.27

v.

P = $421,796.52

 

Final Examination Semester 2, 2013/2014

(a)

Aime was born on 31 December 2012. In order to meet her future tertiary educational expenses, her father intends to invest in an Educational Saving Plan by depositing an annual equal sum of RM3, 600 at the end of each year starting on her 1 st birthday on 31 December 2013. Given that the saving plan yields a return of 9% per annum, what will be the total value of the saving plan when Aime celebrates her 18 th birthday? [3 marks]

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

(b) Suppose there is another new Saving Plan offer by XYZ bank that allows Aime’s father
(b) Suppose there is another new Saving Plan offer by XYZ bank that allows Aime’s father
to make the following annual withdrawal.
Require: Calculate the annual saving amount that the father is required to deposit into
the Saving Plan.
[9 Marks]
Date of withdrawal
Amount of Withdrawal (RM)
On 18 th Birthday
45,000
On 19 th Birthday
50,000
On 20 th Birthday
55,000
Total required equal annual contribution is 1089 +1085 + 1072 = RM3, 246
(a) A=RM3,600,
N=18, i=9%
RM148,685
1089
1085
1072
(b) A
F
A
A
=
=
=
=
(b) Suppose there is another new Saving Plan offer by XYZ bank that allows Aime’s father

Page | 13

From textbook

3.20

If $3,000 is invested now, $3,500 two years from now, and $4,000 four years from now at an interest rate of 6% compounded annually, what will be the total amount in 8 years?

$14,796.27

3.24

You are paying into a mutual fund that earns 6% compound interest. If you are making an annual contribution of $12,000, how much will be in the funds in 20 years?

$441,427.09

3.33

You have borrowed $50,000 at an interest rate of 12%. Equal payments will be made over a three-year period. (The first payment will be made at the end of the first year.) What will the annual payment be, and what will the interest payment be for the second year?

3.20 If $3,000 is invested now, $3,500 two years from now, and $4,000 four years from

13

COEB442 Engineering Economics Revision Sem 1, 2016/2017

3.36 You are considering buying a piece of industrial equipment to automate a part of your
3.36
You are considering buying a piece of industrial equipment to automate a part of
your production process. This automation will save labor costs by as much as
$40,000 per year over 10 years. The equipment costs $250,000. Should you purchase
the equipment if your interest rate is 10%?
Labour cost savings 40,000(P/A,10%,10y) = RM245,782.68
i.e < cost $250,000. Thus DON’T BUY the machinery

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 4

 
 

(Q4.d) Final Examination Semester 1, 2015/2016

(d)

Rinching Furniture Sdn Bhd deposited 50% of its profit amount from part (c), at an interest rate of 8% compounded monthly in the company’s savings account.

 
 

i.

What will be the additional amount in the savings account after one year?

 

A= extra RM913

[2 marks]

 

ii.

Do you agree that the Annual Percentage Yield (APY) is less than 8%?

 
 

Calculate the value of APY to support your answer.

[3 marks]

A= NO. APY=8.299% > 8%

 

Final Examination Semester 2, 2014/2015

  • (a) ONEJIMAT Sdn Bhd, a credit card company based in Kajang has offered you a card that

 

charges interest at 1.15% per month, compounded monthly.

 
  • i. Determine the annual percentage rate (APR) and the annual percentage

yield

 
 

(APY) that ONEJIMAT Sdn Bhd charges on its credit card. Explain why the APR

and the APY amounts that you have calculated are not the same.

 

= APR= 13.8% marks]

= APY=14.71%

[4

 

ii.

If your current outstanding credit card

balance is RM3,000 and you

skip

 

payments for the next three months, what would be the total outstanding

balance three months from now? = RM3,104.69

[2 marks]

  • (b) Miss Aida, a recent university graduate was offered a job and wanted to purchase a new car to facilitate her travel to work. The price of the car is RM58,000 and she is required to make a 10% down payment. Miss Aida will borrow the remainder from Maybank Finance at an interest rate of 3% compounded monthly. The period of the loan is six years.

 
  • i. What is the amount of monthly loan payment that Miss Aida need to pay to Maybank Finance?

 
 

=RM793.44

[5

marks]

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

ii.

Miss Aida has made 36 payments and wants to know the balance remaining immediately after the 36 th payment. What is that balance?

 
 

= RM27,283.62

[2 marks]

Page | 16

 

Final Examination Semester 1, 2014/2015

i.

Mr Johari wanted to purchase a RM800,000 semi-detached house by making a 12.5% down payment to the developer. He borrowed the remaining amount from Maybank Finance, which he will repay on a monthly basis over the next 10 years. If the bank charges an interest rate of 9% per year compounded monthly, how much monthly installment must Mr Johari pay to Maybank Finance?

= RM8890

[5 marks]

 

Final Examination Semester 2, 2013/2014

Upon graduation, Mr. Rajin and Ms. Lawa decide to venture into business by setting up a small bakery store. Both are considering the following three ways of financing the oven.

 

Option A (Debt financing): Purchase the new Oven at the normal price of RM12, 500 and pay for it over 36 months with equal payment at 6% APR financing. A down payment of RM1, 875 is required. There is a resale value of RM6, 875 at the end of 36 months.

Option B (Cash purchase):

Purchase the new Oven at a discount price of RM10, 000 to

 

be paid immediately. Again, it has a resale value of RM 6,875 at the end of 36 months.

 

Option C (Leasing): Lease the new Oven for 36 months with an equal monthly leasing sum of RM226. Down payment of RM1, 250 is required. At the end of the lease, the Oven simply returns to the leaser.

Required:

 

Given that the funds that used in the leasing and purchasing are presently earning 6% annual interest compounded monthly. Find the most economical financing option for

the new Oven.

[13 Marks]

Effective loan interest payment is 6% /12

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

Monthly loan payment is

A

=

323

P

Option A =

6,747

P

Option B =

4,255

P

Option C =

8,678.85

Option B is the most economical since it has the lowest (RM4, 255) equivalent present value.

1.

[Q2, FE Sem 1 12/13]

 

a)

A design-build-operate engineering company borrowed RM3 million for 3 years so that

 

it could purchase new equipment. The terms of the loan included compound interest and repayment of the total amount owed in a single lump-sum payment at the end of the 3-year period. Interest at the end of the first year amounted to RM450,000.

(i)

What was the interest rate on the loan?

[2 marks]

= 15% per year

(ii) How much interest was charged for year 2? [3 marks] = RM517,500

Federal facilities associated with an international port of entry at Southern Region are expected to cost RM60 million. A six-lane, 1274 foot long bridge is expected to cost RM24 million. Land and inspection facilities, offices, and parking will add another RM15million to the cost. Construction is expected to take three years. Assuming that all of the funds are allocated at

 

time 0, what is the future worth of the project in year 3 at an interest rate of 6% per year

 

compounded quarterly?

 

[5 marks]

= RM118,364,400

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 5

bag pack project and the right to commercialise the product from Ujeependu Kaboom Sdn Bhd; planning to purchase it now (n=0). Begje Ade Sdn Bhd has offered a purchase price of RM16.5 million.

Begje Ade Sdn Bhd, a large bag retailer company is interested in purchasing the stress-relieving

Ujeependu Kaboom Sdn Bhd. has just finished a 4-year R&D and pilot testing for stress- relieving bag pack targeted for university students. The bag pack is expected to have a 6 year product life. The R&D expenditures for the past 3 years and the current year, together with the anticipated net cash flows that the company can generate over the next 6 years are summarized in the table below.

Should Ujeependu Kaboom Sdn Bhd accept the offer and sell the project to Begje Ade Sdn Bhd?

Calculate the present value of the net cash flow streams at Y0. = RM4.684 million

Assume Ujeependu Kaboom Sdn Bhd’s MARR= 15%.

  • i. What is the total amount of R&D costs at Y0? = RM6.245 million

MODIFIED Final Examination Semester 2, 2014/2015

Period (n)

Cash Flow (Unit: RM

million)

-3

-0.5

-2

-2

-1

-1.6

0

-1

1

0.8

2

2.4

3-5

4 each year

6

3.5

= YES. Offer price > net inflow

[4 marks]

[8 marks]

[3 marks]

iii.

ii.

Highland Sediment Brick Sdn Bhd is considering purchasing a new injection-molding machine for RM100, 000. It will cost an additional RM20, 000 to do the site installation. The machine will be used for six years with zero salvage value at the end of sixth year. The company is expected

Final Examination Semester 1, 2014/2015

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

to receive annual returns as given below.

Year

Cash Flow (RM)

  • 1 18,500

  • 2 25,500

  • 3 27,980

  • 4 32,660

  • 5 40,230

  • 6 48,500

  • (a) How long does it take to recover the total investment cost? (Hints: use conventional payback method)

[6 marks]

=It takes 4.38 year to recover the total investment cost (using conventional payback method)

  • (b) What is the discounted payback period at an interest rate of 12%?

[10 marks]

=Rm34,637 will be fully paid around 0.71 year into year sixth. As such, the discounted payback

period is 5.17 years

  • (c) Would the investment of this injection molding machine be justified given that the interest rate is at 15%

[9 marks]

NPW= -6,591.11 Since NPW is negative, it is not justifiable for the company to proceed with the purchase.

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

From textbook

5.6
5.6

Camptown Togs. Inc., a children's clothing manufacturer, has always found payroll processing to be costly because it must be done by a clerk. The number of piece-goods coupons received by each employee are collected and the types of tasks per formed by each employee are calculated. Not long ago, an industrial engineer designed a system that partially automates the process by means of a scanner that reads the piece-goods coupons. Management is enthusiastic about this system, because it utilizes some personal computer systems that were purchased recently. It is expected that this new automated system will save $45,000 per year in labor.

expected that operating costs, including income taxes, will be about $5,000 per year. The system will have a five-year useful life. The expected net salvage value of the system is estimated to be $3,000.

The new system will cost about $30,000 to build and test prior to operation. It is

Camptown Togs. Inc., a children's clothing manufacturer, has always found payroll processing to be costly because
  • (c) Determine the net cash flows over the life of the project.

  • (b) Identify the cash outflows over the life of the project.

  • (a) Identify the cash inflows over the life of the project.

A project cost $120,000 and the expected annual returns are given in table below:

  • (a) What is the payback period of the project?

Year

Cash flows

1

$18,500

2

25,500

3

27,980

4

32,660

5

40,230

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

(b)

What is the discounted payback period at an interest rate of 15%

(b) What is the discounted payback period at an interest rate of 15% Larson Manufacturing is
 

Larson Manufacturing is considering purchasing a new injection-molding machine for $300,000 to expand its production capacity. It will cost an additional $25,000 to do the site preparation. With the new injection-molding machine installed, Larson Manufacturing expects to increase its revenue by 5.000. The

5.8

machine will be used for five years with an expected salvage value of $80,000. At an interest rate of 12%, would the purchase of the injection-molding machine be justified?

PW of 62,847.89 > 0 , the investment is justified

5.14

A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato-peeling process. To implement the system, the company anticipates needing $3.5 million to purchase the industrial- strength lasers. The system will save $1,550,000 per year in labor and materials. However, it will require an additional operating and maintenance cost of $360,000. Annual income taxes will also increase by $160,000. The system is expected to have a 10-year service life and will have a salvage value of about $200,000. If the company's MARR is 16%, use the NPW method to justify the project.

PW(16%) = $3,500,000 +[$1,550,000- $360,000- $160, 000](P /A ,16%,10) +$200,000(P /F ,16%,10) = $1, 482,730

Since PW is positive, the project is justified

5.38

You are considering two investment options. In option A, you have to invest $5,000 now and $1,000 three years from now, In option B, you have to invest $3,500 now, $1,500 a year from now, and $1,000 three years from now. In both options, you will receive four annual payments of $2,000 each. (You will get the first payment a year from now.) Which of these options would you choose based on (a) the conventional payback criterion, and

(b)

the present worth criterion, assuming 10% interest?

Both give same payback period of 3 years. Thus, cannot select.

 

Consider two mutually exclusive investment projects, each with MARR = 12%, as

21

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

  • (b) On the basis on FW criterion, which alternative would be selected?

  • (a) On the basis of PW criterion, which alternative would be selected?

 

Project’s Cash Flow

n

A

B

0

-17,500

-15,900

1

13,610

13,210

2

14,930

13,720

3

14,300

13,500

  • a) PW A = $16,732.35 PW B = $16, 441.18 Select A

  • b) FW A= $23,507.74 FW B= $23,098.67 Select A

shown in the table:

You are considering two types of machines for a manufacturing process. Machine A has a first cost of $76,200, and its salvage value at the end of six years of estimated service life is $21,500. The operating costs of this machine are estimated to be $7,000 per year. Extra income taxes are estimated at $2,600 per year.

Compare these two mutually exclusive alternatives by the present-worth method at i =13%

Machine B has a first cost of $45,000, and its salvage value at the end of six years' service is estimated to be negligible. The annual operating costs will be

Thus, machine B is a better choice

(104,249.63

machine A

machine B

(91,371.58)

$11,600.

)

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 6

The Q is a combination of Ch6 & Ch4

(Q2.a & b) Final Examination Semester 1, 2015/2016

  • (a) Ahmad Zaki Enterprise is a taxi service provider. The company is considering to purchase a new Perodua Alza 1.5 Premium that costs RM60, 000. The car is assumed to have a five-year useful life. At the end of five years, it can be sold for RM20, 000. The monthly operating and maintenance costs are RM650. It is calculated that the company is able to earn after- tax revenue of RM19, 000 per year with this new car.

    • i. Using capital recovery cost analysis, compute the equivalent annual cost (AEC) for this new car if the company obtains the financing for the whole total amount at an interest rate of 4%. [7 marks]

A: AEC car = RM17,584

ii.

Determine whether it is a wise investment based on AE criterion? [3 marks]

A: AE = AES-AEC AE=1,416 positive. Yes a wise investment

  • (b) The managing director of Ahmad Zaki Enterprise, however, decided to choose Proton Exora 1.6 Premium that costs RM80, 000. The company makes a down payment in the amount of RM8, 000. It would then borrow the remainder from CIMB bank at an interest rate of 3% compounded monthly. The company also agrees to pay off the loan monthly for a period of five years.

    • i. What is the amount of its monthly installment payment?

A= RM1,296

[5 marks]

ii.

The company has successfully made 20 payments and wish to figure out the balance remaining immediately after 20 th payment. What is that

balance?

A: RM49,273.79

[5 marks]

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

iii.

Determine the total amount of interest paid over the 20-months period.

 

A: RM3,193.79

[5 marks]

Page | 25

 

Final Examination Semester 2, 2014/2015

Syarikat EasyRide Sdn Bhd is considering purchasing a minivan to transport children to a primary school in Semenyih. The minivan initially cost RM70,000 and the company spend another RM5,000 to paint it and also refurbish the van’s interior. The salvage value of the minivan is RM25,000 after eight years of service life at an interest rate of 6%. It is also estimated that the net cash flows from the transport service will be RM20,000 for the first year and increases by RM2,500 per year for the next year and each year thereafter.

i.

What is the annual capital cost of owning and operating the minivan?

 

= CR = RM9,550

[5 marks]

ii.

Determine the annual equivalent cost if the operating and maintenance cost of the minivan is RM14,400 annually.

= AEC= RM23,950

[2 marks]

iii.

What is the annual equivalent savings (revenues) from operating the minivan?

= AES= RM27,988

[ 3 marks]

iv.

From your above analysis, explain whether this is a good investment for the company.

= (AES-AEC) =AEW = RM4038. YES. AEW is positive

[2 marks]

A 300 units condominium building project by Tegap Construction Sdn Bhd. requires an investment of RM12 million. The expected maintenance cost for the building is RM300,000 in year 1, RM350,000 in year 2, and will increase by RM50,000 per year from year 3 to year 4. The cost to hire a manager for the building is RM5,000 per month. After 4 years of operation the building can be sold for RM8 million.

  • b) If the building remains fully occupied during the four years, calculate the annual rent per unit that will provide a return on investment of 12%. [17 marks] = find PW AW divide by 300 units = RM9,015.49

  • c) Assume Tegap Construction Sdn Bhd. decided to sell the units for RM500,000 each. Mr Danial is interested to buy one unit and make a RM100,000 down payment. He

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

obtained a 30-year loan for the remaining amount. Payments will be made monthly

at an amount of RM3,220. The nominal interest rate is 9%. If he planned to pay the remaining balance on the loan after 20 years (240 payments), how much should he

pay the bank?

[8 marks]

= RM254,192.25

 

(Q3, FE Sem 2 12/13)

 

Page | 26

From textbook

 

Consider the accompanying cash flow diagram. Compute the equivalent annual worth at i = 12%

6.5

6.5
Consider the accompanying cash flow diagram. Compute the equivalent annual worth at i = 12% 6.5

6.14

What is the annual equivalent cost of purchasing a lift truck that has an initial cost of $70,000, an annual operating cost of $14,000, and an estimated salvage value of $25,000 after six years of use at an annual interest rate of 6%?

AEC(6%)

= R-E-CR

=0 – 14,000 – CR = - 25,670

CR

= (70,000 -25,000)(A/P,6%,6) + (0.06)(25,000)

6.16

The Emerson Electronics Company just purchased a soldering machine to be used in its assembly cell for flexible disk drives. The soldering machine cost $350,000. Because

of the specialized function it performs, its useful life is estimated to be five years.

26

COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

It is also estimated that at that time its salvage value will be $60,000. What is the capital recovery cost for this investment if the firm's interest rate is 15%?

It is also estimated that at that time its salvage value will be $60,000. What is

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 7

  • (b) To justify the purchase of the acceptable model (challenger) in part (a), your team has agreed to conduct a replacement analysis. Pertinent data of the aging asset (defender) are as follows:

    • (a) Your team are involved with an equipment selection task in your company to replace an aging asset that the company owns. Vital statistics for the new equipment with three different models are as in the table below. The minimum attractive rate of return being used by your company for economic decision is 10% per year. Which model would your team recommend using the Internal Rate of Return method? [12 marks] Is the purchase of the new model to improve efficiency still remain economically

 

Model A

Model B

Model C

Purchase Price

RM8,500

RM9,500

RM10,000

Net Cash Flow

RM2,500

RM2,300

RM3,200

Salvage Value

RM500

RM400

RM400

Useful life, years

5

5

5

Individual IRR

15.39%

7.83%

18.79%

A= AE defender: 404.62; AE challenger: 627.52 replace the defender

A: Interpolated IRR (model C- model A) = 37.63% (Note that Model B is not considered as its IRR < MARR of 10%)

 

Defender

Purchase Price(5 years ago)

RM13,000

Current Market Value

RM4,000

Upgrade Cost

RM1,600

Net Cash Flow

RM1,800

Salvage Value

RM500

Useful life, years

5

(Use 10% and 40% in your calculation using trial and error method)

(this question is a combination of Ch7 + Ch 6 & Ch14)

Q5 [25 marks] Final Examination Semester 1, 2015/2016

attractive? (Use annual equivalent method)

[13 marks]

Mr. Tim, a construction contractor is considering to replace his old machine with a new machine. The old machine has another 5 years useful life. The cash flow details for the old and

(this question is a combination of Ch6 & Ch7 & Ch14)

Final Examination Semester 2, 2014/2015

new machines are as follows:

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

New Machine The cost price is RM 2,000,000. The annual operating cost RM 580,000 at end of first year and increasing by RM 30,000 in the subsequent years till the end of its 5 years useful life. Expected annual income RM 1,650,000 per annum. At the end of its useful life, the machine is expected to be sold for RM 450,000.

Old Machine Purchased 3 years ago at RM 1,500,000. At present the annual operating cost is RM 440,000 per year at end of first year and increasing by 10% per year in the subsequent years till the end of year 5. Expected annual income is RM 980,000 per annum and decreasing by 15% each year. After five years, the market value of the machine 5 is expected to be RM 500,000. If Mr. Tim decided to replace the old machine with a new machine now, the old machine can be sold immediately in the market for RM 800,000.

  • (a) Based on the MARR given, calculate the annual equivalent worth (AEW) of each option. Should Mr. Tim replace the old machine?

  • (b) Calculate the IRR of the project you suggested. (Hint: you can try 40% and 50% interest rate in your calculations).

Mr. Tim uses 12% MARR to evaluate his investment.

= IRR chosen (NEW) = RM 43.14%

= AEW OLD = RM84,372

AEW NEW = RM532,763

Required:

[18 marks]

[7 marks]

FastBits Electronic Company Sdn. Bhd. is evaluating new precision inspection devices to help verify package quality. The manager has obtained the following bids from four companies. All devices have a life of five years and a minimum attractive rate of return of 6%. The alternatives are mutually exclusive.

  • (a) Determine the annual benefits of the devices from all four companies. Device from

 

Company A

Company B

Company C

Company D

Initial Cost (RM)

400,000

100,000

500,000

200,000

Annual Costs (RM)

900

12,000

23,000

9,000

Net Cash Flows (RM)

100,900

27,700

125,200

46,200

IRR

8.3%

12%

8%

5%

Final Examination Semester 2, 2013/2014

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

which company has the highest annual benefit?

[5 marks]

  • (b) FastBits should reject the bid from which company based on the given individual IRR? Why?

[2 marks]

  • (c) Using incremental internal rate of return analysis, from which company, if any, should the manager purchase the new precision inspection device?

Use trial and error method

with 6% and 10% interest rates.

[14 marks]

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

(d)

Show that the same company selection would be made with proper application of the

 

Present Worth (PW) method.

[4 marks]

(a)

  • (a) RM101,800

  • (b) RM39,700

Page | 31

  • (c) RM148,200

  • (d) RM55,200

Company C (10= 5 marks)

(b)

Project D; IRR<MARR (4=2 marks)

(c)

A-B Increment:

= 7.02% Since IRR on increment > MARR, select company A.

C-A Increment:

= 6.82% Since IRR on increment > MARR, select company C. The manager should purchase from company C.

(d)

NPW A = RM25,031 NPW B = RM16,683 NPW C = RM27,392 Device from company C has highest NPW, therefore buy from company C.

From textbook

7.1

Suppose that you invest $1,500 in stock, which is called your financial asset. One year later, your investment yields $1,745. What is the rate of return of your investment?

1,745

= 1500 (1+i) 1 i = 16.33%

 

You are going to buy a new car worth $24,500. The dealer computes your monthly payment to be $514.55 for 60 months of financing. What is the dealer's effective rate of return on this loan transaction?

7.2

 

=9.93% per year

7.29

Consider an investment project with the cash flows given in the table:

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

-15,000 30,000 -$125,000 A 30,000 120,000 -$110,000 B 20,000 20,000 130,000 10%? Cash flow 14,520 3
-15,000
30,000
-$125,000
A
30,000
120,000
-$110,000
B
20,000
20,000
130,000
10%?
Cash flow
14,520
3
0
3,993
Project’s Cash Flow
Consider two investments A & B with the sequences of cash lfows given in the
table:
If A and B are mutually exclusive projects, which project would you
At MARR = 15%, determine the acceptability of each project
Is this project acceptable at MARR = 8%?
Compute the IRR of each investment.
Compute the IRR for this investment. Is the project acceptable at MARR =
If the project’s IRR is 10%,
Consider the cash flows of a certain project given in the table:
Find the value of X.
select based on the IRR incremental investment?
Cash flow
2
1
0
n
7.30
Answer:
(b)
(a)
n
0
1
2
3
3
-3,000
800
900
X
7.37
(a)
(b)
(c)
Answers:
1
0
n
2

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

7.51 (a) IRR (A2-A1) = 7.36%, which is smaller than MARR, so we select (b) If
7.51
7.51
(a) IRR (A2-A1) = 7.36%, which is smaller than MARR, so we select (b) If the

(a) IRR (A2-A1) = 7.36%, which is smaller than MARR, so we select

  • (b) If the firm’s MARR is 10%, which alternative is the better choice?

Consider the two mutually exclusive investment alternatives given in table below:

(a) IRR (A2-A1) = 7.36%, which is smaller than MARR, so we select (b) If the
 

Project’s Cash Flow

n

A

B

0

-$15,000

-$20,000

1

7,500

8,000

2

7,500

15,000

3

7,500

5,000

IRR

23.5%

20%

  • (a) Determine the incremental investment’s IRR.

Answers:

A1.

The following information on four mutually exclusive projects is given here.

All four projects have the same service life and require investment in year 0 only one. Suppose that you are provided with the following additional information about between projects.

IRR (D - C) = 25% IRR (A – D) = 50%

IRR (B - A) = 85% IRR (B - C) = 30%

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

 

Which project would you choose based on the rate of return criterion at a MARR of 29%?

Answer:

Project B

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

Chapter 14

Refer to question above (Mr Tim)

 

Final Examination Semester 2, 2014/2015

 
 

Bombastic Manufacturing Company is considering replacing a stamping machine that has been used in its factory. The new machine will cost RM45,000 delivered and installed, with an estimated economic life of 8 years and a salvage value of RM3,000 at the end of its life. The new machine is expected to perform with so much efficiency and Mr. Tan, the Production Engineer estimates that over its 8-year life, labor, material and other direct costs can be reduced from RM15,000 to RM12,000 annually.

The old machine that is still in used was purchased

5 years
5 years

ago at RM30,000. At the time of

purchased, its economic life was estimated to be eight years with a salvage value of zero. If

the company decides not to purchase the new machine, it will then retain its old machine and the estimated market value, book value and operating costs for the old machine for the next three years is shown in the table below.

Year-end

0

1

   

2

3

4

 

Market Value (RM)

10,600

7,400

   

4,100

1,500

0

 

Book Value (RM)

12,400

7,850

   

4,660

1,880

0

 

Operating Costs (RM)

 

3,540

   

4,130

4,810

5,680

 

If the MARR is 10% before taxes,

   

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

a) Determine the remaining useful life of the old machine (Hint: Refer to the estimated figures
a)
Determine the remaining useful life of the old machine (Hint: Refer to the
estimated figures of market values and operating costs given in the table ).
b)
Determine whether it is economical to make the replacement now.
Answers
a)
Determine the remaining useful life of the old machine (Hint: Refer to the estimated
figures of market values and operating costs given in the table).
Year-end
0
1
2
3
4
AE (10%)
-7,799.96
-7,976.34
-7,928.63
-7,800.56
The old machine’s MOST ECONOMICAL useful economic life is 1 more year with an
AEC value of RM7,799.96.
b)
Determine whether it is economical to make the replacement now.
AEC c =RM- 5,171
Since AECc < AEC D , the defender should be replaced now
For this q, you could do similar exercise from Ch 14  14.8 on page 794

Page | 36

From textbook

14.2. The Columbus Electronics Company is considering replacing a 1,000-pound-capacity forklift truck that was purchased three years ago at a cost of $15,000. The diesel-operated forklift was originally expected to have a useful life of eight years and a zero estimated salvage value at the end of that period. The truck has not been dependable and is frequently out of service while awaiting repairs. The maintenance expenses of the truck have been rising steadily and currently amount to about $3,000 per year. The truck could be sold for $6,000. If retained, the truck will require an immediate $1,500 overhaul to keep it in operating condition. This overhaul will neither extend the originally estimated service life nor increase the value of the truck. The updated annual operating costs, engine

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COEB442 Engineering Economics Revision Sem 1, 2016/2017

A drastic increase in operating costs during the fifth year is expected due to another overhaul, which will again be required to keep the truck in operating condition. The firm's MARR is 15%

  • (c) What is the equivalent annual cost of owning and operating the truck for five years?

overhaul cost, and market values over the next five years are estimated as given in the table.

n

   

Engine

 

O&M

Depreciation

overhaul

Market value

-3

-

-

-

-

-2

-

$3,000

-

-

-1

-

4,800

-

-

0

-

2,880

1,500

6,000

1

1,728

-

4,000

2

1,728

-

3,000

3

864

-

1,500

4

0

-

1,000

5

0

5,000

0

  • (c) PW (15%)= -$7,500-$3,000 P/F, 15%, 1)-$3,500(P/F,15%, 2) -$3,800(P F, 15%, 3)

    • (b) What is the opportunity cost of not replacing the truck now?

    • (a) If the truck is to be sold now, what will be its sunk cost?

  • (a) Purchase cost = $15,000, market value $6,000 = -$22,698.98 AEC (15%) = $6,771.46 (written as +ve because AE

  • -$4,500 (P/F, 15%, 4) - $9,800(P/F, 15%,5)

    sunk cost = $15,000 - $6,000 = $9,000

    • (b) Opportunity cost = $6,000

    C, C is cost)

    Answer:

    A drastic increase in operating costs during the fifth year is expected due to another overhaul,

    14.4. Air Links, a commuter airline company, is considering replacing one of its baggage- handling machines with a newer and more efficient one. The current book value of the old machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000. The new baggage- handling machine has a purchase price of $120,000 and an estimated useful life of seven years. It has an estimated salvage value of $30,000 and is expected to realize economic

    Page | 37

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    COEB442 Engineering Economics Revision Sem 1, 2016/2017

    savings on electric power usage, labor, repair costs and also to reduce the amount of damaged luggage. In total, an annual savings of $50,000 will be realized if the new machine is installed. The firm uses a 15% MARR. Using the opportunity cost approach,

    • (a) What is the initial cash outlay required for the new machine?

    • (b) What are the cash flows for the defender in years zero through five?

    • (c) Should the airline purchase the new machine?

    Answer:

    • (a) Initial cash outlay for the new machine = $120,000

    • (b) Cash flows for the defender: Year 0: -$10,000 Years 1-5: 0

    • (c) AEW(15%) Defender = -$2,983

    AEW(15%) Challenger = $23,868 The company should purchase the new machine because it has a higher annual equivalent cash flow

    Page | 38

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    COEB442 Engineering Economics Revision Sem 1, 2016/2017

    Chapter 9

     

    (Q3.b) Final Examination Semester 1, 2015/2016

    (b)

    i.

    A rice cleaning equipment was purchased in December 2009 for RM8,500 and is yearly depreciated by the double declining balance (DDB) method for an expected life of 10 years. What is the book value of the equipment at the end of 2014? Original salvage value was estimated to be RM1,500 at the end of 10 years. (hints: only do full year depreciation). [9 marks]

    A:

    A:

    Prepare the table

     

    ii.

    Give ONE out of three conditions must an asset satisfy to be considered depreciable. [2 marks]

     

    Final Examination Semester 2, 2013/2014

    (c)

    Assuming that you own a car. Describe how you calculate the economic depreciation accumulated for your car with each passing year. [2marks]

    i.

    ii. InnoCom Sdn Bhd buys a new telecommunication machine that costs $160,000. It has a useful life of 6 years and can be sold for $50,000 at the end of this period. It is expected that $10,000 will be spent by the company to dismantle and remove the machine at the end of its useful life. Compute the annual depreciation allowances and the resulting book values and put them in a table form by using the following methods:

     

    (1)

    Straight- line depreciation

    [4 marks]

    (2)

    150% declining balance

    [7 marks]

    (c)

    i.

    Subtracting the current market value of the car from the original price paid for the car. Economic depreciation = Purchase price – market value [2 marks]

    ii.

    SL Dep = (I – S) /N Salvage value (S) = $50,000 - $10,000 = $40,000 SL Dep = ($160,000 - $ 40,000)/6 =$ 20,000

    [1mark]

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    COEB442 Engineering Economics Revision Sem 1, 2016/2017

    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks]
    $20,000
    $20,000
    $80,000
    $20,000
    value
    150%
    SL
    For 150%DB,
    α = (1/N) x Multiplier
    =1.5/6 = 0.25
    Year
    declining
    method
    balance
    SL
    [4 marks]
    $160,000
    $140,000
    $40,000
    $120,000
    $30,000
    $100,000
    $22,500
    $16,875
    $12,656.25
    $9492.19
    [2 marks]
    $37,968.75
    $50,625
    150%
    value
    Book
    using
    [1 mark]
    $120,000
    $67,500
    $90,000
    $160,000
    $28,476.56
    balance
    declining
    $40,000
    $20,000
    $60,000
    $20,000
    $20,000
    using
    Book
    [1 mark]
    depreciation

    Quality Plastics Inc. makes plastic bowls. It recently bought a new machine, on January 1, that molds plastic pellets into the desired shapes. The price of that machine was RM480,000. It cost RM8,000 to deliver the machine to the factory. It cost RM12,000 to install and properly calibrate the machine. It has an expected useful life of 5 years, and is expected to have RM50,000 salvage value at the end of 5 years.

    What is the depreciable cost of the new machine? =RM500,000

    What is the amount of the annual depreciation if straight line method is use? Determine the book value at the end of year 4.

    =Book value: RM140,000

    =annual depreciation: RM90,000

    Calculate the depreciation percent of the new machine that will be used to compute the depreciation amount, the amount of annual depreciation and book value at the end of each year if the company decides to use double declining balance method. [13 marks]

    5 4 3 2 1 0 YEAR
    5
    4
    3
    2
    1
    0
    YEAR
    DEPRECIATION DDB 200,000 120,000 72,000 43,200 14,800

    DEPRECIATION

    DDB

    DEPRECIATION DDB 200,000 120,000 72,000 43,200 14,800
    200,000
    200,000
    120,000
    120,000
    72,000
    72,000
    43,200
    43,200
    14,800
    14,800
    BOOK VALUE 500,000 300,000 180,000 108,000 64,800 50,000
    BOOK VALUE
    BOOK VALUE
    500,000
    500,000
    300,000
    300,000
    180,000
    180,000
    108,000
    108,000
    64,800
    64,800
    50,000
    50,000
    [4 marks] [2 marks]
    [4 marks]
    [2 marks]
    [4 marks] [2 marks]
    [4 marks] [2 marks]
    [4 marks] [2 marks]
    [4 marks] [2 marks]
    [4 marks] [2 marks]
    [4 marks] [2 marks]
    [4 marks] [2 marks]
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier
    [2 marks] $20,000 $20,000 $80,000 $20,000 value 150% SL For 150%DB, α = (1/N) x Multiplier

    Page | 40

    40

    COEB442 Engineering Economics Revision Sem 1, 2016/2017

    (d) Compare the amount of accumulated depreciation of the machine in the books at the end of the third year comparing straight line method and double declining (Q HAS

    Straight line method: RM90,000 X 3 =RM270,000 Double declining:= RM392,000

    [Q4, FE Sem 1 12/13]

    BEEN MODIFIED)

    [6 marks]

    Year

    Straight Line

    Book value

    Double declining

    Book value

    depreciation

    using SL

    balance (DDB)

    using DDB

    without

    method

    depreciation [5

    method

    switching

    [2 marks]

    marks]

    [5 marks]

    [2 marks]

    0

    1

    2

    3

    4

    5

    Year

    Straight Line

    Book value

    Double

    Book value using

    depreciation

    using SL

    declining

    DDB method

    without

    method

    balance (DDB)

    [5 marks]

    switching

    [2 marks]

    depreciation [5

    [2 marks]

    marks]

    0

    RM200,000

    RM200,000

    1

    RM40,000

    RM160,000

    RM80,000

    RM120,000

    5

    RM40,000

    0

    RM10,368

    RM15,552

    • (b) Idea Perfect Sdn Bhd purchased a RM196,000 hole-punching machine with a freight

    charge of RM1,000 and an installation cost of RM3,000. The machine has a recovery period of 5

    THE DEPRECIATION VALUE FOR 5 TH YEAR USING DDB MUST BE ADJUSTED TO GET 0 SALVAGE VALUE.

    years and the salvage value is expected to be zero. Complete the depreciation below.

    • 3. [FE Sem 1 13/14 Q HAS BEEN MODIFIED]

      • (a) What is depreciation?

    [1 mark]

    Answers

    Page | 41

    41

    COEB442 Engineering Economics Revision Sem 1, 2016/2017

    Depreciation is defined as a gradual decrease in the utility of fixed assets with use and time.

    From textbook

    Page | 42

     

    The General Service Contractor Company paid $400,000 for a house and lot. The value of the land was appraised at $155,000 and the value of the house at $245,000. The house was then torn down at an additional cost of $15,000 so that a warehouse could be built on the combined lots at a cost of $1,250,000. What is the value of the property with the warehouse? For depreciation purposes, what is the cost basis for the warehouse?

    Answer:

    9.3

    9.3

    9.10

    The double-declining-balance method is to be used for an asset with a cost of $88,000, an estimated salvage value of $13,000, and an estimated useful life of six years.

    • (a) What is the depreciation for the first three fiscal years, assuming that the asset was placed in service at the beginning of the year?

    • (b) If switching to the straight-line method is allowed, when is the optimal time to switch?

    Answer:

    42

    COEB442 Engineering Economics Revision Sem 1, 2016/2017

     
    Page | 43

    Page | 43

     

    Compute the DDB depreciation schedule for the following asset:

    Cost of the asset, I

    $38,000

    Useful life, N

    5 years

    Salvage value, S

    $6,000

    9.12

    (a) What is the value of ᾳ ? (b) What is the amount of depreciation for the second full year of use of the asset?

    (c)

    What is the book value of the asset at the end of the fourth year?

    Answer:

    • a) = (1/5)2 = 0.4

    α

    b) = (0.4)(1-0.4)(38,000)=9,120 D
    • b) = (0.4)(1-0.4)(38,000)=9,120

    D 2

    (the yellow one is portion for the 1 st year depreciation)

    • c) = (38,000)(1-0.4) 4 = 4924.80

    B 4

    43