ayy ii UNIVERSITI TEKNOLOGI PETRONAS FINAL EXAMINATION JANUARY 2012 SEMESTER COURSE GCB3173 / GBB3173 — ENGINEERING ECONOMICS AND ENTREPRENEURSHIP DATE : 40" MAY 2012 (THURSDAY) TIME £ 2.30 PM — 5.30 PM (3 hours) INSTRUCTIONS TO CANDIDATES SECTIONA —: Answer ALL questions in the Answer Booklet SECTIONB =: 4. — Answer ALL questions in the Answer Booklet Begin EACH answer on a new page. 2 3. Indicate clearly answers that are cancelled, if any. 4. Where applicable, show clearly steps taken in arriving at the solutions and indicate ALL assumptions, if any. 5. Do not open this Question Booklet until instructed. 6. Discrete Compounding Table is available in the Engineering Data & Formulae Booklet. Note : |. There are SIX (6) pages in this Question Booklet including the cover page. ii, Graph Paper & Engineering Data & Formulae Booklet will be provided4 GBB 3173 SECTION A [30 Marks] Explain the importance of sensitivity analysis in economic evaluation of engineering projects. [10 marks] “For a particular amount of capital investment in a cost reduction project, the amount ($) of annual cost savings required for breakeven should be lower when the minimum attractive rate of return (MARR) is lower". Do you agree with this statement? Explain [8 marks] Two mutually-exclusive investment alternatives with an internal rate of return (IRR) of 10% are shown in TABLE Q3. The incremental rate of return between Altemative B and Alternative A (AIRRe.a) is 10%. Which is the preferred alternative given the minimum attractive rate of return (MARR) is 9% per year? Explain, TABLE Q3 Altemative A | Altemative B “Investment | $500 $700 IRR 10% 10% Incremental IRR (AIRRe.a) 10% [6 marks] “Depreciation deductions result in income tax savings’. Discuss [6 marks)GBB 3173 SECTION B [70 Marks] Power Coal Mine Bhd is considering a new mining pit to increase its production output, The company will have to pay $25 million for the rights to mine on the government land, The infrastructure development costs will amount to another $12 million. It is anticipated that the mine should generate annual net revenue of $10 million for 15 years. When the mine is closed at the end of the fifteenth year, $10 million will be spent for reclamation work. The company’s MARR is 10% per year. a. Draw a cash flow diagram for the above proposal [2 marks] b. Compute the equivalent present worth (PW) of the proposal. [4 marks] c. Calculate the external rate of return (ERR) of the proposal if the rate of external re-investment (¢) is 10% per year. [8 marks] ¢. Determine the minimum annual net revenue required for the proposal to breakeven. Assume that costs of rights to mine, development and reclamation remain the same. [6 marks]GBB 3173 A team of production engineers is evaluating an investment proposal for their plant's capacity expansion to meet the potential increase in demand. Three mutually exclusive design alternatives are considered as shown in TABLE 2. The company will accept the plan if the proposal can meet the minimum attractive rate of return (MARR) of 10% per year. TABLE 2: Three Mutually Exclusive Design Alternatives Design Alternatives Design A | Design B | Design C | Investment (S) 77000 62000 57000 _| Annual Revenue (: 20000 18000 16500 Annual Cost (S) 3000 | 2000 4500 | Salvage Value (§) | 41000 | 9000 6000 Useful Life (years) 8 I 7 6 a Calculate the equivalent annual worth (AW) of every design alternative. [9 marks] b. Determine the most preferred design alternative based on your economic analysis in Q2a. Justify your answer. [2 marks] c. Plot a sensitivity graph and examine the sensitivity of the AW of the preferred design alternative determined in Q2b over a range of + 30% changes in the estimates of the annual revenue. [9 marks]GBB 3173 One of the four large electric ovens at a bakery is being considered for replacement. Record shows that its yearly maintenance expenses are escalating. This oven can be sold now for $20,000. If the oven is kept for four more years, the yearly maintenance costs for the next four years will be $9,500, $9,600, $9,700, and $9,800 respectively. Its salvage value at the end of the fourth year will be $7,000. A new electric oven of similar capacity costs $80,000 and its salvage value at the end of the fourth year is anticipated at $62,000. The maintenance costs for the first two years are free. However, for the third and fourth year, the maintenance costs are estimated ai $1,000 and $3,000 respectively. The company's minimum attractive rate of return is 10% per year. Determine the equivalent annual worth (AW) of the old electric oven [4 marks] it Calculate the equivalent annual worth (AW) of the new electric oven. [4 marks] iii Should the old electric oven be replaced? Justify, [2 marks]GBB 3173 b. Determine the economic life of the new electric oven if its year-end market value (MV) and annual maintenance costs are as shown in TABLE 3a Use the format shown in TABLE 3b for your calculation. TABLE 3a: MV and Annual Maintenance Costs L New Electric Oven EOY | My, end of year | Annual Maintenance Costs ($) o | 80000 - 1 | 75000 0 2 70000 0 3 66000 “4000 4 62000 3000 TABLE 3b: Format of Calculation of Economic Life End of | MV, | Lossin | Costof Annuai Total | EUAG™ Year,k | End of | Market | Capital= | Maintenance | Marginal | through Year,k | Value | 10% of Costs | Cost for | Yeark (MV) | Beginning Year, during | of Year TCr year k MV EVAC, =[UTC,(P/F 10%, f)\A/P.10%,k) (20 marks} -END OF PAPER-