COURSE

G83173 I cCB3173

ENGINEER|NG ECONOMTCS &

ENTREPRENEURSHIP

DATE
TIME

:
:

01=t

SepTeMBER 2012 (SATURDAY)

9.00 AM

- 12.00 NOON (3 hours)

INSTRUCTIONS TO CANDIDATES

1.
2.
3.
4.

Answer ALL questions in the Answer Booklet.

Begin EACH answer on a new page.
lndicate clearly answers that are cancelled, if any.
Where applicable, show clearly steps taken in arriving at the solutions and
indicate ALL assumptions, if any.

5.
6.

Do not open this Queston Booklet until instructed.

Discrete Compounding Table is available in the Engineering Data &

Formulae Booklet.

Note

i.

There are SIX (6) pages in this Question Booklet including

the cover page.

ii.

Graph Paper & Engineering Data & Formulae Booklet will be

provided.

Universiti Teknologi

pETRoNAS

GCB 3173 / GBB 3173

1.

The centralised utility facilities operation of a refinery is considering installing a

large boiler that uses solid waste for fuel in the commercial producton of steam.
The total cost Y in dollars per hour to produce the steam is given by Y = 16 +
0.4X + 0.48X2, where X is the demand of steam in tons/hr. Total revenue in
dollars per hour from the sale of steam is 18X

0.3X2.

Find the maximum total revenue (dollars) of the proposal.

[5 marks]

Determine the maximum profit (dollars) generated from the sale of steam.

b.

[5 marks]

On a graph paper, considering demand of steam ranging from 0 to 35

tons/hr, graphically display the:
Relationship between total revenue and demand.
[2 marks]
il

Relationship between total cost and demand.

[2 marks]

ilt

Range of profitable demand.

[2 marks]

d.

Maximum total revenue from the sale

of steam does not

generate

maximum profit. Explan.

[4 marks]

GCB 3173 / GBB 3173

2.

A chemical producing plant has been ordered by the Department of Environment

to cease discharging acidic waste liquids containing mercury into the

public sewer system. ln view of this, the company has to adjust the pH and
remove the mercury from its waste liquids. Three vendors have provided
estimates on the necessary treatment system and the summary is shown in
(DOE)

TABLE Q2.
TABLE Q2: Estimates of Alternatives Treatment System
Vendor

Useful life

($)
10,000

lvears)

Foxboro

Annual revenue
from Mercury
Recovery
($)
3,200

Salvage
Value

($)
35,000

Annual
Operating
Cost
($)
8,000

Quicktreat

40,000

7,000

3,800

Almadar

80,000

2,000

6,000

10

lnitial
investment

The company's minimum attractive rate of return (MARR) is B% per year.

a.

Calculate the equivalent annual worth (AW) of each alternative treatment

system. Use repeatability assumption.
[12 marks]

b.

Which is the preferred alternative? Explain.

[3 marks]

Calculate and graphically display the sensitivity of the equivalent annual

worth (AW) of the preferred alternative in Q2b over the range of -30% to
+30o/o

changes in:
Annual operating cost.
[6 marks]

GCB 3173 / GBB 3173

ii.

Annual revenue from mercury recovery.

[6 marks]

Provide your comment on the sensitivity

of the preferred

investment

alternative towards changes in the estimates of annual operating cost and

annual revenues from mercury recovery.
[3 marks]

GCB 3173 / GBB 3173

3.

You are requested by a company to evaluate a proposal of installing a new

packaging machine as part of the company's expansion plan. The new machine
can be purchased for $300,000. The annual revenue is calculated to be $20,000
and the machine can last for 10 years. The operating and maintenance costs are
expected to be $3,000 in the first year and will increase subsequenfly by $600
every year (second year $3,600, third year 94,200, fourth year 94,800, and so

on) until the tenth year, The salvage value of the machine will be $20,000. The
company's before{ax MARR is 12% per year. The rate of external re-investment

(e) is 12o/o per year. The company uses straight-line method in calculating
depreciation allowance of its assets. The company's income tax rate is 25o/o.

a.

Calculate the external rate of return (ERR) of the above proposal.

[8 marks]

b.

Compute the minimum annual revenue that will make the proposal
breakeven.
[4 marks]

Set up a table and determine the aftertax cash flow (ATCF) for the
proposal.
[10 marks]
d.

The company saves on income tax through depreciation of the new

machine. Explain.
[3 marks]

GCB 3173 / GBB 3173

4.

a.

Discuss FOUR (4) major reasons for assets replacement.

[8 marks]

b.

The owner of Zenith Construction Company is considering replacing an

existing paving machine with a new unit. The old machine was purchased

three years ago at $200,000. The estimates of yearly operating and

maintenance costs, and the market value of the machine for the next six
years are illustrated in TABLE Q4a. The current market value of the
existing paver machine is $105,000. The company's MARR is 10% per
year.

TABLE Q4a: Estimates of Operating and Maintenance Costs and Market Value
End Of Year,
k
1

Operating Cost
($)
13,000

Mantenance Cost
($)
7,000

Market Value if Sold

in Year k ($)
85,000

15,000

8,000

65,000

17,000

10,000

50,000

20,000

15,000

40,000

25,000

17,000

35,000

30,000

19,000

30,000

Data for the new paving machine has been analysed. lts most economic

life is at seven years with a minimum equivalent uniform annual cost

(EUAC) of $52,000.

What is the amount of capital investment in the defender using the

outsider viewpoint?
[2 marks]

GCB 3173 / GBB 3173

il

Determne the total (margnal) cost (TCr) of the existing paving

machine for the first year through the sixth year. Use the format
shown n TABLE Q4b for your calculation.
[12 marks]

TABLE Q4b: Format for the Galculation of Total (marginal) Gost (TC*)
End of
Year, k

ilt

MV,
End of
Year, k

Loss in
Market Value
(MV) during
year k

Cost of
Capital = 10o/o
of Beginning
of Year MV

Annual
Costs

Total
(Marginal)
Cost for
Year, TC*

When, if at all, should the existing paving machne be replaced with

the new machine? Explain.

[3 marks]

-END OF PAPER-