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ECOR3800W99 - {‘3 M ‘(LA f CARLETON UNIVERSITY FINAL...

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Unformatted text preview: ,.., {‘3- M ‘(LA f CARLETON UNIVERSITY FINAL Kj> immune - O DURAHON: 3 HOURS No.omedems 174 DamnnwntName&.ComseNumben 91.3303, Engineering Economics. Course lnstructor(s) 9330535501. A-M- Khan AuY—aluxztl HtHOIAMDL 1. closed Book. 2. Programable Calculators are not allowed. Students MUST count the number of pages in this examination question paper before beginning to write, and report any discrepancy immediately to a proctor. This question paper has 10 pages. MAY This examination question paper be taken from the examination room. Notes: 1. Please answer five questions- 2. Questions carry equal weight. 1(a) An aggregate demand function is represented by the equation Q = 300 — 15P where Q is the number of trips made and P is the price per trip in dollars. Assume that the cost of serving a trip is 75% of the price charged. (i) Find the (point) price elasticity of demand when P=$10&P=$15. (ii) If price is raised from $10/trip to $lS/trip, find change in revenue. Also, find whether the price should be be raised? 1(5) A new model of a machine can be bought now for $X million and its estimated resale value after 3 years of use is $1.75 million. The estimated operations and maintenance (OaM) costs of this model amount to $0.01 million/year (end of year payments). Instead of paying $)(nfillion now, an instalment plan is available which requires $0.833 million/year for three years (end of year payments). Assume that sale taxes (i.e“, goods and services tax (GST) and provincial sales tax (PST); are not applicable to both payment options. Find X so 'that the IRR is 10% (i.e., how much can be paid if the new model'machine is bought and the payment is made at the outset as opposed to the yearly payment (instalment) option). 2. Using a 10% minimum acceptable rate of return, calculate the present worth of the costs for the two alternatives described below; based on'a best-possible—replacement policy, when the need for the equipment is expected to continue indefinitely. The present equipment could be sold now for $5000, but in 3 years it will have no salvage value owing to radically improved equipment expected to be available then; it will cost $1000 to remove the old equipment in 3 years. This alternative (A) has annual expenses of $3300. introduced in 3 years will have annual operating costs of $1900, a first cost of $10,000, and a salvage value of $2000 at the end of its 3—year life. - A presently available replacement has a price of $14,500 and a salvage value of $1000 at the end of its 6—year economic life. This alternative (B) has operating costs of $2800 per year. What should be done? 3. Cash flows from five investment proposals are itemized in the. table. All investment opportunities are evaluated by using a 10% rate of return and based on a 5-year period. Revenue, S, in year Proposal Investment, 5 1 2 + 3 4 5 A —15,000 4,500 4,500 4,500 4,500 4,500 B ~25,000 12,000 10,000 8,000 6,000 4,000 C -20,000 . 2,000 . 4,000 6,000 8,000' 10,000 D —30,000 '0 0 15,000 15,000 15,000 E -l0,000 4,500 4,500 -2,500 4,500 7,500 EM“ (a) If the proposals are mutually exclusive, which is the best investment based on its present worth? (b) If investment capital is limited to $30,000 and the proposals are independent, which proposals should be accepted. 4. A firm with an effective income tax rate = 42% is considering the purchase of a new machine for $45,000. For the purchase of this new machine a $20,000 loanuwill be required at 8% interest- ” The terms of the loan call for equal annual payments for five years} covering principal plus interest. The useful life of the maphine is five years and the MARK = 10% (after tax). Incomekestimated to result due to machine = $23,000/year and annual‘operating expenses = $7,300/year- The machine is classified as Class 8 (20% CCA rate). Assume that half—year rule is applicable. (a) Find Net Present Worth at MARR of 10% (after tax) under the assumption that salvage value is = UCC + $1000. (b) Find Net Present worth at MARR of 10% (after tax) under the assumption that salvage value is = UCC — $1000. Note: UCC is Undepreciated Capital Cost. 5(a) Five mutually exclusive alternatives for a public project are to be compared. At the minimum attractive rate of 8%, and for a 10 year period, which alternative is the best? Me (i) bee incremental present worth method. (ii) Use incremental benefit/cost ratio method. Project Do—Nothing A B C D Investment (in PW) 0 $5,000 $4,000 $12,000 $2,000 User and government costs/year $5{OOO 3,242 . 3,698 2,559 4,609 M 5(b) For the following two projects, investment and revenue estimates are provided. Which project is the best? The MARR = 10% (in actual dollars). Expected average inflation rate is 4%. ‘ Cost in Revenue, Real or Constant s of 1999 Proposal l999$ 2000 2001 2002 * 2003 A 13,000 5000 5000 5000 5000 B . $10,000 $4000 $4000 $4000 $4000 M 5(a) The following labour costs are given in the constant dollars of 1990. Assumed data on Consumer Price Index (CPI) are given below; Please show labour costs in terms of 1995 constant dollars. ._________________u.l______________________n______________m___ 1990 1995 2000 Cost/Unit $10.00 $11.00 $10-00 (111319905) CPI'ii 100 130 150 (Assumed Values) W— “7 Wm "’ :1.m -4- 6(a) Three mutually exclusive alternatives are described below, which show the probabilities of earning 4 rates of returns. W """ 6;"""";;"h""£6;""""'i§;""""" Th—WW E 0.2 0.3 0.3 0.2 C 0.3 0.3 0.3 0.1 _______________i_______________i__i_______________________. (i) Which alternative should be selected using the expected value (EV) criterion? What is the EV? (ii) Which alternative would be selected if the decision— maker had an aspiration level of 8%? Why? 6(b) A payoff table (in-thousands of dollars) is given below for three investments of equal size and duration. Which alternative would you select? Why? Boom So—So Bust Alternative (P = 0.3) (P=0.5) (P=O.2) A 1000 200 ~500 B 300 400 0 C 600 400 —200 6(a) Total cost function for a production process is as follows: TC = 0.0051:2 + 4n + 200,000 Find (i) n for minimum average total cost. Find minimum -\ average total cost. E,(ii) Find marginal cost at the level of production that 6(d) Expected value of the net present worth (NPW) of a project is $2M and variance of the NPW is $4M. What is the probability of receiving NPW = $2M? a results in minimum cost per unit. production. -5- 7(a) A company is planning to buy an inspection device 7(b) (coordinate-measuring machine) for $45,000. The expected life of the device is 10 years, and the expected annual operating costs and taxes are $600 for the first year with an added increase.per year of $100 for years 2 through 6, and $120 increase for years 7 through 10. Maintenance costs will be zero in the first 2 years because of the warranty but are expected to be $1000 in year 3. For years 4 to 10, an increase of $500/year is applicable. What is the minimum desired annual economic benefit of the device, assuming that these benefits will just offset the annual costs? Interest rate = 8 percent- A company has $500,000 to invest in any one of the mutually exclusive projects shown below. Each of the projects has a life of 4 years, and the outcomes shown are annual returns in thousands of dollars after—tax cash flows Since each of the proposals depends upon public acceptance of tested new products, there is considerable doubt about the state of each return. States of Nature: Potential Market Conditions Project ---------------------------------------------- $1 32 33 S4 "1;. _______________ £35 _________ £53 __________ 555 -------- 556"“ B 150 50 500 o c 300 100 - ' 200 100 D 350 400 200 50 E 200 300 100 o \ i’Which project is preferred according to maximin fiprinciple? (i) (ii) Which project is preferred according to maximax principle? (iii) If equal likelihood principle is used, which project is the choice? (iv) For alpha = 0-6, which project has the highest rating by the partial optimist (Hurwicz) principle? (v) Which project is preferred according to the regret principle? ...
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