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UT ME 353 - Exam Guide

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Version A Name______________________________1ME 353 ENGINEERING ECONOMICSFinal Exam – SampleScoring gives priority to the correct formulas. Numerical answers without the correctformulas for justification receive no credit. Decisions without numerical justificationreceive no credit. Interest tables and factor formulas are at the end of the exam.1. (10 Points) A luxury apartment building project requires an investment of $1,250,000. Thebuilding has 50 units. We expect the maintenance cost for the apartment building to be$150,000 in the first year, $200,000 in the second year, and will continue to increase by$50,000 per year in subsequent years. The cost to hire a manager for the building is estimatedto be $50,000 per year. After five years of operation the apartment building can be sold for$750,000.What is the annual rent per apartment unit that will provide a return on investment of 15%?Assume the building will remain fully occupied during the five years.2. (10 Points) We use the cost of data of problem 1, but now we assume that each apartment unitrents for $1000 per month. In this problem you are to include the effect of taxes. The tax rateon net income per year is 30%. The building is depreciated with the straight-line method usinga tax life of 25 years and a tax salvage of zero. Tax on capital gains is 30%. The after taxminimum acceptable rate of return is 12%. We repeat the other data from problem 1.The building project requires an investment of $1,250,000. The building has 50 units. Weexpect the maintenance cost for the apartment building to be $150,000 in the first year,$200,000 in the second year, and will continue to increase by $50,000 per year in subsequentyears. The cost to hire a manager for the building is estimated to be $50,000 per year. Afterfive years of operation the apartment building can be sold for $750,000.Show the after-tax cash flows in the table below. Also, write the formula for the after-tax netpresent worth of this project. Use as few terms as possible and show time value of moneyfactors with the appropriate interest rates. You do not have to evaluate the formula.Year After Tax CashFlow012345Version A Name______________________________23. (10 Points) We use the cost of data of problem 1, but now we consider inflation. Do notconsider taxes. We first repeat the other data from problem 1.These estimates of future values are estimated with today’s prices, however actual cash flowsescalate in the manner described in the next paragraph. The building project requires aninvestment of $1,250,000. The building has 50 units. We expect the maintenance cost for theapartment building to be $150,000 in the first year, $200,000 in the second year, and willcontinue to increase by $50,000 per year in subsequent years. The cost to hire a manager forthe building is estimated to be $50,000 per year. After five years of operation the apartmentbuilding can be sold for $750,000.We assume that each apartment unit rents for $1000 per month. This rent amount is guaranteedto the renters and is not affected by inflation during the five-year period. The maintenance andmanagement costs are expected to escalate in the future at the same rate as general inflation. Theresale value of the building will escalate at a 20% rate. The general inflation rate is expected tobe 6% per year. The after minimum acceptable rate of return is 18%. This is the market rate ofreturn.Show the cash flows to be used for an analysis in the table below. Indicate whether the cashflows are in real or actual dollars. Also, write the formula for the net present worth of thisproject. Use as few terms as possible and show time value of money factors with theappropriate interest rates. You do not have to evaluate the formula.Kind of dollars in the cash flow: _________________Year Cash Flow012345Version A Name______________________________34. (12 Points) You are considering purchasing a bond with a face value of $1000. The companyissuing the bond will pay you an annual interest payment of 10% of the face value. The nextinterest payment will occur one year from now. The bond matures in 9 years at which time youwill receive the face value of the bond.a. What is the most that you should pay for the bond if your minimum acceptable rate of return(MARR) is 15%?b. Will the purchase price change up or down if the MARR decreases? Explain your answer.c. In addition to the information above, you expect an inflation rate of 7%. The payments from thebond are fixed and are not affected by inflation. You require a real rate of return of 15%. Writea formula with which he can compute the purchase price of the bond in this case. Shownumerical interest rates in your formula.5. (12 Points) A company is considering producing a new product. The manufacturing processcan either be based on manual operations or robotic machines. The manual option costsnothing to install, has operating cost of $300,000 per year and will last indefinitely. The roboticoption costs $1,000,000 to install, has no annual operating cost, but will last only 3 years. Themanual option has no salvage value, but the robotic option has a salvage value of $500,000when you sell it after 3 years. Both methods produce the product equally well. Neglectinflation for this problem. Do an after tax analysis to help the company make the right choice. The robotic option isdepreciated with the ACRS method using the 3-year class. Depreciation percentages are shownbelow. The tax rate is 40%. The company’s after tax MARR is 15% per year.Year Percent1 33.33%2 44.45%3 14.81%4 7.41%6. (10 Points) You have three options to perform some function. The required investment andannual costs are shown below. Use a rate of return analysis to select the best. All three optionshave 0 salvage. Your MARR is 20%. Compute rates to nearest interest rates given in the tablesat the end of the test.Option A B CInvestment 250 300 215Annual Cost 50 55 60Life 5 10 5Version A Name______________________________47. (12 Points) A chemical plant stores raw materials, finished goods and intermediate products intanks. The materials are pumped to and from the various processing operations through pipes.There are several pumps in the system. The original investment in the pumps was $500,000when they were purchased 3 years ago. Unfortunately, there must be a design problem becausethe pumps are leaking. Last year $180,000 was spent to replace seals and to clean up


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