Kathmandu University

School of Engineering
Bachelor in Engineering Year III Semester I 2021
MGTS 301 Engineering Economics - Internal Assessment II

Attempt all the questions:

1. An office supply company has purchased a light duty truck for $15,000. It is anticipated that the
purchase of the truck will increase the company’s revenue by $10,000 annually, while the
associated operating expenses are expected to be $3,000 per year. The truck’s market value is
expected to decrease by $2500 each year in service. If the company’s plans to keep the truck for
only two years, what is the annual worth of this investment? The MARR is 18% per year.

2. A small business owner estimates that the heat loss through the exterior walls of their warehouse
will cost approximately $4,000 next year. A local company is offering insulation that can reduce
the heat loss by 80%. With an installation cost of $17,000 now the business owner intends to keep
the warehouse for 10 years. If the cost of the heat loss increases by $300 per year, after next year,
what is the IRR?

3. A retrofitted space-heating system is being considered for a small office building. The system can
be purchased and installed for $120,000, and it will save an estimated 300,000 kilowatt-hours
(kWh) of electric power each year over a six-year period. A kilowatt-hour of electricity costs
$0.10, and the company uses a MARR of 15% per year in its economic evaluations of refurbished
systems. The market value of the system will be $8,000 at the end of six years, and additional
annual operating and maintenance expenses are negligible. Use the benefit–cost method to make a
recommendation.

4. In the production of anti-depression tablets, Company X has purchased a property for $840,000
that contains an estimated 40,000 tons of anti-depression tablets. The salvage value of the property
when replaced after 40,000 tons is $40,000. Compute the depreciation charges for the first two
years for Company X, if a production of 3000 tons and 5000 tons are planned for years 1 and years
2 respectively.

5. Potable water is in short supply in many countries. To address this need, two mutually exclusive
water purification systems are being considered for implementation in China. Doing nothing is not
an option. Assume the repeatability of cash flows for alternative 1.

System 1 System 2
Capital Investment $100,000 $150,000
Annual Revenues $50,000 $70,000
Annual Expenses $22,000 $40,000
Useful life 5 years 10 years
IRR 16.5% 15.1%
a. Use the PW method to determine which system should be selected when MARR=8% per year.
b. Which system should be selected when MARR=12% per year
6. An assembly operation at a software company now requires $100,000 per year in labor costs. A
robot can be purchased and installed to automate his operation. The robot will cost $200,000 and
will have no market value at the end of the 10 years study period. Maintenance and operation
expenses of the robot are estimated to be $64,000 per year. Invested capital must earn at least 12%
per year. Use the IRR method to determine if the robot is a justifiable investment.
7. Casio Systems is purchasing a new bar code scanning device for its service centre in San
Francisco. The table that follows lists the relevant cost items for this purchase. The operating
expenses for the new system are $10,000 per year, and the useful life of the system is expected to
be five years. The salvage value for depreciation purpose is equal to 25% of the hardware cost.

Cost item Cost

Hardware $160,000
Training $15,000
Installation $15,000
a. What is the book value of the device at the end of year three if the SL depreciation method is
used?
b. Suppose that after depreciating the device for two years with the SL method, the firm decides to
switch to the double declining balance depreciation method for the remainder of the device’s
life (the remaining three years). What is the device’s BV at the end of four years?
8. A remotely situated fuel cell has an installed cost of $2,000 and will reduce existing surveillance
expenses by $350 per year for eight years. The border security agency’s MARR is 10% per year.
a. What is the minimum salvage (market) value after eight years that makes the fuel cell worth
purchasing?
b. What is the fuel cell’s IRR if the salvage value is negligible?
9. A telecommunications firm is considering a product expansion of a popular cell phone. Two
alternatives for the cell phone expansion are summarized below. The company uses a MARR of
8% per year for decisions of this type, and repeatability may be assumed.

Expansion A Expansion B
Capital investment $1,000,000 $1,250,000
Annual revenue $760,000 $580,000
Annual expenses $500,000 $360,000
Salvage value $100,000 $150,000
Useful life 6 Years 8 Years
Which alternative should be recommended and why?

10. An engineer has two bids for an elevator to be installed in a new building. The details of the bids
for the elevator are as follows.
Engineers' Estimate
Bid
Initial Cost Service Life (Years) Annual Operation & Maintenance Cost
Alpha Elevator Inc. 4,50,000 15 27,000
Beta Elevator Inc. 5,40,000 15 28,500
Determine which bid should be accepted, based on the present worth method and annual worth
method. MARR is 12%.
11. If MARR = 10% per year, which one among the given two MEA should be selected? Explain by
using PW, FW and AW method.
A B
Capital Investment $7000 $10000
Annual Cash Flow $2500 $2850
Useful Life (Years) 4 6
Market Value after useful life $500 $400
12. Find IRR of the following project, with the initial investment of Rs. 5 lakh and the salvage value
of Rs. 1 lakh at the end of 5 years. The annual benefit and operation and maintenance cost are as
follows: Also find ERR if  = 12%.
EOY 1 2 3 4 5
Benefit 105000 115000 125000 135000 145000
O & M Cost 5000 10000 15000 20000 25000

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