IENG 302Engineering Economics09/24/2018
ENGINEERING ECONOMICS
EXAM II
Score:_____
Possible: 85
Last Name:______First Name:______
Instructions:Complete this exam using only your engineering notebook, and calculator. Do not separate the pages of this exam.
For each problem, provide the following details:
- Cash flow diagram with values and periods illustrated
- Equation(s) used to solve the problem, with the values used, ex.: $2000 (P|A, 4%, 22)
- For each part of each problem, double underline the answer and associated units
All interest rates given are the APR, unless otherwise stated. Point values for all questions are shown. Note any necessary assumptions, and show your work legibly to obtain credit.
Do not open or start this exam until instructed. The exam is 50 minutes in length.
- (30 pts, total) The town of Dike, IA has a grass airstrip that has earned 6% per year (annual compounding). One day down at the diner, the boys get to thinking that if they were to put up a pole building, put in alounge, and change the name to the Dike International Airport, it might make a few bucks more. Set up the table of project information (below), then perform anEquivalent AnnualWorth INCREMENTAL ANALYSISto advise the airport manager (the local garage mechanic) on the best option of the four:
Option JBW – Joe Bob Williamson says he can put up the building for $17 000 right away; maintain, operate and collect revenues to provide a net annual income of $2 875; and then salvage the stuff for $500 at the end of the fifth year. The entire project can be repeated, if longer operation is desired.
Option BJR – Billy Joe Robertson says he can put up that building for an initial price of $14 575; maintain it, operate the lounge, and still make $2125 per year in revenue. At the end of 10 years, he says he can get $500 at the junk yard for the whole lot.
Option BBJ – Billy Bob Josephsonclaims that he can exactly match Billy Joe’s annual revenues, but if the town will put in $16 800 up front, he knows a metal recycler that will give them $1 800 for everything at the end of the 10 years.
Table Data Option DNOption ______Option ______Option ______
Interest Rate 6% 6% 6% 6%
Lifetime
1st Cost
Annual Revenue
Salvage
(Theblank space below is for your purposes. More blank space is available on the back page, if necessary)
a.)(10 pts) 1st comparison - Current Best Option: ______, Comparison Option: ______.
(put comparison equation in table factor form, then solve and give the resulting best option)
b.)(10 pts) 2nd Comparison - Current Best Option: ______, Comparison Option: ______.
(put comparison equation in table factor form, then solve and give resulting best option)
c.)(10 pts) 3rd Comparison - Current Best Option: ______, Comparison Option: ______.
(put comparison equation in table factor form, then solve and give resulting best option)
- (10 pts) Assume that the net present worth of the best DikeInternationalAirport construction option to date is $3500over a 12-year lifetime at a 6% MARR compounded annually. Robert William Josephson returns from an institute of higher education and says that he can build the airport building for an initial $13 000, generate a net revenue of $3 500 at the end of each year, and obtain $2300 salvage value at the end of four years. He also says that he can repeat this project for the same costs as long as necessary. Perform a Net PresentWorth comparison by setting up the appropriate equation in table factor form, solving it, and then decide if the RWJ Option is better or worse than the current construction option.
- (20 pts, total) Billy Joe Robertson has a sister named Billie Sue who sits on the CountyBoard of Supervisors. She figures that with a slight rezoning change, they can build an airstrip next to the existing Grundy County Diner for $8 000 in first costs, and mow it for $200 yearly (assume the mowing contractor is paid only at the end of each year). Thenew airstrip would need re-leveling and re-seeding every five years at a cost of $1500, and the old airstrip must be decommissioned by the FAA at a one-time cost to the county of $1 700 which would occur at the end of year two. Using a 6% interest rate, find the capitalized cost of constructing and maintaining the DikeInternationalAirport next to the diner forever.
a.)For the non-recurring cash flows, draw a cash flow diagram (2 pts), then set up your equation in table factor form and find the capitalized costfor this portion of the problem (6 pts).
b.)For the recurring cash flows, draw a cash flow diagram (2 pts), then set up your equations in table factor form and find the capitalized cost for this portion of the problem (8 pts).
c.)Solve the problem by estimating the Total Capitalized Cost to the nearest dollar. (2 pts).
- (25 pts, total; 5 pts bonus) Joe Bob’s sister, Bobbie Sue Williamson is an engineer with an option to buy a 25 year bond issued by the Jameson Company that has a face value of $50 000, and 12½ years remaining to maturity. Answer the following:
a.) (5 pts) If the coupon rate is 4.25% annually and dividends are paid quarterly, how much is the dividend?
b.) (10 pts) Assume that the actual dividend is $575 per quarter, and Bobbie Sue wants an MARR of 2% per quarter, compounded quarterly. What is the maximum price she could pay for the bond? (Put the equation in Table Factor form with the appropriate values, then calculate the answer to the nearest dollar.)
c.) (10 pts) If Bobbie Sue buys the bond for $40260, with the $575 per quarter dividend, estimate the yield to maturity as a quarterly ratethat she will obtain (estimated to the nearest ¼%). (Put the equation in Table Factor form with the appropriate values, then solve & identify your final answer. Hint: i* < 6%)
d.) (4 pts, bonus) If Bobbie Sue buys the bond and holds it to maturity as described in (c.), what is her annual yield rate?
(The rest of this page is blank. You may use it for extra calculation space as needed.)
This is the end of the test. Please put your name on the front of this exam, and quietly return this exam as you exit the room.
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