IENG 377 Engineering Economy

Fall 2007 Exam 2

Name:_____________________________________ Row:____________ Seat Number:____________

Work on your own. Answers without proper support wont earn any credit. Use 2 decimal places for final answer unless otherwise specified. Please circle all answers. 1. ABC Manufacturing hired three interns to design a new production process for making leather footballs. The three design alternatives being considered will have capital investment and annual savings as shown in the table below. Assume a useful life of 5 years for each design, no market salvage value, a desired MARR of 10% and an analysis period of 5 years. Unfortunately, ABC Manufacturing hired interns from 3 different schools. Each intern estimated the annual savings differently. Alternative B (Louisville) 760,000 68,000 Not estimated 600,000 Not estimated

Investment Annual Savings Productivity Reduced scrap Fewer injuries Overhead

A (Pitt) 1,240,000 68,000 40,000 660,000 Not estimated

C (WVU) 300,000 120,000 65,000 420,000 25,000

a. For each alternative, what total amount of annual savings should be used in the comparison calculations? A. ____________ B. ____________ C. ____________ b. Calculate the present worth for each alternative. A. ____________

B. ____________

C. ____________

Name:______________________

IENG 377 Engineering Economy

Fall 2007 Exam 2

c.

Which design should be selected on the basis of the Present Worth method?

d. Which design should be selected on the basis of the ROI method?

2.

Two economic alternatives are being considered for the construction of a new computer lab at WVU. Assume no market salvage value at the end of the useful life. Information for the two alternatives are listed below. Assume a MARR of 15%. Alternative Capital investment Annual expenses Useful life (years) A 272,000 28,800 6 B 346,000 19,300 9

a. Using the coterminated assumption and future worth method, which of the two alternatives should be selected?

Name:______________________

IENG 377 Engineering Economy

3.

Fall 2007 Exam 2

The following four alternatives are being considered for a project to increase the fast food sales in the Mountainlair. Assume a MARR of 10%, a useful life and study period of 5 years, and no salvage value for each of the alternatives. Alternative A B $100 23 ?% $150 60 29% C $300 85 13% D

Table 3a

Capital Investment Annual Cash Flow IRR

$50 30 53%

a. Calculate the IRR for alternative B. Choose either 5% or 15%.

b. Which of the alternatives, if any, is not a feasible alternative AND WHY?

Use the table below for questions c and d. Table 3c Incremental Analysis of Alternatives A (C-A) (D-C) Capital Investment Annual Cash Flow $50 30

c.

53% 15% -6% IRR Using values from table 3a, fill in Capital Investment and Annual Cash Flow for (C-A) and (D-C) in table 3c.

d. Which alternative should be chosen based on the incremental investment analysis procedure?

Name:______________________

IENG 377 Engineering Economy

4.

Fall 2007 Exam 2

In year 2000, GE Aviation was considering a long term contract to supply 20 GE-90 aircraft engines per year to Airbus for 5 years (ending in 2004). The sales price of 1 engine was $1.25 million in 2000. The contract stated that Airbus would pay GE on the last day of each year. The price per engine would remain constant at the year 2000 price (i.e. no inflation) and currency would remain constant. If Airbus pays in Euros, GE would immediately exchange the Euros to US Dollars (USD) at the time of payment. Table 4: USD to Euro exchange rate End of Year FX (USD to Euro) 2000 .9731 2001 1.0502 2002 1.1204 2003 .9222 2004 .7786 2005 .7382 a. Using table 4 above, what was the price of 1 engine in Euros in 2000?

b. Using the Euros price calculated in part A, how much revenue would GE earn in USD each year if they agreed to be paid in Euros?

2000 2001 2002 2003 2004

c. If GE was given the option to sell the engines at $1.25 million/engine or the Euros price calculated in part A, which option should they choose? (Assume that GE uses US dollars as its home currency.)

Name:______________________