8/10/2019 Information and Practice Midterm Fall 2013

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IE 1040 – Engineering Economic Analysis Fall 2013

Midterm Exam Information and Practice Exam

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I.E. 1040 Midterm Exam Information

Thursday October 17, 2013

The exam will cover Chapters 1-8&17 (everything covered up through the last class before the exam).

Exam support:  The exam will be closed book and closed notes.

  Copies of the interest factor tables will be provided (Appendix C).

  In addition, I will provide any formulas I believe necessary for problem solving. You will not be expected tohave any formulas memorized.

  Bring your calculator!

There will be about 7-8 problems with multiple parts, similar in nature to the homework and quiz problems andthe problems on this practice exam.

The entire exam will be worth 100 points with the points divided based on the length and difficulty of theproblems. I will note the amount of points each problem is worth.

You may have the entire class period to complete the exam.

Practice Exam

1.  Sample short answer questions … a)  List and describe at least two possible decision-making criteria.b)

 

Describe 3 possible Economic Environments in which a business might be marketing their products.c)  Explain the difference between fixed and variable costs.d)

  What is an “index”? 

2.  A farmer estimates that if he harvests his soybean crop now, he will obtain 1,000 bushels, which he can sell

at $3.00 per bushel. However, he estimates that this crop will increase by an additional 1,200 bushels ofsoybeans for each week he delays harvesting but that the price will drop at a rate of 50 cents per bushel perweek. In addition, it is likely he will experience spoilage of approximately 200 bushels per week for eachweek he delays harvesting. When should he harvest his crop to maximize revenues and how much revenuewill he earn at that time? Note that partial weeks are allowed. ( Answer is 2.5 weeks with revenues of $6,125.)

3.  The community of Upper Snowshoe has expanded its winter tourism very rapidly. Three years ago, it builta new 16,000 kW power plant for $4,500,000. The local construction cost index was 157 at that time andhas risen to 170 now. What is the estimated cost of a 20,000 kW power plant now? Assume a cost capacityfactor of .88. (Answer is $5,929,835.) 

4.  The total fixed costs for manufacturing a product each month is $8,000. The variable cost per unit consistsof direct labor, material and overhead. The labor will be based on the 25th unit and an 85% learning curveis expected to apply to the number of hours per unit. The first unit took 0.5 hours. Labor is charged at $18per hour and overhead is charged at 150% of the direct labor. Material costs are $7.00 per unit. Marketingexpects that the price of the product and the demand will be related such that p=$.90-0.12D. Determine theoptimal demand per month and the profit at that demand. (Answer is 302 units at a Profit of $2,926 permonth.) 

8/10/2019 Information and Practice Midterm Fall 2013

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IE 1040 – Engineering Economic Analysis Fall 2013

Midterm Exam Information and Practice Exam

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5.  a. If you wish to have $250,000 in a savings account at the end of 10 years and you expect the account toearn a nominal rate of 6% per year compounded monthly how much will you need to deposit per month?(Answer is $1525.) b. If Miss Taylor finances $200,000 for a home at a nominal rate of 5.3% compounded monthly for 30 years,what will her monthly payment be? (Answer is $1,111.)

c. A company wishes to make an investment now that is expected to generate a profit of $20,000 next yearand decrease by $500 each year thereafter for a total of 20 years. How much should the company bewilling to invest if they prefer to earn 10% per year on their investments? (Answer is $142,568.)d. Suppose I invest $10,000 today and would like to have $20,000 five years from now. What interest mustI earn per year? (Answer is 14.9 %.)

6.  A company is considering some new equipment to improve an operation on its assembly line. The initialinvestment would be $33,000 with annual operating and maintenance expenses of $6,000. The companyexpects material and labor savings from this investment of $14,000 per year. Finally, they believe theycould salvage the equipment for 10% of the investment cost at the end of its useful life of ten years.

a.  Use one of the equivalent worth methods to determine whether this is an economically profitable

investment if the company uses a MARR of 8%.  Answer: PW = $22,209.36 or AW = $3,310; Yes economically profitable.

b.  Determine the IRR of this investment.  Answer: 21.04%

7.  Let the investment described in question 5 be option A and suppose the company could instead purchasesome more expensive equipment with an initial cost of $40,000 (call this option B) that would lower theannual operating costs to $5,000. Assume annual savings from the investment remains the same and thesalvage value would be 10% of the initial cost at the end of a 10 year life in either case.

a.  Based simply on an economic comparison which option should the company select? Use whichever

method you prefer to make your choice.  Answer: PW of B = $22,243.70 thus pick option B or IRR Δ =a littleover 8% so B is acceptable.

b. 

What other criteria might play a role in this decision? Answer: Safety, Quality, Reliability, Environmental,etc.