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IEEN 5329 Advanced Engineering Economy Analysis Fall 2020 Test 2 1

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IEEN 5329 Advanced Engineering Economy Analysis Fall 2020 Test 2

1. (20 points) The expansion of the Wideplace Mall is delayed over the issue of parking.  There is not enough now to support the new facility and more must be added.  Let's suppose that there are 3 options:  buying more land, filling wetlands at the rear of the site, or building a multilevel garage on the present lot.  Assume a forty-year planning horizon and an interest rate of 9% per year.  Use present worth analysis and the data below to determine which option should be selected.

 

	Purchase Land	Fill Wetlands	Garage
Initial Cost, $	$12,000,000	$19,000,000	$44,000,000
Annual Benefit, $ per year	0	0	4,000,000 (parking fees)
Annual Cost, $ per year	200,000	160,000	2,900,000

 

 

2.  (20 points) Your company needs a small front-end loader for handling bulk materials at the Wideplace plant.  It can be leased from the dealer for three years for $4050 per year including all maintenance.  It can also be purchased for $14,000.  You expect the loader to last for six years and to have a salvage value of $3000.  You predict that maintenance will cost $400 the first year and increase by $200 per year in each year after the first.  Your MARR is 15% per year. Use AW analysis to determine whether to lease or buy the loader. 

 

3. (20 points) For the cash flow series below, calculate the composite rate of return, using a reinvestment rate of 14% per year.

Year	Cash Flow, $
0	3000
1	-2000
2	1000
3	-6000
4	3800

 

4. (20 points) The State Department of Excessive Spending (DES) is planning to build a new office building for the Bureau of Eternal Taxation (BET) near Wideplace. Four proposed sites are to be evaluated.  Any of these sites will save the state $750,000 per year because the space for BET will no longer need to be rented from the private sector. Use any proper analysis approach with a 6% per year interest rate and assumes that the building and its benefits will last for 40 years.  Which, if any, site should DES choose?

 

 

Site	Here	Near	Far	Farther
Initial Cost	$8,600,000	$8,100,000	$7,500,000	$6,800,000
Annual Operating Cost	$160,000	$ 200,000	$240,000	$300,000

                                                  

 

5. (20 points) Solve this problem in Excel. The following two alternatives are mutually exclusive. 

(a) Which one will you select if your MARR is 15% per year? Use rate of return analysis.

(b) Graph interest rate vs. present value for both option 1 and 2.

( c) Discuss how your selection between option 1 and 2 will change when MARR is changed and at which interest rate the two options are the same economically. 

 

Alternative	Initial Cost	Annual Benefit	Life, years
Ordinary (O)	$30,000	$9,000	5
Above average (AA)	33,000	9,000	6

                              

 

6. (20 points extra credits) Eighty-five thousand dollars is deposited in a bank trust account that pays 12% interest per year, compounded monthly. Equal semi-annual withdrawals are to be made from the account, beginning six months from now and continuing forever. Calculate the maximum amount of the semi-annual withdrawal.

 

7. (20 points extra credits) A government bond matures in 15 years. The bond pays 6% interest on its face value of $1000 each year. If an investor plan to hold the bond until its mature time and his MARR is 10% per year. How much would the investor willing to pay for purchasing the bond now?