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UNIVERSITI TEKNOLOGI P ETRONAS

FINAL EXAMINATION SEPTEM BER 2012 SEM ESTER

COURSE :
cCB3173 / GBB3173

- ENG|NEER|NG ECONOMTCS
& ENTREPRENEURSHIP

DATE TIME

: :

9.00 AM

12.00 NOON (3 hours)

INSTRUCTIONS TO CANDIDATES

1. 2. 3. 4. 5. 6.

Answer ALL questions in the Answer Booklet. Begin EACH answer on a new page. lndicate clearly answers that are cancelled, f any. Where applicable, show clearly steps taken in arriving at the solutions and indicate ALL assumptions, if any. Do not open this Question Booklet until instructed. Discrete Compounding Table is available in the Engineering Data & Formulae Booklet.

Note

i. ii.

There are SIX (6) pages in this Question Booklet including the cover page. Graph Paper & Engineering Data & Formulae Booklet will be
provided.

GBB 3173
1.

A road building contractor has secured a major highway construction contract

that will require 50,000 cubic meters of crushed stone every year for four years. The crushed stone can be obtained from a nearby quarry for \$6 per cubic meter.

As an alternative, the contractor is considering to purchase a quarry. lf he owns

the quarry, the crushed stone would only cost him \$4.50 per cubic meter. He anticipates that the qua,rry can be sold for \$50,000 at the end of the fourth year.
The contractor uses a minimum attractive rate of return (MARR) o'f 15% per year for any new nvestment.

a.

How much would he be willing to pay for the quarry? Show your
calculation. [10 marks]

b.

How rnuch would the contractor be willing to pay for the quarry lf his
MARR is 10% per year? Justify.

GBB 3173
2.

An old asset was purchased five years ago for \$75,000. lt can be sold today for

\$15,000. The operating expenses n the past have been \$10,000 per year. However, it is estimated to increase in the future by \$1,500 every year over the
next five years. lt is estimated that the market value of the asset will decrease by

\$1,000 every year over the next five years. The company uses a minimum attractive rate of return (MARR) of 10% per year. Determine the total marginal
cost of ownership of this old asset for each of the next five years. Use,the format shown in TABLE Q2 for your analysis.
[15 marks]

TABLE Q2: Format for the Calculation of Total (marginal) Gost (TC,)
End of Year, k
MV, End of

Year, k
(\$)

(\$)

(\$)

Annual Operating Expenses (\$)

cB,B 3173

3.

A frm is evaluating the cash flows of two alternatives as illustrated in TABLE Q3. The firm's minimum attractive rate of return (MARR) is 10% per year.

TABLE Q3: Cash Flows of Two Alternatives

End ofYear
0
1

-90 25 25 25 25 25 25 40
70
0 10

3 4
5 6

90

a.

Which of the above two alternatives is preferred based on discounted

payback period? Show your calculation. [10 marks]

b. c.

Which is the preferred alternative using future worth analysis? Explain. [12 marks]

ls there any difference in your answer between Q3a and Q3b? Provide
TWO (2) reasons for your justification.

GBB 3173
4

large profitable corporation, is considering adding some automatlc equipment to its production facilities. An investment of \$500,000 will produce annual net revenue of \$120,000 for a useful life of 10 years. lt is

expected that the salvage value of the automatic equipment at the end of the

tenth year is \$80,000. The company uses a minimum attractive rate of return (MARR) of 20% per year and the rate of income tax is 30% per year.

a.

Calculate and tabulate the yearly after-tax cash flows for the above
investment proposal. The company uses straight-line deprecation method in estimating the depreciation allowance of its assets. [10 marks]

b. c.

[2 marks]

of return (ERR) of the above

investment

based on the after-tax cash flows, given the rate of external reinvestment
(e) is 15% per year. Show your calculation.

[10 marks]

d.

Provide your recommendation on the feasibility of the above investment.

Explain.

[3 marks]

GBB 3173
5.

A capital investment of \$2 million is made now. lt is expected to generate net annual revenue of \$0.75 million over a six year planning horizon. The salvage
value of the investment is estimated at \$0.2S million at the end of tf:e sixth year. The minimum attractive rate of return (MARR) is 10% per year.

a.

b.

Graphically plot an nvestment-balance diagram for the above investment.

c.

Provide THREE (3) valuable points relating to the capital investment that
ean be obtained from the investment-balance diagram in Q5b..

-END OF PAPER-