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Instructor Use
Serial
Number
UNIVERSITY OF WINDSOR
FACULTY OF ENGINEERING
Student Name:
Student ID.:
Section No.:
Instructor’s Name:
Notes:
Total Mark
___________________________________________________________________
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2 /15
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4 /25
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6 /10
Total / 100
QUESTION 1 - 10marks
For each of the following problems indicate on the figure at which point in time you are doing the
equivalence
P
01234n $50
$1000
$50
(a) What is the value of n that makes the disbursements equivalent to the receipts, based on a 3%
interest rate?
Solution
P = A (P/A, 3%, n)
$1,000 = $50 (P/A, 3%, n)
(P/A, 3%, n) = 20
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(b) Assuming a 12% interest rate, find the value of J that makes the disbursements equivalent to
6012345 $ J3
5J 2500
46J
JJJ $500
Solution
0P
$500
G
$500
6G
5G
4G
3G
2G
Also:
P = G (P/G, 12%, 7)
$754.50 = G (P/G, 12%, 7)
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= G (11.644)
G = $754.50/11.644
= $64.80
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QUESTION 2 - 15 marks
John bought a car at a local used car lot. Including tax and insurance, the total price was $3000. He
is to pay for the car in 12 equal monthly payments using a Nominal interest of 12% compounded
monthly on the loan, with the first payment due immediately. After six payments, he decides to sell
the car. A buyer agrees to pay a cash amount to payoff the loan in full at the time the next payment is
due and also to pay John $1000. If there are no penalty charges for this early payment of the loan,
how much will the car cost the new buyer? [Cash flow diagram 3Marks]
Solution
10
11
0123456789 Pay
A = off
$3,000
? loan
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QUESTION 3 - 25 marks
Chrysler wants to build a spare parts storage facility in Windsor. A plant engineer has identified four
different location options. Initial cost and annual net cash flow estimates are detailed in the Table
below. If the MARR is 15%, use the IRR analysis to select the economically best location.
Estimates for Four Alternative Building Locations
A B C D
Initial cost, $ -130,000 -150,000 -170,000 -100,000
Annual cash flow, $ +25,000 +30,000 +33,000 +20,000
Life, years 15 15 15 15
P
0123415 $100Project
000
$20 000(D)
Solution
Sort projects in order of least initial cost DABC
P
0123415 $30Project
000
$5 000
(A-D)
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15%< i* < 20% D is current best because i* >MARR
------------------------
Incremental Comparison from DA
A is Challenger
P
0123415 $50Project
000
$10 000
(B-D)
because i* <MARR
-------------------------
Incremental Comparison from DB
B is Challenger
50,000 = 10,000(P/A, i*%,15) (P/A, i*%,15) = 5
if i=20% (P/A,20%,15)= 4.6755
if i=15% (P/A,15%,15)= 5.8474
15%< i* < 20% B is current best because i* >MARR
-------------------------------------
P
0123415 $20Project
000
$3 000
(C-B)
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C is Challenger
20,000 = 3,000(P/A, i*%,15) (P/A, i*%,15) = 6.67
if i=12% (P/A,12%,15)= 6.8109
if i=13% (P/A,13%,15)= 6.4624
12%< i* < 13% C fails test & B is still current best
because i* <MARR
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QUESTION 4 - 20 marks
11
234567890110
$1500
$3000
$1000
$2000
$4000
Years
1$500
$5000
2
PW
P
+31 5
A mechanical engineering student is going to deposit money into her bank account for the following
five years using the pattern shown in figure. She is then planning to withdraw part of her money for
the following 7 years as shown. If she is investing her money at an interest rate of 7% per year, find
net present worth and equivalent annual worth for the shown cash flow diagram.
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11
234567890110
$1000
$5000
$2000
$2500
$4000
$3500
$3000
Years
12
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QUESTION 5 - 15 marks
Only one tester may be bought and the press will not need overhauling if the line improvements are not made. What
mutually exclusive project combinations are available if ABC Auto will invest in at least one project?
[For each infeasible alternative: indicate the reason why you think that the alternative is infeasible]
Solution
There are 7 mutually exclusive projects: {A, B, C, AB, AC, AD, ABD}
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QUESTION 6 - 10 marks
(a) What is the difference in annual worth between an investment of $100, 000 per year for 100
years and an investment of $100 000 per year forever at an interest rate of 10% per year?
Solution:
Other way
For 100 year project
PW100 =100 000 (P/A,10%,100)=100 000
(1 + i ) N − 1 = 100000(1 + 0.1) 100 − 1 = 999927.43
i (1 + i ) 0.1(1 + 0.1)
N 100
A B
Initial cost, $ -60,000 -65,000
Annual cash flow, $ +25,000 +25,000
Life, years 8 8
If the two projects are mutually exclusive and the MARR = 5% which alternative should be taken.
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P
012348 $65 000
$60 $25A
B000
Solution
Since both investments are of equal life and bring an equal +ve cash, than the project with the
smaller investment is the desired one (Select A)
By Calculation
PW(A)= -60 000 +25 000(P/A, 5%, 8) = -60 000 + 25 000 (6.4632) = 101 580
PW(B)= -65 000 +25 000(P/A, 5%, 8) = -65 000 + 25 000 (6.4632)= 96580
Select A
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