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Exam 3 - Fall 2008 | Engineering Economics | C&PE 522, Exams of Engineering

Material Type: Exam; Professor: Southard; Class: Econ Appraisl Chem&Petrl Prjct; Subject: Chemical & Petroleum Engr; University: University of Kansas; Term: Fall 2008;

Typology: Exams

2013/2014

Uploaded on 12/15/2014

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Name ___________________________ A
CPE 522 Engineering Economics
Exam 3
Tuesday, November 25, 2008
1. (65 points) Bowersock, Ltd. operates the dam on the Kansas River, just east of the
Massachusetts St. bridge. Their engineers propose a system to sell the water-
generated electricity to the regional power company, Westar. They will require
equipment and transmission lines to reach the nearby transformer station, and the
purchase of a small amount of land. The timing of investments and cash flows is shown
in Table 1 on the next page.
The land will be purchased for $50,000 in Year 0. The total investment (purchase of the
installed equipment and lines) is $500,000. One-half ($250,000) will be paid at the end
of Year 1 from company funds. The other half will be paid at the end of Year 2, but it
will be borrowed at an interest rate of 8%, compounded annually. This $250,000 loan
will be paid off in 3 equal payments, at the end of Years 3, 4 and 5.
The equipment part of the investment is classified as a 5-year property for purposes of
depreciation. Depreciation should start in Year 3, using the MACRS model. The
equipment does have a salvage value -- $30,000 which should be treated as ordinary
income in Year 8.
At the end of the project life (Year 8), the land will be sold for $68,000. This is profit
(like the salvage) and should be treated like ordinary income. The $35,000 spent as
working capital in Year 2 is returned as a positive cash flow in Year 8, as well.
The federal income tax rate for this company is 35%. The numbers on the table take
into account a 4% inflation rate. That is, each year’s amounts are in ‘then current’
dollars.
If Bowersock must make a ‘real’ (constant dollar) internal rate of return (IRR) of
15%, should they do this project?
Show your calculations, assumptions and answer clearly on the next page, or reference
any other page you use.
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Name ___________________________ A

CPE 522 – Engineering Economics Exam 3 Tuesday, November 25, 2008

1. (65 points) Bowersock, Ltd. operates the dam on the Kansas River, just east of the Massachusetts St. bridge. Their engineers propose a system to sell the water- generated electricity to the regional power company, Westar. They will require equipment and transmission lines to reach the nearby transformer station, and the purchase of a small amount of land. The timing of investments and cash flows is shown in Table 1 on the next page.

The land will be purchased for $50,000 in Year 0. The total investment (purchase of the installed equipment and lines) is $500,000. One-half ($250,000) will be paid at the end of Year 1 from company funds. The other half will be paid at the end of Year 2, but it will be borrowed at an interest rate of 8%, compounded annually. This $250,000 loan will be paid off in 3 equal payments, at the end of Years 3, 4 and 5.

The equipment part of the investment is classified as a 5-year property for purposes of depreciation. Depreciation should start in Year 3, using the MACRS model. The equipment does have a salvage value -- $30,000 – which should be treated as ordinary income in Year 8.

At the end of the project life (Year 8), the land will be sold for $68,000. This is profit (like the salvage) and should be treated like ordinary income. The $35,000 spent as working capital in Year 2 is returned as a positive cash flow in Year 8, as well.

The federal income tax rate for this company is 35%. The numbers on the table take into account a 4% inflation rate. That is, each year’s amounts are in ‘then current’ dollars.

If Bowersock must make a ‘real’ (constant dollar) internal rate of return (IRR) of 15%, should they do this project?

Show your calculations, assumptions and answer clearly on the next page, or reference any other page you use.

Name ___________________________ A

  1. (35 points) A stirred tank reactor has a sophisticated reactant injection system which must be replaced soon. You have inspected the current system, manufactured by StreamJet. And you have received technical information from a competitor, AutoJet.

Although the two injectors appear equivalent in their quality and performance, their costs are very different, as shown on the table below.

StreamJet AutoJet

Initial cost, $ $4000 $10,

Life, years 3 6

Rebuild cost, $ $1000 $ 2200

Operating time before rebuild, hrs 2000 6000

Operating cost, $/hr $1.00 $0.

Given a MARR of 10%: a) Determine the hours per year required to breakeven between the two options. Try an AW calculation.

b) If the injector system is used 7 hours per day, 365 days per year, which is the better investment?