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Engineering Economics Mock Exam 3 - CPE 522 - Prof. Marylee Z. Southard, Exams of Engineering

A mock exam for the engineering economics course (cpe 522) focusing on capital budgeting and investment analysis. It includes two problems: the first problem deals with a new chemical process investment and the second problem concerns the production of a proprietary excipient for a drug formulation. Students are required to calculate the net present value, internal rate of return, and break-even point to determine if the investments are profitable.

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2013/2014

Uploaded on 12/15/2014

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Name ___________________________
CPE 522 – Engineering Economics
Mock Exam 3
Monday, November 24, 2008
1. (65 points) A new chemical process is proposed for construction. The unit has an
installed cost of $2.4 million. The table below shows the timing on all investments is given
below.
Operating Working Deprec.
Year Income costs Investment Salvage Capital Factor
0 $2,400,000
1 $200,000 $100,000 $50,000 0.2
2 $1,000,000 $200,000 0.32
3 $1,200,000 $240,000 0.192
4 $1,400,000 $260,000 0.1152
5 $1,500,000 $300,000 0.1152
6 $1,600,000 $350,000 $60,000 $50,000 0.0576
Year
0
1
2
3
4
5
6
The contractor who builds the unit is paid $2.4M in Year 0. This amount is
borrowed at a rate of 12% compounded monthly. The loan is to be paid off in three equal
yearly payments, at the end of Years 1, 2 and 3.
The plant investment should be depreciated using MACRS with a 5 year property
life. Depreciation should start on Year 1. The unit has a salvage value of $60,000.
Working capital of $50,000 is required in Year 1. This amount will be returned at
the end of the unit’s life.
Inflation is estimated at 3% per year for the 6 year life of this project. The dollar
amounts for each year given in the table are in inflated dollars.
The federal income tax rate is 35%. Although the company has other income, the
company policy is to use the carry-back, carry-forward approach to calculation of income
taxes.
The company wants to make a real internal rate of return of 18% on all investments.
Should this project be recommended? Show all calculations necessary to justify your
answer.
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Download Engineering Economics Mock Exam 3 - CPE 522 - Prof. Marylee Z. Southard and more Exams Engineering in PDF only on Docsity!

Name ___________________________

CPE 522 – Engineering Economics

Mock Exam 3

Monday, November 24, 2008

1. (65 points) A new chemical process is proposed for construction. The unit has an

installed cost of $2.4 million. The table below shows the timing on all investments is given

below.

Operating Working Deprec. Year Income costs Investment Salvage Capital Factor 0 $2,400, 1 $200,000 $100,000 $50,000 0. 2 $1,000,000 $200,000 0. 3 $1,200,000 $240,000 0. 4 $1,400,000 $260,000 0. 5 $1,500,000 $300,000 0. 6 $1,600,000 $350,000 $60,000 $50,000 0.

Year 0 1 2 3 4 5 6

The contractor who builds the unit is paid $2.4M in Year 0. This amount is

borrowed at a rate of 12% compounded monthly. The loan is to be paid off in three equal

yearly payments, at the end of Years 1, 2 and 3.

The plant investment should be depreciated using MACRS with a 5 year property

life. Depreciation should start on Year 1. The unit has a salvage value of $60,000.

Working capital of $50,000 is required in Year 1. This amount will be returned at

the end of the unit’s life.

Inflation is estimated at 3% per year for the 6 year life of this project. The dollar

amounts for each year given in the table are in inflated dollars.

The federal income tax rate is 35%. Although the company has other income, the

company policy is to use the carry-back, carry-forward approach to calculation of income

taxes.

The company wants to make a real internal rate of return of 18% on all investments.

Should this project be recommended? Show all calculations necessary to justify your

answer.

Name ___________________________

2. (35 points) Your company makes the proprietary excipient for a new slow-release

drug formulation. This excipient is mixed with the drug powder itself before

compression into tablets. The company currently purchases the 5000 kg/year of the

excipient powder for $25/kg. Alternatively, the company can produce the excipient in-

house for $5/kg but there will be costs for the new production line. They are:

Initial equipment cost = $150,000 Salvage = 10% of first cost

Operating and labor costs = $35,000 / year MARR = 12%

Project life = 5 years

a) Determine the mass of excipient that must be produced (in kg/year) to break

even between the two options.

b) Do you recommend making or buying the excipient?

CPE 522

Equation Sheet

B - D

P - S

D =

N

benefits - disbenefits - M&Ocosts

%= initial investment