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.
