The Islamic University of Gaza

Industrial Engineering department

Engineering Economy, EIND 4303
Instructor: Dr. Mohammad Abuhaiba, P.E.
Fall 2011

Exam date: 16/11/2011

MidTerm Exam (Open Book)

Questio

Exam Duration: 1.5 hours

Maximum
Grade

n
1
2
3
4
5
6
7
8
Total

Grade
15
6
7
8
13
9
8
8
74

Question #1: (15 points)

A company has determined that the price and the monthly demand of one of its
products are related by the equation
D= 500 p
Where p is the price per unit in dollars and D is the monthly demand. The
associated fixed costs are $1100/month, and the variable costs are $100/unit.
a. What is the optimal number of units that should be produced and sold each
month?
b. What are the values of D at which the company break even?

Solution:
a) D = 500P

(1)

P = 500 D2

(2)

(1)

(1)

D 2=500P

R=PD=D ( 500D2 )=500 DD 3

(2) CT =1100+ 100 D

Profit=P=RCT =500 DD3 1100100 D
D 31100 ( 2 )

D 400 =

dP
=0=4003 D2 ( 2 )
dD
400
D 12 units ( 1 )
3

2
= D

b) Company breakeven when P = 0 = 400 400

D 1100 ( 1 )

Solve for D:
D1 = 3 units
D2 = 18 units

(1)
(1)

Question #2: (6 points)

The future cost of a machine will be $250,000 in 10 years at an APR of 7%
compounded annually. What is the present cost?

Solution:
F = $ 250,000

(1) , N = 10 years (1) , i= 7% (1)

P=?
P = F(1+i)

-n

= 25000 x 1.07

-10

= $12,709

Question #3: (7 points)

What is the present worth of a series of 12 monthly payments at $300 with an 9%
APR compounded monthly?

Solution:
A = $300

(1) , N = 12

(1) , r = 9%

(1),

i= 12 =0.75 ( 1 )
p=?
P = 300 (P/A, 0.75, 12)

(2)

= 300 x 11.4349 = $ 3430

(1)

Question #4: (8 points)

Calculate the future equivalent at the end of 2011, at 8% per year, of the following
series of cash flows in the figure below. Use a uniform gradient amount G in your
solution.
200

200

201

201

$700

$800
$900
$100

Solution:
(cash flows each 1 mark )
0

800
1000

700

900

300
300
200
100

F
0

5
0

1000

F = - 1000 (F/A, 8%, 4) ( F/P,8%,1) + 100(F/G,8%,4)(F/P,8%,1)

(4)

= - 1000 x 4.5061 x 1.08 + 100 x 6.3264 x 1.08

= - $4183 (1)

Question #5: (13 points)

Determine the present equivalent value of the cash flow diagram of the figure
below when the annual interest rate, ik, varies as indicated.
P=?
$200

$200
$100
i = 6%
0

i = 6%

i = 8%
2

$100
i = 4%
3

i = 8%

i = 4%
5

Solution:
P = 200(P/F,6%,1) + 100(P/F,8%,1)(P/F,6%,1) + 200(P/F,4%,1)
(P/F,6%,1)(P/F,8%,1)(P/F,6%,1) + 100(P/F,8%,1)(p/f,4%,2)(p/f,6%,1)
(P/F,8%,1)(P/F,6%,1)
200

100

200

100

= 1.06 1.08 X 1.06 1.04 X 1.06 2 X 1.08 1.082 X 1.042 X 1.062

= $505

Question #6: (9 points)

A small company heats its building and spends $8000 per year on natural gas for
this purpose. Cost increases of natural gas expected to be 10% per year starting
one year from now (i.e. the first cash flow is $8000 at EOY one). Their maintenance
on the gas furnace is $400 per year, and this expense is expected to increase by
10% per year starting one year from now. If the planning horizon is 10 years, what
is the total annual equivalent expense for operating and maintaining the furnace?
The interest rate is 18% per year.

Solution:
f=10%

(1) ,

i=18%

(1)

The cash flow (1 mark)

P = 8400 [1- (P/F,18%, 10)(F/P,10%,10)]
=105,000[1- 1.18

-10

x 1.1

(each term with 1 mark)

] = 52, 9656 (1)

10

A = 52965 (A/P,18%,10) (1)

= 52965 x 0.22254 = $ 11,785 (1)

Question #7: (8 points)

An office supply company has purchased a light duty delivery truck for $20,000. It
is anticipated that the purchase of the truck will increase the companys revenue
by $10,000 annually, while the associated operating expenses are expected to be
$2000 per year. The trucks market value is expected to decrease by $3000 each
year it is in service. If the company plans to keep the truck for only two years, what
is the annual worth of this investment? The MARR = 15% per year.

Solution:
Cash flow (2 marks)
MARR = 15%
A = - 20(A/P,15%,2) + 8 + 14(A/F,15%,2)
= - 20 x 0.6151 + 8 + 14 x 0.4651
= $2,209

(3)

(2)

(1)

Question #8: (8 points)

A computer call center is going to replace all of its incandescent lamps with more
energy efficient fluorescent lighting fixtures. The total energy savings are
estimated to be $2000 per year, and the cost of purchasing and installing the
fluorescent fixtures is $5000. The study period is six years, and terminal market
values for the fixtures are negligible.
a. What is the IRR of this investment?
b. What is the simple payback period of the investment?

Solution:
a) Cash flow (1 mark)
PW = -5000 + 2000(P/A,i%,6)
(P/A,i%,6) = 2.5

(2)

(1)

(i)
30
?
35
The interpolation (2 marks)
I= 30+5 x

P/A
2.6427
2.5
2.3852

( 2.52.6427 )
=32.77 ( 1 )
( 2.38522.6427 )
5000

Simple payback period = 2000

3 years

(1)