TEST 2

Engineering, Economics & Entrepreneurship (GDB3023)

02.04.2019
08.00 – 9.30 PM

1.0
Ahmad is considering constructing a plant to manufacture a new product. The data is
given in Table 1.
Table 1

No Item Amount (RM)

1 Land Cost 250,000
2 Building Cost 550,000
3 Equipment Cost 250,000
4 Additional Working Capital 100,000

It is expected that the product will result in sales of RM750,000 per year for 10 years, at
which time the land can be sold for RM400,000, the building for RM350,000, and the
equipment for RM50,000. All of the working capital would be recovered at the EOY 10.
The annual expenses for labour, materials, and all other items are estimated to total
RM475,000. It the company requires a MARR of 15% per year on project of comparable
risk,
a. Draw the cash flow diagram.
b. Determine if is should invest in the new product line. Use AW method.
(25%)

2.0
The world’s largest carpet maker has just completed a feasibility study of what to do with
the 16,000 tons of overruns, rejects and remnants it produces every year. The company’s
CEO launched the feasibility study by asking, why pay someone to dig coal out of ground
and then pay someone else to put our waste into a landfill? Why not just burn our own
waste? The company is proposing to build a $10-million power plant to burn its waste as
fuel, thereby saving $2.8 million a year in coal purchases. Company engineers have
determined that the waste-burning plant will be environmentally sound, and after its four-
year study period, the plant can be sold to a local electric utility for $5 million.
a. Draw a cash-flow diagram of this situation.
b. What is the IRR of this proposed power plant? Show the linear interpolation
diagram and all associated calculations in detail.
c. If the firm’s MARR is 15% per year, should this project be undertaken?

(30%)
3.0
In September of 2016, Andrew purchased 2,000 shares of ABX common stock for
RM75,000. He then sold 1,000 shares to ABC in September 2017 for RM39 per share.
The remaining 1,000 shares were finally sold for RM50 per share in Septemebr 2018.
d. Draw a cash-flow diagram of this situation.
e. What was the ERR on this investment if the external reinvestment rate is 8% per
year?
(20%)

4.0
Your boss asked you to to evaluate the economics of replacing 1,000 60-Watt
incandescent light bulbs (ILBs) with 1,000 compact fluorescent lamps (CFLs) for a
particular lighting application. During your investigation, you discover that 13-Watt CFLs
costing $2.00 each will provide the same illumination as standard 60-Watt ILBs costing
$0.50 each. Interestingly, CFLs last, on average, eight times as long as incandescent
bulbs. The average life of an ILB is one year over the anticipated usage of 1,000 hours
each year. Each incandescent bulb costs $2.00 to install / reaplce. Installation of a single
CFL costs $3.00, and it will also be used for 1,000 hours per year. Electricity costs $0.12
per kiloWatt hour (kWh), and you decide to compare the two lighting options over an 8-
year study period. If the MARR is 12% per year, compare the economics of the two
alternatives and write a brief report of your findings for the boss.

(25%)