UNIVERSITY OF WINDSOR

INDUSTRIAL & MANUFACTURING SYSTEMS ENGINEERING

85-313-(01 & 02)

Engineering Economy
MIDTERM EXAMINATION
th
Saturday, November 4 , 2006 Amr Shabaka & Ayman Youssef
Closed Book Total Marks: 100 Allowed Time: 2 Hours

* Answer All Questions * Be Neat & Precise * Show All Computations

* Draw Cash Flow Diagrams Whenever Applicable
___________________________________________________________________

QUESTION 1 - 30 marks (a = b = c = 10)

Assuming a 10% interest rate, find the value of E that makes the disbursements equivalent to
the receipts in each of the following cash flow diagrams.
$800 $800 $800
(a) E

0 1 2 3 4

E E
1.5E
(b) $120
$90
$60
$30
0 1 2 3 4 5

E E E E E

(c)
$300 $300
$200 $200 $200
$100 $100

0 1 2 3 4 5 6 7

E E
QUESTION 2 - 20 marks

Clem is saving for a car in a bank account that pays 12% interest, compounded monthly. The
balance is now $2,400. Clem will be saving $120 per month from his salary, and once every
four months (starting in four months) he adds $200 in dividends from an investment. Bank
fees, currently $10 per month, are expected to increase by $1 per month henceforth ($10 at
the end of first month, $11 at the end of the second month and so on). How much will Clem
have saved in two years?

1/3
QUESTION 3 - 20 marks

The Deadeye Distillery is opening a new production facility at Sweetwater Springs. Two
types of stills are being considered and the following cost estimates have been developed:

Types of Stills
Masher Squeezer
Service Life 4 years 6 years
First Cost $10,000 $15,000
Salvage Value 0 $2,000
Annual Costs $800 in year 1, increasing by $1,000 in year 1, increasing
$200 each year thereafter by $400 each year thereafter

Using present worth analysis with MARR of 25%, which alternative should be selected?

QUESTION 4 - 15 marks

Caterpillar Corporation wants to build a spare parts storage facility in the Phoenix, Arizona,
vicinity. A plant engineer has identified four different location options. Initial costs, and
annual net cash flow estimates are detailed in the table below. The annual net cash flow series
vary due to differences in maintenance, labor cost, transportation charges, etc. If the MARR
is 10%, use IRR analysis to select the economically best location if any to be chosen.

Estimates for Four Alternative Building Locations

A B C
Initial cost, $ -275,000 -200,000 -350,000
Annual cash flow, $ +35,000 +22,000 +42,000
Life, years 30 30 30

QUESTION 5 - 15 marks

IQ Computers assembles Unix workstations at its plant just outside St. Catharines, Ontario.
Their current product line is nearing the end of its marketing life, and it is time to start
production of one or more new products. The data for several candidates is shown below.
The maximum budget for research and development is $300,000. A minimum of $150,000
should be spent on these projects. It is desirable to spread out the introduction of new
products, so if two products are to be developed together, they should have different lead
times. Resources draw refers to the labor and space that are available to the new products; it
cannot exceed 100%.

Potential Product
A B C D
Research and
$120,000 $60,000 $150,000 $75,000
development costs
Lead time 1 year 2 years 1 year 1.5 years
Resource draw 60% 10% 40% 30%

On the basis of the above information, determine the set of feasible mutually exclusive
alternative projects that IQ Computers should consider.

2/3
ie = (1 + is )m − 1 for discrete compounding

ie = e r − 1 for continuous compounding

3/3