You want to invest $ 1,000 in a mutual fund that offers
a 5% guaranteed rate of return. Inflation is expected to
be 1% per year. What will your investment be worth in
5 years time, in real dollars based on the present
Consumer Price Index?
An engineering project requires $20 000 as first cost
and has a planning horizon of five years. Operating
costs are $2 000 (actual) per year, and expected annual
revenue is $8 000 (actual). Calculate the project's
present worth if the real interest rate is 5%, the
expected annual inflation is 2% and the salvage value is
$5 000 (actual).
Your company buys a piece of capital equipment for
$100,000. It depreciates at 20% per year, declining
balance. The company is taxed at 40%. The physical
life of the equipment is 5 years, after which it has no
salvage value. Using the equipment, you expect to
incur annual costs of $15,000 and to receive an annual
income of $50,000. Your real after-tax MARR is 10%.
What is the after-tax present worth of this investment if
there is no inflation over the next five years?
What is the expected after-tax present worth of the
investment if there is a 50% chance that there will be
5% inflation over the next five years, given that the
annual costs and annual income are in actual dollars?
Park Iseul has just completed a Masters degree in Library Science. She has
had four job offers, but is finding it difficult to choose between them. She
discusses the problem with her room-mate, Lee Kyung Sook, who is currently
taking a course in Engineering Economics.
“What factors are you considering?” asks Lee.
“The salary is one factor, of course,” says Park, “Megacorp has offered me $9
000 a month, and none of the others come close to that. And they also have
the best prospects for promotion. But really, the most important thing to me is
the atmosphere at work. Megacorp seems very cold and unfriendly. And the
next most important thing is the distance I have to commute – Megacorp is
sixty minutes travel away, I don't want to spend all my time travelling.”
“I can help you make the decision,” says Lee, “All we need to do is to
construct a decision matrix. You give me all the details, and I'll enter them on
a spreadsheet right now.”
Professional Engineering Exam Dec 2007, Q. 2
You plan to manufacture plastic containers for six years in a factory in Ontario.
This requires capital equipment costing $4,200,000. You will finance the purchase
of the equipment by a $3,200,000 loan from the National Bank. The loan interest
is 12%, and the amortization period is 10 years with 10 end-of-year payments. The
CCA rate for the capital equipment is 20%. At the end of the six years the
equipment will be sold for $260,000 and the loan principal remaining after the
sixth loan payment will be repaid to the bank. The anticipated yearly revenue
minus all costs (except loan interest) is $2,860,000. Your tax rate is 40%.
Determine
a) the CCA in the final year and the terminal loss or recaptured CCA
b) the interest portion of the final loan payment and the remaining
principal
c) the pre-tax cash flow in year 6
d) the taxable income in year 6
e) the after-tax cashflow in year 6
Professional Engineering Exam, Dec 2006, #4
A company requires computing equipment for a new project that will last
3 years. They can either purchase the equipment for $X, or lease it for $850,000
per year, payable yearly in advance.
The (after-tax) MARR is 15%, and the Capital Cost Allowance for computing
equipment is 50%. The company makes $1,000,000 per year and pays tax at
30%. The salvage value of the equipment is zero.
Determine:
a) The present value (after tax) of leasing
b) The after-tax cashflow in year 2 of the purchasing option if X is $2.4M
c) The preferred alternative if X = $3M
d) The value of X that would make the two alternatives economically
equivalent
Question 5, Dec 2009
A CNC lathe used in a production process requires major repair. It can either be
completely overhauled for $X, or replaced by a new machine for $1,100,000.
Your MARR is 10%. The lathe is needed for five more years. The O/M costs
and salvage values for both the old and new machines are as follows (all values in
thousands of dollars). The old machine has zero salvage value.
Determine:
Year
1
2
3
4
5
Old O/M
140
140
140
320
140
New O/M
55
55
115
55
55
New salvage
900
760
430
200
65
a) the EUAC of keeping the old machine if X=$470K
b) the range of values for X for which repair is the preferred option
c) the annual saving if X=$710K and we replace the machine
d) the IRR of replacing the machine if X=$750K