ISE 307 Engineering Economic Analysis Midterm Exam Sample

  1. Take the hypothetical cash flow diagram below. At interest rate of 3%, compute the equivalent annual uniform series.

    cash flow diagram

  2. A company is considering a work-incentive plan for its production workers. By this plan, workers will be paid for every part that is produced to the specifications. The company deposits its profits every month in an investment account that pays 1% interest compounded weekly. What interest rate should be used to evaluate the economic justification of this incentive plan?

  3. Advanced Electronics Co. in Riyadh has found a glitch (problem) in one of its ACER laptop models. The glitch does not cause any immediate concern, but it can evolve into a malfunction that will cause the processor to stop working. AEC has two options. Either they place a recall of the affected laptop models, which requires calling customers by phone and asking them to send their laptops by registered mail and returning the laptops, after replacing the part, back to them, on the expense of the company. The customers will be given one year to return their laptops, with an estimated cost of 1 million riyals. Or, they can provide the customers with an extended warranty of 5 years, starting from today; AEC has estimated that the warranty will cost them an estimated annual amount of 200,000 riyals, in today’s prices. If AEC can invest their money in an investment account that yields an annual interest rate of 4%, which option would you recommend AEC should choose? Justify your answer.
     

  4. Munir Munif Group (MMG) plastic manufacturing company is considering expanding its production lines by introducing special hot-high-pressure plastic pipes line. The management is considering the new production line for only five years. The production line requires purchasing plastic injection machine, which will be imported from Weifang Zhongyun in China at a price of 1,200,000 riyals. Weifang Zhongyun will offer MMG a payment plan, by which the price of the machine will be paid off in installments at an annual payment of 308,511 riyals at the end of every year for five years. During these five years, the machine will be covered by an extended warranty. The extended warranty will require MMG to pay 35,000 riyals per year, paid at the end of every year, and the payment will not change during the warranty period. The machine has no significant salvage value. The prices of plastic polymers, which are the raw material for plastic manufacturing, increase according to the general inflation rate in the Kingdom; and it is estimated that MMG will need 100,000 riyals worth of plastic polymers per year in today’s prices. The plastic pipes sales are predicted at 500,000 riyals per year in real terms. If the general inflation rate in the Kingdom of Saudi Arabia is 6% and the inflation-free interest rate is 3% annually, is the new production line justifiable in economic sense under the present worth criterion? Follow the end of year convention. Round the interest rate to the nearest integer; 1.9% to 2%, 1.2% to 1%.
     

  5. ARAMCO has agreed to supply SAFCO with natural gas for ammonia production. The supply of natural gas requires the construction of pipeline system at an estimated construction cost of 40 million riyals. The agreement has been agreed to last for 10 years; after which the salvage value of the system is zero. The agreement calls for a total annual supply of 200,000 cubic meters of natural gas, with a price of 60 riyals per cubic meter. The operating cost of the pipeline system is approximately 8 riyals per cubic meter, with a fixed annual cost of 25,000 riyals. Assume all costs occur at the end of year. If ARAMCO’s MARR = 15%, what is the equivalent annual revenue per cubic meter?

Summer 2008
by Dr Muhammad Al-Salamah