ISE 307 Engineering Economic Analysis Final Exam
- DAC Cleaning Liquids Co.,
Saudi Arabia, is considering replacing an existing
packing machine. The machine has been in operation for 2 years and
it was purchased by 120 thousand
riyals. The current market value of
the machine is 45 thousand riyals. The expected useful life of the
machine is 6 years; with market values and operating costs in
thousand riyals given in the following table:
| Year |
Market Value (riyals) |
Operating cost (riyals) |
| 1 |
25 |
8 |
| 2 |
12 |
8.7 |
| 3 |
9 |
9 |
| 4 |
1 |
17 |
| 5 |
0.2 |
28 |
| 6 |
0 |
31 |
The new machine DAC is
considering costs 40 thousand riyals. The market values and operating
costs in thousand riyals are given in the following table:
| Year |
Market Value (riyals) |
Operating cost (riyals) |
| 1 |
17 |
7 |
| 2 |
4 |
8 |
| 3 |
3 |
30 |
| 4 |
1 |
45 |
DAC’s MARR = 6%. How can you assess DAC
with the machine replacement decision? Justify your answer. - Dammam Municipality is evaluating two projects which are the
restoration of two old roads. Because of the limited funds it has,
the municipality can restore only one of them. Road 1 will be
restored over two years, 108 km over the first year and 92 km over
the second year. The restoration cost is 325,000 riyals per km, paid
at the end of year. The annual repair and maintenance cost is 5,000
riyals per km, paid at the end of the year. The restoration of the
road will reduce the annual number of accidents by 70%, which is
equivalent to 1210 accidents per year, with an average cost of
20,000 riyals per accident.
Road 2 is of length 100 km and the restoration cost is 500,000
riyals per km, paid at the end of year. The road will be worked on
also over two years, 50 km each year. The annual maintenance and
repair cost is 5,000 riyals per km, paid at the end of the year. The
annual number of accidents on the road will be reduced by 65%, about
1001 accidents, with an average cost of 20,000 riyals per accident.
Both roads will be kept in service for 10 years after the
restoration work is complete. The municipality uses
discount rate of
10%. Which road should be restored based on the
benefit-cost ratio
criterion? Justify your answer.
Summer 2008
by Dr Muhammad
Al-Salamah |