Engineering Economics: Practical Investment Analysis Problems
Joint Exercise: Engineering Economics
1. Rate of Return Analysis
Swagelok or Claimtech Enterprises manufactures miniature devices and valves. Over a five-year period, the product line costs were as follows: an initial cost of $25,000 and annual costs of $18,000. The annual income was $27,000. Calculate the rate of return for this product.
2. Equipment Selection and Investment
A company is adding a new operation and must acquire the necessary equipment. Two market alternatives meet the capacity requirements. The annual costs and initial investments are shown below:
The company's discount rate is 12% per year.
- a) Which option is best? Solve using CAN (Net Annual Cost) and CAE (Equivalent Annual Cost).
- b) What assumption is implicit in this resolution?
- c) If the higher-quality machine allows for a higher price, generating $200 more in annual revenue than Alternative B, would your answer to (a) change?
4. Plant Expansion Evaluation
Ultra Mega Zero ABC SA is planning a plant expansion due to projected growth in demand over the next six years. Evaluate the project using the following data:
Given an opportunity cost of 12% annually, determine if the company should proceed with the project.
9. Project Selection and Budgeting
A company has 11 projects in the pipeline and a $6,000,000 financing limit. The Net Present Values (NPV) are as follows:
Assuming all projects are independent:
- a) Use the IVAN (Profitability Index) criterion to determine the optimal set of projects within the investment limit.
- b) Formulate the problem as a PLE (Integer Linear Programming).
7. Perpetual Maintenance Cost Analysis
Maintenance costs for a highway section follow a predictable pattern: no costs for the first two years, then $6,000 in year 3, $7,000 in year 4, increasing by $1,000 annually until year 15, after which costs remain constant for the 40-year life of the road. Assuming the road is replaced by a similar one, calculate the perpetual annual cost at a 10% interest rate.
