A private parcel and shipping company wants to be more efficient, and will invest in equipment to speed up the delivery of its parcels, in order to not only improve the efficiency of its internal expenses and costs, but also to be better than its competitors and to win more customers.

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Economics Engineering Test

Objective 1

1. A private parcel and shipping company wants to be more efficient, and will invest in equipment to speed up the delivery of its parcels, in order to not only improve the efficiency of its internal expenses and costs, but also to be better than its competitors and to win more customers.

To this purpose, it plans to invest an initial amount of $345,000 in equipment. It is expected that while employees are adapting to the new equipment, for the first 3 years it will cost $148,000 per year, and in the following 3 years this cost will increase to $210,000 due to the maintenance of this equipment. Due to the current rapid obsolescence of the equipment, it is expected that the cost of acquiring the equipment will be recovered at an estimated recovery of $140,000 during the first 3 years, since after that period the equipment is not expected to have any appreciable value. For an estimated current interest rate of 10% per annum. Determine:

(a) The economic useful life of the equipment and the annual value associated with it.

b) The percentage increase in the VA of the cost if the equipment is retained 2 years longer than the EUL.

2. You, a recent graduate, are hired in an engineering company that performs maritime works in the country. In those days, the Navy of our country wishes to acquire a coastal maritime surveillance boat to be purchased for a cost of $150,000, and this vehicle according to the manufacturer, has a useful life of 7 years and a salvage value described by the relation S 120,000 – 20,000k, being the value k the number of years of use after being acquired. The AOC series (annual operating cost) is estimated using AOC 60,000 +10,000k. There were several models of coastal boats for the safeguarding of the nation studied, and this was the model that was the most liked, however, the Navy, due to the investment to be made, prefers to acquire a single unit of this model that will be prototype for some tests, and for the purchase also wants an external consultancy and chooses the engineering company where you work, which assigns you for the economic study. Calculate the economic useful life:

a) with a manual solution, using regular VA calculations, and

b) with a spreadsheet, using annual marginal cost estimates.

Note: The interest rate is estimated at 15% per annum The salvage value, by some called market values cannot be less than 0 (zero).

Objective 2

3. A fire truck for high altitude firefighting, which was purchased at a cost of $14,000,000 3 years ago, can no longer meet the current needs of the Capital City Fire Department due to changes in fire protection regulations. In order to bring it up to current times it would require an investment of $70,000, or it can also be sold to a Fire Department in another City with a smaller population for $40,000. If overhauled and upgraded, this truck will be kept for only 3 more years and then replaced with a truck that will be used for various other emergencies, such as decontamination of large areas due to industrial chemical spills, decontamination and cleaning of industrial facilities, etc.

An equal but upgraded to current standards lift truck purchased for the fire department at this time would cost $220,000, and would serve the department from now for at least 8 years, and its salvage value would be $50,000 for years 1 through 4; then $20,000 after 5 years; and $10,000 thereafter, and would have an estimated operating cost of $65,000 per year for maintenance. The Governor’s Office and Mayor’s Office of the Capital City wish to perform an economic analysis at estimates of 15% per year using a 3-year planning horizon, upon which they hire you to do the study. Answer:

a) Should the Governor’s and Mayor’s office purchase the new lift truck for their Fire Department and replace the one they currently own or leave the current truck and do that within 3 years after the upgrade?

b) Compare the capital recovery requirements for the replacement lift truck (incoming engine) over the study period and for an expected life of 8 years of service.

4. It is desired to improve the appearance of a recreational boat for tourists. The boat could be painted at a labor cost along with marine paint at a cost of $6,500. It is estimated that the paint will last and give a good appearance to the boat for 4 years, after which time it would be required to do this work again. Due to current inflation, it is estimated that the cost of doing this work will be increasing, and will be 20% higher and higher in cost, and this will be each time this work is done again after this first job. There is also the alternative of having the ship sand blasting at the present time and every 6 years, at a cost of approximately 40% higher than the previous painting after 6 years.

Objective 3

5. Eight months ago, the owner of a clinic acquires a water purification equipment, which is a water cleaning and purification equipment for use in operating rooms, among other supplies. This machine cost This machine had a cost of $15,000, being for each of the first two months the cash flow of $-2000. The cash flow in the third and fourth month (the following 2 months) of $1000 each. In the last four (4) months, a contract job generated net earnings of $6,000 for each month. After this, the clinic owner, because he has resources to buy equipment that produces a larger quantity of purified water due to new technology and needs the space taken up by previously purchased equipment sells it to the owner of a friendly clinic for $3,000. Find:

(a) the payback period or time with no return.

b) the nominal payback period or time at a rate of 18% per year.

6. A businessman, for an expansion of his shoe factory, comes up with the idea of requesting a loan of $10,500,000 for the expansion of the factory, without knowing or being sure what the interest rate of this loan will be. For this amount, this interest rate could be either 12% per annum or 10% per annum for a five-year loan. According to your engineers’ calculations, the factory would only have a real development if the value or annual amount of the investment is less than $5,700,000. The cost for maintenance and operation is estimated at $3,100,000 per year. The salvage value could be $2,000,000 if the interest rate is 10% per annum or $2,500,000 if the interest rate is 12% per annum. Is the decision to proceed with the project sensitive to the salvage value and interest rate estimates?

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