Fall 2012

Name ______________________________________

(100 points maximum)

ISyE 313
Engineering Economic Analysis
Exam 2
READ THIS FIRST:

You may use any books, notes, calculators, etc., that you wish, with the exception of a
laptop computer.

Cell phones must be put away with ringers turned off.

You have 75 minutes for this examination. Plan your time.

Point values for each question are indicated.

There is an extra credit problem. However, there is a maximum of 100 points on the exam.

For questions requiring calculations, show all your work to receive full credit.

If you need more space, feel free to use the backs of the sheets, just make sure that the
grader knows where you are writing your answers.

Good luck!

ISyE 313 Fall 2012 Exam 2

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1.

(10 points) A year ago you bought a 10 year maturity Bond from the Munchkins of
Munchkinland with a face value of $5,000 and a coupon rate of 4% per year. The bond pays
dividends four times a year. Financial troubles with Munchkin banks have led the yield of the
bond to increase to 6%. What is the current price of the bond?

2.

(10 points) Given the cash flows shown in the table below:
Year
0
1
2
3

Cash Flow ($)

-600
+2200
-1400
-195

a. (5 points) What can you infer applying Descartes rule of signs?

b. (5 points) What can you infer applying Norstroms criteria?

ISyE 313 Fall 2012 Exam 2

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3.

(10 points) Benefit/Cost Analysis

a.

(8 points) From the data given below for a public sector project, compute both the modified and
conventional B/C ratio.
Initial cost = $2,500,000
O & M cost / year = $170,000
Estimated annual benefit = $425,000
Life = 30 Years
Salvage value = $500,000
Interest rate = 6%

b.

(2 points) Would you recommend this project? Why or why not?

ISyE 313 Fall 2012 Exam 2

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4.

(10 points) An alumnus of a small university donated $150,000 to establish a permanent

endowment for scholarships. The first scholarships were awarded 5 years after the money was
donated and every year after that forever. If the amount awarded each year is $15,000, find the
approximate rate of return earned on the fund.

ISyE 313 Fall 2012 Exam 2

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5.

(20 points) Consider the following four mutually exclusive projects. Each alternative has a 10year useful life and no salvage value. Assume a MARR of 12%.
Initial cost
Annual benefits
a.

A
$2000
500

B
$5000
975

C
$3000
500

D
$3000
300

(10 points) Using rate of return analysis, which alternative should be selected?

b. (6 points) Using payback period analysis, which alternative should be selected?

c. (4 points) Give two reasons why the payback period analysis might give you a different
answer than the rate of return analysis.

ISyE 313 Fall 2012 Exam 2

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6.

(20 points) An asset purchased three years ago for $20,000 can be replaced by a new type of
equipment. Market Values and Annual Operating Costs (AOC) for each of the next three years
are shown in the table below. What is the Economic Service Life of the asset if the MARR is
10%?
Year
0 (now)
1
2
3

ISyE 313 Fall 2012 Exam 2

Market Value ($)

13,000
9,000
8,000
6,000

AOC ($)
-2,500
2,700
3,000

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7.

(10 points) The cost of a first-class postage stamp in 1970 was $0.06 and the same stamp costs
$0.45 in 2012. Determine the average annual inflation rate based on this information.

8a.

(5 points) Im undertaking a new low-risk venture and need to raise some capital. I plan to
borrow $100,000 at 3% interest, issue stock worth $500,000 at 6%, and use $250,000 of
retained earnings at 4% to finance the project. What is my WACC?

8b.

(2.5 points) Would my MARR be higher or lower than the WACC calculated in the question
above? Why?

8c.

(2.5 points) If I raised capital in the same fashion for a higher-risk venture, would my MARR
likely be higher or lower than that established for the low-risk venture? Why?

ISyE 313 Fall 2012 Exam 2

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EXTRA CREDIT (10 points)

Terrytop Engineering manufactures video games. Variable costs are estimated to be $20 per unit and
fixed costs are $10,875. The demand-price relationship for this product is Q = 1,000 - 4P where P is
the unit sales price of the game and Q is the demand in number of units.
(a) (2.5 points) Find the breakeven quantity (or quantities).

(b) (2.5 points) What is the company's maximum possible revenue?

(c) (2.5 points) What profit would the company obtain by maximizing its total revenue?

(d) (2.5 points) What is the company's maximum possible profit?

ISyE 313 Fall 2012 Exam 2

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