Can you plz solve Engineering Economy MENG 300 Quiz Three Semester II 2015-2016

Question

Can you plz solve Engineering Economy MENG 300 Quiz Three Semester II 2015-2016 01/06/2016 Student Name Student ID Please tick your section Sec 1: 8-9:15 Sec 2: 9:30-10:45 See 4 1-2315 To improve package sorting at Bahrain Post Office facility, conveyor equipment was upgraded at a cost of BD 350,000. The operating cost is expected to be BD148,000 per year for the first 3 years and BD 220.000 for the next 3 years. The salvage value ofthe equipment is expected to be BD140,000 for the first 3 years, and BD1000 for the last 3 years. At an interest rate of 6% per year, determine: The economic service life of the equipment I10 Marks Cash Flow Notes: Sketch the cash flow diagram (20%). Write the standard notation (60%) Final answer (20%.

Explanation / Answer

Economic service life is the years when equivalent annual cost of using the equipment is minimum. The problem is related with an equipment. Steps are as follows:

step 1: Here the equipment has been purchased at BD 350,000. Its salvage value is BD 140,000 for first three years. So depreciation of first three years will be BD350,000-BD140,000=BD210,000. From 4th to 6th year salvage value is only BD10,000. So for these three years total depreciation will be BD350,000-BD10,000=BD340,000. [column 4 of the table elow]

Step 2: Next consider operating cost. For first three years it is BD 148,000 per year. So for calculating equivalent annual cost, you will take BD 148,000 a total operating cost. For 2 years annual equivalent cost calculation, operating cost will be BD 148,000 (for year 1)+BD 148,000 (for year 2)=BD 296,000. In this manner you have to take cumulative operating cost for six years. Note that from 4th year operating cost will be BD 220,000. [column 6 of the table below]

Step 3: In third step add total depreciation and cumulative operating cost to get total cost.[column 7 of the table]

Step 4: In fourth step, take present value of $1 at 6% discount rate. Formula is 1/(1.06)^n. It will be used to ascertain present value of total cost of a particular year. [ column 8 of the table]

Step 5: Now multiply figures of step 3 and step 4 to get present value of total cost of a particular year.[column 9 of the table]

Step 6: Next ascertian cumulative present value of discount figure of $1. [column 10 of the table]

Step 7: Finally divide figures of step 5 by corresponding figure of step 6 to get annual equivalent cost of runining the equipment. [column 11 of the table]

Identify the year when equivalent annual cost is minimum. It is economic life of the asset. You should replace the asset at the end of its economic life by a new one.

On the basis of above steps, calculations are shown in the table below.

Here economic service life of the equipment is 3 years. ote that equivalent annual cost is minmimum ($20,527.42) in this year.

Year Buy price Salvage Depreciation Operating Cumulative Total cost Discount Present Cumulative Average value cost operating factor value discount annual cost cost factor (1) (2) (3) (4) (5) (6) (7)=(4)+(6) (8) (9)=(7)*(8) (10) (11)=(9)/(10) 0 350,000 1 350,000 140,000 210,000 148,000 148,000 358,000 0.9433962 337735.849 0.943396226 358000.00 2 350,000 140,000 210,000 148,000 296,000 506,000 0.8899964 450338.199 1.833392666 245631.07 3 350,000 140,000 210,000 148,000 444,000 654,000 0.8396193 549111.011 2.673011949 205427.82 4 350,000 10,000 340,000 220,000 664,000 1,004,000 0.7920937 795262.038 3.465105613 229505.86 5 350,000 10,000 340,000 220,000 884,000 1,224,000 0.7472582 914644.004 4.212363786 217133.19 6 350,000 10,000 340,000 220,000 1,104,000 1,444,000 0.7049605 1017963.02 4.917324326 207015.64

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