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Problem 1 Problem 2
(a) Capital cost = P+15000 (P/A, 8.5%, 15) Normalised weight score between 0-10
= -100000-29486.5
Economic service life (ESL) is at year 1
= R-129486.5
Corresponding annual worth (AW) = -R108000
PW< 0 it’s not worthwhile to get the money from the loan
P=R51821.13
Annual operating cost (AOP) = hourly cost + material cost+ direct labour cost
(a) r: revenue per unit : FC= fixed cost : V = Variable cost : P= Profit :Q = quantity
R=FC/Q +V
BALOYI LN 200900086
years Investment Revenue Production Revenue Production Production CF FV 15 % PV 16% FW+ PW-
(m) price per cost per ton cost (investment rate) (borrowing)
ton
2 011
2 012 -266.6667 -266.6667 4.6524 1.0000 -266.6667
2 013 -266.6667 -266.6667 4.0456 0.8621 -229.8933
2 014 -266.6667 -266.6667 3.5179 0.7432 -198.1867
2 015 500.0000 150.0000 900.0000 270.0000 590.0000 590.0000 3.0590 0.6407 1 804.8100
2 016 485.0000 154.5000 873.0000 278.1000 554.9000 554.9000 2.6600 0.5523 1 476.0340
2 017 470.4500 159.1350 846.8100 286.4430 520.3670 520.3670 2.3131 0.4761 1 203.6609
2 018 -700.0000 456.3365 163.9091 821.4057 295.0363 486.3694 -213.6306 2.0144 0.4104 -87.6740
2 019 -700.0000 442.6464 168.8263 796.7635 303.8874 452.8762 -247.1238 1.7490 0.3538 -87.4324
2 020 429.3670 173.8911 1 545.7212 626.0080 839.7132 839.7132 1.5209 0.3050 1 277.1199
2 021 416.4860 179.1078 2 249.0244 967.1824 1 201.8421 1 201.8421 1.3225 0.2630 1 589.4361
2 022 403.9914 184.4811 2 181.5537 996.1978 1 105.3558 1 105.3558 1.1500 0.2267 1 271.1592
2 023 -90.0000 391.8717 190.0155 2 116.1071 1 026.0838 1 010.0233 920.0233 1.0000 0.1954 920.0233 0.0000
9 542.2434 -869.8531
Formulas used
Baloyi, LN Baloyi, LN
3 Bambo+LE
• 2014Ass2BamboLE.pdf
Bambo, LE Bambo, LE Bambo, LE Bambo, LE
Bambo, LE Bambo, LE
4 Beetge+WG
• 2014Ass2Beetge+WG.pdf
Beetge, WG Beetge, WG Beetge, WG Beetge, WG
Beetge, WG Beetge, WG
5 Beya+MM
• 200704431 Ass2 BEYA-MM.pdf
Beya, MM Beya, MM Beya, MM Beya, MM
PROBLEM 1
ASSIGNMENT 2 8
9
10
11
15
15
15
15
0
0
0
0
15
15
15
15
12 15 0 15
STUDENT NUMBER: 200704431 13 15 0 15
14 15 0 15
SURNAME: BEYA 15 15 0 15
INITIALS: MM a) It’s not worthwhile to get the money from the personal investment as WACC = 8.8% >
8.5% (investment rate)
b) Borrow 60% for 15 years at 9%/year and the remaining 40% will be at 8.5%
60% of R250 000 = R100 000
40% of R250 000 = R150 000
WACC = 0.4 x 8.5% + 0.6 x 9%
= 8.8%
c) The better option is to borrow 60% for 15 years at 9%
PROBLEM 2
Normalised weight of an attribute = Score of an attribute / SUM of scores of all attributes
Attributes Scores Normalised weights
Flexibility [f] 10 0.364
Safety [s] 2.5 0.090
Uptime [u] 5 0.182
Speed [v] 5 0.182
Rate of Return [r] 5 0.182
SUM 27.5 1
PROBLEM 3 b)
n
Given: P = R100 000, S = P x 0.85 , n = Number of years after purchase Increase in production of 3 000m3, Q = 5 000 + 3 000 = 8 000m3 and P = R500 000
AOC = (65 + 10 x n) x 1 000, n≥1 Assumptions: v = 5 500 R/unit and FC = R288 330
MARR = 18% P = Revenue – Total Cost
a) Economic Service Life (ESL) and Corresponding Annual Worth (AW) This implies, Revenue = Profit + Total Cost
𝑃+𝐹𝐶
r= 𝑄
+v
n S (A/P,18%, n) P(A/P, 18%, n) A/F, 18%, n S(A/F, 18%, n)
= (500 000 + 288 330 / 8 000) + 5 500
1 85000 1.18 118000 1 85000
2 72250 0.63872 63872 0.45872 33142.52 r = 5 598. 541 R/unit
3 61412.5 0.45992 45992 0.27992 17190.587
4 52200.63 0.37174 37174 0.19174 10008.94784
5 44370.53 0.31978 31978 0.13978 6202.112858 PROBLEM 5
6 37714.95 0.28591 28591 0.10591 3994.39052
n = 10 years, MARR = 15%, first cost = R2 m, Salvage = R50 000
Department Material Cost Direct Cost
n MV AOC CR AW of AOC Total AW A Labour 10 x 25 000 = R250 000 200 000 200 000
1 85000 -75000 -33000 -75003.75 -108003.75 B Machine 5 x 25 000 = R125 000 50 000 200 000
2 72250 -85000 -30729.5 -79590.58 -110320.06 C Labour 15 x 10 000 = R 150 000 50 000 100 000
3 61412.5 -95000 -28801.4 -83901.596 -112703.01 SUM R 525 000 R300 000 R500 000
4 52200.63 -105000 -27165.1 -87948.294 -115113.35
5 44370.53 -115000 -25775.9 -91729.53 -117505.42
AOC = R525 000 + R300 000 + R500 000
6 37714.95 -125000 -24596.6 -95251.488 -119848.1
= R1 325 000
The ESL = 1 year and this corresponds to the Annual Worth AW = -108003.75 Make
b) PWMAKE = -2 000 000 – 1 325 000(P/A, 15%, 10) + 50 000(P/F, 15%, 10)
𝑆(𝐴/𝐹,𝑖,𝑛) 37714.95(0.10591) = -2 000 000 – 1 325 000(5.0188) + 50 000(0.2472)
P= (𝐴/𝑃,𝑖,𝑛)
= 0.28591
= -2 000 000 – 6 649 910 + 12 360
PWMAKE = - R8 637 550
P = R13 970. 796
Buy
A = R1.5m
PROBLEM 4
PWBUY = -A (P/A, 15%, 10)
a)
𝐹𝐶
= -1 500 000(5.0188)
rQ = FC + VC, this implies that: r = +v
𝑄
PWBUY = - R7 528 200
FC = 30 + 0.2(350) + 100 + 55 + 100/3 = R288 330 Decision: As seen, PWBUY < PWMAKE , then the better option is to buy.
Q = 5 000 m3
r = (288330/5000) + 5500
r = 5 557.666 R/unit
2 3
4 5
KL Biyela 201493396
Problem 2
+ )" , - ' .-
Net Cash Flow = Estimated cash flow – Loan repayment
- ⁄ , , / ⁄0 , ,
=15000 – 18615
- , 100 000 ⁄ , 18%, 1 85 000 ⁄ , 18%, 1
= - 3615
- , 100 000 1.18 72 250 1
PW = -100 000 – 3615(P/A,8.8%, 15)
- , 33 000
= -100 000 - (3615x8.1567)
= - 129 486.47
- 1 100 000 0.6387 72 250 0.4587 30 728.92
PW < 0 not worthwhile to get money through the loan
- 4 100 000 0.4599 61412.5 0.2799 28 800
c) Both options are not economically attractive or justifiable (both, PW<0) . However, option A is a
CR 7 100 000 0.3717 52 200 0.1917 27 163.26
better option when compared to B.
Fixed Cost FC = R 30 000 + (350 000*0.2) + 100 000+ 55 000 + (100* 1/3) = R288 333
' .-8 : ' .-8 ; ⁄ , ,
Variable Cost per unit v= R5500
: 236 585.5 115 000 ⁄0 , 18%, 5 ; ⁄ , 18%, 5
Revenue per unit r =?
:236 585.5 115 000 ∗ 0.4371 ; 0.3198
a) Production volume of 5000 m3 per year
b)
QBE = 5000 + 3000 = 8 000 m3
Profit = R – TC = rQ – (FC + vQ) = 500 000
Problem 6
Problem 5 Year Tons Revenue Revenue Unit Costs Fixed Investment Cash Flow (CF)
per ton (A) (B) Costs (D) CF = A-B-C -D
Indirect Costs (C)
Department Basis Hours Rate/Hour Allocated Material Costs Direct Labour 2012 - -266.66 m -266.66 m
Hours Costs 2013 - -266.66 m -266.66 m
A Labour 10 25 000 200 000 200 000 2014 - -266.66 m -266.66 m
B Machine 5 25 000 50 000 200 000 2015 1.8 Mt 500 m 900 m -270 m -40 m 590 m
C Labour 15 10 000 50 000 100 000 2016 1.8 Mt 485 m 873 m -278.1 m -40 m 554.9 m
300 000 500 000 2017 1.8 Mt 470.45 m 846.81 m -286.43 m -40 m 520.38 m
2018 1.8 Mt 456.33 m 821.39 m -295.02 m -40 m -700 m -213.64 m
2019 1.8 Mt 442.65 m 796.77 m -303.88 m -40 m -700 m -247.11 m
Indirect Cost Allocation 2020 3.6 Mt 429.36 m 1545.69 m -625.97 m -80 m 839.72 m
2021 5.4 Mt 416.48 m 2248.99 m -967.14 m -80 m 1201.85 m
Department A: 25 000 (10) = R250 000
2022 5.4 Mt 403.99 m 2181.55 m -996.14 m -80 m 1105.41 m
Department B: 25 000 (5) = R125 000 2023 5.4 Mt 391.87 m 2116.1 m -1026 m -80 m -90 m 920.1 m
AOC = 500 000 + 300 000 + 525 000 T 266.66 266.66 .. 8621 266.66 0.7432 213.64 0.4104 247.11 0.3538
T 869.69 %
= R 1 325 000
0 ,, 9542.4 U
Step 3
T 0 ⁄ , , 11 0 ,, 0
,,
869.96 1 9542.4 0
,
9542.4 ,,
W X 1
869.96
0.2432 24.32%
>U of 18%, therefore the project is economically justified using the ERR approach
Biyela, KL Biyela, KL
7 Chiremba+IF
• 2014Ass2Chiremba+IF.pdf
Chiremba, IF Chiremba, IF Chiremba, IF Chiremba, IF
Chiremba, IF Chiremba, IF
8 Croucamp+PL
• Assignment 2.pdf
Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL
Croucamp, PL Croucamp, PL
Croucamp, PL Croucamp, PL
Croucamp, PL Croucamp, PL
Croucamp, PL Croucamp, PL Croucamp, PL Croucamp, PL
Croucamp, PL Croucamp, PL
9 Daya+YS
• 2014Ass2Daya+YS.pdf
Daya, YS Daya, YS Daya, YS Daya, YS
Deduct the initial investment to determine the interest earned = R599925.00 For AW of market value (taking salvage into account)
More money would be earned by the owner from earning interest on the investment than earning Year Salvage A/F(I,n,MARR) A/F(SV)
from cash flow in the same period. I think it would not be worthwhile to use the money from the 0
investment for the project 1 85 1 85
2 72.25 0.4587 33.141
Question 1b 3 61.41 0.2799 17.189
4 52.20 0.1917 10.007
Determine WACC 5 44.37 0.1398 6.203
6 37.71 0.1059 3.994
%.
WACC =
= 8.8%
Deduct the initial investment to determine the interest earned = R 635875.00 Year Cost Salvage CR
0 -100 -100
A(F/A,8.8,15) = 15000(28.9035) = R 433552.50 1 85 85
2 72.25 72.25
More money would be earned by investing the money. I think it would not be worthwhile to use the 3 61.41 61.41
loan option for the project. 4 52.20 52.20
5 44.37 44.37
Question 1c 6 37.71 37.71
Based on the values found in 1a and 1b, I would choose the investing from capital option as it has
the lowest difference between potential interest from saving and earnings from cash flow. For Annual operating cost, including total present worth of total cost
I have done as much of the assignment as I can. Due to my current work load and schedule, I have
Calculate AW per year been unable to keep up with the lecture content and as a result, I was having trouble completing the
assignment, as can be seen by me not completing questions 3b, 5 and 6. I will attempt to catch up
Year CR A/P(PWT) AW(total)
and be better prepared for the examination. I apologise for this.
0 -100.00 0.00 -100.00
1 85.00 -75.00 10.00
2 72.25 -70.41 1.84
3 61.41 -66.05 -4.64
4 52.20 -62.01 -9.81
5 44.37 -58.24 -13.87
6 37.71 -54.72 -17.00
Question 3b
Question 4a
Assume 1 year
Question 4b
Question 6
FW/-PW = 13.615909
ERR = 16.60%
The project should not be implemented because MRR = 18%
Dipela, MS Dipela, MS
11 Ditsele+SSM
• 2014Ass2DitseleSSM.pdf
Ditsele, SSM Ditsele, SSM Ditsele, SSM Ditsele, SSM
WACC = MARR > 6%, therefore it is not worthwhile to get money from the loan Therefore, the ESL of the machine is 1 year and the corresponding AW is -R108 000
c) b)
The best option would be to do nothing since the capital would cost more but if something definitely Tot AW = CR + AW of AOC
had to be done, Equity Financing would be better because it costs less For year 6, make Tot AW = -R108 000
AW remains the same therefore, CR = -R12 748
Problem 2 CR = -P(A/P) + S(A/F)
-12 748 = -x(0.286) + 0.04x
Let flexibility = x 0.246x = 12 748
Therefore, X = 51 821
f=x P = R51 821
s = x/4
u = x/2 Therefore the initial investment needs to be R51 821, meaning that it would have to reduce by R48 179
v = x/2
r = x/2
Problem 4
f + s + u + v + r = 10
therefore, x + x/4 + 3(x/2) = 10 a)
therefore, x = 3.63 To break even, Revenue = Cost
Fixed = 30 000 + 70 000 + 10 000 + 55 000 + 33 333 = 198 333
Variable = 2500x + 200x + 2000x + 600x + 200x = 5500x
Total Cost = 5500x + 198 333
1 2
Problem 6
R=C
Therefore
Revenue = 5500x + 198 333
= 5500(units) + 198 333
b)
Revenue = Profit + Cost
= 500 000 + 5500x + 198 333
Total Revenue = 500 000 + 5500(total units) + 198 333
Problem 5
Total Annual Cost = 300 000 + 500 000 + 150 000 + 125 000 + 250 000
= R1 325 000
n = 10
I = 15%
P = -P1 - A(P/A) + F(P/F)
= -2 000 000 – 1325 000 (5.02) + 50 000 (0.25)
= -R 8 639 000
3 4
15% 16%
Year Year no. CF + CF - NCF FV @ r PV @ k FW + PW -
2012 0 0 266.6 -266.6 4.6523914 1 0 -266.6
2013 1 0 266.6 -266.6 4.04555774 0.86206897 0 -229.8276
2014 2 0 266.6 -266.6 3.51787629 0.7431629 0 -198.1272
2015 3 900 310 590 3.05902286 0.64065767 1804.8235 0
2016 4 873 318 555 2.66001988 0.5522911 1476.311 0
2017 5 847 326.4 520.6 2.31306077 0.47611302 1204.1794 0
2018 6 0 740 -740 2.01135719 0.41044225 0 -303.7273
2019 7 0 740 -740 1.74900625 0.35382953 0 -261.8339
2020 8 1544 706 838 1.520875 0.30502546 1274.4933 0
2021 9 2246 1046.6 1199.4 1.3225 0.26295298 1586.2065 0
2022 10 2182 1073.6 1108.4 1.15 0.2266836 1274.66 0
2023 11 0 170 -170 1 0.1954169 0 -33.22087
sum = 8620.6737 -1293.337
ERR= 18.82%
ERR > MARR therefore the phased investment should be considered
Dube, SP Dube, SP
15 Dzoro+M
• 2014Ass2Dzoro + M.pdf
Dzoro, M Dzoro, M Dzoro, M Dzoro, M
Problem 1
Table of Options
Problem 2
Weight Calculation = Wi =
∑
=
a) Option 1: Personal Investment
Cost of Capital = 8.5% Where Wi = Weights for each attribute, S=Sum of all Attributes
A =R15, 000. The Present Worth in year 0 needs to be determined. From above:
b) Option 2: Loan
= -R127 649.5
It is not worthwhile to get money from loan because of the negative cashflow.
1 2
Economic Service Life The Capital recover is now sum the sum of the Annual Worths for the years:
CR = A/P(FC) +A/F(MV )
Salvage Value Calculation Annual Operating Cost (AOC) Calculations
S=P x n= number of years=6 AOC= (65+10xn) x1000, n≥1 Year Cost MV A/P(FC) A/F(MV) CR
0 -100, 000
S1=100, 000 x = R85, 000.0000 AOC1= 75, 000 1 85, 000.0000 -118, 000 85, 000.0000 -33, 000.0000
S2=100, 000 x = R72, 250.0000 AOC2= 85, 000 2 72, 250.0000 -63, 870 33, 141.0750 -30, 728.9250
S3=100, 000 x = R61, 412.5000 AOC3= 95, 000 3 61, 412.5000 -45, 990 17, 189.3588 -28, 800.6412
S4=100, 000 x = R52, 200.625 AOC4 = 105, 000 4 52, 200.6250 -37, 170 10, 006.8598 -27, 163.1402
S5=100, 000 x = R44, 370.5313 AOC5 =115, 000 5 44, 370.5313 -31, 980 6, 203.0003 -25, 776.9997
S6= 100, 000 x = R37, 714.9516 AOC6=125, 000 6 37, 714.9516 -28, 590 3, 994.0134 -24, 595.9866
AW of non-recurring costs calculations P/F(1;n;MARR) is from the tables and P/F(AOC) = AOC × P/F(AOC).
A/P(1; n;MARR) is from the tables and A/P(FC) =A/P(1; n;MARR) × Cost The different AOCs are Future Values that need to be converted to Present Worth
A/F(1;n;MARR) is from the tables and A/F(MV ) = AW(1; n;MARR) ×MV . PWT(AOC;n) is the total PW of the AOC from the beginning till the year in question
3 4
Problem 4
AW of PWT(AOC) Fixed Cost and Variable Cost Calculations
A/P(1;n;MARR) is from the tables and A/P(PWT) = PWT(AOC; n) × A/P(1; n;MARR) Description Fixed Cost, R’000 Description Variable Cost, R/Unit
Administrative 30 Materials 2500
Year A/P(1;n;MARR) PWT(AOC;n) A/P(PWT)
Sal and benefits: 20% of 70 Labour 200
0 0000
350
1 1.1800 -63, 562.5000 -75, 003.7500
Equipment 100 Indirect Labour 2000
2 0.6387 -124, 609.5000 -79, 588.0877
Space, etc 55 Subcontractors 600
3 0.4599 -182, 426.5000 -83, 897.9474
Computers 1/3 of 100 33.3333 Misc cost 200
4 0.3717 -236, 585.5000 -87, 938.8304
TOTAL 288.3333 TOTAL 5500
5 0.3198 -286, 852.0000 -91, 735.2696
6 0.2859 -333, 152.0000 -95, 248.1568
Profit (P) = Revenue(R)− Total Cost (TC)
Revenue = Unit revenue(r) × Quantity(Q)
AW per year of the system Total Cost(TC) = Fixed Cost(FC) + Variable Cost(VC)
Variable Cost(VC) = Unit Cost(v) × Quantity(Q)
AW(Total) = CR + A/P(PWTAOC)
Profit = R - TC = rQ - (FC - vQ)
Year CR A/P(PWT) AW(Total)
= (r -v)Q – FC
0
1 -33, 000.0000 -75, 003.7500 -108, 003.7500 If Profit=0,
2 -30, 728.9250 -79, 588.0877 -110, 317.0127
3 -28, 800.6412 -83, 897.9474 -112, 698.5886 0 = (r -v)Q – FC, then (r -v)Q = FC
4 -27, 163.1402 -87, 938.8304 -115, 101.9706
5 -25, 776.9997 -91, 735.2696 -117, 512.2693 Q=
6 -24, 595.9866 -95, 248.1568 -119, 844.1434
a) From the above calculations the ESL is in year 1 where we have the lowest AW(Total) of
-R108 003.7500 a) r = = = R 5 557.6667/Unit
AW1=AW6, S6 = 37, 714.9516, AW1 = -108, 003.7500, A/P(PWT) b) P = R500, 000, v=R5500, r=?, FC = R288, 333.3, Q = 3000
R= P + TC
From S=P x , S6=P x
R=500000 +TC
AW1 = - P (A/P, 18%,6) + S6 (A/F, 18%,6) - A/P(PWT) yr6
TC=8000x5500 +288333.3 = 44, 288, 333.3
-108, 003.7500= - 0.2859P + P x (0.1059) - 95, 248.1568
R= 500, 000 + 44, 288, 333.3=R44, 788, 333.3
-108, 003.7500 + 95, 248.1568 = -0.2859P + (0.37715) (0.1059) P
P = 51 860.4765
5 6
Problem 6
Problem 5
Calculations
Economic Analysis
Construction Cost: R800m spread from 2012 -2014 = - = -R266.6666m
Indirect Costs Revenue: 2015 revenue R500/ton against per unit costs of R150m
Department Basis Hrs Rate/hr Allocated Hrs Material Cost Direct Labour
Cost For 1.8Mt, revenue = 500 x 1.8 x = R900m
A Labour 10 25 000 200 000 200 000 2016 Revenue with decrease of 3%/year = 0.97 x 900 = R873m
B Machine 5 25 000 50 000 200 000 Subsequent decrease to 2019 is by a factor of 0.97 as shown in table
C Labour 15 10 000 50 000 100 000 2020 Revenue = 3.6Mt x 500 = R1800m which is decreased by a factor of
300 000 500 000 2021 revenue =5.4Mt x 500 = R2700m which is decreased by a factor of
.
2022 & 2023 revenue is R2700m reduced by factors of and
Indirect Cost Allocation Calculations respectively.
Department C: 10 000 (15) =150 000 Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Construction -266.6666 -266.6666 -266.6666
Cost
Total Indirect Costs R 525 000 Revenue 900 900(0.97) (900) (900) (900) (1800) (2700) (2700) (2700)
The AOC is comprised of direct labor, direct material, and indirect costs. Cost/Unit -150 -(150) -(150) -(150) -(150) -(300) -(450) -(450) -(450)
Material Cost = 300 000, Direct Labour = 500 000, Idirect Costs = 525 000
Annual -40 -40 -40 -40 -40 -80 -80 -80 -80
Fixed Costs
AOC = 300 000 + 500 000 + 525 000 = R1 325 000 Expansion -700 -700
Cost
Remediation -90
The Make Alternative Analysis Cost
P= 2m, S=50 000, n = 10, i=15% Plant remediation cost = R90m, Borrowing Rate, i=16%, Investment rate, Ir=15%, MARR=18% n=11years
= - R1 721 135 Cost/Unit -150 -154.5 -159.135 -163.9091 -168.8263 -347.7822 -537.3235 -553.4432 -570.0465
The Buy Alternative Annual -40 -40 -40 -40 -40 -80 -80 -80 -80
Fixed Costs
Expansion -700 -700
AWbuy = -R 1 500 000 Cost
Remediation -90
Cost
It is cheaper to Buy than Make NCF -266.6666 -266.6666 -266.6666 710 678.5 647.675 -82.5034 -112.0628 1117.939 1631.7009 1548.1105 1846.0916
7 8
= - 768.2537
= 12 959.4535
-768.2537 + 12959.4536 = 0
=1.353548
= 0.5335 (5.3%)
Since is less than MARR (18%), the project is not economically justifiable
Dzoro, M Dzoro, M
16 Gama+SS
• 2014 Ass 2 Gama-SS.pdf
Gama, SS Gama, SS Gama, SS Gama, SS
Problem 1
Calculations leading to decision making:
= -R426 440.50
= 8.8%
= -R452 322.50
ENGINEERING
MANAGEMENT 2014 Solution
(a) The personal investment is not worthwhile since the MARR as confirmed by the negative
Net Present Value
(b) The loan amount is worthwhile as the return on investment is more than the MARR
(c) The loan investment is a better option
Problem 2
ADVANCED ENGINEERING
Calculations leading to decision making:
MANAGEMENT 1.Flexibility [f] The most important factor
0|Page 1
2.Safety [s] 2.5 0.0909 Y2 = (-R100 000 x 0.6387) + (R72 250.00 x 0.4587) =
5.Rate of Return [r] 5 0.1818 Y5 = (-R100 000 x 0.3198) + (R44 370.53 x 0.1398) =
Y1 = R100 000 x 0.851 = R85 000.00 Y4 = -R63 562.50-R61 047.00-R57 817.00-R54 159.00 = -R236 585.50
2
Y2 = R100 000 x 0.85 = R72 250.00 Y5 = -R63 562.50-R61 047.00-R57 817.00-R54 159.00-R50 266.50= R-2876 852.00
Y3 = R100 000 x 0.853 = R61 412.50 Y6 = -R63 562.50-R61 047.00-R57 817.00-R54 159.00-R50 266.50-R46 300.00
2 3
b).
Y6 = -R133 152.00 x 0.2859 = -R95 248.16 Reduced cost investment = R100 000 - 30 878.27 = R69 121.73
Y2 = -R79 588.09-R30 728.93 = -R110 317.01 Variable Cost: R/Unit Fixed Cost, R’000
2 -R85000 R72250.00 - R30728.93 -R61047.00 -R124609.50 -R79588.09 -R110317.01 R (revenue) = Total Cost
3 -R95000 R61412.50 - R28800.64 -R57817.00 -R182426.50 -R83897.95 -R112698.59 R = Total cost (Fixed Cost plus Variable cost)
4 -R105000 R52200.63 - R25777.00 -R54159.00 -R236585.50 -R87938.83 -R115101.97
R = FC+VC
5 -R115000 R44370.53 - R24595.99 -R50266.50 -R286852.00 -R91735.27 -R117512.27
rQ = (FC+vQ)
6 -R125000 R37714.95 - R27163.14 -R46300.00 -R333 52.00 -R95248.16 -R119844.14
r = ((FC+vQ))/Q
r = FC/Q + V
4 5
6 7
10.97
FW/-PW 0.2433
ERR 24.33%
Gama, SS Gama, SS
17 Govender+D
• 2014Ass2Govender-D.pdf
Govender, D Govender, D Govender, D Govender, D
Govender, D Govender, D
18 Govender+L
• 2014Ass2GovenderL.pdf
Govender, L Govender, L Govender, L Govender, L
Govender, T Govender, T
21 Ilemobade+OO
• 2014Ass2Ilemobade-O.O.pdf
Ilemobade, OO Ilemobade, OO PROBLEM
Ilemobade, OO 1: Ilemobade, OO
BORROW OR NOT?
14GIE4058/14M6MAE19
2014Ass2Ilemobade-O.O
(Assignment 2)
Name: ILEMOBADE O. O.
26 May 2014
BUY OR MAKE?
PROBLEM 4:
(b) :
∑
( )
- Should the phased investment be considered if ERR method of analysis is used and MARR is ∑
18%?
( )
ERR ≥ MARR, all proposals must offer at least MARR to be considered and a project is not
economically viable unless it is expected to return at least the MARR.
Since the phased investment ERR of 24.32% is higher than MARR of 18% then it should be
considered as a viable project.
Funky Industries primarily relies on 100% equity financing to fund projects. A good opportunity is A committee of four people submitted the following statements about the attributes to be used in a
available that will require R250 000 in capital. The Funky owner can supply the money from personal weighted attribute evaluation.
investments that currently earn an average of 8.5%/year. The annual cash-flow from the project is
estimated to be R15 000. It is also possible to borrow 60% for 15 years at 9%/year. 1. Flexibility[f] The most important factor
2. Safety[s] 50% as important as uptime
If the MARR is the Weighted Average Cost of Capital (WACC), determine which is the better option? 3. Uptime[u] One-half as importnt as flexibility
(The analysis is done before tax.) 4. Speed[v] As important as uptime
5. Rate of Return[r] Twice as important as safety
(a) (4 marks) is it worthwhile to get the money from the personal investment?
Use these statements to determine the normalised weights if scores are assigned between 0 and 10.
(b) (4 marks) is it worthwhile to get the money from the loan?
(a) The Personal investment is not a good option since the return on investment is less than the
MARR (8.5% < MARR 8.8%)
(b) The loan is a good option since the return on investment is more than the MARR (9% >MARR
8.8%)
(c) The personal investment is not an option to consider since repayment is less than the
repayment on the loan.
Problem 3 [8] Year (4) =-R95 000.00 - R10 000.00 = -R105 000.00
Economic service life Year (5) = -R105 000.00 - R10 000.00 = -R 115 000.00
A new machine has a first cost of P=R100 000 and can be used up to 6 years. Its salvage value is Year (6) = -R115 000.00 - R10 000.00 =- R125 000.00
estimated to be:
Salvage
S = P × 0,85n
Year (1) =R 100 000.00*0.851 = R 85 000.00
n = Number of years after purchase
Year (2) = R 100 000.00*0.852 = R 72 250.00
The operating cost will be R75 000 and increase by R10 000 per year after the first year. [AOC =
(65+10×n) ×1 000, n≥1] Year (3) = R 100 000.00*0.853 = R 61 412.50
(a) (4 marks) determine the Economic Service Life (ESL) and corresponding Annual worth (AW) of the Year (5) = R 100 000.00*0.855 = R 44 370.53
machine. Year (6) = R 100 000.00*0.856 = R 37 714.95
(b) (4 marks) How much would the first cost have to reduce to make the equivalent annual cost for a full Capital Recovery {-P*(A/P, 18%, n) + Sn*(A/F,18%,n)}
6 years numerical equal to the AW estimated in the previous part (at ESL). Assume all the other
estimates remain the same and neglect the fact that this lower P value will still not make a newly Year (1) = (-R100 000.00*1.1800) + (R85 000.00*1.0000) = -R33 000.00
calculated ESL equal to 6 years.
Year (2) = (-R100 000.00*0.6387) + (R72 250.00*0.4587) = -R30 728.93
6 -R 125 000.00 R 37 714.95 -R 24 595.99 -R 46 300.00 -R 333 152.00 -R 95 248.16 -R 119 844.14 Year (5) = -R115 000.00*0.4371 = -R50 266.50
The ELS is the number of years n at which the equivalent uniform annual worth of cost is the Year (6) = R125 000.00*0.3704 = R46 300.00
minimum. Year 1 is our ELS as its annual worth is R 108 003.75 Accumulative AOC
AOC Year (1) = -R63 562.50
Year (1) =R 75000.00 Year (2) = -R63 562.50 - R61 047.00= -R124 609.50
Year (2) =-75000.00 - R10 000.00 =- R85 000.00 Year (3) = -R63 562.50 - R61 047.00 - R57 817.00= -R182 426.50
Year (3) =-R85 000.00-R10 000.00 =- R95 000.00 Year (4) = -R63 562.50 - R61 047.00 - R57 817.00 - R54 159.00 = -R236 585.50
Year (5) = -R63 562.50 - R61 047.00 - R57 817.00 - R54 159.00 - R50 266.50 =- R286 852.00 Problem 4 [8]
Year (6) = -R63 562.50 - R61 047.00 - R57 817.00 - R54 159.00 - R50 266.50 - R46 300.00= When is the price right?
-R333 152.00 After graduation (and some experience) you earn a promotion to manager of engineered public
systems. One of the systems under your supervision is an emergency intercept pump system for potable
(safe to drink; drinkable). water. If the tested water quality or volume varies by a percentage, the system
AW= (AW of AOC) NJ *(A/P, 18%, n) automatically switches to preselected options of treatment or water sources. The manufacturing
process for the pump system had the following fixed and variable costs over a 1 year period.
Year (1) = -R63 562.50*1.1800 = -R75 003.75
Fixed Cost, R' 000 Variable Cost, R/Unit
Year (2) = -R124 609.50*0.6387 = -R79 588.09 Administrative 30 Materials 2500
Salaries and Benefits: 20% of 350 Labour 200
Year (3) = -R182 426.50*0.4599 = -R83 897.95 Equipment 100 Indirect Labour 2000
Space, etc 55 Subcontractors 600
Year (4) = -R236 585.50*0.3717 = -R87 938.83 Computers: ⅓ of 100 Misc cost 200
Year (5) = -R286 852.00*0.3198 =- R91 735.27 (a) (4 marks) Determine the minimum revenue per unit to break even at the current production volume
of 5 000m3 per year.
Year (6) = -R333 152.00*0.2859 =- R95 248.16
(b) (4 marks) If selling internationally and to large corporations is pursued, an increased production of 3
000m3 will be necessary. Determine the revenue per unit required if a profit goal of R500 000 is set for
Total AW = Capital Recovery +AW the entire system. Assume the cost estimates above stay the same.
Year (4) = -R27 163.14 - R87 938.83 = -R115 101.97 Fixed Cost, R' 000 Variable Cost, R/Unit
Administrative 30 Materials 2500
Year (5) = -R25 777.00 - R91 735.27 = -R117 512.27 Salaries and Benefits: 350*(20/100) = 70 Labour 200
Equipment 100 Indirect Labour 2000
Year (6) = -R24 595.99 - R95 248.16 = -R119 844.14 Space, etc 55 Subcontractors 600
Computers: 100*(1/3) = 33.333333 Misc cost 200
Total 288.3333 5500
The ELS is the number of years n at which the equivalent uniform annual worth of cost is the
To reach the minimum revenue, the Profit should be equal to the revenue minus the total cost.
minimum. Year 1 is our ELS as its annual worth is R 108 003.75
Therefore, revenue is equal to the total cost.
(b)
R(revenue) = Total cost
With annual worth of R108 003.75
R = Total cost (Fixed Cost + Variable cost)
MARR 18%
R = (FC + VC)
Period of six (6) years
rQ= (FC +vQ)
P = 108 003.75 * (P/F, 18%, 6) =
r = {(FC + vQ)}/Q
=108 003.75 *0.3704 = 40 004.58
r = FC/Q + V
The first cost will be reduced by: 100000.00 – 40 004.58 = R59 995.42
(b) For several years the Cuisinart Corporation has purchased the carafe assembly of its major coffee-maker
line at an annual cost of R1, 5m. The suggestion to make the component in-house has been made. For
Profit = revenue – Total cost the three departments involved the annual indirect cost rates, estimated material, labour, and hours are
= R- TC found in the table below. The allocated hours column is the time necessary to produce the carafes for a
year. Equipment must be purchased with the following estimates: first cost of R2m, salvage value of R50
= R-(FC +VC) 000 and life of 10 years. Perform an economic analysis for the make alternative, assuming that a market
rate of 15%/year is the MARR.
R500 000 = R - [(R5500* 8000m3) + (288 333.3)]
Indirect Costs
R500 000 = R – [44 000 000 + 288 333.3]
Department Basis Allocated Material Direct
R500 000 = R – 44 288 333.3 Rate/h
Hours Hours Cost Labour Cost
R = -R500 000 – R44 288 333.3 A Labour 10 25 000 200 000 200 000
B Machine 5 25 000 50 000 200 000
rQ = 44 788 333.3
C Labour 15 10 000 50 000 100 000
r = 44 788 333.3/8000m3 300 000 500 000
r = R5 598.5417/m3
Solution
= -R2 000 000.00 (A/P, 15%, 10) + 50 000 (A/F, 15%, 10) – R1 325 000
Solution
Given information
Problem 1
If the MARR is equal to the weighted Average Cost of Capital ( ) which is:
In analysing for a debt-equity mix on investment, if 60% of the required capital may be
borrowed then 40% of the required capital may be funded on equity financing. Therefore,
Then,
In order to chose or select the best alternative for investments, the decision must be based on
the following criterion:
Faculty of Engineering and the Built Environment (a) NO, it is not worthwhile to get the money from the personal investment because the
average return of 8.5% does not exceed the (8.8%).
(b) Yes, it is worthwhile to get from the loan because the return of 9% each year is
greater than the (8.8%).
(c) The better option is (b).
Ming: Engineering Management
Problem 2
Advanced Engineering Economics
In order to determine the normalized weights if scores are assigned between 0 and 10, let us
Assignment 2 use one of the method which is more practical. This method is called Weighted Rank Order.
It is actually based on placing the entire attribute in order of increasing importance and thus
Student Number: 201183291 giving to the most important attribute a higher score. Also we need to use the following
formula to determine the normalized weights.
Problem 3
,
Where, ,
,
,
We should demonstrate that the normalized weights are equal to 1 after all calculation which
is:
,
Now the following table will show all the calculation which includes the score, the weights as
Since the operating cost will be and increase by per year after the first
well as the sum of scores and weights.
year, one would refer at this following table:
Attribute Score Weights Normalized weights
(a)
In order to determine the Economic Service Life and corresponding Annual worth ( ) of
the machine, the following formula should be used:
Then,
13969.9660
Problem 4
(a) The minimum revenue at the break even point can be determined as follow:
Where,
Thus,
It can be seen that the smallest Annual Worth of costs is and occurs at year 1 or
,
. Therefore:
(b)
We know that,
In order to make the equivalent annual cost for a full 6 years equal to the estimated
in the previous part which implies , then the capital recovery must equal
(b)
to zero. Thus,
Buy Option:
Given,
Therefore, the buy option should be preferable because is less costly on an annual
equivalent basis.
Problem 6
Solution 0.0000
Let us calculate the annual equivalent cost of each as follows:
Make option:
,
2,6600
Thus,
Kawayongo, JM Kawayongo, JM
25 Kenesi+M
• Enegineering Economics assignment 2.pdf
Kenesi, M Kenesi, M Kenesi, M Kenesi, M
Q1
A.
Alternative 1
The marr is the same as the wacc there is no factoring of interest for project risk, limited capital tax structure the rate is too low its not wise
to use money from personal investments to finance the project.
Revenue = 15000
STUDENT NAME: MCDONALD KENESI
Net annual return = 15000 -21250 = - 6250
STUDENT NO 201417305
Which provides return on equity of - 6250/250000 = - 0.025 (-2.5%)
ENGINEERING Economics Assignment 2
B.
11 May 2014
Alternative 2
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014
Annual equity expense = 250000(A/P,0.088,15)= 250 000 (0.1226) = 30650 Financing from personal funds has a lower cost of capital and its economically justified.
Alternative 1
Alternative 2
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014
Fl – flexibility 0.5171
Sf – safety 0.2295
Up – Uptime 0.1725
Sp – speed 0.0802
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014
end of year salvage value AOC when retired in n year Annual equivalent
N=3
1 85 000.00 75 000.00 108 000.00 AE (3) = (100000- 61412.50)(A/P, 18%, 3) + 61412.50(0.18) + 65000 +10000(A/G, 18%, 3)
2 72 250.00 85 000.00 100 315.93
3 61 412.50 95 000.00 102 702.64 =38587.50(0.4599)+11054.25+65000+10000(0.8902)
4 52 200.63 105 000.00 105 110.14
=102702.64
5 44 370.53 115 000.00
6 37 714.95 125 000.00
7 32 057.71 135 000.00
N=4
AE (4) = (100000- 52200.63)(A/P, 18%, 4) + 52200.63(0.18) + 65000 +10000(A/G, 18%, 4)
Annual equivalent worth= (P-S) (A/P, I, n) + Si +annual equivalent of maintenance and operation. Note (65+10n) x 1000 is an arithmetic
=47799.37(0.3717)+9396.1134+65000+10000(1.2947)
gradient function thus (A/G,i,n) factor will be used.
=105110.14
N=1
Economic service life thus becomes two years i.e. year with least value of cost.
AE (1) = (100000-85000) (A/P, 18%, 1) +85000(0.18) + 65000 +10000
Q3.b annual worth = 100315.925 calculated in (a).
=15000(1.1800) +15300+65000+10000
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014
Q4
If annual worth is to be equivalent to that calculated then: fixed costs R’000 variable cost
administrative 30.00 materials 2500
100315.925 = (P-S)(A/P,i,6) + Si + 65000 + 10000(A/G,i,n)
salaries and benefits 70.00 labour 200
100315.925 = (P-0.37715 P)(02859) + (0.37715 P)(0.18) + 65000 + 10000(2.0252)
equipment 100.00 indirect labour 2000
100315.925 = P {(0.62285)(0.2859)+(0.37715)(0.18)}+65000 + 20252
space etc. 55.00 subcontractors 600
100315.925 = P {0.178073+ 0.067887} + 85252
Computers 33.33 misc. cost 200
100315.925 - 85252 = P (0.246617) Total Fixed cost 288.33 5500.00
15063.925 = 0.246617 P
F – fixed cost = 288 330
Then P= 15063.925/0.246617 = 61082.2652
V- variable cost =5500 N
Solution: First cost has to reduce to 61082.27 to make annual cost to be equivalent for 6 years.
TC - Total cost = 288330 + 5500 N
r- revenue received
N - number of units
RN = 288330 + 5500 N
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014
Revenue per unit is to be at least 5557.67 for break even at production of 5000m3. Q5
b. 500 000 = RN –(288330 + 5500N) annual worth for the challenger n=10, P= R2m, S = 50000
Q6.
Equivalent Annual Cost = annual equivalent of P- annual equivalent of Maintenance and
Operation + annual equivalent of salvage value year
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0 1 2 3 4 5 6 7 8 9 10 11 12
fixed cost 0 0 0 0 40 40 40 40 40 80 80 80 80
1 526 135.00
cost per t 0 0 0 0 150 154.5 159.14 163.91 168.83 347.78 358.22 368.96 380.03
defender = annual worth R1.5m
Cost per
produced 0 0 0 0 190 194.50 199.13 203.909 208.826 427.782 438.215 448.962 460.031
thus annual worth is in favour of the defender by -26 135.00 capital 266.67 266.67 266.67 700 700
the decision to buy is economically viable remediation 90
TOTAL
OUTFLOWS 0 266.670 266.670 266.670 380.00 389.00 398.27 1107.81 1117.65 855.564 876.431 897.924 1011.32
rate of decline of
unit price 1 0.97 0.9409 0.91267 0.88529 0.85873 0.83297 0.80798 0.78374
production 0 0 0 0 1.8 1.8 1.8 1.8 1.8 3.6 5.4 5.4 5.4
revenue/ton 500.00 485.00 470.45 456.336 442.646 429.36 416.486 403.991 391.871
TOTAL REVENUE 900.00 873.00 846.81 821.405 796.763 1545.7 2249.02 2181.55 2116.10
NCF 0 -266.667 -266.667 -266.667 520.00 484.00 448.54 -286.412 -320.889 690.156 1372.593 1283.629 1104.77
Engineering economics assignment 2 MKenesi201417305 May 2014 Engineering economics assignment 2 MKenesi201417305 May 2014
PW Negative NCF = 266.667 (P/F,16%,1) +266.667 (P/F,16%,2) + 266.667(P/F,16%,3) + 286.412 (P/F,16%,7) + 320.889 (P/F,16%,8)
= 798.1447
PWo = FWn
(1+i’)11 = 11.729
(1+i’) = 1.2508
i’= 0.25085=25,085%
Interest rate is 25,085% is greater than 18%. MARR of 18% is not justified.
Kenesi, M Kenesi, M
26 Kgosi+TD
• 2014Ass2KgosiTD.pdf
Kgosi, TD Kgosi, TD Kgosi, TD Kgosi, TD
PROBLEM 1
Given:
b) MARR @ 8.8%
PROBLEM 2 PROBLEM 4
rQ = FC + VQ
PROBLEM 3
r = R5 500/unit
Yr. First Cost Salvage Capital Recovery AOC AC PW (AC) AW (AOC+RC) Total AW
0 100000
1 85000 33000 75000 75000 63562.5 75003.75 108000
2 72250 30728.93 85000 85000 124609.5 79590.03 110318.96
3 61412.5 28800.64 95000 95000 182426.5 83902.3 112702.94
b) Profit = R500 000
4 2200.63 27163.14 105000 105000 236585.5 87947.98 115111.12
5 44370.53 25777 115000 115000 286852 91728.91 117505.91 Q = 8000m3
6 37714.95 24595.99 125000 125000 333152 95251.53 119847.52
Profit = rQ – (FC +vQ) = (r – v)Q - FC
PROBLEM 5 PROBLEM 6
Data: Given:
Annual cost = R1.5m
Investment Value Units
First cost = R2m Phase I (P Cap) 1.8 Mega ton
Phase IIA 3.6 Mega ton
Salvage value = R50 000
Phase IIB 5.4 Mega ton
N= 10 years Production Cost 150 per ton
Production Revenue 500 per ton
MARR = 15% gR (Revenue) -3% per year
gC (Costs) 3% per year
Fixed Cost I 40 million
Indirect costs Fixed Cost II 80 million
Department Basis hours Rate/hr Allocated Material Direct Remediation Cost 90 million
hr cost labour Investment Cost ( r) 15% per year
cost Borrowing Rate (k) 16% per year
A Labour 10 25 000 200 000 200 000 Periods 11 years
B Machine 5 25 000 50 000 200 000
C Labour 15 10 000 50 000 100 000
Total 300 000 500 000 Calculations:
PV @ 16
Year Invest Production CF FV @ 15% % FW + PW -
Indirect cost allocation calculations: 2012 -266.67 -266.67 4.6524 1 -266.67
2013 -266.67 -266.67 4.0456 0.8621 -229.89
Department A1CA 10 x 25 000 R 250 000 2014 -266.67 -266.67 3.5179 0.7432 -198.18
A1Cb 5 x 25 000 R 125 000 2015 590 590 3.059 0.6407 1804.82
2016 554.9 554.9 2.66 0.5523 1476.05
A1Cc 15 x 10 000 R 150 000 2017 520.37 520.37 2.3131 0.4761 1203.65
Total R 525 000 2018 -700 486.37 -213.63 2.0114 0.4104 -87.68
2019 -700 452.88 -247.12 1.749 0.3538 -87.44
2020 839.71 839.71 1.5209 0.305 1277.09
AOC = 500 000 + 300 000 + 525 000 = R1 325 000 2021 1201.84 1201.84 1.3225 0.263 1589.43
2022 1105.36 1105.36 1.15 0.2267 1271.16
2023 -90 1010.02 920.02 1 0.1954 920.02
AW = FC x (A/P,I,N) + S(A/F,I,N) – AOC
Σ 9542.22 -869.86
AW = -2 000 000 (A/P,15%,10) + 50 000(A/F,15%,10) – 1 325 000
a) PW=-250 000 + (15000) (P/A; 8.5%; 15) * (r) = 2(s) = (2) (2.5) = 5
Cost of debt capital is 9% for loan Capital recovery = Present value ((A/P; 18%; n) + Salvage value (A/F; 18%; n)
WACC= (0.4) (8.5%) + (0.6) (9%) =8.8% therefore MARR = 8.8% a) AW1 = [-100 000 (A/P; 18%; 1) + 85000 (A/F; 18%; 1)] –AOC1 -10000(A/G;18;1)
Annual Ne t Cash flow (NCF) = Project NCF – loan Payment = -100 000 (1.1800) + 85000 (1 – 75000) = R -108 000
= 15000 – 18.615 = R-3615 AW2 = [-100 000 (A/P; 18%; 2) + 85000 (A/F; 18%; 2)] –AOC1 - 10000(A/G;18;2)
It’s not worthwhile getting money from the loan. = [-100 000 (0.6387) + 72250 (0.4587)] – 75000 -10000(0.4587) = R -110315.93
c) Amount of equity invested = 250 000 – 150 000 = R100 000 AW3 = [-100 000 (A/P; 18%; 3) + 61412.5 (A/F; 18%; 3)] -AOC1 - 10000(A/G;18;3)
Thus By calculating PW at the MARR on committed equity capital = [-100 000 (0.4599) + 61412.5 (0.2799)] - 75000 - 10000(0.8902) = R -127 702.64
PW= -100 000 – 3615(P/A; 8.8; 15) AW4 = [-100 000 (A/P; 18%; 4) + 52200.63 (A/F; 18%; 4)] - AOC1 - 10000(A/G;18;4)
= -100 000 – 3615(8.1567) = [-100 000 (0.3717) + 52200.63 (0.1917)] – 75000 – 10000(1.2947) = R – 115 110.14
= R-129486.47 AW5 = [-100 000 (A/P; 18%; 5) + 44370.53 (A/F; 18%; 5)] -AOC1 - 10000(A/G;18;5)
Because of the above 100% investing is a better option. = [- 100 000 (0.3198) + 44370.53 (0.1398)] – 75000 – 10000(1.6728) = R -117 504.99
AW6 = [-100 000 (A/P; 18%; 6) + 37774.95 (A/F; 18%; 6)] - AOC1 - 10000(A/G; 18; 6) Problem 5
= [-100 000 (0.2859) + 37774.95 (0.1059)] – 75000 – 10000(2.0252) = R -119 841.63 To make components in house, the AOC is comprised of direct labor, direct material and indirect
costs.
ESL is in year 1 = R108 000
The provided table is used to calculate indirect cost allocation:
P = -12748/-0.246= R 51821.14
Department A : 25 000(10) = R 250 000
Comparing the two options, it is cheaper to make, since AW cost to make is lower than buying.
year Investment Production Remediation Cash flow (CF) Future Value at rate 15% (FV@r) Present Value @ borrowing rate 16%_(PW@k) FW+ PW-
2012 -266.67 -266.67 4.6524 1.0000 -266.67
2013 -266.67 -266.67 4.0456 0.8621 -229.896
2014 -266.67 -266.67 3.5179 0.7432 -198.189
2015 590 590 3.059 0.6407 1804.81
2016 554.9 554.9 2.6600 0.5523 1476.034
2017 520.37 520.37 2.3131 0.4761 1203.668
2018 -700 486.36 -213.64 2.0114 0.4104 -87.6779
2019 -700 452.88 -247.12 1.7490 0.3538 -87.4311
2020 839.71 839.71 1.5209 0.3050 1277.115
2021 1201.84 1201.84 1.3225 0.2630 1589.433
2022 1105.36 1105.36 1.1500 0.2267 1271.164
2023 1010.02 -90 920.02 1.0000 0.1954 920.02 179.7719
Total sum= 9542.244 -869.864
Question 1 Question 2
Present Worth PW = -R125 435, where PW is below 0 Uptime [u] One-half as important as u=0.5*f 50 0.1818
important
b) 60% loan for 15 years at 9% per year
Speed [v] As important as uptime v=u=0.5*f 50 0.1818
MARR = WACC = (60 * 9%) + (40 * 8.5%) = 8.8%
Rate of return [r] Twice as important as safety r=2*s=0.5*f=u 50 0.1818
Loan principal P loan = R250 000 * 0.6 = R150 000
Total 275 1.0000
Annual payment of the loan for 15 years = P loan * (A/P, 9%, 15)
AW 3 =-100 000(A/P, 18%, 3)-95 000+61 412.5 (A/F, 18%, 3)=R-123 800.6412
AW 4 =-100 000(A/P, 18%, 4)-105 000+52 200.625 (A/F, 18%, 4)=R-132 163.1402
AW 5 =-100 000(A/P, 18%, 5)-115 000+44 370.5313 (A/F, 18%, 5)=R-140 776.9997
AW 6 =-100 000(A/P, 18%, 6)-125 000+37 714,9516 (A/F, 18%, 6)=R-149 595.9866 The alternative annual worth is
ESL is 1 year with AW=R-108 000 per year. AW make = P (A/P, i, n) +S (A/F, i, n)-AOC
a) P = R-TC with P: Profit, R: revenue (R=r*Q BE ) and TC: Total cost (TC=Fixed cost + Variable cost) Carafes is the cheapest option to buy than making it , because making it costs more than buying it.
r*Q BE = FC + VC
(r-v) *Q BE = FC
P=R-TC=R-(FC+VC)=rQ-FC-vQ
r=R5598.541/m3
Question 5
Question 6
13.39
ERR 26.6 %
1145. 351= PCap Phase IIB × (PR(1 + gR)(yr−2015) − PR(1 + gC )(yr−2015)) − F C Phase II
= 5, 4(500(1 − 0, 03)^(2017−2015) − 150(1 + 0.03)^(2017−2015)) − 80
ERR = 26.6%
Khwela, NC Khwela, NC
29 Kudumela+FP
• 2014Ass2KudumelaFP.pdf
Kudumela, FP Kudumela, FP Kudumela, FP Kudumela, FP
Jenna Lavagna endure a little less risk if the capital was generated from its own resources,
rather than owing an external party money that could possibly not be generated.
201464989
Question 2:
Advanced Engineering Economics
Table 1. Table indicating the weighted attribute evaluation of the committee.
Assignment 2
Attribute Description Score Weights Normalised
Question 1: Calculation Weight
Flexibility (f) = max 10 = 10/27.5 = 0.3636
A: Safety(s) = 0.5u 2.5 = 2.5/27.5 = 0.0909
Uptime(u) = 0.5s 5 = 5/27.5 = 0.1818
Speed(v) =u 5 = 5/27.5 = 0.1818
Rate of Return(r) = 2s 5 = 5/27.5 = 0.1818
Because with the 100% equity option the WACC = MARR = 8.5% this would Total =27.5 =1
not be an option for the company due to the expected return being lower than
the cost of capital. Question 3:
B: a.)
( )( )
( ( )
( )( ) ( )( )
Again due to the WACC = MARR = 8.8% being higher than the expected return
on Investment the investment would not be advised.
C:
If the option of “Do Nothing” Exists this would be the one to go for or
perhaps an alternative investment. However if one of the options had to be
selected, it would be Option A because the cost of equity is less than the cost of
borrowing, therefore it would be cheaper to finance the investment with Option
A. It would be advisable to have a look at the noneconomic attributes of the The calculations in the excel spreadsheet above indicate the ESL is 1 year at an
two options. In this case the company would own more of itself and perhaps annual worth of -R 108 000.00.
The theory calculations (to make the result easier to interpret are as follows for - 108 000.00= ( ) ( )( )
the first 3 years) . ( ) ∑( ( ) ( ) ( )
Note: the values differ slightly from the ones in the table due to the rounding ( ) ( ) ( ))
error introduced by the table look up values. - 108 000.00= (( ) ( )) ( ) ∑( )
( ) ( ) - 108 000.00= ( )
- 12748.5117 = ( )
( ) ∑( ( ))
P = 51830.3818
( ) ( ) Therefore the initial investment would be adjusted to R 51830.3818
which is R48 169.6182 less than the original initial investment.
( )∑( ( ) ( )) Approximately 48.16% lower!
( ) ( )
( )∑( ( ) ( )
( ))
b.)
( ) ( )( )
( )∑( ( ) ( )
Question 4:
( ) ( )
a.)
( ) ( ))
Question 6:
I have included two solutions here, due to the poor wording of the question. To
obtain the answers posted on Ulink one would have to assume the cost are
R150/tonne and not R150 million per 1.8 million tonnes as is indicated in the
question. 6.1 indicates the solution that the lecturer expects. 6.2 however uses
the wording of the question on the actual question paper.
6.1 Calculations pertaining to Table 2 below which is the solution that the
lecturer expects.
Therefore a revenue of R 5 557.67 for 5000m3 will be required to break even.
b.) ( )
( )
( )
( ) ( )
Question 5:
Make AW:
( ) ( ) ∑
Table values were obtained from the relevant interest tables. For negative cash
( ) ( ) flows the P/F table value was obtained for 16% counting the number of years to
get to the present values. For positive cash flows the F/P value was obtained for
15% interest counting the number of years to get to the future value:
Therefore due to the lower cost in buying the carafae assembly on an annual
basis, Cuisinart Corporation should select the option of buying it at R 1.5m
compared to the option of making it at R1.721m. The Corporation will save
R 221 037.5
Lavagna, J Lavagna, J
6.2 Calculations pertaining to Table 3 below using the actual wording of the
question paper
( )
Table 2. Table displaying the calculations towards positive Future Worth and negative Present Worth Values
Cash flow
Construction Revenue Total Per unit Fixed Remed. FV @ PV @
Year MTons for the +FW -PW
Costs Factor Revenues costs Costs Cost 15% 16%
year
2012 0 -266.67 -266.67 1 -266.67 ∑
2013 0 -266.67 -266.67 0.8621 -229.8962
2014 1.8 -266.67 -266.67 0.7432 -198.1891
2015 1.8 0 500 900 -270 -40 590 3.059 R 1 804.81
Table values were obtained from the relevant interest tables. For negative cash
2016 1.8 0 485 873 -278.1 -40 554.9 2.66 1476.034 flows the P/F table value was obtained for 16% counting the number of years to
2017 1.8 0 470.45 846.81 -286.443 -40 520.367 2.3131 1203.6609
2018 1.8 -700 456.3365 821.4057 -295.0362 -40 -213.6305 0.4104 -87.6739 get to the present values. For positive cash flows the F/P value was obtained for
2019 1.8 -700 442.6464 796.7635 -303.8873 -40 -247.1238 0.3538 -87.4324 15% interest counting the number of years to get to the future value:
2020 3.6 429.3670 1545.7212 -626.0080 -80 839.7132 1.5209 1277.1198
2021 5.4 416.4860 2249.0244 -967.1823 -80 1201.8420 1.3225 1589.4361
2022 5.4 403.9914 2181.5536 -996.1978 -80 1105.3558 1.15 1271.1592
2023 5.4 391.8716 2116.1070 -1026.083 -80 -90 920.0233 1 920.0233
9542.2434 -869.8617
The sum of the positive cash flows at FW: R 9 542.24 million
∑
Therefore: (∑ ) ( ( )
)
Thus the investment should be considered due to the EROR > MARR at 18%.
Lavagna, J Lavagna, J
Lavagna, J Lavagna, J
Lavagna, J Lavagna, J
Table 3. Table displaying the calculations towards positive Future Worth and negative Present Worth Values
Construction Revenue Total Per unit Per unit Per unit Fixed Remed. Cash flow for FV @ PV @
Year MTons Costs Factor Revenues amount factor costs Costs Cost the year 15% 16% +FW -PW
2012 0 -266.67 -266.67 1 -266.67
2013 0 -266.67 -266.67 0.8621 -229.89620
2014 1.8 -266.67 -266.67 0.7432 -198.18914
2015 1.8 0 500 900 150 83.333333 -150 -40 710 3.059 2171.89
2016 1.8 0 485 873 154.5 85.833333 -154.5 -40 678.5 2.66 1804.81
2017 1.8 0 470.45 846.81 159.135 88.408333 -159.135 -40 647.675 2.3131 1498.137
2018 1.8 -700 456.3365 821.4057 163.90905 91.060583 -163.90905 -40 -82.50335 0.4104 -33.859374
2019 1.8 -700 442.646405 796.763529 168.826321 93.792400 -168.826322 -40 -112.062792 0.3538 -39.647815
2020 3.6 429.3670129 1545.721246 173.891111 96.606172 -347.782222 -80 1117.939024 1.5209 1700.273
2021 5.4 416.4860025 2249.024413 179.107844 99.504358 -537.323533 -80 1631.70088 1.3225 2157.924
2022 5.4 403.9914224 2181.553681 184.481079 102.48948 -553.443239 -80 1548.110441 1.15 1780.327
2023 5.4 391.8716797 2116.10707 190.015512 105.56417 -570.046537 -80 -90 1376.060534 1 1376.061
∑
Therefore: (∑ ) ( (
)
)
Thus the investment should be considered due to the EROR > MARR at 18%.
Lavagna, J Lavagna, J
32 Legoabe+KA
• 2014ASS2LEGOABEKA.pdf
Legoabe, KA Legoabe, KA Legoabe, KA Legoabe, KA
Problem 1:
= R-125437
Since PW˂0, it means that the 100% equity financing doesn’t agree with the required MARR
= 150 000(0.1241)
Cost for the borrowed 60% capital is at 9% per year for the loan
Student Number: 200571399
WACC = (equity fraction) (cost of equity capital) + (debt fraction) (cost of debt capital)
Lecture: L.S.J.Krüger
= (0.4) (8.5%) + (0.6) (9%)
Due Date: 26 May 2014
= 0.088
= 8.8%
= 8.8%
Problem 2:
The Annual Net cash flow = Project NCF –loan payment amount
Allocate a score of 10 for the most important attribute
= 15 000-18 615 Therefore, the most important attribute is F
= R-3615 F = 10
Equity amount invested = 250 000- 150 000 S = 0.5 ×U
= R 100 000 = 0.5 × 5
PW at MARR of 8.8% on the basis of the committed equity capital = 2.5
U = ½ (F)
PW = -100 000- 3615(P/A, MARR, 15)
= ½ (10)
= -100 000- 3615 (8.1567)
=5
= -129486.47
But :
= R -129486.47
V= U=5
Therefore since PW˂0, the 60:40 D-E mix doesn’t meet the required MARR. R= 2×S
Therefore it is not worthwhile to get money from loan =2×2.5
=5
c) Therefore in conclusion both financing plans and options don’t make the project
economically attractive, but PW for the personal investment option is closer to zero,
Attributes Important score
thus making it the better option.
F 10
S 2.5
U 5
V 5
R 5
Sum 27.5
Weighting
Wi = Score
Total Score
S= 2.5
27.5
= 0.1
3 4
Problem 3:
U= 5
27.5
Year Salvage Value (R) AOC Per year (R)
= 0.18
1 85000 75000
2 72250 85000
F= 10 3 61412.5 95000
27.5 4 52200.625 105000
5 44370.53125 115000
= 0.36 6 37714.95156 125000
V= 5
27.5 AOC per year = (65+10×n) ×1000
= 0.18 Year 1:
= 0.18 =R 75 000
Year 2:
Therefore
AOC per year = (65+10×n) ×1000
∑ F+S+U+V+R = 0.36+0.1+0.18+0.18+0.18
= (65+10×2) ×1000
= 1.00
=R 85 000
Year 3:
= (65+10×3) ×1000
=R 95 000
Year 4:
= (65+10×4) ×1000
=R 105 000
Year 5:
= (65+10×5) ×1000
5 6
=R 115 000
Year 6: =R 44370.53
=R 85 000 AW2 = -100 000 (A/P, 18%, 2) – ((75 000 +10 000(A/F, 18%, 2)) + 72250(A/F, 18%, 2)
S = P×0.85n = R-110315.9
=100 000×0.852 AW3 = -100 000 (A/P, 18%, 3) – ((75 000 +10 000(A/F, 18%, 3)) + 61412.5(A/F, 18%, 3)
Year 3 = R-112702.6
S = P×0.85n
AW4 = -100 000 (A/P, 18%, 4) – ((75 000 +10 000(A/F, 18%,4)) + 52200.6(A/F, 18%,4)
=100 000×0.853
= -100 000(0.3717) – ((75 000+10 000(1.2947)) +52200.6(0.1917)
=R 61412.5
= R-115110.1
Year 4
AW5 = -100 000 (A/P, 18%, 5) – ((75 000 +10 000(A/F, 18%,5)) + 44370.5(A/F, 18%,5)
S = P×0.85n
= -100 000(0.3198) – ((75 000+10 000(1.6728)) +44370.5(0.1398)
=100 000×0.854
= R-117505
=R 52200.63
AW6 = -100 000 (A/P, 18%, 6) – ((75 000 +10 000(A/F, 18%, 6)) + 37714.95(A/F, 18%, 6)
Year 5
= -100 000(0.2859) – ((75 000+10 000(2.0252)) +37714.95 (0.1059)
S = P×0.85n
= R-119847.99
=100 000×0.855
7 8
-P (0.2859) – ((75 000+10 000(2.0252)) +37714.95 (0.1059) =-108 000 = 30+ (20% of 350) +100+55+(1/3 of 100)
Total Variable cost = material +labour + Indirect labour + subcontractors +Misc cost
Therefore P= R 58558.98
= 2500+200+2000+600+200
But the original first cost amount was 100 000, therefore: = R5500/m3
Preduced= P original –Pequivalent AW QBE = FC
r-v
r = R5500.01 per m3
=5000 m3+3000 m3
= 8000 m3
Profit = R-TC
Thus r = R5562.53/m3
9 10
Problem 5: Problem 6:
11 12
ERR={(Fw+/-Pw-)^1/n} -1
ERR is 24.49%
13
Legoabe, KA Legoabe, KA
33 Lentsoane+MA
• 2014Ass2Lentsoane+MA.pdf.PDF
Lentsoane, MA Lentsoane, MA Lentsoane, MA Lentsoane, MA
QUESTION 2
Assignment No 2 2014/05/26
No. Attributes Score Normanisation of Score
QUESTION 1 1 Flexibility (f) 10 = 10/27.5 0.363636364
2 Safety (s) 2.5 = 2.5/27.5 0.090909091
Borrow or not Borrow 3 Uptime (u) 5 = 5/27.5 0.181818182
a) 4 Speed (s) 5 = 5/27.5 0.181818182
5 Rate of Return (r ) 5 = 5/27.5 0.181818182
P = R -250000 Total Score = 27.5 SUM =
MARR= = 85% 1
Calculating PW for the 40% equity financing n S (R ) A/F (1;n;MARR) A/F (MV) ( R)
0
PW = P + A(P/A, MARR,15) 1 85 000 1 85 000
= -100000+(-3615)(8.1567) 2 72 250 0.4587 33 141
= R -129486.4705 3 61 413 0.2799 17 189
It is also not worthwhile to get money from the loan. 4 52 201 0.1917 10 007
5 44 371 0.1398 6 203
c) There is no better option. 6 37 715 0.1059 3 994
QUESTION 5 QUESTIONAluminiam
6 Refinery Project (Expandable)
Total Annual Operating Cost = Direct Labour Cost + Direct Material Cost + Inderect Cost
= 500 000 + 300 000 + 525 000
= R 1 325 000
Due to the Make Price being higher than the current purchase price, it is then cheaper to parchase than to make.
Assignment 2 St No.: 200624832 Ratings by attractive with 100 for most important
Logic: F = 100
Problem 1 1 1
U= F = 100 = 50
2 2
a. 100% of equity financing
S = 0.5 50 = 25
MARR is 8.5%
R = 2S = 2 25 = 50
PW = -250 000 + 15 000 (P/A, 8.5%, 15)
Attribute Importance Scores:
PW = -250 000 + 15 000 (8.3042)
F 100
PW = $ -125 437 S 25
U 50
PW < 0, 100% percent finance does not meet the MARR requirement.
V 50
R 50
Total 275
b. With 60:40 Normalized weights, W = Score
275
Loan Principal = 250 000 0.6 = 150 000
F 0.36
Loan payment = 150 000 (A/P, 9%, 15) S 0.10
U 0.18
Loan payment = 150 000 (0.1241) = $ 18615 per year V 0.18
R 0.18
At WACC = 0.4 8.5% + 0.6 9% = 8.8% Total 1.00
= 15 000 – 18615
PW = $-129 486.47
PW < 0, 60:40 does not meet MARR requirement. In both financial plans, the project is not
economically viable.
1 2
Problem 3 Problem 4
S = P 0.85 n
Fixed cost, R’000 Fixed cost, R’000 Variable cost, R/Unit
Administrative 30 30 Materials 2500
a. For n = 1, Salaries and benefits: 20% of 350 70 Labour 200
Equipment 100 Indirect labour 2000
AW1 = -100 000 (A/P, 18%, 1) – 75 000 + 100 000 (0.85)2 (A/F, 18%, 1) 100
Space, etc. 55 Sub-contractors 600
AW1 = $-108 000 55
Computers : 0.33 of 33.33 Misc. cost 200
And for n = 2,
100
AW2 = -100 000 (A/P, 18%, 1) – 75 000 – 100 000 (A/G, 18%, 2) + 100 000(0.85)2 (A/F, 18%, 2) Total R288,33
R5500/Unit
AW2 = $-110 316
a. Profit = (r – v)Q – FC
ESL in 1 year with AW1 is $-108 000 0 = (r-5500) 5000 – 288 330
288330
(r – 5500) =
5000
b. Where n = 6 288330
r = 5500 R5557.67/u nit
5000
AW6 = -108 000 = -P(A/P, 18%, 6) – 75 000 – 100 000(A/G, 18%, 6) + P (0.37715)(0.10591)
3 4
Problem 5 Problem 6
Dept. Rate/h Allocated hrs Dept. cost Material cost Direct labour 800
A 10 25 000 250 000 200 000 200 000 Annual Investment = 266.67
3
B 5 250 000 125 000 50 000 200 000
C 15 10 000 150 000 50 000 100 000 annual Capacity
Total 525 000 300 000 500 000 Investment (Rm)
investment (Mt)
AOC = 525 000 + 300 000 + 500 000
Phase 1 (2012 - 2014) 800 266.67 1.8
AOC = R1 325 000 Phase 2 (2018 -2019) 1400 700 3.6 to 5.4
Remediation Cost 90 0
AWmake -P (A/P, i, n) + S (A/F, i, n) – AOC Production Cost
Production Revenue 500
= -2 000 000 (A/P, 15%, 10) + 50 000(A/P, 15%, 10) – 1 325 000 annual decrease 3%
= -2 000 000(0.1993) + 50 000(0.1993) – 1 325 000 Unit cost 150
Annual increase 3%
= -356 000 + 8900 – 1 325 000
AWmake = -1 672 100 Revenue per ton = Initial revenue/ton – (annual percentage decrease annual revenue/ton)
It is therefore cheaper to make Carafes because AW of costs is less. Unit cost/ton = initial unit cost + (annual percentage increase annual unit cost/ton)
Unit Fixed
Years n investment Capacity Revenue/ton
Cost/ton Cost
2012 1 266.667
2013 2 266.667
2014 3 266.667
2015 4 1.8 500.000 150.000 40
2016 5 1.8 485.000 154.500 40
2017 6 1.8 470.450 159.135 40
2018 7 700 1.8 456.337 163.909 40
2019 8 700 1.8 442.646 168.826 40
2020 9 3.6 429.367 173.891 80
2021 10 5.4 416.486 179.108 80
2022 11 5.4 403.991 184.481 80
2023 12 90 5.4 391.872 190.016 80
5 6
1
FWT ( NCF ) N
ERR
1
PWT ( NCF )
F/P,15% P/F,16%
Total Total Cash
n factor FW (+) n factor PW (-)
Revenue Cost Flow
-266.667 11 0 1 -266.667
-266.667 10 1 0.862 -229.893
-266.667 9 2 0.743 -198.187
900.00 310.000 590.000 8 3.059 1804.810 3
873.000 318.100 554.900 7 2.660 1476.034 4
846.810 326.443 520.367 6 2.313 1203.661 5
821.406 335.036 -213.631 5 6 0.410 -87.674
796.764 343.887 -247.124 4 7 0.354 -87.432
1545.721 706.008 839.713 3 1.521 1277.120 8
2249.024 1047.182 1201.842 2 1.323 1589.436 9
2181.554 1076.198 1105.356 1 1.150 1271.159 10
2116.107 1106.084 920.023 0 1.000 920.023 11
9542.243431 -869.8531
FW(+)/-PW(-) 10.9699
ERR 24.327%
ERR 25%
Madede, BK Madede, BK
36 Magae+TO
• 2014Ass2Magae+TO.pdf
Magae, TO Magae, TO Magae, TO Magae, TO
Maharaj, RR Maharaj, RR
38 Makabate+CT
• 2014Ass2MakabateCT.pdf
Makabate, CT Makabate, CT Makabate, CT Makabate, CT
C) I would recommend taking money from his own pocket as to taking a loan.
1 2
PROBLEM 2 PROBLEM 3
SOLUTION SOLUTION
A) AW1 = -100 000 (A/P,18%,1) -75000+37714,9515 (A/F,18%,1)
= -R 155285, 0485
Flexibility = 10
Safety = 5/2 = 2, 5 AW2 = - 100 000 (A/P, 18%, 2) -75000 (P/A, 18%, 2) (A/P, 18%, 2) -85000
(P/F, 18%, 2)(A/P, 18%, 2)
Uptime = 10/2 = 5 = -R 528773, 8729
Speed = same importance as uptime = 5
AW3 = - 100 000 (A/P, 18%, 3) -75000 (P/A, 18%, 3) (A/P, 18%, 3) -95000
Rate of return = 2* 2, 5 = 5 (P/F, 18%, 3) (A/P, 18%, 3)
= -R 147577, 081
AW4 = - 100 000 (A/P, 18%, 4) -75000 (P/A, 18%, 4) (A/P, 18%, 4) -105000
(P/F, 18%, 4) (A/P, 18%, 4)
ATTRIBUTE SCORE WEIGHT = -R 132411, 2485
FLEXIBILITY 10 0, 37
SAFETY 2, 5 0, 09
AW5 = -100 000 (A/P, 18%, 5) -75000 (P/A, 18%, 5) (A/P, 18%, 5) – 115000
UPTIME 5 0, 18 (P/F, 18%, 5) (A/P, 18%, 5)
= -R 123061, 1187
SPEED 5 0, 18
RATE OF RETURN 5 0, 18 AW6 = -100 000 (A/P, 18%, 6) -75000 (P/A, 18%, 6) (A/P, 18%, 6) – 125000
(P/F, 18%, 6) (A/P, 18%, 6)
27, 5 1 = -R 149885, 6137
B) EAC =i (NPV)/1 – (1 + i) –n
= i (100 000) / 1 – (1 + 0, 18) -6
= 0, 18 (100 000) / 1- (1, 18) -6
= 18 000 / 1 – 0, 3704
= R 26102, 0881
The first cost would have to be reduced by R 26102, 0881
3 4
PROBLEM 4 PROBLEM 5
SOLUTION SOLUTION
A) QBE = FC/ R-V
= 635 000/ R- 5500 DEPARTMENT A = 25000 (10)
= 250 000
R+ 5500= 635 000
R = 635 000/5500 DEPARTMENT B = 25000 (5)
= 125 000
R = 115, 4545
DEPARTMENT C = 10000 (15)
= 150 000
B) Profit Goal = R 500 000
Production volume = 5000m + 3000m AOC = -P (A/P, I, n) + S (A/F, I, n) – AOC
= 200 000 (A/P, 15%, 10) + 50 000 (A/F, 15%, 10) – 525 000
rQ – (FC + VQ) = 500 000 = 200 000 (0, 1993) + 50000 (0, 0493) – 525 000
r (8000) – (635 000 + 115, 4545(8000) = 500 000 = 398 600 + 2465 – 525 000
r (8000) – (635 000 + 923636) = 500 000 = - 123935
r (8000) = 500 000 + 635 000 – 923636
r (8000) = 211364
r (8000) / 8000 = 211364 / 8000 The Annual cost is –R 1500 000 (AW)
r = 26, 4205
Therefore…it is cheaper to make, as the annual cost is less.
5 6
PROBLEM 6
SOLUTION
Therefor the required rate of return is 19, 88% as it is better than the MARR of 18%.
Makabate, CT Makabate, CT
39 Makgale+NS
• 2014Ass2Makgale-NS.pdf
Makgale, NS Makgale, NS Makgale, NS Makgale, NS
Problem 1 Problem 2
a) Personal investment Member Member Member Member Norm.
1 2 3 4 Sum Average weight
MARR = 8.5% Fexibility
[f] 4.5 6 8 9 27.5 6.875 0.16
PW = -250 000 + 15 000(P/A, 8.5%, 15) safety [s] 3.375 4.5 6 6.75 20.625 5.15625 0.12
Uptime
= -250 000 + 15 000(8.3042) [u] 6.75 9 12 13.5 41.25 10.3125 0.24
Speed
[v] 6.75 9 12 13.5 41.25 10.3125 0.24
= R-125 437 Rate of
Return
b) 60% -40% financing [r] 6.75 9 12 13.5 41.25 10.3125 0.24
171.875 42.96875 1
Loan principal = 250 000(0.60) = R150 000
Annual NCF = project NCF – loan payment 3 45990 95000 182426.500 83897.947 129887.947
4 37170 105000 236585.500 87938.830 125108.830
= 15 000 – 18 618 = -R3 618 5 31980 115000 286852.000 91735.270 123715.270
6 28590 125000 333152.000 95248.157 37714.952 161553.108
Amount of equity invested = 250 000 – 150 000 = R100 000
ESL is at year 5
Even when first cost is reduced to R75 000, the ESL remain in year 5.
a) = R1 325 000
= R 27.5 X 106
0 = Revenue – 27788330
FV @ r PV @ k FW+ @ r PW- @ k
Revenue = R 27.79 x 106 Unit Unit Prod. Prod. Total F/P (1; P/F
n year Investment Revenue Cost Fix. Cost Rev Cost cost Income NCF n;15%) (1;n;16%)
b) 0 2012 -266.667 -266.667 -266.667
Production volume = 8 000 m2 3 2015 500.000 150.000 40 900.000 270.000 310.000 590.000 590.000 1804.810
6 2018 -700 456.337 163.909 40 821.406 295.036 335.036 486.370 -213.631 -92.352
Revenue = R44 788 330
7 2019 -700 442.646 168.826 40 796.764 303.887 343.887 452.877 -247.123 -92.894
Per Unit Revenue = 44788330/8000 8 2020 429.367 173.891 80 1545.721 626.008 706.008 839.714 839.714 1277.120
11 2023 -90 391.872 190.016 80 2116.107 1026.084 1106.084 1010.023 920.023 920.023
Problem 5
FW+ / -
PW- = 10.77691
Department A: 25 000(10) = R250 000
ERR = 0.241261
Department B: 25 000(5) = R125 000
24.13%
Total indirect costs = A+B+C = R525 000 i’ > MARR of 18%, therefore the phase investment should be considered using EROR approach.
ANSWER 1 c) Both financing options should be rejected; they are not economically attractive because
their PW is less than zero.
NCF: R15, 000
ANSWER 2
a) Personal Investment – 100% Equity
Attribute Logic Score Wi
PW = - 250, 000 + 15, 000(P/A, 8.5%, 15) 1. Flexibility (f) 7 7 0.3636
2. Uptime (u) ½ (f) 3.5 0.1818
= - 250, 000 + 15, 000(8.3042) 3. Safety (s) 50%(u) 1.75 0.0909
4. Speed (s) s=u 3.5 0.1818
= - R125, 437
5. Rate of Return (r) 2(s) 3.5 0.1818
Conclusion: PW <, 100% equity doesn’t meet the MARR requirement, therefore it is not 19.25 1
worthwhile. ANSWER 3
b) 60% Loan – 40% Equity a) AW 1 = -100, 000(A/P, 18%, 1) – 75, 000 + 100, 000(0.85)¹ (A/F, 18%, 1)
Principal Loan = R250, 000(0.6) AW 1 = -100, 000(1.18) – 75, 000 + 100, 000(0.85) (1.0)
= R150, 000 AW 1 = - R108, 000
AW 4 = -R115, 703
WACC = 0.4(85%) + 0.6(9%)
AW 5 = -R117, 505
= 8.8%
AW 6 = -R119, 848
+ P(0.85)6(A/F,18%,6)
Equity invested = 250, 000 – 150, 000 -108,000 = -P(0.28591) – 75,000 – 10,000(2.0252) + P(0.37715)(0.10591)
P = R51, 828
PW@MARR based on committed equity capital
b) 60% Loan and 40% Equity mix doesn’t meet the MARR requirement, therefore it is r =57.6666 + 5, 500
not worthwhile.
r = R5. 557 per unit
Makhafola, MR Makhafola, MR Makhafola, MR Makhafola, MR
Makhafola, MR Makhafola, MR
ANSWER 5
Unit
AW (make) = -2, 000, 000(0.1993) + 50, 000(0.0493) Annual Revenue Fixed Total Total Cash
Year Capacity Cost per n factor FW (+) n factor PW (-)
investment per ton Cost Revenue Cost Flow
Ton
FW(+)/-PW(-) 10.9699
ERR 24.327%
Conclusion:
The project may be considered because the ERR of 24.327% is more than the MARR of 18%
Makhafola, MR Makhafola, MR
Makhafola, MR Makhafola, MR
41 Makhoba+CS
• 2014GIE4058Ass2Makhoba-SC.pdf
Makhoba, CS Makhoba, CS Makhoba, CS Makhoba, CS
Makhoba, CS Makhoba, CS
42 Makhuvele+A
• 2014Ass2Makhuvele+A.pdf
Makhuvele, A Makhuvele, A Makhuvele, A Makhuvele, A
PROBLEM 2
(B) Loan Amount = 60% of project cost
= (250000)(60%)
= R150000 ATTRIBUTE EQUAL TO SCORE (Wi) WEIGHT (Wi)/ Total
Flexibility (F) F 10 10/27.5 =0.3636
Loan Annual Payment at 9% = P(A/P,9%,15) Safety[s] 0.5U 2.5 2.5/27.5 =0.0909
=(150000)(0.1241) Uptime[u] 0.5F 5 5/27.5 =0.1818
=R18615 Speed[v] U 5 5/27.5 =0.1818
Rate of Return[r] 2S 5 5/27.5 =0.1818
Debt-Equity Mix (60% – 40%): Total 27.5 1
WACC = (equity fraction) (cost of equity capital)+(debt fraction)(cost of debt
capital)
=(0.85)(0.4)+(0.9)(0.6)
=0.088
=8.8% PROBLEM 3
But MARR = WACC
Therefore MARR =8.8%
A)
Net Annual Net Cash flow = Annual Cash flow –Annual Loan Amount
Capital Recovery AW of Total AW
= 15000 – 18615 Year Salvage(S) AOC
CR = A/P(FC) +A/F(S )
A/G
AOC AW(Total) = CR + A/P(AW)
=R –3615 1 85000 -75000 -33000 -75000 -108000
Anticipated Equity investment = Project cost – Total loan amount
2 72250 -85000 -30727.48 0.4587 -79587 -110315.93
= 250000 – 150000
3 61412.5 -95000 -28800.64125 0.8902 -83902 -112702.6413
=R100 000
Therefore PW @ 8.8% =Initial Investment +Net Annual Cash flow 4 52200.625 -105000 -27163.14019 1.2947 -87947 -115110.1402
= P + A(P/A, 8.8%,15) 5 44370.5313 -115000 -25776.99972 1.6728 -91728 -117504.9997
= –100 000 + (–3615) (P/A, 8.8%,15) 6 37714.9516 -125000 -24595.98663 2.0252 -95252 -119847.9866
= –100 000 –(3615)(8.1567)
=R–129486.471
Economic Service Life is 1 year with Annual worth of R-108000
PW < 0 therefore, it is not worthwhile to get money from loan
B)
AW1 =-108000
But AW6 = CR + A/P(PWTAOC)
-108000 = -P(A/P,18%,6) + S(A/F,18%,6)+ AOC+ G(A/G,18%,6)
= R 1 325 000
B) Profit = 500 000
AW make = – Initial Investment + Salvage – AOC
– – = –P(A/P,i,n) + S(A/F,i,n) – AOC
= –2 000 000(A/P,15%,10) + 50 000(A/F,15%,10) – 1325000
– – = –2 000 000(0.1993) + 50 000 (0.0493) – 1325000
= R –1721135
–
– AW buy = R – 1500000
Makhuvele, A Makhuvele, A
( )
PROBLEM 6
( ) -1
Fixed cost
Tonnage
FV PV
ton
ERR>MARR
Makhuvele, A Makhuvele, A
43 Makibelo+CP
• 2014Ass2Makibelo C.P.pdf
Makibelo, CP Makibelo, CP Makibelo, CP Makibelo, CP
Makibelo, CP Makibelo, CP
44 Makuleka+JM
• 2014Ass2MakulekaJM.pdf
Makuleka, JM Makuleka, JM Makuleka, JM Makuleka, JM
Assignment: 2 Advance Economics: 14GIE4058 Student ID: 809750365 Student Name: JM Makuleka Date: 25-05-2014 Q5.
Calculate PW at the MARR on the basis of the committed equity capital. = -2000000(A/P,15%,10) + 50000(A/F,15%,10) - 132500
PW = -100,000 -3615(P/A,8.8%,15) = -2000000(0.1993) + 50000( 0.0493) - 1325000
= -100,000 -3615 x (8.1567) = -R1721135.00
= -R132294.96
Since PW < 0; a 60-40 D-E mix does not meet the MARR requirement.
Both do not meet MARR requirement. For buying:
AW = - R1500000
Therefore both buying and making are not viable to invest due to loses already.
Q2.
Normalised Q6.
weighted P/F @ k of F/P @ r
Flexibility Safety Uptime Speed Rate of return Total Average 16%(-) 15% (+) -ve +ve
Flexibility (f) 1 2 9 9 4 24 0.1818 Annual
Safety(S) 0.5 1.5 6.75 6.75 3 18 0.1364 revenue per Capacity Fixed Total Annual Present
Uptime(U) 1.5 3 13.5 13.5 6 36 0.2727 Yrs Investment ton Unit cost (Mt) Cost Revenue Total Annual Cost Cash Flow Borrowing PW n Investing FW Worth Future Worth
Speed(V) 1.5 3 13.5 13.5 6 36 0.2727 2012 266.6667 0 266.6667 -266.6667 0 1 11 4.6524 -266.6667
Rate of Return(S) 1 1.5 6.75 6.75 3 18 0.1364 2013 266.6667 0 266.6667 -266.6667 1 0.8621 10 4.0456 -229.8933
TOTAL 132 1 2014 266.6667 0 266.6667 -266.6667 2 0.7432 9 3.5179 -198.1867
2015 500 150.000 1.800 40 900.0000 310.0000 590.0000 3 0.6407 8 3.059 1804.8100
2016 485 154.500 1.800 40 873.0000 318.1000 554.9000 4 0.5523 7 2.66 1476.0340
Q3. 2017 470.45 159.135 1.800 40 846.8100 326.4430 520.3670 5 0.4761 6 2.3131 1203.6609
a) 2018 700 456.3365 163.909 1.800 40 821.4057 1035.0363 -213.6306 6 0.4104 5 2.0114 -87.6740
P = 100000 2019 700 442.646405 168.826 1.800 40 796.7635 1043.8874 -247.1238 7 0.3538 4 1.749 -87.4324
n = 6 years 2020 429.367013 173.891 3.600 80 1545.7212 706.0080 839.7132 8 0.305 3 1.5209 1277.1199
2021 416.486002 179.108 5.400 80 2249.0244 1047.1824 1201.8421 9 0.263 2 1.3225 1589.4361
S = P x0.85^(n) yr First cost Salvage cost AOC A/P P/F A/F AW 2022 403.991422 184.481 5.400 80 2181.5537 1076.1978 1105.3558 10 0.2267 1 1.15 1271.1592
= 100000x (0.85^(6) 0 100000 0 0 0 0 0 2023 90 391.87168 190.016 5.400 80 2116.1071 1196.0838 920.0233 11 0.1954 0 1 920.0233
= 37714.9516 1 0 85000 75000 1.1800 0.8475 1.000 -108003.7500 -869.8531 9542.2434
2 0 72250 85000 0.63872 0.7182 0.45872 -69721.4198
MARR = 18% 3 0 61412.5 95000 0.45992 0.6086 0.27992 -55392.6076 ERR =0.243265989
4 0 52200.625 105000 0.37174 0.5158 0.19174 -47298.1188 ERR = ERR = ((FW+)/( −PW))^(1/N) -1 =24.32659894
AOC = (65 +10 x n) 5 0 44370.53125 115000 0.31978 0.4371 0.13978 -41850.1085 = ((9542.2434)/(869.8531))^(1/11) -1
6 0 37714.95156 125000 0.28591 0.3704 0.10591 -37834.2425 ESL = 24.33%
n =2 AW = P(A/P,I,n)+S(A/F,I,n)-[AoCx(P/F,I,n)](A/P,I,n)
= -100 000 x 0.63872 + 72250 x 0.45872 -85000 x 0.4182 x 0.6382
= - 69721
Therefore n =6 AW = P(A/P,I,n)+S(A/F,I,n)-[AoCx(P/F,I,n)](A/P,I,n)
= 37834
Therefore ESL is at year 6 at AW = R37834
Q4.
a) Profit = Revenue- Total Cost
= R-TC
= Revenue-(FC+VC)
but TC = FC+VC
TC = 288330 + (5500 x 8000)
= 44288330
= 44288330 +500000
Therefore TC ( R) = R4928830
AW6 = - 100 000 (A/P, 18%, 4) – [ (75 000)(P/F, 18%, 1) + 85 000(P/F, 18%, 2) + 6. Given the following:
95 000(P/F, 18%, 3) + 105 000(P/F, 18%, 4) + 115 000(P/F, 18%, 5)] (A/P, 18%, 6) + Borrowing rate k = 16%, investment rate r = 15%, MARR = 18%, then
(37 715 – 125 000)(A/F, 18%, 6) = -78 998, Revenue = R500/t x 1.8 = R900M/t
The ESL is 2 years with AW = -R26 143.
For the external rate of return the following formula is widely used:
The first cost P will have to be reduced by R114 860 (R250 000 – R135 140).
∑ ( )
4. Given the following
(a) Total fixed costs FC = R568 000, Total variable costs v = R5 500,
Rn = P0 = 900(P/G, -3%, 9)(P/F, 15%, 2), where
At break-even, the Profit = 0 = (r – v)Q – FC
(P/F, 15%, 2) = [1 – (1–0.03)/(1+0.15)]/(0.15+0.03) = 4.3550
Then, r = FC/Q + v = 568 000/5000 + 5 500
Then P0 = 900(4.3550)(0.7561) = R2 964
r = R5 614 per year, per m3 of volume.
Therefore FW+ = 2694(F/P, 15%, 12) = R15 856.
(b) For profit goal of R500 000 at an additional capacity of 3000 m3, Expenditure En is:
Then, revenue per unit cost r is: 500 000 = (r – 5 500)8000 – 568 000
(r – 5 500) = (500 000 + 568 000)/8000
∑ ( )
r = R5 634 per year, per m3 of volume.
5. For making the equipment in-house, P0 = -40(P/A, 16%, 5)(P/F, 16%, 3) – 80(P/A, 16%, 4)(P/F, 16%, 8) – 700(P/A,
Total AOC = R525 000 + R300 000 + R500 000 = R1 325 000, 16%, 2)(P/F, 16%, 6) – 150(P/G, 3%, 9)(P/F, 16%, 2) - 90, where
(P/G, 3%, 9) = [1 – (1+0.03)/(1+0.16)]/(0.16-0.03)
AWmake = -2 000 000(A/P, 15%, 10) + F(A/F, 25%, 10) – AOC Then PW- = -R1 264
= -2 000 000(0.1993) + 50 000(0.0493) – 1 325 000
= -R1 721 135 To compute ERR,
1264(F/P, ERR, 12) = 15 856
AWbuy = -R1 500 000 Therefore (F/P, ERR, 12) = 15 856/1264 = 12.5443
It is cheaper to buy since AWmake > AWbuy Then the approximate ERR 23%
Problem 3 Problem 4
Yr FR A/P(18%) A/P(FC) Salvage CR AOC P/F (18%) P/F(AOC) PWT(AOC) AW(PWT) AW total (a) Fixed costs(FC) = (30 + 0.2 x 350 + 100 + 55 +100/3) x 1000
(1000) (1000)
= (30 + 70 + 100 + 55 + 33.3333) x 1000
0 ‐100 0.0000 0.0000 0.0000 0.0000 0.0000 1.0000 0.0000 0.0000 0.0000 0.0000 = R 288 333.333
1 1.1800 ‐118.0000 0.0000 ‐118.0000 ‐75.0000 0.8475 ‐63.5593 ‐63.5593 ‐75.0000 ‐193.0000 Variable cost ( VC)/Unit = 2500 + 200 + 2 000 + 600 + 200
2 0.6387 ‐63.8700 0.0000 ‐63.8700 ‐85.0000 0.7182 ‐61.0457 ‐124.6050 ‐79.5852 ‐143.4552 = 5 500/Unit
3 0.4599 ‐45.9900 0.0000 ‐45.9900 ‐95.0000 0.6086 ‐57.8199 ‐118.8656 ‐54.6663 ‐100.6563
4 0.3717 ‐37.1700 0.0000 ‐37.1700 ‐105.0000 0.5158 ‐54.1578 ‐111.9778 ‐41.6221 ‐78.7921
5 0.3198 ‐31.9800 0.0000 ‐31.9800 ‐115.0000 0.4371 ‐50.2676 ‐104.4254 ‐33.3952 ‐65.3752
Q =
6 0.2859 ‐28.5900 37.7150 9.1250 ‐125.0000 0.3704 ‐46.3039 ‐96.5715 ‐27.6098 ‐18.4848
Revenue r/unit = + v
FR is first cost = R100 000
A/P (FC) is the annual worth of the first cost r = R 112 666/Unit
P = 20.4623/0.2859 = R71 571.528
Problem 5 Problem 6
To make the components in – house the Annual Operating Cost (AOC) includes indirect costs +
material costs + Direct labour costs. FV@r PV @ k
Year Costs Production CF (15%) (16%) FW+ PW‐
Therefore:
2012 0 ‐266.6666 0.0000 ‐266.6666 4.6524 1.0000 0.0000 ‐266.6666
Indirect costs = 10 x 25 000 + 5 x 25 000 + 15 x 10 000, for department A,B and C
2013 1 ‐266.6666 0.0000 ‐266.6666 4.0456 0.8621 0.0000 ‐229.8850
= R 525 000
2014 2 ‐266.6666 0.0000 ‐266.6666 3.5179 0.7432 0.0000 ‐198.1767
Material costs = R 300 000, total of department A,B and C from the given table
2015 3 590.0000 590.0000 3.0590 0.6407 1804.8235 0.0000
Direct labour cost = R 500 000 , total of department A,B and C from the given table 2016 4 554.9000 554.9000 2.6600 0.5523 1476.0450 0.0000
AOC = 525 000 + 300 000 + 500 000 2017 5 520.3670 520.3670 2.3131 0.4761 1203.6405 0.0000
= R 1 325 000 2018 6 ‐700.0000 486.3694 ‐213.6306 2.0114 0.4104 0.0000 ‐87.6830
To make: 2019 7 ‐700.0000 452.8762 ‐247.1238 1.7490 0.3538 0.0000 ‐87.4397
Annual worth (AW) = First Cost (A/P,MARR,n) + Salvage (A/F,MARR,n) + AOC 2020 8 839.7132 839.7132 1.5209 0.3050 1277.0989 0.0000
= ‐ 2 000 000 (A/P,15%,10 years) + 50 000 (A/F, 15%,10 years) – 1 325 000 2021 9 1201.8421 1201.8421 1.3225 0.2630 1589.4361 0.0000
From the table at 15 % 2022 10 1105.3558 1105.3558 1.1500 0.2267 1271.1592 0.0000
= ‐2 000 000 (0.1993) + 50 000 (0.0493) ‐ 1 325 000 2023 11 ‐90.0000 1010.0233 920.0233 1.0000 0.1954 920.0233 0.0000
= ‐R 1 721 135 Total 9542.2265 ‐869.8511
The Cuisinart Corporation was purchased at an annual cost of ‐ R 1 500 000. ERR 0.2433 24.33
Buy or Make?
Answer is buy, AW of buying < AW of making.
ERR = 24.33 %
Where :
Production = 1.8 (capacity) x 500 (revenue)(1‐0.03)n ‐ 1.8(capacity) x 150(production
cost)(1+0.03)n ‐ 40 (fixed cost), where n(number of year) = 1,2,3etc. n start in year 4.
In year 10:
Production = 5.4 (capacity) x 500 (revenue)(1‐0.03)n – 5.4(capacity) x 150(production
cost)(1+0.03)n ‐ 80 (fixed cost), where n(number of year) = 1,2,3etc. n start in year 4.
ERR = (FW+/‐PW‐)1/n = (9542.2265/‐( ‐869.8511))1/11x 100% = 24,33 %
The phased investment should be considered as the External Rate of Return is higher than the MARR
18%.
Question 1
= (1)(8.5%)+(0)(9%)
=8.5%
ROR=R15000/R25000(100)= 6%
FACULTY OF ENGINEERING AND THE BUILD ENVIRONMENT (b). WACC= (equity fraction)(cost of equity capital)+(debt fraction)(cost of debt capital)
ENGINEERING MANAGEMENT =(0.4)(8.5%)+(0.6)(9%)
=8.8%
ASSIGNMENT 2 MARR=88%
(c). Better option is to finance the opportunity with 100% personnel investment because in (a)
MARR-ROR= 2.5% at (b) MARR-ROR=2.8 % so it is cheaper to finance it with option (a).
AW6=R-108 003.77
Wi=Si/S, where Wi is weight, Si is score for each attribute and S is the total score.
= R57.6666/m3
Option 2=-R1500.000
Question 6
Given information
Advanced Engineering Management: Assignment 2 2014 Advanced Engineering Management: Assignment 2 2014
NOMPUMELELO MANGENA
Problem 2
201284323
The committee of the scale
Problem 1
Borrow or not
(c ) Funky Industries/ owner should let this opportunity pass as it is not worthwhile to For n = 5: AW5 = -100,000(A/P,18%,5) – 75,000 - 10,000(A/G,18%,5)
invest money in it whether borrow or not , Opportunity not so good after calculations + 100,000(0.85)5(A/F,18%,5)
= = - 100 000(0,3198) – 75 000 – 10 000 ( 1,6728) + 44371 ( 0,1398)
= R – 117,505
1 2
Advanced Engineering Management: Assignment 2 2014 Advanced Engineering Management: Assignment 2 2014
Problem 4
Profit = (r – v) Q – FC
rQ = FC + vQ
(b) Q= 8000 m3
Profit = (r – v) Q – FC
500,000 = ( r – 5500)8000 – 288,333
(r – 5500) = ( 500,000 + 288,333) / 8000
3 4
Advanced Engineering Management: Assignment 2 2014 Advanced Engineering Management: Assignment 2 2014
Problem 6
ERR 0.2433
24.3266
5 6
Cell no. 061 2600 206/ Work tel. no. 011 3604 424
Course: Advanced Engineering Economics (GIE4058)
ADVANCED Submission Date: 22 May 2014
ENGINEERING ECONO
MICS
ASSIGNMENT 2
(1 + 0.085)15 − 1
𝑃𝑊 = −𝑅 250000 + 15000
QUESTION 01 0.085(1 + 0.085)15
(1.085)15 − 1
𝑃𝑊 = −𝑅 250000 + 15000
GIVEN INFORMATION: 0.085(1.085)15
a) Funky Industries primarily relies on 100% equity financing to fund projects. 3.3997 − 1
𝑃𝑊 = −𝑅 250000 + 15000
b) A good opportunity is available that will require R250 000 in capital. 0.085(3.3997)
c) The Funky owner can supply the money from personal investments that currently earn
2.3997
an average of 8,5%/year. 𝑃𝑊 = −𝑅 250000 + 15000
0.085(3.3997)
d) The annual cash-flow from the project is estimated to be R15 000.
e) It is also possible to borrow 60% for 15 years at 9%/year. 𝑃𝑊 = −𝑅 250000 + 15000 8.3042
f) If the MARR is the Weighted Average Cost of Capital (WACC), determine which is the
better option? (The analysis is done before tax.) 𝑃𝑊 = −𝑅 125437.1060
QUESTION: According to the calculation above, 100% equity financing does not meet the MARR
requirement because PW ˂ 0. Therefore it is not worth while to get the money from personal
a) Is it worthwhile to get the money from the personal investment? investment.
b) Is it worthwhile to get the money from the loan?
c) Which is the better option? b) Scenario 02:60% of the capital is borrowed for 15 years at 9%/year. The other 40% still
comes from equity.
ANSWER:
Therefore the amount of money coming from a loan is:
a)Scenario 01: The Funky owner decides to continue with 100% equity financing for projects.
𝐿𝑜𝑎𝑛 = (𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑) × (60%)
If the Funky owner decides to continue with 100% equity financing for projects:
𝐿𝑜𝑎𝑛 = 250000 × 60%
MARR = 8.5%.
𝐿𝑜𝑎𝑛 = 𝑅 150000
We determine PW at the MARR, assuming the life of the project to be 15-years.
The loan payment though is at 9%/ annum for the 15-years, therefore the loan cost per annum is:
Therefore:
𝐿𝑜𝑎𝑛 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 = 𝐿𝑜𝑎𝑛 × (𝐴 𝑃 , 9%, 15)
𝑃𝑊 = −𝑅 250000 + 15000(𝑃 𝐴 , 8.5%, 15)
𝑊𝐴𝐶𝐶 = 8.8%
Therefore the MARR is 8.8%, since it is given that the two are the same.
QUESTION 02
𝑀𝐴𝑅𝑅 = 8.8%
There the amount of money coming from equity is: GIVEN INFORMATION and ANSWER:
𝐸𝑞𝑢𝑖𝑡𝑦 = (𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑) × (40%) The ratings by attribute are presented below, with 100 for most important.
(1 + 0.088)15 − 1
𝑃𝑊 = −100000 − 3609 The normalised weights are determined according to the following formula:
0.088(1 + 0.088)15
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒
3.5435 − 1 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑠𝑒𝑑 𝑊𝑒𝑖𝑔𝑡𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 = 𝑁𝑊𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 =
𝑃𝑊 = −100000 − 3609 𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠
0.088 × 3.5435
Therefore, the normalised weights of the attributes are determined as follows:
2.5435
𝑃𝑊 = −100000 − 3609
0.088 × 3.5435 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 10
𝑁𝑊𝐹𝑙𝑒𝑥𝑖𝑏𝑖𝑙𝑖𝑡𝑦 = = = 0.3636
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
𝑃𝑊 = −100000 − 3609 8.1575
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 2.5
𝑃𝑊 = −𝑅 129440.4175 𝑁𝑊𝑆𝑎𝑓𝑒𝑡𝑦 = = = 0.0909
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
According to the calculation above, 60%-40% loan-equity financing also does not meet the
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 5.0
MARR requirement because PW ˂ 0. Therefore it is also not worth while to get the money from 𝑁𝑊𝑈𝑝𝑡𝑖𝑚𝑒 = = = 0.1818
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
loan-equity investment.
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒 𝑠𝑐𝑜𝑟𝑒 5.0
c)The better option is 100% equity investment because its PW is greater. 𝑁𝑊𝑆𝑝𝑒𝑒𝑑 = = = 0.1818
𝑆𝑢𝑚 𝑜𝑓 𝑠𝑐𝑜𝑟𝑒𝑠 27.5
QUESTION:
a) Determine the Economic Service Life (ESL) and corresponding Annual Worth (AW) of
the machine.
b) How much would the first cost have to be reduced to make the equivalent annual cost for
thebe equivalentfor a full 6 years numerical equal to the AW estimated in the previous
part (at ESL). Assume all the otherestimates remain the same and neglect the fact that this
lower P value will still not make a newly calculated ESLequal to 6 years.
ANSWER:
𝐴𝑊1 = −𝑅 108000
𝐴𝑊2 = − 100000 × 𝐴 𝑃 , 18%, 2 − [75000 + 10000(𝐴 𝐺 , 18%, 2)] + [100000 × 0.852 ] × (𝐴 𝐹, 18%, 2) The Economic service life (ESL) is 1 year and the Annual worth (AW) =-R108000 per annum.
2
𝐴𝑊2 = − 100000 × 0.63872 − [75000 + 10000(0.4587)] + [100000 × 0.85 ] × (0.45872)
The ESL annual worth has to be equated to the equivalent annual cost for a full 6-years. The
For year 3, n = 3, therefore: equivalent annual cost for a full 6-years is as follows;
𝐴𝑊3 = − 100000 × 𝐴 𝑃 , 18%, 3 − [75000 + 10000(𝐴 𝐺 , 18%, 3)] + [100000 × 0.853 ] × (𝐴 𝐹, 18%, 3) 𝐴𝑊6 = 𝐴𝑊𝐶𝑜𝑠𝑡 = −28591 − [𝑥 + 10000(𝐴 𝐺 , 18%, 6)]
𝐴𝑊3 = − 100000 × 0.45992 − [75000 + 10000(0.8902)] + [100000 × 0.853 ] × (0.27992) 𝐴𝑊𝐶𝑜𝑠𝑡 = −28591 − 𝑥 − 20252
𝐴𝑊4 = − 100000 × 𝐴 𝑃 , 18%, 4 − [75000 + 10000(𝐴 𝐺 , 18%, 4)] + [100000 × 0.854 ] × (𝐴 𝐹, 18%, 4) 𝐴𝑊𝐸𝑆𝐿 = 𝐴𝑊𝐶𝑜𝑠𝑡
𝐴𝑊4 = − 100000 × 0.37174 − [75000 + 10000(1.2947)] + [100000 × 0.854 ] × (0.19174) −108000 = 𝐴𝑊𝐶𝑜𝑠𝑡
𝐴𝑊5 = − 100000 × 𝐴 𝑃 , 18%, 5 − [75000 + 10000(𝐴 𝐺 , 18%, 5)] + [100000 × 0.855 ] × (𝐴 𝐹, 18%, 5) 𝑥 = 59157
𝐴𝑊5 = − 100000 × 0.31978 − [75000 + 10000(1.6728)] + [100000 × 0.855 ] × (0.13978) Therefore the initial cost would have to be reduced by:
𝐴𝑊5 = −31978 − 75000 − 16728 + 6202.113 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 𝑟𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 75000 − 59157
𝐴𝑊6 = − 100000 × 𝐴 𝑃 , 18%, 6 − [75000 + 10000(𝐴 𝐺 , 18%, 6)] + [100000 × 0.856 ] × (𝐴 𝐹, 18%, 6)
𝐴𝑊6 = −𝑅 119849
a. The total fixed cost and the total variable cost per unit are presented in table 4.2 below:
QUESTION 04
Table 4.2: Total fixed costs and total variable per unit costs
Fixed Cost, Variable Cost, R/Unit
GIVEN INFORMATION: Administrative 30000 Materials 2500
Salaries and benefits: 20% of 350000 Labour 200
a) Manager of engineered public systems. Equipment 100000 Indirect Labour 2000
b) One of the systems under your supervision is an emergency intercept pump system for Space,etc. 55000 Subcontractors 600
potable* water. Computers: 1/3 of 100000 Misc. cost 200
c) If the tested water quality or volume varies by a preset percentage, the system TOTAL 288333.3333 TOTAL 5500
automatically switches to preselected options of treatment or water sources.
d) The manufacturing process for the pump system had the following fixed and variable
Therefore, from table 4.2 above, the total fixed cost per year is R 288 333.333 and the
costs over a 1 year period.
total variable cost per year per unit is R/U 5500.
Table 4.1: fixed costs and variable costs
Fixed Cost, ‘000 Variable Cost, R/Unit According to formula 4.1 below, profit is given by:
Administrative 30 Materials 2500
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 [4.1]
Salaries and benefits: 20% of 350 Labour 200
Equipment 100 Indirect Labour 2000 Where:
Space,etc. 55 Subcontractors 600
Computers: 1/3of 100 Misc. cost 200 𝐶𝑜𝑠𝑡𝑇𝑜𝑡𝑎𝑙 = 𝐶𝑜𝑠𝑡𝐹𝑖𝑥𝑒𝑑 − 𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 [4.1]
i.e.
QUESTION:
𝑃 =𝑅−𝐶
a) Determine the minimum revenue per unit to break even at the current production volume 𝑃 = 𝑅 − 𝐶𝑉 + 𝐶𝐹 [4.2]
of 5000m3 per year.
b) If selling internationally and to large corporations is pursued, an increased production of
3000m3 will be necessary. Determine the revenue per unit required if a profit goal of
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡
R500 000 is set for the entire system. Assume the cost estimates above stay the same.
The total variable cost per year is given by:
ANSWER:
𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 = 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 × 𝑈𝑛𝑖𝑡𝑠
Assumptions:
Therefore:
Assume that the fixed costs are given in Rands.
Assume that, 1Unit = 1 m3 𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 = 5500 × 5000
𝐶𝑜𝑠𝑡𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 = 𝑅 27500000
Therefore the total variable cost is R 27 500 000, and the total fixed cost is R 288
333.3333.
𝑅 = (𝐶𝑉 + 𝐶𝐹 )
𝑟𝑄𝐵𝐸 = (𝐶𝑉 + 𝐶𝐹 )
QUESTION 05
(𝐶𝑉 + 𝐶𝐹 )
𝑟=
𝑄𝐵𝐸
GIVEN INFORMATION:
(27 500 000 + 288 333. 3333)
𝑟=
5000 a) Cuisinart Corporation has been purchasing thecarafe assembly of its major coffee-
maker line at an annual cost of R1,5m.
𝑟 = 5557.667 𝑅𝑎𝑛𝑑𝑠/𝑈𝑛𝑖𝑡
b) Now a suggestion has been made to make the component in-house.
b. Increased production of 3000m3 implies a total production of 8000m3. The profit is given c) There are three departments involved.
R 500 000. d) The departments’ annual indirect cost rates, estimated material, labour, and hours are
presented in table 5.1 below.
Therefore substituting the given information into equation 4.2 above: e) The equipment must be purchased with the following estimates:
𝑃 = 𝑅 − 𝐶𝑉 + 𝐶𝐹 [4.2] i. First cost of R2m.
ii. Salvage value of R50 000.
i.e. iii. Life of 10 years.
𝑃 = 𝑟𝑄 − 𝐶𝑉 + 𝐶𝐹 [4.2] QUESTION:
500 000 = 𝑟 × 8000 − 𝑣𝑄𝑁𝑒𝑤 + 288333.333 a) Perform an economic analysis for the make alternative, assuming that a market rate of
500 000 = 𝑟 × 8000 − 5500 × 8000 + 288333.333 15%/year is the MARR.
𝑟 = 5598.5417 𝑅𝑎𝑛𝑑𝑠/𝑈𝑛𝑖𝑡
ANSWER:
If the components are going to be made in house, the annual operating cost (AOC) consistsof: The annual operating costs is therefore:
Indirect costs. 𝐴𝑂𝐶 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡
Direct labour.
𝐴𝑂𝐶 = 525000 + 300000 + 500000
Direct material.
𝐴𝑂𝐶 = 𝑅 1325000
The indirect costs are calculated according to the following formula:
𝐴𝑊𝑀𝑎𝑘𝑒 = −𝑃 𝐴 𝑃 , 𝑖, 𝑛 + 𝑆 𝐴 𝐹 , 𝑖, 𝑛 − 𝐴𝑂𝐶
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴 = 25000 × 10
𝐴𝑊𝑀𝑎𝑘𝑒 = −2000000 𝐴 𝑃 , 15%, 10 + 50000 𝐴 𝐹 , 15%, 10 − 1325000
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐴 = 𝑅 250000
𝐴𝑊𝑀𝑎𝑘𝑒 = −2000000 0.19925 + 50000 0.04925 − 1325000
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑜𝑢𝑟𝑠𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 × 𝑅𝑎𝑡𝑒𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵
𝐴𝑊𝑀𝑎𝑘𝑒 = −𝑅 1721038
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 = 25000 × 5
Therefore it is cheaper to continue buying because:
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐵 = 𝑅 125000
−𝑅 1,500,000 > −𝑅 1,721,038 = 𝐴𝑊𝑀𝑎𝑘𝑒
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶 = 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑜𝑢𝑟𝑠𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶 × 𝑅𝑎𝑡𝑒𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 𝐶
The totals of the material cost and direct labour cost for the departments are given as:
Maraba, TJ Maraba, TJ
The initial investment is displayed by the three –R266.6667 millionin years 2012, 2013 and
2014,which are represented in the figure by 12, 13 and 14 respectively. In these years there is no
productions and therefore no revenues and costs.
𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
2000 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
1500
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟗𝟎𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
1000 Investment
Production Revenue Revenues in years 2016 – 2019 are also calculated with the same formula 6.1 above, at the same
500
Production Cost 1.8 Mt tonnes per year, but the only difference being that the initial revenue per ton of
0 Annual Fixed Costs +R500/ton decreasesby -3%annually.
0 12 13 14 15 16 17 18 19 20 21 22 23
-500 Therefore, the revenue in 2016 is:
-1000 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]
-1500
(0.97) × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Figure 6.1: Cash flows 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟖𝟕𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Maraba, TJ Maraba, TJ
In year 2017, the revenue is:
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.1]
(0.97)2 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟖𝟒𝟔. 𝟖𝟏𝟎𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 From here onwards, the revenue is given by formula 6.2 below:
(0.97)5 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (3.6 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟏𝟓𝟒𝟓. 𝟕𝟐𝟏𝟐 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Again the tonnes produced per annum increase from 3.6Mt to 5.4Mt in 2021 due to expansion in
capacity. The tonnes produced per annum remain at 5.4Mt from this point onwards.
(0.97)6 × 𝑅 500𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = × (5.4 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = +𝑹𝟐𝟐𝟒𝟗. 𝟎𝟐𝟒𝟒 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
SECTION 6.4: PRODUCTION COST, ANNUAL FIXED COSTS AND COST PER TONNES In year 2018, the cost is:
Once again, the initial investment is represented by the three –R266.6667 million in years 2012, 𝐶𝑜𝑠𝑡 =
𝐶𝑜𝑠𝑡
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛
2013 and 2014, represented in the figure by 12, 13 and 14 respectively. In these years there is no
productions and therefore no revenues and costs. (1.03)3 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
In year 2015(i.e. 15), the first production cost of –R270 millionis displayed in the figure 6.1.
This production cost is calculated according to the given information in the following manner: 𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟗𝟓. 𝟎𝟑𝟔𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
1.8Mt per annum produced from year 2015 to year 2019 𝐶𝑜𝑠𝑡 =
𝐶𝑜𝑠𝑡
× (𝑡𝑜𝑛𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛
The cost per ton per annum is R150/ton,increasing at +3% annually
(1.03)4 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Therefore, according to formula 6.3 below, the 2015cost is calculated as follows: 𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3] 𝐶𝑜𝑠𝑡 = 𝑹𝟑𝟎𝟑. 𝟖𝟖𝟕𝟒 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛 The cost per ton per annum continues to increase by 3% annually, throughout all the years. But,
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 in year 2020 the tonnes produced increase from 1.8Mt to 3.6Mt due to expansion in capacity,
which is effective as from 2020.
𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟕𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Therefore in 2020 the cost is:
Costs in years 2016 – 2019 are also calculated with the same formula 6.3 above, at the same 1.8
Mt tonnes per year, but the only difference being that the initial cost per ton of 𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
R150/tonincreases by +3% annually.
(1.03)5 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Therefore, the cost in 2016 is: 𝐶𝑜𝑠𝑡 = × (3.6 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑛
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3] 𝐶𝑜𝑠𝑡 = +𝑹𝟔𝟐𝟔. 𝟎𝟎𝟖𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
(1.03) × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛 Again the tonnes produced per annum increase from 3.6Mt to 5.4Mt in 2021 due to expansion in
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 capacity. The tonnes produced per annum remain at 5.4Mt from this point onwards.
𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟕𝟖. 𝟏 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 Therefore in 2021, the revenue is:
In year 2017, the cost is: 𝐶𝑜𝑠𝑡 =
𝐶𝑜𝑠𝑡
× (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛
𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡 = × (𝑡𝑜𝑛𝑛𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) [6.3]
𝑡𝑜𝑛 (1.03)6 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 = × (5.4 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛
(1.03)2 × 𝑅 150𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑜𝑠𝑡 = × (1.8 𝑡𝑜𝑛𝑛𝑒𝑠)
𝑡𝑜𝑛 𝐶𝑜𝑠𝑡 = +𝑹𝟗𝟔𝟕. 𝟏𝟖𝟐𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
𝐶𝑜𝑠𝑡 = 𝑹𝟐𝟖𝟔. 𝟒𝟒𝟑𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Maraba, TJ Maraba, TJ
Where n = 7, 8 for the years 2022 and 2023respectively. The computed costs, the tonnes
produced per annum and the revenues per ton are presented in table 6.2 belowfor their
corresponding years.
Annual fixed costs are also presented in figure 6.2 below. The annual fixed costs are presented
from 2015 (15) at–R40 million. The –R40 millionremains constant from 2015 (15)through to
SECTION 6.5: INVESTMENT, PRODUCTION COST/ ANNUM, TOTAL COSTS/ ANNUM, REVENUES AND THE CASH FLOWS
2019 (19). In 2020 (20), the annual fixed cost value increases to –R80 millionfor the life of the
The total costs are the sums of the annual fixed costs and the corresponding production cost. These are presented in table 6.3 below
project. These values are also presented in table 6.2 below.
together with the investments, the revenues and the cash flows for the respective years.
Table 6.3: Investment, total costs, revenues and the cash flows
n Year Investment (R. million) Prod.Cost (R. million) Annual FC (R. million) Total Costs (R. million) Revenue(R. million) CF (Combined)
Table 6.2: Revenue, tonnes produced per annum and the revenues per ton 0 2012 -266.6667 0 0 0 0 -R266.6667
N Year Prod.Cost/(Tons) Prod.(Tons) Prod. Cost (R. million) Annal FC 1 2013 -266.6667 0 0 0 0 -R266.6667
2 2014 -266.6667 0 0 0 0 -R266.6667
0 2012 0 0 0 0 3 2015 0 -270 -40 -310 900 R 590.00
1 2013 0 0 0 0 4 2016 0 -278.10 -40 -318.10 873 R 554.90
2 2014 0 0 0 0 5 2017 0 -286.4430 -40 -326.443 846.8100 R 520.37
6 2018 -700 -295.0363 -40 -335.036 821.4057 R -213.63
3 2015 150 1.8 270 -40
7 2019 -700 -303.8874 -40 -343.887 796.7635 R -247.12
4 2016 154.5 1.8 278.1 -40 8 2020 0 -626.0080 -80 -706.008 1545.7212 R 839.71
5 2017 159.135 1.8 286.4430 -40 9 2021 0 -967.1824 -80 -1047.18 2249.0244 R 1201.84
10 2022 0 -996.1978 -80 -1076.2 2181.5536 R 1105.36
6 2018 163.9091 1.8 295.0363 -40
11 2023 -90 -1026.0838 -80 -1106.08 2116.1071 R 920.02
7 2019 168.8263 1.8 303.8874 -40
8 2020 173.8911 3.6 626.0080 -80
9 2021 179.1078 5.4 967.1824 -80
10 2022 184.4811 5.4 996.1978 -80
11 2023 190.0155 5.4 1026.0838 -80
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ
Investments.
The production costs per annum.
The annual fixed costs per annum
The total costs per annum.
The revenues per annum.
The complete cash flows per annum.
Investment - As presented in table 6.3 above, the initial investment is represented by the three –
R266.6667 million in years 2012, 2013 and 2014. In the years 2018 and 2019, there is a further
investment of –R700 million per yearfor the plant upgrade; and then there is aplant remediation + and - Nett Cash Flows vs. Year
cost of -R90millionat the end of the plant’s lifetime in 2023. 1400
Production cost per annum–Production costs begin in 2015 when operations start. The 1200
production cost increases from –R270 million in 2015 to –R1026.0838 million in the 2023 at the 1000
end of the plant’s lifetime. The increase is brought about by the annual +3% increase in
800
production cost per ton produced throughout the plant’s lifetime, and the increase in tonnes
produced, from 1.8Mt to 3.6Mt in 2020 and eventually to 5.4Mt in 2021 onwards, after the plant 600 + Nett Cash Flow
upgrade in 2018 and 2019. 400 - Nett Cash Flow
Annual fixed costs – Annual fixed costs also begin in 2015 when operations start. The fixed costs 200
are constant from2015 to 2019, at –R40 million. In 2020 the annual fixed per annum costs 0
increase from -R40 million to -R80 million because of plant upgrades. The annual fixed costs 0 12 13 14 15 16 17 18 19 20 21 22 23
-200
remain at -R80 million from 2020 for the life of the plant which ends in 2023.
-400
Total costs – The total costs are given by the sum of the production costs and the annual fixed
Figure 6.2: Positive and negative net cash flows.
costs for each year. And they increase from -R310 million in 2015, to –R1106.08 million in
2023.
Cash flow per annum – The cash flow for every year is given by the sum of the investments, the
revenues and the total costs for every year. The nettcash flow for each year can be seen in figure
6.2 below, and it ranges from –R266.6667 million to +R1201.84 million.
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ
SECTION 6.6: FUTURE WORTH FACTOR AND PRESENT WORTH FACTOR The future worth factor (FWf) for year 2017
The future worth factors and the present worth factors presented in table 6.4below are calculated
for the investment rate of 15% and the borrowing rate of 16% respectively. They are calculated 𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛
in the following ways:
𝐹𝑊𝑓2017 = (1 + 0.15)6
Future worth factor(FWf) for 15%investment rateaccording to formula 6.5 below: 𝐹𝑊𝑓2017 = (1.15)6
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛
Calculation of the FWffor years 2015, 2016, 2017 and 2020, 2021, 2022 and 2023
𝐹𝑊𝑓2020 = (1 + 0.15)3
Therefore, the future worth factor (FWf) for year 2015
𝐹𝑊𝑓2020 = (1.15)3
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛 [6.5] Therefore:
𝐹𝑊𝑓2015 = (1 + 0.15)8 𝐹𝑊𝑓2020 = 1.521
8
𝐹𝑊𝑓2015 = (1.15)
𝐹𝑊𝑓2021 = (1 + 0.15)2
The future worth factor (FWf) for year 2016
𝐹𝑊𝑓2021 = (1.15)2
𝑛
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟) Therefore:
7
𝐹𝑊𝑓2016 = (1 + 0.15) 𝐹𝑊𝑓2021 = 1.323
7
𝐹𝑊𝑓2016 = (1.15)
Therefore:
𝐹𝑊𝑓2016 = 2.660
The future worth factor (FWf) for year 2022 Present worth factor(PWf) for 16%investment rate:
1
𝑃𝑊𝑓 = (1+𝑘)𝑛 [6.6]
𝐹𝑊𝑓𝑌𝑒𝑎𝑟 = (1 + 𝑟)𝑛
𝐹𝑊𝑓2022 = (1.15)1
Therefore: Where:
1
𝑃𝑊𝑓2018 =
(1.16)0
Therefore:
𝑃𝑊𝑓2018 = 1.0000
1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛
1
𝑃𝑊𝑓2013 =
(1 + 0.16)1
1
𝑃𝑊𝑓2013 =
(1.16)1
Therefore: 1
𝑃𝑊𝑓2019 =
(1.16)7
𝑃𝑊𝑓2013 = 0.8621
Therefore:
𝑃𝑊𝑓2019 = 0.3538
The present worth factor (PWf) for year 2014
1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛
1
𝑃𝑊𝑓2014 =
(1 + 0.16)2
1
𝑃𝑊𝑓2014 =
(1.16)2
Therefore:
𝑃𝑊𝑓2014 = 0.7432
1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛
1
𝑃𝑊𝑓2018 =
(1 + 0.16)6
1
𝑃𝑊𝑓2018 =
(1.16)6
Therefore:
𝑃𝑊𝑓2018 = 0.4104
1
𝑃𝑊𝑓𝑌𝑒𝑎𝑟 =
(1 + 𝑘)𝑛
1
𝑃𝑊𝑓2019 =
(1 + 0.16)7
Maraba, TJ Maraba, TJ
Going back to table 6.4 above, the FW+ and PW-values are determined according to formulas
[6.7] and [6.8] respectively.
For the years: 2015, 2016, 2017 and 2020, 2021, 2022 and 2023
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ
Maraba, TJ Maraba, TJ Maraba, TJ Maraba, TJ
𝐹𝑊2023 + = 1 × 920.02
For year-2020
Therefore: 𝐹𝑊2023 + = 920.02
Negative net cash flows occur in the years 2012, 2013, 2014 and 2018, 2019 For year-2018
Therefore formula 6.8 is used to determine the PW-values in the following way: 𝑃𝑊𝑌𝑒𝑎𝑟 − = 𝑃𝑊𝑓𝑌𝑒𝑎𝑟 × (𝐶𝐹𝑌𝑒𝑎𝑟 )
Therefore:
𝑃𝑊2013 − = −229.8934
For year-2014
Therefore:
𝑃𝑊2014 − = −198.1867
SECTION 6.8: FW+ and PW- SUMMATIONS (∑) Where: n = the number of years, i.e. n = 11
Table 6.5 below, displays the calculated FW+ and PW-values and their respective summations Therefore substituting into the above equation,
(∑)
1
𝐸𝑅𝑅 = −1 + 10.9298 11 × 100
Table 6.5:FW+ and PW- valuesand their respective summations
FW+ PW-
Therefore:
-266.67
-229.89 𝐸𝑅𝑅 = 24.2852%
-198.18
1804.82 Therefore:
1476.05
𝐸𝑅𝑅 = 24.2852% > 𝑀𝐴𝑅𝑅 = 18 ∗
1203.64
-87.68 Therefore the phased investment should be considered.
-87.44
1277.10
1589.44
1271.16
920.02
∑ = 9542.23 ∑ = - 869.86
Therefore:
𝐹𝑊 + = 9542.23
and,
𝑃𝑊 − = − 869.86
And therefore:
∑ 𝐹𝑊 + 9542.23
=
− ∑ 𝑃𝑊 − −(−869.86)
∑ 𝐹𝑊 +
= 10.9298
− ∑ 𝑃𝑊 −
And therefore:
1
∑ 𝐹𝑊 + 𝑛
𝐸𝑅𝑅 = −1 + × 1000
− ∑ 𝑃𝑊 −
Problem 1
PW at MARR:
UNIVERSITY OF JOHANNESBURG
(a). PW = -250, 000 + P(P/A,8.5%,15)
MPhil Engineering Management
= -2500, 000 + 15, 000(8.3042)
= R-125437
= R-3615
Equity Invested = 250 000 – 150 000 1. Flexibility (f) The most important factor
2. Safety (s) 50% as important as uptime
= R100 000
3. Uptime (u) One half as important as flexibility
Now find PW for committed equity capital at new MARR
4. Speed (s) As important as uptime
PW = -100 000 + A(P/A,i,n) 5. Rate of return (r) Twice as important as safety
Problem 3 Problem 4
r = R5500.058
r = 62.536 + 5500
r = 5562.54 = 5563
Problem 5 Problem 6
Provided: Provided:
Revenue
Indirect Costs Year Cost Unit Cost Fixed Cost Capacity
Basic
2012
Department Hours Rate/hour Allocated hours Material Cost Direct Labour Cost
2013
A Labour 10 25 000 200 000.00 200 000.00
2014
B Machine 5 25 000 50 000.00 200 000.00
2015 500 150 40 000 000.00 1 800 000.00
C Labour 15 10 000 50 000.00 100 000.00
2016 485 154.5 40 000 000.00 1 800 000.00
Total 300000.000 500000.000 2017 470.45 159.14 40 000 000.00 1 800 000.00
2018 456.34 163.91 40 000 000.00 1 800 000.00
2019 442.65 168.83 40 000 000.00 1 800 000.00
Let’s allocate indirect cost: 2020 429.37 173.89 80 000 000.00 3 600 000.00
2021 416.49 179.11 80 000 000.00 5 400 000.00
Departments Costs 2022 403.99 184.48 80 000 000.00 5 400 000.00
2023 391.87 190.01 80 000 000.00 5 400 000.00
A 10 x (25 000) = R250 000
B 5 x (25 000) = R125 000
C 15 x (10 000) = R150 000 Workings:
TOTAL R 525 000
Year Production Investment CF FV at r PV at k FW+ PW-
2012 -266666666.7 -266666666.7 4.6524 1 -266666667
2013 -266666666.7 -266666666.7 4.0456 0.8621 -229893333
AOC = 500 000 + 525 000+ 300 000 2014 -266666666.7 -266666666.7 3.5179 0.7432 -198186667
2015 590000000 590000000 3.059 0.6407 1804810000
= R1 325 000 2016 554900000 554900000 2.66 0.5523 1476034000
2017 520358000 520358000 2.3131 0.4761 1203640090
Have, 2018 486374000 -700000000 -213626000 2.0113 0.4104 -87672110
2019 452876000 -700000000 -247124000 1.749 0.3538 -87432471
AW = -P(A/P,i,n) + S(A/F;i;n) – AOC 2020 839728000 839728000 1.5208 0.305 1277058342
2021 1201852000 1201852000 1.3225 0.2629 1589449270
= -1 500 000(A/P,15%,10) + 50 000(A/F;15%;10) – 1 325 000 2022 1105354000 1105354000 1.15 0.2267 1271157100
2023 101004400 -90000000 920044000 1 0.1954 179776598
= -1 500 000 (0.1993) + 50 000 (0.0493) – 1 325 000 Total 8622148802 -690074651
Presently we buy at AW = R -1 500 000 which is more than AW MARR; therefore buying Production = (Capacity x Revenue cost) – (Capacity x Unit Cost) – FC
is cheaper than making.
CF = Investment + CF
Masunungure, I Masunungure, I
55 Mathebula+NP
• 2014Ass2MATHEBULA+NP.pdf
Mathebula, NP Mathebula, NP Mathebula, NP Mathebula, NP
Mathebula, NP Mathebula, NP
56 Mathopo+NS
• 2014Ass2Mathopo+NS.pdf
Mathopo, NS Mathopo, NS Mathopo, NS Mathopo, NS
PROBLEM 1
1(a)
26 May 2014
1 (b
WACC = (Equity fraction) (cost of equity capital) + (debt fraction) (cost of debt capital)
WACC = (40 /100) (8.5%) + (60 / 100) (9%)
WACC = (0.4) (8.5%) + (0.6) (9%)
WACC = 3.4 + 5.4
FACULTY OF ENGINEERING AND THE BUILT ENVIRONMENT
WACC = MARR = 8.8%
UNIVERSITY OF JOHANNESBURG
Page 1 of 12 Page 2 of 12
P = A (P/A, i, n) flexibility
PW = -129 486.47
Wi = Si / Si
1) W i = 10 / 25 = 0.4
2) W i = 2.5 /25 = 0.1
3) W i = 5 / 25 = 0.2
4) W i = 2.5 / 25 = 0.1
5) W i = 5 / 25 = 0.2
Page 3 of 12 Page 4 of 12
P = = R 100 000, n = 6 years, MARR = 18%, AOC = (65 + 10 x n) x 1000, n 1) AW 1 = [-118 000 + 8500] – [ (63563) (1.1800)]
AW 1 = -184 504
Year 3 = S3 = R 10 000 x (0.85)3 = R 10 000 x (0.6141) = R 6 141 AW 4 = [-37 170 + 1001] – [ (236 586) (0.3717)]
4 AW 4 = -124 108
Year 4 = S5 = R 10 000 x (0.85) = R 10 000 x (0.5220) = R 5 220
Year 5 = S5 = R 10 000 x (0.85)5= R 10 000 x (0.4437) = R 4 437 AW 5 = [-31 980 + 620] – [ (286 853) (0.3198)]
AW 5 = -123 096
6
Year 6 = S6 = R 10 000 x (0.85) = R 10 000 x (0.3772) = R 3 772
AW 6 = [-28 590 + 400] – [ (333 153) (0.2859)]
AW 6 = -123 438
AOC = (65 + 10 x n) x 1000, n 1
Year 6 = (65 +10 x 6) x 1000 = R 125 000 -184 504 = [ - P(0.2859) + 400] – (95 248.44)
Page 5 of 12 Page 6 of 12
PROBLEM 4
4(a) PROBLEM 5
v = ( 2500 + 200 + 2000+ 600 +200) = R5 500 per unit Equipment must be purchased with the following estimates:
Q(current production volume) = 5000 m3 per year P = first cost = R 2 M = 2, 000, 000, S = R 50 000, n = 10 years, MARR = 15% / year
r = [288 000 + (5 500 x 5000)] / (5000) Indirect Cost (Department B) = 25 000 x 5 = 125 000
4(b) Total
Q(increased production) = 8000 m3 per year, P = R500 000, FC = R288 000, v = R5 500 per unit Indirect Cost = 250 000 + 125 000 +150 000 = 525 000
P + FC = (r – v) Q
AOC = 525 000 + 300 000 +500 000
(P + FC) / Q = r – v
AOC = 1’ 325’000
(500 000 + 288 000) / 8000 = r - 5 500
r = 98.5 + 5 500
AW (make) = [-P (A/P, i, n) + S (A/F, i, n)] – AOC
r = R5 598.5 per unit
AW (make) = [-2, 000, 000 (A/P,15%, 10) + 50 000 (A/F, 15%, 10)] – AOC
Page 7 of 12 Page 8 of 12
PROBLEM 6
Alternative 2 : Buy Decision
+ -
n Year P(Investment) Production NCF FV at PV at FW PW
Annual Cost = The AW of buy = R 1.5 M 15% 16%
Decision: It is cheaper to buy because the annual worth of buy (R 1.5 M) is less 0 2012 -266.67 -266.67 4.6524 1.000 0.00 -266.67
1 2013 -266.67 -266.67 4.0456 0.8621 0.00 -229.90
than the AW for make (R 1’721’135). 2 2014 -266.67 -266.67 3.5179 0.7432 0.00 -198.19
3 2015 590.00 590.00 3.0590 0.6407 1804.81 0.00
4 2016 554.90 554.90 2.6600 0.5523 1476.03 0.00
5 2017 520.37 520.37 2.3131 0.7461 1203.67 0.00
6 2018 -700 486.37 -213.63 2.0114 0.4104 0.00 -87.67
7 2019 -700 452.88 -247.12 1.7490 0.3538 0.00 -87.43
8 2020 839.71 839.71 1.5209 0.3050 1277.12 0.00
9 2021 1201.84 1201.84 1.3225 0.2630 1589.43 0.00
10 2022 1105.36 1105.36 1.1500 0.2267 1271.16 0.00
11 2023 -90 1010.02 920.02 1.0000 0.1954 920.02 0.00
Sum 9542.24 -869.86
ERR = 1.2433 – 1
ERR = 34.33%
Page 9 of 12 Page 10 of 12
per unit cost (v) : increase per year = +3% P(2020) = (429.3705 – 173.8949) 3.6 – 80
P(2020) = 919.71 – 80
r(2016) = 500 (0.03) = 15 ; 500 – 15 = 485 P(2020) = 839.71
r(2017) = 485 (0.03) =14.55; 485 -14.55 = 470.45
P(2021) = (416.4894 – 179.1117) 5.4 – 80
v(2016) = 150 (0.03) = 4.5; 150 + 4.5 = 154.5 P(2021) = 1281.84 – 80
v(2017) = 154.5 (0.03) = 4.635; 154.5 + 4.635 = 159.135 P(2021) = 1201.84
P(2016) = (485 – 154.5)1.8 – 40 P(2022) = (403.9953 – 184.4851) 5.4 – 80
P(2016) = 594.9 – 40 P(2022) = 1185.36 – 80
P(2016) = 554.90 P(2022) = 1105.36
P(2017) = (470.45 – 159.135)1.8 – 40 P(2023) = (391.8754 – 190.0197) 5.4 – 80
P(2017) = 560.367 – 40 P(2023) = 1090.02 – 80
P(2017) = 520.37 P(2023) = 1010.02
Assumption 5 P(remediation cost) = R90m, r = R 442.65 per ton, v = R168.83 m, Q2020 = 3.6, Q2021
= 5.4 Mt, Mt FC = 80m, per ton revenue (r) : decrease per year = -3%,
to 2023
per unit cost (v) : increase per year = +3%
Page 11 of 12 Page 12 of 12
2014Ass2Matsaung+M 2014Ass2Matsaung+M
Assignment 2: Advanced Engineering Economy: GIE4058 Date: 07-05-2014 Conclusion: 60% debt-40% equity mix does not meet the MARR requirement, PW< 0.
Problem 01 (c) Overall, both financing plans make the project economically unattractive. However,
60% debt-40% equity mix is a better option as R150 000 of the funky owner’s personal
Borrow or not? investment will still be making a return averaging 8.5% per year.
Funky Industries primarily relies on 100% equity financing to fund projects. A good opportunity is
available that will require R250 000 in capital. The Funky owner can supply the money from personal Problem 02
investments that currently earn an average of 8,5%/year. The annual cash-flow from the project is
estimated to be R15 000. It is also possible to borrow 60% for 15 years at 9%/year. 1. Flexibility[f] The most important factor
If the MARR is the Weighted Average Cost of Capital (WACC), determine which is the better 2. Safety[s] 50% as important as uptime
option? (The 3. Uptime[u] One-half as important as flexibility
analysis is done before tax.) 4. Speed[v] As important as uptime
(a) (4 marks) Is it worthwhile to get the money from the personal investment? 5. Rate of Return[r] Twice as important as safety
(b) (4 marks) Is it worthwhile to get the money from the loan?
(c) (2 marks) Which is the better option?
Answer 01 Answer 2:
(a) For 100% equity financing when MARR = 8.5%, Present Worth is determined as follows: Committee Members
Attributes 1 2 3 4 Sum Average Wj
PW = -R250 000 + R15 000 (P/A,8.5%,15)
Flexibility 10 8 6 6 30 7.50 0.3636
= -R250 000 + R15 000 (8,3042) Safety 2.5 2 1.5 1.5 7.5 1.88 0.0909
Uptime 5 4 3 3 15 3.75 0.1818
= -R125 437 Speed 5 4 3 3 15 3.75 0.1818
Rate of Return 5 4 3 3 15 3.75 0.1818
Conclusion: 100% equity does not meet the MARR requirement since PW is less than 0. Totals 82.5 20.63 1
Annual Net Cash Flow = Project NCF - loan payment Using MARR=18% determine
= R15,000.00 – R18,615.00 = -R3,615.00 (a) (4 marks) Determine the Economic Service Life (ESL) and corresponding Annual Worth (AW) of
the machine.
Equity invested = R250,000 – R150,000 = R100, 000
(b) (4 marks) How much would the first cost have to reduced to make the equivalent annual cost for
PW = -R100,000 –R3,615.00(P/A,8.8%,15) the be equivalent for a full 6 years numerical equal to the AW estimated in the previous part (at ESL).
= -R100,000 – R3,615.00(8.1567) = -R129,486.47 Assume all the other estimates remain the same and neglect the fact that this lower P value will still
not make a newly calculated ESL equal to 6 years.
1 2
2014Ass2Matsaung+M 2014Ass2Matsaung+M
(a) Year 1: AW1 = -100 000 (A/P,18%,1) – 75 000 + 100 000 (0.85)1(A/F,18%,1) Profit = (r – v) Q – FC
Year 2: AW2 = -100 000 (A/P,18%,2) – 75 000 – 10 000(A/G,18%,2) + 100 000 (0.85)2(A/F,18%,2) (r – 5500) = 288330 / 5000
Year 3: AW3 = -100 000 (A/P,18%,3) – 75 000 – 10 000(A/G,18%,3) + 100 000 (0.85)3(A/F,18%,3) b) Profit = R500 000 Q = 8000m3
Year 4: AW4 = -100 000 (A/P,18%,4) – 75 000 – 10 000(A/G,18%,4) + 100 000 (0.85)4(A/F,18%,4) 500,000 = (r – 5500)8000 – 288330
Year 5: AW5 = -100 000 (A/P,18%,5) – 75 000 – 10 000(A/G,18%,5) + 100 000 (0.85)5(A/F,18%,5) r = R5598.54 per unit
Year 6: AW6= -100 000 (A/P,18%,6) – 75 000 – 10 000(A/G,18%,6) + 100 000 (0.85)6(A/F,18%,6) Buy or make?
For several years the Cuisinart Corporation has purchased the carafe assembly of its major coffee-
= - R 119 849 maker line at an annual cost of R1,5m. The suggestion to make the component in-house has been
made. For the three departments involved the annual indirect cost rates, estimated material, labour,
ESL is at Year AW1 = - R 108 000 and hours are found in the table below. The allocated hours column is the time necessary to produce
the carafes for a year. Equipment must be purchased with the following estimates: first cost of R2m,
(b) Answer for b.: salvage value of R50 000 and life of 10 years. Perform an economic analysis for the make alternative,
assuming that a market rate of 15%/year is the MARR.
Equate AW for Year 6 with AW1= - R108 000, solve for P
= R51 827.46
The first cost has to be reduced significantly from R100 000 to R51 827.46
Problem 4
Answer 5
a) Q = 5000 m3
Annual cost = R1,5 million First cost = R2 million
Total Fixed Cost = R30 000 + R70 000+ R100 000+ R55 000+ R33 330 Salvage Value = R 50 000
Total Variable Cost = R2500 + R200 + R2000 + R600 + R200 MARR = 15% per year
3 4
2014Ass2Matsaung+M 2014Ass2Matsaung+M
Total = R525 000 n Year Revenue Unit Costs Capacity Fixed Invest Production CF FV @ r PV @ k FW+ PW-
Costs costs
0 2012 - 4.6524 1.0000 -
AOC = 525 000 + 300 000 + 500 000 = R 1,325,000.00 R266,6 266.667
66,700
AWmake= first cost x (A/P,i,n) + S (A/F,i,n) – AOC 1 2013 - 4.0456 0.8621 -
R266,6 229.893
66,700
= -2000 000 x(A/P,15%,10) + 50 000(A/F,15%,10) – 1,325,000.00 2 2014 - 3.5179 0.7432 -
R266,6 198.187
66,700
= -2000 000(0.1993) + 50 000(0.0493) - 1,325,000.00 3 2015 R500.00 R150.00 1.8Mt R40m R900 310 3.0590 0.6407 1804.81
4 2016 R485.00 R154.50 1.8Mt R40m R873 318.1 2.6600 0.5523 1476.03
= -398600 + 2465 - 1,325,000.00 5 2017 R470.45 R159.1350 1.8Mt R40m R846.81 326.4430 2.3131 0.4761 1203.66
6 2018 R456.3365 R163.9091 1.8Mt R40m - R821.4057 335.0364 2.0114 0.4104 -87.674
R700m
= -R 1,721,135 7 2019 R442.6464 R168.8264 1.8Mt R40m - R796.7635 343.8873 1.7490 0.3538 -87.432
R700m
The curefes are purchased with an AW of R1500 000 8 2020 R429.3670 R173.8912 3.6Mt R80m R1545.7212 706.0080 1.5209 0.3050 1277.12
9 2021 R416.4860 R179.1079 5.4Mt R80m R2249.0244 1047.1821 1.3225 0.2630 1589.43
10 2022 R403.9914 R184.4811 5.4Mt R80m R2181.5356 1076.1979 1.1500 0.2267 1271.16
It is cheaper to purchase than to make because the AW of costs of making is more. 11 2023 R391.8717 R190.0155 5.4Mt R80m -R90m R2116.1072 1106.0837 1.0000 0.1954 920.0234
What percentage?
In late 2011, ZMC, Ltd., approved the construction of an Alumina Refinery with a capacity of 1,8Mt ERR = (∑FW+/-∑PW-)1/N- 1
†of alumina per year at the cost of about R800m ‡. The plant was constructed so that it could be
expanded to an annual capacity of 5,4Mt, and in November of 2013 ZMC announced that it was = (9542.23/-(-869.85))1/11-1
considering expanding due to market conditions.
Make the following assumptions: Consider this problem as a phased expansion problem with the = (1.24-1) x 100%
cost to construct the original facility (R800m) spread evenly over years 2012 through 2014. First year
(2015) revenues are R500/t against per unit costs of R150m with a production of 1,8Mt. The per ton =24.06%
revenues are expected to decrease 3% annually due to worldwide increases in capacity, while per
unit costs are expected to increase 3% annually. Assume that expansion to 5,4Mt of annual capacity Calculations:
is to commence in 2018 and 2019 at the cost of R700m each year. This results in a capacity of 3,6Mt
Revenue Cost2016 = R500 – (R500x3/100) = R485
in 2020 and 5,4Mt in 2021 through the remaining plant life (ending in 2023). The plant carries an
expected remediation cost of R90m. Finally, annual fixed costs of R40m are expected to begin in Unit Cost2016 = R150 + (R150x3/100) = R154.50
2015 and extend through 2019, increasing to R80m for the life of the project.
Assuming a borrowing rate of 16% and investment rate of 15%, should the phased investment be Production2016 = Revenue Cost x Capacity
considered if one uses ERR as method of analysis and MARR is 18%?
= R485 x 1.8 = 873.00
Given Information
Cash Flow2016 = (Unit cost x Capacity) + Fixed cost
Value Units
Initial Capacity 1,8 Mega ton = (R154.50 x 1.8) + R40 m
After Expansion Capacity 5,4 Mega ton
Cost of original facility 800 million
2015 Production Revenue R500 Per ton
= R318.10
2015 Production Costs R150 Per unit cost
Revenues -3% Per year Future Value2016 = Production – Cash Flow
Costs +3% Per year
Remediation Cost 90 million = 873 – 318.10
Periods 12 Years
= 554.90
5 6
AR MAYOYO(802052953)
ASSIGNMENT 2:
Problem 1
Cost of 60% debt capital is 9% for the loan, Cost of 40% equity capital is 8.5% at MARR.
WACC = (Equity Fraction) (Cost of Equity Capital) + (Debt Fraction)*(Cost of Debt Capital)
WACC = 0.4(8.5%) + 0.6(9%)
= 8.8%
= 15 000 – 18 615
= R-3 615
= R100 000
= R -70 513.53
Conclusion: 60% debt-40% equity mix does not meet the MARR requirement
Problem 3
Annual Worth5 = -100 000(A/P, 18%, 5) + 100 000(0.85)5(A/F, 18%, 5) – 75 000 - 10 000(A/G, 18%, 5)
= -100 000(0.3198) + 100 000(0.85)5(0.1398) – 75 000 - 10 000(1.6728) Given MARR = 15%
=– R 117505
AOC = R500 000 + R300 000 + R525 000
Annual Worth6 = -100 000(A/P, 18%, 6) + 100 000(0.85)6(A/F, 18%, 6) – 75 000 - 10 000(A/G, 18%, 6)
= -100 000(0.2859) + 100 000(0.85)6(0.1059) – 75 000 - 10 000(2.0252) = R1 325 000
= – R 119 848
ESL is 1 year with AW1 = R-108 000 AW = -P (A/P, 15%, 10) + S (A/F, 15%, 10) – AOC
(b) Set the AW relation for year 6 equal to AW1 = R-108 000 and solve for P the required lower first cost. = -2 000 000 x 0.1993 + 50 000x 0.0493 - 1 325 000
Annual Worth6 = -108 000 = -P (A/P, 18%, 6) + P (0.85)6(A/F, 18%, 6) – 75 000 - 10 000(A/G,18%,6) AW = -R1 721 135
-108 000 = -P (0.28591) + P (0.37715)(0.10591)– 75 000 – 10 000(2.0252)
0.24597P = -95 252 + 108 000 The annual worth to buy, AW = -R1 500 000
P = R51 828
It is cheaper to purchase, because the AW of costs is less.
The first cost would have to be reduced from R100 000 to R51 828.
Problem 6
Information
ERR = 22.09%
ERR = 22.09%
Problem 1
Problem 2 Problem 3
𝑣=𝑢=5 𝑆 = 𝑃 × 0.85𝑛
𝑇𝑜𝑡𝑎𝑙(𝑛𝑜𝑟𝑚𝑎𝑙𝑖𝑠𝑒𝑑 𝑠𝑐𝑜𝑟𝑒𝑠) = 𝐹 + 𝑆 + 𝑢 + 𝑣 + 𝑟 = 1
𝐴𝑊𝑘 = −𝑃(𝐴/𝑃, 𝑖, 𝑘) + 𝑆𝑘 (𝐴/𝐹, 𝑖, 𝑘) − 𝐴𝑂𝐶
b)
𝐴𝑊 = −108000
Solve for P
𝑃 = 45491.73
Problem 4 Problem 5
a) 𝐴: 25000(10)
1 𝐶: 10000(15)
𝐹𝐶 = [30 + 350 0.2 + 100 + 55 + 100 ] × 1000 = 288333.33
3
𝑇𝑜𝑡𝑎𝑙 = 525000
𝑣 = 2500 + 200 + 2000 + 600 + 200 = 5500
𝐴𝑂𝐶 = 300000 + 500000 + 525000 = 1325000
𝐹𝐶 288333.33
𝑟= +𝑣 = + 5500 = 𝑅 5557.67 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 𝑃 = 𝑅 2𝑚
𝑄𝐵𝐸 5000
𝑆 = 500000
b) 𝑛 = 10
𝐴𝑊 = 𝑅 − 1 500 000
The Annual worth cost for purchasing the Carafe is less than for when making them.
Problem 6
Calculate PW:
Negative cashflow: i=16%
Positivecashflow: i=15%
𝑃𝑊𝑛𝑒𝑔 = −266 666 666 − 266 666 666 (𝑃/𝐴, 16%, 2) − 211 526300(𝑃/𝐹, 16%, 6)
− 244956431 (𝑃/𝐹, 16%, 7)
=
−266666666 − 266666666 (1,6052) − 211 526300(0,4104) −
244956431 (0,3538)
= −868195977
= 4143512134
𝑃𝑊 = 𝑃𝑊𝑝𝑜𝑠 + 𝑃𝑊𝑛𝑒𝑔
FW at MARR = 18%
𝐹𝑊 = 𝑃𝑊(𝐹/𝑃, 18%, 11)
Mhlanga, XM Mhlanga, XM
63 Mkhaliphi+VK
• 2014Ass2Mkhaliphi+VK.pdf
Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK Mkhaliphi, VK
UNIVERSITY OF JOHANNESBURG
Contents
1. Problem 1……………………………………………………………………….. 1
2. Problem 2 ……………………………………………………………………….1
3. Problem 3 ………………………………………………………………………..2
4. Problem 4 …………………………………………………………………………4
Assignment 2
at the
6. Problem 6…………………………………………………………………………..6
UNIVERSITY OF JOHANNESBURG
7. References ………………………………………………………………………..7
Student Name: V.K Mkhaliphi
Problem 1 Problem 3
a) Debt fraction = 60% and equity fraction = 40% - Step 1: Determine operating costs for each year. First operating cost is R75000 and it will
WACC = (equity fraction)(cost of equity capital) + (debt fraction)(cost of debt capital) increase by R10 000 each year after the first year. (See table below for all calculated operating
WACC = (0.4)(0.085) + (0.6)(0.09) costs)
WACC = 0.088 (8.8%) - Step 2: Determine salvage value for each year, using the given formula of S = P x 0.85ᵑ. P is given
as R100 000 and n is the corresponding year number. (See table below for all calculated Salvage
To determine cost of equity capital (Rₑ), the following formula is used: values)
Rₑ = [(First-year dividend)/Price of stock] + Expected dividend rate Year Cost Operating Cost (AOC) Salvage (S)
0 -R100 000
=[15000/250000] + 0.085 1 R75 000 R85000
2 R85 000 R72250
Rₑ =0.145 (14.5%) 3 R95 000 R61412.5
4 R105 000 R52200.625
Since Rₑ (14.5%) is bigger than WACC, which is MAAR (8.8%), it is worthwhile to get money from
5 R115 000 R44370.53
Personal investment 6 R125 000 R37714.95
- Step 3: Calculate the total AW for each year using the formula:
b) Cost of Capital = [(cost of debt x Debt) + (Expected return on investment x dividend)] / Total AW = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n).
Capital
Cost of Capital = [(9% x 150000) + (8.5% x 15000)] / 250000 Year 1
Cost of Capital = 0.0591 (5.91%) AW₁ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
AW₁ = -100000(A/P,18%,1) + 85000(A/F,18%,1) – [75000(P/F,18,1)](A/P,18%,1)
Since the cost of capital for debt (5.91%) is less than MARR, which is WACC calculated above AW₁ = -100000(1.1800) + 85000(1.000) – [75000(0.8475)](1.1800)
(8.8%) it is not worthwhile to get money from loan. AW₁ = -108003.75
Year 2
AW₂ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
c) Getting money from the personal loan is the better option. AW₂ = -100000(A/P,18%,2) + 72250(A/F,18%,2) – [85000(P/F,18,2)](A/P,18%,2)
AW₂ = -100000(0.6387) + 72250(0.4587) – [85000(0.7182)](0.6387)
AW₂ = -69719.64
Problem 2 Year 3
AW₃ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
No. Attributes Score Weight
AW₃ = -100000(A/P,18%,3) + 61412.5(A/F,18%,3) – [95000(P/F,18,3)](A/P,18%,3)
1. Flexibility [F] 10 0.3636 AW₃ = -100000(0.4599) + 61412.5(0.2799) – [95000(0.6086)](0.4599)
2. Safety [S] 2.5 0.0909 AW₃ = -55390.68
3. Uptime [U] 5 0.1818
4. Speed [S] 5 0.1818 Year 4
5. Rate of Return [R] 5 0.1818 AW₄ = -P(A/P,i,n) + S(A/F,i,n) – [AOC(P/F,i,n)](A/P,i,n)
TOTAL 27.5 1 AW₄ = -100000(A/P,18%,4) + 52200.625(A/F,18%,4) – [105000(P/F,18,4)](A/P,18%,4)
ELS is 1 year
b) AOC(P/F,i,n) = AW₁
108003.75(P/F,18%,6) = 108003.75
108003.75 (0.3704) = 108003.75
Therefore P =67999.16
Problem 5 Question 6
AW for purchasing is given as R1.5m. To make a comparison for making, AW for making must be Assumptions
calculated. - The capacity of 1.8 remains constant at 1.8 until the capacity expansion in 2020 to 3.4, and
another expansion in 2021 to 5.4 and it remains 5.4 throughout the life cycle.
Department Basis Hours Rate/Hour Allocated Hours Total cost for - Cost of construction, which is R800m is evenly spread with in 3 year (from 2012 to 2014), which
Hours makes the cost to be R266.67m (800/3)
A Labour 10 25000 250000 - First revenues are expected in 2015, which are R500/t. The capacity in 2015 is 1.8 Revenues per
B Machine 5 25000 125000 year are calculated by multiplying the expected revenues with the capacity.
C Labour 15 10000 150000
- The per ton revenue is expected to decrease by 3% every year, starting in 2016. That is, revenue
TOTAL 525000
of R500/t will decrease by 3% to R485/t in 2016, and the R485/t will decrease by 3% in 2017 and
so on. For every year. Revenues for each year are calculated by multiplying the actual
Annual Operating Cost = Material cost + Direct labour cost + Total cost for hours
revenue/ton by the capacity.
AOC = 525 000 + 300 000 + 500 000
- The per unit cost (which is R150m) increase by 3% with a production of 1.8. (to get total,
AOC = R1325000
multiply unit cost by capacity)
- Fixed cost is R40m from 2015 and after 2019, it increases to R80m
Calculate the AW for make:
- Remediation cost: R90 m
Year Capacity Cost to Fixed Cost Revenue Unit Cost NCF
AW = -P (A/P,i,n) + S(A/F,i,n) – AOC
construct
AW = -2000000 (A/P,15%, 10) + 50000 (A/F, 15%,10) – 1325000
2011 (0)
AW = -2000000 (0.1993) + 50000 (0.0493) – 1325000 2012 (1) 1.8 -266.67 -266.67
AW = -1721136 2013 (2) 1.8 -266.67 -266.67
2014 (3) 1.8 -266.67 -266.67
Comparing the AW for making (-1721136) to the AW for purchasing, (1500000), 2015 (4) 1.8 -40 900 -278.1 581.9
It is cheaper to purchase because AW cost is less. 2016 (5) 1.8 -40 873 -278.1 554.9
2017 (6) 1.8 -40 846.81 -286.45 520.36
2018 (7) 1.8 -700 -40 821.41 -295.04 -213.63
2019 (8) 1.8 -700 -40 796.77 -303.89 -247.12
2020 (9) 3.6 -80 1545.73 -626 839.73
2021 (10) 5.4 -80 2249.05 -967.19 1201.86
2022 (11) 5.4 -80 2181.6 -996.19 1105.41
2023 (12) 5.4 -80 2116.15 -1026 1010.15
Step 1: Determine PWₒ of all negative NCF at the borrowing rate of 16%:
PWₒ = -266.67(P/F,16%,1) – 266.67(P/F,16%,2) – 266.67(P/F,16%,3) – 213.63(P/F,16%,7) –
247.12(P/F,16%,8)
PWₒ = -266.67(0.8621) – 266.67(0.7432) – 266.67(0.6407) – 213.63(0.3538) – 247.12(0.3050)
PWₒ = -R749.89m
FW = 581.9(1.7490) + 554.9(2.0114) + 520.36(2.3131) + 839.73(3.5179) + 1201.86(4.0456) + 1. L. Blank & A. Tarquin, “Engineering Economy: 7th Edition”, New York: McGraw-Hill Companies
1105.41(4.6524) + 1010.15(5.3503) Inc, 2012
FW = 18095.68
PW + FW = 0
PW (F/P, i, n) + FW = 0
-749.89(1+r) ¹² + 18095.68 = 0
-749.89(1+r) ¹² = -18095.65
(1+r) ¹² = (-18095.65)/(-749.89)
(1+r) ¹² = 24.131
1+r = 1.3038
r= 0.3038 (30.38%)
Since the rate (30.38%) is bigger than MARR of 18%, the investment should be considered.
4 0.3717 -63.1890
(a) r = R 5 557.67 5 0.3198 -54.3660
6 0.2859 -48.6030
PROBLEM 5
Multiply every figure by 1000 000 10-4.3.2 Calculate the AW of the Market value (MV)
PURCHASED ASSEMBLE LINE AT AN ANNUAL COST OF R 1.5M
Years 0 1 2 3 4 5 6 7 8 9 10 Yr MV
A/F(1;n;M
A/F(MV)
Purchased 0.0000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 -1.5000 ARR)
PW Ratios @ 0
1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 1 144.5000 1.0000 144.5000
15%
2 122.8250 0.4587 56.3398
Annual PW 1 0.0000 -1.3043 -1.1342 -0.9863 -0.8576 -0.7458 -0.6485 -0.5639 -0.4904 -0.4264 -0.3708 3 104.4013 0.2799 29.2219
4 88.7411 0.1917 17.0117
5 75.4299 0.1398 10.5451
Total Annual
-7.5282 6 64.1154 0.1059 6.7898
PW 1
Multiply every figure by 1000 000
MAKE THE COMPONENT FOR THE ASSEMBLE LINE IN HOUSE 10-4.3.3 Calculate Capital Recovery (CR)
First Cost -2.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Salvage Yr A/P(FC) A/F(MV) CR
0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0500 0
Value
AOC 0.0000 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 1 -200.6000 144.5000 -56.1000
NCF -2.0000 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.3250 -1.2750 2 -108.5790 56.3398 -52.2392
3 -78.1830 29.2219 -48.9611
Annual PW 2 -2.0000 -1.1522 -1.0019 -0.8712 -0.7576 -0.6588 -0.5728 -0.4981 -0.4331 -0.3766 -0.3152 4 -63.1890 17.0117 -46.1773
5 -54.3660 10.5451 -43.8209
Total Annual 6 -48.6030 6.7898 -41.8132
-8.6375
PW 2
10-4.3 Solution Part 1: Capital Recovery 10-4.5 AW per year of the system
Mnguni, NC Mnguni, NC
66 Moche+TM
• 2014Ass2MocheTM.pdf
Moche, TM Moche, TM Moche, TM Moche, TM
WACC 0,4(8,5%)+0,6(9%)=8,8%
PROBLEM 3
A/P CUM
n First cost Factor MAAR CR AOL Factor(P/F) (P/F)AOL Total Factor(A/P) CR(A/P)
0 -100 000 0
-118
1 1,18000 000 85 000 85 000 -75 000 0,8475 63 560 -63 560 1,1800 -75 000
-124
2 0,6387 -63 870 72 223 33 140 -85 000 0,7182 61 050 610 0,6387 -79 588
-182
3 0,4599 -45 999 61 412 17 190 -95 000 0,6086 57 820 436 0,4599 -83 899
-105 -236
4 0,3717 -37 170 52 200 10 010 000 0,5158 54 160 590 0,3717 -87 941
-115 -286
5 0,3198 -31 980 44 370 6 200 000 0,4371 50 270 860 0,3198 -91 738
-125 -333
6 0,2859 -28 590 37 715 3 990 000 0,3704 46 300 166 0,2859 -95 250
PROBLEM 4 Q
V= R 5 500 = 5 5982,54
Q,BE = FC
W–C
W = FC + (VQ,BE)
Q,BE PROBLEM 5
FW+
NCF(-)(PW) MARR 18.00%
(p/f,k%n)(k=16%)
SumNCF(FW+)
SumNCF(PW-) ERR>MARR Consider the Phased Investment
Moche, TM Moche, TM
67 Mofokeng+JT
• 2014Ass2Mofokeng+T.J..pdf
Mofokeng, JT Mofokeng, JT Mofokeng, JT Mofokeng, JT
=R 25,650 3= = 0.182
WACC = 0.4 (8.5%) + 0.6 (9%)
= 8.8% 4= = 0.182
= R100, 000
Problem 3 = R-115,112
P= R100 000 For n = 5: Aw = -100, 000 (A/P, 18%, 5) - 75,000 -10, 000 (A/G, 18%, 5) +100,000
( ) (A/F, 18%, 5)
i = 18%
= R-117,504
= R 37 317, 951
For n = 6: Aw = -100, 000 (A/P, 18%, 6) - 75,000 -10, 000 (A/G, 18%, 6) +100, 000
Operating cost = R75 000
( ) (A/F, 18%, 6)
AOC = [65 + 10(6)] 1000
= -100, 000 (0.2859) - 75, 000 - 10, 000 (2.0252) + 100, 000 ( ) (0.1059)
= R125 000
= - 28,590 - 75,000 - 20,252 + 3,994
For n=1: Aw1 = -100, 000 (A/P, 18%, 1)-75, 000+100, 000 ( ) (A/F, 18%, 1)
=R-119,848
= -100, 000 (1.1800) - 75, 000 + 100, 000 (0.85) (1, 0000)
ESL is year1 with Aw1 = R108, 000
= - 118, 000 – 75, 000 + 85, 000
(b) AW6 = -108,000 = -P (A/P, 18%, 6) - 75, 000 -10, 000 (A/G, 18%, 6) + P ( )
= R- 108, 000
(A/F, 18%, 6)
For n=2: Aw2 = -100,000 (A/P, 18%, 2) – 75,000 - 10, 000 (A/G, 18%, 2) + 100,000
-108,000 = -P (0.2859) - 75, 000 - 10, 000 (2.0252) + P (0.3772) (0.1059)
( ) (A/F, 18%, 2)
0, 2459 P = -95,252 + 108,000
= -100,000(0.6387)-75,000-10,000(0.4587) + 100,000( ) (0.4587)
P = R51, 828
= - 63,870-75,000-4,587+33,141
The first cost must be reduced by R48, 172 to give R51, 828
= R- 110, 316
PROBLEM 4
For n=3: Aw3 = -100, 000(A/P, 18%, 3) - 75,000 -10,000 (A/G, 18%, 3) + 100,000
( ) (A/F, 18%, 3)
Fixed Cost, R’000 Variable Cost, R/unit
= - 100, 000(0.4599)-75, 000-10,000(0.8902) + 10,000( ) (0.2799)
Space, etc 55 Subcontractors 600 Carafes was purchased for R1, 500000. Therefore it is cheaper to purchase because
of low cost.
PROBLEM 6
Computers: 1/3 of 100 Misc cost 200
Information supplied
Department C: 10, 000(15) = R150, 000 Borrowing Rate 16% Per year
The make alternative Annual worth is the total of capital recovery and AOC
Year 2015 = 1.8(500-150)-40 = 590 2023 -90 1010,026 919,9 1,000 0,1954 919,9
= [PR - PR ]-
ERR -1
Problem 1 Problem 2
a) Personal investment Member Member Member Member Norm.
1 2 3 4 Sum Average weight
MARR = 8.5% Fexibility
[f] 4.5 6 8 9 27.5 6.875 0.16
PW = -250 000 + 15 000(P/A, 8.5%, 15) safety [s] 3.375 4.5 6 6.75 20.625 5.15625 0.12
Uptime
= -250 000 + 15 000(8.3042) [u] 6.75 9 12 13.5 41.25 10.3125 0.24
Speed
[v] 6.75 9 12 13.5 41.25 10.3125 0.24
= R-125 437 Rate of
Return
b) 60% -40% financing [r] 6.75 9 12 13.5 41.25 10.3125 0.24
171.875 42.96875 1
Loan principal = 250 000(0.60) = R150 000
Annual NCF = project NCF – loan payment 3 45990 95000 182426.500 83897.947 129887.947
4 37170 105000 236585.500 87938.830 125108.830
= 15 000 – 18 618 = -R3 618 5 31980 115000 286852.000 91735.270 123715.270
6 28590 125000 333152.000 95248.157 37714.952 161553.108
Amount of equity invested = 250 000 – 150 000 = R100 000
ESL is at year 5
Even when first cost is reduced to R75 000, the ESL remain in year 5.
a) = R1 325 000
= R 27.5 X 106
0 = Revenue – 27788330
FV @ r PV @ k FW+ @ r PW- @ k
Revenue = R 27.79 x 106 Unit Unit Prod. Prod. Total F/P (1; P/F
n year Investment Revenue Cost Fix. Cost Rev Cost cost Income NCF n;15%) (1;n;16%)
b) 0 2012 -266.667 -266.667 -266.667
Production volume = 8 000 m2 3 2015 500.000 150.000 40 900.000 270.000 310.000 590.000 590.000 1804.810
6 2018 -700 456.337 163.909 40 821.406 295.036 335.036 486.370 -213.631 -92.352
Revenue = R44 788 330
7 2019 -700 442.646 168.826 40 796.764 303.887 343.887 452.877 -247.123 -92.894
Per Unit Revenue = 44788330/8000 8 2020 429.367 173.891 80 1545.721 626.008 706.008 839.714 839.714 1277.120
11 2023 -90 391.872 190.016 80 2116.107 1026.084 1106.084 1010.023 920.023 920.023
Problem 5
FW+ / -
PW- = 10.77691
Department A: 25 000(10) = R250 000
ERR = 0.241261
Department B: 25 000(5) = R125 000
24.13%
Total indirect costs = A+B+C = R525 000 i’ > MARR of 18%, therefore the phase investment should be considered using EROR approach.
Problem 1
MARR = 8.5
R 250 000
ECONMICS
W<0 MARR requirements are not met by 100% equity because we get
Calculations: PW at MARR of 8, 8%
PW = -100 000 + (-3615) (P/A, 8.8, 15)
= -100 000 + (-3615 x 8.1567)
= - R129 486, 5
PW < 0, a 60% debt and – 40% equity mix does not meet the MARR requirement
rQ + FC + VC Problem 5
r = FC + VC = R288, 3333 + R5500 Annual cost = R1, 5 m
Total cost (TC) = FC + VC = 288, 33 + 5500 = 5788, 33 Basis level = indirect allocated cost
QBE = FC_
Rate
r-V
rV = 288,33 = 0, 0360 Indirect cost allocation calculation:
8000
Department: ACA = 25000x R10/h =R250 000
1, 1577 – V = 0, 0360
V = R1.1217/m3 : ACB = 5 x 25 000 = R125 000
R.C
The carafes are purchased with an AW of 3%
0 2012 - -866,6674 -266,6667
AWbuy = R1 500 00 266,6667
1 2013 ↓ - -266,6667 -229,8934
NB: It is expensive to make because the AW of costs is more 266,6667
2 2014 - -266,6667 -198,1870
266,6667
3 2015 500,0000 150,0000 1.8 40 900,0000 310,0000 590,0000 590,0000 3,0590 0,6407 1804,8100
4 2016 485,0000 154,5000 40 873,0000 318,1000 554.9000 554,9000 2,6600 0,5523 1476,034
5 2017 470,4500 759,350 ↓ 846,8100 326,4430 520,3670 520,3670 2,3131 0,4761 1203,6609
6 2018 456,3465 763,9091 ↓ -700 821,4057 333.0364 486,3694 -213,6306 2,0114 0,4104 -87,6740
7 2019 442,6464 168,1263 -700 796,7635 343,8873 452,8762 -247,1238 1.7490 0,3538 -87,43242
8 2020 429,3670 173,8911 3,6 80 1545,7212 706,0080 839,7132 839,7132 1,5209 0,3050 1277,1198
9 2021 4164860 179,1078 5,4 2249,0244 1047,1821 1201,8423 1201,8423 1,3225 0,2630 1589,4362
10 2022 403,9914 184,4811 ↓ ↓ 2181,5536 1076,1979 1105,3558 1105,3558 1,1500 0,2267 1271,1592
11 2023 391,8717 190,0155 -90 2116,1071 1106,0837 1010,0234 920,0234 1.000 0,1954 179,7728
∑FW+=954 ∑PW-=-
2,,2435 869,8553
∑RR = [(∑FW+/-∑PW-)^1/n)] – 1
= [(9542,2435/-(-869,8553)^1/11]-1
= 0,2433 x 100 = 24,33%
Revenue (for R.C) Calculation
R.C.(2015) = R500
R.C.(2016) = R500 – (R500 X 3/100) = R485
R.C. (2017) = R485 – (R485 X3/100) = R470.45
NB: The same method is applied to the entire calculation of R.C.
Assignment 2
Problem 2
A) MARR = 8.5% F 10
PW = -250000 + 15000(P/A, 8.5%, 15) S 2.5
= -250000 +15000(8, 3042) U 5
= -250000 +124563 V 5
R 5
=R -125437
THE EQUITY DOES NOT MEET MARR REQUIRMENT.
Importance Soccer = 27, 5
Weighting, Wi = Score/27, 5
B) LOAN= R 250000*0.60 = R 150000.
LOAN PAYMENT = 150000*(A/P, 9%, 15) F Wi =10/27.5 = 0.363
= 150000*(0, 1241) S Wi=2.5/27.5 = 0.0909
= R 18615 PER YEAR U Wi=5/27.5 = 0.181
WACC = 0.4(8.5%) + 0.6(9%) V Wi= 5/27.5 = 0.181
= 8.8 % R Wi=5/27.5 = 0.181
Annual NCF= project NCF-loan payments Total =1
= 15000 -18615= R -3615
Pw = -100000 -3615(P/A, 8.8%, 15)
= -100000 -3615(8.1567)
= -100000 -29486.47
= R- 129486.47
Problem 3 Problem 4
Aw2 = -P (A/P, 18%, 2) -75000+ S (A/F, 18%, 2)-10000(A/G, 18%, 2) r =5500.05766 m^3 per year.
THERFORE AW3 TO AW6 THE NUMBER WILL KEEP ON INCREASING IN THE NEGTIVE DIRECTION
Problem 5
B) Aw6= -108000=-P(A/P,18%,6)- 75000-10000(A/G,18%,6) +P(0.85)^6*(A/F,18%,6)
-108000=-P (0.2859)-75000-10000(2.0252) +P(0.37714)(0.10591) Total Hrs. = 10 * 25000 + 5 * 25000 + 15* 10000= R525000.
- 108000= -P0.2459 -95252 AOC =R300000 +R 500000+R525000= R1325000
0.24597P= 12748 AW= -P(A/P, 15%, 10) + S(A/F,15%,10) –AOC
P=12748/0.24597 = -2000000(0.1993) + 50000(0.0493) -1325000
P=R51828 = -398600 +2465-1325000
The cost would have been reduced from R100000 T0 R 51828 = R-1721135
Problem 6
FV@
Year Investment Production CF 15% PV@16% FW- PW-
2012 -266.666 -266.666 4.6524 1 -266.7
-
2013 -266.666 -266.666 4.0256 0.5621 229.896
-
2014 -266.666 -266.666 3.5179 0.743 198.189
2015 590 590 3.059 0.6407 1804.31
2016 554.9 554.9 2.66 0.5523 1476.03
2017 520.361 520.361 3.3131 0.4761 1203.67
2018 -700 486.36 -213.64 2.0114 0.4104 -87.23
2019 -700 452.376 247.12 1.749 0.3538 -87.23
2020 839.713 839.713 1.5209 0.305 1279.11
2021 1201.342 1201.342 1.3225 0.263 1589.13
2022 1103.356 1103.356 1.155 0.2267 1271.16
2023 -90 1010.023 920.013 1 0.1954 920.023
-
9542.233 869.895
Problem 1
= R-125 473.00
100% equity investment does not meet the MARR requirement, therefore is not worthwhile.
THE FACULTY OF ENGINEERING AND THE BUILT b. 60% - 40% D-E financing
Loan principal amount = 250 000 x 0.60 = R 150 000.00
ENVIRONMENT Equity amount = 250 000 -150 000 = R 100 000.00
Loan payment per year = 150 000 (P/A, 9%, 15) = 150 000 x 0.1241 = R 18 615.00
GIE4058: ADVANCED ENGINEERING ECONOMICS This option does not meet the MARR, it is therefore not worthwhile.
b) Set the AW relation for year 6 equal to AW1 = R-108,000 and solve for P, the required
lower first cost.
Normalised weight = (Score) i / total score
AW6 = -108,000 = -P (A/P, 18%, 6) – 75,000 - 10,000(A/G, 18%, 6) + P (0.85)6(A/F, 18%, 6)
Normalised weights
Attributes Logic Score(0 -10)
1. Flexibility 100% 10 0,3636 -108,000 = -P (0.28591) – 75,000 – 10,000(2.0252) + P (0.37715) (0.10591)
2. Safety 25% 2,5 0,0909
3. Uptime 50% 5 0,1818 0.24597P = -95,252 + 108,000
4. Speed 50% 5 0,1818
5. Rate of return 50% 5 0,1818 P = R51, 828
Total Score = 27,5 1
The first cost would have to be reduced from R100, 000 to R51, 828 by R48, 172.00
Problem 3 Problem 4
Mokoena, PV Mokoena, PV
Problem 5
Annual Operating Cost (AOC) = Direct cost + Material Cost + Indirect cost
Problem 6 continues…
= 500 000+ 300 000 + 525 000
Cash flows in R’000 000
Mokoena, PV Mokoena, PV
73 Mokuwe+PKW
• 2014Ass2Mokuwe PKW.pdf
Mokuwe, PKW Mokuwe, PKW Mokuwe, PKW Mokuwe, PKW
Problem 2
Initials & Surname : PKW MOKUWE
Taking the most important factor to be 10
Student No : 201231394
________________________________________________________________ Attributes Logic Importance Weight
1. Flexibility(f) The most important factor 10 0.36363636
Problem 1 2. Safety(s) 50% as important as uptime 2.5 0.09090909
3. Uptime (u) One-half as important flexibility 5 0.18181818
(a) When the R250 000 is left at the bank for an average of 8,5% per year 4. Speed(v) As important as Uptime 5 0.18181818
for 15 years: 5. Rate of Return(r) Twice as important as safety 5 0.18181818
Total 27.5 1
F = 250 000(F/P,8.5%,15)
= 250 000(3,3997) = 849 925 Weight = (Attributes) / (total of Importance)
Subtracting the initial investment: 849 925 – 250 000 = 599 925 Problem 3
R599 925 is what Funky Industries would make
(a) Given: P = R100 000
(b) Taking 60% loan S = P x 0.85n (n is years after purchase)
250 000 x 0.6 = R150 000 (Amount to be borrowed)
AOC =
Equity invested = 250 000 – 150 000 n OC
(65+10xn)1000
S = (Px0.85)^n A/P,18%,n A/F,18%,n P/F,18%,n A/G,18%,n AW
Initials & Surname: PKW Mokuwe Initials & Surname: PKW Mokuwe
Student No. 201231394 Page 1 Student No. 201231394 Page 2
n=3 Problem 4
AW3 = -100K(A/P,18%,3)+100K(0.85)3(A/F, 18%, 3) – 75K – 10K(A/G,18%,3)
= -100K(0.4599) + 100K(0.85)3(0.2799) – 75K – 10K(0.8902) Fixed cost, R'000 Variable cost, R/Unit
= – R 112 703 Administrative 30 Materials 2500
Salaries and Benefits: 20% of 350 Labour 200
n=4 Equipment 100 Indirect Labour 2000
AW4 = -100K(A/P,18%,4) +100K(0.85)4(A/F,18%,4) – 75K – 10K(A/G,18%, 4) Space, etc. 55 Subcontractors 600
= -100K(0.3717) + 100K(0.85)4(0.1917) – 75K – 10K(1.2947) Computers: 1/3 of 100 Misc cost 200
= – R 115 110 Totals 288.33 5500
Initials & Surname: PKW Mokuwe Initials & Surname: PKW Mokuwe
Student No. 201231394 Page 3 Student No. 201231394 Page 4
Problem 5 Problem 6
Given Info:
Indirect Costs
Direct Investment Value Units
Department Allocated Material
Basic Hrs Rate/h Labour Phase A 1.8 Mega tons
Hrs Cost
Cost Phase B(i) 3.6 Mega tons
A Labour 10 25 000 200 000 200 000 Phase B(ii) 5.4 Mega tons
B Mahine 5 25 000 50 000 200 000 Production Cost 150 Per ton
C Labour 15 10 000 50 000 100 000 Production Revenue 500 Per ton
Total 525 000 300 000 500 000 Revenues (gR ) -3% Per year
Costs (gC ) 3% Per year
Given: P = R2 000 000 FC phase A 40 million
N = 10 FC phase B 80 million
i = 15% Remediation Cost 90 million
S = R50 000 Investment Rate (r ) 15% Per year
Borrowing Rate (k ) 16% Per year
Periods 11 years
AOC = 525 000 + 300 000 + 500 000 = R1 325 000
AW = - P(A/P,15%,10) + S(A/F,15%,10) – AOC R800m spread evenly over 2012 – 2014 gives: R266.67 for 3 years (2012 –
= - 2000000(0.1993) + 50000(0,0493) – 1325000 2014)
= - R1 721 135 Cash Flow
n Years Unit cost Capacity Investment Production FV @ r PV@ k FW+ PW-
CF
1 2012 -266.67 -266.67 4.6524 1 -266.666667
Buying costs is R1 500 000 while making costs is R1 721 135. It is cheaper to 2 2013 -266.67 -266.67 4.0456 0.8621 -229.893333
buy than to make. 3 2014 -266.67 -266.67 3.5179 0.7432 -198.186667
4 2015 150 1.8 590 590 3.059 0.6407 1804.81
5 2016 154.5 1.8 554.9 554.9 2.66 0.5523 1476.034
6 2017 159.14 1.8 520.358 520.358 2.3131 0.4761 1203.64009
7 2018 163.91 1.8 -700 486.374 -213.626 2.0113 0.4104 -87.6721104
8 2019 168.83 1.8 -700 452.876 -247.124 1.749 0.3538 -87.4324712
9 2020 173.89 3.6 839.728 839.728 1.5208 0.305 1277.058342
10 2021 179.11 5.4 1201.852 1201.852 1.3225 0.2629 1589.44927
11 2022 184.48 5.4 1105.354 1105.354 1.15 0.2267 1271.1571
12 2023 190.01 5.4 -90 1010.044 920.044 1 0.1954 920.044
∑ 9542.192802 -869.851248
FW+/PW- 10.96991333
ERR 24.33%
CF = Investment x Production
FW+ = Cash Flow x FV@r (positive cash flows)
PW- = Cash Flow x PV@k (negative cash flows)
ERR = ∑(FW/PW)1/n
= 24,33%
Initials & Surname: PKW Mokuwe Initials & Surname: PKW Mokuwe
Student No. 201231394 Page 5 Student No. 201231394 Page 6
E MAIL : Julius.Mosoane@transnet.net
Mosoane, SJ Mosoane, SJ
76 Motjoadi+V
• 2014Ass2Motjoadi V.pdf
Motjoadi, V Motjoadi, V Motjoadi, V Motjoadi, V
WACC=0.4(8.5)+0.6(9) Problem 3
MARR=8.8%
P=R100000 n=6 MARR=18%
Annual NCF=Project NCF-loan payment
Number Operating cost Salvation
=R15000-R18615 1 75000 85000
2 85000 72250
=R-3615 3 95000 614125
4 105000 52200.625
Amount of equity invested=R250000-R150000=R100000 5 115000 44370.531
6 125000 37714.951
Calculate PW at the MARR on the basis of committed equity capital
PW=-100000-3615(P/A*8.8*15) a- Determine the economic service life(ESL) and corresponding annual worth (AW) of the
machine
=-100000-3615(8.1567)
AWn=-P(a/p,i,n)+S(a/f,i,n)-(PW of AOCn)(a/p,i,n)
=R-129486.4705
AW1=-100000(1.1800)+75000-(75000*0.8475)(1.1800) = R-108003.75
PW<0;at 60% debt-40% equity mix does not meet the MARR requirement, it is not worthwhile to
get the money from the loan.
AW6=-100 000(A/P,18,6)+ 37714.952 (A/F,18,6)- [75000(P/F,18,1)+85000(P/F,18,2)+ For making the components in-house, the AOC is comprised of direct labour, direct material, and
95000(P/F,18,3)+ 105000(P/F,18,4)+ 115000(P/F,18,5)+ 125000(P/F,18,6) ](A/P,18,6 ) indirect costs.
Department A: 25000(10) =R250000
=R -119844.147 Department B: 25000(5) =R125000
Department C: 10000(10) =R150000
because AW1<AW2<AW3<Aw4<AW5<AW6 it means that AW is the smallest value and R525000
AOC = R525000+R300000+R500000
AW6 is the biggest value
AOC = R1325000
- The ESL is n=1 and AW=R-108003.75 - The make alternative annual worth is
AWmake=-P(A/P,i,n) + S(A/F,i,n) – AOC
b- How much would the first cost have to be reduce =-2000000(A/P,15%,10) +50000(A/F,15%,10)-1325000
AW6=AW1 =-2000000(0.1993) + 50000(0.0493) – 1325000
-100000(a/p,18,6)+P(0.85*6)(a/f,18,6)- = R-1721135
[75000(p/f,18,1)+85000(p/f,18,2)+95000(p/f,18,3)+105000(p/f,18,4)+11500(p/f,18,5)+25000
- Currently the carafes are purchased with an AW of
(p/f,18,6)](a/p,18,6)-108003.752=-p(0.2859)+px0.85*6x0.1059-95248.16 AWbuy=R-1500000
>-12755.592=-0.24596p It is expensive to make, because the AW of cost is more
>P=51860.43 AWmake> AWbuy
The first cost have to be reduced to 51860.43
Problem 6
GIVEN INFORMATION
VALUE UNITS
P=380029.5264
Phase I 1.8 Mega ton
Phase II A 5.4 Mega ton
Problem 4 Phase III B 7.2 Mega ton
Production cost R500 Per ton
FC=30000+70000+100000+55000+33333=R288333.33 Production revenue R150 millions
Gr (revenues) -3% Per year
Vc/unit=R5500 Gc (cost) 3% Per year
TC phase I 5.4 millions
a- Determine the minimum revenue per unit if the production is 5000m3 per unit TC phase II 7.2 millions
R=(FC+QxV)/Q Investment rate 15% Per year
R =(288333.333+5500*5000)/5000 Borrowing rate 16% Per year
r=R5557.66/unit peroid 11
b- Determine the revenue per unit for
Profit=R500000
QUESTION 1
OPTION 1
= 0.19
MARR = 19%
ASSIGNMENT 2- Advanced Engineering
Management OPTION 2
MARR = 18.4%
a) Yes it is
Author: Ndumiso Mthembu (Pr. Techni Eng.) b) Yes it is
c) Option 1 is better as it will yield the greatest return overall.
Student Number: 200726878
QUESTION 2 QUESTION 4
a)
TOTALS WEIGHTS Q= FC
1 Flexibility 10.0000 0.3636 r–v
2 Safety 2.5000 0.0909
r = FC + v
3 Uptime 5.0000 0.1818
Q
4 Speed 5.0000 0.1818
5 Rate of Return 5.0000 0.1818 r = R 288 333.33 + R 5500
27.5000 1.0000 5000m³
r = R 5557.667
Therefore the total of the weights is 1.000
Therefore the minimum revenue per unit is R 5 557.667
QUESTION 3 b)
4 100,000 0.37170 37,170 52201 -27,163 105,000 0.3717 0.5158 54,159 236,586 87,939 -115,102 = R 500 000 + R 288 333.33 + 5 500
5 100,000 0.31980 31,980 44371 -25,777 115,000 0.3198 0.4371 50,267 286,853 91,736 -117,513 8000
6 100,000 0.28590 28,590 37715 -24,596 125,000 0.2859 0.3704 46,300 333,153 95,248 -119,844
r = R 5 598.5417
The ESL is therefore 1 year, the lowest AW total
Therefore the revenue required is R 5 598.5417
b)
Mthembu N. Pr. Techni Eng. Page 2 Mthembu N. Pr. Techni Eng. Page 3
Student Number 200726878 Student Number 200726878
Mthembu, N Mthembu, N Mthembu, N Mthembu, N
Mthembu, N Mthembu, N Mthembu, N Mthembu, N
Question 5 QUESTION 6
Given information
INDIRECT COST MATERIAL DIRECT
DEPRTMENT ALLOCATION COST LABOUR Investment Value Units
A 250000 200000 200000 Phase I (PCap) 1.8 Mega ton
B 125000 50000 200000 Phase IIA 3.6 Mega ton
C 150000 50000 100000 Phase IIB 5.4 Mega ton
Production Cost (PC) 150 per ton
525000 300000 500000
Production Revenue (PR) 500 per ton
gR (Revenues) 3% per year
AOC = MATERIAL COST + DIRECT COST + INDIRECT COST gC (Costs) 3% per year
AOC = R 500 000 + R 300 000 + 525000 FC Phase I 40 million
AOC = 1325000 FC Phase II 80 million
Remediation Cost 90 million
Investment Rate (r) 15% per year
The make alternative annual work is Borrowing Rate (k) 16% per year
Periods 11 years 11 years
9,542.23 -869.85
-10.97
ERR 24.33%
Mthembu N. Pr. Techni Eng. Page 4 Mthembu N. Pr. Techni Eng. Page 5
Student Number 200726878 Student Number 200726878
Mthembu, N Mthembu, N Mthembu, N Mthembu, N
79 Munyai+TT
• 2014Ass2Munyai+TT.pdf
Munyai, TT Munyai, TT Munyai, TT Munyai, TT
15000 PW is also more than 0 and therefore meet the MARR requirements.
1 15
(c) Both options meet the MARR requirements and make the project economically
viable. But based on the annual income, it will be better to use 100% equity
(option a).
250000
PROBLEM 2 SOLUTION
PW = -250000 + 15000(P/A; 8, 5%; 15) If 10 is given to the most important attribute and 0 to the least important attribute,
= -250000 + 15000 (8.3042) therefore
= R40647
Importance Score
PW is greater than 0, therefore it meets the MARR requirements 1. Flexibility [f] The most Important 10
2. Safety [s] 0.5u 2.5
(b) Borrowing i.e. 60% - 40% Debt – Equity 3. Uptime [u] 1/2f 5
4. Speed [v] u 5
Debt/loan = 250000 x 0.6 = R150000, this will require to be paid annual
5. Rate of Return [r] 2s 5
Equity Invested = R100 000 Total 27.5
PROBLEM 3 SOLUTION Yr Cost A/P(1;n;MARR) A/P (FC) Salvage Cost A/F (1;n;MARR) A/F (MV) CR
0 -100000 0.0000 0
1 1.1800 -118000 85000 1 85000.00 -33000.00
PART 1: CAPITAL RECOVERY 2 0.6387 -63870 72250 0.4587 33141.08 -30728.93
3 0.4599 -45990 61412.5 0.2799 17189.36 -28800.64
4 0.3717 -37170 52200.625 0.1917 10006.86 -27163.14
Annual Worth of the First Cost
5 0.3198 -31980 44370.53125 0.1398 6203.00 -25777.00
6 0.2859 -28590 37714.95156 0.1059 3994.01 -24595.99
Yr Cost A/P(1;n;MARR) A/P (FC)
-
0 100000 0.0000 0.0000
- PART 2: ANNUAL OPERATING COST
1 1.1800 118000.0000
2 0.6387 -63870.0000 Yr AOC P/F(1;n;MARR) P/F(AOC)
3 0.4599 -45990.0000 0 1.0000 0.00
4 0.3717 -37170.0000 1 -75000 0.8475 -63562.50
5 0.3198 -31980.0000 2 -85000 0.7182 -61047.00
6 0.2859 -28590.0000 3 -95000 0.6086 -57817.00
4 -105000 0.5158 -54159.00
5 -115000 0.4371 -50266.50
Annual Worth of Salvage Value 6 -125000 0.3704 -46300.00
Yr A/P(1;n;MARR) PWT (AOC;n) A/P (PWT) Fixed Cost, R'000 Variable cost, R/Unit
0 0.0000 Administrative 30 Materials 2500
1 1.1800 -63562.50 -75003.75 Salaries and benefits:
- 20% of 350 Labour 200
2 0.6387 -124609.50 79588.0877 Indirect
- Equipment 100 Labour 2000
3 0.4599 -182426.50 83897.9474 Space, etc 55 Subcontractors 600
- Computer: 1/3 of 100 Misc Cost 200
4 0.3717 -236585.50 87938.8304 635 TOTAL (v) 5500
-
5 0.3198 -286852.00 91735.2696
-
Fixed Cost Variable Cost (R/Unit)
6 0.2859 -333152.00 95248.1568
Administrative R 30,000.00 Materials R 2,500.00
Salaries and benefits: 0.2x350000 R 70,000.00 Labour R 200.00
AW per year of the system Equipment R 100,000.00 Indirect labour R 2,000.00
Space, etc. R 55,000.00 Subcontractors R 600.00
Yr CR A/P (PWT) AW(Total) Computers: 0.3333x100000 R 33,330.00 Miscellaneous cost R 200.00
0
1 -33000 -75003.75 -108003.75 Total FC R 288,330.00 R 5,500.00
-
2 -30728.925 -79588.08765 110317.013 (a) Qbe = FC/r-v
-
3 -28800.64125 -83897.94735 112698.589 Therefore, minimum revenue per unit r is
-
4 -27163.14019 -87938.83035 115101.971 r = (FC/Qbe) + v
- = (288330/5000) + 5500
5 -25776.99973 -91735.2696 117512.269 = R5557.666
-
6 -24595.98663 -95248.1568 119844.143
= (9,542.24/-869.85)1/11 – 1
= 24%
= (4,484.50 /- 694.75)1/5 – 1
= 45%
ERR before the phased investment is higher than the ERR after investment,
therefore phased investment shouldn’t be considered.
Munyai, TT Munyai, TT
80 Mutai+DK
• 2104Ass2Mutai+DK.pdf
Mutai, DK Mutai, DK Mutai, DK Mutai, DK
Q1) From the project cash flows and the initial investment, we determine ROR necessary for breakeven:
UNIVERSITY OF JOHANNESBURG
*
0 = −250000 + 15000(P/A,i ,15)
* 250000
(P/A,i ,15) = = 16.6667 .
15000
0 = −250000 + 15000(P/A,8.5%,15)
0 = −250000 + 15000 * 8.3042
ADVANCED ENGINEERING ECONOMICS – 14M6MAE19 = −125,437.00
Present Value is <0, it shows that we cannot get back the R250,000 in 15 years.
Decision: Do not get money from personal investments
We allocate flexibility a score of 10, then the rest of the attributes are scored relative to this score.
Normalised weight is obtained by dividing each attribute’s score by the cumulative score of 27.5
Page 1 of 7 Page 2 of 7
Q3
Q3b)
j=k
Total AWk = -P(A/P,i%,k) + Sk + (A/F,i%,k) - ∑ AOC j (P/F,i%, j)(A/P,i%,k) Salvage Value = P * 0.85 6 = 0.3771P
j=1
Calculation table for salvage values: AW = AW = − P ( A / P ,18%,6) + 0.3771P ( A / F ,18%,6) − 95,248.1568( annualised expenses from above, AW )
1 6 6
P 100000.00
Year 1 2 3 4 5 6 - 108,003.75 = −0.2859 P + 0.3771P * 0.1059 − 95,248.1568
Salvage Value = P*(0.85^n) 85000.00 72250.00 61412.50 52200.62 44370.5313 37714.9516
12,755.5932
P= = R 51860.47648
AW1 = -100000(A/P,18%,1) + 85000(A/F,18%,1) - [75000(P/F,18%,1)](A/P,18%,1) 0.24596
AW1 = -100000 * 1.18 + 85000 * 1 - [75000 * 0.8475] * 1.18 Reduction: 100,000-51,860.47648=R48,139.5235
AW1 = -108,003.75
AW = -100000(A/P,18%,3) + 61412.50(A/F,18%,3) - [75000(P/F,18%,1) + 85000(P/F,18%,2) + 95000(P/F,18%,3)] Equipment 100000 Indirect Labour 2000
3
(A/P,18%,3) Space 55000 Subcontractors 600
AW = -100000 * 0.4599 + 61412.50 * 0.2799 - [75000 * 0.8475 + 85000 * 0.7182 + 95000 * 0.6086] * 0.4599 Computers 33333.33 Misc. costs 200
3
AW = −112,672.3743 Total Fixed Costs 288333.3 Total Variable Costs 5500
3
Q5
Make Alternative
Q6 For yearly NCF > 0, we get the FW values at the end of year 2023, the rate applied is the investment rate, 15% for
Schedule of cash flow pattern:
each yearly net cash flow (NCF). From the table, under the column column 3, FW2023 = 12489.4225 . This value is
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 obtained by adding FW values for each yearly NCF>0 in column 1.
Initial Costs('000,000) -800/3 -800/3 -800/3
Production Costs('000,000) -150 -150*1.03 -150*(1.03)2 -150*(1.03)3 -150*(1.03)4 -150*(1.03)5 -150*(1.03)6 -150*(1.03)7 -150*(1.03)8
Revenue('000,000) +900 +900*0.97 +900*(0.97)2 +900*(0.97)3 +900*(0.97)4 +900*(0.97)5 +900*(0.97)6 +900*(0.97)7 +900*(0.97)8
For yearly NCF < 0, we get the PV values at year 0 (beginning of 2012), the rate applied is the borrowing rate, 16%
Fixed Costs('000,000) -40 -40 -40 -40 -40 -40 -40 -40 -40 for each yearly net cash flow (NCF). From the table above, column 5, PV2012 = −662.3022 . This value is obtained
Remediation Costs('000,000) -90
Expansion: by adding PV values for each yearly NCF<0 in column 1.
Capital costs('000,000) -700 -700
Increase in Production costs('000,000) -150*(1.03)5 -300*(1.03)6 -300*(1.03)7 -300*(1.03)8
Increase in Revenue('000,000) +900*(0.97)5 +1800*(0.97)6 +1800*(0.97)7 +1800*(0.97)8 Thereafter we find a rate that will equate the two values together as shown below:
Increase in Fixed Costs('000,000) -40 -40 -40 -40
*
Net Cash Flow Calculated Values for each year in millions
PV2012 ( F / P, i ,12 ) + FW2023 = 0
*
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total
− 662.3022( F / P, i ,12) = −12,489.4225
Initial Costs -266.6667 -266.667 -266.667
Production Costs -150 -154.5 -159.135 -163.90905 -168.82632 -173.89111 -179.107844 -184.48108 -190.015512 * 12 12,489.4225
Revenue 900 873 846.81 821.4057 796.763529 772.860623 749.674804 727.1845603 705.3690235 (1 + i ) =
Fixed Costs -40 -40 -40 -40 -40 -40 -40 -40 -40 662.3022
Remediation costs -90
Yearly NCF without expansion -266.6667 -266.667 -266.667 710 678.5 647.675 617.49665 587.937208 558.969512 530.56696 502.7034805 385.3535113
Expansion
1/12
* 12489.4225
Capital Expansion costs -700 -700
i = − 1 = 0.277293
Production costs -173.89111 -358.215689 -368.96216 -380.031024
Revenue 772.860623 1499.34961 1454.369121 1410.738047
Fixed Costs -40 -40 -40 -40 662.3022
Total NCF After Expansion -266.6667 -266.667 -266.667 710 678.5 647.675 -82.5034 -112.0628 1117.9390 1631.7009 1548.1104 1376.0605
*
(F/P,15%,n) Multiplication Factors
FW at (F/P,15%,n)
3.059
2171.89
2.66
1804.81
2.3131
1498.137
1.5209 1.3225
1700.2735 2157.9244
1.15
1780.3270
1
1376.0605 12489.4225 i = 27.7293%
(P/F,16%,n) Multiplication Factors 0.8621 0.7432 0.6407 0.3538 0.305
PV at (P/F,16%,n) -229.8933 -198.187 -170.853 -29.189685 -34.179152 -662.3022
*
i > MARR of 18%,
ERR makes use of the investment rate and the borrowing rate. It uses the investment rate for excess net cash flow in
any year and the borrowing rate for any cash short fall in any year.
Decision is to accept the phased investment project.
Page 5 of 7 Page 6 of 7
The table below shows net cash flow based on MARR of 18%
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Initial Costs('000,000) -266.6667 -266.6667 -266.6667
Production Costs('000,000) -150.0000 -154.5000 -159.1350 -163.9091 -168.8263 -173.8911 -179.1078 -184.4811 -190.0155
Revenue('000,000) 900.0000 873.0000 846.8100 821.4057 796.7635 772.8606 749.6748 727.1846 705.3690
Fixed Costs('000,000) -40 -40 -40 -40 -40 -40 -40 -40 -40
Remediation Costs('000,000) -90
Yearly Cash Flow without expansion -266.6667 -266.6667 -266.6667 710.0000 678.5000 647.6750 617.4967 587.9372 558.9695 530.5670 502.7035 385.3535
Expansion
Capital costs('000,000) -700 -700
Increase in Production costs('000,000) -173.8911 -358.2157 -368.9622 -380.0310
Increase in Revenue('000,000) 772.8606 1499.3496 1454.3691 1410.7380
Increase in Fixed Costs('000,000) -40 -40 -40 -40
Total Yearly Cash Flow After Expansion -266.6667 -266.6667 -266.6667 710.0000 678.5000 647.6750 -82.5034 -112.0628 1117.9390 1631.7009 1548.1104 1376.0605
(P/F,18%,n) Multiplication Factors 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.2660 0.2255 0.1911 0.1619 0.1372
PV values for each year -226.0000 -191.5200 -162.2933 366.2180 296.5724 239.8988 -25.8978 -29.8087 252.0952 311.8180 250.6391 188.7955
Cummulative PV per year -226.0000 -417.5200 -579.8133 -213.5953 82.9770 322.8758 296.9780 267.1693 519.2646 831.0826 1081.7217 1270.5172
The total cumulative PV is R1270.5172, Since PV > 0, accept the phased investment project
Both MARR and ERR reach the same conclusion, accept the phased investment project.
Page 7 of 7
Mutai, DK Mutai, DK
81 Mwabi+J
• 2014Ass2MwabiJ.pdf
Mwabi, J Mwabi, J Mwabi, J Mwabi, J
=-100000-3615(8.1567)
201404924
Thus NPV<0, therefore it is not viable to undertake this project under these
conditions.
14GIE4058/14M6MAE19 Assignment 2
C) The option for which the owner contributes 100% of the capital is the more viable
option as it has a lower Weighted Average Cost of Capital and a lower present
Question 1 worth.
a)
b) Speed[v] 5
=-150000(0.1241) W1=10/27.5=0.3636
=-18615 W2=2.5/27.5=0.909
W3=5/27.5=0.1818
=-3615
NPVequity= -100000-3615(A/P,8.8,15)
-[75000(0.8475)+85000(0.7182)+95000(0.6086)](0.4599)
Uptime[u] 0.1818
- [75000(P/F,18,1)+85000(P/F,18,2)+ 95000(P/F,18,3)
AOC2=85000 S2=72250 + 105000(P/F,18,4)+ 115000(P/F,18,5) ](A/P,18,5)
AW2=-100 000(A/P,18,2)+ 72250(A/F,18,2)- = -100000(0.3198)+ 44370.5325 (0.1398)
[75000(P/F,18,1)+85000(P/F,18,2)](A/P,18,2)
-[75000(0.8475)+85000(0.7182)+95000(0.6086)+ 105000(0.5158)
= -100000(0.6387)+72250(0.4587)-[75000(0.8475)+85000(0.7182)](0.6387)
+ 115000(0.4371)](0.3198)
= -63870+33141.075-[79588.088](0.6387)
= -31980+6203-91735.27
= -110317.017
= -117511.35
AOC3=95000 S3=61412.5
AOC6=225000 S6=37714.952
AW3=-100 000(A/P,18,3)+ 61412.5(A/F,18,3)
AW6= -100 000(A/P,18,6)+ 37714.952 (A/F,18,6)
- [75000(P/F,18,1)+85000(P/F,18,2)+ 95000(P/F,18,3](A/P,18,3)
- [75000(P/F,18,1)+85000(P/F,18,2)+ 95000(P/F,18,3)
= -100000(0.4599)+61412.5(0.2799)
= -100000(0.2859)+ 37714.952 (0.1059) Therefore the first cost should be reduced by R78125.467, (100000-21874.533)
-[75000(0.8475)+85000(0.7182)+95000(0.6086)+ 105000(0.5158)
+ 115000(0.4371)+125000(0.3704)](0.2859) Question 4
= -28590+3994.013-95248.16 a) Fixed costs= FC=30+(350x0.2)+100+55+(1/3x100)
= -119844.147 =(30+70+100+55+33.33)x1000
=R 288330
Thus the estimated service life for this project is one year as it has the lowest Annual Variable Costs= Vc =2500+200+2000+600+200
worth.
=R 5500 per unit
b)
-12755.592=-0.24596P
b) Profit=(R- Vc) QBE- FC
P=51860.43
Revenue=(Profit- FC)/ QBE+ Vc
=((500 000+288330)/(8000))+5500)
Therefore the first cost should be reduced by R 48139.57, (100000-51860.43
=5598.54
)
-108003.75=-P(0.2859)+37714.951(0.1059) -119754.08
Question 5
Direct labour=500000
Direct material=300000 Investment=-266.66m
NPV=-266(P/F,16,1)
Indirect costs= 250000x10+25000x5+ 10000x15 =-266(0.8621)
=525000 =-229.89m
Therefore it is cheaper to buy the product then to make the product as the AW of the Production revenue= 500/t
bought product is cheaper. Production cost= 150/t
Production Revenue= R500x1.8M
=R900 million
Question 6
Production cost= 150x1.8M=270M
Annual fixed cost= R40m
Summary
Year PW FW CF= 270+40
=310m
0 -266.66m
1 -229.89m
Net flow= 900m-310m=590m
2 -198.181m
3 1804.81m
FV at r=590m
4 1476.3m NPV at k= 590m
5 1203.9m
6 -87.63m FW += P(F/P,I,n)
7 -92.85m =590m (F/P,15,8)
8 1277.13m =590m (3.0590)
=1804.81m
9 1589.46m
10 1293.295m Year 2016 n=4
11 999.341m
Total 875.211m 9644.236 3% decrease in per ton revenue from previous year
3% increase in production cost from the previous year
FV at r=821.41 m-334.93=486.48
NPV at k= -213.52m
PW -= P(P/F,I,n)
Year 2017 n=5 =-213.52m (P/F,16,6)
=-213.52m (0.4104)
3% decrease in per ton revenue from previous year =-87.63m
3% increase in production cost from the previous year
Investment=0
Production Revenue= 873m x((100-3)/100)
=R846.81 million Year 2019 n=7
FW += P(F/P,I,n) FV at r=1105.38
=839.726m (F/P,15,3) NPV at k= 1105.38
=839.726m (1.5209)
=1277.13m FW += P(F/P,I,n)
=1105.38 (F/P,15,1)
=1105.38 (1.17)
Year 2021 n=9 =1293.295m
Investment=0
Production Revenue= 5.4MxR416.489
=R2249.04 million Year 2023 n=11
Production cost=5.4 MxR179.1067 3% decrease in per ton revenue from previous year
=967.18m 3% increase in production cost from the previous year
FV at r=1106.08
NPV at k= 999.341
FW += P(F/P,I,n)
=999.341 (F/P,15,0)
=999.341
Sum of FW +=9644.176m
Sum of PW -=875.211m
ERR=( FW +/ PW -)1/n-1
=(9644.236/875.311)1/11-1
=(11.018)1/11-1
=0.24376
Therefore ERR=24.376%
Thus the investment should be considered as this above the ERR is higher the
expected MARR of 18%
Mwabi, J Mwabi, J
82 Ndika+N
• 2014Ass2Ndika+N.pdf
Ndika, N Ndika, N Ndika, N Ndika, N
Ndika, N Ndika, N
83 Ndlovu+BM
• 2014Ass2Ndlovu+BM.pdf
Ndlovu, BM Ndlovu, BM Ndlovu, BM Ndlovu, BM
Problem 1
a)
WACC =Equity fraction× Cost of equity capital + Debt Fraction ×Cost of debt capital
WACC= 8.5%
=6%
b)
WACC =Equity fraction× Cost of equity capital + Debt Fraction ×Cost of debt capital
WACC= 8.8%
=6%
Advanced Engineering Management
MAAR>ROR, it’s not worthwhile
UNIVERSITY OF JOHANNESBURG c) There is no better option since the ROR is lower than the MARR for both options.
Student Name: Rialivhuwa Nekhwevha
Student Number: 200807477
Date: 22 May 2014
Problem 2 Problem 4
Attributes Score(Si) Weight (Wi) Score 0-10 Computer:1/3 Variable Cost R/Unit
Flexibility(f) 100 =100/275 =3.6364 Administrative R 30,000.00 Material R 2,500.00
=0.3636 Salaries:20% R 70,000.00 Labour R 200.00
Safety (s) 25 =25/275 =0.909
Equipment R 100,000.00 Indirect Labour R 2,000.00
=0.0909
Space R 55,000.00 Subcontractors R 600.00
Uptime(u) 50 =50/275 =1.818
=0.1818 Computer:1/3 R 33,333.33 Misc Cost R 200.00 Volume
Speed(v) 50 =50/275 =1.818 Total Fixed
=0.1818 Cost R 288,333.33 Total Variable cost R 5,500.00 5000 m3
Rate Of Return (r) 50 =50/275 =1.818
=0.1818 Profit =Revenue -Total cost(Variable cost +fixed cost)
Sum of score and weight 275 =0.9999 =9.9994 Profit =0
=1 =10 r×Q=v×Q+Fixed Cost
r= r×Q + Fixed Cost
Q
Problem 3
r(revenue/unit) =R 5,557.67 per Unit
a) The minimum revenue per unit to break even is
=R5,557.67/Unit
P=R100, 000.00
=-100,000×(1.18) +85000×(1)-[75000×0.8475]×1.18 R 5, 598.54 is the revenue per unit required to reach the target profit of R500, 000.00
=-R108, 003.75
b)
Problem 5 Problem 6
AOC consist of the following; direct labour, direct material and indirect cost Given Information
Investment Value Units
Cost allocation of indirect cost:
Phase 1(PCap) 1.8 Mega Tons
Rate per hour ×allocated Phase 2 (Pcap) 3.6 Mega Tons
Department hours Phase 3(Pcap) 5.4 Mega Tons
A R 250,000.00 Production Cost(PC) 150 per ton
B R 125,000.00 Production Revenue(PR) 500 per ton
C R 150,000.00 gr(Revenue) 0.03 %
R 525,000.00 gc(Cost) 0.03 %
Fixed Cost A 40 million
Fixed Cost B 80 million
Annual operating cost =Departmental cost +material cost +direct labour cost
Borrowing Rate(k) 0.16 %
AOC = R525, 000+ R300, 000+ R500, 000 Investment Rate( r) 0.15 %
Period 11 years
= R1, 325, 00.00 MARR 18 %
=590
= 839.7132
= 1201.842
Results
ERR= 24.3266%
ERR is much higher than the MARR of 18% phase investment must be considered
G.Ngwenya 2
Assignment 2
Assignment 2 15000
𝑅𝑂𝑅 𝑜𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 = × 100%
250000
Lecturer: L Krüger
= 6%
It is better to leave the money in the investment because it will attract less interest should it
By be invested in the project
Gracious Ngwenya b)
𝑊𝐴𝐶𝐶 = 0.6(9%) + 0.4(8.5%)
920305655 = 5.4% + 3.4%
= 8.8%
c) Doing nothing.
2 Problem 2
Score
1 Flexibility 10
2 Safety 2,5
3 Uptime 5
4 Speed 5
5 Rate of return 5
3 Problem 3
a)
G.Ngwenya 3
Assignment 2
ESL =4 YEARS
4 Problem 4
a) Breakeven point is at:
𝐹𝐶
𝑄𝐵𝐸 =
𝑟−𝑣
𝑟 = 5627
b) 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐹𝐶 + 𝑉𝐶
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 500000 = 635000 + (5500) × 8000
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 45135000
45135000
𝑟=
8000
𝑟 = 5641.88
5 Problem 5
Ngwenya, G Ngwenya, G
87 Nkabinde+CS
• 2014Ass2Nkabinde+CS.pdf
Nkabinde, CS Nkabinde, CS Nkabinde, CS Nkabinde, CS
Solution:
Analysis: The Present Worth is - R125 437, which evince that if the Project Capex was to be sourced from 100% equity at 8.5 return on equity, the project will fail
to recoup the initial investment (first cost) and/or will not break-even, despite the annual income of R15 000 for 15 years.
Advanced Engineering Economics: 14GIE4058
Assignment No 2 Conclusion: The project doesn’t meet the minimum rate of return that is acceptable, and as such it doesn’t the meet the [capital investment] requirements. It is
safe to conclude that it is note worthwhile to get 100% Equity financing (personal investment), given that the net present worth reflects a deficit of –R125 437,
Due Date: 26 May 2014 which means that the return on equity is less than zero (MAAR < 0).
C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2 C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2
Given Debt-Equity (D-E) Mix of 60%-40% Project Financing Annual Net Cash Flow = Project Annual NCF – Annual Debt Payment
= + R15 000 – R18 609
Debt Portion (Principal) = R250 000 (0.60) = R150,000 = Principal Loan (CFo) = Po = - R3 609
Loan Repayment Amounts (Annuity) = Principal Loan (CFo) (A/P, i%,N)
= - R150 000 (A/P,9%,15) Portion of the Equity Finance = R250 000(40%) = R100 000
= - R150 000 (0,12406) PW of 40% Equity = -R100 000 + (-R3609) (P/A,8.8%,15)
= - R18 609 p.a PW40%Equity = -R100 000 + (-R3609) (8, 1567)
PW40%Equity = -R100 000 - R29 438
Analysis: This means that for 15 years, the total amount will be R18 609 x 15 = R279 135, if this amount discounted to what it is worth today, yield R76 633, PW40%Equity = -R129 438
which is below the Project Loan of R150 000. Another way of looking at this is the comparison of Annuities. The project income generated annually for 15 years,
is R15 000, but borrowing R150 000 at 9%, which requires a loan repayment annual amount of R18 609 (Cash outflows). The required repayments annual Given that the Net Present Worth of 100% Equity Finance is - R125 437, then compute the annuity equivalent – Annuity = - R125 437(P/A, 8.5%, 15) = R15 105.
installment is therefore is more than the project income (Cash inflows). There will be an annual deficit of R18 609 less R15 000, which is R3 609. This simply This means that the project can be fully funded at the annuity expense of R15 105 p.a. The 100% equity finance (R18 609 - R15 110) = R2 959 cheaper than the
means that the project income is not sufficient to recoup or repay the R150 000 loan taken to invest in this project, or the initial investment cannot be recovers 60% loan finance. In addition, just the 40% Capex option, of the required capital, requires annual repayments of R18 689, for 15 years, which is R1051 more
is the D-E Mix of 60%-40%, was to be used as gearing (capital structure of capital investment). Returns on such a gearing capital (investment) structure will not expense that the 100% equity financing option.
give the required capital recovery.
. Conclusion: Equity Finance option is much better then D-E mix debt funding of 60%-40. Besides the fact that both options do not meet the MARR, financing
Conclusion: Therefore it is safe to conclude that borrowing R150 000 at 9% is not a worthwhile investment. the project in this case proves to be a better option both qualitative and quantitatively.
C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2 C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2
Solution 3(a)
Solution 1(c)
ATTRIBUTES RATIONALE IMPORTANCE IMPORTANCE SCORE WEIGHT(S) [Wi = Score/27,5] % Given the following:
1. Flexibility Most NB = 100% 100% 10 0,3636 36,36%
2. Safety 50% [Uptime] 25% 2,5 0,0909 9,09% MARR = 18% Period = 6 years
It is clear that there is uniform decline by 15% in salvage value, and uniform growth by R10 000 in operational costs. Given this prevalent
growth, the uniform growth gradient equation must be used as indicated hereunder.
Year 1, Annual Worth(yr1) = First Cost (A/P, i%, n) + Salvage (A/F, i%, n) – Annual Operating Cost
= -R108 000
Nkabinde, CS Nkabinde, CS Nkabinde, CS Nkabinde, CS
Nkabinde, CS Nkabinde, CS Nkabinde, CS Nkabinde, CS
C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2 C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2
Solution 3(a)
Year2: AW(yr2) = -R100 000(A/P,18%,2) + 100,000(0.85)2(A/F,18%,2) – 75000 – 10 000(A/G,18%,2)
(b) Given the findings that the annual worth of the ESL is R108, for the first year (Year 1), and the assumption that in the 6th Year everything will be the same save
= -R100 000 (0.6387) + R100 000(0,72 250) (0,4587) – 75 000 – 10 000(0,4587) the Annual Worth will be that of the Economic Service Life, the following equation must be used to compute an equivalent Present Value
= -R110 314, 798 Year 1, Annual Worth(yr1) = First Cost (A/P, i%, n) + Salvage (A/F, i%, n) – Annual Operating Cost
Annual Worth for the second year is -R110 315 But given AW(year 1) = AW(year 6), and all else remain unchanged (the same)
Therefore AW(Year 1) = First Cost (A/P, i%, 6) + Salvage (A/F, i%, 6) – Annual Operating Cost(at year 6, with uniform growth)
Year3: AW(yr3) = -R100 000(A/P,18%,3) + 100 000(0.85)3(A/F,18%,3) – 75 000 – 10 000(A/G,18%,3)
-AW(Year 1) = -P(A/P,18%,6) + P(0.85)6(A/F,18%,6) – 75 000 – 10 000(A/G,18%,6)
= -R100 000 (0,4599) + R100 000(0,61 413) (0,2799) – 75 000 – 10 000(0,8902)
Solve for P =? Using (based on) the above equation
= -R112 701
P(A/P,18%,6) - P(0.85)6(A/F,18%,6) = – 75 000 – 10 000(A/G,18%,6)] + [AW(Year 1)]
Annual
Adjusted Operating P[(A/P, 18%,6) - (0,85)6(A/F,18%,6)] = -75 000 – 10 000 (A/G,18%,6)
Year (n) -P (A/P, i%, k) -FC(A/P; i%; N) AOC Cost Total AW
0 P[(0.2859) - (0.3771)(0.1059)] = -75 000 – 10 000(2, 0252)
1 -R 118 000 R 85 000 -75000 -R 108 000,00
P[0,2859 - 0,03993)] = - 95 252 + 108 000
2 -R 63 870 R 33 142 -R 4 587 -75000 -R 110 314,798
3 -R 45 990 R 17 191 -R 8 902 -75000 -R 112 701,176 P (0.24596) = 12 748 = 12 748/0.2459
4 -R 37 170 R 10 009 -R 12 947 -75000 -R 115 108,122
5 -R 31 980 R 6 202 -R 16 728 -75000 -R 117 505,983 P = 51 828,489
6 -R 28 590 R 3 994 -R 20 252 -75000 -R 119 847,605 Analysis: Thus the present worth at AW (year1) = AW (year 6) is R51 828, therefore the first cost will have to be reduced with X = FC – P, which is
R100 000 - R51 828,489, resulting to R48 171, 511, an equivalent of R48 172.
Conclusion: It is found that the first cost will have to be reduced by R48 172 to decrease from R100 000 to R51 828
The Economic Service Life is 1 year, and the corresponding Annual Worth (AW) is R108 000 (One hundred and Eight Thousand Rand Only).
C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2 C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2
PROBLEM NO 4: WHAT IS THE RIGHT PRICE?
Solution 4(b)
Solution 4(a)
Given:
Given: FIXED COST VARIABLE COSTS R/Unit
FIXED COST VARIABLE COSTS R/Unit Administrative R 30 Materials R 2 500
Administrative R 30 Materials R 2 500 Salaries and benefits: 20% of (350) R 70 Labour R 200
Salaries and benefits: 20% of (350) R 70 Labour R 200 Equipment R 100 Indirect Labour R 2 000
Equipment R 100 Indirect Labour R 2 000 Space etc. R 55 Subcontractor R 600
Space etc. R 55 Subcontractor R 600 Computers: 1/3 of (100) R 33 Misc. Cost R 200
Computers: 1/3 of (100) R 33 Misc. Cost R 200 TOTAL R 288,33 TOTAL R 5 500
TOTAL R 288,33 TOTAL R 5 500 If production capacity increase by 3000, Determine the required revenue per unit to get a profit target of R500 000?
(a) Determine the minimum revenue per unit to break even at the current production volume of 5 000m^3 per Profit = R 500 000
year? volume = 8000
The minimum revenue per unit to break even is R 5 557 666,7 The profit target of R500 000, can be obtained if the revenue per unit is R5 500 099
C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2 C.S Nkabinde, Student No: 8096483360 Advanced Engineering Economics Assignment No 2
PROBLEM NO 6: WHAT PERCENTAGE (ERR)?
PROBLEM NO 5: BUY OR MAKE
SOLUTION TO PROBLEM NO 5 Given the following information:
Item No Item Description Value Units
INDIRECT COST ALLOCATION FOR MAKE ALTERNATIVE 1 Capacity Phase 1 1,8 Mega ton p.a
Department Allocation Rate/hour Duration (Basis hours) Indirect Cost Allocation 2 Capacity Phase 2.1 3,6 Mega ton p.a
A Labour hours (direct) 10 25000 R 250 000 3 Capacity 2.2 5,4 Mega ton p.a
B Machine hours 5 25000 R 125 000 4 Revenue (Production) [2015] R 500 Per ton
C Labour hours (direct) 15 10000 R 150 000 5 Cost (Production) [2015] R 150 Per ton
TOTAL INDIRECT ALLOCATION COST = R 525 000 6 Uniform Gradient Cost (gC) g= 1+3% Per year
7 Uniform Gradient Revenue (gR) g = 1-3% Per year
Annual Operating Cost (Make Option) = Direct Labour + Direct Materials + Indirect Allocation 8 Fixed - Cost Phase 1 [2015-] R 40 million
R 500 000 R 300 000 R 525 000 9 Fixed - Cost Phase 2 [2019] R 80 million
10 Remediation Cost R 90 million
Annual Operating Cost = R 1 325 000 11 Borrowing Rate (k) 16% Per year
12 Investment Rate ( r ) 15% Per year
13 Period (In years = n) 11 Years
Annual Worth (Make) = INITIAL INVESTMENT (P)(A/P, I, N) + SALVAGE VALUE(A/F, I, N) + ANNUAL OPERATING COST
14 MARR 18% Per year
2 000 000(A/P,15%,10) + 50000(A/F,15%,10) + R 1 325 000
(-2000000) x (0.1993) (50000) x (0.0493) R 1 325 000 NB: Formulae employed
R 398 600 R 2 465 R 1 325 000 PRODUCTION = Total Production (Revenue) - TOTAL Cost of Production (Variable Cost plus Fixed Cost)
AW(Make) = - R 1 726 065 Production Revenue - Variable Costs + Fixed Costs
Prod Capacity x Revenue (price) - Prod Capacity x Variable Cost - (Given figure)
SUMMARY OF ANALYSIS AND FINDINGS (1,8 x 500)(1-gR)n - (1.8 x 150) (1+gC)n - FC
0 0
Findings Year 2015 (1,8 x (500) (0,97) - (1,8 x (150) (1+3%) - 40 = R590
1 1
1. Given that the current carafes are purchased with AW of -R1 500 000 (R1.5 million) AW (Purchase Cost) R 1 500 000 Year 2016 (1,8 x (500) (0,97) - (1,8 x (150) (1+3%) - 40 = R554, 90
2 2
Year 2017 (1,8 x (500) (0,97) - (1,8 x (150) (1+3%) - 40 = R520,37
2. Whereas the make alternative will cost an Annual Worth of -R1 726 065 (-R1.73 million) AW (Make Cost) R 1 726 065
Year 2018 (1,8 x (500) (0,97)3 - (1,8 x (150) (1+3%)3 - 40 = R486,37
Net Savings R 226 065 Year 2019 (1,8 x (500) (0,97)4 - (1,8 x (150) (1+3%)4 - 40 = R452.88
Recommendations and Conclusions Year 2020 5
(3,6 x (500) (0,97) - 5
(3,6 x (150) (1+3%) - 80 = R839,71
6 6
The company will make a net savings of R 226 065, if the make alternative is chosen, and as such it is recommended that the company Year 2021 (5,4 x (500) (0,97) - (5,4 x (150) (1+3%) - 80 = R 1201,84
7 7
should rather make the components in house, instead of buying them Year 2022 (5,4 x (500) (0,97) - (5,4 x (150) (1+3%) - 80 = R1105,36
Year 2023 (5,4 x (500) (0,97)8 - (5,4 x (150) (1+3%)8 - 80 = R1010,02
Step 1: Based on given data and above calculations, determine Net Cash Flow (NCF) for each year;
Step 2: Discount all negative Cash Flows (Outflows), to year zero, using P = F(P/F; Borrowing rate; N) = P (1+16%)-N
Step 3: Compound all positive incoming Cash Flows (Inflows) to the Future value of year 2023, using F = P(F/P; Investment rate; N) = P (1+15%)N
Step 4: Determine Sum of FW+, and Sum PW-, forthwith use equation: FWn+= PW-(F/P, ERR%, N) to find External Rate of Return (ERR)
Nkabinde, CS Nkabinde, CS
88 Nkgoeng+RM
• 2014Ass2NkgoengRM.pdf
Nkgoeng, RM Nkgoeng, RM Nkgoeng, RM Nkgoeng, RM
Problem 1
Information given:
Advanced Engineering Economics • Funky industries relies on 100% equity funding to finance projects.
1 2
1. c) Looking at both answers, we have P W < 0 which tells us that: 3. b) how much the first cost must reduce to make the equivalent annual cost for a full 6 years
• 100% equity financing does not meet the MARR of 8.5% requirement numerical to the AW estimated in the previous part. Assume all other estimates remain the
same and neglect the fact that P value will still not make a newly calculated ESL equal to 6
• The Debt-Equity ratio 60% − 40% equity mix does not meet the MARR of 8.8% require- years.
ment.
Maybe if the revenue generated was a bit higher than R15,000 one of the options would have Solution
been suitable.
3. a) The capital recovery is determined as follows:
-End of Problem 1 CR1 = −100, 000(A/P, 18%, 1) + 85, 000.00(A/F, 18%, 1) = −R33, 000.00
CR2 = −100, 000(A/P, 18%, 2) + 72, 250.00(A/F, 18%, 2) = −R30, 729.36
Problem 2 CR3 = −100, 000(A/P, 18%, 3) + 64, 412.50(A/F, 18%, 3) = −R27, 961.79
CR4 = −100, 000(A/P, 18%, 4) + 52, 200.00(A/F, 18%, 4) = −R27, 165.11
A committee of four people submitted statements about the attributes to be used in a weighted
attribute evaluation. We are required to determine the normalised weights if scores are assigned CR5 = −100, 000(A/P, 18%, 5) + 44, 370.53(A/F, 18%, 5) = −R25, 775.77
between 0 and 10. Solution CR6 = −100, 000(A/P, 18%, 6) + 37, 714.95(A/F, 18%, 6) = −R24, 596.62
The full table of the normalised weights is shown in Table 1
The annual worth is determined using the following equation from MS-EXCEL
Attribute Comment Score Norm-Score
AW of AOC1 = −P M T (18%, 1, N P V (18%, C5 : C5)) (1)
1. Flexibility The most Important factor 10 0.3636
2. Safety 50% As important as uptime 2.5 0.0909
Year Salvage (R) AOC (R) CR (R) AW of AOC (R) Total AW (R)
3. Uptime One-half as important as flexibility 5 0.18182
Y-1 85,000.00 -75,000 -33,000 -75,000.00 -108,000.00
4. Speed As important as uptime 5 0.18182
Y-2 72,250.00 -85,000 -30,729.36 -79,588.10 -110,316.51
5. RoR Twice as important as safety 5 0.18182
Y-3 64,412.50 -95,000 -27,961.79 -83,901.58 -111,863.37
Total 27.5 1.0000 Y-4 52,200.00 -105,000 -27,165.11 -87,946.96 -115,112.07
Y-5 44,370.53 -115,000 -25,775.77 -91,728.38 -117,504.14
-End of Problem 2
Table 2: Economic Service Life & Annual Worth
Problem 3
3. b)
We have been given the following information:
-End of Problem 3
First Cost P = R100, 000
Life n = 6 years Problem 4
Salvage S = P × 0.85n
Operating Cost AOC = 1000(65 + 10n) Solution
MARR = 18%
Total Cost = Total Variable Cost + Total Fixed Costs
about a new machine. We are required to determine:
T C = vQ + F C
3. a) the Economic Service Life and corresponding Annual Worth of the machine. v = variable cost per unit
Q = volume of production
3 4
AOC = 500, 000 + 300, 000 + 525, 000 = R1, 325, 000
5 6
N CF − = 5947
N CF + = 13639.7
FW
= 10.96
−P W
(14083.3) 1/11
ERR = −1
(1285.3)
= (10.957)1/11 − 1
= 0.243
= 24.3%
-End of Problem 6
Nkgoeng, RM Nkgoeng, RM
89 Novela+MB
• 2014Ass2Novela-MB.pdf
Novela, MB Novela, MB Novela, MB Novela, MB
Novela, MB Novela, MB
90 Nyamande+G
• 2014Ass2Nyamande+G.pdf
Nyamande, G Nyamande, G Nyamande, G Nyamande, G
Nyamande, G Nyamande, G
91 Nzamba+P
• 2014Ass2Nzamba+P.pdf
Nzamba, P Nzamba, P Nzamba, P Nzamba, P
Problem 1: Borrow or not? Based on the data given on the table, the following may be written
(2)
𝑃𝑊𝑝 ?
𝑖 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
(3)
(4)
We know that
1 2 3 4 5 6 7 8 9 10 15
∑
( )
( )
( )
Substituting values using equations (1) to (4)
𝑃𝑆 ?
𝑃𝐺 ?
𝑖 ( ⁄ ) ( )( ⁄ )
𝑆 ?
𝑃𝐴 ? ( ) ( ⁄ )
[ ]( ⁄ )
( ) ( ⁄ )
0 1 2 3 4 5 6
( 7) ( )( 7)
7 ( ) ( 7 )
[ ]( 7)
9 ( ) ( 7 )
Figure 1
( ⁄ ) ( )( ⁄ )
(a) Economic service life and annual worth ( ) ( ⁄ )
The annual worth AWk for a year k is given by the formula: [ ( ) ( ⁄ )] ( ⁄ )
( ) ( ⁄ )
( ⁄ ) ( ⁄ ) [∑ ( ⁄ )] ( ⁄ )
( 99) ( )( 799)
( ) ( 7 )
Where
[ ( ) ( 7 )] ( 99)
( ) ( )
and ( )
( ⁄ ) ( )( ⁄ )
[∑( ) ( ⁄ )] ( ⁄ )
( ⁄ ) ( )( ⁄ )
( ) ( ⁄ )
Having this, the total annual worth can be computed for every year spanning the expected ( ) ( ⁄ )
life, ( ⁄ )
( ) ( ⁄ )
[ ( ) ( ⁄ )]
( ⁄ ) ( )( ⁄ )
[( ) ( ⁄ )]( ⁄ )
( 7 7) ( )( 9 7)
( ) ( 7 ) Year P/F A/P A/F CR Sum(AOC*(P/F)) Sum(AOC)*A/P Total AW
( ) ( 7 ) 1 0,8475 1,18 1 -33000 63562,5 75003,75 -108003,7500
( 7 7)
( ) ( ) 2 0,7182 0,6387 0,4587 8380 124609,5 79588,08765 -71208,0877
[ ( ) ( )] 3 0,6086 0,4599 0,2799 15422,5 182426,5 83897,94735 -68475,4474
4 0,5158 0,3717 0,1917 15030,63 236585,5 87938,83035 -72908,2054
5 0,4371 0,3198 0,1398 12390,53 286852 91735,2696 -79344,7384
6 0,3704 0,2859 0,1059 9124,952 333152 95248,1568 -86123,2052
And
( 9 ) ( )( 9 )
( ) ( 7 )
( ) ( 7 )
( ) ( ) ( 9 )
( ) ( )
(b) Cost reduction
[ ( ) ( 7 )]
( ⁄ ) ( ⁄ )
( ⁄ ) ( )( ⁄ ) ( )
( ⁄ ) ( )( ⁄ ) [( )( ⁄ ) ( ⁄ )] ( )
( ) ( ⁄ )
( )
( ) ( ⁄ )
( )( ⁄ ) ( ⁄ )
( ) ( ⁄ )
( ⁄ )
( ) ( ⁄ ) 7 7 ( )
( ) ( ⁄ ) ( )( 9) ( 9)
[ ( ) ( ⁄ )]
( 9) ( )( ⁄ )
( ) ( 7 )
( ) ( 7 )
( ) ( )
( 9)
( ) ( )
( ) ( 7 )
[ ( ) ( 7 )]
Where
( )
𝑃𝑊𝐵 ?
𝑃𝐴𝐵 ?
𝑖
Substituting in the equation,
0 1 2 3 4 5 6 7 8 9 10
𝑚 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
(b) Revenue per unit required for R 500 000 in profit Figure 2
Let us find an expression for the revenue per unit in terms of profit
( )( ⁄ )
( )( )
9 𝑚
The Make Option
𝑃𝑊𝑀 ?
2011 2012 2015 2018 2021 2022 2023
2013 2014 2016 2017 2020 2020
0 1 2 3 4 5 6 7 8 9 10 11 12
𝑃𝑆 ?
0 1 2 3 4 5 6 7 8 9 10
𝑚 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑚
Figure 3
( )( ⁄ ) ( )( ⁄ )
( )( ) ( )( 7 ) 𝑚 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑚 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Clearly, , consequently Buy is the best option.
7 𝑚 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Figure 4
The revenue per unit will decrease by 3% every year; its annual revenue in year k is given by Having the cost per unit, the annual operating cost for year k is given by,
( )
Where Using the formula above from year 2015 to 2023, with 2015 as the first year, the results shown in
table 2 are obtained.
And
Table 2: Annual production costs
Table 1: Annual revenues The total annuals cost can be determined by adding up all incurred costs (shown in table 2).
And
The net cash flow in year k is the difference between the positive (revenue) and negative cash flows
(costs) as illustrated in the equation below.
Using the appropriate F/P at the investment rate of 15%, and P/F values at the borrowing rate of
16% (shown in the columns labelled FV and PV respectively in table 4), positive and negative
resultant cash flows can be computed. See table 4 below.
It follows that the total positive and negative cash flows are:
7 9 9 77 7 9 79 7 7
7
And
9 9 7 9 9 7 9 9 7 9 77 9
It follows,
9 9
( )
77
Nzamba, P Nzamba, P
92 Oshokoya+TJ
• 2014ASS2OshokoyaTJ.pdf
Oshokoya, TJ Oshokoya, TJ Oshokoya, TJ Oshokoya, TJ
O.O. Oshungade The 100% equity does not meet the MARR requirement because the PW is less than 0
201474790
Advanced Engineering Economics GIE4058 Therefore, it is not worthwhile to get the money from personal investment.
Assignment 2 (b) Loan – 60% debt – 40% equity (D-E financing)
(a) Is it worthwhile to get the money from the personal investment? Annual NCF = project NCF – payment of loan = 15,000 – 18,615 = -3,615
(b) Is it worthwhile to get the money from the loan? PW = -100,000 + -3,615 ( ) = -100,000 – 3,615 (8.1567)
(c) Which is the better option? PW = -100,000 – 29486.47 = -129,486.47
Solution PW = R-129, 486.47
Cash flow, -250,000(-250k), 15,000(15k) The 60% debt-40% equity mix does not meet the MARR requirement because the PW is less
15k 15k
than 0
0
Therefore, it is not worthwhile to get the money from loan.
1 15 (c) In conclusion both the money from personal investment and loan is not worth while
therefore, I recommend doing nothing.
-250k
Problem 2 [8]
(a) Personal investment – 100% equity financing
The committee on the scale
MARR = 8.5% which is determine from the question.
A committee of four people submitted the following statements about the attributes to be used
The present worth at MARR will be determine in a weighted attribute evaluation.
PW = R-125, 437
1 2
Solution Solution
Attribute Score (Si) Weights (Wi) (a) Given, first cost P = R100 000, years = 6 years, MARR = 18%
1. Flexibility[f] 10
Year (n) salvage value, S = P ×0.85n AOC = (65+10×n) ×1000,
2. Safety[s] (R000) n≥1 (R000)
1 85.0000 -75.0000
3. Uptime[u] 2 72.2500 -85.0000
3 61.4125 -95.0000
4. Speed[v] 5 4 52.2006 -105.0000
5 44.3705 -115.0000
5. Rate of Return[r] 2 2.5 = 5 6 37.7149 -125.0000
n = Number of years after purchase Annual worth of the salvage value (SV)
The operating cost will be R75000 and increase by R10000 per year after the first year. [AOC Year SV (R000)
= (65+10×n) ×1000, n≥1] ( ) ( )
0
Using MARR=18% determine 1 85.0000 1.0000 85.0000
2 72.2500 0.4587 33.1411
(a) Determine the Economic Service Life (ESL) and corresponding Annual worth (AW) of
3 61.4125 0.2799 17.1894
the machine. 4 52.2006 0.1917 10.0069
5 44.3705 0.1398 6.2030
(b) How much would the first cost have to reduced to make the equivalent annual cost for a
6 37.7149 0.1059 3.9940
full 6 years numerical equal to the AW estimated in the previous part (at ESL). Assume all
( ) Is from the table and ( )= ( ) SV
the other estimates remain the same and neglect the fact that this lower P value will still not
make a newly calculated ESL equal to 6 years.
Total Capital Recovery
3 4
3 61.4125 -45.9900 17.1894 -28.8006 The ESL is therefore the first year (1st year), the lowest AW (T) and the corresponding
4 52.2006 -37.1700 10.0069 -27.1631 AW is -108.0038 (R000).
5 44.3705 -31.9800 6.2030 -25.7770
6 37.7149 -28.5900 3.9940 -24.5960 (b) Annual worth at 6 years (AW6) = R-108.0038, n = 6, MARR = 18%
CR= Sum of ( ) ( )
AW6 = CR + ( )
Part 2: Annual operating costs (AOC)
CR = ( ) ( ) = ( ) -P + ( ) SV, where SV= P
Present worth of the AOC n
×0.85
Year AOC (R000) PWT (AOC)
( ) ( ) Therefore, CR = ( ) -P + ( ) P ×0.85n
0 1.0000 0.0000
1 -75.0000 0.8475 -63.5625 -63.5625 CR = ( ) -P + ( ) P ×0.856 = 0.2859 -P + 0.1059 P ×0.3771
2 -85.0000 0.7182 -61.0470 -124.6095
3 -95.0000 0.6086 -57.8170 -182.4265 CR = - 0.2859P + 0.0399P = -0.2460P
4 -105.0000 0.5158 -54.1590 -236.5855
5 -115.0000 0.4371 -50.2665 -286.8520 ( ) At year 6 = -95.2482
6 -125.0000 0.3704 -46.3000 -333.1520
( ) Is from the table and ( )= ( ) AOC Therefore AW6 = -0.2460P + -95.2482, but AW6 = -108.0038
PWT (AOC) is the total PW of the AOC -108.0038 = -0.2460P + -95.2482, make P the subject of formula,
5 6
(a) Determine the minimum revenue per unit to break even at the current production volume Profit (P) = R500, 000
of 5 000m3 per year.
FC = R288, 333.33
(b) If selling internationally and to large corporations is pursued, an increased production of 3
000m3 will be necessary. Determine the revenue per unit required if a profit goal of R500 VC = 5,500 8,000 = R44, 000, 000
000 is set for the entire system. Assume the cost estimates above stay the same. TC = 44, 000, 000 + 288,333.33 = R44, 288, 333.33
Solution P = rQ – TC
(a) At break even, Revenue (R) = Total cost (TC)
= = = R5598.5417/ unit
Where R = rQ, TC = FC + VC
7 8
Annual cost (AOC) = R- 1,325,000 (-1.325m) In late 2011, ZMC, Ltd., approved the construction of an Alumina Refinery with a capacity of
1,8Mt †of alumina per year at the cost of about R800m ‡. The plant was constructed so that it
To perform an economic analysis the net present value (NPV) need to be calculated. could be expanded to an annual capacity of 5,4Mt, and in November of 2013 ZMC
Cash flow diagram announced that it was considering expanding due to market conditions.
50k Make the following assumptions: Consider this problem as a phased expansion problem with
0 1 2 3 the cost to construct the original facility (R800m) spread evenly over years 2012 through
2014. First year (2015) revenues are R500/t against per unit costs of R150 with a production
10 of 1,8Mt. The per ton revenues are expected to decrease 3% annually due to worldwide
-1.325m -1.325m -1.325m increases in capacity, while per unit costs are expected to increase 3% annually. Assume that
-2m expansion to 5,4Mt of annual capacity is to commence in 2018 and 2019 at the cost of
R700m each year. This results in a capacity of 3,6Mt in 2020 and 5,4Mt in 2021 through the
Make alternative present worth is remaining plant life (ending in 2023). The plant carries an expected remediation cost of
R90m. Finally, annual fixed costs of R40m are expected to begin in 2015 and extend through
NPW = Po + P (AOC) + P (SV)
2019, increasing to R80m for the life of the project.
Po = - 2,000,000
Assuming a borrowing rate of 16% and investment rate of 15%, should the phased
P (AC) = AC ( ) = -1,325, 000 ( ) = -1,325,000 5.0188 investment be considered if one uses ERR as method of analysis and MARR is 18%?
Solution
= -6,649,910
Given
P (SV) = SV ( ) = 50,000 ( ) = 50,000 0.2472 = 12360
Investment Value Units
NPW = - 2,000,000 + -6,649,910 + 12360 = - 8,637,550 = R8, 637,550 (cost) Phase 1 (capacity (cap)) 1.8 Mega ton
Phase 2a 3.6 Mega ton
Therefore the annual worth will be Phase 2b 5.4 Mega ton
Production cost (PC) 150 Per ton
AW = NPW ( ) = - 8,637,550 ( ) = - 8,637,550 0.1993 Production revenue (PR) 500 Per ton
Growth cost (gC) 3% Per year
= R- 1,721,463.72 Growth revenue (gR) -3% Per year
FC phase 1 40 Million
Also the Make alternative annual worth can be calculated directly FC phase 2 80 Million
Remediation cost 90 Million
AW = -P ( ) – AOC + SV ( ) Borrowing rate (k) 16% Per year
Investment rate (r) 15% Per year
AW = -2,000,000 ( ) - 1,325,000 + 50,000 ( ) Periods (N) 11 Years
MARR 18%
AW = -2,000,000 0.1993 – 1,325,000 + 50,000 0.0493 = -398600 – 1,325,000 + 2465
AW = R- 1,721,135 which is almost the same as using the present worth method Production
Currently, the carafes are purchased with an annual worth of: AW (BUY) = R-1,500,000 2015: Phase 1 (cap) [(PR (1 + gR) (year – 2015) – PC (1+gC) (year – 2015)] – FC phase 1
Therefore, it is cheaper to buy, because the AW of purchase/buy is less than that of make. 2015: 1.8 [500 (1- 0.03)0 – 150 (1+ 0.03)0] – 40 = 1.8[500 -150] – 40 = 1.8[350] – 40
9 10
2015: 630 – 40 = 590 2023: 5.4 [500 (1- 0.03)8 – 150 (1+ 0.03)8] – 80 = 5.4 [391.87 -190.02] – 80 = 5.4 [201.85]
– 80
2016: Phase 1 (cap) [(PR (1 + gR) (year – 2015) – PC (1+gC) (year – 2015)] – FC phase 1
2023: 1089.99 – 80 = 1009.99
2016: 1.8 [500 (1- 0.03)1 – 150 (1+ 0.03)1] – 40 = 1.8[485 -154.5] – 40 = 1.8[330.5] – 40
2019: 1.8 [500 (1- 0.03)4 – 150 (1+ 0.03)4] – 40 = 1.8[442.65 -168.83] – 40 = 1.8[273.82] – ERR =( ) , N = 11
40
= = 10.97
2019: 492.88 – 40 = 452.88 ( )
2020: Phase 2a (cap) [(PR (1 + gR) (year – 2015) – PC (1+gC) (year – 2015)] – FC phase 2 ERR = ( ) = ( ) = 1.2435 – 1 = 0.2435
5 5
2020: 3.6 [500 (1- 0.03) – 150 (1+ 0.03) ] – 80 = 3.6[429.37 -173.89] – 80 = 3.6[255.48] – ERR = 24.35%
80
2021: Phase 2b (cap) [(PR (1 + gR) (year – 2015) – PC (1+gC) (year – 2015)] – FC phase 2
2021: 5.4 [500 (1- 0.03)6 – 150 (1+ 0.03)6] – 80 = 5.4 [416.49 -179.11] – 80 = 5.4 [237.38]
– 80
2022: Phase 2b (cap) [(PR (1 + gR) (year – 2015) – PC (1+gC) (year – 2015)] – FC phase 2
2022: 5.4 [500 (1- 0.03)7 – 150 (1+ 0.03)7] – 80 = 5.4 [403.99 -184.48] – 80 = 5.4 [219.51]
– 80
2023: Phase 2b (cap) [(PR (1 + gR) (year – 2015) – PC (1+gC) (year – 2015)] – FC phase 2
11 12
ASSIGNMENT 2 2)
Y1 : AW1 -100 000(A/P, 18%, 1) – 75 000 + 100000 (0.85 1 )( A / F ,18 %,1) = -R 108,000
a) WACC=8.8%, ROR=8.5% It is not worthwhile.
Y2 : AW2 -100 000(A/P, 18%, 2) - 75 000 – 10 000(A/G, 18%, 2) +
b) WACC=8.8%, ROR=9% It is worthwhile.
100000 (0.85 2 ) (A/F, 18%, 2) = -R 110 316
c) Loan. The project will yield 0.2% profit.
1 2
Y3 : AW3 -100 000(A/P, 18%, 3) – 75 000 – 10 000(A/G, 18%, 3) + Total Variable Costs: 2500 + 200 + 2000 + 600 + 200 = 5500 R/unit
Y5 : AW5 - 100 000(A/P, 18%, 5) – 75 000 – 10 000(A/G, 18%, 5) + VX FC ((5500 ) R / m 3 )(5000 m 3 )) 288 ,333 .333
P 5,557 .667 R / m 3
X 5000 m 3
100000 (0.85 5 )( A / F ,18 %,5) -R 112,505
b)
5)
AW6 AW1 = -108000= -P (A/P, 18%, 6) – 75 000 – 10 000(A/G, 18%, 6) + P (0.856) (A/F,
18%, 6) Purchase
P=51,827
Make
PX = VX + FC + Profit Department Rate/hr Allocated Hrs Indirect Costs Material Costs Direct Costs
A 10 25 000 250 000 200 000 200 000
Total Fixed Costs: 30 + 20 %( 350) + 100 + 55+ 1/3(100) = R 288.333 x R1000 =
B 5 25 000 125 000 200 000 50 000
R 288,333.333 C 15 10 000 150 000 100 000 50 000
TOTAL 30 R/hr 60 R/hr R 525 000 500 000 300 000
3 4
AOC= R 300 000 + R 500 000 + 525 000= R 1,325,000 PHASE Yr FC Pcap
I 2015-2019 40 1,8
IIA 2020 80 3,6
AW= IIB 2021-2023 80 5,4
P( A / P,15%,10) S ( A / F ,15%,10) AOC 2000000(0.1993) 50000(0.0493) 1,325000
= - R 1,721 037
PHASE I
W purchase R1,5m
Wmake R1,7m
2015: P CapPhaseI PR1 g c
yr 2015
PC(1 g c ) yr2015 FCPhaseI
INVESTMENT
5 6
1
FW
ERR
N
1 =0.2433= 24.33%
PW
Ramagaga, TS Ramagaga, TS
96 Rambani+AE
• 2014Ass2Rambani+AE.pdf
Rambani, AE Rambani, AE Rambani, AE Rambani, AE
PROBLEM 2
NAME: NG RAMOHLALE ADVANCED ENGINEERING ECONOMICS
Given:
STUDENT NUMBER: 802025832 ASSIGNMENT 2 – 22 MAY 2014
1. Flexibility[f] The most important factor
PROBLEM 1 2. Safety[s] 50% as important as uptime
One-half as important as
3. Uptime[u] flexibility
Given:
4. Speed[v] As important as uptime
100% equity financing, MARR = 8.5% 5. Rate of
return[r] Twice as important as safety
PW at the MARR.
Annual NCF = project NCF - loan payment AW2 = -100,000(A/P,18%,2) – 75,000 - 10,000(A/G,18%,2)
= 15,000 – 18,609 = R-3,609 + 100,000(0.85)2(A/F,18%,2)
= R - 110,316
Amount of equity invested = 250,000 - 150,000 = R100,000
AW3 = -100,000(A/P,18%,3) – 75,000 - 10,000(A/G,18%,3)
MARR on equity capital. + 100,000(0.85)3 (A/F,18%,3)
= R - 112,703
PW = -100,000 + 3,609(P/A,8.8%,15)
= -100,000 + 3,609(8.1567) AW4 = R- 115,112
= R-70,562 AW5 = R - 117,504
AW6 = -100,000(A/P,18%,6) – 75,000 - 10,000(A/G,18%,6)
Conclusion: PW < 0; a 60% debt-40% equity mix does not meet the MARR requirement. + 100,000(0.85)6 (A/F,18%,6)
= R - 119,849
The first cost would have to be reduced from R100,000 to R51,828. This is a quite large C: 15(10 000) = R150 000
reduction.
Total = R525 000
PROBLEM 5 Given:
Given:
Revenue Unit Fixed
Year cost cost Cost Capacity
Indirect costs
2012
Direct
2013
Basis Allocated Material Labour
Department hours Rate/h hours cost cost 2014
A Labour 10 25000 200000 200000 2015 500 150 40,000 1,8
B Machine 5 25000 50000 200000 2016 485 154.5 40,000 1,8
C Labour 15 10000 50000 100000 2017 470.45 159.14 40,000 1,8
Σ 300000 Σ 500000 2018 456.34 163.91 40,000 1,8
2019 442.65 168.83 40,000 1,8
2020 429.37 173.89 80,000 3,6
2021 416.49 179.11 80,000 5,4
2022 403.99 184.48 80,000 5,4
2023 391.87 190.01 80,000 5,4
Solution FV@r
FW+
ERR = 24.3266%
FW+2015 = CF2015 x FV@r2015
Solution calculations:
= 590,000 x 4.6524 = R1804,810
Note: R10m = 10 000 000
FW+2016 = R1476,034
Production2015 = (Capacity x Revenue cost) – (Capacity x Unit cost) – Fixed cost
FW2017 = R 1203,640
= (1,8 x 500) – (1,8 x 150) – 40,000 = R590,000
FW2020 = R 1277,058
Production2016 = (1,8 x 485) – (1,8 x 154.5) – 40,000 = R554,900
FW2021 = R 1589,449
The same method is used to calculate production until 2023.
FW2022 = R 1271,157
Cash flow2012 to 2014 = Investment + Cash flow
FW2023 = R 920,044
= R-266,667 + 0 = R-266,667
PW-
Cash flow2015 = 0 + 590,000 = R590,000
PW-2012 = CF2012 x PV@k2013
Cash flow2016 = R 554,900
= -266,667 x 1 = R -266,667
Cash flow2017 = R520,358
PW-2013 = R-229,893
Cash flow2018 = -700,000 + 486,374 = R-213,626
PW-2014 = R-198,187
The same method is used until 2023.
PW-2018 = R-87,672
PW-2014 = R-87,432
= (10.9699)1/11 – 1
= 1.2433 – 1
= 0.2433 x 100
ERR = 24.3266%
Ramohlale, NG Ramohlale, NG
98 Reddy+K
• 2014REDDY + K Revised23May2014.pdf
Reddy, K Reddy, K Reddy, K Reddy, K
Reddy, K Reddy, K
99 Rikhotso+C
• 2014Ass2Rikhotso+C.pdf
Rikhotso, C Rikhotso, C Rikhotso, C Rikhotso, C
Problem 1
[a]
( )
= -250 000 + 124 563.5489 = 15 000 x ( )
= R -124 563.5489
Since PW < 0, 100% equity financing does not meet the MARR requirement; therefore it is not
Advanced Engineering Economics – Assignment 2 worthwhile to get the money from the personal investment.
By
[b]
Nishaal Rooplall 60% - 40% D-E financing
= R 150 000.0000
Submitted to
( )
Loan payment, A = P x ( )
University of Johannesburg
( )
= 150 000 x ( )
= 8.8%
MPhil: Engineering Management
MARR = 8.8%
Advanced Engineering Economics – Assignment 2 21 May 2014 Advanced Engineering Economics – Assignment 2 21 May 2014
Since PW < 0, a 60%-40% D-E financing mix does not meet the MARR requirement; therefore it is not = R -108 000.0000
worthwhile to get the money from the loan.
Attribute Logic Importance Score = -100 000 x F = (100 000 x 0.853) = 61 412.5 x
1. Flexibility (f) = 100 / 275 0.3636
2. Safety (s) = 25 / 275 0.0909 = R -45 992.3861 = R 61 412.50000 = R 17 190.8241
3. Uptime (u) = 50 / 275 0.1818
4. Speed (v) = 50 / 275 0.1818 AW3 = -45 992.3861 - 95 000.0000 + 17 190.8241
5. Rate of Return (r) = 50 / 275 0.1818
Total 1.0000 = R -123 801.5620
Nishaal Rooplall Student Number – 200802947 Page 3 Nishaal Rooplall Student Number – 200802947 Page 4
Advanced Engineering Economics – Assignment 2 21 May 2014 Advanced Engineering Economics – Assignment 2 21 May 2014
[b]
n
AW4 = -100 000(A/P, 18%, 4) – (65 + 10 x n) (1 000) + (P x 0.85) (A/F, 18%, 4) AW1 = AW6
( )
A=Px AOC = (65 + 10 x 4) (1 000) A=Fx -108 000 = -y ( ) – 125 000 + 3 994.3954
( ) ( )
= R 27 788 333.3333
AW6 = -100 000(A/P, 18%, 6) – (65 + 10 x n) (1 000) + (P x 0.85) n (A/F, 18%, 6) = R5 557.6667 / unit
( )
A=Px ( )
AOC = (65 + 10 x 6) (1 000) A=Fx ( )
[b]
( )
= -100 000 x ( )
= R 125 000.0000 = 37 714.9516 x ( ) The revenue per unit with a profit goal of R 500 000.00 and an additional production of 3 000m3 is
= R -28 591.0129 = R 37 714.9516 = R 3 994.3954 = (R 288 333.3333 + R 44 000 000.0000 + R 500 000.0000) / 8 000
Nishaal Rooplall Student Number – 200802947 Page 5 Nishaal Rooplall Student Number – 200802947 Page 6
Advanced Engineering Economics – Assignment 2 21 May 2014 Advanced Engineering Economics – Assignment 2 21 May 2014
Problem 5 Problem 6
For making the components in-house, the AOC is comprised of direct labour, direct material and indirect Given:
costs.
Description Value
Department Allocated Hours Rate per hour Total Phase 1 - Pcapital 1.8 Mt
A 25 000 10 R 250 000.0000 Phase 2.1 3.6 Mt
B 25 000 5 R 125 000.0000 Phase 2.2 5.4 Mt
C 10 000 15 R 150 000.0000 Production Cost - PC R 150 / ton
Total R 525 000.0000 Production Revenue - PR R 500 / ton
grevenues -3% / year
gcosts +3% / year
AOC = Direct Labour Cost + Material Cost + 525 000 Fixed Costs Phase 1 – FCphase 1 R 40 000 000
= 500 000 + 300 000 + 525 000 Fixed Costs Phase 2 – FCphase 2 R 80 000 000
Remediation Cost R90 000 000
= R 1 325 000.0000 Investment Rate – r 15% / year
Borrowing Rate – k 16% / year
The make alternative Annual worth (AW) is: Period 11 years
( )
AWmake = -P (A/P, i, n) + S (A/F, i, n) - AOC A=Px ( )
( ) Production2015 = (Pcapital-Phase 1) x (PR (1 + grevenues) (n – 2015) – PC (1 + gcosts) (n – 2015)) – FCphase 1
= -398 504.1248 + 2 462.6031 - 1 325 000 = -2 000 000 x ( )
= (1.8) x (500(1-0.03) (2015-2015) – 150(1+0.03) (2015-2015)) - 40
= R -1 721 041.5220 = -2 000 000 x
= (1.8) x (500(0.97) (0) – 150(1.03) (0)) - 40
= R -398 504.1248
= 590.0000
A=Fx ( ) Production2016 = (Pcapital-Phase 1) x (PR (1 + grevenues) (n – 2015) – PC (1 + gcosts) (n – 2015)) – FCphase 1
= 520.3670
= 486.3694
Nishaal Rooplall Student Number – 200802947 Page 7 Nishaal Rooplall Student Number – 200802947 Page 8
Advanced Engineering Economics – Assignment 2 21 May 2014 Advanced Engineering Economics – Assignment 2 21 May 2014
Production2019 = (Pcapital-Phase 1) x (PR (1 + grevenues) (n – 2015) – PC (1 + gcosts) (n – 2015)) – FCphase 1 FV@r2023 = 1.0000
(2019-2015) (2019-2015)
= (1.8) x (500(1-0.03) – 150(1+0.03) ) - 40 FV@r2022 = 1.0000 x 1.15 = 1.1500
(4) (4)
= (1.8) x (500(0.97) – 150(1.03) ) - 40 FV@r2021 = 1.1500 x 1.15 = 1.3225
Production2021 = (Pcapital-Phase 2.2) x (PR (1 + grevenues) (n – 2015) – PC (1 + gcosts) (n – 2015)) – FCphase 2.2 FV@r2015 = 2.6600 x 1.15 = 3.0590
Production2022 = (Pcapital-Phase 2.2) x (PR (1 + grevenues) (n – 2015) – PC (1 + gcosts) (n – 2015)) – FCphase 2.2
Nishaal Rooplall Student Number – 200802947 Page 9 Nishaal Rooplall Student Number – 200802947 Page 10
= 10.6397
= 10.6397(1/11) – 1 = (1 + 0.18)11
= 23.9816% = 6.1759%
= 16.8156%
ERR is higher than the IRR, therefore the phased investment should not be considered.
Rooplall, N Rooplall, N
101 Senga+EA
• 2014Ass2Senga+EA.pdf
Senga, EA Senga, EA Senga, EA Senga, EA
1. Solution
The Present Worth PW = -250 000 + (15 000) * (P/A, 8.5%, 15)
= -R125 437
UNIVERSITY OF JOHANNESBURG
DEPARTMENT OF ENGINEERING AND BUILT For 100% equity financing, the Present Worth PW = -R125 435 which is below 0, thus it’s not worthwhile
to get the money from the personal investment.
ENVIRONMENT b. Option 2: 60% loan for 15 years at 9% per year
The loan is 60% of the capital required; hence loan principal Ploan= R250 000 * 0.6
= R150 000
Assignment 2: Advanced Engineering The annual payment of the loan for 15 years = Ploan * (A/P, 9%, 15)
= R18 615 which is higher than the project’ NCF (R15 000).
2. Solution AW3=-100 000(A/P, 18%, 3)-95 000+61 412.5 (A/F, 18%, 3)=R-123 800.6412
Given Logic Importance score Weighting wi AW4=-100 000(A/P, 18%, 4)-105 000+52 200.625 (A/F, 18%, 4)=R-132 163.1402
Flexibility The most important factor 100 0.3636
[f] AW5=-100 000(A/P, 18%, 5)-115 000+44 370.5313 (A/F, 18%, 5)=R-140 776.9997
Safety [s] 50% as important as uptime s=0.5*u=0.25f 25 0.0909
Uptime [u] One-half as important as u=0.5*f 50 0.1818 AW6=-100 000(A/P, 18%, 6)-125 000+37 714,9516 (A/F, 18%, 6)=R-149 595.9866
important
The Economic Service Life is 1 year with AW=R-108 000 per year.
Speed [v] As important as uptime v=u=0.5*f 50 0.1818
Rate of Twice as important as safety r=2*s=0.5*f=u 50 0.1818 4. Solution
return [r]
Total 275 1.0000 Fixed cost, R’000 Variable cost, R/Unit
Administrative 30 Materials 2500
Salaries and benefits( 20% of 350) 70 Labour 200
Logic:
Equipment 100 Indirect labour 2000
Space, etc. 55 Subcontractors 600
We can attribute 100 to the most important factor which is “Flexibility [f]”.
Computer (1/3 of 100) 33.3333 Misc cost 200
f=100 Total 288.3333 Total 5500
5. Solution
For making the components in-house, the AOC is comprised of direct labor, direct material, and indirect
costs. Use the data of Table 15–9 to calculate the indirect cost allocation.
R525 000
Currently, the carafes are purchased with an AWbuy =R1 500 000
6. Solution
Revenue cost will decrease 3% annually (starting from 2015 at R500) while the Unit Costs will also
increase 3% annually (starting from 2015 at R150m); thus we have the revenue costs and the unit costs
for the next years as follow:
RC2015=R500.0000 UC2015=R150m
RC2016=R485.0000 UC2016=R154.5m
RC2017=R470.4500 UC2017=R159.135m
RC2018=R456.3365 UC2018=R163.9091m
RC2019=R442.6464 UC2019=R168.8263m
RC2020=R429.3670 UC2020=R173.8911m
RC2021=R416.4860 UC2021=R179.1078m
RC2022=R403.9914 UC2022=R184.4811m
RC2023=R391.8717 UC2023=R190.0155m
Senga, EA Senga, EA
102 Shaku+NA
• 2014Ass2ShakuNA.pdf
Shaku, NA Shaku, NA Shaku, NA Shaku, NA
PW = -250000 + 15000(P/A,8,5%,15)
Student Number: 809714023 = -250 000 + 15000x 8,3042
= -125,537
Therefore it is better to keep the money in the bank as 100% equity does not
meet the minimum MARR.
Degree: M6MCQ
Problem 1b)
Firstly we calculate the WACC if we are going to be partly borrowing from the
Course Code: GIE4058 bank
WACC = idebt (Cdebt/V) + iequity (Cequity/V) ; where id = 9%, Cdebt = 150 000; Cequity
= 100 000; ie = 8,5%, V = Cdebt + Ceqiuity
Due Date: 26 May 2014 We then calculate the loan repayment: 150000(A/P,9%,15) = 150 000 x
0,1241 = 18,615
Annual NCF of the project: Project NCF – Loan repayment = 15000 – 18,615
= -3,615
Therefore the debt equity mix does not meet minimum MARR requirements.
Problem 2
Normalised
weights
-‐
No.
Attribute
Importance
component
scale
Scores(0-‐10)
Score/Total)
1
Flexibility(f)
The
most
important
factor
10
0,36
2
Safety
(s)
50%
as
important
as
uptime
2,5
0,09
3
Uptime
(u)
One-‐half
as
important
as
flexibility
5
0,18
4
Speed
(v)
As
important
as
uptime
5
0,18
5
Rate
of
return
(C
)
Twice
as
important
as
safety
5
0,18
TOTAL
27,5
1,00
1
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
Taking the score of each attribute and dividing by the total scores combined, To calculate the Capital Recovery we add the annual worth of the same years
calculate the normalized weight
Annual
Problem 3 Market
worth
of
Annual
Capital
Yr
First
Cost
Value
first
cost
Worth
of
MV
Recovery
Given: 0
-‐100000
0
1
85000,00
-‐118000
85000
-‐33000
Market
2
72250,00
-‐63870
33141
-‐30729
Yr
First
Cost
AOC
Value
3
61412,50
-‐45990
17189
-‐28801
0
-‐100000
4
52200,63
-‐37170
10007
-‐27163
1
-‐75000
85000,00
5
44370,53
-‐31980
6203
-‐25776
2
-‐85000
72250,00
6
37714,95
-‐28590
3994
-‐24596
3
-‐95000
61412,50
4
-‐105000
52200,63
5
-‐115000
44370,53
We then calculate the Present worth of operating cost
6
-‐125000
37714,95
Present
MARR = 18% Worth
of
Yr
AOC
P/F(1,n;MARR)
AOC
0
Firstly we calculate the capital recovery which is Annual worth of first cost and 1
-‐75000
0,8475
-‐63562,5
annual worth of market value 2
-‐85000
0,7182
-‐61047
3
-‐95000
0,6086
-‐57817
Annual
4
-‐105000
0,5158
-‐54159
Market
Worth
of
5
-‐115000
0,4371
-‐50266,5
Yr
First
Cost
AOC
Value
A/P(1,n;MARR)
First
Cost
6
-‐125000
0,3704
-‐46300
0
-‐100000
0
0
1
-‐75000
85000,00
1,18
-‐118000
2
-‐85000
72250,00
0,6387
-‐63870
We then calculate the PW accumulated as the years progress
3
-‐95000
61412,50
0,4599
-‐45990
4
-‐105000
52200,63
0,3717
-‐37170
Present
5
-‐115000
44370,53
0,3198
-‐31980
Worth
of
PWT
6
-‐125000
37714,95
0,2859
-‐28590
Yr
AOC
P/F(1,n;MARR)
AOC
(AOC;N)
0
1
-‐75000
0,8475
-‐63562,5
-‐63562,5
Calculate the AW of the Market Value 2
-‐85000
0,7182
-‐61047
-‐124609,5
3
-‐95000
0,6086
-‐57817
-‐182426,5
Annual
4
-‐105000
0,5158
-‐54159
-‐236585,5
Market
Worth
of
5
-‐115000
0,4371
-‐50266,5
-‐286852
Yr
Value
A/F(1,n;MARR)
MV
6
-‐125000
0,3704
-‐46300
-‐333152
0
1
85000,00
1
85000
2
72250,00
0,4587
33141,08
3
61412,50
0,2799
17189,36
4
52200,63
0,1917
10006,86
5
44370,53
0,1398
6203,00
6
37714,95
0,1059
3994,01
3
4
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
Given:
Yr
AOC
A/P(1,n;MARR)
PWT
(AOC)
A/P
(PWT)
0
fixed
cost
variable
cost,R/Unit
1
-‐75000
1,18
-‐63562,5
-‐75003,8
Administration
30000
materials
2500
2
-‐85000
0,6387
-‐124609,5
-‐79588,1
salaries
@
20%
of
350
000
70000
labour
200
3
-‐95000
0,4599
-‐182426,5
-‐83897,9
Equipment
100000
indirect
labour
2000
4
-‐105000
0,3717
-‐236585,5
-‐87938,8
Space..etc
55000
subcontractor
600
5
-‐115000
0,3198
-‐286852
-‐91735,3
Computers
1/3
of
100
33333,33
misc
cost
200
6
-‐125000
0,2859
-‐333152
-‐95248,2
Total
288333,33
5500
We then calculate the AW of the system by adding the credit worth + annual a) For break even;
worth of PWT (AOC)
Revenue is = Total Cost
Capital
Yr
Recovery
A/P
(PWT)
AW/Total
Total cost = Fixed cost +Variable cost
0
1
-‐33000
-‐75003
-‐108003
Total variable cost of production of 5000m3 = 5500 x 5000 = 27,500,000
2
-‐30728,925
-‐79588
-‐110317
3
-‐28800
-‐83897
-‐112698
Total cost = 288 333,33 + 27,500,00 = 27,788,333.33
4
-‐27163
-‐87938
-‐115102
5
-‐25776
-‐91735
-‐117512
6
-‐24595
-‐95248
-‐119844
Minimum revenue per unit = Total cost / quantity
= 27,788,44.33/5000
The economic life is therefore 1 year, when the AW(total) is the lowest.
= R5,557.67 per unity
b)
b) Profit = Revenue – total cost
5
6
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
Problem 5 Problem 6:
Given: Firstly we need calculate the nett cash flow of the project:
Indirect
Costs
Department
Basis
Rate/h
Allocated
Indirect
Material
Cost
Direct
Labour
Hours
Hours
variable
cost
Cost
A
Labour
R
10
R
25
000
R
250
000
R
200
000
R
200
000
B
Machine
R
5
R
25
000
R
125
000
R
50
000
R
200
000
C
Labour
R
15
R
10
000
R
150
000
R
50
000
R
100
000
Borrow rate is 16%
Total
R
525
000
R
300
000
R
500
000
Investment rate is 15%
MARR is 18%
First Cost = R2million
Salvage Value is R50 000 after 10yeas We then calculate the FW at of all the positive net cashflow using the
MARR = 15% investment rate of 15% and also calculate all the Present Worth of all the
The annual operating cost is: indirect variable cost + material cost + direct negative cash flow at borrow rate of 16%
labour cost = 525000 + 300 000 + 500 000 =R -1 325 000
7
(!
Shiburi, N Shiburi, N Shiburi, N Shiburi, N
105 Silaule+C
• 2014Ass2Silaule+C.pdf
Silaule, C Silaule, C Silaule, C Silaule, C
2014Ass2SilauleC Problem 2
Therefore it is not worthwhile to get the money from the personal investment as it will Year Cost A/P A/P(FC)
be at a loss. 0 -100 000 0 0
1 1.18 -118000
( b ) Loan @ 60% of 250 000= 250 000*0.06
2 0.6387 -63870
= 150 000 3 0.4599 -45990
4 0.3717 -37170
Loan Annual loan payment = 150 000(0.1241) 5 0.3198 -31980
= 18 615
Year MV A/F A/F(MV)
NCF = 15 000 – 18 615 0
1 85 000 1 85000
= -3 615 2 72 250 0.4587 33141.075
3 61 412.50 0.2799 17189.35875
WACC = MARR = 0.4(8.5%) + 0.6(9%) = 8.8%
4 52 200.63 0.1917 10006.85981
PW = -100 000 + (-3 615*8.1567) 5 44 370.53 0.1398 6203.000094
3(a) continues:
P = R51 842.704
The first cost would have to be reduced from R100 000 to R51 842.704
Problem 5 Problem 6
-10.97
ERR 24.33%
The calculated ERR is 24.33% therefore the phased investment should be considered.
Problem 1 Future Worth of debt-equity funding is much higher (R 886,345) than the Project Future Worth (R
433,552.5).
a) MARR = 0.4(0.085) + 0.6(0.09) = 0.088 = 8.8%
Based on the MARR, it is NOT worthwhile to get the money from the personal investment because: c) The best option would be to do nothing, i.e. do NOT undertake the proposed project because the Cost
Project ROR (8.5%) is less than MARR (8.8%). of Capital for both funding options is higher than the Return on Investment of the proposal.
Equivalence Comparison: But if question is referring to the best out of the two funding options then Equity-Debt funding is the better
option because it is a lower Cost of Capital (R849,925) than the Debt Capital (R886,343).
Fproject = A(F/A,i,n) But this answer is only practicable if Proposed Project’s is higher than that of the Equity-Debt, which would
= 15000(F/A,8.8%,15) occur if MARR was set at approximately 17%, i.e.:
= 15000(28.9035)
= R 433,552.5 F = A (F/A,i,15)
849925 = 15000(F/A,i,15)
Fequity = P(F/P,i,n) (F/A,i,15) = 849925/15000 = 56.66
= 250000(F/P,8.5%,15)
= 250000(3.3997) From interest tables we see the table that best approximates F/A = 56.66 is the 17% interest table.
= R 849,925 ____________________________________________________________________________________
Based on the Equivalence, It is NOT worthwhile to get the money from the personal investment because: Problem 2
Personal Investment’s Future Worth equivalent is much higher (R849925) than that of the proposed
project’s Future Worth (R433552.5).
ATTRIBUTE SCORE WEIGHT CALCULATION WEIGHT
b) Based on the MARR, it is INDEED worthwhile to get the money from the loan because: F 10 10/27.5 0.3636
Loan ROR (9%) is higher than MARR (8.8%). S 2.5 2.5/27.5 0.0909
Problem 4 _____________________________________________________________________________________
a) BE given by R = TC
rQ = FC + vQ
Problem 6
PW 0(F/P,i,12) + FW 12 = 0
- 1860088836.9425(1 + i)12 + 3807932246 = 0
i = [(3807932246/1860088836.9425)1/12 - 1
i = 1.19 – 1
i = 0.190
i = 19%
_____________________________________________________________________________________
Sombane, MN Sombane, MN
108 Sondlane+R
• 2014Ass2Sondlane+R.pdf
Sondlane, R Sondlane, R Sondlane, R Sondlane, R
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
Table of contents
1 PROBLEM 1 ............................................................................................................................................... 3
2 PROBLEM 2 ............................................................................................................................................... 5
3 PROBLEM 3 ............................................................................................................................................... 5
4 PROBLEM 4 ............................................................................................................................................. 11
5 PROBLEM 5 ............................................................................................................................................. 13
6 PROBLEM 6 ............................................................................................................................................. 15
1 2
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
1 Problem 1
Cost of 60% debt capital is 9% for the loan.
Given information:
WACC. at 60% Debt and 40% Equity Capital.
Funky Industries primarily rely on 100% equity to finance projects.
WACC = (150 000/250 000)0.09 + (100 000/250 000)0.085
Capital required to fund new opportunity is R250 000.
= 0.6 x 0.09 + 0.4 x 0.085
Funky owner can supply the funds from personal investment that currently = 0.088
earn an average of 8.5%. = 8.8%, therefore MARR = 8.8%
Annual cash flow from the project is estimated to be R15 000.
Debt of 60% Capital Required (R150 000) for 15 years at 9% per year is
available. NCFannual = NCFproject - loan payment
a. Is it worthwhile to get the money from the personal investment? = -R3 615
MARR = 8.5%, Calculation of PW at MARR:
Equity = total finance required - debt
PW%equity = P + 15000(P/A;MARR;n) where MARR = 8.5% & n = 15 = 250 000 – 150 000
= -250000 + 15000 x 8.3042
= R100 000
= -R 125 437.00
PW = -100 000 + 11 391(P/A;MARR;n);where MARR = 8.8% & n=15
Therefore 100% equity is not worth while because it doesn’t meet the MARR
= -100 000 + (-3 615) x 8.1567
requirement.
= -R129 486.47
b. Is it worthwhile to get 60% of the money required to fund the project from a
loan?
Therefore 60%-40% D-E is also not worthwhile because it doesn’t meet the
60%Debt – 40%Equity project financing:
MARR requirement.
Loan principal = 250 000(0.6) = R150 000
3 4
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
a. The economic service life (ESL) and corresponding Annual Worth (AW) of the Year First Cost Market value AOC A/P(1;n;MARR) (A/P)x(FC) A/F(1;n;MARR) A/F(MV)
0 R -100 000 R - R - 0.0000 0.0000 0.0000 0.0000
machine if MARR is 18%. 1 R 85 000 R -75 000 1.1800 -118000 1.0000 85000
2 R 72 250 R -85 000 0.6387 -63870 0.4587 33141
3 R 61 413 R -95 000 0.4599 -45990 0.2799 17189
Using tables: 4 R 52 201 R -105 000 0.3717 -37170 0.1917 10007
Step1: 5 R 44 371 R -115 000 0.3198 -31980 0.1398 6203
6 R 37 715 R -125 000 0.2859 -28590 0.1059 3994
Future worth (FW) has been transformed to Annual Worth (AW)
Calculate:
Market value = Salvage value = P x 0.85n
Annual Operating Cost = 65 000 + 10 000 x n)
5 6
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
Step7:
Step4:
The Annual Worth (AW) of PWT(AOC):
Year First Cost Market value
AOC P/F(1;n;MARR) P/F(AOC) PWT(AOC;n) A/P(PWT)
Capital recovery = A/P(FC) + A/F(MV)
0 R -100 000 R - R - 0.0000 0.0000 0.0000 0.0000
Year First Cost Market value
AOC (A/P)x(FC)A/F(MV) Capital Recovery 1 R 85 000 R -75 000 0.8475 -63 563 -63563 -75004
2 R 72 250 R -85 000 0.7182 -61 047 -124610 -79588
0 R -100 000 R - R - 0.0000 0.0000 0.0000
3 R 61 413 R -95 000 0.6086 -57 817 -182427 -83898
1 R 85 000 R -75 000 -118000 85000 -33000
4 R 52 201 R -105 000 0.5158 -54 159 -236586 -87939
2 R 72 250 R -85 000 -63870 33141 -30729
5 R 44 371 R -115 000 0.4371 -50 267 -286852 -91735
3 R 61 413 R -95 000 -45990 17189 -28801
6 R 37 715 R -125 000 0.3704 -46 300 -333152 -95248
4 R 52 201 R -105 000 -37170 10007 -27163
5 R 44 371 R -115 000 -31980 6203 -25777 Where A/P(PWT) = PWT(AOC;n) x A/P(1;n;MARR)
6 R 37 715 R -125 000 -28590 3994 -24596
7 8
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
+ P(0.37715)(0.1059)
RV or P = $51 843.72
Therefore the first cost would have to be reduced to $51 843.72 for the
equivalent annual cost at year 6 to be equal to AW at ESL.
9 10
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
4 Problem 4 Therefore:
11 12
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
Indirect Costs
Department Basis Rate/hAllocated Indirect Material Direct Labour
Hours Hours Variable Cost Cost Cost
A Labour R 10.00 25000 R 250 000.00 R 200 000.00 R 200 000.00
B Machine R 5.00 25000 R 125 000.00 R 50 000.00 R 200 000.00
C Labour R 15.00 10000 R 150 000.00 R 50 000.00 R 100 000.00
Total R 525 000.00 R 300 000.00 R 500 000.00
Annual TVC = Indirect variable cost + Material cost + Direct labour cost
= 525 000 + 300 000 + 500 000
= R1 325 000.00
= -R 1 325 000 (it negative because it is a negative cash flow)
13 14
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
15 16
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
First Cost Remediation Profit/Loss (NCF) External rate of return (ERR) = (FW/-PW) 1/n - 1
Year No. Year (Phase1) cost per year F/A(1;n;r) F/A x Profit(NCF)
= (103 336 580 537/-(-3 193 028 988))1/12 – 1
0 2011 R -
1 2012 R 266 666 667 R -266 666 666.67 = 33.59%
2 2013 R 266 666 667 R -266 666 666.67
3 2014 R 266 666 667 R -266 666 666.67
4 2015 R - R 590 000 000.00 4.9934 R 2 946 106 000 The ERR is higher than MARR at 18% therefore the refinery project as a whole
5 2016 R - R 554 900 000.00 6.7424 R 3 741 357 760 (phase 1&2) is viable.
6 2017 R - R 520 367 000.00 8.7537 R 4 555 136 608
7 2018 R 700 000 000 R -213 630 590.00
8 2019 R 700 000 000 R -247 123 849.70
9 2020 R - R 839 713 246.14 16.7858 R 14 095 258 607
10 2021 R - R 1 201 842 053.12 20.3037 R 24 401 840 494 b. Phase 1 analysis
11 2022 R - R 1 105 355 849.91 24.3493 R 26 914 641 196
12 2023 R - R 90 000 000 R 920 023 304.56 29.0017 R 26 682 239 872
Total R 2 200 000 000 R 90 000 000 R 4 471 447 014.03 R 103 336 580 537 What was the effect of the Second Phase (Phase2) of the project on External Rate of
F/A(Profit or +NCF) = F/A(1;n;r) x Profit(+NCF) per year Return (ERR), should the company go ahead with Phase2, is it worthwhile?
Assuming that the Remediation Cost will remain the same, analysis of the project
All negative NCF converted to Present Worth (PW): without Phase2 is as follows:
17 18
Engineering Economics Assignment No.2 200971063 Masters in Engineering Management Engineering Economics Assignment No.2 200971063 Masters in Engineering Management
19 20
Therefore:
Phase1’s ERR at 35.81% is higher than Phase 1&2’s ERR at 33.59%. Both ERRs
are higher than MARR at 18% therefore the company should abandon Phase2 and
only build Phase1 of the Refinery project.
21
Sondlane, R Sondlane, R
109 Stadler+CR
• 2014Ass2Stadler+CR.pdf
Stadler, CR Stadler, CR Stadler, CR Stadler, CR
ROR = = = 6% To use the personal investment would not be feasible because R4 364.43 will be lost in capital annually by investing the funds in the
company. My answer to A is no.
WACC=MARR=8.5% in the investment so
b
A = P(i(1 + i)n/(1 + i)n– 1)where i is 8.5%
n n
= 250 000 (0.085(1 + 0.085) /(1 + 0.085) – 1)
Borrow 60% from the R250 000 = R150 000
= R30105.1154
MARR = 9%
= R30 105.15 will be the annual capital recovery.
Borrow 40% from the R250 000 = R100 000
MARR = 8.5%
= 8.8% which is MARR In my opinion not one of the two options is feasible and I would recommend. The WACC of could not be achieved so both
options are going to be not feasible at the end.
A = P (i(1 + i)n/(1 + i)n– 1)where i is 9%
= R18 608.8324
= R18 063.0692
= 18 608.8324 – 18 063.0692
= R545.7632
= R545.76 will be lost in annual capital by investing the funds in the company. The boorowing option is better is
this case.
So to borrow the 60% of the money R545.76 would be gained. The answer to b is yes due to a higher annual CR.
Problem 2: Problem 3:
= -R108 003.75
AW2 = -100 000(0.6387) +72 250(0.4587) – [(75 000 x 0.8475) + (85 000 x 0.7182)] (0.6387)
= -R110 317.01265
= -R110 317.01
AW3 = -100 000(0.4599) +61 412.5(0.2799) – [(75 000 x 0.8475) + (85 000 x 0.7182) + (95 000 x 0.6086)] (0.4599) AW6 = -100 000(0.2859) +37 714.95156(0.1059) – [(75 000 x 0.8475) + (85 000 x 0.7182) + (95 000 x 0.6086) + (105 000 x 0.5158) + (115
000 x 0.4371) + (125 000 x 0.3704)] (0.2859)
= -45 990 + 17 189.35875 – [182426.5] (0.4599)
= -28 590 + 3 994.01337– [333152] (0.2859)
= -R112 698.5886
= -R119 844.1434
= -R112 698.59
= - R119 844.14
The Economic Service Life (ESL) for the machine would be 1 year and the corresponding AW isR108 003.75
AW4 = -100 000(0.3717) +52 200.625(0.1917) – [(75 000 x 0.8475) + (85 000 x 0.7182) + (95 000 x 0.6086) + (105 000 x 0.5158)](0.3717)
b.
= -37 170 + 10 006.85981– [236585.5] (0.3717)
= -R115 101.9705
-108 003.75 = -P (0.2859) + (P X0.85ˆ6) (0.1059) – [(75 000 x 0.8475) + (85 000 x 0.7182) + (95 000 x 0.6086) + (105 000 x 0.5158) + (115
= -R115 101.97 000 x 0.4371) + (125 000 x 0.3704)] (0.2859)
= - R117 512.27
a. = R288 333.333
VCTotal = (2500 x 5000) + (200 x 5000) + (2000 x 5000) + (600 x 5000) + (200 x 5000)
TC = FCTotal+ VCTotal
Fixed Cost Variable Costs R/Unit Profit = Revenue – Total Cost (TC)
Administrative R30 000 Material 2500
Salaries and Benefits R70 000 Labour 200 Revenue = Profit + Total Cost (TC)
Equipment R100 000 Indirect Labour 2000
Space Etc. R55 000 Subcontractors 600 = 0 + 27 788 333.33
Computers R33 333.33 Misc cost 200
= R27 788 333.33
Profit = Revenue – Total Cost Revenue = Unit Revenue (r) x Quantity (Q)
= + 5500
Total Cost (TC)8000 = Fixed Cost (FC) + Variable Cost (VC)8000
= R5 557.6667 revenue per unit
= 288 333.333+ 44 000 000
= R5 557.67 revenue per unit
= 288 333.333+ 44 000 000
= R 44 788 333.33
= R 5598.5417
Labour costs:
= -R 1 721 135
Construction Fixed cash Production Total production
Expenses per Total Debit per Nett cash flow F/P @
AWbuying = R1 500 000 Year and Income per year outflows capacity cost P/F @ 16% Netto profit per year
year year per year 15%
Remediation in R In t in R
2012 -266666667 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 -266666666.6667 1.0000 -266666666.6667
I will recommend buying the coffee maker components as the AW is lower so it would be more cost effective. 2013 -266666667 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 -266666666.6667 0.8621 -229893333.3333
2014 -266666667 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 -266666666.6667 0.7432 -198186666.6667
2015 0 900000000.0000 40000000.0000 1800000.0000 270000000.0000 310000000.0000 590000000.0000 590000000.0000 3.0590 1804810000.0000
2016 0 873000000.0000 40000000.0000 1800000.0000 278100000.0000 318100000.0000 554900000.0000 554900000.0000 2.6600 1476034000.0000
2017 0 846810000.0000 40000000.0000 1800000.0000 286443000.0000 326443000.0000 520367000.0000 520367000.0000 2.3131 1203660907.7000
2018 -700000000 821405700.0000 40000000.0000 1800000.0000 295036290.0000 335036290.0000 486369410.0000 -213630590.0000 0.4104 -87673994.1360
2019 -700000000 796763529.0000 40000000.0000 1800000.0000 303887378.7000 343887378.7000 452876150.3000 -247123849.7000 0.3538 -87432418.0239
2020 1545721246.2600 80000000.0000 3600000.0000 626008000.1220 706008000.1220 839713246.1380 839713246.1380 1.5209 1277119876.0513
2021 2249024413.3083 80000000.0000 5400000.0000 967182360.1885 1047182360.1885 1201842053.1198 1201842053.1198 1.3225 1589436115.2510
2022 2181553680.9091 80000000.0000 5400000.0000 996197830.9941 1076197830.9941 1105355849.9149 1105355849.9149 1.1500 1271159227.4021
2023 -90000000 2116107070.4818 80000000.0000 5400000.0000 1026083765.9240 1106083765.9240 1010023304.5578 920023304.5578 1.0000 920023304.5578
= -266666666.6667(1) -229893333.3333 (0, 8621) -198186666.6667 (0.7432) -87673994.1360 (0.4104) -87432418.0239 (0.3538)
= -R869853078.8265
= R9542243430.9622
Yes I would recommend the phased investment should be considered as the ERR that was calculated at 22.09% which is much
higher than the MARR of 18%.
Stadler, CR Stadler, CR
110 Taruvinga+TP
• 2014Ass2TaruvingaTP.pdf
Taruvinga, TP Taruvinga, TP Taruvinga, TP Taruvinga, TP
QUESTION 1:
MARR = 15 000/0.06
= 6% QUESTION 3
a)
Salvage value S =P x 0.85n = 100 000x 0.856
b) Break Even Point = 288 333 + 500 000/ [(x-5500)/x] = AWMAKE = -P(A/P,i,n) + S(A/F,I,n) – AOC
8 000
= -2000000(A/P,15%,10) + 50 000(A/F,15%,10) – 1 325 000
788 333/[(x-5500)/x] = 8 000
788 333 = 8000x/(x- 5500) = -R1 721 037
788 333(x-5500)= 8000x
780333x = 5500 x 788 333
X = 5 556
To Purchase:
Conclusion
QUESTION 5
It is cheaper to make, because the AW of costs is less
To make:
Conclusion:
The phased investment should be considered since it has a high ERR of 24.33%
Taruvinga, TP Taruvinga, TP
111 Thobela+M
• 2014Ass2ThobelaM.pdf
Thobela, M Thobela, M Thobela, M Thobela, M
Thobela, M Thobela, M
112 Tlomatsana+LE
• 2014Ass2TlomatsanaLE.pdf
Tlomatsana, LE Tlomatsana, LE Tlomatsana, LE Tlomatsana, LE
Tlomatsana, LE Tlomatsana, LE
113 Tortumlu+F
• 2014Ass2TortumluF.pdf
Tortumlu, F Tortumlu, F Tortumlu, F Tortumlu, F
PW < 0, 100% equity does not mee MARR. It is not worth while taking the money from the investment.
PW < 0, 60%-40% Financing doesn't meet MARR. It's not worth while taking a loan.
Problem 2
Problem 3
Tshabalala, S
Year Tshabalala, S
Cost A/P(1, n, MARR) A/P(FC) A/F(MV)
0 -100,000
1 1.18 -118,000 85,000
2 0.6387 -63,870 33,141.08
3 0.4599 -45,990 17,189.36
4 0.3717 -37,170 10,006.86
5 0.3198 -31,980 6,203.00
6 0.2859 -28,590 3,994.01
1 2 3 4 5 6
Year MV AOC Capital Recovery AW of AOC Total (6) = (4) + (5)
1 85,000 75,000 -33,000 -75,003.75 -108,003.75
2 72,250 85,000 -30,728.93 -79,588.09 -110,317.01
3 61 412,5 95,000 -28,800.64 -83,897.95 -112,698.59
4 52,200.63 105,000 -27,163.14 -87,938.83 -115,101.97
5 44,370.53 115,000 -25,777.00 -91,735.27 -117,512.27
6 37,714.95 125,000 -24,595.99 -95,248.16 -119,884.15
Problem 4
Revenue = FC/Q + V
Revenue = 288 333,3333/5000 + 5500
Revenue = R 5 557,6666
b). Profit = R - TC
Profit = (r - v)Q - FC
500 000 = 8000r - 44 000 000 - 288 333,3333
r = R 5 598,5417
Tshabalala, S Tshabalala, S
115 Van Vuuren+DJ
• 2014Ass2VanVuuren+DJ.pdf
Van_Vuuren, DJ Van_Vuuren, DJ Van_Vuuren, DJ Van_Vuuren, DJ
Yusuf, AS Yusuf, AS
117 Zondi+HF
• 2014GIE4058Ass2ZondiHF.pdf
Zondi, HF Zondi, HF Zondi, HF Zondi, HF
Assignment 2 for Engineering Economic by HF Zondi 200582868 Assignment 2 for Engineering Economic by HF Zondi 200582868
Solution 1 Solution 3
a)
Yr First cost Initial cost Sulvage value Capital AOC PW (AC) AW of Total AW
(A/P);n;18% Recovery AOC and
CR = -250000 + 15000(F/A,8.5,15) 0 100 000 1.00000 100 000 100000 0
= -250000 + 423484.5 1 100 000 1.18000 118 000 85000 -33 000 75 000 63 563 63 563 75 005 -108 005
= 173484.5 2 100 000 0.63870 63 870 72250 -30 729 85 000 61 047 124 610 79 589 -110 318
3 100 000 0.45990 45 990 61413 -28 801 95 000 57 817 182 427 83 898 -112 699
4 100 000 0.37170 37 170 52201 -27 163 105 000 54 159 236 586 87 939 -115 102
5 100 000 0.31980 31 980 44371 -25 777 115 000 50 267 286 853 91 736 -117 513
6 100 000 0.28590 28 590 37715 -24 596 125 000 46 300 333 153 95 248 -119 844
ESL = 1
b) MARR =(8.5* 0.4) + (9*0.6)
= 8.80%
b) AW = CR +A
= P(A/P,18%,6)-S(A/F,18%,)
A= 250000(A/P,8.8%,15) + 15000(F/A,8.8,15)
108005 = P*0.2859 - 3994
= -30650 + 433552.5
P= 391 741
= 402902.5
P must be reduced by R 291 741
1 2
2014GIE4058Ass2ZondiHF 2014GIE4058Ass2ZondiHF
Zondi, HF Zondi, HF Zondi, HF Zondi, HF
Zondi, HF Zondi, HF
Solution 5
AOC = 1325000
+ S(A/F,I;n) 2465
- AOC -1325000
AW = -1721135
It is cheaper to purchase than to make therefore I will recommend that they continue to purchase
Solution 6
9 542.23 -869.85
-10.97
ERR 24.33%
3
2014GIE4058Ass2ZondiHF
Zondi, HF Zondi, HF
118 Zwane+KC
• 2014GIE4058Ass2Zwane-KC.pdf
Zwane, KC Zwane, KC Zwane, KC Zwane, KC
Solution to Problem 1 Since PW is less than zero, 60% debt financing and 40% equity financing mix does not meets the
MARR requirements.
(a) 100 percent equity financing
(c) Therefore, 100 percent equity financing plan makes the project economically attractive.
Since the MARR is 8.5%, therefore Present Worth will be
Solution to Problem 2
PW = P + A(P/A,8.5%,15)
Rating by attribute with 100 for most important
=R-250 000 +R15 000(8,3042)
Logic :
=R-250 000 + R124 563
F = 10
=R125 437
U = 0.5f = 5
Since the PW is greater than zero, 100% equity financing meets the MARR requirement.
S = 0.5 x u = 2.5
V=5
(b) 60% debt financing and 40% equity financing
R = 2xs = 2 x 2.5= 5
Total Loan borrowed = R250 000 x 60% = R150 000
Attribute Importance Score
Loan payment =R150 000(A/P,9%,15)
F 10
=R150 000 x 0.1241
S 2.5
=R18 615 per year
U 5
Cost of 60% debt capital is 9% of loan.
V 5
WACC = (0.4 x 8.5%) + (0.6 x 9%) = 8.8
R 5
MARR = 8.8%
= R-129 486.47
Salvage value formula = P x 0.85^n Total fixed cost = 30 + (350 x 0.2) + 100 + 55 + (0.333 x 100)
Year End of year Salvage value End of Year Annual Worth = R288.33
1 = 100000 x 0.85^1 = 85000 AW1 = -100000(A/P,18%,1) – 75000 + 85000 Total variable cost = 2500 + 200 + 2000 + 600 + 200
2 = 100000 x 0.85^2 =72250 AW1 = -100000(A/P,18%,2)– 85000 + 72250(A/F,18%,2) 288.33 = (LP-5500) x 5000
3 = 100000 x 0.85^3 =61412.5 AW1 = -100000(A/P,18%,3)– 95000 + 61412.5(A/F,18%,3) = R5500.058 per year
4 = 100000 x 0.85^4 =52200.6 AW1 = -100000(A/P,18%,4)– 105000 + 52200.6(A/F,18%,4) 500000 = - 288.33 + (List Price-5500) x 8000
Total Annual Operating Cost= direct labor + direct material + indirect costs Production cost calculation
= R500 000 + R 300 000 + R 525 000 Formula: PCap phase 1 x (PR(1 + gR) (Year − 2015) – PC(1+gC) (Year − 2015) ) – FCphase1
= R1 325 000
Year Production Cost
The make alternative annual worth is = -P(A/P,15%,10) + S(A/F,15%,10) – AOC
2015 1.8 x ( 500 x (1-0.03) ( 2015− 2015) – 150(1+0.03) ( 2015− 2015) ) – 40 = 590
=- 2 000 000(A/P,15%,10) + 50 000(A/F,15%,10) – 1 325 000
2016 1.8 x ( 500 x (1-0.03) ( 2016− 2015) – 150(1+0.03) ( 2016− 2015) ) – 40 = 554.9
= -2 000 000(A/P,15%,10) + 50 000(A/F,15%,10) – 1 325 000
2017 1.8 x ( 500 x (1-0.03) ( 2017− 2015) – 150(1+0.03) ( 2017− 2015) ) – 40 = 520.367
=- 2 000 000(0.1993) + 50 000(0.0493) – 1 325 000
= R -1 721 135 2018 1.8 x ( 500 x (1-0.03) ( 218− 2015) – 150(1+0.03) ( 2018−2015) ) – 40 = 486.37
Option two: purchase the component 2019 1.8 x ( 500 x (1-0.03) ( 2019−2015) – 150(1+0.03) ( 2019−2015) ) – 40 = 452.876
2022 5.4 x ( 500 x (1-0.03) ( 2022− 2015) – 150(1+0.03) ( 2022− 2015) ) – 80 = 1105.36
Solution to Problem 6
( 2023 − 2015 )
i’ = (9552.65/869.835)^(1/11) – 1
920.023
i’ = ERR = 24.34%
ERR is greater than MARR , the project is economically justified using this ERR approach.
590
554.9
520.367
0 1 2 3 4 5 6 7 8 9 10 11
213.631
247.124
266.67
= -869.835
= 590 x 3.0590 + 554.9 x 2.660 + 520.34 x 2.3131 + 839.71 x 1.5209 + 1209.83 x 1.3225 + 1105.3
x 1.1500 + 920
= 9552.65