Test 1

UNIVERSITI TEKNOLOGI MALAYSIA

TEST 1 1 HOUR

ENGINEERING ECONOMY

QUESTION 1. BASICS AND CASH FLOWS

i. List the four essential elements involved in decision making in engineering economic analysis.

ii. What is meant by end-of-period convention?

[12 MARKS]

QUESTION 2. INTEREST RATE AND CASH FLOWS

i. RKI Instruments borrowed $3,500,000 from a private equity firm for expansion of its manufacturing facility for making carbon monoxide monitors/controllers. The company repaid the loan after 1 year with a single payment of $3,885,000. What was the interest rate on the loan?

ii. Construct a cash flow diagram for the following cash flows: $25,000 outflow at time 0, $9000 per year inflow in years 1 through 5 at an interest rate of 10% per year, and an unknown future amount in year 5.

iii. Construct a cash flow diagram that represents the amount of money that will be accumulated in 15 Years from an investment of $40,000 now at an interest rate of 8% per year.

[18 MARKS]

QUESTION 3. EQUIVELENCE

  1. At an interest rate of 15% per year, an investment of $100,000 one year ago is equivalent to how much now?
  1. As a principal in the consulting firm where you have worked for 20 years, you have accumulated 5000 shares of company stock. One year ago, each share of stock was worth $40. The company has offered to buy back your shares for $225,000. At what interest rate would the firm’s offer be equivalent to the worth of the stock last year?
  1. Iselt Welding has extra funds to invest for future capital expansion. If the selected investment pays simple interest, what interest rate would be required for the amount to grow from $60,000 to $90,000 in 5 years?

[30 MARKS]

 

ENG ECON TEST 1