ECOR 3800 - Assignment 2

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School

Carleton University *

*We aren’t endorsed by this school

Course

3800

Subject

Civil Engineering

Date

Apr 3, 2024

Type

pdf

Pages

Uploaded by BarristerFerretMaster23

ECOR3800/Winter 2023 Assignment #2 Page 1/3 Carleton University Department of Civil and Environmental Engineering ECOR 3800 A: Engineering Economics Assignment #2 Due on: February 9 th , 2023 INSTRUCTIONS: 1. Clearly put a square around your final answers. 2. Unless otherwise stated, answer all questions by hand (not typed) and submit. 3. To submit, scan your assignment and upload it as a pdf to the Brightspace submission form. 4. Show all of your work. No marks will be given without intermediate steps. 5. Make sure your work is neat and that the scans are legible. Marks will be deducted for neatness 6. Late assignments submitted within 24 hours of the deadline will be deducted 25%, assignments submitted past 24 hours will not be accepted 1. (17 Marks) Your firm plans on purchasing an existing rental property with a remaining service life of 35 years. Recently, the tenants signed a 5-year lease, fixing the rental income at $250,000 annually for the next five years. Rental income is expected to increase by 5% every five years over the remaining life of the property. Based on this increase, the annual rental income would be $262,500 for years 6 through 10, $275,625 for years 11 through 15, $289,406 for years 16 through 20, $303,877 for years 21 through 25, $319,070 for years 26 through 30, and finally $335,024 for years 31 through 35. Operating expenses, including income taxes, are estimated be $60,000 for the first year increasing by $7,000 each year thereafter. At the end of the property service life, you expect to sell the lot on which it stands for net amount of $375,000. Alternatively, you could invest in a mutual fund that earns at the rate of 8% per annum, what would be the maximum amount you would be willing to pay for the property at the present time? 2. (8 Marks) The City is building a new basketball court in its newly built recreation centre. Two alternative designs are being investigated, both of which are expected to have infinite service life. The first design has an initial cost of $90,000. Every 8 years, the court surface would have to be refinished and painted at a cost of $6,000. To ensure that the finish and pain lasts for 8 years, a company is hired to do monthly touch-ups at a cost of $500 per year. The second design would have an initial cost of $70,000. For this alternative, the pain and the finish are less durable, and it would need to be refinished and repainted every 6 years at a cost of $10,000, and every 3 years an inspection is required at a cost of $3,000. The city would like to evaluate its projects based on an MARR of 7%. Which court design should be endorsed? (Hint: In this question, you will have to use infinite series).

ECOR3800/Winter 2023 Assignment #2 Page 2/3 3. (10 Marks) Candleworks inc. plans on purchasing a new wax melter for its line of candles. There are two choices of supplier: Waxtail and Simpliwax. Their proposals are as follows: Waxtail Simpliwax Expected life 6 years 7 years First cost $300,000 $425,000 Maintenance $12,000/year + $0.02/unit $25,000/year + $0.20/unit Labour $1.50/unit $1.05/unit Other costs $9,500/year+$1.60/unit $20,000/year+$0.95/unit Salvage Value $7,000 $27,000 Management thinks they would be able to sell 10,000 candles per year based on current demand. If the demand increases, sales may be as high as 50,000 candles a year. Candleworks inc. uses an MARR of 10% for equipment projects. a) Who is the preferred supplier if sales are 10,000 units per year? b) Who is the preferred supplier if sales are 50,000 units per year? 4. (5 Marks) Cropiva manufactures agricultural equipment, and they are planning on introducing a new product which would require an initial investment of $12 million in assets and would produce a net annual revenue of $1.75 million over a service life of twelve (12) years. After the 12 years, the product will likely become obsolete, and the assets would be sold for an estimated $0.5 million. What is the rate of return of this project? And would it be an acceptable project with the MARR = 10%? 5. (15 Marks) Jacob is in charge of resource development and investment in his firm, and he was recently presented with 5 different 6- year investment projects as shown below. Jacob’s determine that it is not in his firm’s best interest to invest in any project that will earn less than 11%. He is also given the go ahead by the board of governors for the firm to choose any and all projects that he finds acceptable, so he does not have to choose only 1 project. Calculate the IRR for each of the projects presented below using an excel spreadsheet graph of present worth vs rate of return. Attach the graph for each project and indicate which projects should Jacob invest in, and which projects he has to stay away from. Project A B C D E Initial Cost $2,000 $3,000 $5,000 $4,250 $14,000 Annual Revenue $1,000 $900 $1,800 $2,000 $5,380 Annual Maintenance $500 $200 $600 $900 $2,580 Salvage Value $350 $200 $800 $150 $0 6. (15 Marks) A think-tank group. has recently come up with five proposals for consideration. Each project has an estimated life of 5 years. Their impacts in dollars are given below: A B C D E Required Capital 8,000 7,500 1,800 3,500 13,500 Annual Cash Flow 2,100 1,850 450 850 3,500 Salvage Value 700 1,200 0 500 0

ECOR3800/Winter 2023 Assignment #2 Page 3/3 Assuming that the projects are mutually exclusive, determine which, if any , of the proposals should be accepted if the MARR is 10.5% 7. (15 Marks) You are considering the following project: It pays you $3,100 at the end of the first year, costs $8,000 by the end of the second year and brings $5,100 a year after. What is the project's internal rate of return(s), exact external rate of return and the approximate external rate of return if current MARR is 12%?

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ECOR 3800 - Assignment 2

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