SEEM 2440A/B Engineering Economics First term, Midterm Examination

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1 SEEM 2440A/B Engineering Economics First term, Midterm Examination Instructions Exam Duration: 90 minutes Total Marks: 100 This examination paper comprises of THREE questions. Answer ALL questions. The Interest and Annuity Table for Discrete Compounding is attached on P.5. It is IMPORTANT to note that the provided table may not cover all the cases in this examination paper. You need to use the related formula to calculate the values which cannot be obtained from the provided table. This is a closed-book, closed-notes exam. You are only allowed to use ONE A4 size double-sided paper WITHOUT any attachment as your personal notes. Results obtained from a financial calculator will not receive any mark. You must show all your work for each question in detail. 1

2 1. SEEM Company is planning to start a new production line to produce a new product. The life of the production line is 15 years. The unit selling price of the new product and the annual cost for producing it at the end of each year are given in Table 1 below Table 1 End of Year (EOY) Selling price per unit ($ per unit) Annual cost ($) , , ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) ,200 2,890(0.85) , , , ,000 The annual production level of this new product is X units per year and is assumed to be unchanged throughout the life of the production line. We also assume that all the units of this new product produced can be sold throughout the life of the production line. The interest rate is 6% per year. a. (20) Calculate the equivalent total future worth at the end of year 15 of all the annual costs in Table 1. b. (20) Assuming that all the annual revenues from selling this new product are evaluated at the end of the year. Determine X that makes the equivalent total future worth at the end of year 15 of all the annual revenues from selling this new product to be equal to the answer in (a). Round your answer to the nearest integer. 2

3 2. The cost of operating a train for travelling one kilometer varies with its velocity and is given by b Co av (1) where C o is the cost of operating the train for travelling one kilometer in dollars per kilometer, v is the velocity of the train in kilometers per hour, and a and b are constants. a. (20) Based on the collected data of C o and v in Table 2 below, apply the linear regression technique to estimate a and b in Equation (1). Correct your answers to 2 decimal places. Table 2 C o ($ per km) v (km per hr) 9, , , , , b. (15) The company that owns the train wants to minimize the cost of operation, but that the cost must be balanced against the cost of the passengers time for each kilometer they travel (C p ) which is related to v through 375, 000 C p (2) v where C p is the cost of passengers time for each kilometer they travel in dollars per kilometer. Using the answers of a and b in (a), find the velocity v which the train should be operated in order to minimize the total cost for travelling one kilometer (C T ), which is the sum of C o and C p? 3

4 3. In year 2011, a 4 liters electric hot water pot is sold at $3,210 per unit. Table 3 below shows the information about some costs for producing one 4 liters electric hot water pot Direct labor cost Factory Overhead cost Quality control cost Packaging cost Table 3 $70 per hour 145% of the direct labor cost 35% of the direct labor cost $50 per unit In year 2005, the material cost for producing one 2.5 liters electric hot water pot was $527. Suppose that the cost-capacity factor is 0.91 and the cost index of the material has increased from 121 in year 2005 to 195 in year Assume that learning curve model applies to the labor. The time required to produce the 4 th and 7 th unit of the 4 liters electric hot water pot are 12 hours and 9 hours respectively. Use the estimated time to produce the 20 th unit of the 4 liters electric hot water pot as the standard time for cost estimation purposes. a. (10) Find the material cost for producing one 4 liters electric hot water pot in year b. (15) Suppose that all the units of the 4 liters electric hot water pot produced can be sold. Taking all the costs in Table 3 and (a) into account and ignore the time value of money, determine the number of units of the 4 liters electric hot water pot should be produced in year 2011 in order to achieve a profit of $191,000. Round your answer to the nearest integer. End of the paper 4

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