HES3380 Engineering Management IMinor Activity Report 2

Name: SAHA SUMAN Tutorial Group: 1Student ID: 6726143 Date: 20/10/09

1. By using equipment ZX in its current process, FunQ company can have a saving around $40,000 per year (cash inflow). If this equipment can be bought for $110,000 and the equipment will be disposed without cost or benefit after 10 years. What is the payback period for buying the equipment?

Suggested Solution:

Years

2. The profit out of a plastic moulding machine is $295,000 over 5 years. If the initial investment requires $150,000. What is the rate of return of buying this plastic moulding machine?

Suggested solution

= $ 59,000

Project cost = initial investment = $150,000

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3. Jack wants to borrow $50,000 from the bank now in hope that he can return it as lump sum of money after 5 years. Since the loan is insecure, the interest rate is %20 per annum.

a. How much should be repaid at the end of the 5 years period?b. The bank manager informs Jack that the bank requires some repayments and

they cannot wait that long. What would be yearly repayments if an equal amount to be paid?

c. What if the money is to be repaid monthly over 5 years?

Suggested solution:

(a) Principal amount borrowed = $ 50,000

Annual interest rate= 20% per annum

1st year interest =0.2 50,000 =$10,000

2nd year interest= (50,000+10,000) 0.2 = $12,000

3rd year interest = (60,000+12,000) 0.2=14,400

4th year interest=(72,000+14,400) 0.2= 17,280

5th year interest= (17,280+86,400) 0.2 = 20,736

Total accumulated interest= $74,416Total repayment at the end of 5 yrs period = 74,416+50,000=$124,416

Alternative solution:

Given P=$50,000 k= 20%= 0.2 ,n=5

F= $50,000 =$50,000 = $124,416

(b)

= $16,718.99

(c)

Given P= $50,000,

60 monthly repayments.

= $1324.69

Therefore Jack would need to pay $1,324.69 per month for 5 years (60 months). His total repayment in 5 years will be

$ 1,324.69 per month 60 months = $79,481.4

4. Project A requires $100,000 initially but it provides $50,000 income per year for three years. Project B, however, requires $50,000 with annual return of $30,000 for three years. Which project would you select if the interest rate is 15% per annum based on NPV?

Suggested Solution

Project 1

= - $100,000 + ($ 43,478.26 + $37,807.18+$32,875.81) = $ 14,161.25 Project 2:

= −$ 50,000 + ( $26,086.96 + $ 22,684.31+$19,725.49) = $ 18,496.76 Because the Net present value (NPV) of project 2 is > than project 1 , I would select project 2.

5. A student has spent $10,000 out of his credit card and he want to return $250 each month. Assuming the interest rate is 24% per annum. How long will it take to clearout his debt? What if he pays $300 per month with the same interest rate? Repeat the calculations for $400, $500 and $600 repayments per month? Do you have any particular observation?

Case 1: Returns $250 each month

Given P = $10,000, A= $250, k = 24% = 0.24 annually = monthly

Case 2: Returns $300 each month

Instead A = $300

Case 3: Returns $ 400 each month

Instead A = $400

Case 4 : Returns $500 each month

Instead A = $500

Case 5 : Returns $ 600 each month

Instead A = $600

It can be seen that the greater the amount the student returns, the shorter time span required to clear out his debt.

6. A friend has offered Amir an interesting investment opportunity. Amir needs to pay $200,000 now and in return he gets $30,000 per year for four year and whole investment amount, ie $200,000, in the fifth year. What is the internal rate of return for this investment and what is your advice for Amir? (hint: to determine internal rate of return, NPV should be set to zero and solve the related equation for i, this is often difficult if not

impossible. So trail and error method could be used for which Microsoft Excel is very handy. Internal rate of return in this case should be around %12.67)

0 = $200,000 +

0 =

k = 12.67%= 12.67/100 = 0.01267 satisfies the above equation ie for the LHS of the equation to be equal to the RHS of the equation

My advice for aamir is that If he can use the $200,000 to get a better return of 12.67% on any other investment, he should probably invest there.