The Hashemite Uuniversity Faculty of Engineering Department of Civil Engineering CONSTRUCTION PROJECT MANAGEMENT Assignment 2: Engineering Economic Analysis

Question 1: Construct the appropriate diagrams illustrating the cash flows and calculate the annual interest rates in the following cases. 1. A firm takes a three-year loan of $100,000, which is to be repaid at the end of the third year in a lump sum payment of $130,000. 2. Mr. Smith borrows $5,000 from the bank. The loan is repayable in seven equal annual installments of $950 each. 3. An investor borrows $9,457 from the bank and quarterly pays back $500 to the bank for 6 years. Question2: What is the future (terminal) value of $850.00 invested at 13% per year for five years if the interest is: 1. 2. 3. 4. 5. Compound annually? Compound semi-annually? Compound quarterly? Compound monthly? Compound daily?

Question 3: The XYZ Company is evaluating the following two mutually exclusive projects. Given that the MARR = 20% and the project is repeatable. Project A: Investment of $25,000 for an instrument that lasts 5 years. The salvage value of the instrument is 0, and the annual income is $8,600. Project B: Investment of $15,000 for an instrument that lasts 3 years. The salvage value of the instrument is 0, and the annual income is $4,400. 1. Compare the two projects using the internal rate of return (IRR) method. Which is more profitable? 2. Compare the two projects using net present value (NPV) method. Which is more profitable? 3. Which method (IRR or NPV) will you choose to evaluate the two projects and why?

Question 4 A backhoe is purchased for $20,000. The terms are 10% down and $360 per month for 60 months. What annual effective interest rate is being charged? Question 5 Consider four mutually exclusive alternatives that each has an 8-year useful life.

If

the MARR is 8%, which alternative should be selected? (Use IRR method to calculate your answer) A Initial Cost Uniform Annual Benefit Salvage Value Question 6 Your firm owns a large earth-moving machine and has contracts to move earth for $1 per cubic yard. For $100,000 this machine may be modified to increase its production output by an extra 10 yd3 per hour, with no increase in operating costs. The earth-moving machine is expected to last another 8 years, with zero salvage value at the end of that time. Determine whether or not this investment meets the company objective of earning at least 15% return. Assume that the equipment works 2,000 hours per year. Question 7 KJK, Inc., is considering a project that involves investing $25,000,000 today in order to reduce operating expenses in the future. The project involves replacing their mainframe computer, which currently does all the accounting and other information systems for the company. KJK would replace this computer with a PC-based computer network, with a powerful server to handle the company's complex database. KJK, Inc., faces no real capital constraints and has a required rate of return of 16%. Determine this project's Internal Rate of Return from the table below and make a recommendation as to whether KJK should accept or reject this project. Briefly explain.
Discount Rate (%) 5 7 9 11 13 15 17 Present Value of All Incremental Net Cash Inflows $ 75,000,000 65,000,000 50,000,000 35,000,000 25,000,000 15,000,000 5,000,000 2

B $800 120 500

C $600 97 500

D $500 122 0

$1,000 122 750