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Engineering Economics

Engineering Economics
?
All of the group members names and their Banner numbers
Other Requirements:
?
Include a completed group declaration form
?
Use clear writing, and a clear organized layout
?
Draw cash flow diagrams where appropriate
?
Cite
sources for information acquired elsewhere
?
All assignments must be bound or stapled in upper left

hand corner
?
Make reasonable assumptions as required.
?
Clearly state all assumptions.
?
Use excels spread sheets to solve the problem.
Case Study: Submission #
2
Continuing Case Study 1, assume that you are supposed to
execute
project 1 which
is
implementing a new
product to upgrade the current service. Your careful examination reveals following information:
The project lifetime
can be extended to 10 years by
reinvestment on
new
equipment at the end of year 5 with
the amount of $10 million.
The initial investment remains the same ($25 million)
,
but we decided to use a $10
million loan
to cover
part of initial investment
at the rate of 15% annual interest to be
paid back in 10 years.
The total annual benefit per each new customer is $80 in
year 1 and will be
decreased
by
3
% every year. Also
the average annual benefit from upgrading customer is $20
for year 1 with 4%
decrease
every following year
.
Initial investm
ent ($25M
) includes purchasing
some equipment ($15M), the lands
for
$4M
and the buildings
for
$
6M
. T
he estimated salvage value
of equipment p
urchased at the beginning
of project
is $3M
at the end of
year 10. Also, the estimated salvage value of equipment
purch
ased at the end of year 5 is $4M at the end of
the project and value of the buildings will be $3M.
The value of land will increase by
15
%
at the end of 10
years
.
Detail of updated project information
over 10 years is provided in table below.
Year
0
1
2
3
4
5
6
7
8
9
10
Investment
25,000,000
0
0
0
0
0
10,000,000
0
Marketing and
operations cost
2,000,000
1,000,000
1,000,000
500,000
500,000
800,000
Decrease by 10% every year
from previous year
Forecasted new
customer acquisition
40,000
35,000
30,000
25,000
20,000
30,000
Decrease by 5% every year
from previous year
Forecasted upgrading
customers
100,000
80,000
60,000
40000
20,000
50,000
Decrease by 5% every year
from previous year
Consider
that minimum a
cceptable
rate of return
for the first
five
years is
1
8% and
for next
five
years is
20
%.
Assume that all equipment are eligible for CCA=30% and the building is eligible for CCA=4%. 50% rule
applies for the equipment
only
.
Include
disposal tax effect
with rate of 40% in your calculatio
ns
.
Q1
: Prepare an income statement including revenues, the operating
and marketing
costs, depreciation
(Building and the equipment), disposal tax,
loan
interest payments and any other cost or revenue applicable
for the project life (
10
years). Using CRA
(Canada Revenue Agency) website the current tax rate for the
province/territory in which your business is located, as well as the current federal tax rate. Do not forget to
include references.
Q2
: Prepare the cash flow statement for the life of the projec
t. Is this project an economic project? Answer to
this question by finding NPW of the project.
Also, compute the internal rate of return.
Q3
: Pick two other provinces/territories with different tax rates (one higher and one lower than yours) and
conclude
whether the after

tax effect would be better or worse, comparing NPW of the project in these
provinces/territories. If a higher or lower tax rate than your province does not exist between Canadian
provinces and territories, assume +/

5% differential.
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