JULY 2020 CONFIDENTIAL

SECTION A (Total: 40 marks)

INSTRUCTION: Answer ALL questions.

Please answer MCQ questions in the VLE.
SECTION B (60 marks)

Answer all question

For consistency purposes, only dollar ($) symbol is to be used in the calculation.

Question 1
a) Define the term “measure of worth”. Identify three different commonly-applied
measures.

The measure of worth is ideals that are used in selecting the best alternative in
engineering economics of a specific set of approximations. Three widely
implemented value indicators are:
• Present Worth (PW)
• Annual Worth (AW)
• Future Worth (FW)
[2 marks]
b) Raju Construction Sdn Bhd borrowed $2.6 million to finance the construction of an
entertainment complex in a smart community development project. The company
made “interest only” payments of $312,000 each year for 3 years and then repaid the
principal in a single lump sum payment of $2.6 million. Calculate the interest rate on
the loan.

It is provided the sum of borrowing is $2.6 million.

Company made interest only payment value $312,000 each years.
Repaid the principal in a single lump sum payment of $2.6 million.
That mean calculation involves 1 year only.

Principal × Interest Rate × Time

Interest =
100

$1,260,000 × Interest Rate × 1

$312,000 =
100

PMB 20403 ENGINEERING ECONOMIC Page 1 of 12

JULY 2020 CONFIDENTIAL

$312,000
× 100 = Interest Rate
$2,600,000

𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐑𝐚𝐭𝐞 = 𝟏𝟐%

[4 marks]
Question 2
A new engineering graduate who started a consulting business borrowed money for 1
year to furnish the office. The amount of the loan was $50,000, and it had an interest
rate of 10% per year.
However, because the new graduate had not built up a credit history, the bank made
him buy loan-default insurance that costs $1000. In addition, the bank charged a loan
set-up fee of 1% of the loan principal. Suggest the effective interest rate the engineer
paid for the loan?

Loan Principal Amount : $50,000

Interest Rate per Year: 10%
Interest Rate = $50,000 × 0.1 = $5,000
Loan-Default Insurance = $1000
Loan Set-Up Fee : 1%
Loan Set-Up Fee : $50,000 × 0.01 = $500
TOTAL COST = $5,000 + $1,000 + $500 = $6,500

Total Cost
Effective Interest Rate =
Loan Principal
$6,500
Effective Interest Rate = × 100
$50,000

𝐄𝐟𝐟𝐞𝐜𝐭𝐢𝐯𝐞 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐑𝐚𝐭𝐞 = 𝟏𝟑%

[6 marks]

PMB 20403 ENGINEERING ECONOMIC Page 2 of 12

JULY 2020 CONFIDENTIAL

Question 3

a) At a simple interest rate of 12% per year, determine how long it will take $5000 to
increase to twice as much.

Present Value, P = $5000

Interest Rate, i = 12%
P×i×n
SI =
100
5000 × 12 × n
5000 =
100
500,000 = 60,000𝑛
500,000
𝑛=
60,000
𝑛 = 8.333
𝐧 = 𝟖 𝐲𝐞𝐚𝐫 𝟒 𝐦𝐨𝐧𝐭𝐡
[3 marks]
b) Compare the time it will take to double if the rate is 20% per year simple interest.

Rate of interest = 20%

5000 × 20 × n
5000 =
100
500,000 = 100,000𝑛
𝐧 = 𝟓 𝐲𝐞𝐚𝐫𝐬
[3 marks]

PMB 20403 ENGINEERING ECONOMIC Page 3 of 12

JULY 2020 CONFIDENTIAL

Question 4
A commercial property developer plans to borrow money to finance an upscale mall in
an exclusive area of the city. The developer plans to get a loan that will be repaid with
uniform payments of $400,000 over a 15-year period beginning in year 2 and ending
in year 15. Determine how much will a bank be willing to loan at an interest rate of 10%
per year?

The bank would be able to provide the loan : $2,678,795.44

[6 marks]

PMB 20403 ENGINEERING ECONOMIC Page 4 of 12

JULY 2020 CONFIDENTIAL

Question 5
a) The inflation rate had significantly affected our living cost. Analyse how many future
dollars 10 years from now will have the same buying power as $10,000 today? The
market interest rate is 12% per year and the inflation rate is 7% per year.

Future Value, F
Present Value P = $10,000
Inflation Rate, f = 7%
Market Interest Rate if = 12%
Number of Period, n = 10
𝐹 = 𝑃(1 + 𝑓)ᵑ
𝐹 = $10,000(1 + 0.07)10
𝐹 = $10,000(1.9672)
𝑭 = $𝟏𝟗, 𝟔𝟕𝟐

𝐹 = $10,000(1 + 0.12)10
𝐹 = $10,000(3.1058)
𝑭 = $𝟑𝟏, 𝟎𝟓𝟖. 𝟒𝟗

[3 marks]

b) Determine today’s purchasing power of $1,000,000 thirty years in the future, if,
If = 15% per year and f = 5% per year.

Future Value, F : $1,000,000

Market Interest Rate if : 15%
Inflation Rate, f = 5%
Number of Period, n = 10

𝐹
𝑃=
(1 + 𝑓)𝑛

Present worth at 15%

1,000,000
𝑃=
(1 + 0.15)30

PMB 20403 ENGINEERING ECONOMIC Page 5 of 12

JULY 2020 CONFIDENTIAL

𝑷 = $𝟏𝟓, 𝟏𝟎𝟑. 𝟎𝟓

Present worth at 5%

1,000,000
𝑃=
(1 + 0.05)30

𝑷 = $𝟐𝟑𝟏, 𝟑𝟕𝟕. 𝟒𝟓

[3 marks]

Question 6
Kaylar Sensors Sdn Bhd is a company that makes load/ force sensors based on
capacitive sensing technol-ogy. For a major plant expansion project, the company
wants to have $30 million 5 years from now.
If the company already has $15 million in an investment account for the expansion,
determine how much more must the company add to the account now so that it will
have the $30 million 5 years from now? The funds earn interest at the rate of 10% per
year.

Kaylar Sensors wanted amount at the end of 5 years = $30,000,000

Interest Rate = 10% per year
𝐹 = 𝑃(1 + 𝑓)ᵑ
$30,000,000 = 𝑃(1 + 0.1)5
$30,000,000 = 𝑃(1.6105)
$30,000,000
𝑃=
1.6105
𝑃 = $18,627,755.35
In hand : $15,000,000
The Sum Kaylar Sensors has got to include more to the account
= $18,627,755.35 − $15,000,000
= $3,627,755.35

[6 marks]

PMB 20403 ENGINEERING ECONOMIC Page 6 of 12

JULY 2020 CONFIDENTIAL

Question 7

Officials from the Muncipal Council gathered to launch the start of a beach restoration
project that involves dumping sand and adding anti-erosion structures. The first cost of
the project is $30 million with annual maintenance estimated at $340,000.
If the restored/expanded beaches attract visitors who will spend $6.2 million per year,
determine the conventional B/C ratio at the social discount rate of 8% per year?
Assume the MPS wants to recover the investment in 20 years

𝑃 = 𝐴(𝑃⁄𝐴, 𝑖, 𝑛)

𝑃𝑊 𝑜𝑓 𝐶𝑜𝑠𝑡 = $30,000,000 + 340,000(𝑃⁄𝐴, 8%, 20)

= $30,000,000 + 340,000(9.818)
= $33,338,120
𝑃𝑊 𝑜𝑓 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠 = $6,200,000(𝑃⁄𝐴, 8%, 20)
= $6,200,000(9.818)
= $60,871,600
Benefit/Cost Ratio,
𝑃𝑤 𝑜𝑓 𝐵𝑒𝑛𝑒𝑓𝑖𝑡
𝐵⁄𝐶 𝑅𝑎𝑡𝑖𝑜 =
𝑃𝑤 𝑜𝑓 𝐶𝑜𝑠𝑡
$33,338,120
=
$60,871,600
𝐵⁄𝐶 𝑅𝑎𝑡𝑖𝑜 = 𝟏. 𝟖𝟑

[6 marks]

PMB 20403 ENGINEERING ECONOMIC Page 7 of 12

JULY 2020 CONFIDENTIAL

Question 8
a) The preliminary cost for a 50,000 ft2 (square foot) aircraft hangar must be
estimated. (a) The first unit estimate was $98.23 per square foot. Estimate the cost
of the hangar. (b) The budget limit came in at $4 million. Perform two analyses:
determine the maximum allowed size to be within budget at the first estimated unit
cost, and determine the maximum unit cost to stay within budget and maintain the
50,000 ft2 size.

(a) Area of The Aircraft Hanger,N = 50,000 ft2

Cost per ft2 , u = $98.23
Cost Estimated, C
𝐶 =𝑢×𝑁
𝐶 = 50,000 × 98.23
= 50,000 × 98.23
= $𝟒, 𝟗𝟏𝟏, 𝟓𝟎𝟎

Estimate The Cost of The Hangar are $4,911,500

(b) C = $4,000,000 , u = $98.23, N will be:

C
𝑁=u
$4,000,000
𝑁=
$98.23
𝑁 = 𝟒𝟎, 𝟕𝟐𝟏 𝐟𝐭 𝟐

C = $4,000,000 , N = 50,000ft2, u will be

C
𝑢=
N
$4,000,000
𝑁=
50,000ft 2
𝑁 = $𝟖𝟎 𝐟𝐭 𝟐

[3 marks]

PMB 20403 ENGINEERING ECONOMIC Page 8 of 12

JULY 2020 CONFIDENTIAL

b) Estimate the total cost of a house (from purchasing a lot to furnishing it) using the
following estimates:
Cost Data House Data
2
Purchasing a lot = $2.50/ft Lot size = 100 × 150 ft
Construction = $125/ ft2 of livable space House size = 50 × 46, with 75%
livable
Furnishings = $3000 per room Number of rooms = 6

Cost Estimated of Lot, CL

Cost Lot, u = $98.23
Lot Size, N = 100 x 150 =15,000
𝐶𝐿 = 𝑢 × 𝑁
𝐶𝐿 = 2.5 × 15,000
= $37,500
Cost Estimated of Construction , Cc
Cost of Construction, u = $125
House Size, N = 46 x 50 x 75% =1725
𝐶𝑐 = 𝑢 × 𝑁
𝐶𝑐 = 125 × 1725
= $215,625
Cost Estimated of Furnishing , Cf
Cost Finishing per Room, u = $3000
Number of Room, N = 6
𝐶𝑓 = 𝑢 × 𝑁
𝐶𝑓 = 3000 × 6
= $18,000

TOTAL COST ESTIMATE :

𝐶 = 𝐶𝐿 × 𝐶𝐶 × 𝐶𝐹
𝐶 = 37,500 + 215,625 + 18,000
𝐶 = $𝟐𝟕𝟏, 𝟏𝟐𝟓

[3 marks]

PMB 20403 ENGINEERING ECONOMIC Page 9 of 12

JULY 2020 CONFIDENTIAL

Question 9

a) What is the primary difference between a sales tax, a value-added tax and good
service tax?
Sales Tax Value-Added Tax Good Service Tax
Single-Stage Tax Multi-Stage Tax Multi-Stage Tax,
Comprehensive Tax
Imposed & Paid One Paid Everytime a Good On both goods and
Time Only is Resold services

[2 marks]
b) In recent development, the government is considering to reinstate the GST after it
was abolished 1.5 year ago. The GST is proposed to be applied at a rate of 10%,
with few exceptions. If vendor A sells raw materials to vendor B for $80,000 plus
GST, and vendor B sells a product to vendor C for $150,000 plus GST, and vendor
C sells an improved product to an end-user for $270,000 plus GST,
Determine the amount of tax collected by vendor B and suggest how much tax
does vendor B send to Malaysian’s Inland Revenue?

GST rate = 10%

Sale price of Vendor A = $80,000 + GST
= $80,000 + $8,000
= $88000
Sale price of Vendor B = $150,000 + GST
Value added by Vendor B = $150,000 - $88,000
= $62,000
GST on value added = 6200
= Tax sent by vendor B to Malaysian’s Inland Revenue
Tax collected by vendor B = 10% of sale price of $150,000
= $15,000
Tax sent by vendor B to Malaysian’s Inland Revenue = $6200

[4 marks]

PMB 20403 ENGINEERING ECONOMIC Page 10 of 12

JULY 2020 CONFIDENTIAL

Question 10

Carrolton Oil and Gas, an independent oil and gas producer, is approved to use a 20%
of gross income depletion allowance. The write-off last year was $700,000 on its
horizontal directional drill wells. Determine the estimated total reserves in barrels if the
volume pumped last year amounted to 1% of the total and the delivered product price
averaged $40 per barrel.

Annual Gross Income depletion amount can be max 20% gross income
$700,000
𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 =
20%
𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 = $3,500,000
Price per Barrel = $40
Calculate quantity of barrels mined in the tear as follow:
$3,500,000
=
40
= 87,500
Quantity mined this 1% of the total reserve
$87,500
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 =
1%

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 = 𝟖, 𝟕𝟓𝟎, 𝟎𝟎𝟎 𝒃𝒂𝒓𝒓𝒆𝒍𝒔

[6 marks]

END OF ASSIGNMENT

PMB 20403 ENGINEERING ECONOMIC Page 11 of 12

JULY 2020 CONFIDENTIAL

Appendix A
FORMULAE
Dt = (B - S)/n
BVt = B - t Dt
Constant value dollar = future dollar / (1 + f)n
𝑖𝑓 = 𝑖 + 𝑓 + (𝑖)(𝑓)
F = P(F/P,i,n) = P(1 + i)n
P = F(P/F,I,n) = F(1 + i)-n
P = A(P/A,i,n) = A [ (1+i)n - 1]
i( 1 + i)n
A = P(A/P,i,n) = P[ i( 1 + i)n ]
(1+i)n - 1
QBE = FC/(r -v)
Profit = (r - v)Q -FC
TI = GI - OE - D
Compound interest factor tables for 5%,6%,8%,10%,
12% and 15%

PMB 20403 ENGINEERING ECONOMIC Page 12 of 12