THE UNIVERSITY OF HONG KONG

M.SC(ENG.) EXAMINATIONS

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING SYSTEMS ENGINEERING

(IMSE7015) ENGINEERING ECONOMICS AND FINANCE

December 10, 2022 6:30 pm – 8:30 pm

This paper contains three questions.

All THREE questions are COMPULSORY.
For the calculation parts, please show your workings.
Equations and tables are at the back of this question paper.

Use of Calculators:
“Only approved calculators as announced by the Examinations Secretary can be used in
this examination. It is the candidates’ responsibility to ensure that their calculator operates
satisfactorily, and candidates must record the name and type of the calculator used on the
front page of the examination script.”

(IMSE7015 – page 1 of 8)
Question 1

Teamwork, a manufacturer, is considering a project to launch a new product T1. The project is
expected to have a four-year life.

A new $3,400,000 machine will be required; the machine’s end-of-project salvage value is about
$200,000. Working capital of $750,000 will also be required at the beginning of the project.

The project will need twenty production workers and all of them will come from an existing
production line of the company. Although the existing production line will have twenty fewer
workers, Teamwork believes its production volume will be unaffected because the remaining
workers are prepared to work overtime. The total overtime payment to the remaining workers is
expected to be $240,000 per month in the next 4 years.

T1’s expected sales are 300,000 units per year. Variable cost of $15 will be incurred per unit,
which can be sold for $32. The twenty production workers will each be paid a fixed monthly sum
of $15,000, same as what they will receive if the T1 project is rejected and they stay in the existing
production line. The project will also require other fixed costs of $250,000 per year.
这个不算现⾦流！

Teamwork believes the risk of the T1 project is similar to that of the company’s existing operations.
Teamwork has only two long-term funding sources, equity and bonds. The current market value
of the company’s ordinary shares is $50m and the cost of equity is 14% pa.

The company has in issue 500,000 bonds which will mature in six years’ time. Each bond has a
$100 face value and an $86 market value. The coupon rate is 8% pa paid annually. Bond interest
payments have just been made by the company.

The company pays profit tax in the same year at 30% pa. Ignore tax allowable depreciation.

Required:

(a) Determine Teamwork’s weighted average cost of capital. (8 marks)

(b) Calculate the net present value of the T1 project. (14 marks)

(c) Teamwork has conducted a scenario analysis with three economic scenarios – normal (80%
probability), weak (15%) and good (5%).
T1’s expected sales per year are 300,000 units in the normal scenario (same as that given
above), 250,000 units in the weak scenario and 330,000 units in the good scenario. Working
capital is expected to remain unchanged at $750,000 in all three scenarios.
Determine the expected net present value of the T1 project. (8 marks)

(d) T1’s production requires significant water usage and the expected cost is already included
in the variable cost of $15 per unit. But Teamwork is increasingly concerned that the T1
project may experience water shortage during the dry summer months if rainfall is
unexpectedly low in the area where T1’s operations are located.
Basing on the results in parts b) and c) and the other information provided, advise Teamwork
whether the T1 project should be launched. (10 marks)

(IMSE7015 – page 2 of 8)
Question 2

(a) Company K is considering two mutually exclusive projects, Project A and Project B.

Each project requires an initial investment for machines, and expects an identical net income
(after deducting expenses) in every project year. The projects’ cash flows are given in the
table below.

Project A Project B
Life of project (years) 2 3
Initial investment ($) 33,600 63,400
Annual net income ($) 21,600 To determine in
parts i. & ii. below
Salvage value at
project’s end ($) 0 7,270

The company’s required rate of return is 14% per year.

Required:
i) Determine the annual net income of Project B that will make the two projects equally
attractive. The study period is six years. Assume that the repeatability assumption is
applicable. (12 marks)

ii) If the study period is now two years, what annual net income of Project B will make
the two projects equally attractive? Explain your assumptions. (6 marks)
假设：⽤直线折旧法求出折旧，求出残值，然后计算

(b) Discuss the advantages and the limitations of using annual worth (AW) as the assessment
tool to evaluate projects. (10 marks)

(IMSE7015 – page 3 of 8)
Question 3

Synergy manufactures and sells high technology products. Sales are all on credit.

Your company had no previous business dealings with Synergy but is currently considering
whether to accept Synergy as a supplier to a new project.

Given on the next page are Synergy’s financial statements for the company’s most recent two
years, 20X2 and 20X1 (except that the 20X1 profit or loss statement is not available).

In addition, the following information is available.

1. On 31 Dec 20X2, Synergy issued new shares for $1,000,000 and received the $1,000,000 on
the same day. As the company had no immediate use for the money, it put the entire sum
into the bank.

2. The typical 20X2 financial ratios of companies in Synergy’s industry (20X2 industry
averages. See table below.
20X2
Industry
Averages
Current ratio 2.5
Acid test ratio 1.3
Debt to equity 0.9
Times interest earned 4.2
Gross profit percentage 24.5%
Return on total assets 16.1%
Average receivables days (days) 32
Inventory holding period (days) 60
Average payables days (days) 29

Required:

(a) Comment on Synergy’s financial situation in 20X2. (25 marks)

(b) Advise your company as to whether Synergy should be accepted as a supplier. (7 marks)

(IMSE7015 – page 4 of 8)
Question 3 (cont’d)
Statement of profit or loss
for the year to 31 December ($'000) 20X2
Sales 11,480
Cost of sales -9,210
Gross profit 2,270
Selling and administration expenses -1,273
Profit before interest and taxation 997
Interest expenses -207
Profit before taxation 790
Taxation -205
Profit after taxation 585

Balance sheet as at 31 December ($'000) 20X2 20X1

Current assets
Cash 1,216 625
Inventory 2,233 1,804
Accounts receivable 1,722 792
5,171 3,221
Non-current assets - Plant and equipment 3,646 3,315
Total assets 8,817 6,536

Current liabilities
Accounts payable 1,168 871
Bank borrowing 770 759
1,938 1,630
Non-current liabilities – Bank borrowing 1,972 1,584
Total liabilities 3,910 3,214

Equity
Issued share capital 3,200 2,200
Retained profit 1,707 1,122
4,907 3,322

Total liabilities and equity 8,817 6,536

(IMSE7015 – page 5 of 8)
Equations

Value under different i and N

(F/P, i%, N) (1+i)^N

(P/F, i%, N) 1/[(1+i)^N]

(F/A, i%, N) [(1 + i)^N − 1]

i

(A/F, i%, N) i
[(1 + i)^N − 1]

(P/A, i%, N) [(1 + i)^N − 1]

[i*(1 + i)^N]

(A/P, i%, N) [i*(1 + i)^N]

[(1 + i)^N − 1]

(IMSE7015 – page 6 of 8)
Present Value of $1
(P/F, i%, n)
Interest rate i
Periods (n) 10% 12% 14% 16% 18% 20%
1 0.90909 0.89286 0.87719 0.86207 0.84746 0.83333
2 0.82645 0.79719 0.76947 0.74316 0.71818 0.69444
3 0.75131 0.71178 0.67497 0.64066 0.60863 0.57870
4 0.68301 0.63552 0.59208 0.55229 0.51579 0.48225
5 0.62092 0.56743 0.51937 0.47611 0.43711 0.40188
6 0.56447 0.50663 0.45559 0.41044 0.37043 0.33490
7 0.51316 0.45235 0.39964 0.35383 0.31393 0.27908
8 0.46651 0.40388 0.35056 0.30503 0.26604 0.23257
9 0.42410 0.36061 0.30751 0.26295 0.22546 0.19381
10 0.38554 0.32197 0.26974 0.22668 0.19106 0.16151
11 0.35049 0.28748 0.23662 0.19542 0.16192 0.13459
12 0.31863 0.25668 0.20756 0.16846 0.13722 0.11216

Future value of $1
(F/P, i%, n)
Interest rate i
Periods (n) 10% 12% 14% 16% 18% 20%
1 1.10000 1.12000 1.14000 1.16000 1.18000 1.20000
2 1.21000 1.25440 1.29960 1.34560 1.39240 1.44000
3 1.33100 1.40493 1.48154 1.56090 1.64303 1.72800
4 1.46410 1.57352 1.68896 1.81064 1.93878 2.07360
5 1.61051 1.76234 1.92541 2.10034 2.28776 2.48832
6 1.77156 1.97382 2.19497 2.43640 2.69955 2.98598
7 1.94872 2.21068 2.50227 2.82622 3.18547 3.58318
8 2.14359 2.47596 2.85259 3.27841 3.75886 4.29982
9 2.35795 2.77308 3.25195 3.80296 4.43545 5.15978
10 2.59374 3.10585 3.70722 4.41144 5.23384 6.19174
11 2.85312 3.47855 4.22623 5.11726 6.17593 7.43008
12 3.13843 3.89598 4.81790 5.93603 7.28759 8.91610

Present value of an Annuity of $1 in Arrears

(P/A, i%, n)
Interest rate i
Periods (n) 10% 12% 14% 16% 18% 20%
1 0.90909 0.89286 0.87719 0.86207 0.84746 0.83333
2 1.73554 1.69005 1.64666 1.60523 1.56564 1.52778
3 2.48685 2.40183 2.32163 2.24589 2.17427 2.10648
4 3.16987 3.03735 2.91371 2.79818 2.69006 2.58873
5 3.79079 3.60478 3.43308 3.27429 3.12717 2.99061
6 4.35526 4.11141 3.88867 3.68474 3.49760 3.32551
7 4.86842 4.56376 4.28830 4.03857 3.81153 3.60459
8 5.33493 4.96764 4.63886 4.34359 4.07757 3.83716
9 5.75902 5.32825 4.94637 4.60654 4.30302 4.03097
10 6.14457 5.65022 5.21612 4.83323 4.49409 4.19247
11 6.49506 5.93770 5.45273 5.02864 4.65601 4.32706
12 6.81369 6.19437 5.66029 5.19711 4.79322 4.43922

(IMSE7015 – page 7 of 8)
Future value of an Annuity of $1 in Arrears
(F/A, i%, n)
Interest rate i
Periods (n) 10% 12% 14% 16% 18% 20%
1 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
2 2.10000 2.12000 2.14000 2.16000 2.18000 2.20000
3 3.31000 3.37440 3.43960 3.50560 3.57240 3.64000
4 4.64100 4.77933 4.92114 5.06650 5.21543 5.36800
5 6.10510 6.35285 6.61010 6.87714 7.15421 7.44160
6 7.71561 8.11519 8.53552 8.97748 9.44197 9.92992
7 9.48717 10.08901 10.73049 11.41387 12.14152 12.91590
8 11.43589 12.29969 13.23276 14.24009 15.32700 16.49908
9 13.57948 14.77566 16.08535 17.51851 19.08585 20.79890
10 15.93742 17.54874 19.33730 21.32147 23.52131 25.95868
11 18.53117 20.65458 23.04452 25.73290 28.75514 32.15042
12 21.38428 24.13313 27.27075 30.85017 34.93107 39.58050

The annuity that is the equivalent of a present value of $1

(A/P, i%, n)
Interest rate i
Periods (n) 10% 12% 14% 16% 18% 20%
1 1.10000 1.12000 1.14000 1.16000 1.18000 1.20000
2 0.57619 0.59170 0.60729 0.62296 0.63872 0.65455
3 0.40211 0.41635 0.43073 0.44526 0.45992 0.47473
4 0.31547 0.32923 0.34320 0.35738 0.37174 0.38629
5 0.26380 0.27741 0.29128 0.30541 0.31978 0.33438
6 0.22961 0.24323 0.25716 0.27139 0.28591 0.30071
7 0.20541 0.21912 0.23319 0.24761 0.26236 0.27742
8 0.18744 0.20130 0.21557 0.23022 0.24524 0.26061
9 0.17364 0.18768 0.20217 0.21708 0.23239 0.24808
10 0.16275 0.17698 0.19171 0.20690 0.22251 0.23852
11 0.15396 0.16842 0.18339 0.19886 0.21478 0.23110
12 0.14676 0.16144 0.17667 0.19241 0.20863 0.22526

The annuity that is the equivalent of a future value of $1

(A/F, i%, n)
Interest rate i
Periods (n) 10% 12% 14% 16% 18% 20%
1 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
2 0.47619 0.47170 0.46729 0.46296 0.45872 0.45455
3 0.30211 0.29635 0.29073 0.28526 0.27992 0.27473
4 0.21547 0.20923 0.20320 0.19738 0.19174 0.18629
5 0.16380 0.15741 0.15128 0.14541 0.13978 0.13438
6 0.12961 0.12323 0.11716 0.11139 0.10591 0.10071
7 0.10541 0.09912 0.09319 0.08761 0.08236 0.07742
8 0.08744 0.08130 0.07557 0.07022 0.06524 0.06061
9 0.07364 0.06768 0.06217 0.05708 0.05239 0.04808
10 0.06275 0.05698 0.05171 0.04690 0.04251 0.03852
11 0.05396 0.04842 0.04339 0.03886 0.03478 0.03110
12 0.04676 0.04144 0.03667 0.03241 0.02863 0.02526

— End of Paper —
(IMSE7015 – page 8 of 8)