University of Toronto
CHE 374
University of Toronto
Faculty of Applied Science and Engineering
Final Examination, December 14th 2015
Third Year – Engineering Science
CHE374H1 F – Economic Analysis and Decision Making
Calculator Type 1
Exam Type D
Examiner – Yuri Lawryshyn
Aids allowed: Text book, one (1) 8.5” x 11” aid sheet, any type of calc
...[Show More]
University of Toronto
Faculty of Applied Science and Engineering
Final Examination, December 14th 2015
Third Year – Engineering Science
CHE374H1 F – Economic Analysis and Decision Making
Calculator Type 1
Exam Type D
Examiner – Yuri Lawryshyn
Aids allowed: Text book, one (1) 8.5” x 11” aid sheet, any type of calculator.
|
Question Number
|
Marks
|
|
1
|
8
|
|
2
|
7
|
|
3
|
4
|
|
4
|
8
|
|
5
|
8
|
|
6
|
8
|
|
7
|
8
|
|
Total
|
51
|
Answer all questions.
You must submit your aid sheet with your name and group number on it.
Page 2 of 12
Question 1 (8 marks)
A 3-D printer has a useful life of 7 years and an initial selling price of $23,000. The salvage value after 7 years is $4,000. The market value of a 3-year old printer is $12,000. Calculate the book value after 4 years and the depreciation amount for the 5th year using the following depreciation methods:
a) Straight line
b) Declining balance
c) Sum of digits
d) Unit of production based on the following expected production of 3-D objects:
|
Year
|
Production (units)
|
|
1
|
50
|
|
2
|
60
|
|
3
|
40
|
|
4
|
20
|
|
5
|
10
|
|
6
|
15
|
|
7
|
5
|
Page 3 of 12
Question 2 (7 marks)
LCJ is a multi-faceted specialty manufacturer of components. LCJ is considering producing and selling heat exchanger tubes used in high efficiency condensing furnaces. The cost of the stateof-the-art equipment to take on this new business would be $10 million (assume a first cost on January 1, 2016) and the salvage value would be $1 million after 10 years, ending in 2025. LCJ foresees one of two sales strategy options:
1) LCJ could keep its price high and see its cash-flow from sales be $3 million in the first
year (2016), then $5 million for the remaining 9 years (2017-2025), or
2) LCJ could come in with a low price in an effort to gain market share, where, in this case,
the first year cash-flows from sales would be estimated to be $2.5 million (i.e. in 2016),
then $4 million in 2017 and growing at 5% each year afterwards up to and including
2025.
All estimates are in real dollars (as of January 1, 2016), all cash-flows are stated on a before tax basis and LCJ does not want to account for any future cash-flows resulting from this business opportunity. Given the data below, calculate the total present worth of the two alternatives (including asset purchase and tax benefits) and provide a recommendation.
• LCJ tax rate = 20%
• CCA rate for the automation process = 15%
• Expected inflation rate = 2%
• LCJ real MARR (after tax) = 10%
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