Final

Question 1

How do you select between alternatives when a present or analysis is used?

Answer 1

You use the MARRRI and solve for present worth a single project is economically justified if present worth is greater than than zero and you select the alternative with the largest present worth

Question 2

How do you evaluate projects or compare alternatives when capitalized cost is used

Answer 2

This is present worth with the service period of infinity. You use the MARR or I and your Cost needs to be greater than zero for single project to be economically justified select the alternative with the largest capital.

Question 3

How do you select an alternative when using future worth?

Answer 3

Do you use an MARR or interest rate and you calculate the future worth a single project is economically justified a future worth is greater than zero and you select the alternative with the largest future worth.

Question 4

How do you evaluate projects when using annual worth?

Answer 4

You use the MARR or interest rate and you look for a project with an annual worth greater than zero for it to be economically justified then you select the alternative with the largest annual worth.

Question 5

Return on invest

Answer 5

ROI represents an alternative approach to comparing alternatives and in theory it can be used instead of the approaches covered earlier in the course

Question 6

External rate of return

Answer 6

If you have to discard both values when using an ROR

Question 7

How did the conclusion recommendations change based on approach?

Answer 7

All approaches will lead to the same conclusion or recommendation provided that the least common multiple method rather than the study period method is used

Question 9

What are the issues with ROI?

Answer 9

In some cases, ROI will give more than one potential numerical result which may differ from other methods. That’s an engineering economic analysis. The preferred methods are not ROI. All is ideally used to supplement where decision makers are specifically interested in understanding ROI, but it is not recommended as the primary basis for making decisions on a project or comparing alternatives.

Question 10

Rate of return

Answer 10

ROR is the rate paid on the unpaid balance of borrowed money for example a loan at $1000 and an interest rate of 10% is to be repaid and equal installments over four years. Each of the four years the interest rate is applied to the unpaid balance of borrowed money.

Question 11

Internal rate of return

Answer 11

IROR. The interest rate i* that makes present worth annual worth future worth of a cash flow series 0

Question 12

How does RoR different from present worth capitalized cost future worth and annual worth?

Answer 12

The four methods use cash flows and MARR. Whereas ROR uses one input, which is cash flows and does not consider an interest rate. Single projects are economically justified if I is greater than MARR.

Question 13

Using ror

Answer 13

ROR assumes any net positive cash flows are reinvested at the interest rate. For projects where I is substantially different to MARR reinvestment at I may be unrealistic. The calculation of eye is more labor-intensive than the calculations for other methods. Non-conventional cash flow can kneeled multiple eye values and then some cases ROR analysis does not lead to a usable eye and it is necessary to resort to EROR.

Question 14

Recommendation aboutRoR

Answer 14

It is not recommended as the primary method for analysis. It should only be used supplementary.

Question 15

Incremental cash flow

Answer 15

We need to consider the difference in cash for every year in our evaluation.

Question 16

Incremental cash flow

Answer 16

= cash flow larger than initial investment-cash flow smaller than initial investment

Question 17

Logic for incremental ROR analysis

Answer 17

Find i* for both alternatives. Is that greater than the MARR? if no reject alternatives. If yes, find the incremental change or Delta eye to determine whether that additional expense can be justified.

Question 18

What is the incremental cash full capture?

Answer 18

How the alternative with the higher initial investment differs from the alternative with the lower initial investment

Question 19

Incremental ROR for more than two alternatives

Answer 19

1. Order alternatives from smallest to largest initial investment.
2. Calculate i* of the CF and eliminate all values lower than the MARR. Remaining alternative with lowest cost is the defender.
3. Determine CF between defender and challenger, which is the next lowest alternative. Set up incremental RR relations using present worth annual worth or future worth.
4. Calculate. Delta i* on incremental CF using factors or IRR function.
5. If. Delta i* is greater than MARR eliminate defender challenger becomes new defender against next alternative if high is less than MIRR remove challenger defender remains alternative remains

Question 20

Public sector project

Answer 20

Is a product service or system used financed and owned by the citizens of a government level. The project is designed and constructed to serve citizens for the public good at no profit.

Question 21

Public sector project terminologies

Answer 21

C-cost estimated expenses to government unit
B-benefits, estimated advantages to be experienced by the public
D-benefits, undesirable consequences to public
i-discount rate term used instead of interest rate

Question 22

The point or perspective on public projects

Answer 22

Must be determined before cost for benefit or dis benefit estimates are made their typically several potential viewpoints and the perspective taken may result in cash flows being classified differently

Question 23

Types of contracts for public sector projects

Answer 23

Contractor does not share in the project risk or contractor shares in project risk

Question 24

Contractor does not share and project risk

Answer 24

Fixed price contract lump sum payment cost reimbursable contract

Question 25

Contractor shares and project risk

Answer 25

Design build projects contractors take on more than one function from the design staged operating stage. Design build finance maintain operate projects requires a contractor to perform all of the activities with collaboration and approval of the owner.

Question 26

B/C analysis of a single project approaches

Answer 26

Conventional B/C ratio or modified B/C ratio

Question 27

Conventional B/C ratio

Answer 27

B/C = B-D /C

Question 28

Modified B/C ratio

Answer 28

B/C = B-D-M&O costs/ Initial investment -savage value

Question 29

How to determine if a B/C project is economically justified

Answer 29

FB/C is greater than or equal to one

Question 30

Incremental B/C analysis for two mutually exclusive alternatives

Answer 30

Almost the same as an anchor mental analysis alternatives are ordered by increasing equivalent total costs. Errors and B/C can occur if alternatives are ordered by cost first or initial investment only.

Question 31

Steps for incremental B/C analysis for mutually exclusive alternatives

Answer 31

1) order alternatives by equivalent cost. For this illustration, we assume X has a lower annual worth cost calculate B/C for comparison X versus DN. If B/sees less than one keep the option and compare why versus DN if B/C is greater than or equal to one X and incrementally compare why versus X.calculate B/CY for comparison of if it’s greater than one select why if it’s less than one select X

Question 32

Incremental B/C analysis for multiple alternatives

Answer 32

Determine equivalent total cost for each alternative using present worth annual worth or future worth. Order alternatives by increasing equivalent total cost smallest first. Determine B and D for each alternative for direct benefits. If only direct benefits are estimated calculate B/C for each alternative and eliminate all with values less than one.calculate change and see change in B and change in D between two order alternatives. Calculate change and B divided by change and see if it’s greater than one higher cost alternative becomes defender to new challenger repeat until one alternative remains.

Question 33

Profitability index

Answer 33

Used primarily for revenue projects and private sector were the benefits are not considered. Close relation to modified B/C ratio since revenue in the private sector are about the same as in the public sector. The PI is also called the present worth index PWI and is often used to assist in the selection of independent projects on Budget is limitedgreater than one project is economically justified if PI is less than one it is not acceptable

Question 34

Cost effectiveness analysis

Answer 34

Combines monetary cost estimates with non-monetary benefit estimates using a measure of worth that is termed cost effectiveness measure or cost effectiveness ratio useful for service sector project where it’s difficult to estimate the economic benefits.

Question 35

Service sector project

Answer 35

Our systems or processes that provide services to individuals, businesses or government units. They primarily involve the intangibles of the system or process not the physical facilities.

Question 36

Cost effectiveness ratio

Answer 36

CER. Smaller CER values are better for the same level of effectiveness.

Question 37

Break even analysis and payback analysis

Answer 37

Complementary analysis in engineering economics so they do not replace present or future worth annual worth based analysis instead, they complement by providing additional insight that is not provided previously

Question 38

Benefits of breaking even a payback analysis

Answer 38

Finding the number of units that need to be produced a facility for the cost to equal the revenue. This is a break even analysis for one project. Deciding whether to outsource production typically a higher cost per unit with low to no fixed cost or produce in house. This is break even an ass for two projects. Determining what point and time the revenue is generated by an investment will equal the initial investment. this is a payback analysis for one project and determining the number of units that need to be produced in facility to achieve payback by specified moment and time current break even and payback analysis .

Question 39

Symbols for payback and break even analysis

Answer 39

Qbe- break even quantity for one parameter/decision variable FC- fixed cost i.e. cost that does not vary as the number of units produced ferries VC total variable cost i.e. the total cost that vary in line with the number of units produced varies- variable cost per unit produced R-total revenue r-revenue per unit produced np-payback period

Question 40

Introduction to break even analysis and payback cost

Answer 40

They do not require specialized formulas. Instead we perform based on general analytical skill set formulating an equation that contains a variable to represent an unknown value and solving for that variable and understanding of engineering, economic analysis concepts.

Question 41

Reasons why I replacement study is necessary

Answer 41

One of the most common and important issues and industrial practices is that a replacement or retention of an asset process or system that is currently installed. The fundamental question answered by replacement/retention study about a current installed system is should the system be replaced now or later if the system should be replaced later, when should it be replaced?annual and replacement studies

Question 42

Replacements study terminology basics

Answer 42

Defender D Challenger C Market value MV Economic service life n Defender first cost Challenger first cost Non-owners viewpoint Study period or planning horizon

Question 43

Defender

Answer 43

D. Currently installed asset.

Question 44

Challenger

Answer 44

See. Best potential replacement for defender.

Question 45

Market value

Answer 45

MV. Value of defender is sold on open market.

Question 46

Economic service life

Answer 46

n. Number of years at which lowest annual worth of cost occurs.

Question 47

Defender first cost

Answer 47

Current MOV of defender used as first cost of D in analysis

Question 48

Challenger first cost

Answer 48

Cost to recover for a challenger usually it’s P value

Question 49

Non-owner viewpoint

Answer 49

Outsider viewpoint for objectivity

Question 50

Study period are planning horizon

Answer 50

Specified time period for replacement study

Question 51

Replacement study basics

Answer 51

The services provided by each alternative are required for the indefinite future. The challenger is the best available alternative to replace the defender. Once the challenger has replaced the defender, the challenger can be used for successive life cycles with all costs repeated similar to applying the LCM for an alternative with a shorter period of service. The cost estimates for every lifecycle of the defender and challenger will be the same as in their first cycle.

Question 52

Replacement study basics

Answer 52

Some costs are ignored as they are not relevant to this decision that must be made. The non-owner of viewpoint is employed assumes that service provided by the fender can be purchased by making an initial investment that is equal to the market value of the defender, also known as the opportunity cost approach, the first cost of the challenger can be calculated

Question 53

Replacement study basics

Answer 53

The formula that is used to determine the cost of the challenger ensures that the market value of the defender is not included in cash flows that are associated with the challenger. Instead, this market value forms part of the cash flow of the defender are a portion of this way, because it is highly likely that the challenger and the defender have different end values, when comparing to alternatives who want to spread the cash flow associated with the market value over the remaining service of the defender service of the challenger

Question 54

What are the two types of replacement studies?

Answer 54

The study period is specified and the study period is not specified i.e. indefinite future

Question 55

Setting up a replacement study over a specified.

Answer 55

Ensure that we have a solution in place for the specified period of study one that defenders life is shorter than the study. Another solution needs to replace it for the remainder of the study. Most likely the challenger. Capital recovery is calculated appropriately when the challengers life is longer than the study. Period, we need to use an appropriate and to calculate the capital recovery

Question 56

Economic service life

Answer 56

Number of years in at which the equivalent annual worth of costs is the minimum

Question 57

Keynotes for economic service life ESL

Answer 57

Capital recovery decreases as more years are considered. Annual worth of AOC increases as more years are considered. ESL is located at the lowest value of the sum.

Question 58

Incorporating tax and replacement analysis

Answer 58

Performing replacement analysis on after tax cash flows has beyond the scope of the course however, two aspects are often relevant to replacement analysis have a financial impact that is only observed when and after tax analysis is performed that is depreciation and is resulting from replacement trade-in value

Question 59

Cost of capital

Answer 59

The cost of capital is the weighted average interest rate paid based on the proportion of investment capital from debt and equity sources

Question 60

MARR

Answer 60

The MARR is set relative to the cost of capital MARR can be set for one project a series of projects or the entire company and MAR our value changes overtime due to changing circumstances it’s a reasonable rate of return established for the evaluation and selection of alternatives. The project is not economically viable unless it is expected to return at least the MAR.

Question 61

Debt capital

Answer 61

Represents boring from outside the company

Question 62

Debt financing

Answer 62

Includes boring via bonds loans and mortgages. The lender does not share in the profits made using the debt funds, but there is risk in that the borrowed or could default on part or all of the borrowed funds.

Question 63

Equity capital is corporate money comprised of the funds of owners and retained earnings. Owners funds are further classified as money obtained from the scale of stocks or owners capital for private nonstop. Issuing companies retained earnings or funds previously retained in the corporation for capital investment.

Question 64

Impact of tax rates on MARR

Answer 64

If corporate taxes are rising pressure to increase the MRR is present use of after tax analysis may assist in eliminating this reason for a fluctuating MARR since accompanying business expenses will tend to decrease taxes and after tax cost

Question 65

D-E mix and weighted average coc

Answer 65

The equity identifies percentages of debt and equity financing. It can be calculated for project several projects or for an organization. The WAC is determined in line with the DE mix as follows WAC is equal to the equity fraction times the cost of equity plus step fraction times the cost of debt most firms operate over range ofmixes

Question 66

Debt financing

Answer 66

Includes boring through loans or issuance of bonds bond, dividends and loan interest payments are tax deductible as corporate expenses. This reduces the income base on which taxes are calculated with end result of less taxes paid. Therefore the cost of that capital is reduced because there is annual tax savings.

Question 67

Cost of debt capital

Answer 67

The annual tax savings linked to the cost of debt financing is calculated as follows. Tax savings equals expenses times effective tax rate. And the equation the effective tax rate is a combination of federal state and local tax rates. They are reduced to a single number to simplify computations this tax saving is subtracted from corporate expenses in order to calculate the net cash flow.

Question 68

Parameter

Answer 68

A variable or factor for which an estimated or stated value is necessary

Question 69

Sensitivity analysis

Answer 69

And analysis to determine how measure of worth changes when one or more perimeters fairies over selected range of values

Question 70

General procedure for sensitivity analysis

Answer 70

One select parameter to analyze. Assume independent with other parameters. Two select probable range and increment. Three select measure of worth. Four calculate measure of worth values. Five interpret results graph of measure versus parameter helps understand sensitivity.

Question 71

Sensitivity of several parameters

Answer 71

Sensitivity of several parameters for one alternative are better understood when graphed as percent change from the most likely estimate for each perimeter versus measure of worth

Question 72

Three estimate sensitivity analysis

Answer 72

Applied when selecting one ME alternative from two or more. For each parameter to be analyze, provide three estimates of pessimistic most likely and an optimistic estimate.

Question 73

Multi attribute considerations

Answer 73

The starting point is to find the set of attributes that will be taken into consideration. Three principles that generate a higher quality of attributes, no missions, no redundancies and decompose ability. Next normalized set of weights is defined so that the sum is equal to one then an evaluation measure is defined for each attribute, then rate each proposal based on each attribute using applicable evaluation measures normalize the evaluation of all attributes retain a set of data where each attribute is evaluated using a consistent scale take a moment to consider complete the proposals based on

Question 74

The weight some approach

Answer 74

The weighted some approach indicates which are recommended proposal should be as important to realize that a recommended based on a multi criteria decision and an analysis approach is much less clearcut than a recommendation purely based on financial measures of fourth

Question 75

Normalization approaches

Answer 75

Divide by the largest value, range, normalization, Z scores, or dividing by the total

Question 76

Range normalization, and the z scores

Answer 76

Proportionality is not maintained

Question 77

Three problematic characteristics of weighted sum

Answer 77

Ranking reversal due to change and normalization approach, rank reversal due to removal of unwanted candidates, and all rounders overlooked in favor of unbalanced candidates

Question 78

Weighted product approach

Answer 78

As an alternative to the weighted summer approach awaited product approach can be applied. The advantage of weighted product approach is its dimension list. There are no need for normalization of a valuation measures. Different attributes can be measured on different scales. Rescaling has no effect on the outcome effect of raiders rating inconsistently is dressed more effectively and it’s less susceptible to the line trap.