ENGINEERING MANAGEMENT 3000

Question 1

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END OF SEMESTER EXAM SAMPLE QUESTIONS

Semester 2 2015

[20 MARKS]

A project team has successfully completed a prototype machine and ready

for investment. Your help is required to work out the following:
(a)

What is the after-tax cost of debt under each of the following: a) Kd interest
rate of 12% and tax rate 25%, b) Kd interest rate of 14% and tax rate 34%,
[5 Marks]
and c) Kd interest rate of 15% ant tax rate 40%?

(b)

The estimated beta () of the firm is 1.7. The market return (rm) is 14% and the
[5 Marks]
risk-free (rf) rate is 7%. What is the cost of equity?

(c)

The cost of equity is 22%, the before tax cost of debt is 13%, and the marginal
tax rate is 40%. The capital structure of the firm calls for a debt to capital ratio
of 45%. Calculate the Weighted Average Cost of Capital (WACC). [5 Marks]

(d)

The company wants to issue stock to finance investment for producing a new
product. The annual return to the market portfolio is expected to be 15% and the
current risk-free interest rate is 5%. The expected return from the production line
is 20% annually. What is the maximum value that would induce the firm to
issue the stock
?
[5 Marks]

Question 2

[20 MARKS]

An engineering company has expected incomes from their established product as

shown by the solid lines in Figure Q2. The company expects further investments for
improvements on the product as shown by the broken lines. What is the value of Y at
the beginning (year 0) that makes the inflow series equal to the outflow series at an
interest rate of 8% compounded annually?
[20 MARKS]
$2.5m
$2m

$2m

$1m

$1m

$1m

$1.5m $1.5m $1.5m $1.5m

2Y
Figure Q2 Cash Flow diagram of the engineering firm
Semester 2 2015

ENGINEERING MANAGEMENT 3000

Question 3

Page 2 of 3

END OF SEMESTER EXAM SAMPLE QUESTIONS

[20 MARKS]

A utility engineering company is considering expanding their operations in one of the

four possible suburbs of a large city. The expected costs and probability factors of
investments depends on the size and ease of the constructions in respective suburbs as
tabulated in Table Q4. The expected returns are also given.
Table Q3
Lowest cost ($m)
Lower cost ($m )
Medium cost ($m)
High cost ($m)
RETURNS ($m)

Suburb 1
$121m (0.2)
$135m (0.2)
$142m (0.3)
$151m (0.3)
$172m

Suburb 2
$115m (0.1)
$123m (0.3)
$134m (0.3)
$148m (0.3)
$170m

Suburb 3
$132m (0.1)
$137m (0.2)
$140m (0.3)
$145m (0.4)
$167m

Suburb 4
$111m (0.3)
$120m (0.2)
$125m (0.2)
$138m (0.3)
$168m

Form a decision tree and select the most economical suburb to invest. [20 MARKS]
Question 4

[20 Marks]

Briefly describe the following:

(a)

List and briefly explain five stages of projects.

[5 Marks]

(b)

Explain project Life Cycle.

[5 Marks]

(c)

What sort of skills would you expect from a project manager?

[5 Marks]

(d)

What are the differences between project management,

process management and production management ?

[5 Marks]

Question 5

[20 Marks]

A team of employees are preparing a new proposal for an expansion project. Answer
the following:
(a)

Computer workstation for process control cost $200,000 with a salvage value of
$15,000 at the end of five years. Calculate the annual depreciation allowances
and the resulting book values using the double-declining balance method.
[5 Marks]

(b)

A packaging machine costs $190,000 with a salvage value of $10,000. In its

lifetime, it will package 300,000 items. Calculate the allowed depreciation
[5 Marks]
amount on the day that it packs the 110,000th item.

(c)

A backup diesel generator costs $120,000 and has a useful operating life of
100,000 hours or 15 years. The expected salvage value of the generator is
$20,000. The generator operated for 4,000 hours in the first year and 6,000
hours in the second year. Determine the depreciation using the straight-line
method for the first year and for the second year based on the operating hours.
Explain the financial implications if the company adopted the double-declining
balance method to calculate depreciation on a yearly basis.
[10 Marks]
Semester 2 2015

ENGINEERING MANAGEMENT 3000

Question 6

Page 3 of 3

END OF SEMESTER EXAM SAMPLE QUESTIONS

[20 MARKS]

Laser Sight Centre wants to install a new operating theatre in their surgery.
The anticipated activities and the durations of activities for the installation are
given in Table Q4.1.

Table Q4.1

(a)
(b)
(c)
(d)

Activity Predecessors Weeks

A
5
B
6
C
4
D
A
4
E
B
5
F
C
7
G
D,E
2
H
E
3
I
B,F
5
J
I
4
K
G,H,J
7
Draw the AOA network.
Generate possible paths and calculate their duration.
Calculate the slacks for all paths and find the critical path.
Draw a Gantt chart.

[5 Marks]
[5 Marks]
[5 Marks]
[10 Marks]

Semester 2 2015

END OF EXAMINATION PAPER

ENGINEERING MANAGEMENT 3000

A1//
a)

Page 1 of solutions

SOLUTIONS

Semester 2 2015

END OF SEMESTER EXAM SAMPLE

QUESTIONS

After tax cost of debt

Kd = K1 (1-Tc) = 12% (1-25%) = 9%
Kd = K1 (1-Tc) = 14% (1-34%) = 9.24%
Kd = K1 (1-Tc) = 15% (1-40%) = 9%

b)

Ke = Rf + (Rm-Rf) = 7% + 1.7 (14%-7%) = 18.9%

c)

WACC = (E/V) K e + (D/V) Kd (1-Tc) = (0.55) 22% + (0.45) 13% (1-40%) = 15.61%

d) Ke = Rf + (Rm-Rf) = 20% = 5% + (15%-5%)

Giving = 1.5

A2//

(1.08) 8 1
[(1.08) 4 1]
2Y Y
1
.
5

8
3
2.5
0.08 (1.08) 4
0.08 (1.08) 2 1 [(1.08) 1] 2

3
4
4
1.08
0.08 (1.08)
(1.08)
1.08
(1.08) 9

2 X 5.747 X
7.173 X 2 2.5771 1.47 3.65175 1.25062 10.9495
1.08
Thus giving X=$1,526,484.40

Page 2 of solutions

ENGINEERING MANAGEMENT 3000

END OF SEMESTER EXAM SAMPLE QUESTIONS

A3//

$121m
$135m

0.2
0.3

$172m

0.2
0.3

$142m
$151m
$111m

0.3

Sub 1

$168m

Sub 4

$138m
$132m

$167m
0.1

Sub 2

$125m

0.2

0.3
Sub 3

$120m

0.2

$137m

0.2
0.3

$140m

0.4

$145m

$170m
0.1

$115m
0.3
0.3

0.3

$123m
$134m
$148m

Now Calculate the tree values:

ENGINEERING MANAGEMENT 3000

Page 3 of solutions
END OF SEMESTER EXAM SAMPLE QUESTIONS

Question 3 continued.....

Suburb 1
0.2 (probability of lowest cost) $121m
0.2 (probabilitylow cost) $135m
0.3 (probability medium cost) $142m
0.3 (probability high cost) $151m
TOTAL

24.2m
27.0m
42.6m
45.3m
139.1m

Gain is:
172m-139.1 =
$32.9m

Suburb 2
0.1 (probability of lowest cost) $115m
0.3 (probabilitylow cost) $123m
0.3 (probability medium cost) $134m
0.3 (probability high cost) $148m
TOTAL

11.5m
36.9m
40.2m
44.4m
133.0m

Gain is:
170m-133.0 =
$37.0m

Suburb 3
0.1 (probability of lowest cost) $132m
0.2 (probabilitylow cost) $137m
0.3 (probability medium cost) $140m
0.4 (probability high cost) $145m
TOTAL

13.2m
27.4m
42.0m
58.0m
140.6m

Gain is:
167m-141.8 =
$26.4m

Suburb 4
0.3 (probability of lowest cost) $111m
0.2 (probabilitylow cost) $120m
0.2 (probability medium cost) $125m
0.3 (probability high cost) $145m
TOTAL

33.3m
24.0m
25.0m
41.4m
123.7m

Gain is:
168m-125.8 =
$44.3m

Hence choose Suburb 4 as this has the greatest gain.

Page 4 of solutions

ENGINEERING MANAGEMENT 3000

END OF SEMESTER EXAM SAMPLE QUESTIONS

A4//
a) Five stages of projects

1. Conceptual Phase
Ideas are proposed, developed and evaluated
Practical considerations eg technical feasibility and sources of funding are
highlighted
2. Feasibility phase (Study Phase)
Ideas are elaborated. One of the idea or direction is selected and acted upon
3. Design Phase
The selected path is put in action for design and construction
4. Production (Execution, Implementation Phase)
The selected system is prototyped and produced
5. Operations Termination phase
The system is delivered and commissioned
Project management is practiced in all phases of project life cycle
CONCEPT FEASIBILITY DESIGN

%Completion
100%

0%

Start

PRODUCTION OPERATIONS

Finish

Time

Project Initiation.
A project manager is selected
A project team is put together
Resources are set up
A work program is organised
Mid-Life
Momentum builds quickly
Rapid Progress is made
Progress leads to less uncertainty about final goals Conclusion.
Conclusion
Slow progress during Integration of project modules
Uncertainty about teams future leads to slow termination
Project group may be maintained for the next project

ENGINEERING MANAGEMENT 3000

Page 5 of solutions

Question 4 continued.....
c)

d)

A5//
a)

END OF SEMESTER EXAM SAMPLE QUESTIONS

Skills and attributes of a project manager can be listed as:

A leader
Outcome oriented
Positive approach
Energetic
Enthusiastic
Friendly
Motivator of people
Social sensitivity to other people
Concerned for people
Win/win focus; collaborative non-confrontational
Seeks new ideas and approaches
Drive (make it happen)
Thorough
Organiser and delegator
Proud of the work
Learns from past experiences and makes improvements.
Process Management: ONE product flows along a process line continuously.
Production Management: The product moves along a production line in
batches
Project Management: UNIQUE or ONE-OFF PRODUCTION. Non Repetitive
Double-declining balance method
B0= $200k
B1= $200k - 2$200k/5 = $120k
B2= $120k - 2$120k/5 = $72k
B3= $72k - 2$72k/5 = $43.2.6k
B4= $43.2k - 2$43.2k/5 = $25.84k
B5= $25.84k - 2$25.84k/5 = $15.5k
Since the salvation value is $15,000 maximum depreciation in year five is $0.5k

b)
c)

Depreciation expense per mile = (190k-10k)/300k = $0.60 per item

D110k = $0.6110,000 = $66,000
D4k = [(120k-20k)/100k] 4,000 = $4,000
D5k = [(120k-20k)/100k] 6,000 = $6,000 If
If you use double decline method
Dyear1 = 120k-(2$120/15) = $104,000

Depreciation is $16,000 much

higher than depreciation on item base

Dyear2 = 104k-(2$104k/15k) = $90,133.3

Depreciation is $13,666.7

Machine is inefficiently used in the first two years therefore it may better better to
adopt depreciation based on items produced to reserve savings for the later years.

Page 6 of solutions

ENGINEERING MANAGEMENT 3000

END OF SEMESTER EXAM SAMPLE QUESTIONS

A6//

A,5
1

B,6

D,4

G,2

EDummy
E,5

H,3

BDummy
C,4

F,7

K,7

10

J,4
7

I,5

Table 4.1 Critical path analysis

Sequence Number
Event sequence
1
1-2-5-9
2
1-3-6-9
3
1-3-7-8-9

Activity sequence
A,D,G,K
B,E,H,K
B,Bdum,I,J,K

Sum
18
21
22

Slacks
10
6
5

4
5

B,E,Edum,G,K
C,F,I,J,K

20
27

1-3-6-5-9
1-4-7-8-9

The critical path is C,F,I,J,K since it has the longest route of 27 weeks.