CARLETON UNIVERSITY

Department of Civil and Environmental Engineering

Engineering Economics – ECOR 3800 Section B

ASSIGNMENT 2

March 5, 2019

Due date: March 12, 2019 at 4:00 pm

Please put in Civil Engineering Department ECOR 3800 Section B Slot

Student Name:_______________________________________________

Student I.D.__________________________________________________

GROUP: A, B

Notes: 1. There will be a late submission penalty of 20% per day

2. If you don’t circle your Group or you circle the wrong Group there would be a
penalty of 10%
 Engineering Economics – ECOR 3800 Section B, Winter 2019

Problem 1.

Movit Manufacturing has the following alphabetized income statement and balance sheet
entries from the year 2016. Construct an income statement and a balance sheet from the
information given.

Accounts payable $7 500

Accounts receivable 15 000
Accrued wages 2850
Cash 2100
Common shares 150
Contributed capital 3000
Cost of goods sold 57 000
Current assets ?
Current liabilities ?
Deferred income taxes 2250
Depreciation expense 750
General expense 8100
GICs 450
Income taxes 1800
Interest expense 1500
Inventories 18 000
Land 3000
Less: Accumulated depreciation 10 950
Long-term assets ?
Long-term bonds 4350
Long-term liabilities ?
Mortgage 9450
Net income after taxes 2700
Net income before taxes 4500
Net plant and equipment 7500
Net sales 76 500
Operating expenses ?
Owners’ equity ?
Prepaid expenses 450
Selling expenses 4650
Total assets 46 500
Total current assets 36 000
Total current liabilities 15 000
Total expenses 15 000
Total liabilities and owners’ equity 46 500
Total long-term assets 10 500
Total long-term liabilities 16 050
Total owners’ equity 15 450
Working capital loan 4650

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Engineering Economics – ECOR 3800 Section B, Winter 2019

Balance Sheet for Movit Manufacturing:

As of Dec. 31, 2016 (in $000s)

Assets

Current assets
Cash 2 100
GICs 450
Accounts receivable 15 000
Inventories 18 000
Prepaid expenses 450
36 000
Total current assets

Long-term assets
Land 3 000
Plant and equipment 18 450
Less accumulated 10 950
depreciation
Net plant and equipment 7 500
Total long-term assets 10 500
46 500
Total assets

Liabilities

Current liabilities
Accounts payable 7 500
Accrued wages 2 850
Working capital loan 4 650
Total current liabilities 15 000
Long-term liabilities
Deferred income taxes 2 250
Mortgage 9 450
Long-term bonds 4 350
Total long-term liabilities 16 050

Owners’ Equity
Common shares 150
Contributed capital 3 000
Retained earnings 12 300
Total owners’ equity 15 450
Total liabilities and owners’ 46 500
equity

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Engineering Economics – ECOR 3800 Section B, Winter 2019

Income Statement for Movit Manufacturing:

Month ending Dec. 31, 2016 (in $000s)
Net sales 76 500
Cost of goods sold 57 000
Gross profit 19 500

Operating expenses
Selling expenses 4 650
Depreciation expense 750
General expense 8 100
Interest expense 1 500
Total expenses 15 000

Net income before taxes 4 500

Income taxes 1 800
Net income after taxes 2 700

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 Engineering Economics – ECOR 3800 Section B, Winter 2019
Problem 2.

Calculate for Movit Manufacturing in Problem 1 the financial ratios listed in the table
below. Using these ratios and those provided for 2014 and 2015, conduct a short analysis
of Movit’s financial health.

Movit’s financial ratios 2016 2015 2014

Current ratio 1.90 1.60
Acid test 0.90 0.75
Equity ratio 0.40 0.55
Inventory turns 7.00 12.00
Return-on-assets ratio 8% 10%
Return-on-equity ratio 20% 18%

Movit’s financial 2016 2015 2014

ratios
Current ratio 2.40 1.90 1.60
Acid test 1.17 0.90 0.75
Equity ratio 0.33 0.40 0.55
Inventory turns 4.25 7.00 12.00
ROA 6% 8% 10%
ROE 17% 20% 18%

While Movit appears to be solvent, with an increasing current ratio and acid test values, their equity
ratio has been dropping, as have their inventory turns and return on total assets. This could
be due to a drop in sales effectiveness over the period (drop in turns) and an increase in debt
financing (drop in equity ratio and return on total assets). Despite the solvency, there is some
concern about the degree to which Movit relies on debt and the apparent drop in return on total
assets and inventory turns. One reason for these changes could be increased borrowing coupled
with lower sales volumes. Comparative income statements and balance sheets for the period
would be useful in getting to the bottom of what is going on with Movit.

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 Engineering Economics – ECOR 3800 Section B, Winter 2019

Problem 3

Northwest Aerocomposite manufactures fibreglass and carbon fibre fairings. Its largest
water-jet cutter will have to be replaced some time before the end of four years. The old
cutter is currently worth $49 000. Other cost data for the current and replacement cutters
can be found in the tables that follow. The MARR is 15 percent. What is the economic life
of the new cutter, and what is the equivalent annual cost for that life? When should the
new cutter replace the old?

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 Engineering Economics – ECOR 3800 Section B, Winter 2019
Reading from the first table, the challenger’s economic life is 5 years, with an EAC of $39 452

EAC EAC EAC

Year Salvage O&M Capital O&M Total
0 90000
1 72000 12000 31500 12000 43500
2 57600 14400 28570 13116 41686
3 46040 17280 26159 14315 40475
4 36864 20736 24141 15601 39742
5 29491 24883 22474 16978 39452
6 23593 29860 21086 18449 39536
7 18874 35832 19927 20020 39947
8 15099 42998 18957 21694 40651
9 12080 51598 18142 23476 41618

For the defender:

EAC EAC EAC

Year Salvage O&M Capital O&M Total
0 49000
1 36500 17000 19850 17000 36850
2 19875 21320 20897 19009 39906
3 15656 26806 16952 21255 38207
4 6742 33774 15813 23762 39575

Keep the defender for 3 more years before replacing it by the challenger. Note that the
defender becomes undesirable over a 2-year period, but for a 3 year period is again
preferred.

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 Engineering Economics – ECOR 3800 Section B, Winter 2019

Problem 4.

Nico has a 20-year-old oil-fired hot air furnace in his house. He is considering replacing it
with a new high-efficiency natural gas furnace. The oil-fired furnace has a scrap value of
$500, which it will retain indefinitely. A maintenance contract costs $300 per year, plus
parts. Nico estimates that parts will cost $200 this year, increasing by $100 per year in
subsequent years. The new gas furnace will cost $4500 to buy and $500 to install. It will
save $500 per year in energy costs. The maintenance costs for the gas furnace are
covered under guarantee for the first five years. The market value of the gas furnace can
be estimated from straight-line depreciation with a salvage value of $500 after 10 years.
Using a MARR of 10 percent, should the oil furnace be replaced?

Solution

We do not know the maintenance costs for the gas furnace after the 5-year guarantee period.
However, it’s reasonable to assume that the economic life of a furnace is longer than 5 years,
so that the annual costs over a 5-year study will be no less than the annual costs over the
economic life.

The salvage value of the gas furnace at the end of five years can be calculated as:

BVsl(5) = 4500 – 5(4500 – 500)/10 = 4500 – 5(400) = 2500

The capital cost for the gas furnace is calculated as follows (using the capital recovery
formula):

Agas= (5000 – 2500)(A/P, 10%, 5) + 2500(0.1)

= 2500(0.2638) + 250 = 909.50

Since there are no maintenance costs, the total cost for the new furnace will be about $910
per year. The energy savings of $500 will be included as an operating cost for the old furnace.

Capital cost for the old furnace for the next year is:

Acap = (500 – 500)(A/P, 10%, 1) + 500(0.1) = 50

Operating costs will be $300 for the maintenance contract, $200 for parts, and $500 in extra
energy costs.

Po&m = 200 + 300 + 500 = 1000

Total cost for the next year will be $1050 for the defender.

Since the annual costs for the new furnace are more than $140 less than the old one, even if
the new furnace is replaced every 5 years, Nico should replace his furnace immediately with a
new gas furnace.