advanced engineering economy by excel 1

Due Date: Saturday 2 May 2020

@ 23:55

Please, Show all your work

(Full MS Word report with excel results saved as PDF)

Do not forget to state your conclusions

Student Name:

Student ID#:

Submitted to:

Dr. Abdullah Jameel Halawany

Recent research has made possible the development of a sensing device. The company that own the Research (HALA) has just work on a process for mass-producing the device. The visibility study provides the following information:

  • The estimate of annual sales would be 1,500 units if the device were priced at $85,000 per unit (in dollars of the first operating year).
  • HALA would need a new manufacturing plant. This plant could be built and made ready for production within 2 year.
  • HALA would need a 30-acre tract of land that would cost $2 million; the land could be purchased on December 31, 2021.
  • The new manufacturing plant building would cost $6 million and would be depreciated according to the Straight-Line (SL) Method.
  • A first payment of $2 million (out of the manufacturing plant building cost $6 million) would be due to the contractor on December 31, 2021, and the remaining $4 million on December 31, 2022.
  • The required manufacturing equipment would be installed and would be paid for on December 31, 2022. The equipment cost is $145 million, plus a further $5 million for installation. The equipment would be depreciated according to the Double Declining Balance (DDB) Method.
  • The project would require an initial investment of $15 million in working capital. This investment would be made on December 31, 2022.
  • The project’s estimated economic life is 7 years (starting after the 2-year construction period).
  • At the end of the project lifetime, the land is expected to have a market value of $2.5 million, the building a value of $500,000 million, and the equipment a value of $5 million.
  • The estimated total variable manufacturing costs would $14 million yearly.
  • Fixed costs would be $20 million for each year of operations.
  • Since the plant would begin operations on January 1, 2023, the first in flow cash would occur on December 31, 2024.
  • HALA has $5.4 million budget for research and development (R&D). The company has already expensed all of it to date on R&D.
  • HALA’s market interest rate (MARR) is 25%. Any capital gains will also be taxed at 40%.

Your report must provide answers for the following:

Part one:

  • Construct the Income Statement, and Cash Flow Statement for the project
  • Determine the Net Cash Flows, PW, and IRR of the project.
  • Comment on “Gains tax” and “Sunk cost” amounts if there is any.

Part two: New Information

  • By December 31, 2024 Unit prices, Variable manufacturing costs, and Fixed overhead costs are expected to increase with inflation rate of 5% yearly
  • By December 31, 2023 working capital is projected to increase with inflation rate of 4% yearly over the life of the project.
  • Determine the Net Cash Flows, PW, and IRR of the project, with inflation.
  • Comment on the effect of the inflation on PW, and IRR of the project.
  • Comment on “Gains tax” and “Sunk cost” amounts if there is any.

Part three:

  • Would you recommend that the firm approve the project under the case of no inflation?
  • Would you recommend that the firm approve the project under the case of inflation?

Part four:

  • What is the break-even for demand of the project under case of no inflation?
  • What is the break-even for demand of the project under case of with inflation?
  • Conduct a Sensitivity Analysis for the project with inflation and comment.

“State your full conclusion after each part”

(count for 50% of mark)