Fall 2015 CMGT 547 Managerial Engineering Economics – Exam

1. Pick common types of Engineering Economic Decisions and briefly describe it. What are the key considerations for your chosen type of decision. Provide an example. (5 points)

2. You have just purchased 5000 shares of stock at $40 per share. Your analysis indicates that the stock price will increase 8% per year. How much will your investment be worth in 5 years? When will the market price have doubled? Assume no dividend payments for this calculation. (10 points)

3. What is depreciation? Why is it important to Engineering Economic Decisions? Explain the difference between book and tax depreciation. (15 points)

4. You are the CEO of Cardinal Company (a small software engineering firm) and have just been briefed on a new process and system which will likely improve the efficiency and effectiveness of software development, test, and quality assurance activities. This would potentially make your company more competitive in the market and result in more work. Projected cash flows are detailed below. The process has a 5 year life cycle. Discuss your assessment of this process change’s viability and profitability. Calculate net cash flow for each year, payback period, total return on investment, internal rate of return, and net present worth. State any assumptions (i.e. Minimal attractive rate of return). Explain your reasoning behind those assumptions.
(20 Points)

Year Revenue Capital Expenditures
Initial Investment $6,000,000
2016 $2,250,000 $350,000
2017 $2,500,000 $300,000
2018 $4,000,000 $300,000
2019 $5,000,000 $300,000
2020 $5,000,000 $300,000