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ENG207 Engineering Economics and Analysis SUSS Assignment Sample Singapore

ENG207 Engineering Economics and Analysis is a course that focuses on the application of economic principles to engineering decision-making. The course covers topics such as cost analysis, project evaluation, financial analysis, risk analysis, and decision-making under uncertainty. The course is designed to provide students with the necessary skills to make informed decisions in engineering projects, taking into account the economic, social, and environmental factors. Students will learn how to use different tools and techniques to evaluate projects, analyze costs and benefits, and assess risks. The course may include lectures, case studies, group projects, and assignments. Students may also be required to use software tools such as Excel or MATLAB to perform calculations and analysis.

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Assignment Activity 1: Discuss the pros and cons in using various analysis methods in engineering economics.

 

Engineering economics involves using various techniques and methods to evaluate the costs and benefits associated with different engineering projects or decisions. In this context, different analysis methods have their own advantages and disadvantages, as discussed below:

  1. Net Present Value (NPV): NPV is a widely used analysis method that calculates the present value of all cash inflows and outflows associated with a project, discounted at a specific rate of return. NPV is beneficial because it takes into account the time value of money and provides a clear picture of the project’s profitability. However, NPV can be complex and time-consuming to calculate, and it requires accurate estimates of cash flows and discount rates.
  2. Internal Rate of Return (IRR): IRR is another widely used analysis method that calculates the rate of return at which the present value of cash inflows equals the present value of cash outflows. IRR is useful because it considers the time value of money and provides a single rate of return for decision-making purposes. However, IRR assumes that cash flows are reinvested at the same rate, which may not be realistic, and it can produce multiple solutions under certain circumstances.
  3. Payback Period (PP): PP calculates the time required for a project’s cash inflows to recover the initial investment. PP is straightforward and easy to calculate, and it provides a quick estimate of the project’s profitability. However, PP does not consider the time value of money and ignores cash flows beyond the payback period.
  4. Benefit-Cost Ratio (BCR): BCR calculates the ratio of the present value of benefits to the present value of costs. BCR is useful because it considers both costs and benefits and provides a simple measure of profitability. However, BCR may not be appropriate for projects with multiple benefits and costs, and it assumes that all benefits and costs occur at the same time.
  5. Sensitivity Analysis: Sensitivity analysis involves testing the impact of changes in assumptions or inputs on the project’s profitability. Sensitivity analysis is beneficial because it helps to identify the most critical assumptions and inputs and provides insights into the project’s risk profile. However, sensitivity analysis can be time-consuming, and it does not provide a definitive answer.

Assignment Activity 2: Analyze projects based on various financial parameters.

Analyzing projects based on various financial parameters is essential to evaluate their feasibility and profitability. Here are some key financial parameters to consider when analyzing a project:

  1. Return on Investment (ROI): This is the ratio of the net profit to the total investment made in a project. A higher ROI indicates a more profitable project.
  2. Net Present Value (NPV): This represents the present value of the project’s future cash inflows minus the present value of its cash outflows. A positive NPV means that the project is expected to generate more cash inflows than outflows and is therefore financially viable.
  3. Internal Rate of Return (IRR): This is the rate at which the project’s net present value equals zero. A higher IRR indicates a more attractive investment opportunity.
  4. Payback period: This is the time it takes for the project to recover the initial investment. A shorter payback period is generally preferable.
  5. Profitability Index (PI): This is the ratio of the present value of the project’s future cash inflows to the initial investment. A higher PI indicates a more profitable project.
  6. Break-even analysis: This is the analysis of the minimum level of sales or production required for a project to break even and start generating profits.
  7. Sensitivity analysis: This is the analysis of how changes in certain assumptions, such as sales volume or production costs, would impact the project’s financial performance.

By analyzing these financial parameters, you can gain a comprehensive understanding of a project’s financial feasibility and profitability. It is important to consider all these parameters in conjunction with each other and to also take into account any non-financial factors that may impact the project’s success.

 

Assignment Activity 3: Identify the different types of projects based on the given information.

Assignment Activity 4: Employ incremental analysis / cashflow analysis / present worth analysis / payback period / NPV / IRR to rank and select the projects.

To rank and select projects, there are several financial analysis techniques that can be used, including incremental analysis, cash flow analysis, present worth analysis, payback period, net present value (NPV), and internal rate of return (IRR). Here’s how each of these techniques can be used:

  1. Incremental analysis: This technique involves comparing the financial impact of each project relative to a baseline scenario. The projects that result in the highest incremental benefit should be ranked higher. For example, if a company is considering two projects that each cost $100,000, but Project A generates $200,000 in revenue while Project B generates $150,000 in revenue, then Project A would be ranked higher based on its incremental benefit of $100,000 ($200,000 – $100,000) compared to Project B’s incremental benefit of $50,000 ($150,000 – $100,000).
  2. Cash flow analysis: This technique involves analyzing the inflows and outflows of cash associated with each project over its expected life cycle. The project with the highest net cash inflows should be ranked higher. For example, if a company is considering two projects with identical upfront costs but Project A generates $50,000 in annual cash inflows for five years while Project B generates $60,000 in annual cash inflows for five years, then Project B would be ranked higher based on its higher net cash inflows over the life of the project.
  3. Present worth analysis: This technique involves calculating the present value of all cash inflows and outflows associated with each project, discounted at a specified interest rate. The project with the highest present worth should be ranked higher. For example, if a company is considering two projects with identical upfront costs and expected cash inflows of $50,000 per year for five years, but Project A is discounted at a 5% interest rate while Project B is discounted at a 10% interest rate, then Project A would be ranked higher based on its higher present worth at a 5% interest rate.
  4. Payback period: This technique involves calculating the length of time it takes for a project to recoup its initial investment. The project with the shortest payback period should be ranked higher. For example, if a company is considering two projects with identical upfront costs but Project A recoups its initial investment in two years while Project B takes three years to recoup its initial investment, then Project A would be ranked higher based on its shorter payback period.
  5. Net present value (NPV): This technique involves calculating the present value of all cash inflows and outflows associated with each project, discounted at a specified interest rate, and subtracting the initial investment. The project with the highest NPV should be ranked higher. For example, if a company is considering two projects with identical upfront costs and expected cash inflows of $50,000 per year for five years, but Project A has an NPV of $25,000 while Project B has an NPV of $20,000, then Project A would be ranked higher based on its higher NPV.
  6. Internal rate of return (IRR): This technique involves calculating the interest rate at which the present value of all cash inflows and outflows associated with a project equals zero. The project with the highest IRR should be ranked higher. For example, if a company is considering two projects with identical upfront costs and expected cash inflows of $50,000 per year for five years, but Project A has an IRR of 15% while Project B has an IRR of 12%, then Project A would be ranked higher based on its higher IRR.

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Assignment Activity 5: Use taxation rules, depreciation and other expenses in financial calculations.

Taxation rules, depreciation, and other expenses are important factors that can significantly impact financial calculations. Let me explain how they work and how they affect financial calculations:

  1. Taxation Rules: Taxes are a significant factor that affects a company’s financial calculations. Depending on the type of business and its jurisdiction, companies may be required to pay income tax, sales tax, property tax, and other taxes. The tax rate and tax laws applicable to the business can have a significant impact on its bottom line.

When calculating financial metrics such as net income, taxes must be taken into account. For example, if a company has a net income of $100,000 but is subject to a 30% income tax rate, it will owe $30,000 in taxes, resulting in a net income after taxes of $70,000.

  1. Depreciation: Depreciation is a method used to allocate the cost of an asset over its useful life. Depreciation can be used to reduce taxable income, resulting in lower taxes paid by a company.

When calculating financial metrics such as net income, depreciation must be taken into account. For example, if a company has a net income of $100,000 and has $20,000 in depreciation expenses, its taxable income would be reduced to $80,000, resulting in a lower tax liability.

  1. Other Expenses: Other expenses such as salaries, rent, utilities, and other operating costs also affect financial calculations. These expenses must be subtracted from revenue to determine the company’s net income.

When calculating financial metrics such as net income, all expenses must be taken into account. For example, if a company has revenue of $200,000 but has $80,000 in expenses, including salaries, rent, utilities, and other operating costs, its net income would be $120,000.

Assignment Activity 6: Present the cash flow table and financial analysis on a project / company.

To present a cash flow table and financial analysis on a project or company, the following steps can be followed:

  1. Determine the initial investment: This includes all the costs required to start the project or company, such as equipment, building, and working capital.
  2. Estimate the cash inflows: This involves forecasting the expected revenue or sales for the project or company.
  3. Estimate the cash outflows: This includes all expenses required to operate the project or company, such as salaries, rent, utilities, and taxes.
  4. Create a cash flow table: The cash flow table summarizes the cash inflows and outflows for each period, typically monthly or annually. It shows the net cash flow, which is the difference between cash inflows and outflows for each period.
  5. Calculate the net present value (NPV): The NPV is a financial metric that calculates the present value of future cash flows, taking into account the time value of money. A positive NPV indicates that the project or company is expected to generate a profit, while a negative NPV indicates a loss.
  6. Calculate the internal rate of return (IRR): The IRR is a financial metric that calculates the discount rate that makes the present value of cash inflows equal to the present value of cash outflows. The IRR represents the expected rate of return for the project or company.
  7. Perform sensitivity analysis: Sensitivity analysis involves testing how changes in key assumptions, such as sales volume or cost of capital, affect the financial performance of the project or company.

Assignment Activity 7: Solve problems using breakeven analysis.

Breakeven analysis is a tool used to determine the minimum amount of sales required to cover all the costs of a business and reach a point where the business is neither making a profit nor incurring a loss. This analysis is useful for businesses to determine their pricing strategies, evaluate new projects or product lines, and make informed decisions about their operations. Here are some examples of how to use breakeven analysis to solve problems:

  1. Pricing strategy: Suppose a business has fixed costs of $10,000 per month and variable costs of $5 per unit. If the business plans to sell a product for $20 per unit, how many units must they sell to break even?

Breakeven point = Fixed costs ÷ (Price per unit – Variable costs per unit)

Breakeven point = $10,000 ÷ ($20 – $5)

Breakeven point = 667 units

Therefore, the business must sell 667 units to break even. If the business plans to sell fewer units, they will incur a loss.

  1. New project evaluation: Suppose a company is considering launching a new product line that will cost $50,000 to set up and have a variable cost of $10 per unit. The company expects to sell the product for $30 per unit. What is the breakeven point for this new product line?

Breakeven point = Fixed costs ÷ (Price per unit – Variable costs per unit)

Breakeven point = $50,000 ÷ ($30 – $10)

Breakeven point = 2,500 units

Therefore, the company must sell 2,500 units of the new product to break even. If the company sells fewer units, they will incur a loss.

  1. Cost reduction analysis: Suppose a business has a breakeven point of 1,000 units per month. If the business can reduce its fixed costs by $5,000 per month, how many units must they sell to break even?

Breakeven point = Fixed costs ÷ (Price per unit – Variable costs per unit)

New fixed costs = $10,000 – $5,000 = $5,000

Breakeven point = $5,000 ÷ ($20 – $5)

Breakeven point = 333 units

Therefore, the business must sell 333 units to break even after the fixed cost reduction. The cost reduction has significantly reduced the breakeven point, making the business more profitable.

Overall, breakeven analysis is a useful tool for businesses to evaluate their pricing strategies, new projects, and cost reduction opportunities. By determining the breakeven point, businesses can make informed decisions about their operations and improve their profitability.

Assignment Activity 8: Calculate marginal cost, average cost, salvage value, payback period, NPV, IRR, net income, net cashflow and other financial parameters.

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