Cairo University

Faculty of Engineering
Chemical Engineering Department

Economics Exams’ notes

Prepared by: Eng. Amira khaled Anwar / Chemical Engineering

students

1
 Introduction

This file contains the exams and their solution from year 2002 till
2009, some problems are very important and unique, and so they are
mentioned in the following table:

Question Type of problem Page

Question 2 / 2002 Proof / DCFRR 5
Question 4 / 2002 Optimization / Condenser 10
Question 2 / 2003 Alternative investment 15
Question 4 / 2004 Optimization / Pipe thickness 29
Question 2 / 2005 Alternative investment 35
Question 3 / 2005 Optimization 37
Question 4 / 2005 Sensitivity analysis 39
Question 5 / 2006 ROII/NPW/POP/.. 56
Question 2 / 2007 Alternatives/optimization 61
Question 3 / 2007 Depreciation 64
Question 1 / 2008 Depreciation 73
Question 4 / 2008 Alternative investment 76
Question 5 /2008 Sensitivity analysis 78
Question 2 / 2009 Alternative investment 85
Question 3 / 2009 DCFRR / NPW 87
Question 5 / 2009 Optimization / absorber 92

2
Other problems like:

 Balance sheet
 TCI / Manufacturing cost

They are totally systematic; anyone in the exams could be solved in the same
manner; just take care of the following consideration:
For balance sheet: DONOT take rent as current asset
For MC / PC: if service life is given, take (1/n) as %age from the FCI as
depreciation where:

Service life n 1 / n Depreciation

20 years 0.05 0.05 * FCI
10 years 0.1 0.1 * FCI
7 years 0.143 = 0.15 0.15 * FCI

3
 June 2002
Question 1
Estimate the manufacturing cost per kg of product under the following
considerations:
Fixed capital investment = $ 120 millions
Annual production output = 30 million kilograms of product
Raw materials cost = $ 2.0 /kg of product
Utilities: filtered and softened water = 1.5 gal. /kg of product ($2.0/1000gal)
100psig steam = 50 kg/kg of product ($5/1000kg)
Purchased electric power = 1KWh/kg of product ($0.15/KWh)
Operating labor: 50 men per shift at $10 per employee-hour
Plant operates 300 – 24 hour- day per year. Corrosive liquids are involved.
Shipments are in bulk carload lots. A large amount of direct supervision is
required. There are no patent, royalty, interest or rent charges. Plant overheads
costs amount to 50% of the cost for operating labor, supervision, and
maintenance.

The solution:

Direct manufacturing cost calculations:

1. Variable cost
1.1 Raw materials cost = $2.0 /kg

1.2 Miscellaneous materials

Miscellaneous materials are function in the maintenance cost, so we have to
calculate the cost of maintenance first and from it, we can calculate the
miscellaneous materials cost.
Maintenance cost = (5 - 10) % of FCI
As corrosive liquids are involved, so we take the maintenance cost = 10% FCI =
0.1* 120 = $ 12 million

4
Miscellaneous materials cost = 10% f maintenance cost = 0.1*12 = $1.2 million
Miscellaneous materials cost per kg of product = (1.2 * 10 6) / (30 * 106) = $ 0.04/
kg product

1.3 Utilities:
Water: (1.5gal/kg product) *($2.0/1000gal) = $0.003/kg product
Steam: (50kg/kg product) *($5/1000kg) = $0.25/kg product
Power: (1kWh/kg product) *($0.15/kWh) = $ 0.15/kg of product
Utilities cost = 0.003 + 0.25 +0.15 = $ 0.403/ kg product

1.4 Shipping and packaging cost →neglected

Variable cost = 2 + 0.04 + 0.403 +0 = $ 2.443/kg product

2. Fixed cost

2.1 Maintenance cost = 0.1 of FCI = $ 12millions

Maintenance cost per kg of product = 12/30 = $0.4/kg product

2.2 Labor cost per kg of product = (50 men/shift)*(3 shifts)*(8 hr/day)*(300

day/year)*($10/employee) / (30 million kg product) = $ 0.12/kg product.

2.3 Supervision cost = 20% of labor cost = 0.2 * 0.12= $0.024/kg product

2.4 Plant overheads cost= 50% (labor + supervision + maintenance) = 0.5 *(0.12
+ 0.024 +0.4) = $ 0.272/kg product

2.5 Depreciation = 15% of FCI = 0.15 * $120 millions / 30 millions = $0.6/ kg

product

2.6 Interest, rent charges, patents, and royalty are neglected

5
2.7 Insurance cost = 1% of FCI = 0.01 * 120/30 = $0.04/kg of product

Fixed cost = 0.4 + 0.12 + 0.024 + 0.272 +0.6 +0.04 = $ 1.456/kg product

Direct Manufacturing Cost

= variable cost + fixed cost = 2.443 + 1.456 = $3.899 / kg product

Indirect manufacturing cost

Indirect manufacturing cost is not specified, so we will take it as 25% of DMC,
thus

Total Manufacturing Cost

= DMC + IMC = 3.899 + 0.25* 3.899 = $4.87/ kg of product

Question 2 (Important)

[I] DCFRR can be calculated for the case of a single lamp investment and
constant annual cash flow by the following equation:

Where: I = annual rate of return

R = annual cash flow
I = investment
N = life of the project (year)
a) Derive this equation from its basic economic relation
Given that: Initial investment (I) =EGP 1,000,000
Useful life of project n = 6 years
Annual cash flow R= EGP 400,000
b) Calculate (true rate of return) TRR

6
Solution:

a) At DCFRR NPV=0

b)

By trial &error 32.67%

7
[II] The following information apply to AZM Company on a given date

Account payable = EGP 5000 Account receivable = EGP 6000

Cash in bank = EGP 12000 Reserve for expansion = EGP 2000

Government bonds = EGP 15000 Social security tax payable = EGP

1000

Long term debts = EGP 2000 Prepaid rent = EGP 500

Machinery and equipment = EGP

50000
Reserves for depreciation = EGP 1000

Inventory = EGP 4000 Debts due within one year = EGP 2000

Determine the current ratio, cash ratio, and working capital for company at the
given date.

Solution

Current assets = Cash in bank + Account receivable + Gov. Bonds + Inventory

= 12000 + 6000 + 15000 + 4000 + = EGP 37,000

Current liabilities = debts/1yr + account payable + Taxes

= 2000 + 5000 + 1000 = EGP 8000

Cash = cash + Gov. Bonds = 12000 + 15000 = EGP 27,000

 Working capital = 37000 – 8000 = EGP 29,000

8
  Current ratio = 37000/8000 = 4.625
 Cash ratio = 27000/8000 = 3.375

Question 3:

A company has two alternative investments which are being considered

company policies, based on the current economic situation, dictate a minimum
annual return on the original investment of 15 % after taxes must be predicted for
any unnecessary investment with interest on investment not included as a cost.
Company policies also dictate that, where applicable straight line depreciation is
used and for time value of money inter-precipitation end of year and profit
analysis is used. Land value and prestart up costs can be ignored. Given the
following data:

Annual Annual
Salvage Service cash flow cash
Investment If , $ Iw ,$ value ,$ life , year after expenses
no. taxes, $ Constant
,$
1 200,000 15,000 18,000 7 60,000 32,000

2 250,000 20,000 25,000 8 65,000 25,000

Determine and comment which investment, if any, should be made by alternative

analysis profitability – evaluation methods of:

i) Rate of return on initial investment.

ii) Minimum payout period with no interest charge.

Solution:

By rate of return on initial investment:

First; calculate the depreciation of each alternative

9
First alternative:

Depreciation = (fixed investment - salvage value)/service life

Depreciation = (200000 – 18000)/7

Depreciation = $ 26000

Second alternative:

Depreciation = (250000 – 25000)/8

Depreciation = $ 28125

R.O.I for alternative 1

= (60,000 – 26,000) / (200,000 + 15,000) = 0.158 = 15.8 %, therefore alternative

1 is valid and now we will compare alternative 2 to 1

R.O.I.I = (saving/ additional investment) * 100

R.O.I.I = [(65000 – 60000) + (26000 – 28125)]/ (270000 – 215000)

R.O.I.I =5.23 % < 15 %

So alternative two is not accepted, and alternative one is recommended.

By minimum payout period with no interest charge:

Pay out period = (fixed investment – salvage value)/annual cash flow

First alternative:

Payout period = (200000 – 18000)/60000 = 3.033 year

Second alternative:

Pay out period = (250000 – 25000)/65000 = 3.462 year

So alternative one is recommended, it has less payout period.

10
Question 4: The optimization problem (Important)
Vapor needs to be condensed where, vapor flow rate = 5000 lb / hr
Temperature for the vapor is 170 oF. The heat of condensation of the vapor is
200 Btu/Ib.
Cooling water is available at 70 oF. The cost of the cooling water is ($5/1000m 3).
The overall heat transfer coefficient at the optimum conditions may be taken as
50 Btu/hr.ft2.of. The cost for the installed condenser is $34 per ft2 of heat transfer
area, and the annual fixed charges including maintenance are 20% of the initial
cost.
The heat capacity of the water may be assumed to be constant at 1.0 Btu/Ib. oF.
If the condenser is to operate 6000 hr/year, determine the cooling water flow
rate in m3/hr for optimum economic conditions.

Solution:
The procedure will be as follows:

1. Assume outlet water temperature to

2. Calculate water flow rate where: Q = V*LH = m cp (to – ti )
3. Calculate Δtm
4. Buy knowing Q, U & Δt m, calculate A
5. Calculate capital cost of the condenser by knowing A and price per ft 2 of
area
6. Calculate the fixed charges which are certain, given percentage of the
initial cost of the condenser
7. Calculate the operating cost of water by knowing, water flow rate per year
and price of cooling water per lb
8. Add the fixed charges and the operating cost
9. Draw 3 curves, one for fixed charges and one for the operating cost and
last for the total and from this figure, obtain minimum cost
10. From this cost, you can get optimum to, consequently the optimum water
flow rate and optimum area of condenser.

11
Trials to mw Δtm A Capital FC / yr OC / yr TC
1 120 = 72.1 277.7 * 0.2 * 9442 20,000 2156
34 = = 1884 *6000*0.3
20,000 lb / hr = 277.7 3
9442 048
*0.005/(62
.4) = 272
2
3
4
5
6
7
8

12
 June 2003

Question 1:

(i) A process plant making 2000 tons per year of a product selling for $0.8 per lb
has an annual direct production costs of $2 million at 100%and other fixed costs
of $700000.what is the fixed cost per pound at the breakeven point? if the selling
price of product is increased by 15% what is the dollar increase in net profit at full
capacity if the income tax rate is 25% of gross earnings.

Solution:

Production= 2000 tons = 2,000,000 kg = 4415011.038 lb

Variable cost/lb = 2,000,000/4415011.038 = $ 0.453

Profit = Sales – variable cost – Fixed cost

@ BEP

0 = 0.8*X – 0.453*X – 700,000

No. of lb @ BEP

X = 2017291.066 lb

Therefore,

Fixed cost/lb = Fixed cost/No. of lb = 700,000/2017291.066 = $ 0.347/lb

Profit = Sales – variable cost – Fixed cost

Profit = 0.8*4415011.038 – 700000 – 2000000 = $ 832,008

Net profit = profit – Taxes = 0.75* profit = $624,006

Price of product increased 15%, therefore

Price of product = 0.8 *(1+0.15) = 0.92

Profit = 0.92*4415011.038 – 700000 – 2000000 = $ 1,361,810

Net profit = profit – Taxes = 0.75* profit = $1,021,358

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Increase in the net profit = 1,021,358 – 624,006 = $397,351

(ii) The following information applies to AZM Company on a given data

Determine the current ratio, cash ratio, and working capital

reserve for expansion 1200

reserve depreciation 600
cash in bank 5000
Inventory 2000
accounts receivable 3000
prepaid rent 300
government bond 6000
debts due within one
year 1500
social security taxes
payable 340
accounts payable 2500
long term depts. 1600
machinery and
equipment 20000

Solution:

current assets=cash in bank + inventory + accounts receivable + government

bond
current assets=5000+2000+3000+6000
current assets=16000 EGP

current liabilities=debts due within one year + social security taxes payable
+ accounts payable
current liabilities=1500+340+2500
current liabilities=4340 EGP

working capital=current assets-current liabilities

working capital=16000-4340=11660 EGP

current ratio=16000/4340=3.7

14
 cash ratio=(cash + government bond)/current
liabilities=2.534562
Question 2:

(i) Write short notes on each of the following:

1. Stocks Market.
2. Main Features of Corporation
3. Added Value
4. M & S Cost Index

Solution:

1. Stocks Market: It’s the place where we buy and sell the stocks after
the company produces it.
There are 2 markets for money:
i. Production Market: The market where it is dealt with it at the
beginning through the side which produces the stock, it might be a
company or a bank.
ii. Exchange Market: The market where we deal after buying the
stocks,
The stock market produces a daily report containing the prices of
stocks so that people can compare between what happened today
and the day before.

2. Main Features of Corporation: It’s an organization (company,

factory,etc) that doesn’t belong to a soul owner nor does it belong to
some people but it’d rather be divided into shares and stocks.
Advantages:
i. Perpetual life.
ii. Limited liability to stockholders.
iii. Ease of transferring ownership.
iv. Ease of expansion.
v. Applicability to all sizes of firms.

15
 Disadvantages:
i. Government regulations.
ii. Capital stock tax.
iii. Expense of organization.

3. Added Value: It’s the difference between the value of the product and
the value of what it takes to produce it from its raw materials, axillaries
(water and electricity) and chemicals added. Added Value is used to
judge on the industrial efficiency.

4. M & S cost index:

Marshall and Swift Stevens equipment cost index where cost index is
defined as:
As the value of money changes with time, what cost x last year, would
probably cost more than x this year
Cost index is used to obtain the price of certain item at the present
time by knowing its price before
Present cost = original cost *

(ii) (important )The facilities of an existing company must be increased if the

company is to continue in operation. There are two alternatives. One of the
alternatives is to expand the present plant, if this is done, the expansion would
cost $ 130,000. Additional labor cost would be $ 150,000 per year, while
additional cost s for overhead, depreciation, taxes and insurance would be $
60,000 per year.

A second alternative requires construction and operation of mew facilities at a

location about 50 miles from the present plant. This alternative is attractive
because cheaper labor is available at this location the new facilities would cost $
200,000, labor costs would be $ 120,000 per year, overhead costs would be $
70,000 per year, annual insurance and taxes would amount to 2% of the initial
cost, all other costs except depreciation would be the same at each location. If
the minimum return on any acceptable investment is 9 %, determine the

16
minimum service life allowable for the facilities at the distant location for this

Alternative 1( Expand the Alternative 2( Build new

present plant) facilities at a location)
Expansion/new $ 130,000 $ 200,000
facilities at new
location
Additional labor cost $ 150,000/year $ 120,000/year
Overhead (O) $ 70,000/year
Depreciation (D) D
Taxes (T)
Insurance (I)
T+I 0.02*$ 200,000 = 4,000
O+T+I+D $ 60,000 70,000+4,000+D
alternative to meet the required incremental return. The salvage value should be
assumed to be zero, and straight line depreciation accounting is used.

Solution:

ROII= 9%=0.09

ROII

0.09=

D=$ 9,700

As salvage value =$ 0

D=

D= =9,700

Therefore, No. of years= 20.6 years

Note: when we calculate the annual savings we noticed that the summation of
the depreciation, overhead, insurance and the taxes in the 1 st alternative is lower
than the overhead, insurance and the taxes (without the depreciation) in the 2 nd
alternative that’s why we count it as a –ve value as we will spend more in the 2 nd
alternative  (60,000 -(74,000+D))

17
Question 3

A company has two alternative investments which are being considered

Company policies, based on the current economic situation, dictate a minimum
annual return on the original investment of 15% after taxes must be predicted for
any unnecessary investment with interest on investment not included as a cost.
Company policies also dictate that, where applicable, straight-line depreciation is
used, for time-value of money interpretation, end of year and profit analysis is
used in land value and prestart up costs can be ignored. Given the following
data:

Invest If, Iw Salvage value, Service life, Annual cash flow Annual cash expenses

NO. $ $ $ years after taxes, $ constant for each year,$

1 360,000 24,000 32,000 7 110,000 constant 60,000

2 450,000 40,000 50,000 8 120,000 constant 44,000

Determine and comment which investment, if any, should be made by

alternative –analysis profitability- evaluation methods of:

(i) Rate of return on initial investment

(ii) Minimum payout period with no interest charge

(iii) Net present worth (NPW)

(iv)Capitalized cost

18
Question 4: (optimization / Condenser)

The overhead condenser of a distillation tower is to be designed to condense

8000 lb of vapor/hour. The effective condensation temperature for the vapor is
180 °F. The latent heat of condensation of vapor equals 220 Btu/lb. Cooling
water is available at 80 °F. The cost of cooling water is $9×10 -6. The overall heat
transfer coefficient equals 100 Btu/hr.ft2.°F. The cost of the installed condenser is
$33 ft2 of heat transfer area, and the annual fixed charges including maintenance
and interest are 25% of the initial investment. The condenser is to operate 8000
hours/year.

Determine the outlet temperature of cooling water, cooling water flow rate and
the heat transfer area for optimum conversion conditions. (c p of cooling water= 1
Btu/lb. °F )

Solution:

Same procedure as question 4 / 2002

Question 5:

(i) Define: Discounted cash flow rate of return (DCFRR)

(ii) For the following project under study:
1. The construction of the project will be completed in 3 years. The project
needs 5 years from the start till the full capacity change (6th year till 15th
year).
2. Data about the construction, operating costs and volume of sales during
installation and operation stages are:

Year Construction Operating Costs Volume of Sales

Costs (EGP (EGP 1000) (1000 tons)
1000)
1 160 5 -
2 210 5 -
3 260 10 -
4 - 15 10
5 - 20 15
6-15 - 25 20

3. Suggested selling price EGP 10 per ton, and the average interest is 15%.

19
 Required:

a. Project performance evaluation by DCFRR method.

b. Testing project sensitivity if the selling price becomes EGP 9 per ton, and
the construction costs increase by 10%.

Solution

(i) DCFRR: Discounted cash flow rate of return

0 = Σ [F / (1+i) n]

It is used to calculate the value of the rate of return (i) which makes NPW
= 0.

This value of rate of return (i) is the maximum value that a project can
withstand.

Year 1 2 3 4 5 6-15

Construction -160 -210 -260 - - -

Costs (EGP
1000)
Operating Costs -5 -5 -10 -15 -20 -25
(EGP 1000)
Volume of Sales - - - 10 15 20
(1000 tons)
Volume of Sales - - - 100 150 200
(EGP 1000) (=10*10) (=15*10) (=20*10)
Net Cash Flow -165 -215 -270 85 130 175
(EGP 1000)
(ii) a.

DCFRR method:

0 = -165/ (1+i) – 215/ (1+i)2-270/ (1+i) 3 + 85/ (1+i)4+130/ (1+i) 5

+ 175*[(1+i)10-1]/[i*(1+i)10] * 1/(1+i)5

By trial and error: DCFRR = 17.39 % > MARR (15%)

Therefore, the project is feasible.

20
b.

Year 1 2 3 4 5 6-15

Construction -176 -231 -286 - - -

Costs (=1.1* (=1.1* (=1.1*
(EGP 1000) 160) 210) 260)
Operating -5 -5 -10 -15 -20 -25
Costs (EGP
1000)
Volume of - - - 10 15 20
Sales (1000
tons)
Volume of - - - 90 135 180
Sales (EGP (=10*9) (=15*9) (=20*9)
1000)
Net Cash Flow -181 -236 -296 75 115 155
(EGP 1000)

DCFRR method:

0 = -181/ (1+i) – 236/ (1+i)2-296/ (1+i) 3 + 75/ (1+i)4+115/ (1+i) 5

+ 155*[(1+i)10-1]/[i*(1+i)10] * 1/(1+i)5

By trial and error: DCFRR = 13.46 % < MARR (15%)

Therefore, the project is sensitive.

21
 June 2004

Question (1):

i) Estimate the manufacturing cost per kg of product under the following

conditions:

Fixed –capital investment = $ 100 million

Annual production output = 30 million kg of product

Raw materials cost = $1.5/kg of product

Utilities: Filtered and softened water = 15 gal/kg of product, ($2/1000 gal)

100 psig steam = 50 kg/kg of product (5$/1000kg)

Purchased electrical power =1.5KWH/kg of product ($0.2/KWH)

Operating labor 50 men per shift at $15 per employee-hour

Plant operates 300 24-h days per year. Corrosive liquids are involved. Shipments
are in bulk car load lots. A large amount of direct supervision is required. There
are no patent, royalty, interest or rent charges.

Plant overhead costs amount 60% of the cost for operating labor, supervision
and maintenance.

Solution:

i) F.C.I = $100*106

Annual production rate = 30*10 6 kg/yr

Manufacturing cost = D.P.C + I.P.C = Variable cost + fixed cost + I.P.C

1) Variable cost = Raw material + Miscellaneous material + Utilities +

Shipping & Package

22
 - R.M cost = 1.5/kg
Miscellaneous materials = 10% Maintenance
Where Maintenance = 5 - 10% F.C.I = $ 0.1 *[(100*106)/ (30*106)] =
$0.333/kg
- Miscellaneous materials = 10% Maintenance = $0.0333/kg
- Utilities = 15*(2/1000) + 50*(5/1000) + 1.5*(0.2/1) = $0.58/kg
- Shipping & Packaging Neglect
Variable Cost = 1.5 + 0.0333 + 0.58 = $2.11/kg

2) Fixed Cost = Maintenance + Labor + Supervision + Plant overheads +

Rent + Royalty + Insurance + Interest + Depreciation + Patent
- Labor Cost = (50*15*3*8*300)/(30*106) = $0.18/kg
- Supervision = 20% Labor = $0.036/kg
- Plant Overheads = 60% (Labor + supervision + maintenance)
= 0.6 * (0.18 + 0.036 + 0.333) = $0.33
- Insurance = 1% F.C.I = $0.033/kg
- Depreciation = 15% F.C.I = $0.5/kg

Fixed Cost = 0.333 + 0.18 + 0.036 + 0.33 + 0.033 + 0.5 = $1.412/kg

Manufacturing cost = D.P.C = 2.11 + 1.412 = $3.522/kg

I.P.C = 20% of D.P.C

Production Cost = 1.2 * 3.522 = $4.23/kg

ii) In order to make it worth able to purchase a new piece of equipment, the
annual depreciation costs for the equipment cannot exceed $3000 at any time.
The original cost of the equipment is $30,000 and it has zero salvage and scrap
value.

Determine the length of service life necessary if the equipment is depreciated:

 By the straight-line method

 By the sum-of-the-years-digits method

23
Solution:

First considering the straight line method:

Annual depreciation $3000

V0 = $30.000 VS =0 n =???

D1 = (VO -VS)/n=3000 = (30.000-0)/n

N ―service life‖ =10 years

Second considering the sum of years digits method

In this method, we have to assume N in order to be able to solve, so we will solve

by trial and error by assuming (N) and getting d

 D1 for 10 years = (10/(1+2+3+4+….+10))*(30.000-0)= $5454.5

 D1 for 15 years = (15/(1+2+3+….+15))*(30.000-0)= $3750
 D1 for 19 years = (19/(1+2+3+….+19))*(30.000-0)= $3000

Therefore N = 19 years

Question 2:

(i) Define:

 DCFRR.
 Sensitivity Analysis.

(ii) For the following project under study:

1- The construction of the project will be completed in 3 years. The project

need 5 years from the start till the full capacity stage (6 th year till 15th
year).

Construction Costs Operating Costs Volume of Sales

Year
(EGP 1000) (EGP 1000) (1000 Tons)
1 600 20 -
2 800 20 -
3 1000 40 -
4 - 60 32
5 - 80 48
6 - 15 - 100 80

24
 2- Data about the construction costs, operating costs and volume of sales
during installation and operation stages are as illustrated in the above
table.
3- Suggested selling price EGP 12 per Ton, and the average interest cost is
15% percent.

Required:
i. Draw the cash flow diagram of this project.
ii. Project performance evaluation by DCFRR method.
iii. Testing project sensitivity if the selling price is decreased from EGP 12 to
EGP 10 per ton, operating costs are increased by 10% and the
construction costs is increased by 10% percent.

Solution:

(i) 1- DCFRR = "Discounted Cash Flow Rate of Return"

 It's the rate of discount at which the sum of positive present values is
equal to the sum of negative present values which means the (NPW) net
present value of the cash flow is zero.

DCFRR = the more profitable the project.

2- Sensitivity Analysis:

 It is an analysis method to study the change is selling price and its effect
on the project to be accepted or not.

(ii)We will have to calculate the net cash flow each year, so we will multiply the
selling price by the volume of sales to get sales in EGP, and then subtract both
investment and operating costs from it.

Year 1 2 3 4 5 6 - 15
Construction Costs (EGP 1000) -600 -800 -1000 - - -

Operating Costs (EGP 1000) -20 -20 -40 -60 -80 -100

25
 Volume of Sales (1000 Tons) - - - 32 48 80

Volume of Sales (EGP 1000) - - - 384 576 960

Net Cash Flow -620 -820 -1040 324 496 860

The non cumulative cash non discounted cash flow can be drawn as follows:

1500

1000

500

Value 0
of cash 0 2 4 6 8 10 12 14 16
-500
flow
-1000

-1500
Time

Studying the project performance evaluation by DCFRR method is as follows:

Using the discounted cash flow rate of return technique:

0 = -620/(1+i) + -820/(1+i)2 + -1040/(1+i)3 + 324/(1+i)4 + 496/(1+i)5 + 860 *

[((1+i)10 – 1)/ i (1+i) 10 ] * 1/ (1+i)5

By trial and error, DCFRR = 21.7%

Since that MARR (15%) is less than the DCFRR (21.7%), therefore the project is
feasible.

Testing the sensitivity:

Here we will resolve using the same procedure but based on the new selling
price which is EGP 10 per ton, operating costs are increased by 10% and the
construction costs are increased by 10% percent.

26
 Year 1 2 3 4 5 6 - 15

Construction Costs (EGP 1000) -660 -880 -1100 - - -

Operating Costs (EGP 1000) -22 -22 -44 -66 -88 -110

Volume of Sales (1000 Tons) - - - 32 48 80

Volume of Sales (EGP 1000) - - - 320 480 800

Net Cash Flow -682 -902 -1144 254 392 690

By trial and error, the value of the DCFRR is = , and as this value is
compared to the given MARR, the project is .

Question 3

(i) Write important technical points on the followings:

(a) Stocks market (b) Added Value

(c) Corporation (d) Cost Index

Solution:

Added value:

Added value is defined as the difference between the value of the product
and the value of what it takes to produce it from raw materials, auxiliaries,
chemicals added and so on.

It is used to judge on the industrial efficiency.

Stocks market:
It is the place where we buy and sell the stocks after the company produce it.

The stock market produces daily a bulletin containing the prices of stocks so
that you can compare between what happened yesterday and today.

27
 Corporation:

It does not belong to a certain owner but its ownership would be divided into
shares of stocks.

Advantage:

 limited liability to stock holders

 perpetual life
 ease of transferring ownership
 ease of expansion

Disadvantage:

 government regulation
 capital stock tax

Cost index:

As the value of money changes with time, what cost x the last year would
probably cost more than x this year.

Cost index is used to obtain the price of certain item at the present time by
knowing its price before

3) (ii) A Power Plant for generating electricity is one part of a plant design
proposal . 2 alternative power plants have been suggested one uses a boiler and
steam turbine while the other uses a gas turbine

The following information applies to the two proposals:

Boiler & steam turbine Gas turbine

Initial investment EGP 2,000,000 EGP1,500,000

Fuel costs per year 60,000 90,000

Maintenance and repairs , per year 40,000 60,000

Insurance and taxes , per year 66,000 45,000

28
Service life , year 25 18

Salvage value at end of service life 0 0

All the costs are the same for either type of power plant A 10 percent return is
required on any investment if one of these 2 power plants must be accepted ,
which one should be recommended

Solution:

R.O.I.I = 10%

Annual additional investment = 2,000,000 -1,500,000 = 500,000

Annual saving:

 Fuel = 90,000 - 60,000 = 30,000

 Maintenance = 60,000- 40,000 = 20,000
 Insurance & taxes = 45,000-66,000 = -21,000
 Deprecation) if st. line method = (1,500,000/18) – (2,000,000/25) = 3333.33

Annual savings = 30,000 + 20,000 -21,000 + 3333.33 = EGP 32,333

R.O.I.I = (annual savings /annual additional investment) *100

= (32,333/500,000)*100= 6.466 <10 %

Using of gas turbine will be profitable

29
Question 4: (Important)

A-Optimum economic design could be based on condition giving the least cost
per unit of time or the maximum profit per unit of production.

Explain briefly general procedures for determining optimum conditions in one

variable and two variables analytically and graphically

B-Sea water is pumped through 61.0 meters line at 0.088m3\s the power
requirements being given by: w=6.89 v3/d5 KW where : v= volumetric flow rate ,
m3/s, d= pipe diameter (m), knowing that the facility operates 24 hours a day and
365 days in a year

a) What is the optimum pipe diameter using mild steel and stainless steel
giving minimum total cost/ year?
b) Which material would be specified if a 22% return on capital is
acceptable?

Data Mild steel Stainless

steel
Cost of piping , EGP/m 8.04 d0.6 14.7d0.6

service life, years 4 10

Purchased cost of piping, EGP A B

Installed cost , EGP A+1500 B+3000

Maintenance cost , EGP/year A 0.06b

Cost of electricity ,EGP/KWH 0.005 0.005

Solution:

Operating cost:

Electricity cost per year = (6.89 v3/d5) * 24 * 365 * 0.005 = $ 301.8 v3/d5 / yr =
EGP (0.2057 / d5)/ yr

Purchased cost of piping:

For mild steel, A = 8.04 d0.6 * 61 = 490.44 d0.6
For stainless steel, B = 14.7d0.6 * 61 = 896.7 d0.6

30
Fixed cost:

Maintenance:

For mild steel, 490.44 d0.6

For stainless steel, 0.06 B = 53.8 d0.6

Depreciation:

For mild steel, (490.44 d0.6 + 1500) / 4 = 122.61 d0.6 + 375

For stainless steel, (896.7 d0.6 + 3000) / 10 = 89.67 d0.6 + 300

Total cost = operating cost + Fixed cost

Optimum diameter occurs at [d (total cost) / d (d)] = 0

For mild steel d = 0.34 m

For stainless steel d = 0.392 m

To compare between them:

We will just substitute by the optimum diameters and get all the costs and the
additional investment and calculate the ROII as follows:

Mild steel ( d = 0.34) Stainless steel (d = 0.392)

Installed cost 1757 3511
Electricity 45 22
Maintenance 257 30.7
Depreciation 439 351
Total cost / yr 741 404

ROII = = 0.192 = 19.2 %, mild steel is recommended

31
 June 2005

1) The total capital investment for a conventional chemical plant is $1,500,000

and the plant produces 3 million kg of product annually. The selling price of
the product is $0.99/kg. Working capital amounts to 15% of the total capital
investment. The investment is from company funds and no interest is
charged. Raw materials costs for product are $0.09/Kg, labor $0.08/Kg,
utilities $0.05/Kg, and packaging $0.08/Kg. Distribution costs are 5% of the
total product cost. Plant-overhead costs amount to 60% of the cost for
operating labor, supervision, and maintenance. Estimate the following:
i. Manufacturing cost per kilogram of product.
ii. Total product cost per year.
iii. Profit per Kilogram of product before taxes.

Answer:
T.C.I=F.C.I+W.C.I=$1,500,000
Plant produces →3 million Kg/year
Selling price of product =$0.99/Kg
W.C.I=15%* T.C.I= (0.15)*(1,500,000) =$225,000 and interest is neglected
Raw material=$0.09,Labor=$0.08/Kg, Utilities=$0.05/Kg, Packaging=$0.08/Kg.
Sales Distribution costs =5% * T.P.C
Plant overheads=60% [ labor cost + supervision + maintenance ]

Since: T.C.I=F.C.I+W.C.I then 1,500,000= F.C.I+225,000

F.C.I=$1,275,000/year

P.C=D.P.C+I.P.C
where D.P.C= Fixed cost + Variable cost

Variable cost= Raw material + Miscellaneous materials (10% Maintenance) +

Utilities + Packaging
where
Maintenance= (5-10) % * F.C.I, Take it 7%
= $89,250/year =89250/ (3*106)

32
 =$0.02975
Therefore;
Variable cost =[0.09+0.02975+0.05+0.008]=$0.17775/Kg

Fixed cost= Labor cost + Supervision + Maintenance+ Plant overheads +Rent +

Royalty Insurance + Depreciation.
Where,
Supervision=20% Labor cost= $0.016/Kg.
Plant overheads = 0.6 (0.08 + 0.016 + 0.02975) = $0.07545
Royalty =0 as he said in problem it is a conventional plant (means not new idea
with royalty)
Insurance =1% F.C.I=12750/3*106=$0.00425/Kg

Deprecation=15% F.C.I=191250/3*106=$0.06375/Kg.
Therefore,
Fixed cost=$0.2692/Kg

D.P.C= manufacturing cost 0.17775+0.2692= $0.447/Kg

TPC = 1.2 * 0.447 = $0.5364/kg

Total Product Cost per Year= 0.5364 *(3*106) =$1609200/year

Profit ―before taxes‖/kg = 0.08 – 0.5364 = $0.043/kg

33
2)
i. Write short notes on each of the following:
i. Stock Markets.
ii. Corporations.
iii. Characteristics of Chemical Processes.
iv. Planning of management functions.

Solution:

1. Stock Markets:
They are the places where we buy and sell the stocks after the
company produces it ,
There are two markets for the money:

A] Production market: it is the market where the stocks are dealt

through the producer of it like a bank or a company.

B] Trading market: the market where we deal the stocks after buying it
from the main source.

2. Corporations:
It is an association that doesn’t belong to a certain owner or some but
its ownership is divided to stocks and shares

Advantages:
a] perpetual life ,b] limited liability to stockholders, c] ease of
transferring ownership, d]ease of expansion, e] applicability to all sizes
of firms .

Disadvantages:
a] governmental regulations, b] capital stock tax, c] expense of
organization

34
3. Characteristics of Chemical Processes:

a) Rapid changes in products and processes.

b) High rate of depreciation.
c) Large capital requirements.
d) Use of standardized unit processes to produce a wide variety of
products.
e) Active research programs to cut cost and find new products.
F) Expansion is not limited by existing markets.
g) Chemical industry is the largest consumer of power, water and
naturally of chemicals.
h) Hazards of pollution.
I) Requires skilled labor.

4. Planning of management functions:

Planning involves selecting objectives, strategies and policies for either

the whole enterprise or for an organization part of it. Planning is all
about decisions making since it involves selecting from alternatives, all
managers plan to the work of the units that are under their
responsibilities.

35
 ii. (Important) A process for sulphonation of phenol requires the use of a
3000 gal Kettle. It is desired to determine the most suitable material of
construction for this vessel. The time value of money is to be taken into
account by use of an interest rate of 10%. The life of the kettle is
calculated by dividing the corrosion allowance of in. by the estimated

corrosion rate. The equipment is assumed to have a salvage value of 10%

of its original cost at the end of its useful life. For the case in question,
corrosion data indicate that only a few corrosion resistant alloys will be
suitable.

Vessel Type Installed Cost, Average Corrosion Rate,

$ in/yr
Nickel Clad 80,000 0.02
Monel Clad 95,000 0.01
Hastelloy B (Ni 180,000 0.0045
Alloy)

Determine which material of construction should be used with appropriate

justification for the selection.

Answer:

R.O.I.I) given=10%

Vessel Installed Average No. of years Salvage Depreciation

Type Cost, $ Corrosion =(1/8)in*(1/rate)yr/in value
Rate, in/yr
Nickel 80,000 0.02 (1/8)/0.02= $8000 $11520
Clad 6.25 yr
Monel 95,000 0.01 (1/8)/0.01= $9500 $6840
Clad 12.5 yr

36
Hastelloy 180,000 0.0045 (1/8)/0.0045= $18000 $5827.34
B (Ni 27.8 yr
Alloy)

Nickel clad vs. Monel Clad :

R.O.I.I = (annual savings/additional investment)*100 %=( 11520 - 6840)/ (95000-

80000)
=31.2%

R.O.I.I = 31.2 % ˃10% then Monel is better than nickel.

Monel Clad vs. Hastelloy B (Ni Alloy):

R.O.I.I = annual savings/additional investment*100%= (6840 – 5827.34)/18000-

95000)

=1.2%

R.O.I.I = 1.2 % ˂10% then Monel is the preferred one than both materials

37
3) (important) A plant produces blowers at the rate of S units/day. The variable
costs per blower have been found to be EGP 50 + 0.15S. The total daily fixed
charges are EGP 2000 and all other expenses are constant at EGP 8000 per
day. If the selling price per blower is EGP 225, determine:
i. The daily profit at a production schedule giving the minimum cost per
blower.
ii. The daily profit at a production schedule giving the maximum daily
profit.
iii. The production schedule at the break-even point.

Solution:

Variable cost per blower = 50+0.15*S

Total variable cost= (50+0.15S)*S= 50S+0.15S 2/day

a) Minimum cost per blower:

b) Maximum daily profit:

Profit=Sales-Fixed cost-Variable cost

Profit= (225*S) -10,000 - (50S+0.15S 2)

38
Maximum profit = 584 * (225) -10,000 – 50*584 - 0.15 *5842 = $41,042

c) Break-even point

Profit= sales-fixed cost-variable cost

S = 60.25 = 61 units/day (first BEP)

= 1107 units/day (units must be a whole digit number)

(second BEP)

The values seem not logical somehow, right? , but if we understand the problem,
we can see that there is some logic in it!, lets analyze it using numbers and see
what does each value mean

 First the BEP occurs at 1107 and maximum profit occurs at 583, which
means that I achieved maximum profit at 583 then the profit starts to
decrease till I reached 1107, then I started to lose
 If we tried the least value of s which is zero, no production, p = -10,000,
because we still pay the fixed charges
 So there is other BEP which gives me the minimum S which I have to
produce to get over the value of fixed charges which is 10,000 and there is
second BEP which gives me the maximum S that I can produce before I
start to lose because the effect of S 2 starts to appear strongly where the
variable costs increases exponentially fast

39
  The two BEP could be calculated from the last equation as it has two roots

Can you draw a curve that describes the shape of the profit with S?

4) (important) For the following project under study for the production of a
product for detergents:
i. The construction of the project will be completed in 3 years. The
project needs 5 years from the start till the full capacity stage (6 th year
till 15th year).
ii. Data about the construction costs, operating costs and values of sales
during installation and operation stages are:

Year Construction Costs Operating Costs Volume of Sales

( EGP 1000) ( EGP 1000) ( 1000 tons)
1 600 20 -
2 800 20 -
3 1000 40 -
4 - 60 32
5 - 80 48
6 - 15 - 100 80

iii. Suggested selling price EGP 12 per ton, and the average interest cost
is 15%.
Required:
i) Draw the cash flow diagram of this project.
ii) Project performance evaluation by DCFRR method.
iii) Testing project sensitivity if the selling price is decreased from EGP 12
to EGP 10 per ton, and the operating costs are increased by 5% while
the construction costs are increased by 8%.

40
 Solution:

Interest Rate= 15%=0.15

1st case: selling price= EGP 12

Yr Construction Operating Sales Cash flow Present

Cost Cost (EGP EGP 1000 Value
(EGP 1000) (EGP 1000)
1000)
1 600 20 - -620/(1+i)1 - 539 130
2 800 20 - -820/(1+i)2 - 620 038
3 1000 40 - -1040/(1+i)3 - 683 819
4 - 60 32(12)=384 (384-60)/(1+i)4 185 248
5 - 80 48(12)=576 (576-80)/(1+i)5 246 600
6- - 100 80(12)=960 (960-100)*((1+i) 10- 2 145 885
15 1)/(i*(1+i)10))/(1+i)5
- - - - NPV= 734 746

(i) Cash flow diagram (discounted, non cumulative)

Cash Flow Diagram

2500000

2000000

1500000

1000000

500000

0
7 6 5 4 3 2 1 0
500000-

1000000-

Note : the chart should be completed to year 15

(ii) Put NPV=0:

41
-620/(1+i)1 -820/(1+i)2 -1040/(1+i) 3 + (384-60)/(1+i) 4 + (576-80)/(1+i)5+(960-100)*((1+i)10-
1)/(i*(1+i)10))/(1+i)5=0

Multiply both sides by (1+i) 5

=> -620*(1+i) 4 -820*(1+i) 3 -1040*(1+i)2 + (384-60)*(1+i) 1 + (576-80)+(960-100)*((1+i)10-

1)/(i*(1+i)10))=0

By trail & error: DCFRR= 21.323%

Note that IRR<DCFRR => the project is justified

(iii) 2nd case:

 8% increase in construction cost

 5% increase in operating cost
 Selling price is reduced to EGP 10

Yr Construction Operating Sales Cash flow Present

Cost Cost (EGP Value
(EGP 1000) (EGP 1000)
1000)
1 648 21 - -669/(1+i)1 - 581 739
2 864 21 - -885/(1+i)2 - 669 187
3 1080 42 - -1122/(1+i)3 - 737 733
4 - 63 32(10)=320 (320-63)/(1+i)4 146 941
5 - 84 48(10)=480 (480-84)/(1+i)5 196 882
6- - 105 80(10)=800 (800-105)*((1+i) 10- 1 734 174
15 1)/(i*(1+i)10))/(1+i)5
- - - - NPV= 89 338

Put NPV=0:

=> -669*(1+i) 4 -885*(1+i) 3 -1122*(1+i)2 + (320-63)*(1+i) 1 + (480-84)+ (800-105)*((1+i)10-

1)/(i*(1+i)10))=0

By trail & error: DCFRR=15.8%

42
Note that IRR<DCFRR but the difference is very narrow and so the project in case 2 is still
justified but less than in case 1

5) A company has two alternative investments which are being considered.

Company policies based on the current economic situation dictate a minimum
annual return on the original investment of 15% after taxes must be predicted
for any unnecessary investment. Company policies also dictate that, where
applicable, straight-line depreciation is used and, for time-value of money
interpretation, end of year and profit analysis is used. Land value and
prestart-up costs can be ignored. Given the following data:

Investment If, $ Irv, $ Salvage Service Annual Annual

no. value, $ life, years cash flow cash
after taxes, expenses,
$ constant
for each
year, $
1 200,000 15,000 18,000 7 60,000 32,000
Constant
2 250,000 20,000 25,000 8 65,000 25,000
Constant

Determine and comment which investment, if any, should be made by

alternative-analysis profitability-evaluation methods of:

i) Rate of return on investment.

ii) Payout period.
iii) Net present worth (NPW) at i=15%.
iv) Capitalized cost at i=12%.

43
 Solution:

i. ROII) given = 15%

Depreciation for case (1):

D1= = $26,000

Depreciation for case (2):

D2 = = $28,125

For case (1): Annual Savings = Annual Cash flow-depreciation

= 60,000-26,000 = $34,000

For case (2): Annual Savings = Annual Cash flow-depreciation

= 65,000-28,125 = $36,875

Since,

ROII =

ROII = = 5.23% < 15%

Case (1) is more economically profitable.

ii. Payout Period =

Depreciable fixed capital investment = Fixed capital investment –

salvage value

For Case (1):

Payout Period = = 3.033 years

44
 For Case (2):
Payout Period = = 3.46 years

Investment (1) is more economically recommended.

iii. For case (1):

NPW = -200,000 – 15,000 + 60,000[(1.15) -1 + (1.15) -2 + (1.15) -3 +
(1.15)-4 + (1.15)-5 + (1.15)-6 + (1.15) -7] + (18,000+15,000) (1.15) -7
NPW = $47,031.1

For case (2):

NPW = -200,000 – 15,000 + 65,000[(1.15) -1 + (1.15) -2 + (1.15) -3 +
(1.15)-4 + (1.15)-5 + (1.15) -6 + (1.15)-7 + (1.15) -8] + (25,000 + 20,000)
(1.15)-8
NPW = $91386.477

I. Capitalized Cost for the first investment = 12%

 Capitalized Cost = (F.C – W.C) + W.C + VS +

 Investment No.1;
Capitalized Cost = (200000 – 15000) +15000 + 18000 +

= $ 637.47 * 103
 Investment No.2 ;
Capitalized Cost = (250000 – 20000) +20000 + 25000 +

= $ 639.16 * 103

Therefore alternative 1 is recommended

45
 June 2006

Question 1:

i. A process plant making 2000 tons per year of a product selling for $0.8 per lb
has annual variable costs of $2 million at 100% capacity and other fixed costs of
$700,000. What is the fixed cost per pound at the break-even point? If the selling
price of the product is increased by 10%, what is the dollar increase in net profit
at full capacity if the income tax rate is 20% of gross earnings (1ton=2000 lbs).

Solution

Product; 2000 ton/year = 4,000,000 lb/year;

Selling price = $0.8/lb;
Variable costs = $2,000,000;
Fixed costs = $700,000;
Profit = sales - fixed costs - variable costs;
Let the capacity of production as percentage from total = X;

At the breakeven point:

0.8 * 4,000,000* X – 2,000,000 * X - 700,000 = 0;
X = 0.583 = 58.3%
Fixed cost per Lb at BEP = (700,000) / (0.583 * 400,000) = $3 / Lb product

Profit at full capacity:

Profit = (4000000) * (0.8) - (2000000) - (700,000) = $500,000
Net profit = profit - income tax = 500,000 - 100,000 = $400,000

Profit at full capacity and the selling price of the product is increased by
10%:
New selling price = 1.1 * 0.8 = $0.88;
Profit = (0.88) * (4000000) - (2000000) - (700,000) = $820,000;
Net profit = 820,000 - 164,000 = $656,000;
The dollar increase in net profit = 656,000 - 400,000 = $256,000
46
ii. The original investment for an asset was EGP 10,000 and the asset was
assumed to have a service life of 12 years with EGP 2000 salvage value at the
end of the service life. After the asset has been in use for 5 years, the remaining
service life and final salvage value are estimated at 10 years and EGP 1000,
respectively. Under these conditions, what is the depreciation cost during the
sixth year of the total life if straight line depreciation is used?

Solution

Original investment = EGP 10,000;

Service life = 12 years;
Salvage value = EGP 2000;
Depreciation during 1st 5 years = (5) * ((10,000 – 2000) / 12) = EGP 3333.33
Depreciation cost during the 6th year of the total life = ((10,000 – 3333.33 –
1000) / 10) = $566.67

Question 2

i. Write short notes on each of the following:

(a) Stocks market

It is the place where we buy and sell the stocks after the company produces it.
There are two markets for the money, Production market; which is the market
where it is dealt with it for the first time through the side which produces the
stock; it might be a company or a bank. And circulation market which is the
market where we deal with it after buying the stocks.
The stocks market produces daily handout containing the prices of stocks so that
you can compare between what happened yesterday and today.

47
 (b) Added-value
Added value is defined as the difference between the value of the product and
the value of what it takes to produce it from raw materials, auxiliaries (water and
electricity), chemicals added and so on and it is used to judge on the industrial
efficiency.

(c) Partnership
A partnership is usually defined as an association of two or more persons to
carry on as co-owners of a business for profit.

Advantages
- Ease of organization
- Combined talents, judgments and skills
- Larger capital available to the firm
- Tax advantages

Disadvantages
- Unlimited liability
- Limited life
- Divided authority
- Danger of disagreement

(d) Capitalized cost

The capitalized cost is defined as the original cost of the equipment plus the
present value of the renewable perpetuity.
K= CV +

48
 (e) Planning in management functions
Planning first is based on identifying the targets then choosing the systems and
ways of working planning is mainly taking decisions as you have to choose
between the all possible alternatives. The planning responsibility can’t be de
attached from the work of the other managers where all managers plan to the
work of the units that are under their responsibilities.

ii. A process for sulfonation of phenol requires the use of a good kettle. It is desired
to determine the most suitable material of construction for this vessel .The time
value of money is to be taken into account by use of an interest rate of 10%. The
life of the kettle is calculated by dividing the corrosion allowance of inch by the

estimated corrosion rate.The equipment is assumed to have a s alvage value of

10% of its original cost at the end of its useful life.For the case in question,
corrosion data indicate that only a few corrosion resistant alloys will be suitable.

Vessel type Installed cost Average corrosion

rate, In/yr.
Nickel clad $ 80,000 0.02
Monel clad $ 95,000 0.01
Mastelloy (Ni alloy) $ 180,000 0.0045

Determine which material of construction should be used with appropriate

justification of selection.

Solution

Service life = ;

Salvage value = 10% (installed cost)

49
 Depreciation=

Vessel type Installed depreciation Service life

cost
Nickel (1) $80,000 = $11520 (1/8) / 0.02 = 6.25

Monel (2) $95,000 = $6840 (1/8) / 0.01 = 12.5

Mastelloy (3) $180,000 = $5833.6 (1/8) / 0.0045 = 27.77

Comparing alternative (2) with alternative (1)

ROII = * (100) %

ROII = = 0.312 * 100 = 31.2 % > 10 %

Therefore; alternative (2) is accepted.

Comparing alternative (2) with alternative (3)

ROII = = 0.01184 * 100 = 1.184 % < 10 %

Therefore; Alternative (3) is refused.

Alternative (2) is accepted and optimum material of construction is ―monel clad―.

50
 Question 3

Determine the optimum economic thickness of insulation that should be used

under the following conditions: saturated steam is being passed continuously
through a steel pipe with an outside diameter of 16 inches. The temperature of
steam is 400 ˚F and the steam is valued at $1 per 100 lb. The pipe is to be
insulated with a material that has a thermal conductivity of 0.02 Btu\hr.ft2
(˚E/ft).the cost of the installed insulation per foot of pipe length is $9*X, where X
is the thickness of the insulation inches. Annual fixed charges including
maintenance amount to 20% of the initial installed cost. The total length of the
pipe is 500 ft, and the average temperature of the surroundings may be taken as
70˚F.Heat transfer resistance due to the steam film, Scale and pipe wall are
negligible. The air-film coefficient at the outside of the insulation may be
assumed constant at 2 Btu\hr.ft2˚F for all insulation thickness-heat capacity of
steam at these conditions = 826 Btu\lb.

Question 4:

For the following project;

1-The construction of project will be completed in 3 years. The project needs five
years from the start till the full capacity at age (6th year till 15th year).
2-Data about the construction costs, operating costs and volume of sales during
installation and operation at ages are:

Year Construction costs Operating Costs Volume of sales

(EGP 1000) (EGP 1000) (1000 tons)
1 600 20 —
2 800 20 —
3 1000 40 —
4 — 60 32
5 — 80 48
6-15 — 100 80

51
3-Suggested selling price EGP 15 per ton, and the average interest cost is 15%.
Required:
i) Draw the cash flow diagram of this project.
ii) Project performance evaluation by TRR method
.

Solution

i) First we multiply the volume of sales which is in tons by the selling price which
equals EGP 15 per ton to get the sales cash flow.

construction operating Volume of sales

year sales(EGP)
cost(EGP) cost(EGP) (tons)
1 600000 20000 0 0
2 800000 20000 0 0
3 1000000 40000 0 0
4 0 60000 32000 480000
5 0 80000 48000 720000
6 0 100000 80000 1200000
7 0 100000 80000 1200000
8 0 100000 80000 1200000
9 0 100000 80000 1200000
10 0 100000 80000 1200000
11 0 100000 80000 1200000
12 0 100000 80000 1200000
13 0 100000 80000 1200000
14 0 100000 80000 1200000
15 0 100000 80000 1200000

Second we calculate the net cash flow by subtracting the construction cost and
the operating cost from the sales:
Net cash flow = sales – (construction cost + operating cost)

52
 construction operating
year sales(EGP) Net
cost(EGP) cost(EGP)
1 600000 20000 0 -620000
2 800000 20000 0 -820000
3 1000000 40000 0 -1040000
4 0 60000 480000 420000
5 0 80000 720000 640000
6 0 100000 1200000 1100000
7 0 100000 1200000 1100000
8 0 100000 1200000 1100000
9 0 100000 1200000 1100000
10 0 100000 1200000 1100000
11 0 100000 1200000 1100000
12 0 100000 1200000 1100000
13 0 100000 1200000 1100000
14 0 100000 1200000 1100000
15 0 100000 1200000 1100000

Third we calculate the NPV by using this law:

NPV = ΣCF n / (1 + i) n
Where
 NPV = Net Present Value
 CFn = the cash flow in period n
 i = the discount rate=15 %

Cumulative
Year Net Cash flow NPV
Value
1 -620000 -620000/(1+i) 1 -539130.43 -539130

2 -820000 -820000/(1+i) 2 -620037.81 -1159168

3 -1040000 -1040000/(1+i)3 -683816.88 -1842985

4 420000 -420000/(1+i) 4 240136.363 -1602849

5 640000 640000/(1+i)5 318193.111 -1284656

6 1100000 1100000/(1+i)6 475560.356 -809095

7 1100000 1100000/(1+i)7 413530.744 -395565

53
 8 1100000 1100000/(1+i)8 359591.951 -35972.6

9 1100000 1100000/(1+i)9 312688.653 276716.1

10 1100000 1100000/(1+i)10 271903.177 548619.2

11 1100000 1100000/(1+i)11 236437.545 785056.8

12 1100000 1100000/(1+i)12 205597.865 990654.6

13 1100000 1100000/(1+i)13 178780.752 1169435

14 1100000 1100000/(1+i)14 155461.524 1324897

15 1100000 1100000/(1+i)15 135183.934 1460081

Fourth we draw the cash flow diagram of the project between the NPV and time
in years and between cumulative value and time in years

Discounted cash flow

600000
500000
400000
Value of cash flow (EGP)

300000
200000
100000
0
100000- 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
200000-
300000-
400000-
500000-
600000-
700000-
800000-
Time (year)

54
 Cumulative discounted cash flow
1800000
1600000
1400000
1200000
1000000
Value of cash flow (EGP)

800000
600000
400000
200000
0
200000-
400000- 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
600000-
800000-
1000000-
1200000-
1400000-
1600000-
1800000-
2000000-
2200000-
Time (year)

ii) At TRR; the NPV = 0, and if rate of return i is > TRR…..this means loss and if
rate of return is < TRR… this means profit
So what we will do is that we will calculate TRR and compare it with rate of return
given and see whether the project gains or losses.

NPW = 620000 / (1+i) 1 + 820000 / (1+i) 2 + 1040000 / (1+i)3 + 420000 (1+i)4 +

640000 / (1+i)5 + 1100000 [(1+i)10-1) / (i (1+i) 10] (1+i)5 = 0
Using trial and error;

i NPW
0.1 2858.387602
0.11 2516.417683
0.12 2209.246031
0.13 1932.997527
0.14 1684.27198
0.15 1460.080851
0.16 1257.793033
0.17 1075.088313
0.18 909.917349

55
So i which 0.19 760.4671906 makes this NPV
= 0 is i≈0.26 0.2 625.1315322 (26%)
0.22 391.2608816
0.23 290.3318368
0.24 198.6931123
0.25 115.4479628
0.26 39.79493808
0.27 -28.98320837

As seen in the next chart the value of the TRR is as follows:

TRR= 26.565 %

Since that the rate of return is 15 % and less than the TRR, the project is
justified.

56
 3500

3000

2500

2000
NPW

1500

1000

i which makesNPV =0
500

0 I
0 0.05 0.1 0.15 0.2 0.25 0.3
500-

Question 5 (important)

i. A company has 2 alternatives which are being considered. Company policies

dictate that a minimum annual return on the original investment of 15% after
taxes must be predicted given the following data should be made by alternative
analysis.
Profitability-evaluation methods of:
(a) Rate of return on initial investment
(b) Minimum payout period with no interest charge

57
 (c) Net present worth (at i=15%)
(d) Capitalized cost (at i=15%)

Invest If,$ Iw,$ Salvage Service Annual Annual cash

Number value,$ life, years cash expanses,$
flow,$
1 180,000 12,000 16,000 8 55,000 30,000
2 225,000 20,000 25,000 8 60,000 22,000

Solution
First we will calculate the Depreciation charges for both where:
D1= = 20,500 D2 = = 25,000

First we have to see if alternative 1 is valid or not and this is done by calculating
ROI for alternative 1

ROI = = = 0.179 = 17.9 %

Therefore alternative 1 is valid and now we will start comparing alternative 2 to 1

as follows:

ROII = =

(a) ROII1-2 = = 0.0094 = 0.94%

Therefore alternative 2 is refused and alternative 1 is chosen

(b) Min. payout 1 = = = 2.9 year

58
 Min. payout 2 = = 3.33 year

N.B. Profit + depreciation = annual cash flow

Therefore alternative1 is accepted.

(c) Npw 1 = -180,000 - 12,000 + 55,000 * + = EGP

63,955.9

Npw 2 = -245,000 + 60,000 * + = EGP 38,949.87

Therefore 1 is accepted.

(d) Capitalized cost 1 = + 16,000 + + 12,000 = EGP

471649.4

Capitalized cost 2 = 200,000 + 25,000 + + 20,000 = EGP

488,800
Alternative 1 is chosen as it has lower capitalized cost.

ii. The following information applies to AZM company, Given date:

 Long term debt: EGP 3200
 Accounts payable: EGP 5000
 Cash in bank: EGP 10000
 Government bonds: EGP 12000
 Reserve for depreciation: EGP 1200
 Inventory: EGP 4000
 Debts due within one year: EGP 3000
 Machinery and equipment (at cost): EGP 40000
 Prepaid rent: EGP 600
 Social security taxes payable: EGP 680
 Reserve for expansion: EGP 2400
 Accounts receivable: EGP 6000

59
Determine the current ratio, cash ratio and working capital for company AZM at
the given data.

Solution
Current assets = cash + government bonds + inventory + + accounts receivable
= 10,000 + 12,000 + 4000 + 6000 = EGP 32000

Current liabilities = accounts payable + debts within 1 year + taxes = 5000 +

3000 + 680 = EGP 8680

Current ratio = = = 3.68

Working capital = current assets - current liabilities = 32,000-8680 = EGP 23,320

Cash ratio= = = 2.53

60
 June 2007

Question 1:

i- The total capital investment for a conventional chemical plant is $2000000

and the plant produce 3 million kg of a product annually. The selling price of
the product is $1.5/kg. Working capital amounts to 15% of the total capital
investment. Raw materials cost for the product is $0.1/kg, utilities$0.07/kg
and packaging $0.008/kg. Labor costs $0.09/Kg.
Distribution costs are 5% of the total product cost. Plant overhead costs
amount of 60% of the cost of operating labor, supervision and maintenance.

Estimate the following:

a- Manufacture cost per kg of product.
b- Total product cost per year.
c- Profit per kg of product before taxes.

Solution:

TCI = FCI+WCI

2,000,000 = FCI+0.15*2000, 000

FCI= $1,700,000

Variable cost= 0.1+0.07+0.008+ (0.1*0.08*1700000/3000000)

= $0.1825/kg

Fixed cost =0.09*(1+0.2) +

(1700000/3000000)*[0.15+0.01+0.08]+0.6*[(1.2*0.09)+0.08*1700000/3*10^6]=

$0.336/kg

a) Manufacturing cost = fixed cost+ variable cost

= 0.336+0.1825 = $0.5185/kg

b) Total production cost per kg = 1.2*(0.5185) = $0.6222/kg

Total production cost per year = 0.6222*3000000= $1866600

c) Profit per kg = 1.5-0.6222 = $0.8778/kg

61
ii- A power plant for generating electricity is one part of a plant design proposal.
two alternatives power plants with necessary capacity have been suggested.
One uses a boiler and steam turbine while the other uses a gas turbine. The
following information applies to the two proposals:-

Boiler and steam

Gas turbine
turbine
Initial investment $ 500,000 750,000
Fuel cost/yr $ 26,000 18,000
Insurance $ 17,000 24,000
Maintenance $ 21,000 16,000
Service life 10 20
Salvage value 0 0
Depreciation 50,000 37,500

Where: Depreciation = (P+S)/N

Solution:

ROI I = (8000 – 7000 + 5000 + 12,500)/250,000 = 0.074 =7.4%

Since ROII is 7.4% < 10%, therefore the steam turbine is not accepted and Gas
turbine is recommended

Question 2: (Important)

A plant is being designed in which 450,000 lb/day of caustic soda solution

containing 5% by weight caustic soda must be concentrated to 40% by weight. A
single effect or multiple effect evaporators will be used and a single effect
evaporator of the required capacity requires an initial investment of $ 54,000.
This same investment is required for each additional effect. The service life is
estimated to be 10 years, and the salvage value of each effect at the end of the

62
service life is estimated to be $ 18,000. Fixed charges minus depreciation
amount to 20% yearly based on the initial investment. Steam costs $ 1.8 per
1000 lb, and administration and labor costs are $ 120 per day, no matter how
many evaporator effects are used. Where X is the number of evaporator effects,
0.9X is the amount of water evaporated / lb steam. There are 300 working days
per year, 24 hours per day.

 If minimum ROII is 15%, how many effects are needed? (Alternative

problem)
 How many effects should be used for giving the minimum total cost per
year? (Optimization problem)

Solution for the alternative problem:

 Initial caustic = 0.05 * 450,000 = 22,500 lb /day

 The amount of caustic remains the same as only water evaporates, so the
amount of caustic after evaporation is also 22,500 lb
 This amount = 40% from the total after evaporation
 Total amount = 22500/0.4 = 56,250 lb/day
 Amount of water evaporated per day = amount before evaporation –
amount after evaporation = 450,000 – 56,250 = 393,750 lb/day
 Amount of steam / day = 1 * 393,750 / 0.9X = 437500 / X
 Cost of steam / day = (1.8 / 10000) * (437,500 / X) = 787.5 / X
 Fixed charges/ day = 0.2 * 54,000X/ 300 = 36X
 D = [(54000 – 18000) / (10 * 300 ) ] * X = 12X

ROI1-2 = = 1.92 = 192%

ROI2-3 = = 0.4625 = 46.25%

63
ROI3-4 = = 0.098 =9.8 %

Number of effects is 3 effects

Solution for the optimization problem:

Here solution will be as following:

 Take X = 1
 Calculate the cost of the evaporator
 Calculate the fixed charges per year which amounts to certain percent
from the evaporator cost and add to it depreciation charges
 Calculate the amount of water evaporated per year
 Calculate the amount of steam used per year
 Calculate the steam cost per year
 Calculate the total cost of fixed charges and operating charges
 Repeat the previous steps by putting X = 2, 3
 Choose the X which gives minimum total cost

X Evaporator Fixed cost Water Steam used Steam Total cost

cost +D evaporated per year cost
Per year Per year Per year
1 54,000 14,400 = 393,750 * (393750*300) 236,250 250,650
(0.2*54,000 300 /( 0.9 *1) =(
+3600) amount
of steam
*
1.8/1000)
2 108,000 28,800 393,750 * (393750*300) 118,125 146,925
300 /( 0.9 *2)
3 162,000 43,200 393,750 * (393750*300) 78,750 121,950
300 /( 0.9 *3)
4 216,000 57,600 393,750 * (393750*300) 59,063 116,662.5
300 /( 0.9 *4)
5 270,000 72,000 393,750 * (393750*300) 47,250 119,250
300 /( 0.9 *5)

Therefore the optimum number of evaporators = 4 evaporators

Note: the alternative way says 3 while optimization says 4, any comments?

64
Question 3: (Important)

i) The total value of a new plant is $ 2 million. A certificate of necessity has been
obtained permitting a write- off 60% of the initial value in 5 years. The balance of
the plant requires a write –off period of 15 years.

Using the straight –line method and assuming negligible salvage and scrap
value, determine the total depreciation cost during the first and the sixth year.

Solution:

Applying the straight line method to get the first depreciation charge

We want to save 60% of the equipment cost in 5 years

So total depreciation in the first 5 years = 0.6* 2*10 6 = $1,200,000

By dividing this value on 5 years

D1 = D 2 = ….. = D5 = $240,000

To get the deprecation charge in the sixth year

D6= (V0-Vs)*(1/n)

D6 = (2*10^6-0.6*2*10^6-0)*(1/10)

D6 = $80,000

ii) An engineer in charge of the design of a plant must choose either a batch or a
continuous system. The batch system offers a lower initial outlay, but owing to
high labor requirements, it exhibits a higher operating cost.

The following table misses some values of cash flow and NPW

NPW
item year DCFRR @ 15%
0 1:10
$-
batch system 50,000 ?? 25% ??
$-
continuous system 70,000 ?? 25% ??

65
Find the value of cash flows and net present worth for two systems. If the
company requires a minimum rate of return of 15%, which system should be
chosen?

Solution:

First we will complete the missing spaces in the previous table

To get R, substitute in the NPW = 0 using DCFRR = 25%

[ 1  i   1]
n

0 = -P + R *
i 1  i 
n

Batch system

[1.2510 – 1]
50,000 = R *
0.25* 1.25
10

R=$14003.63

Continuous system

[ 1  i   1]
n

P=R*
i 1  i 
n

[1.2510 – 1]
70,000 = R*
0.25* 1.25
10

R=$19605.08

For the NPW at I = 15%:

Batch:

[ 1  i   1]
n

NPW = - 50,000 + R *
i 1  i 
n

[ 1  0.15   1]
10

NPW= - 50,000 + 14003.63 *

0.15 * 1  0.15 
10

NPW = $20280.98

66
Continuous:

[ 1  i   1]
n

NPW = -70,000 + R *
i 1  i 
n

[ 1  0.15   1]
10

NPW = -70,000 + 19605.08 *

0.15 * 1  0.15 
10

NPW = $28393.36

Given ROII = 15%

Additional investment = $20,000

Savings = 19605.08 - 14003.63 = $5601.45

[ 1  i   1]
10

20,000 = 5601.45 *
i 1  i 
10

By trial and error processes

I = 0.25 = 25% > 15%

Continuous system is recommended

Question 4:
For the following project:

1-The construction of the project will be completed in 3 years. The project needs
five years from the start till the full capacity stage (6 th years till 15th years)

2- Date about the construction costs, operating costs and volume of sales during
installation and operation stages are:

Year Construction cost Operating cost Volume of sales

EGP 1000 EGP 1000 1000 tons
1 800 30 -
2 1000 30 -
3 1200 50 -

67
 4 - 70 40
5 - 100 60
6-15 - 120 100

3-suggested selling price EGP 20 per ton, and the average interest cost is 15%
present required

(i)Draw the cash flow diagram of the project

(ii) Project performance evaluation by TRR method.

(iii)Testing project sensitivity if the selling price is decreased from EGP 20 to

EGP 15 per ton

Solution:

Volume of
Construction Operating Volume
sales Net cash Comulative Comulative
Year cost cost of sales npw
EGP1000 flow cash flow npw
EGP 1000 EGP 1000 1000 tons

1 -800 -30 - - -830 -721.739 -830 -721.739

2 -1000 -30 - - -1030 -778.8 -1860 -1500.539
3 -1200 -50 - - -1250 -821.895 -3110 -2322.434
4 - -70 40 800 730 417.38 -2380 -1905.054
5 - -100 60 1200 1100 546.894 -1280 -1358.16
6-15 - -120 100 2000 1880 ............ 600 ..............

68
 Cash Flows and Discounted Cash Flows
2200
2000
1800
1600
1400
1200
1000
Value of Cash Flow

800
600
400
Net cash flow
200
0 Discounted at 15%
-200 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-400
-600
-800
-1000
-1200
-1400
-1600
Time, year

69
 21000
Cash Flows and Discounted Cumulative Cash Flows

18000

15000
Value Of Cash Flow*1000

12000

Undiscounted Cum
9000
Discounted Cum
6000

3000

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-3000
years

(ii)

[ 1  i   1]
10
830 1030 1250 730 1100 1
0= + + + + + 1880 * *
(1  i) (1  i) (1  i) (1  i) (1  i) i * 1  i  (1  i) 5
2 3 4 5 10

By trial and error, TRR = 33.9 %

Since the average interest 15% is less than TRR, therefore the project is feasible

70
 (iii)

Year Construction cost Operating cost Volume of sales Volume of Net cash flow
EGP 1000 EGP 1000 1000 tons sales
EGP 1000

1 -800 -30 - - -830

2 -1000 -30 - - -1030
3 -1200 -50 - - -1250
4 - -70 40 600 530
5 - -100 60 900 800
6-15 - -120 100 1500 1380

[ 1  i   1]
10
830 1030 1250 530 800 1
0= + + + + + 1380 * *
(1  i) (1  i) (1  i) (1  i) (1  i) i * 1  i  (1  i) 5
2 3 4 5 10

By trial and error, TRR = 26%

Since the average interest 15% is less than TRR, therefore the project is not sensitive.

i) Write short notes on each of the followings:

a- Added-value b- Corporations

c- Stocks market d- Planning in

management functions

Solution:

a- Added-value: it is the difference between the value of the product and the
value of what it Takes to produce it from raw materials, auxiliaries (water-
electricity), chemicals added and so On and it is used to judge on the industrial
efficiency.

b- Corporations: it does not belong to certain owner or some but it is

ownership would be divided into shares of stocks.

71
 c- Stocks market: it is the place where we buy and sell the stocks after the
companies produce it there are two markets for the money:

1. Production market

2.‫سوق التداول‬

d- Planning in management functions: planning first is based on identifying

the targets then choosing the systems and ways of working planning is mainly
taking decisions as you have to choose between the all alternatives.

The planning responsibility can't be detached from the work of the other
managers where all managers plan to work of the units that are under their
responsibilities.

ii) The following information applies to AZM Company on - given date:

Terms EGP
Long term debts 3,200
Accounts payable 5,000
Cash in bank 20,000
Government bonds 25,000
Reserve for depreciation 1500
Inventory 5000
Debts due within one year 3000
Machinery and equipment (at cost) 50,000
Prepaid rent 1000
Social security taxes payable 700
Reserve for expansion 2500
Accounts receivable 8000

Determine the current ratio, cash ratio, and working capital for company AZM at
the given date

72
Solution:

Current assets = Cash in bank + Government bonds + Inventory

+ + Accounts receivable

= 20,000 + 25,000 + 5,000 + 8,000

= EGP 58,000

Current liabilities = Accounts payable + Debts within 1 year + Social security

taxes payable

= 5,000 + 3,000 + 700 = EGP 8,700

Current assets
Current ratio = = = 6.66
Current liabilities

Cash
Cash ratio = = = 5.17
Current liabilities
Working capital = Current assets - Current liabilities
= =58,000 – 8,700 = EGP 49,300

73
 June 2008

Question (1):

i-The annual direct production cost for a plant operating at 70% capacity are
$280,000 while the sum of the annual fixed charges, overhead costs and general
expenses is $200,000.what is the break-even point in units of production per year
if total annual sales are $560,000 and the product sells at $40 per unit? What are
the annual gross earnings for this plant at 100% capacity? And if there are 22%
taxes and 26% surtaxes on each profit above $25,000, estimate the net profit

Answer:
Profit = Sales - Variable cost - fixed cost
0 = (560000/0.7)*x – (280000/0.7)*x-200000
X=0.5 this means BEP occurs at capacity at 50%
Units at70%= total sales/price per unit=560000/40=14000 units
BEP in units of production = (50/70)*(14000) =10000 units

At 100% capacity
P=(560000/0.7) - (280000/0.7)- 200000=200000$
Net Profit=200000-(0.22*200000) - 0.26*(200000 - 250000) = $110500

ii- (Important) The cost of all purchased items of chemical engineering plant is
$900,000 and 20 years of service life is estimated .calculate the %age of original
paid off after 3 years of service life using the declining balance method for
depreciating assets as compared to sum of years digits method

Solutions:

 P= $900,000
 S=0
 N=20 years

1 – Declining method

First year= P * (f / n) = (900,000)*(1/20) = $45,000

So = (900,000-45,000) = $855,000$

Second year= (855,000)*(1/20) = $ 42750

So= (855,000-42750) = $812250

74
Third year= (812250)*(1/20) =$ 40612.5

So = (812250-40612.5) = $771,637.5

% paid off in 3 years = (128,363/900,000) * 100 = 14.2625%

2-sum of years digits

Here we can get the three years together where:

D1 + D2 + D3 = (20 + 19 + 18) / (1+2+3+4+-----------+20) * 900,000= $244,286

D %=( 244,286/900,000) = 27.14%

Question (2):

i-write short notes on each of the following:

a-Added value:

it is defined as the difference between the value of the product and the value of
what it takes to produce it from raw materials, auxiliaries(water,
electricity,…etc),chemical added and so on. And it is used to judge the industrial
efficiency.

b-cost index:

as the value of money changes with time, what costed x the last year, would
probably cost more than x this year. And it is used to obtain the price of certain
item at the present time by knowing its price before.

Present cost = original cost*(index value at present time/index value at time

original cost was estimated)

c- Declining balance method:

This method ignores the scrap value and depreciation is calculated as follows:

D1=f*(1/n)*cost

75
D2=f*(1/n)*remaining cost

n: number of years

f: 1(single) or 2(double) or 3(triple)

d-Capitalized cost:

It is defined as the original cost of the equipment plus the present value of the
renewable perpetuity

K=Cv + (Cr/((1+i)^n)-1))

II-The following information applies to AZM Company on given date

Long term debts 3300

Accounts payable 6000

Cash in bank 40000

Government bonds 45000

Reserve for depreciation 2000

Inventory 6000

Debts within one year 3000

Machinery and equipment 60000

Prepaid rent 1500

Social security taxes payable 800

Reserve for expansion 3000

Accounts receivable 9000

Determine the current ratio, cash ratio and work capital for company AZM at the
given data

76
Solution:

Current assets=40000+6000+45000+9000=100,000

Current liabilities=3000+6000+800=9800

Working capital=100,000-9800=90,200

Current ratio= (100000)/9800=10.2

Cash ratio= (40000+45000)/9800=8.6734

Question (3):

The overhead condenser of a distillation tower is to be designed to condense

12000 lbs of vapor/hr. The effective condensation temperature for the vapor is
225℉. The latent heat of condensation of vapor equals 245 Btu/lb, cooling water
is available at 80℉. The cost of cooling water is $ 11*10E-6/lb. The overall heat
transfer coefficient equals 160

Btu/hr ft2℉. The cost of installed condenser is $75/ft 2 of heat transfer area, and
the annual fixed charges including maintenance and interest rate are 30% of the
initial investment. The condenser is to operate 8000 hrs/year.

Determine

1. The outlet temperature of cooling water

2. Cooling water flow rate
3. The heat transfer area for optimum conditions
[Cp of cooling water = 1 Btu/lb℉]

Question (4): (important)

An engineer in charge of the design of a plant must choose either batch or a

continuous system. The batch is to be installed at a cost of $ 60,000 and it is
expected to operate for as long as 20 years. Two men operate this batch system
at $4 per employee-hour. Utilities required for the batch unit cost $1,100 per
month and annual fixed charges other then depreciation accounted to 10% of the
initial cost.

77
The continuous system costs $40,000 and expenses for the monthly
consumption of fuel and water amount to $2,100. Three working labors would be
required for this unit per month at $1,600 each. Annual fixed cost excluding
depreciation is 25% age of the purchased cost.

The plant is operated 24 hours, 365 days per year and both systems have a
negligible salvage value. If the minimum return on any investment is 15%,
determine the minimum service life for the continuous system to be accepted as
an alternative to meet the incremental return.

Solution:

Batch:

P= $ 60,000
Salvage(S) = 0
N= 20 years

 Depreciation= (60,000-0)/20 = $3,000 / year

 Employees cost = 2*employee*($4/employee in hr)*(24 hr/day)*(365
day/year) = $70,080 / year
 Utilities cost = ($ 1,100/month)*(12/year) = $ 13,200 / year
 Annual fixed changes = 0.1*60,000 = $ 6,000

Continuous System:

 P = $ 40,000
 Utilities cost = ($ 2,100/month)*(12month/year) = $ 25,200
 Employees costs = 3*(employee/month)*($
1,600/employee)*(12month/year) = $ 57,600
 Annual fixed cost excluding depreciation = 0.25*40,000 = $ 10,000

ROI = [(10,000-6,000) - (70,080-57,600) + (25,200-13,200) - (3,000-D)] / 20,000

D = $ 2,480

D=P/n

2480 = 40,000/n

n = 17 years

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Question 5: (important)

The construction of the project will be completed in 3 years, the project needs 5
years from the start till full capacity stage ( 6th till 15th years )

Data about the construction costs, operating costs and volume of sales during
installation and operation stages are: (values are in EGP1000)

Year construction cost operating cost volume of sales (1000 ton)

1 -600 -20 -

2 -800 -20 -

3 -100 -40 -

4 -60 32

5 -80 48

6-15 -100 80

16 -120 60

Salvage value at end of service life=EGP 200,000

Suggested selling price EGP 15 per ton, and the average interest rate is 15 %.

Required:

(i) Project performance evaluation by DCFRR method.

(ii) Testing project sensitivity if the selling price is decreased from EGP
15 to 10 per ton, and both construction and operation costs is
increased by 10 %

Solution:

i) Project performance evaluation by DCFRR technique

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 Item/year 1 2 3 4 5 6_15 16
Cash out flow
Construction
600 800 1000 _ _ _ _
(1000 EGP)
Operating cost
20 20 40 60 80 100 120
(1000 EGP)
out cash flow
(620) (820) (1040) (60) (80) (100) (120)
(1000 EGP)
Cash in flow
Sale price
_ _ _ 480 720 1200 900
(1000 EGP)
N.C.F
(620) (820) (1040) 420 640 1100 780
(1000 EGP)
Starting

6-15

16

1
2
3

80
 4
5
6-15 = 2160.84
16

1
2
3
4
5
6-15

16

NPV=+223.66

6-15

81
 16

is between 15% and 27%

ii)
1 2 3 4 5 6-15 16
Construction 660 880 1100 - - - -
Operating 22 22 44 66 88 110 132
Σ Out cash
(682) (902) (1144) (66) (88) (110) (132)
flow
Sales price - - - 320 480 800 600
Net cash flow (682) (902) (1144) 254 392 690 468

5 .89
6-15

16

82
 NPV=+84.54

6-15

16

NPV=-32.88

Sensitivity analysis for decreased selling price and increase expenses:

DCFRR = 15.7 which is still greater than 15% not sensitive

83
84
 June 2009

Question (1)

Estimate the manufacturing cost per kilo of product under the following
conditions:
Fixed capital investment =$10 million.
Annual production output =20 million Kg of product.
Raw materials cost=$0.25/kilo of product.
Utilities:-

 Filtered and softened water =20 gal/Kg of product ($2/1000gal).

 100 psig steam=80 Kg/Kg of product ($2.5/1000Kg).
 Purchased electrical power=0.6 KWH/Kg of product ($0.2/KWH).
Operating labor=20 men per shift at $20 per employee –hour
Plant operates 300 (24-h) days per year.
Corrosive liquids are involved. Shipments are in bulk car load lots.
A large amount of direct supervision is required.
There are no patent, royalty, interest, or rent charges.
Plant overhead costs amount to 50 % of the cost for operating labor, supervision,
and maintenance.
Solution
F.C.I=$10 million.
Annual production output =20 million Kg of product.
Raw materials cost=$0.25/kilo of product.

Plant Overhead =0.5 (labor + supervision + maintenance)

Maintenance per Kg of product = 0.1 F.C.I

Miscellaneous material = 0.1 maintenance = 0.1*0.05

Variable cost per Kg of product = 0.25+ 0.1* 0.05+ 0.36 = $ 0.615

Depreciation = 0.15 F.C.I

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Insurance = 0.01 F.C.I
Fixed cost per Kg of product = 0.144 * (1+0.2) +
0.5*[(0.144 * (1+0.2)) +0.05] + 0.5 * (0.15+0.01) +0.05 =$ 0.4142

Manufacturing cost per Kg of product = Fixed cost + variable cost

= 0.4142+ 0.615 = $1.03

Question (2)

i- Write short notes on each of the followings:

a. Added value
b. Cost indexes
c. Sinking fund method
d. Corporation

(Important) ii- A plant is producing 20000 t/y of a product. The overall yield is
70% on a mass basis (kg of product per kg raw materials). The raw material
costs £20/t and the product sell for £50/t. A process modification has been
devised that will increase the yield to 80%. The additional investment required is
£50000 and the additional costs are negligible.

Is the modification worth making?

Determine ROII and payback time?

Solution
i-
a. Added value:

Is defined as the difference between the value of the product & the value of what
it takes to produce it from raw materials, auxiliaries (water , electricity…etc),
chemicals added and so on , it’s used to judge on the industrial efficiency.

b. Cost index:

As the value of money changes with time, what cost x the last year, would
probably cost more than x this year.
Cost index is used to obtain the price of certain item at the present time by
knowing its price at another time.

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There are several types of cost indices such as Marshall and Swift (Marshall and
Stevens) and Lewis.

c. Sinking fund method:

It’s a method used to calculate the yearly cost due to depreciation.

d. Corporation:

Business doesn’t belong to a certain owner, or some. Ownership is divided into

shares of stokes.
Advantages:

 Limited liability to stakeholders.

 Ease of transferring ownership.
 Applicability to all sizes of firms.
 Ease of expansion.
 Perpetual life.

Disadvantages:

 Government regulations.
 Capital stock tax.
 Expense of organization.

ii- product 2 = (80 * 20,000) / 70 = 22,857.14 t/y

Annual savings = (22,857.14 - 20,000) * 50 = £ 142,857

Because ROII > 15 %, it means that this modification is worth to make

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Note: this solution is based upon the idea that the plant will use the same amount
of raw material and product will increase that’s why we were concerned with the
savings which results from extra product.

But if the plant would produce same amount of product and in this case if yield
increases, it would use less raw material, in that case savings would be in cost of
raw material.

What do you think is better?

Question (3)

i- Mention the most important steps in planning a new business.

(Important) ii- A company is considering the purchase and installation of a pump

which will deliver oil at a faster rate than the pump already in use. The purchase
and installation of the larger pump will require on immediate outlay of $1600 but it
will recover all the oil by the end of one year. The relevant of cash flows have
been established as follows

Year NPW at 10
DCFRR
0 1 2 %
-$
Install larger pump $ 20,000 0 ? ?
1600
Operating existing
0 $ 10,000 $ 10,000 ? ?
pump

Find the missing values in the above table for the discounted cash flow rate of
retain and net present worth.
If the company requires a minimum rate of retain 10 %, which alternative should
be chosen?

Solution
i-
1- Determine what profit you want from this business organizing the time you
will give and the investment you will have.
2- Survey the market you plan to serve to as certain if necessary sales
volume required to produce the profit called in step 1 is obtained.
3- Prepare a statement of assets to be used.
4- Prepare an opening day balance sheet.

88
 5- Study the location and the specific site chosen in relation to specific
characteristics.
6- Prepare a layout for the entire space to be used for business activity.
7- Choose your legal form of organization.
8- Review all aspects of your merchandising plan.
9- Analyze your estimated expenses in term of their fixed or variable nature.
10- Determine the firm’s breakeven point.
11- Review the risks to which you are subjected and how you plan to cope
with them.
12- Establish a personal policy at the outset.
13- Establish an adequate system for counting records.

ii-
 In case of installing larger pump
Get DCFRR = i at NPW = 0

i = 1150 %

NPW at 10 % i = 0.1

NPW = $ 16582

 In case of operating the already existing pump

Get DCFRR = i at NPW = 0

i =∞
NPW at 10 % i = 0.1

NPW = $ 17356

Since that there is no construction cost in one of them so we cannot compare

using ROI or DCFRR, so we will take the investment which has the higher NPW ,
so we will keep the already existing pump

89
 Question (4)

i. Define DCFRR
ii. For the following project:
1- The construction of project will be completed in 3 years, the project needs
five years from the start till full capacity stage.
2- Data about the construction costs, operating costs and volume of sales
during installation and operation stages are:

Construction costs Operation costs Volume of sales

Year
(EGP 1000) (EGP 1000) (1000 tons)
1 1200 40 —
2 1600 40 —
3 2000 80 —
4 — 120 64
5 — 160 96
6-15 — 200 160
16 — 240 120

3- Salvage value at end of the project = EGP 400000

4- Suggested selling price EGP 15 per ton, and the average interest rate is
15% percent

Required:

1- Project performance evaluation by DCFRR method.

2- Testing project sensitivity if the selling price is decreased from EGP 15 to
EGP 10 per ton, and both construction and operating costs is increased by
10% percent.

Solution

i. DCFRR: (discounted cash flow rate of return)

At DCFRR or TRR (true rate of return) the NPW = 0 (present income = present
investment), and if rate of return i is > DCFRR…..this means loss and if rate of
return is < DCFRR… this means profit
So what we will do is that we will calculate TRR and compare it with rate of return
given and see whether the project gains or lose. Also we can use DCFRR as a
method for evaluation of different projects.

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ii. 1-

Construction Costs Operating Costs Sales Net Cash Flow

Year
(EGP 1000) (EGP 1000) (EGP 1000) (EGP 1000)
1 -1200 -40 - -1240
2 -1600 -40 - -1640
3 -2000 -80 - -2080
4 - -120 64*15 840
5 - -160 96*15 1280
6:15 - -200 160*15 2200
16 - -240 120*15 1560

By trial and error: DCFRR = 26.88946 %

Since that MARR (15%) is less than the DCFRR (26.88946%), therefore the
project is feasible.

2-

Construction Costs Operating Costs Sales Net Cash Flow

Year
(EGP 1000) (EGP 1000) (EGP 1000) (EGP 1000)
1 -1320 -44 - -1364
2 -1760 -44 - -1804
3 -2200 -88 - -2288
4 - -132 640 508
5 - -176 960 784
6:15 - -220 1600 1380
16 - -264 1200 936
 Using the discounted cash flow rate of return technique:

91
By trial and error: DCFRR = 19.54495 %

Since that MARR (10%) is less than the DCFRR (19.54495%), therefore the
project is not sensitive.

 Using the NPW technique:

NPW = 4553.752974 (EGP 1000) = 4,553,752.974 EGP > 0, therefore the project
is not sensitive.

92
Question (5) (Important)

An absorption tower containing wooden grids is to be used for absorbing SO 2 in

a sodium sulfite solution. A mixture of air and SO 2 will enter the tower at a rate of
100,000 ft 3/min, temperature of 260 ⁰F, and pressure of 1.2 atm. The
concentration of SO 2 in the entering gas is specified, and a given fraction of
entering SO2 must be removed in the absorption towers. The molecular weight of
the entering gas mixture may be assumed to be 29.1. Under the specified design
conditions, the number of transfer units necessary varies with the superficial gas
velocity as follows:

Where GS is the entering gas velocity at Ib/hr.ft2 based on the cross sectional
area of the empty tower. The height of the transfer unit is constant at 20 ft. The
cost for the installed tower is $ 1.5 / ft3 of inside volume, and annual fixed
charges amount to 20 percent of the initial cost. Variable operating charges for
the absorbent blower power, and pumping power are represented by the
following relation:

The unit is to be operated 8000 hr/year.

Determine the height and diameter of the absorption tower at conditions of

minimum annual cost.

Solution:

 P M =ρ RT
 1.5 * 29.1 = ρ * 0.082 * 400
 ρ = 1.33 g/L = (1.33 /453.6) * (12 * 2.54)3 * (1/1000) = 0.083 lb/ft3
 m = 0.083*v = 0.083 * 100,000 = 8300 lb/min

 Z = NTU * HTU =
 Volume of the tower = Area * Z, area = m/G
 Volume of the tower = (8300 / G) *
 Cost of the tower = 1.5 * (8300 / G) *

93
 = 79680*
 Annual fixed charges/yr = 0.2 * 79680 * = 15936*
 Operating charges/yr = ( ) * 8000

 Total cost/yr = 15936 * +( ) * 8000

 Optimum G occurs at =0

 -13067.5 * + [3 * 10-8 Gs - - ] * 8000 = 0

 Solve to get G

94
95