23-CS-4 Engineering Management · December 2019
Nivaar worked solution (AI-drafted; not reviewed by a licensed engineer)
National Exams — December 2019 — 11-CS-4 Engineering Management. Closed book; no calculators. Any five questions constitute a complete paper; all questions are of equal value (20 marks each). Full worked answers to all seven questions are given below.
Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.
The balance sheet is a statement of an organization's financial position at a single point in time, and it is governed by the fundamental accounting identity that Assets = Liabilities + Owners' Equity. Its three components are defined as follows. Assets are the economic resources the firm owns or controls that are expected to provide future benefit; they are divided into current assets, which are cash or are expected to convert to cash within one year (cash, accounts receivable, inventory), and fixed or non-current assets, such as land, buildings, and equipment, that are used over many years. Liabilities are the firm's obligations to outside parties—current liabilities such as accounts payable and short-term debt due within a year, and long-term liabilities such as bonds and long-term loans. Owners' (or shareholders') equity is the residual interest in the assets after deducting liabilities, comprising contributed capital paid in by owners plus retained earnings accumulated from profits not distributed. Because equity is the residual, the statement always balances.
The two analyses answer different questions. (a) Engineering economic analysis exists to evaluate the economic worth of engineering projects and to choose rationally among competing technical alternatives. It places costs and benefits that occur at different times on a common basis by applying the time value of money, so that a design requiring high capital but low operating cost can be compared fairly with one that is cheaper to build but more expensive to run. Its purpose is to support capital-investment and design-selection decisions. (b) Financial analysis exists to assess the overall financial health and performance of the enterprise, typically by computing ratios from the financial statements—liquidity ratios (can it pay short-term bills?), solvency ratios (is its debt sustainable?), and profitability ratios (is it generating adequate return?). Its purpose is to inform investors, lenders, and management about the condition of the firm as a whole, rather than about a single project.
(a) Net Present Value (NPV) is the sum of all of a project's cash flows, each discounted to the present at the required rate of return, minus the initial investment. A positive NPV means the project earns more than the required rate and adds value, so the decision rule is to accept projects with NPV greater than zero and, among mutually exclusive options, to choose the highest NPV. (b) Rate of Return on Investment (ROI) expresses net return as a percentage of the amount invested; it is a simple, widely understood profitability measure but in its basic form ignores the timing of cash flows. (c) Internal Rate of Return (IRR) is the particular discount rate at which a project's NPV equals zero—effectively the project's own compound rate of return. The rule is to accept a project whose IRR exceeds the minimum acceptable rate of return (MARR) or cost of capital. NPV and IRR usually agree, but NPV is theoretically preferred when they conflict for mutually exclusive projects.
Consider a proposed $500,000 automation cell expected to save $140,000 per year for five years with a MARR of 12%. The engineer discounts the five annual savings with the uniform-series factor (P/A, 12%, 5) = 3.6048, giving a present worth of about $504,670; subtracting the $500,000 leaves an NPV of about +$4,670, so the cell adds value, if only marginally. The IRR—the rate making that NPV zero—is about 12.4%, just above the 12% MARR, giving the same accept decision, while a simple ROI on the first year would understate the case because it ignores the four later years of savings. The firm's overall financial analysis, meanwhile, would confirm it has the liquidity and solvency to fund the investment.
