Economics : Engineering Questions

1Question 1To calculate the rate of return of each project, calculate the internal rate of return (IRR) of eachproject. IRR is the rate where present value of cash inflows = initial investmentProject 18,250 (1+ r) -3 = 5,000(1+ r) -3 =50008250(1+ r) -3 = 0.606(1+ r) 3 =10.606(1+ r) 3 = 1.65(1 +r) = 3 1.65(1 +r) = 1.182Rate of return (r) = 1.182 1 = 0.182 = 18.20%Project 2We can estimate IRR using the formulaIRR = ra +NPVa(ra rb )NPVa NPVbWhere ra and rb are the higher and lower estimates of the rate of returnNPV a is the higher NPV and NPV b is the lower NPVNPV (16%) = 2500 (1 + 0.16)-1 + 4000(1+0.16)-2 5000 = $127.82NPV (19%) = 2500 (1 + 0.19)-1 + 4000(1+0.19)-2 5000 = -$74.50IRR = 16% +127.82(19% 16%) = 17.90127.82 (74.50)Rate of return = 17.90%2Question 2a) Manufacturing costs are costs which are incurred directly during the manufacturingprocess, for example, the cost of raw materials used. These costs include direct materialscost, direct labor cost, and manufacturing overhead cost.Non-manufacturing costs are those costs which are not directly incurred in themanufacturing process. These costs ...


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