IMSE 530 – Engineering Economic Analysis Project – Spring 2017
The following is a case you need to solve. You must work in groups of 3 or 4 students. You can use the discussion board in Canvas to find members for your group if you need so. One member of your group must send an email to fabioftv@k-state.edu with the name of all other members until March 10. Otherwise, you will be assigned to a random group. The due date of the project is March 31st at 5:00 pm. You must turn in a hard copy at Rathbone 2084.
You need to submit a report so we can evaluate your written and analytical skills. Standard formats, margins, and appropriate grammar are expected. The format of the report is a one page executive summary and a maximum five pages technical report.
The executive summary should include all information you feel is pertinent to your answer and should be written so that an educated (not necessarily technical) person can read, understand, and be convinced to follow your advice. The executive summary should contain proper statements of the problem, benefits, solution, and recommendation(s).
The technical report is written to someone who has expertise in industrial engineering and he/she will read the technical report to verify the correctness of your decisions. You want to include the reasons and justification of your decisions. You should include in an appendix with all supporting documents, spreadsheets, etc. Appendix is not included in the five pages limit. The technical report should include introduction, statement of the problem, assumptions, alternatives evaluated, analysis with proper use of time value of money, recommendation(s), and conclusion.
Grading: 20% Executive Summary; 20% Technical Report; 60% Correctness of your decisions and the reasons for choosing your decisions.
Submission: You must submit a hard copy of your report at Rathbone 2084 by the due date (March 31st at 5:00 pm). Please, submit the executive summary and technical report stapled together.
Lease a Lot
Round Table Rental Yards provides construction equipment, trailers, crutches, etc., on short term rentals. Historically, Art, the owner, has purchased the items that he rents out, but his business has been expanding so rapidly that he is considering both straight leases and lease purchase arrangements. He has decided to use the procurement of a new bulldozer with a list price of $290,000 as a test case.
If he purchases the bulldozer outright, then he must also decide whether he should plan on overhauling it or selling it after 3 years. This overhaul will cost about $150,000, but it should double the useful life of the bulldozer. However, the bulldozer’s value on the used market would drop from $180,000 after Year 3 to $135,000 after Year 6. Its annual operation and maintenance costs will start at $25,000 and increase by $7500 each year. This increase is due to increased use more than to increased age, so it is not affected by the overhaul.
The manufacturer has a subsidiary that specializes in financing through leases and lease purchases. In both cases, the subsidiary uses a term of 5 years with no option to extend it further. Art believes that other contract periods could be negotiated, but for this initial analysis he believes that their standard term is representative of the other possibilities. For the standard lease, the annual payment is $45,000. For the lease-purchase, the annual payment increases by $42,000. Although lease contracts can be written either way, for this lease Art would be responsible for the overhaul cost at Year 3.
Art will insure the bulldozer for theft, catastrophic damage, and liability. This policy will cost him $9500 each year. He will spend about 5% of the rental income transporting it to and from job sites. On the plus side, he expects it to bring in $175,000 the first year. Rental income should increase by $30,000 each year until it hits a maximum utilization of $300,000 per year. If secured loans are available for 9%, which financing plan do you recommend?
Art’s business can depreciate the bulldozer under a 5-year modified accelerated cost recovery system (MACRS depreciation schedule), with a combined state and federal tax rate of 41%. Do tax considerations change your recommendation?
