Net Asset Value of an investment company

TECH330 Engineering Economics Group Project

Financial paperwork. Graph showing the rising Net Asset Value (NAV) of an investment company. Image Credit: Financial paperwork. [Photography]. Retrieved from Encyclopædia Britannica ImageQuest. http://quest.eb.com/search/132_1303651/1/132_1303651/cite Introduction Welcome to the group project portion of the class. Here you will have the opportunity to work together with a few of your fellow classmates on a more extended problem, share ideas, answer some questions asked in the problem, and write up something that may be similar to what you might present in the workplace if facing such a problem. Your group project, spans from Modules 2 to Module 8, and will address one of the chapter ending cases studies. The case study selected for your group project is included at the end of this document. Final Paper requirements and expectations. The final paper must be 10 to 20 pages in length, and contain the following sections:

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1. Title 2. Introduction 3. Team charter 4. Review the problem along with the specifics of required information and desired solutions. 5. What are the limits to giving an answer that will for certain solve the problem(s)? In other

words what are the internal variables and external variables that could change over time that would change the predicted outcome and therefore solutions to the problem(s)?

 

 

6. Explain the process that will be used to solve the problem (s). 7. Answer the questions specifically asked in the case study and explain how the answers were

derived. Show the calculations in an appendix in the report. 8. Answer any other questions than management may have if this was being submitted in a “real

workplace” situation. 9. Summary 10. References (should include only sources cited in the body of your paper. References do not

count towards the page count. A rule of thumb is that a 10 page paper should have at least 10 references, a 12 page paper should have at least 12 references, a 15 page paper should have at least 15 references, etc.)

11. Use appropriate word processing software for preparing all your work. No handwritten work will be accepted.

Project milestones. The Engineering Economy group Project accounts for 30% of your course grade and consists of the following four milestones, or assignments. Each milestone is geared to assist you in meeting your final goal.

• Module 2: Team Charter. (3%)

• Module 3: Group Roles. (3%)

• Module 5: Draft (showing significant progress towards completing the project). (6%)

• Module 7: Group Project: Final paper (15%)

• Module 8: Peer evaluation. (3%) Expectations. Your instructor has assigned you to groups of approximately 4 (3 to 5) members. As a group, strictly adhere to the following expectations:

• All group communication takes place using your group’s discussion board and file exchange in Canvas.

• Every group member VISIBLY contributes to each assignment regardless of her/his role.

• Each assignment is submitted through Canvas by your group’s Project Manager.

Module 2: Team Charter Begin your project by reviewing the full Engineering Economics Group Project document.

Next, you will complete the team charter. Your team charter, a written agreement among members, will identify the team’s purpose and its members’ mutually-agreed upon expectations and contributions. By developing this charter, each member will clearly understand his/her team responsibilities. Team charters encourage members to build more trusting relationships with one another. Although team charters may vary, the basic components include the team’s mission, goals, performance agreement, and evaluation standards. Working collaboratively, your team will develop a charter using your assigned discussion board. Your team charter should include the following elements:

 

 

1. Mission Statement – A mission statement states the purpose of your team and identifies what your team must accomplish.

2. Team Vision – Clearly and concisely state the ideal outcome of your team’s efforts. 3. Boundaries – Clarify the values, policies, and procedures your team supports that cannot be

violated; the decisions the team can make on its own versus needed permission from others; the activities that are legitimate for the team to engage in; and the stakeholders affected by the team’s activities.

4. Operating Guidelines – Describe your team structure and the processes you will use, including how the leader will function; how decisions will be made; how work will be allocated; how team members will communicate; and how conflict will be managed.

5. Performance Norms and Consequences -Clarify the norms that are needed to facilitate goal attainment and member satisfaction including: the expectation for team meetings and each member’s contribution toward the Team Project; how members will treat each other; the expected standards of performance and how team performance will be evaluated.

Please download the Team Charter template to develop your Team Charter. Your final team charter should be 1-2 pages in length. Use APA formatting with Times New Roman, 12-font, double spaced, with one inch margins. Also, all members must “individually” submit their team’s charter for instructor evaluation, indicating their agreement with the document.

Evaluation: Your Engineering Economics Group Project, in total, accounts for 30% of your course grade. The Team Charter assignment accounts for 10% of the Group Project grade. Review the TECH330_M2A3_Rubric on the Rubric page or by going to the Start-Here Course Information section of the course to see more information on grading criteria. Module 3: Group Roles Begin your project by reviewing the full Engineering Economics Group Project document. After reviewing the document, work with your group to decide on which of the role(s) below each member will fill. Each role must be filled, and if necessary, some members may fill more than one role.

• Team Leader: Manages the project and submits assignments

• [Market analyst]

• [Financial analyst]

• etc adding other roles the team thinks important.

Assemble and construct the following in a single Word document:

• Title Page – Use the following format for the title: Engineering Economics Project: <subtitle of your choice> (you’ll use this title for the remainder of the project)

• Summary – One paragraph describing the challenges of this particular topic (approximately 100 words)

• Group Roles – A table that identifies which role(s) each member of your team is filling

• References – A listing in APA bibliographic format of the 10 sources you compiled

Evaluation: Your Engineering Economics Group Project, in total, accounts for 30% of your course grade. The Group Roles assignment accounts for 10% of the Group Project grade. Review the TECH330_M3A3_Rubric on

 

 

the Rubric page or by going to the Start-Here Course Information section of the course to see more information on grading criteria. Module 5: Draft You should now have made progress on the first six sections of the Group Project.

1. Title 2. Introduction 3. Team charter 4. Review the problem along with the specifics of required information and desired solutions. 5. What are the limits to giving an answer that will for certain solve the problem(s)? In other

words what are the internal variables and external variables that could change over time that would change the predicted outcome and therefore solutions to the problem(s)?

6. Explain the process that will be used to solve the problem (s). There should be enough here to determine that progress is being made in the same way a manager would ask for and want to see progress on a similar type of “real workplace” assignment. The instructor is not going to proof read the draft but will review to assess progress and that the group is working toward a final acceptable presentation of the Group project. Evaluation: Your Engineering Economics Group Project, in total, accounts for 30% of your course grade. The Draft assignment accounts for 20% of the Group Project. Review the TECH330_M5A3_Rubric on the Rubric page or by going to the Start-Here Course Information section of the course to see more information on grading criteria. Module 7: Group Project: Final Paper Congratulations! After weeks of research and work, you are now ready to complete the Final Paper. Using your annotated outline from Module 5, construct your Final Paper. The final paper must be 10 to 20 pages in length, and contain the following sections:

• Title

• Introduction

• Team charter

• Review the problem along with the specifics of required information and desired solutions.

• What are the limits to giving an answer that will for certain solve the problem(s)? In other words what are the internal variables and external variables that could change over time that would change the predicted outcome and therefore solutions to the problem(s)?

• Explain the process that will be used to solve the problem (s).

 

 

• Answer the questions specifically asked in the case study and explain how the answers were derived. Show the calculations in an appendix in the report.

• Answer any other questions than management may have if this was being submitted in a “real workplace” situation.

• Summary

• References (should include only sources cited in the body of your paper. References do not count towards the page count. A rule of thumb is that a 10 page paper should have at least 10 references, a 12 page paper should have at least 12 references, a 15 page paper should have at least 15 references, etc.)

• Use appropriate word processing software for preparing all your work. No handwritten work will be accepted.

Evaluation: Your Engineering Economy Group Project, in total, accounts for 30% of your course grade. The Final Paper accounts for 50% of the Group Project. Review the TECH330_M7A3_Rubric on the Rubric page or by going to the Start-Here Course Information section of the course to see more information on grading criteria. Module 8: Peer Evaluation For this activity, you will complete a peer evaluation form to rate all team members’ participation and contribution to the following team activities: Download and complete the Peer Evaluation Form [DOC file, 14KB]. Evaluation: Your Engineering Economy Group Project, in total, accounts for 30% of your course grade. The Peer Evaluation accounts for 10% of the Group Project. Review the TECH330_M8A2_Rubric on the Rubric page or by going to the Start-Here Course Information section of the course to see more information on grading criteria.

 

 

Group Project Options Group Project 1 WATER TREATMENT PLANT PROCESS COSTS Background

Aeration and sludge recirculation have been practiced for many years at municipal and industrial water treatment plants. Aeration is used primarily for the physical removal of gases or volatile compounds, while sludge recirculation can be beneficial for turbidity removal and hardness reduction.

When the advantages of aeration and sludge recirculation in water treatment were first recognized, energy costs were so low that such considerations were seldom of concern in treatment plant design and operation. With the huge increases in electricity cost that have occurred in some localities, however, it became necessary to review the cost-effectiveness of all water treatment processes that consume significant amounts of energy. This study was conducted at a municipal water treatment plant for evaluating the cost-effectiveness of the pre-aeration and sludge recirculation practices.

Information

This study was conducted at a 106 m3/min water treatment plant where, under normal operating circumstances, sludge from the secondary clarifiers is returned to the aerator and subsequently removed in the primary clarifiers. Figure 13–12 is a schematic of the process.

 

 

Figure 13–12 Schematic of water treatment plant. To evaluate the effect of sludge recirculation, the sludge pump was turned off, but aeration was continued. Next, the sludge pump was turned back on, and aeration was discontinued. Finally, both processes were discontinued. Results obtained during the test periods were averaged and compared to the values obtained when both processes were operational. The results obtained from the four operating modes showed that the hardness decreased by 4.7% when both processes were in operation (i.e., sludge recirculation and aeration). When only sludge was recirculated, the reduction was 3.8%. There was no reduction due to aeration only, or when there was neither aeration nor recirculation. For turbidity, the reduction was 28% when both recirculation and aeration were used. The reduction was 18% when neither aeration nor recirculation was used. The reduction was also 18% when aeration alone was used, which means that aeration alone was of no benefit for turbidity reduction. With sludge recirculation alone, the turbidity reduction was only 6%, meaning that sludge recirculation alone actually resulted in an increase in turbidity—the difference between 18% and 6%. Since aeration and sludge recirculation did cause readily identifiable effects on treated water quality (some good and others bad), the cost-effectiveness of each process for turbidity and hardness reduction was investigated. The calculations are based on the following data:

 

 

• Aerator motor = 40 hp • Aerator motor efficiency = 90% • Sludge recirculation motor = 5 hp • Recirculation pump efficiency = 90% • Electricity cost = 9 ¢/kWh (previous analysis) • Lime cost = 7.9 ¢/kg • Lime required = 0.62 mg/L per mg/L hardness • Coagulant cost = 16.5 ¢/kg • Days/month = 30.5

As a first step, the costs associated with aeration and sludge recirculation were calculated. In each case, costs are independent of flow rate.

Aeration cost:

40 hp × 0.75 kW/hp × 0.09 $/kWh × 24 h/day ÷ 0.90 = $72 per day or $2196 per month

Sludge recirculation cost:

5 hp × 0.75 kW/hp × 0.09 $/kWh × 24 h/day ÷ 0.90 = $9 per day or $275 per month

The estimates appear in columns 1 and 2 of the cost summary in Table 13–1 below.

 

Savings from Discontinuation of

Extra Cost for Removal of

Total Extra Cost (6) = (4) +

(5)

Net Savings

(7) = (3) − (6)

Alt .

I.D .

Alternative Description

Aeratio n (1)

Recirculati on (2)

Total Saving

s (3) = (1) + (2)

Hardne ss (4)

Turbidit y (5)

1

S Sludge recirculation a nd aeration Normal operating condition

2 Aeration only — 275 275 1380 469 1849 −1574

3

S Sludge recirculation only 2196 — 2196 262 845 1107 +1089

4

Neither aeration nor sludge recirculation 2196 275 2471 1380 469 1849 +622

TABLE 13–1 Cost Summary in Dollars per Month

 

 

Costs associated with turbidity and hardness removal are a function of the chemical dosage required and the water flow rate. The calculations below are based on a design flow of 53 m3/min. As stated earlier, there was less turbidity reduction through the primary clarifier without aeration than there was with it (28% vs. 6%). The extra turbidity reaching the flocculators could require further additions of the coagulating chemical. If it is assumed that, as a worst case, these chemical additions would be proportional to the extra turbidity, then 22% more coagulant would be required. Since the average dosage before discontinuation of aeration was 10 mg/L, the incremental chemical cost incurred because of the increased turbidity in the clarifier effluent would be

 

(10 × 0.22) mg/L × 10–6 kg/mg × 53 m3/min

× 1000 L/m3 × 0.165 $/kg × 60 min/h

× 24 h/day = $27.70/day or $845/month

 

Similar calculations for the other operating conditions (i.e., aeration only, and neither aeration nor sludge recirculation) reveal that the additional cost for turbidity removal would be $469 per month in each case, as shown in column 5 of Table 13–1 above. Changes in hardness affect chemical costs by virtue of the direct effect on the amount of lime required for water softening. With aeration and sludge recirculation, the average hardness reduction was 12.1 mg/L (i.e., 258 mg/L × 4.7%). However, with sludge recirculation only, the reduction was 9.8 mg/L, resulting in a difference of 2.3 mg/L attributed to aeration. The extra cost of lime incurred because of the discontinuation of aeration, therefore, was

2.3 mg/L × 0.62 mg/L lime × 10−6 kg/mg × 53m3/min × 1000 L/m3 × 0.079 $/kg × 60 min/h × 24 h/day = $8.60/day or $262/month

When sludge recirculation was discontinued, there was no hardness reduction through the clarifier, so that the extra lime cost would be $1380 per month.

The total savings and total costs associated with changes in plant operating conditions are tabulated in columns 3 and 6 of Table 13–1 above, respectively, with the net savings shown in column 7. Obviously, the optimum condition is represented by “sludge recirculation only.” This condition would result in a net savings of $1089 per month, compared to a net savings of $622 per month when both processes are discontinued and a net cost of $1574 per month for aeration only. Since the calculations made here represent worst-case conditions, the actual savings that resulted from modifying the plant operating procedures were greater than those indicated. In summary, the commonly applied water treatment practices of sludge recirculation and aeration can significantly affect the removal of some compounds in the primary clarifier. However, increasing energy and chemical costs warrant continued investigations on a case-by-case basis of the cost-effectiveness of such practices.

 

 

Case Study Exercises

1. What will be the monthly savings in electricity from discontinuation of aeration if the cost of electricity is now 12 ¢/kWh?

2. Does a decrease in the efficiency of the aerator motor make the selected alternative of sludge recirculation only more attractive, less attractive, or the same as before?

3. If the cost of lime were to increase by 50%, would the cost difference between the best alternative and second-best alternative increase, decrease, or remain the same?

4. If the efficiency of the sludge recirculation pump were reduced from 90% to 70%, would the net savings difference between alternatives 3 and 4 increase, decrease, or stay the same?

5. If hardness removal were to be discontinued at the treatment plant, which alternative would be the most cost-effective?

6. If the cost of electricity decreased to 8 ¢/kWh, which alternative would be the most cost-effective? 7. At what electricity cost would the following alternatives just break even? (a) Alternatives 1 and 2, (b)

alternatives 1 and 3, (c) alternatives 1 and 4. Group Project 2 AFTER-TAX ANALYSIS FOR BUSINESS EXPANSION Background

Charles was always a hands-on type of person. Within a couple of years of graduating from college, he started his own business. After some 20 years, it has grown significantly. He owns and operates Pro- Fence, Inc. in the Metroplex, specializing in custom-made metal and stone fencing for commercial and residential sites. For some time, Charles has thought he should expand into a new geographic region, with the target area being another large metropolitan area about 500 miles north, called Victoria.

Pro-Fence is privately owned by Charles; therefore, the question of how to finance such an expansion has been, and still is, the major challenge. Debt financing would not be a problem in that the Victoria Bank has already offered a loan of up to $2 million. Taking capital from the retained earnings of Pro- Fence is a second possibility, but taking too much will jeopardize the current business, especially if the expansion were not an economic success and Pro-Fence were stuck with a large loan to repay.

This is where you come in as a long-time friend of Charles. He knows you are quite economically oriented and that you understand the rudiments of debt and equity financing and economic analysis. He wants you to advise him on the balance between using Pro-Fence funds and borrowed funds. You have agreed to help him, as much as you can.

Information

Charles has collected some information that he shares with you. Between his accountant and a small market survey of the business opportunities in Victoria, the following generalized estimates seem reasonable:

• Initial capital investment = $1.5 million

 

 

• Annual gross income = $700,000 • Annual operating expenses = $100,000 • Effective income tax rate for Pro-Fence = 35% • Five-year MACRS depreciation for all $1.5 million investment

The terms of the Victoria Bank loan would be 6% per year simple interest based on the initial loan principal. Repayment would be in five equal payments of interest and principal. Charles comments that this is not the best loan arrangement he hopes to get, but it is a good worst-case scenario upon which to base the debt portion of the analysis. A range of D-E mixes should be analyzed. Between Charles and yourself, you have developed the following viable options:

Debt Equity

Percentage Loan Amount, $ Percentage Investment Amount, $

0 100 1,500,000

50 750,000 50 750,000

70 1,050,000 30 450,000

90 1,350,000 10 150,000

 

Case Study Exercises

1. For each funding option, perform a spreadsheet analysis that shows the total CFAT and its present worth over a 6-year period, the time it will take to realize the full advantage of MACRS depreciation. An after-tax return of 10% is expected. Which funding option is best for Pro-Fence? (Hint: For the spreadsheet, sample column headings are: year, GI − OE, loan interest, loan principal, equity investment, depreciation rate, depreciation, book value, TI, taxes, and CFAT.)

2. Observe the changes in the total 6-year CFAT as the D-E percentages change. If the time value of money is neglected, what is the constant amount by which this sum changes for every 10% increase in equity funding?

3. Charles noticed that the CFAT total and PW values go in opposite directions as the equity percentage increases. He wants to know why this phenomenon occurs. How should you explain this to Charles?

4. After deciding on the 50-50 split of debt and equity financing, Charles wants to know what additional bottom-line contributions to the economic worth of the company may be added by the new Victoria site. What are the best estimates at this time?

Group project 3 INDIRECT COST ANALYSIS OF MEDICAL EQUIPMENT MANUFACTURING COSTS Background

A portable sterilizing unit, PS6, was introduced recently to the market. It utilizes nitrogen dioxide (NO2) gas as the sterilant. This unit sterilizes and makes available at the bedside some of the reusable

 

 

instruments that nurses and doctors usually obtain by walking to or receiving delivery from a centralized area. The PS6 unit makes the instruments available at the point and time of use for burn and severe wound patients who are in a regular patient room. There are two models of PS6 available. The standard version sells for $10.75, and a premium version with customized trays and a battery backup system sells for $29.75. The product has sold well to hospitals, convalescent units, and nursing homes at the level of about 1 million units per year.

(1) Information

The manufacturer, Health Care Services, has historically used an indirect cost allocation system based upon direct hours to manufacture for all its other product lines. The same was applied when PS6 was priced. However, Arnie, the person who performed the indirect cost analysis and set the sales price, is no longer at the company, and the detailed analysis is no longer available. Through e-mail and telephone conversations, Arnie said the current price was set at about 10% above the total manufacturing cost determined 2 years ago, and that some records were available in the design department files. A search of these files revealed the manufacturing and cost information in Table 15– 11 below. It is clear from these and other records that Arnie used traditional indirect cost analysis based on direct labor hours to estimate the total manufacturing costs of $9.73 per unit for the standard model and $27.07 per unit for the premium model.

PS6 Direct Cost (DC) Evaluation

Model Direct Labor,

$∕Unit1 Direct Material,

$∕Unit Direct Labor, Hours∕Unit

Total Direct Labor Hours

Standard 5.00 2.50 0.25 187,500

Premium 10.00 3.75 0.50 125,000

PS6 Indirect Cost (IDC) Evaluation

Model Direct Labor, Hours∕Unit

Fraction IDC Allocated

Allocated IDC, $

Sales, Units∕Year

Standard 0.25 1/3 1.67 million 750,000

Premium 0.50 2/3 3.33 million 250,000

1Average direct labor rate is $20 per hour.

TABLE 15–11 Historical Records of Direct and Indirect Cost Analyses for PS6

Last year management decided to place the entire plant on the ABC system of indirect cost allocation. The costs and sales figures collected for the PS6 line the year before were still accurate. Five activities and their cost drivers were identified for the Health Care Services manufacturing operations (Table 15– 12 below). Also, the volumes for each model are summarized in this table.

 

 

Activity Cost Driver Volume/Year Actual Cost,

$/Year

Quality Inspections 20,000 inspections 800,000

Purchasing Purchase orders 40,000 orders 1,200,000

Scheduling Change orders 1,000 orders 800,000

Production setup Setups 5,000 setups 1,000,000

Machine operations Machine hours 10,000 hours 1,200,000

Volume Level for the Year

Cost Driver Standard Premium

Quality inspections 8,000 12,000

Purchase orders 30,000 10,000

Number of change orders 400 600

Production setup 1,500 3,500

Machine hours 7,000 3,000

TABLE 15–12 PS6 Activities, Cost Drivers, and Volume Levels for ABC-Based Indirect Cost Allocation

The ABC method will be used henceforth, with the intention of determining the total cost and price based on its results. The first impression of the production manager is that the new system will show that indirect costs for PS6 are about the same as they have been for other products over the last several years when a standard model and an upgrade (premium) model were sold. Predictably, they state, the standard model will receive about 1∕3 of the indirect cost, and the premium will receive the remaining 2∕3. Fundamentally, there are two reasons why the production manager does not like to produce premium versions: They are less profitable for the company, and they require significantly more time and operations to manufacture.

(2) Case Study Exercises

1. Use traditional indirect cost allocation to verify Arnie’s cost and price estimates. 2. Use the ABC method to estimate the indirect cost allocation and total cost for each model. 3. If the prices and number of units sold are the same next year (750,000 standard and 250,000

premium), and all other costs remain constant, compare the profit from PS6 under the ABC method with the profit using the traditional indirect cost allocation method.

4. What prices should Health Care Services charge next year based on the ABC method and a 10% markup over cost? What is the total profit from PS6 predicted to be if sales hold steady?

 

 

5. Using the results above, comment on the production manager’s prediction of indirect costs using ABC (1∕3 standard; 2∕3 premium) and the two reasons given to not produce the premium version of PS6.

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