2. (a) A civil engineering contractor operates a fleet of mini-diggers, and from past experience has found that a mini-digger normally has a useful working life of 5 years. Such a machine has an initial capital cost of 10,000 and at the end of the 5-year period has a salvage value of 800. The cost of maintenance of each mini-digger amounts to 3,000 for the first year, and increases by 500 for each succeeding year.

(i) If the current interest rate is 12 per cent, which is the equivalent annual cost of owning and maintaining each mini-digger? (5 marks)

(ii) If the contractor can sell the mini-diggers for 1,200 each at the end of the fourth year, should he be advised to do so? (Provide calculations to justify your recommendation) (3 marks)

(b) In project financing, what is the Minimum Attractive Rate of Return (MARR)? (2 marks)

(c) When financially evaluating a project, the internal rate of return (IRR) can be used. Explain what the IRR is and how it can be used to evaluate a project. (4 marks)

(d) The quality control procedure used on a particular project is Acceptance by Variables. The variable used for comparison is an index sample mean. The sample mean is assumed to be Gaussian distribution with mean and variance 2 /n, where n is the number of samples. The value of 2 is known to be 60 and n is 6. Good production has a mean a of 85 or higher. Poor production is represented by a mean t of 72 or less. If the standard mean value for comparison is L = 76, find the producers risk and the consumers risk. (6 marks)