Engineering Economics Paper solution

1. © Haris H. | harishassan1995@gmail.com
FA 14 / Q No.2.
Find the value of a note with a remaining term of three years, a face value of $10,000 and a coupon of $500 per
year. Assume the market yield is 4%.
Value =
$500
1.041
+
$500
1.042
+
$500
1.043
+
$10,000
1.043
= $10,277.21
Fall 15 / Ses1 a)
You can make two different investments. The interest you receive on the first investment is $110 per year for three
years. You receive $330 on the second investment in the third year and nothing in the first two years. If your
discount rate is 6%, what should you pay for each of these investments?
Present Value of #1 =
$110
1.061
+
$110
1.062
+
$110
1.063
= $294.03
Present Value of #2 = $0 + $0 +
$330
1.063 = $ 277.07
Fall 12 / Ses2 / Q3.
Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now;
$2,000 a year for eight years; or $24,000 at the end of eight years. Assuming you could earn 11 percent
annually, which alternative should you choose? If you could earn 12 percent annually, would you still
choose the same alternative?
Present value of annuity (Appendix D)
PVA = A x PVIFA
Alternative 1: $10,000 now; PVA = $10,000
Alternative 2 at 11%: $2,000 a year for eight years; PVA = 2000[5.146] = $10,292
Alternative 2 at 12%: $2,000 a year for eight years; PVA = 2000[4.968] = $ 9,936
Present value of a single amount (Appendix B)
PV = FV x PVIF
Alternative 3 at 11%: $24,000 at the end of eight years; PV = 24000[0.434] = $10.416
Alternative 3 at 12%: $24,000 at the end of eight years; PV = 24000[0.404] = $ 9,696
Alternative 3 would be the best choice at 11%.
Alternative 1 would be the best choice at 12%.
FA 14 / Q No.4.
A local university has initiated a logo-licensing program with the clothier Holister, Inc. Estimated fees (revenues)
are $80,000 for the first year with uniform increases to a total of $200,000 by the end of year 9. Determine the
gradient and construct a cash fl ow diagram that identifi es the base amount and the gradient series.
The year 1 base amount is 𝐶𝐹1 = $80,000, and the total increase over 9 years is
𝐶𝐹9 − 𝐶𝐹1 = 200,000 – 80,000 = $120,000
Solved for G, determines the arithmetic gradient. G
FA 14 / Q No.6.
Eight years ago, Ohio Valley Trucking purchased a large-capacity dump truck for $115,000 to provide short-haul
earthmoving services. The company sold it today for $45,000. Operating and maintenance costs averaged $10,500
per year. A complete overhaul at the end of year 4 cost an extra $3600. Calculate the annual cost of the truck at
8% per year interest.
FA 14 / Q No.7. | SP 14 / Q No 5
An industrial engineer is considering two robots for purchase by a fi ber-optic manufacturing company. Robot X
will have a fi rst cost of $80,000, an annual maintenance and operation (M&O) cost of $30,000, and a $40,000
salvage value. Robot Y will have a fi rst cost of $97,000, an annual M&O cost of $27,000, and a $50,000 salvage
value. Which should be selected on the basis of a future worth comparison at an interest rate of 15% per year? Use
a 3-year study period.
SP 14 / Q No.1.
Metso Automation, which manufactures addressable quarter-turn electric actuators, is planning to set aside
$100,000 now and $150,000 one year from now for possible replacement of the heating and cooling systems in three

2. © Haris H. | harishassan1995@gmail.com
of its larger manufacturing plants. If the replacement won’t be needed for 4 years, how much will the company
have in the account, if it earns interest at a rate of 8% per year?
SP 14 / Q No.2.
A company that sells high-purity laboratory chemicals is considering investing in new equipment that will reduce
cardboard costs by better matching the size of the products to be shipped to the size of the shipping container. If
the new equipment will cost $220,000 to purchase and install, how much must the company save each year for 3
years in order to justify the investment, if the interest rate is 10% per year?
SP 14 / Q No.3.
Rolled ball screws are suitable for high-precision applications such as water jet cutting. Their total manufacturing
cost is expected to decrease because of increased productivity, as shown in the table. Determine the equivalent
annual cost at an interest rate of 8% per year.
SP 14 / Q No.7.
The cost of grading and spreading gravel on a short rural road is expected to be $300,000. The road will have to
be maintained at a cost of $25,000 per year. Even though the new road is not very smooth, it allows access to an
area that previously could only be reached with off-road vehicles. The improved accessibility has led to a 150%
increase in the property values along the road. If the previous market value of a property was $900,000, calculate
the B/C ratio using an interest rate of 6% per year and a 20-year study period.
SP 12 / Q No.1.
SP 12 / Q No.2.
You need $28,974 at the end of nine years, and your only investment outlet is an 8 percent long-term certificate of
deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of
the first year.
a. What single payment could be made at the beginning of the first year to achieve this objective?
b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?
a. Present value of a single amount (Appendix B)
PV = FV x PVIF (i = 8%, n = 10)
PV = 28974 [0.463]
PV = 13,415
b. Annuity equaling a present value (Appendix C)
A = PVA/PVIFA (i = 8%, n = 10)
PVA = A/ PVIFA
PVA = 28974/ [14.487]
PVA = 2,000
FA 14 / Q No. 1.
Larson Manufacturing is considering purchasing a new injection-molding machine for $250,000 to expand its
production capacity. It will cost an additional $20,000 to do the site preparation. With the new injection-
molding machine installed, Larson Manufacturing expects to increase its revenue by $90,000. The machine
will be used for 5 years, with an expected salvage value of $75,000. At an interest rate of 12%, would the
purchase of the injection-molding machine be justified? (10 points)
Using the formulas: P=A[(〖(1+i)〗^n-1)/〖i(1+i)〗^n ]
And: P=F(1+i)^(-n)
We find that NPW = -250,000 + 90,000[(〖(1+.12)〗^5-1)/〖.12(1+.12)〗^5 ] – 75,000(1+.12)^5=
= -250,000 + 90,000(3.604776202) + 75,000(0.5674268557)
= $96986.87 I would say that the purchase of this machine is justified.
FA 15 / Quiz
The Ford Foundation expects to award $15 million today in grants to public high schools to develop new
ways to teach the fundamentals of engineering that prepare students for university-level material. The
grants will extend over a 10-year period and will create an estimated savings of $1.5 million per year in

3. © Haris H. | harishassan1995@gmail.com
faculty salaries. The foundation uses a 6% discount rate for all grant awards. This grant program will
share the Foundation funding with ongoing activities, so an estimated $200,000 per year will be removed
from other program funding. Also $500,000 per year will be incurred as annual operation costs. Use the
B/C method to determine if the grants program is economically justified using: 1 Conventional B/C
analysis
Use AW as the common monetary equivalent:
AW of investment cost = 15, 000, 000(A/P, 6%, 10) = $2, 038, 050
AW of benefit = $1,500,000
AW of disbenefit = $200,000 AW of M&O cost = $500,000
FA 15 / Assignment Q. No. 4:
Machines that have the following costs are under consideration for a robotized welding process. Using an
interest rate of 10% per year, determine which alternative should be selected on the basis of a present
worth analysis.
Machine X Machine Y
First cost, $ 250,000 430,000
Annual operating cost 60,000 40,000
Salvage value 70,000 95,000
Life, years 3 6
SP 11 / Q No.7.
A person invests a sum of Rs. 50,000 in a bank at a nominal interest rate of 18% for 15 years. The compounding is
monthly. Find the maturity amount of the deposit after 15 years.
SP 11 / Q No.5. | SP 12 / Q No.5.
Alpha Finance Company is coming with an option of accepting Rs. 10,000 now and paying a sum of Rs. 1,60,000
after 20 years. Beta Finance Company is coming with a similar option of accepting Rs. 10,000 now and paying a
sum of Rs. 3,00,000 after 25 years. Compare and select the best alternative based on the future worth method of
comparison with 15% interest rate, compounded annually.
SP 11 / Q No.7. | SP 14 / Q No 6
A person invests a sum of Rs. 2,00,000 in a business and receives equal net revenue of Rs. 50,000 for the next 10
years. At the end of the 10th year, the salvage value of the business is Rs. 25,000. Find the rate of return of the
business.
SP 11 / Q No.8.
Two mutually exclusive projects are being considered for investment. Project A1 requires an initial outlay of Rs.
50,00,000 with net receipts estimated to be Rs. 11,00,000 per year for the next eight years. The initial outlay for the
project A2 is Rs. 80,00,000, and net receipts have been estimated at Rs. 20,00,000 per year for the next eight years.
There is no salvage value associated with either of the projects. Using the BC ratio, which project would you select?
Assume an interest rate of 15%.
FA 14 / Q No.3.
P&G sold its prescription drug business to Warner-Chilcott, Ltd. for $3.1 billion. If income from product sales is
$2 billion per year and net profit is 20% of sales, what rate of return will the company make over a 10-year planning
horizon?
Program is not justified.