Engineering 100 - Engineering Economics Homework #4 Due: September 29, 2020

Engineering 100 - Engineering Economics
Homework #4
Due: September 29, 2020
1. A loan company has been advertising a plan where one may borrow $1000 and make a
payment of $10.87 per month. This payment is for interest only and includes no payment
on the principal. What is the nominal interest rate that they are charging? (Answer: 13%)
2. What effective interest rate per year corresponds to a nominal rate of 12%
compounded monthly? (Answer: 12.7%)
3. What is the nominal interest rate and the effective interest rate of a loan that charges
0.8% interest each month?
4. If the nominal interest rate is 12% compounded quarterly, what is the effective interest
rate? (Answer: 12.55%)
5. An engineering student is given two options for investing a $20,000 inheritance.

Option one is at 6% nominal interest, compounded continuously. Option two is at 7%
interest, compounded monthly. Given that the student wishes to invest the money for
five years, which option should she choose?
6. A new tennis court complex is planned and two companies have offered bids for the
construction. The interest rate affecting all cash flows is 7%. Using present worth
analysis to determine which bid should be selected
Bidder Construction Cost Annual Useful Life (years)

Maintenance Cost
Company A $500,000 $25,000 18
Company B $640,000 $10,000 18
7. A construction company is considering the purchase of an earthmoving vehicle, and

they are considering two models. Given an interest rate of 9%, and the projected
information for the two models given below, which vehicle should the company purchase
and why?
Model First Cost Annual Annual Salvage Useful Life

Operating Income Value (years)
Cost
A $50,000 $12,000 $19,000 $10,000 10
B $80,000 $11,000 $22,000 $30,000 10
8. An engineer has received two bids for an elevator to be installed in a new building.
The bids, plus his evaluation of the elevators, are as follows:
Bidder Installed Cost Service Life Annual Salvage Value

(years) Operating Cost
Westinghome $45,000 10 $2700/yr $3000
It is $54,000 15 $2850/yr $4500
The engineer will make a present worth analysis using a 10% interest rate. Prepare the
analysis and determine which bid should be accepted. (Answer: Westinghome =
$92,713, Itis = $92,459, choose Itis)
9. The president of the E.L. Echo Corporation thought that is would be appropriate for
his firm to “endow a chair” in the Industrial Engineering Department of the local
university; that is, he is considering making a gift to the university of sufficient money to
pay the salary of one professor forever. The professor’s salary would come from the fund
established by the Echo Corporation. If the professor will receive $67,000 per year, and
the interest received on the endowment is expected to remain at 8%, what lump sum of
money will the Echo Corporation need to provide to establish the endowment fund?
(Answer: $837,500)
10. A man had to have the muffler replaced on his two-year-old car. The repairman
offered two alternatives. For $50 he would install a muffler guaranteed for two years.
But for $65 he would install a muffler guaranteed for “as long as you own the car.”
Assuming the present owner expects to keep the car for about three more years, which
muffler would you advise him to have installed if you thought that 20% were a suitable
interest rate and the less expensive muffler would only last two years? (Answer: Choose
the $65 muffler)
11. A firm is considering three mutually exclusive alternatives as part of a production

improvement program. The alternatives are:
A B C
Installed Cost $10,000 $15,000 $20,000
Uniform Annual $1,625 $1,530 $1,890
Benefit
Useful Life, in years 10 20 20
For each alternative, the salvage value at the end of its useful life is zero. At the end of
ten years, A can be replaced with another A with identical cost and benefits. Given an
interest rate of 6%, which alternative should be selected? (Answer: Alternative A)

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Engineering 100 - Engineering Economics

5. An engineering student is given two options for investing a $20,000 inheritance.

Bidder Construction Cost Annual Useful Life (years)

7. A construction company is considering the purchase of an earthmoving vehicle, and

Model First Cost Annual Annual Salvage Useful Life

Bidder Installed Cost Service Life Annual Salvage Value

11. A firm is considering three mutually exclusive alternatives as part of a production

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