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EE HW3 Solution

This document contains a student's homework on engineering economic analysis problems. In problem 1, the student calculates the present worth of two electric motor options using capital costs, efficiency rates, maintenance costs, useful life, and electricity costs. Motor A is selected as it has a lower total present worth. Problem 2 analyzes four antipollution equipment designs, selecting option D3 which has the lowest present, future, and annual worth values. Problem 3 calculates the annual worth of three distribution center designs, selecting option B. Problem 4 analyzes two water purification systems, selecting system B when the interest rate is 8% or 15% as it provides a higher positive present worth in both cases.

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216 views5 pages

EE HW3 Solution

This document contains a student's homework on engineering economic analysis problems. In problem 1, the student calculates the present worth of two electric motor options using capital costs, efficiency rates, maintenance costs, useful life, and electricity costs. Motor A is selected as it has a lower total present worth. Problem 2 analyzes four antipollution equipment designs, selecting option D3 which has the lowest present, future, and annual worth values. Problem 3 calculates the annual worth of three distribution center designs, selecting option B. Problem 4 analyzes two water purification systems, selecting system B when the interest rate is 8% or 15% as it provides a higher positive present worth in both cases.

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© © All Rights Reserved
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Student Name: …

Student ID: …

ENGINEERING ECONOMY
HOMEWORK 3
Question 1:
Two electric motors are being considered to drive a centrifugal pump. One of the motors must be
selected. Each motor is capable of delivering 60 horsepower (output) to the pumping operation. It
is expected that the motors will be in use 800 hours per year. The following data are available:

Motor A Motor B
Capital investment $1,200 $1,100
Electrical efficiency 0.92 0.80
Annual maintenance $160 $100
Useful life 3 years 6 years

a. If electricity costs $0.07 per kilowatt-hour, which motor should be selected if the MARR is 8%
per year? Recall that 1 hp = 0.746 kW. Assume repeatability.
b. What is the basic trade-off being made in this problem?
MARR = 8%/year

PWB = -$1,100 - $3,233.2*(P/A,8%,6) = -$16,047.1


Cách 2: Use the annual worth
AW (8%) = −$1,200(A/P,8%,3) − $160 − 60hp0.92(0.746 kW/hp)(800 hrs/yr.)($0.07/kWh) =
A

−$3,350.12
AW (8%) = −$1,100(A/P,8%,6) − $100 − 60hp0.8( (0.746 kW/hp)(800 hrs/yr.)($0.07/kWh) =
B

−$3,549.5
 Select Motor A
→ Alternative A should be preferred because it gives a lower cost (smaller absolute value of PW).
Student Name: …
Student ID: …

b) Increased capital investment of Motor A (relative to Motor B) is being traded off for improved
electrical efficiency and lower annual energy expenses.
Question 2:
The Logistics Company must install antipollution equipment in a new refinery to meet federal
clean-air standards. Four design alternatives are being considered, which will have capital
investment and annual operating expenses as shown below. Assuming a useful life of 8 years for
each design, no market value, a desired MARR of 10% per year, determine which design should
be selected on the basis of the PW method. Confirm your selection by using the FW and AW
methods. Which rule (Section 6.2.2) applies? Why?

Design Capital Investment Annual Expenses


D1 $600,000 $780,000
D2 760,000 728,000
D3 1,240,000 630,000
D4 1,600,000 574,000
Student Name: …
Student ID: …

Design Capital Investment Annual Expenses


D1 $620,000 $760,000
D2 780,000 748,000
D3 1,200,000 650,000
D4 1,620,000 574,000

Design D1 D2 D3 D4
A/P, 10%, 8 0.1874 0.1874 0.1874 0.1874
F/A, 10%, 8 11.4359 11.4359 11.4359 11.4359
F/P, 10%, 8 2.1436 2.1436 2.1436 2.1436
P/A, 10%, 8 5.3349 5.3349 5.3349 5.3349
PW -4674524 -4770505.2 -4667685 -4682232.6
FW -10020316 -10226061 -10005655 -10036838.6
AW -876188 -894172 -874880 -877588

Present worth method: D3 > D1 > D4 >D2


 Present worth analysis => Select Alternative D3
Student Name: …
Student ID: …

Annual worth analysis: D3 > D1 > D4 > D2


 Annual worth analysis => Select Alternative D3
Future worth analysis: D3 > D1 > D4 > D2
 Future worth analysis => Select Alternative D3

Question 3:
Three mutually exclusive distribution center design alternatives are being considered. The
estimated sales and cost data for each alternative are given on p. 292. The MARR is 20% per year.
Annual revenues are based on the number of units sold and the selling price. Annual expenses are
based on fixed and variable costs. Determine which selection is preferable based on AW. State
your assumptions.
DC A DC B DC C
Investment cost $40,000 $60,000 $50,000
Estimated units to be sold/year 15,000 20,000 18,000
Unit selling price, $/unit $3.50 $4.40 $4.10
Variable costs, $/unit $1.00 $1.40 $1.15
Annual expenses (fixed) $15,000 $30,000 $26,000
Market value 0 $20,000 $15,000
Useful life 10 years 10 years 10 years

Total annual revenue: RA = 15000*3.5 = 52500$


RB = 20000*4.4 = 88000$
RC = 18000*4.1 = 73800$
Total annual cost: CA = FA + VA = 15000 + 1*15000 =30000$
CB = FB + VB = 30000 + 1.4*20000 = 58000$
CC = FC + VC = 26000 + 1.15*18000 = 46700$
Total annual profit: AA = RA – CA = 52500 – 30000 = 22500$
AB = RB – CB = 88000 – 58000 = 30000$
AC = RC – CC = 73800 – 46700 =27100$
AW:
AWA = -40000*(A/P, 20%, 10) +22500 + 0*(A/F, 20%, 10) = $12,960
AWB = -60000*(A/P, 20%, 10) + 30000 + 20000*(A/F, 20%,10) = $16,460
AWC = -50000*(A/P, 20%, 10) + 27100 + 15000*(A/F,20%,10) = $15,752
Alternative B is most preferable.

Question 4:
Potable water is in short supply in many countries. To address this need, two mutually exclusive
water purification systems are being considered for implementation in China. Doing nothing is not
an option. Refer to the data below and state your key assumptions in working this problem.
Student Name: …
Student ID: …

System 1 System 2
Capital investment $110,000 $150,000
Annual revenues 50,000 70,000
Annual expenses 25,000 40,000
MV at end of useful life 20,000 0
Useful life 5 years 10 years
IRR 16.5% 15.1%

a. Use the PW method to determine which system should be selected when MARR = 8% per year.
b. Which system should be selected when MARR =15% per year?
MARR = 8%/year
Determine the study period, which is equal to the least common multiple of the two useful lives
(in this case =LCM(5,10) = 10)
Annual Profit:
A1 = 50000 – 25000 = 25000$
A2 = 70000 – 40000 = 30000$

PWA = -$110,000[1+(P/F,8%,5)] + $25,000(P/A,8%,10) + $20,000[(P/F,8%,5) +(P/F,8%,10)] =


5762.5$
PWB = -$150,000 +$30,000(P/A,8%,10) = 51303$
→ Alternative B should be preferred because it provides positive and larger PW (optimize the
profitability)
b) PW method
Apply PW method with interest rate 15%
PWA = -24334$
PWB = 563.06 $
→ Alternative B should be preferred because it provides positive and larger PW (optimize the
profitability)

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