CHAPTER 6 Solutions Manual

For

Basics of Engineering Economy, 1e

Leland Blank, PhD, PE

Texas A&M University
and
American University of Sharjah, UAE

Anthony Tarquin, PhD, PE

University of Texas at El Paso

PROPRIETARY MATERIAL.
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 Chapter 6

6.1 The lowest rate of return is –100%.

6.2 For an investment that doubles every 6 months when interest is compounded
semiannually, the effective rate of return per 6-months is 100%. Therefore, the
nominal return per year is 2*100 = 200%.

6.3 For interest on principal, interest each month is 0.005(100,000,000) = $500,000

For interest on unrecovered balance, monthly payment is:
A = 100,000,000(A/P,0.5,60)
= 100,000,000(0.01933)
= 1,933,333

Amt owed after 1st month is 100,000,000 – 1,933,333 = $98,067,000

Interest in month 2 = $98,067,000(0.005) = $490,335

Difference = 500,000 – 490,335 = $9665

6.4 Amount due after 1 month = 300,000(1.007) = $302,100

Balance after $50,000 payment = 302,100 – 50,000
= $252,100

6.5 Solve equation by trial and error or Excel:

0 = -50,000 + 15,000(P/A,i,4) + 9000(P/F,i,4)
Try i = 12%: -50,000 + 15,000(3.0373) + 9000(0.6355) = $1279 i too low
Try i = 14%: -50,000 + 15,000(2.9137) + 9000(0.5921) = $-965.60 i too high

By interpolation, i = 13.14%

6.6 Move all cash flow to year 1:

0 = -80,000 – 9000(P/F,i,1) + 40,000(P/F,i,2) + 70,000(P/F,i,3)

Solve for i by trial and error or excel: i = 8.74% (Excel)

6.7 0 = -24,000 + (27,000 – 17,000)(P/A,i,5)

(P/A,i,5) = 2.4000
i = 30.77% (Excel)

6.8 0 = -2000 + 7000(P/F,i,2)

(P/F,i,2) = 0.28571
Solve by equation or spreadsheet
i = 87.1% per year

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6.9 0 = -65,220(P/A,i,4) + (57,925 – 35,220)(P/A,i,31)(P/F,i,4)
0 = -65,220(P/A,i,4) + (22,705)(P/A,i,31)(P/F,i,4)
Solve by trial and error:
Try 6%: 0 = -225,994 + 250,510 = $24,516 i too low
Try 7%: 0 = -220,913 + 217,071 = -$3842 i too high

i = 6.86% per year (spreadsheet)

6.10 0 = -1537(P/A,i,48) + (2057 – 1537)(P/A,i,240)(P/F,i,48)

0 = -1537(P/A,i,48) + (520)(P/A,i,240)(P/F,i,48)
Solve by trial and error or spreadsheet:
(a) i = 0.39% per month (spreadsheet)
(b) i = 0.39*12 = nominal 4.68% per year

6.11 0 = -100 – 400(100,000) + 20(P/A,i,10) (millions)

0 = -140 + 20(P/A,i,10)
(P/A,i,10) = 7.000
From 7% and 8% tables, i is slightly over 7%
i = 7.07% per year (spreadsheet)

6.12 0 = -5(6000) + 600(P/A,i,156)

(P/A,i,156) = 50.0000
Solve for i by trial and error or spreadsheet:
(a) i = 1.89% per week (spreadsheet)
(b) i = 1.89*52 = nominal 98.3% per year

6.13 Spending $60,000 now will result in savings of $28,000 in years 0, 3 and 6. The
rate of return equation is :
0 = -60,000 + 28,000 + 28,000[(P/F,i,3) + (P/F,i,+6)]
0 = -32,000 + 28,000[(P/F,i,3) + (P/F,i,+6)]
Solve for i by trial and error or spreadsheet:
i = 13.7% per year (spreadsheet)

6.14 0 = -500 + 0.18(2500)(P/F,i,2) + 500(1.62)(P/A,i,5)(P/F,i,5) – 10(P/A,i,10)

0 = -500 + 450(P/F,i,2) + 810(P/A,i,5)(P/F,i,5) – 10(P/A,i,10)

Solve for i by trial and error or spreadsheet:

i = 42% per year (spreadsheet)

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6.15 (a) 0 = -4.97 + + 1.3(P/A,i,10)
(P/A,i,10) = 3.8231
Solve for i by trial and error or spreadsheet:
i = 22.8% per year (spreadsheet)

(b) Cost of guardrail = 72,000(113) = $8.136 million

0 = -8.136 + 1.1(P/A,i,10)
(P/A,i,10) = 7.39636
Solve for i by trial and error or spreadsheet:
i = 5.9% per year (spreadsheet)

6.16 0 = 2,000,000 – 200,000(P/A,i,2) – 2,200,000(P/F,i,3)

Solve for i by trial and error or spreadsheet:

i = 10% per year (spreadsheet)

6.17 Move $20 million to year 5 and then determine interest rate that will provide 100
scholarships every six months forever.

Total cost of scholarships per six months = 100(5000) = $500,000

A = Pi
500,000 = 20,000,000(F/P,i,5)i
(F/P,i,5)i = 0.02500
Solve for i by trial and error or spreadsheet:
i = 2.24% per six months

6.18 Difficulties: May be multiple i* values, computationally more difficult than

other methods, may require trial and error solution, multiple alternatives more
difficult to handle

6.19 The alternative with the higher rate of return may not be the best alternative when
its initial investment is less than the total money available for investment . In some
cases, the weighted average ROR on the total amount available for investment can
be higher when the lower ROR alternative is selected.

6.20 Overall ROR: 60,000(0.20) + 140,000(0.12) = 200,000(i)

i = 14.4%

6.21 A cash flow tabulation helps to identify the incremental cash flows between two
alternatives

6.22 Revenue alternatives have positive cash flows and can be compared against
do-nothing. Cost alternatives can only be compared against each other
(incrementally)

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6.23 (a) Incremental CF year 0 = -25,000 –(-15,000) = -$10,000
(b) Incremental CF year 3 = -400 - (-1600 – 15,000 + 3000) = +$13,200
(c) Incremental CF year 6 = 6000 – 3000 = +$3000

6.24 Year Alternative X Alternative Y Y-X

0 -15,000 -25,000 -10,000
1-5 -1,600 -400 +1200
5 3,000 6,000 +3000
Sum = -10,000 + 5(1200) + 3000 = -1000

6.25 Year Alternative B Alternative A B-A

0 -85,000 -50,000 -35,000
1 43,000 13400 29,600
2 43,000 13400 29,600
3 43,000 13400-50,000+3000 76,600
4 43,000 13400 29,600
5 43,000 13400 29,600
6 43,000+8000 13400+3000 34,600
Sum = $194,600

6.26 (a) $190,000 (b) $30,000 (c) $39,000

6.27 (a) $51,000 (b) $16,000 (c) $4000

6.28 (a) 0 = -2800 + 1100(P/A,i,9) +2000(P/F,i,10)

Solve for i by trial and error or spreadsheet.

i = 38.2% per year (spreadsheet)

(b) Select Alt X3

6.29 0 = -45,000 + 15,000(P/A,i,6) + 45,000(P/F,i,3) + 6000(P/F,i,6)

Solve for i by trial and error or spreadsheet:

i = 45.2% per year (spreadsheet)

6.30 0 = -800,000 + 40,000(P/A,i,20)

(P/A,i,20) = 20.0000

Solve for i by trial and error or spreadsheet:

i = 0% per year (spreadsheet)

(Note: Incremental investment is exactly equal to incremental savings)

i < MARR of 8% per year; select design 2B

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6.31 For cost alternatives, one must be selected. Since none were economically justified,
select lowest cost alternative A

6.32 0 = -1,600,000 – 240,000(P/A,i,10) + 700,000(P/A,i,10)

0 = -1,600,000 + 460,000(P/A,i,10)
(P/A,i,10) = 3.4783

Solve for i by trial and error or spreadsheet:

i = 25.9% per year (spreadsheet)
i > MARR; select RO

6.33 Rank alternatives according to increasing initial investment: DN, 44, 55, 88

DN vs 44: 0 = -40,000 + 2000(P/A,i,20)

(P/A,i,20) = 20.0000

Solve for i by trial and error or spreadsheet:

i = 0% per year, eliminate 44 Mbps

DN vs 55: 0 = -46,000 + 4000(P/A,i,20)

(P/A,i,20) = 11.5000

Solve for i by trial and error or spreadsheet:

i = 5.97% per year (spreadsheet)
i < MARR, eliminate 55 Mbps

DN vs 88: 0 = -61,000 + 7500(P/A,i,20)

(P/A,i,20) = 8.1333

Solve for i by trial and error or spreadsheet:

i = 10.7% per year (spreadsheet)
i < MARR, eliminate 88 Mbps
Select DN

6.34 Rank alternatives according to increasing initial investment (including DN) and
Compare incrementally:

DN vs iGen-1: 0 = -500,000 + 100,000(P/A,i,3) + 70,000(P/F,i,3)

Solve for i by trial and error or spreadsheet:
i < 0; eliminate iGen-1 (spreadsheet)

DN vs iGen-2: 0 = -600,000 + 160,000(P/A,i,3) + 85,000(P/F,i,3)

i < 0; eliminate iGen-2 (spreadsheet)

DN vs iGen-3: 0 = -650,000 + 205,000(P/A,i,3) + 95,000(P/F,i,3)

i = 4.3%; eliminate iGen-3 (spreadsheet)

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 DN vs iGen-4: 0 = -750,000 + 310,000(P/A,i,3) + 120,000(P/F,i,3)
i =17.8%; select iGen-4 (spreadsheet)

6.35 Rank alternatives according to increasing initial investment and compare

incrementally: 2, 1, 3, 5, 4

2 vs 1: 0 = -2000 + 3300(P/A,i,4)
i = 161% eliminate 2 (spreadsheet)

1 vs 3: 0 = -3500 - 3300(P/A,i,4)
i < 0% eliminate 3 (spreadsheet)

1 vs 5: 0 = -10,000 + 500(P/A,i,4)
i < 0% eliminate 5 (spreadsheet)

1 vs 4: 0 = -18,000 + 3800(P/A,i,4)
i < 0% eliminate 4 (spreadsheet)

Select Machine 1

6.36 Rank alternatives according to increasing initial investment (including DN) and
compare incrementally: DN, D, A, C, E, B

(a) DN vs D: i = 11% < MARR eliminate D

DN vs A: i = 10% < MARR eliminate A
DN vs C: i = 7% < MARR eliminate C
DN vs E: i = 12% > MARR eliminate DN
E vs B: i = 15% > MARR eliminate E

Therefore, select B

(b) DN vs D: i = 11% < MARR eliminate D

DN vs A: i = 10% < MARR eliminate A
DN vs C: i = 7% < MARR eliminate C
DN vs E: i = 12% < MARR eliminate E
DN vs B: i = 13% < MARR eliminate B

Therefore, select DN

6.37 (a) Initial cost Machine 1: -60,000 – (-x) = -16,000 x = $44,000

Overall ROR Machine 2: 0 = -60,000 + 16,000(P/A,i,10) i = 23.4%
Incremental investment 3:2: -72,000 – (-60,000) = -$12,000
Incremental cash flow 4:3: 24,000 – 19,000 = $5000
Incremental ROR 3:2: 0 = -12,000 + 3000(P/A,i,10) i = 21.4%
Incremental ROR 4:3: 0 = -26,000 + 5000(P/A,i,10) i = 14%

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 (b) Machines are ranked according to initial investment cost;
Compare 2 vs 1: ROR = 35.7% > MARR eliminate 1
Compare 2 vs 3: ROR = 21.4% > MARR eliminate 2
Compare 3 vs 4: ROR = 19% > MARR eliminate 3

Select Machine 4

6.38 Rank Alternatives: DN, A, C, B, E, D

DN vs A: ROR = 20% > MARR eliminate DN
A vs C: i = (900/5000)*100 = 18% > MARR eliminate A
C vs B: i = (1100/5000)*100 = 22% > MARR eliminate C
B vs E: i = (2000/30,000)*100 = 6.7% < MARR eliminate E
B vs D: i = (6000/50,000)*100 = 12% < MARR eliminate D

Select Alternative B

6.39 (a) Select A, B, and C

(b) DN vs A: i = 29%, eliminate DN;
A vs B: i = 1%, eliminate B
A vs C: i = 7%, eliminate C
A vs D: i = 10%, eliminate D Therefore, select A

(c) Same as above; select A

6.40 (a) To get overall ROR for X1, must find revenue for X1:
Revenue for X2 = 30,000*0.1333 = $4000;
Revenue diff between X1 and X2: x/10,000 = 0.02; x = $200
Therefore, revenue for X1 = 4000 – 200 = $3800
ROR X1 = 3800/20,000 = 0.19 = 19%

To get overall ROR for X3, must find revenue for X3:
Revenue diff between X2 and X3: x/20,000 = 0.20; x = $4000
From calculation above, revenue for X2 = $4000
Therefore, to get revenue for X3: x - 4000 = $4000; x = $8000
ROR X3 = 8000/50,000 = 0.16 = 16%

Revenue X4: x/75000 = 0.12 x = $9000

Incremental values line 1:

Incremental ROR X1 vs X2 = 2% (given)
Incremental ROR X1 vs X3 = 14% (given)
Incremental ROR X1 vs X4 = (9000-3800)/(75,000-20,000) = 9.5%

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 Incremental values line 2:
Incremental ROR X2 vs X3 = 20% (given)
Incremental ROR X2 vs X4: (9000-4000)/(75,000-30,000) = 11.1%

Incremental values line 3:

Incremental ROR X3 vs X4: (9000-8000)/(75,000-50,000) = 4%

Incremental values line 4:

Incremental ROR X4 vs X1 = 9.5% (calculated above)
Incremental ROR X4 vs X2 = 11.1% (calculated above)
Incremental ROR X4 vs X3 = 4% (calculated above)

(b) Select DN. All overall ROR’s < MARR.

(c) DN vs X1: i = 19%; eliminate DN

X1 vs X2; i = 2%; eliminate X2
X1 vs X3; i = 14%; eliminate X1
X3 vs X4; i = 4%; eliminate X4 Select X3

6.41 A series that has more than one sign change in net cash flow.

6.42 The max number is equal to the number of sign changes in net cash flow.

6.43 Descarte’s rule of signs: net cash flow.

Norstrom’s criterion: cumulative cash flow.

6.44 There is only one positive root when the cumulative cash flow series changes sign
only once and Sn ≠ 0.

6.45 (a) one (b) three (c) seven

6.46 Year Net CF Cum CF

1 -5000 -5000
2 8000 3000
3 -2000 1000
4 6000 7000

Cumulative CF through year 4 is $7000

6.47 (a) 3 (three changes in sign of net cash flow)

(b) Per Norstrom’s criterion, there is only one ROR value;
0 = -17 -20(P/F,i,1) + 4(P/F, i,2) -11(P/F,i,3) + 32(P/F,i,4) + 47(P/F,i,5)
Solve for i by trial and error or spreadsheet.
i = 17.4% (spreadsheet)

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6.48 (a) 2 (two changes in sign of net cash flow)

(b) Per Norstrom’s criterion, there is only one ROR value.

0 = -3000 + 1400(P/F,i,1) + 1700(P/F, i,2) + 3500(P/F,i,3) - 200(P/F,i,4)

Solve for i by trial and error or spreadsheet.

i = 42.1% (spreadsheet)

6.49 The reinvestment interest rate is used to find a single interest rate when there are
multiple interest rates in a rate of return equation.

6.50 F0 = 5000 ; F0 >0; use c

F1 = 5000(1 + 0.14) –2000 = 3700; F1>0, use c
F2 = 3700(1 + 0.14) –1500 = 2718 F2>0, use c
F3 = 2718(1 + 0.14) – 7000 = -3901.48 F3<0, use i’
F4 = -3901.48(1 + i’) + 4000

Set F4 = 0 and solve for i’

i’ = 2.5%

6.51 First, calculate the cumulative CF:

Year Cash Flow, $1000 Cumulative CF

0 -38 -38
1 10 -28
2 44 +16
3 -5 +11

(a) The cumulative cash flow starts out negatively and changes sign only once.
Therefore, there is only one root to the equation.

0 = -38 + 10(P/F,i,1) + 44(P/F,i,2) – 5(P/F,i,3)

Solve for i by trial and error or Excel:

i = 16.2% per year (spreadsheet)

(b) Apply net reinvestment procedure because reinvestment rate, c = 8 %, is not

equal to i* rate of 16.2% per year.

F0 = -38 F0 < 0; use i’

F1 = -38(1 + i’) + 10 F1 < 0; use i’
F2 = F1(1 + i’) + 44 F2 > 0; use c (F2 must be > 0 because last term
is negative)
F3 = F2(1 + 0.08) - 5

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 Solve for F3:
F1 = -38 – 38i’ + 10
F2 = (-38 – 38i’ + 10)(1 + i’) + 44
= -38 - 38i + 10 – 38i – 38i2 + 10i’ + 44
= -38i’2 – 66i’ + 16
F3 = (-38i’2 –66i’ + 16)(1.08) – 5
= -41.04i’2 –71.28i’ + 17.28 – 5
= -41.04i’2 –71.28i’ + 12.28

Set F3 = 0 and solve for i’ by quadratic equation, trial and error, or spreadsheet

i’ = 15.8% per year (spreadsheet)

6.52 Apply net reinvestment procedure because reinvestment rate c = 20% is not equal
to i* rate of 44.1% per year. Set up PW = 0 relation and write the F relations.
0 = -5000 + 4000(P/F,i,1) + 20,000(P/F,i,4) – 15,000(P/F,i,5)

F0 = -5000 F0 < 0; use i’

F1 = -5000(1 + i’) + 4000
= -5000 – 5000i + 4000
= -1000 – 5000i F1 < 0; use i’
F2 = (-1000 – 5000i)(1 + i’)
= -1000 – 5000i –1000i – 5000i2
= -1000 – 6000i – 5000i2 F2 < 0; use i’
F3 = (-1000 – 6000i – 5000i2)(1 + i’)
= -1000 – 6000i – 5000i2 –1000i – 6000i2 – 5000i3
= -1000 – 7000i – 11,000i2 – 5000i3 F3 < 0; use i’
F4 = (-1000 – 7000i – 11,000i2 – 5000i3)(1 + i’) + 20,000
= 19,000 – 8000i – 18,000i2 – 16,000i3 - 5,000i4 F4 > 0; use c
F5 = (19,000 – 8000i – 18,000i2 – 16,000i3 - 5,000i4)(1.20) – 15,000
= 7800 – 9600i – 21,600i2 – 19,200i3 - 6000i4

Set F5 = 0 and solve for i by trial and error or spreadsheet.

i = 37.6% per year (spreadsheet)

6.53 F0 = 2000 F0 > 0; use c

F1 = 2000(1.30) + 1200
= 3800 F1 > 0; use c
F2 = 3800(1.30) -4000
= 940 F2 > 0; use c
F3 = 940(1.30) - 3000
= -1778 F3 < 0; use i’
F4 = -1778(1 + i’) + 2000

Set F4 = 0 and solve for i’.

i’= 12.5%

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 Problems for Test Review and FE Exam Practice

6.54 Answer is (a)

6.55 Answer is (d)

6.56 Answer is (d)

6.57 0 = -50,000 + 30,000(P/F,i,1) + 38,000(P/F,i,2)

Solve by trail and error to get

i* = 22.2%
Answer is (b)

6.58 Answer is (b)

6.59 Year 0 1 2 3 4 5___

NCF, $ -22,000 -27,000 +16,000 -4,500 +3,000 -9,000

Four sign changes

Answer is (d)

6.60 A to DN: 23.4% > 16%; select A

B to A: -5.1% < 16%; select A
C to A: 12.0% < 16%; select A
Answer is (a)

6.61 Answer is (c)

6.62 Answer is (c)

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