Home Assignments for Chapter Five (2078/03/18)

Engineering Economics BME IV/I By Er. Rajesh Bhattarai (Paschimanchal Campus)

1. Consider the following cash flows:
Period n Project’s Cash Flow
0 A B C D
1 -2500 -3500 -5500 -4000
2 300 2000 2000 5000
3 300 1500 2000 -3000
4 300 1500 2000 -2500
5 300 500 5000 1000
6 300 500 5000 1000
7 300 1500 2000
8 300 3000
(a) Calculate the payback period for each project.
b) Determine whether it is meaningful to calculate a payback period for project D.
(c) Assuming that I=10%, Calculate the discounted payback period for each project.
2. Evaluate the discounted payback period for the following project, where MARR = 15%
Year Cash Flow in Rs. (000)
0 (85)
1 15
2 25
3 35
4 45
5 45
6 35
3. What do you mean by MARR ? What are the factors responsible to the determination of
MARR.
4. Two Machines are being considered for a manufacturing process. Machine A has a first
cost of NRs. 75,200 and its salvage value at the end of six years of estimated service life
is Rs. 21,000. The operating costs of this machine are estimated to be Rs. 6,800 per year.
Extra income taxes are estimated at Rs. 2,400 per year. Machine B has a first cost of Rs.
44,000 and its salvage value at the end of six years' service is estimated to be negligible.
The annual operating costs will be Rs. 11,500. Compare these two mutually exclusive
alternatives by the PW method and FW methods at i= 15%
5. A large food-processing corporation is considering using laser technology to speed up and
eliminate waste in the potato-peeling process. To implement the system, the company
anticipates needing $3.5 million to purchase the industrial strength lasers. The system will
save $1,550,000 per year in labor and materials. However, it will require an additional
operating and maintenance cost of $350,000. Annual income taxes will also increase by
$150,000. The system is expected to have a 10-year service life and will have a salvage
value of about $200,000. If the company’s MARR is 18%, use the NPW method to justify
the economics of the project.
6. Consider the following sets of investment projects, all of which have a three-year
investment life:
Period Project Cash Flow In Rs.
N Project A B C D
0 -12500 -11000 12,500 -13000
1 5,400 -3000 -7000 5,500
2 14,400 21,000 -2000 5,500
3 7,200 13,000 4000 8,500
(a) Compute the net present worth of each project at I=15%
 (b) Compute the net future worth of each project at I=15% ,Which project or projects are
acceptable?
7. Maintenance money for a new building has been sought. Mr. Kendall would like to make
a donation to cover all future expected maintenance costs for the building. These
maintenance costs are expected to be $50,000 each year for the first 5 years, $70,000 each
year for years 6 through 10, and $90,000 each year after that. (The building has an
indefinite service life.)
(a) If the money is placed in an account that will pay 13% interest compounded annually,
how large should the gift be?
(b) What is the equivalent annual maintenance cost over the infinite service life of the
building?
8. A group of concerned citizens has established a trust fund that pays 6% interest,
compounded monthly, to preserve a historical building by providing annual maintenance
funds of $30,000 forever. Compute the capitalized equivalent amount for these building
maintenance expenses.
9. Suppose that there are two alternative electric motor that provide 100 HP output. An alpha
motor can be purchased for Rs. 125,000 and has an efficiency of 74%, an estimated life of
10 Years, and estimated maintenance cost of Rs. 5000 per year. A beta motor will cost Rs.
160000 and has an efficiency of 92%, a life of 10 Years and annual maintenance costs of
Nrs. 2500. Annual taxes and insurance costs either motor will be 1.5% of the investment.
If the minimum attractive rate of return is 12% , how many hours per year would the motors
have t be operated at full load for the annual cost to be equal? Assume that salvage values
for both are negligible and that electricity cost of Rs. 5 Per Kilowatt hour. Recommend the
motor which is more economical for higher hour operation.
10. An electric motor is rated at 10 horsepower (HP) and costs $800. Its full load efficiency is
specified to be 85%. A newly designed high-efficiency motor of the same size has an
efficiency of 90%, but costs $1,200. It is estimated that the motors will operate at a rated
10 HP output for 1,500 hours a year, and the cost of energy will be $0.07 per kilowatt-
hour. Each motor is expected to have a 15-year life. At the end of 15 years, the first motor
will have a salvage value of $50 and the second motor will have a salvage value of $100.
Consider the MARR to be 8%. Find (a) Use the NPW criterion to determine which motor
should be installed. (b) In (a), what if the motors operated 2,500 hours a year instead of
1,500 hours a year? Would the motor you chose in (a) still be the choice?
Capital (Recovery) Cost/Annual Equivalent Cost
11. The owner of a business is considering investing $55,000 in new equipment. He estimates
that the net cash flows will be $5,000 during the first year, but will increase by $2,500 per
year the next year and each year thereafter. The equipment is estimated to have a 10-year
service life and a net salvage value of $6,000 at that time. The firm’s interest rate is 12%.
(a) Determine the annual capital cost (ownership cost) for the equipment. (b) Determine
the equivalent annual savings (revenues). (c) Determine whether this is a wise investment.
12. You are considering purchasing a dump truck. The truck will cost $45,000 and have an
operating and maintenance cost that starts at $15,000 the first year and increases by $2,000
per year. Assume that the salvage value at the end of five years is $9,000 and interest rate
is 12%. What is the equivalent annual cost of owning and operating the truck?
13. Emerson Electronics Company just purchased a soldering machine to be used in its
assembly cell for flexible disk drives. The soldering machine cost $250,000. Because of
the specialized function it performs, its useful life is estimated to be five years. It is also
estimated that at that time its salvage value will be $40,000. What is the capital cost for
this investment if the firm’s interest rate is 18%?

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14. A chemical company is considering two types of incinerators to burn solid waste generated
by a chemical operation. Both incinerators have a burning capacity of 20 tons per day. The
following data have been compiled for comparison:
Description Incineration A Incineration B
Installed Cost 1,200,000 750,000
Annual O & M Costs 50,000 80,000
Service Life 20 Years 10 Years
Salvage Value 60,000 30,000
Income Taxes 40,000 30,000
If the firm’s MARR is known to be 13%, determine the processing cost per ton of solid
waste incurred by each incinerator. Assume that incinerator B will be available in the
future at the same cost.
15. Consider the cash flows for the following investment projects (MARR = 15%):
Project Cash Flow
N A B C
0 -2500 -4000 -5000
1 1000 1600 1,800
2 1800 1500 1,800
3 1000 1500 2,000
4 400 1500 2,000
(a) Suppose that projects A and B are mutually exclusive. Which project would you select,
based on the AE criterion? (b) Assume that projects B and C are mutually exclusive. Which
project would you select, based on the AE criterion?
16. The cash flows for two investment projects are as follows:
Period Project's Cash Flow
N A B
0 -4000 5,500
1 1000 -1400
2 X -1400
3 1000 -1400
4 1000 -1400
(a) For project A, find the value of X that makes the equivalent annual receipts equal the
equivalent annual disbursement at i= 13%
(b) Would you accept project B at i=15%, based on an AE criterion?
IRR
17. Consider the following two mutually exclusive investment projects that required the same
amount of investment:
Year Project A Project B
0 -9000 -9,000
1 4800 5,800
2 3,700 3,250
3 6,550 2,000
4 3,780 1,561
IRR 18% 18%
Which project would you select on the basis of the rate of return on incremental
investment, assuming that MARR = 12%

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18. A plant engineer is considering two types of solar water heating system:
Flat plate Vacuum Tube
Initial Cost 700,000 1,000,000
Annual Savings 70,000 100,000
Annual Maintenance 10,000 5,000
Expected Life 20 Years 20 Years
Salvage Value 40,000 50,000
The form's MARR is 12% on the basis of the IRR Criterion, which system is better choice
in your view?
19. What is internal rate of return (IRR) of the investment project? How do you predict unique
real value of IRR when there are multiple values of IRR
Consider two mutually exclusive alternatives with the following sequences of cash flows:
Period Net Cash Flow (In Thousands NRs.)
N Project A Project B
0 -1100 -1300
1 500 620
2 500 620
3 500 620
Consider MARR as 15%
a) Compute the IRR on the incremental investment in the amount of NRs. 200,000
b) If the Firm's MARR is 10% which alternative would you select and why?
20. Calculate the investment projects with the following sequences of cash flows.
Net Cash flows(In Million)
Years Project A Project B Project C
0 -2000 -1000 -3000
1 1500 800 1500
2 1000 600 2000
3 800 600 1000
Consider MARR as 15%
a) Compute the IRR for each project
b) If these projects are independent projects, which project would you select and why?
c) If these projects are mutually exclusive projects, which project would you select on the
basis of rate of return on incremental investment basis?