Engineering Economy

Sheet number 1
1- Explain why subject of engineering economy is important for the practicing engineer
2- Classify each of the following cost items as mostly fixed of variable:
- raw materials
- direct labor
- depreciation
- supplies
- utilities
- property taxes
- interest on borrowed money
- administrative salaries
- insurance
- clerical salaries
- sales commissions
- rents
3- Compare the interest earned by “P” dollars at i% per year simple interest with that earned
by the same amount “P” for five years at i% compounded interest.
4- Ahmed loans Mohamed $ 8,000, with interest compounded at rate of 8% per year. How
much must Mohamed repay to Ahmed after 6 years?
5- What is the present equivalent of $ 18,000 to be received in 15 years when the interest
rate is 7% per year?
6- A future amount of $200,000 is to be accumulated throw annual payments, “A”, over 25
years. If the interest rate is 8% per year, what is the value of A?
7- Mohamed makes six end of years deposits of $2,000 each in a saving account paying 5%
compounded annually. If the accumulated account balance is withdrawn four years after the
last deposit, how much money will be withdrawn?
8- How much money should be deposited each year for 12 years if you wish to withdraw
$3,000 each year for 5 years beginning at the end of 14 th years? Let i=7% per year.
9- A loan of $10,000 is to be repaid over a period of 8 years. During the first 4 years, exactly
half of the loan principle is to be repaid (along with accumulated compound interest by a
uniform series of payments of “A1” dollars per year. The other half of the loan principle is to
be repaid over 4 years, with accumulated interest, by a uniform series of payment of “A2”
dollars per year. If the interest rate is 9% per year, what are the values of A1 and A2?
10. In the following cash flow diagram, what is the value of K on the left hand cash-flow
diagram figure “a” that is equivalent to the right hand cash-flow diagram figure “b? let i=12%
per year.

650
k k 430 540
320
100 210

0 1 2 3 4 5 0 1 2 3 4 5 6 7

11- Calculate the future equivalent at the end of 2005, at 8% per year, of the following series
of cash flow [use a uniform gradient amount “G” in your solution]

2002 2003 2004 2005

$400
$600
$800
$1000

12- A small company pays $8,000 per year on electricity for the air conditioning purposes.
Cost increases of electricity are expected to be 10% per year starting one year from now (i.e.
the first cash flow is $8,800 at the end of year one). Their maintenance on the air conditioners
is $345 per year and this expenses is expected to increase by 15% per year starting one year
from now. If the planning horizon is 15 years, what is the total annual equivalent expense for
operating and maintaining the air conditioning system? The interest rate is 18% per year.
13- Determine the present equivalent value of the cash flow diagram in the following figure
when the annual interest rate i% varies as indicated?
?=P $1,000
$800 $600
$400
i=10% i=8% i=6% i=6%

3 4
0 1 2
14- Compute the effective annual interest rate in each of thes situations:
a. 12% nominal interest, compounded semiannually.
b. 12% nominal interest, compounded quarterly.
c. 12% nominal interest, compounded weekly.

15- Determine the amount of money that must be invested at 12% nominal interest,
compounded monthly, to provide an annuity of $10,000 (Per year) for 6 years, starting 12
years from now. The interest rate remains constant over this entire period of time.