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Chapter 01 Problems & Final Answers

The document contains several math problems related to concepts in engineering economy including interest rates, present and future value, equivalence, cash flows, simple and compound interest. The problems cover topics such as calculating interest rates on loans, determining future values of investments given compound interest rates, and constructing cash flow diagrams.

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Eng. Mahmoud Alkhabit
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192 views4 pages

Chapter 01 Problems & Final Answers

The document contains several math problems related to concepts in engineering economy including interest rates, present and future value, equivalence, cash flows, simple and compound interest. The problems cover topics such as calculating interest rates on loans, determining future values of investments given compound interest rates, and constructing cash flow diagrams.

Uploaded by

Eng. Mahmoud Alkhabit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 1 Problems

Interest Rate & Rate of Return:


1.9 RKI Instruments borrowed $3,500,000 from a private equity firm for expansion of its manufacturing
facility for making carbon monoxide monitors controllers. The company repaid the loan after 1 year
with a single payment of $3,885,000. What was the interest rate on the loan?

Answer: i = 11%

1.10 Emerson Processing borrowed $900,000 for installing energy-efficient lighting and safety equipment
in its La Grange manufacturing facility. The terms of the loan were such that the company could pay
interest only at the end of each year for up to 5 years, after which the company would have to pay the
entire amount due. If the interest rate on the loan was 12% per year and the company paid only the
interest for 4 years, determine the following:
a) The amount of each of the four interest payments
b) The amount of the final payment at the end of year 5

Answer: a) $108,000
b) $1,008,000

1.11 Which of the following 1-year investments has the highest rate of return?
a) $12,500 that yields $1,125 in interest,
b) $56,000 that yields $6,160 in interest, or
c) $95,000 that yields $7,600 in interest.

Answer: a) 9%
b) 11%
c) 8%

Terms & Symbols:


Identify the four engineering economy symbols (P, F, A, i, n) and their values from the following problem
statement. Use a question mark with the symbol whose value is to be determined.
1.15 Thompson Mechanical Products is planning to set aside $150,000 now for possibly replacing its large
synchronous refiner motors whenever it becomes necessary. If the replacement is not needed for 7
years, how much will the company have in its investment set-aside account, provided it achieves a
rate of return of 11% per year?

Answer: P = $150,000, n = 7, i = 11%, F = ?


1.16 Atlas Long-Haul Transportation is considering installing Valutemp temperature loggers in all of its
refrigerated trucks for monitoring temperatures during transit. If the systems will reduce insurance
claims by $100,000 two years from now, how much should the company be willing to spend now, if
it uses an interest rate of 12% per year?

Answer: F = $100,000, n = 2, i = 12%, P = ?

1.17 A green algae, Chlamydomonas reinhardtii, can produce hydrogen when temporarily deprived of
sulfur for up to 2 days at a time. A small company needs to purchase equipment costing $3.4 million
to commercialize the process. If the company wants to earn a rate of return of 10% per year and
recover its investment in 8 years, what must be the net value of the hydrogen produced each year?

Answer: P = $3.4 M, i = 10%, n = 8, A = ?

1.18 Vision Technologies, Inc., is a small company that uses ultra-wideband technology to develop
devices that can detect objects (including people) inside of buildings, behind walls, or below ground.
The company expects to spend $100,000 per year for labor and $125,000 per year for supplies before
a product can be marketed. At an interest rate of 15% per year, what is the total equivalent future
amount of the company’s expenses at the end of 3 years?

Answer: A = $100,000 + 125,000, i = 15%, n = 3, F = ?

Cash Flows:
1.20 Identify the following as cash inflows or outflows to commercial air carriers: fuel cost, pension plan
contributions, fares, maintenance, freight revenue, cargo revenue, extra-bag charges, water and
sodas, advertising, landing fees, seat preference fees.

1.23 Construct a cash flow diagram for the following cash flows: $25,000 outflow at time 0, $9000 per
year inflow in years 1 through 5 at an interest rate of 10% per year, and an unknown future amount
in year 5.

1.24 Construct a cash flow diagram to find the present worth in year 0 at an interest rate of 15% per year
for the following situation:

Year Cash Flow, $


0 -19,000
1-4 8,100

1.25 Construct a cash flow diagram that represents the amount of money that will be accumulated in 15
years from an investment of $40,000 now at an interest rate of 8% per year.
Equivalence:
1.26 At an interest rate of 15% per year, an investment of $100,000 one year ago is equivalent to how
much now?

Answer: F = $115,000

1.27 During a recession, the price of goods and services goes down because of low demand. A company
that makes Ethernet adapters is planning to expand its production facility at a cost of $1,000,000 one
year from now. However, a contractor who needs work has offered to do the job for $790,000 if the
company will do the expansion now instead of 1 year from now. If the interest rate is 15% per year,
how much of a discount is the company getting?

Answer: $79,565

1.29 A design/build engineering company that usually gives year-end bonuses in the amount of $8000 to
each of its engineers is having cash flow problems. The company said that although it could not give
bonuses this year, it would give each engineer two bonuses next year, the regular one of $8000 plus
an amount equivalent to the $8000 that each engineer should have gotten this year. If the interest rate
is 8% per year, what will be the total amount of bonus money the engineers should get next year?

Answer: $16,640

Simple & Compound Interest:


1.31 If a company sets aside $1,000,000 now into a contingency fund, how much will the company have
in 2 years, if it does not use any of the money and the account grows at a rate of 10% per year?

Answer: $1,210,000

1.32 Iselt Welding has extra funds to invest for future capital expansion. If the selected investment pays
simple interest, what interest rate would be required for the amount to grow from $60,000 to $90,000
in 5 years?

Answer: i = 10%

1.35 A solid waste disposal company borrowed money at 10% per year interest to purchase new haulers
and other equipment needed at the company owned landfill site. If the company got the loan 2 years
ago and paid it off with a single payment of $4,600,000, what was the principal amount P of the
loan?

Answer: P = $3,801,653

1.36 If interest is compounded at 20% per year, how long will it take for $50,000 to accumulate to
$86,400?

Answer: n = 3 years

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