Economic engineering years, how much will the company

have at the end of that time period?

Chapter 1
1.11 A company that offers a great
variety
Services received a $2 million loan to 1.22 Badger Pump Company invested
purchase new equipment and repaid $500,000 five years ago in a new
the principal amount of the loan plus product line that now returns
$275,000 in interest after one year. $1,000,000. What rate of return did the
What was the interest rate on the loan? company earn based on a ) simple
interest, and b ) compound interest?

1.13 The US Filter company entered

into a contract for a small water
desalination plant, with which it expects
to obtain a rate of return of 28% on its Episode 2
investment. If the company invested $8
million in equipment during the first 2.2 The US Border Patrol is analyzing
year, what was the amount of profit in the purchase of a new helicopter for
that year? aerial surveillance of the New Mexico
and Texas border with the Mexican
Republic. A similar helicopter was
purchased four years ago at a cost of
$140,000. With an interest rate of 7%
per year, what would be the current
equivalent value of said amount?

1.15 A chemical company that is

starting to operate has set the goal of
obtaining a rate of return of at least
35% per year on its investment. If the
company acquired $50 million as
venture capital, how much should it 2.7 Car manufacturer Renault signed a
receive in the first year? $75 million contract with ABB of Zurich,
Switzerland, to automate chassis
assembly lines, body assembly shops,
and line control systems. If ABB will
receive payment in two years (when
the systems are ready), what is the
current value of the contract with
1.20 Certain certificates of deposit interest at 18% per year?
accumulate simple interest of 10%
annually. If a company now invests
$240,000 in such certificates for the
purchase of a new machine in three
 Economic engineering

2.22 A recent engineering graduate

passed the FI exam and received a
raise (at the beginning of the first year)
of $2,000. At an interest rate of 8% per
year, what is the present value of the
$2,000 each year if you expect to be in 2.56 A company that produces plastic
business for 35 years? control valves has a fund of $500,000
for equipment replacement. If the
company spends $75,000 per year on
new equipment, how many years will it
take to reduce the fund to less than
$75,000 at an interest rate of 10% per
year?
2.27 A cash flow sequence starts in
year 1 at $3,000 and increases by
$1,000 each year until year 10. a )
calculate the value of the gradient G , b
) determine the amount of cash flow in
From the 10% table, n is between 11 and 12
year 8, and c ) find the value of n for years; therefore, n = 11 years
the gradient.
2.63 A person was told that a certain
cash flow sequence had started with
$3,000 in year 1 with increments of
$2,000 each year. How many years are
necessary for the equivalent annual
value of the sequence to be $12,000,
with an interest rate of 10% per year?

From the 10% table, n is between 12 and 13

years old; therefore, n = 13 years

Chapter 3
3.2 One plan to raise funds to benefit
Texas schools involves a wealth tax
that could raise $56 for each student in
a certain school district. If there are
50,000 students in the district, and
2.39 Suppose you were asked to cash flow begins two years from now,
prepare a table of factor values (such what is the present value of the plan to
as the one at the back of the book) to tax wealth over a five-year planning
calculate the present value of a horizon, at an interest rate of 8% per
geometric gradient series. Determine year? ?
the first three values (i.e., for n = 1, 2,
and 3) for an interest rate of 10% per
year, and a rate of increase of g of 4%
per year.

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 Economic engineering

3.35 Exxon-Mobil plans to sell a

number of producing wells. These are
expected to generate 100,000 barrels
of oil annually for eight more years,
with a selling price of $28 per barrel in
3.5 Toyco Watercraft and a parts the following two years, increasing by
supplier have a contract that involves $1 per barrel through year 8. How
purchases of $150,000 annually, the much should an independent refinery
first purchase would be made today be willing to pay for wells today, if the
and similar purchases would follow interest rate is 12% per year?
over the next five years. Determine the
present value of the contract, with an
interest rate of 10% per year.

3.40 A start-up company selling colored

car polishing wax receives a loan of
$40,000 with an interest rate of 10%
per year, and wishes to repay it over a
five-year period with annual payments
such that the third party the fifth is
3.14 The operating cost of a cyclone- $200,000 more than the first two.
type coal dust boiler is expected to be Determine the amount of these first two
$80,000 per year. If the steam payments.
produced will only be needed for five
years from today (that is, during years
1 to 5), what is the equivalent annual
value in these years of the operating
cost, with an interest rate of 10 %
annual?

Chapter 4

3.18 Life Savings Accounts, known as 4.2 Identify the capitalization period for
LSAs, would allow people to invest the following interests: a ) 7% annual
money after tax without any profits nominal, compounded quarterly; b )
being taxed. If an engineer invests 6.8% annual effective, compounded
$10,000 now and $10,000 for each of monthly, and c ) 3.4% quarterly
the next 20 years, how much would be effective, compounded weekly.
in the account immediately after (a) Quarterly (b) monthly (c)
making the last deposit, if the account weekly
grows 15% per year?

4.17 Deposits of $100 per week are

made into a savings account that pays
interest at 6% annually, compounded
quarterly. Identify payment and
capitalization periods.

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 Economic engineering

Chapter 5
4.21 A company that specializes in the
development of software for online
security wants to have $85 million 5.9 Two methods can be used to
available to pay stock dividends within produce expansion anchors. Method A
3 years. How much money should you It costs $80,000 upfront and would
now set aside in an account that earns have a salvage value of $15,000 after 3
an interest rate of 8% annually, years, while its operating cost would be
compounded quarterly? $30,000 per year. Method B would
have an initial cost of $120,000, the
operation would cost $8,000 per year,
and the salvage value after its 3-year
4.40 An engineer deposits $300 per life would be $40,000. With an interest
month in a savings account with an rate of 12% per year, which method
interest rate of 6% per year, should be used, based on present
compounded semiannually. How much value analysis?
will be in the account at the end of 15
years? Assume there is no
intermediate compounding period.

4.48 Due to the chronic lack of water in 5.22 Painting the Golden Gate Bridge
Santa Fe, sports fields must use costs $400,000. If said structure were
artificial grass or desert plants. If the painted today and every 2 years
value of water saved each month is thereafter, what would be the
$6,000, how much could a private capitalized cost of the painting work at
developer spend on artificial grass if he a rate of 6% annual interest?
wanted to recover his investment in 5
years, with an interest rate of 18% per
year, compounded continuously?

5.28 What is the capitalized cost

(absolute value) of the difference
between the following two plans, with
an interest rate of 10% per year? Plan
A requires spending $50,000 every 5
4.53 How much money could a years forever (starts in year 5). Plan B
manufacturer of fluid-layer abrasives requires spending $100,000 every 10
spend today, instead of spending years forever (starts in year 10).
$150,000 in year five, if the interest rate
is 10% in years 1 through 3, and 12%
in years 4 and 5?

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 Economic engineering

5.49 What is the present value of a

$50,000 bond whose interest is 10%
per year, payable quarterly? The bond
matures in 20 years. The interest rate
in the market is 10% annually,
compounded quarterly.
5.36 Determine the payback period for
an asset whose initial cost is $40,000,
with a salvage value of $8,000 at any
time in the first 10 years after
acquisition, and which generates
The bond interest rate and the market interest
income of $6,000 per year. The rate are the same.
required return is 8% per year. Therefore, PW = face value = $50,000

Chapter 6
6.1 Suppose that an alternative has a
3-year life and that you calculated its
annual value during this life cycle. If
5.38 Darnell Enterprises built an
you were asked to provide the annual
addition to its building that cost
value of the same alternative for a 4-
$70,000. Other annual expenses are
year study period, would the estimate
expected to be $1,850, but additional
of the annual value calculated for the
income will be $14,000 per year. How
alternative with a 3-year life be valid for
long will it take before the company
the 4-year study period? Yes or no?
recovers its investment, at an interest
Because?
rate of 10% per year?
The estimate obtained from the three-year AW
would not be valid, because the AW calculated
over a life cycle is valid only for the entire cycle,
not as part of it. Here, the asset would be used
for only part of its three-year life cycle.

6.3 An engineering consulting company

studies two SUV models for its
managers. The General Motors brand
will have an initial cost of $26,000, an
operating cost of $2,000, and a salvage
value of $12,000 after 3 years. On the
other hand, the one manufactured by
Ford would have an initial cost of
$29,000, an operating cost of $1,200,
and a resale value of $15,000 after 3
years. With an interest rate of 15% per Buy the Ford SUV.
year, which model should the company
purchase? Do an annual value 6.7 An industrial engineer analyzes the
analysis. purchase of two robots for a company
Mag. Juan Carlos Garcia Corzo. Page 5
 Economic engineering

that manufactures fiber optics. Robot

Robot Y would have an initial cost of
$97,000, M&O costs of $27,000 per
year, and a salvage value of $48,000.
Which should you select based on
comparing its annual value with an
interest rate of 12% per year? Use a 3-
year study period.

Understanding TR

7.2 A loan of $10,000, amortized over 5

years with an interest rate of 10% per
year, would require payments of $2,638
to complete when interest is charged to
the unpaid balance. If interest is charged
to the principal instead of the unpaid
Select robot Y by a small margin. balance, what would the balance be after
5 years if the same payments of $2,638
6.15 How much should you deposit into were made each year?
your retirement savings account if you
start today and continue to do so
annually until the ninth year (i.e., 10
deposits), if you want the ability to
withdraw $80,000 per year forever, and Determination of TR
start do it in 30 years? Assume the 7.5 What rate of return per month will an
account earns interest at 10% annually. entrepreneur earn over the 2 1 / 2- year
project period if he invested $150,000 in
Find P in year 29, go back to year 9, and then the production of 12-volt portable air
use A/F for n = 10. compressors? Your estimated monthly
costs are $27,000, with income of
$33,000 per month.

6.21 A philanthropist working to 7.8 Barron Chemical uses a thermoplastic

establish a permanent fund wants to polymer to improve the appearance of
deposit money each year, starting now certain RV panels. The initial cost of a
and making 10 more deposits (i.e., 11 process was $130,000, with annual costs
deposits), so that money is available for of $49,000 and revenue of $78,000 in
research related to planetary year 1, with annual increments of $1,000.
colonization. If the amount of the first A salvage value of $23,000 was realized
deposit is $1,000,000, and each when the process was discontinued after
successive deposit is $100,000 greater 8 years. What rate of return did the
than the previous one, how much would company have from this process?
be available forever starting in year 11,
if the fund receives an interest rate of
10% per year ?

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 Economic engineering

Understanding Incremental RT

8.2 What is the joint rate of return on a

$100,000 investment, which returns 20%
on the first $30,000 and 14% on the
remaining $70,000?
Solve by trial and error or Excel

7.26 RKI Instruments manufactures a

ventilation controller designed to 8.9 A total of $50,000 is available to invest
monitor and control carbon monoxide in in a project to reduce internal theft at an
closed parking lots, boiler rooms, appliance warehouse. Two alternatives
tunnels, etc. Below is the net cash flow identified as Y and Z are studied. The
associated with a phase of the joint rate of return on the $50,000 was
operation. a ) How many possible determined to be 40%, with 15% as the
values of rates of return are there for rate of return on the $20,000 increase
this cash flow series? b ) Find all values between Y and Z. If Z is the highest initial
of the rate of return between 0% and cost alternative, a ) what is the amount of
100%. investment required for Y, and b ) what is
the rate of return on Y?
Year Net cash flow, $
0 –30 000
1 20 000
2 15 000
3 –2 000

(a) There are two sign changes, indicating that

there can be two real number rates of return
values .
8.13 An engineering consulting firm is
trying to decide whether it should buy
Ford Explorers or Toyota 4Runners for
the company's managers. The models
under consideration would cost $29,000
for the Ford and $32,000 for the Toyota.
The annual operating cost of the Explorer
is expected to be $200 per year higher
than that of the 4Runner. Marketing
7.46 An investment of $60,000 gave values after 3 years are estimated at 50%
rise to a uniform income of $10,000 per of the initial cost for the Explorer and 60%
year for for the Toyota. a ) What is the rate of
10 years. The rate of return on return relative to that of the Ford, if
investment was closest to: Toyota is selected? b ) If the firm's MARR
a ) 10.6% annually is 18% per year, what brand of vehicle
b ) 14.2% annually should it buy?
c ) 16.4% annually
(a) Find the rate of return on incremental cash
d ) 18.6% annually flow.

From the tables, I is between 10% and 11% The

answer is (a)
Mag. Juan Carlos Garcia Corzo. Page 7
 Economic engineering

(b) The incremental ROR is less than MARR;

select Ford

Comparison between multiple

alternatives

8.28 A metal coatings company is

studying four different methods to
recover heavy metal byproducts
contained in liquid waste from a
manufacturing site. The investment
costs and income associated with each
method have been estimated. They all
have a life of 8 years. The MARR is
11% annually. a ) If the methods are
independent because it is possible to
implement them in different plants,
which ones are acceptable? b ) If the
methods are mutually exclusive,
determine which should be selected
based on the RT evaluation.
Method Initial Salvag Annual
cost, $ e income,
value, $/year
$
TO –30 000 + 1000 +4000
b –36 000 + 2000 +5000
c –41 000 +500 +8000
d –53 000 -2000 +10500

Mag. Juan Carlos Garcia Corzo. Page 8