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Assignment 5

The document contains a series of engineering economics problems and their solutions, focusing on investment calculations, interest rates, depreciation, and cost analysis. It includes scenarios such as determining present values, future values, and break-even points for various financial situations. Each problem is accompanied by a specific answer, illustrating practical applications of engineering economics principles.

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8 views29 pages

Assignment 5

The document contains a series of engineering economics problems and their solutions, focusing on investment calculations, interest rates, depreciation, and cost analysis. It includes scenarios such as determining present values, future values, and break-even points for various financial situations. Each problem is accompanied by a specific answer, illustrating practical applications of engineering economics principles.

Uploaded by

ninjakiwipoptart2003
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Engineering Economics

Dr. Jerome Lavelle


Associate Dean, College of Engineering
[email protected]; 919-515-3263; 120 Page Hall
1. How much money must be invested now at 8% to purchase a machine in 5
years for $200,000? (Answer) $136,117
2. I put $1000 in an account from my high school graduation gifts, and
$2000 into the same account after my college graduation 4 years later.
Five years after I started my first job how much is in the account if it
earns 4% per year? (Answer) $3857
3. What amount invested in a savings account that pays 8% interest
annually is worth $215,892.50 after 10 years? (Answer) $100,000
4. A company wishes to set aside budget to cover the maintenance costs of
a machine for its lifetime of 12 years. The maintenance charges are $1000
annually and paid at the end of each year of service. How much money
must be invested at the beginning of the first year to pay for the
maintenance costs if the interest rate is 4% on the set aside dollars?
(Answer) $9,385
5. A computer purchased for $1200 will have a salvage value of $600 after 6
years. Annual maintenance charges are estimated to be $100. At an interest
rate of 10%, what is the equivalent uniform annual cost (EUAC)?
(Answer) $298
6. A company wishes to make 5 equal annual investments so that on the
date of the last investment, it will have $50,000 to buy a new machine. What
amount must be invested each year at an interest of 4%?
(Answer) $9,230
7. A mother wishes to put enough money in a fund today for her son to
attend college starting in 10 years. How much money must she invest
today at 5% interest to provide $15,000 per year for the 4 years?
(Answer) $34,284
8. A software company has a projected cash flow for a business activity as
follows:
Year 0 = $ -100,000
Year 1 = $ -150,000
Year 2 = $ 150,000
Year 3 = $ 400,000
Assuming each cash flow occurs at the end of the year and an interest rate
of 8%, what is the annual worth (uniform annual income) of this activity
over the 3-year period?
(Answer) $80,411
9. A company is considering buying a truck which has an initial cost of
$100,000, an expected life of 10 years, and a salvage value of $10,000.
Annual operating costs for the first 5 years are estimated to be $5,000 per
year, and will be $8000 per year for the second 5 years. If the interest rate is
8% per year, the present cost of this investment is?
(Answer) $137,074
10. A company wishes to establish a fund to cover the maintenance of a machine for
its lifetime of 12 years. The maintenance charges are paid at the end of each year of
service and are estimated to be $1000 the first year and increase by $100 in each
subsequent year. How much money must be invested at the beginning of the first
year to pay for the maintenance costs if the interest rate is 4% per year?

(Answer) $14,110
11. The Thumbscrews Credit Card has an advertised and
charges a rate of 10% per month on any unpaid balance of
a loan. Express this value as an effective annual interest
rate.
(Answer) 214%
12. How much money must be invested in a retirement plan each
month to accumulate $500,000 in 5 years? Assume an annual
interest rate of 6% compounded monthly.
(Answer) $7,150
13. A company has two alternatives for manufacturing a certain device:
Plan A: Buy a machine for $2000 which would permit the device to be

manufactured for $3.00 per unit.


Plan B: Buy a machine for $20,000 which would permit the device to
be manufactured for $1 per unit.
Assuming a volume of 3000 devices per year, what is the break even year
for these two plans? Ignore discounting.
(Answer) 3 years
14. A firm has estimated that the fixed costs of operations for a new
product at $4.5M per year. Variable costs will depend on the volume of
production, and has been quantified at $250 per unit. If the firm plans to
sell the product for $1000. What volume of sales is needed for this
product to break-even? (Answer) 6,000 units
15. If accumulated tuition, fees and interest on your undergraduate
engineering education loan is $37,500 when you graduate, and you can use
20% of your starting annual salary of $75,000 each year to pay off the loan,
what is the payback period of this investment? (ignore discounting)
(Answer) 2.5 years
16. Calculate the annual inflation-adjusted interest rate, if the general
inflation rate is 2% per year, and the interest rate is 3.5% per year ?
(Answer) 5.6%
17. If the inflation adjusted interest rate from a government study was given
as 7.00%, and inflation for the stated period was 2.5%, what was the real
interest rate per period?
(Answer) 4.4%
Problems 18-21 refer to a certain machine which has a first cost of $30,000,
annual costs of $6,000, a salvage value of $4,000 and a life of 10 years.
Assume an interest rate of 8%.

18. What is the depreciation allowance in years 1-10 for this asset using
straight line depreciation?
(Answer) $2,600
19. What is the book value of this machine at the end of the third year
using straight line depreciation?
(Answer) $22,200
20. Using MACRS depreciation method, what is the depreciation
allowance for this asset in the 6th year of its life?
(Answer) $2,211
21. What is the book value of this machine at the end of the third year
using Modified ACRS depreciation?
(Answer) $17,280
22. An individual wishes to establish an endowment for a scholarship fund
that generates $9000 every year. At an interest rate of 3%, the amount
that must be provided for the endowment is closest to:
(Answer) $300,000
23. A bond pays interest $25 twice a year. It will be redeemed for $1000 in
5 years. At an interest rate of 4% per year semi-annual compounding,
what is the present value of the bond?
(Answer) $1,045
24. If you deposit $1000 in an account and then withdraw $2000 10 year
later what rate of return do you earn on your investment?
(Answer) 7.2% per year
25. You deposit $1000 each year in an account for 5 years. At the time of
the last deposit the bank tells you the account is worth $6,500. What rate of
return did you earn on your investment?
(Answer) 13.1% per year
26. How many years will it take for an initial investment of $10,000 to double
at an annual interest rate of 4%?
(Answer) 17.7 years
27. What is the B/C Ratio for a firm considering an
investment in a new manufacturing technology:
Investment = $2,500,000
Net annual saving: $600,000
Salvage value: $150,000
Project life = 10 years
MARR (i%) = 15%
(Answer) 1.22
28. If interest is 0% (ignoring time value of money) what are the annual
costs of a 12 year project that saves a company $600,000 over the term
of the project and has a B/C Ratio of 1.0? (Answer) $50,000

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