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Questions and Answers of Economics

Which one of the following is the proper dollar value of defender equipment to use in replacement analysis?(a) Original cost.(b) Present market value (c) Present trade-in value.(d) Present book
You have the following options for a major equipment unit:(a) Buy new.(b) Trade in and buy a similar rebuilt equipment from the manufacturer.(c) Have the manufacturer rebuild your equipment with all
Consider following data for a defender asset. What is the appropriate replacement analysis technique to -compare this asset against a competing challenger? How is this method used? That is, what
The Clap Chemical Company needs a large insulated stainless see tank for the expansion of its plant. Clap has located such a tank at a recently closed brewery. The brewery has offered to sell the
The plant manager has just purchased a piece of unusual machinery for $10,000. Its resale value at the end of 1 year is estimated to be $3000, because the device is sought by antique collectors,
In a replacement analysis problem, the following facts are known:Initial cost $12,000Annual Maintenance None for the first 3 years$2000 at the end of the fourth year$2000 at the end of the
An injection molding machine has a first cost of $1,050,000 and a salvage value of $225,000 in any year the machine is sold. The maintenance and operating cost is $235,000 with an annual gradient of
Bill's father read that, at the end of each year, an automobile is worth 25% less than it was at the beginning of the year. After a car is three years old, the rate of decline reduces to 15%.
A professor of engineering economics owns a 1996 automobile. In the past 12 months, he has paid $2000 to replace the transmission, bought two new tires for $160, and installed a new tape deck for
The Ajax Corporation purchased a railroad tank car 8 years ago for $60,000. It is being depreciated by SOYD depreciation, assuming a 10-year depreciable life and a $7000 salvage value. The tank car
The Quick Manufacturing Company, a large profitable corporation, is considering the replacement of a production machine tool. A new machine would cost $3700, have a 4-year useful and depreciable
The Plant Department of the local telephone company purchased four special pole hole diggers 8 years ago for $14,000 each. They have been in constant use to the present. Owing to an increased
Five years ago, Thomas Martin purchased and implemented production machinery that had a first cost of $25,000. At the time of the initial purchase it was estimated that yearly costs would be $1250,
Consider Problem 13-18 involving Thomas Martin. Suggest when, if at all, the old should be replaced with the new, if the values for the old machine are as follows. The old machine retains only 70% of
Mary O'Leary's company ships fine wool garments from County Cork, Ireland. Five years ago she purchased some new automated packing equipment having a first cost of $125,000 and a MACRS class life of
Big-J Construction Company, Inc. (Big-J CC) is conducting routine periodic review of existing field equipment. The owner of Big-J CC has asked for a replacement evaluation of a paving machine now in
VMIC Corp. has asked you to look at the following data. The interest rate is 10%.After considering the data, answer questions (a)-(c). Marginal
SHOJ Enterprises has asked you to look at the following data. The interest rate is 10%. After considering the data, answer questions (a)-(c). Marginal
As proprietor of your own business, you are considering the option of purchasing a new high-efficiency machine to replace older machines currently in use. You believe that the new technology can be
Fifteen years ago the Acme Manufacturing Company bought a propane-powered forklift truck for $4800. The company depreciated the forklift using straight line depreciation, a 12-year life, and zero
A firm is concerned about the condition of some of its plant machinery. Bill James, a newly hired engineer, was assigned the task of reviewing the situation and determining what alternatives are
Machine A has been completely overhauled for$9000 and is expected to last another 12 years. The $9000 was treated as an expense for tax purposes last year. Machine A can be sold now for $30,000 net
Fred's Rodent Control Corporation has been using a low-frequency sonar device to locate subterranean pests. This device was purchased 5 years ago for $18,000. The device has been depreciated using
(a) A new employee at CLL Engineering Consulting Inc., you are asked to join a team performing an economic analysis for a client. Your team seems stumped on how to assign an after-tax first cost to
Foghorn Leghorn is considering the replacement of an old egg-sorting machine used with his Foggy's Farm Fresh Eggs business. The old ,egg machine is not quite running eggs actly the way it was
BC Junction purchased some embroidering equipment for their Denver facility 3 Years ago for $15, 000. This equipment qualified as MACRS 5 year property. Maintenance costs are estimated to be $1000
Reconsider the acquisition of packing equipment for Mary O'Leary's business, as described in Problem 13-20. Given the data tabulated there, and again using an after-tax MARR of 25% and a tax rate of
What is the Consumer Price Index (CPI)? What is the difference between commodity specific and composite price indexes? Can each be used in engineering economic analysis?
In Chapters 5 (Present Worth Analysis) and 6 (Annual Cash Flow Analysis) it is assumed that prices are stable and a machine purchased today for $5000 can be replaced for the same amount many years
An economist has predicted that there will be a 7% per year inflation of prices during the next 10 years. If this proves to be correct, how much will an item that presently sells for $10 bring a
A man bought a 5% tax-free municipal bond. It cost $1000 and will pay $50 interest each year for 20 years. The bond will mature at the end of the 20 years and return the original $1000. If there is
A man wishes to set aside some money for his daughter's college education. His goal is to have a bank savings account containing an amount equivalent to $20,000 with today's purchasing power of the
An economist has predicted that for the next 5 years, the United States will have an 8% annual inflation rate, followed by 5 years at a 6% inflation rate. This is equivalent to what average price
A newspaper reports that in the last 5 years, prices have increased a total of 50%. This is equivalent to what annual inflation rate, compounded annually?
A South American country has had a high rate of inflation. Recently, its exchange rate was 15 cruzados per dollar; that is, one dollar will buy 15 cruzados in the foreign exchange market. It is
An automobile manufacturer has an automobile that gets 10 kilometers per liter of gasoline. It is estimated that gasoline prices will increase at a 12% per year rate, compounded annually, for the
An economist has predicted that during the next 6 years, prices in the United States will increase 55%. He expects a further increase of 25% in the subsequent 4 years, so that prices at the end of 10
Sally Johnson loaned a friend $10,000 at 15% interest, compounded annually. She is to repay the loan .in five equal end-of-year payments. Sally estimates the inflation rate during this period is 12%.
Dale saw that the campus bookstore is having a special on pads of computation paper normally priced at $3 a pad, now on sale for $2.50 a pad. This sale is unusual and Dale assumes the paper will not
An investor wants a real rate of return if (rate of return without inflation) of 10% per year on any projects in which he invests. If the expected annual inflation rate for the next several years is
(a) Compute the equivalent annual inflation rate, based on the consumer price index, for the period from 1981 to' 1986.(b) Using the equivalent annual inflation rate computed in part (a), estimate
You are considering the purchase, for $15,000, of an annuity that pays $2500 per year for the next 10 years. You want to have a real rate of return of 5%, and you estimate inflation will average 6%
Inflation is a reality for the general economy of the United States for the foreseeable future. Given this assumption, calculate the number of years it will take for the purchasing power of today's
A homebuilder's advertising has the caption, "Inflation to Continue for Many Years." The advertisement continues with the explanation that if one buys a home now for $97,000, and inflation continues
Sally Seashell bought a lot at the Salty Sea for $18,000 cash. She does not plan to build on the lot, but instead will hold it as an investment for 10 years. She wants a 10% after-tax rate of return
A group of students decided to lease and run a gasoline service station. The lease is for 10 years. Almost immediately the students were on fronted with the need to alter the gasoline pumps to read
Pollution control equipment must be purchased to remove the suspended organic material from liquid being discharged from a vegetable packing plant. Two alternative pieces of equipment are available
The City of Columbia is trying to attract a new manufacturing business to the area. It has offered to install and operate a water pumping plant to provide service to the proposed plant site. This
Sam purchased a home for $150,000 with some creative financing. The bank, which agreed to lend Sam $120,000 for 6 years at 15% interest, took a first mortgage on the house. The Joneses, who sold Sam
General Price inflation is estimated to be 3% for the next 5 years, 5% the 5 years after that, and 8% the following 5 years. If you invest $10,000 at 10% for those 15 years, what is the future worth
I ma Lucky girl recently found out that her grandfather has passed away and left her his Rocky Mountain Gold savings account. The account was originally opened 50 years ago when Ima's grandfather
Auntie Frannie wants to provide tuition for her twin nephews to attend a private school. She-anticipates sending a check for $2000 at the end of each of the next 8 years to apply to the cost of
As a recent graduate, you are considering employment offers from three different companies. However, in an effort to confuse you and perhaps make their offers seem better, each company has used a
Calculate the future equivalent in Year 15 of:(a) Dollars having today's purchasing power.(b) Then-current purchasing power dollars, of $10,000 today. Use a market interest rate of 15% and an
A firm is having a large piece of equipment overhauled. It anticipates that the machine will be needed for the next 12 years. The firm has an 8% minimum attractive rate of return. The contractor has
A couple in Ruston, Louisiana, must decide whether it is more economical to buy a home or to continue to rent during an inflationary period. Presently the couple rents a one-bedroom duplex for $450 a
Given the following data, calculate the present worth of the investment. First cost = $60,000 Project life = 10 years Salvage value = $15,000 MARR = 25% General price inflation=4% per year Annual
Here is some information about a professor salary index Year
From the data in Table 14-1 in the text calculate the average annual inflation rate of first class postage as measured by the LCI for the following years:(a) End of 1970 to end of 1979(b) End of 1980
From the data in Table 14-1 in the text, calculate the overall rate change of first-class postage as measured by the LCI for the following decades:(a) The 1970s (1970-1979)(b) The 1980s
From the data in Table 14-2 in the text calculate the average annual inflation rate as measured by the CPI for the following years:(a) End of 1973 to end of 1982(b) End of 1980 to end of 1989(c) End
Homeowner Henry is building a fireplace for the house he is constructing. He estimates that his fireplace will require 800 bricks. Answer the following:(a) If the cost of a chimney brick in 1978 was
As the owner of Beanie Bob's Basement Brewery, you are interested in a construction project to increase production to offset competition from your cross-town rival, Bad Brad's Brewery and Pool hall.
Philippe Marie wants to race in the Tour de France ten years from now. He wants to know what the cost of a custom-built racing bicycle will be ten years from today. Calculate the cost given the
Due to cost structures, trade policies and corporate changes the costs for three big automakers are estimated to vary over the next three-year period. These changes will be reflected in the purchase
Granny Viola has been saving money in the Bread & Butter mutual fund for 15 years. She has been a steady contributor to this fund over those years and has a pattern of putting $100 into the
Andrew just purchased a new boat for $15,000 to use on the river near his home. He has received delivery of the boat, and agreed to the terms of the following loan: all principal and interest is due
You were recently looking at the historical pries paid for homes in a neighborhood that you are interested in. The data that you found, average price paid, is given below. Calculate on a year-to-year
The U.S. tax laws provide for the depreciation of equipment based on original cost. Yet owing to substantial inflation, the replacement cost of equipment is often much greater than the original cost.
Sam Johnson inherited $85,000 from his father. Sam is considering investing the money in a house, which he will then rent to tenants. The $85,000 cost of the property, consists of $17,500 for the
Tom Ward put $10,000 in a 5-year certificate of deposit that pays 12% interest per year. At the end of the 5 years the certificate will mature and he will receive his $10,000 back. Tom has
Dick De Wolf and his wife have a total taxable income of $60,000 this year and file a joint federal income tax return. If inflation continues for the next 20 years at a 7% rate, compounded annually,
A small research device is purchased for $10,000 and depreciated by MACRS depreciation. The net benefits from the device, before deducting depreciation, are $2000 at the end of the first year and
When there is little or no inflation, a homeowner can expect to rent an unfurnished home for 12% of the market value of the property (home and land) per year. About 18 of the rental income is paid
(This is a continuation of Problem 14-53.) As inflation has increased throughout the world, the rental income of homes has decreased and a net annual rental income of 8% of the market value of the
Consider two mutually exclusive alternatives stated in year-O dollars. Both alternatives have a 3-year life with no salvage value. Assume the annual inflation rate is 5%, an income tax rate of 25%,
Examine the financial pages of your newspaper (or the Wall St. Journal) and determine the current interest rate on the following securities, and explain why the interest rates are different for these
Consider four mutually exclusive alternatives: Each alternative has a 10-year usefu11ife and no salvage value. Over what range of interest rates is C the preferred alternative
Frequently we read in the newspaper that one should lease an automobile rather than buying it. For a typical 24-month lease on a car costing $9400, the monthly lease charge is about $267. At the end
Assume you have $2000 available for investment for a 5-year period. You wish to invest the money not just spend it on fun things. There are obviously many alternatives available. You should be
There are many venture capital syndicates that consist of a few (say, eight or ten) wealthy people who combine to make investments in small and (hopefully) growing businesses. Typically, the
A factory a $100,000 capital budget determines which project(s) should be funded and the opportunity cost of capital.
Chips USA is considering the following projects to improve their production process. Chips have a short life, so a 3-year horizon is used in evaluation. Which projects should be done if the budget is
National Motors's Rock Creek plant is considering the following projects to improve the company's production process. Which projects should be done if the budget is $500,000? What is the opportunity
The What Zit Company has decided to fund six of nine project proposals for the coming budget year. Determine the next capital budget for What Zit. What is the MARR?
Which projects should be done if the budget is $100,000? What is the opportunity cost of capital?
Economic analysis and decision making in the public sector is often called "a multi-actor or multi-stakeholder decision problem." Explain what this phrase means. .
Compare the general underlying objective of public decision making versus private decision making.
In the text the authors describe a general recommendation regarding the scope of viewpoint that is appropriate in public decision making. What do they suggest? What example is given to highlight the
In government projects, what is meant by the phrase "most of the benefits are local." What conflict does this create for the federal government in terms of funding projects from public monies?
Discuss the alternative concepts that can be employed when setting the discounting rate for economic analysis in the public sector. What is the authors' final recommendation for setting this rate?
What is the essential difference between the conventional and modified versions of the benefit-cost ratio? Is it possible for these two measures to provide conflicting recommendations regarding
List the potential costs, benefits, and disbenefits that should be considered when one is evaluating a nuclear power plant construction.
Describe how a decision maker can use each of the following to "skew" the results of a B/C ratio analysis in favor of his or her own position on funding projects: .(a) Conventional versus modified
Think about a major government construction project under way in your state, city, or region. Are the decision makers who originally analyzed and initiated the project currently in office? How can
Consider the following investment opportunity:Initial cost
A government agency has estimated that a flood control project has costs and benefits that are parabolic, according to the equation (Present worth of benefits)2 - 22(Present worth of cost) + 44 = 0
The High ridge Water District needs an additional supply of water from Steep Creek. The engineer has selected two plans for comparison: Gravity plan: Divert water at a point 10 miles up Steep Creek
Calculate the conventional and modified benefit-cost ratio for the investment represented by the following data.Required first costs
For the data given in Problem 16-13, for handling benefits and costs, demonstrate that the calculated B/C ratio is the same using the each of the following methods: present worth, annual worth, and

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