Questions and Answers of Fundamentals Engineering Economics

Assume that you are going to buy a new car for $25,000. You will be able to make a down payment of $3,000. The remaining $22,000 will be financed by the dealer. The dealer computes your monthly
Mr. Smith wishes to sell a bond that has a face value of $1,000. The bond bears an interest rate (coupon rate) of 7.5%, with bond interest payable semiannually. Four years ago, the bond was
The city of Houston made a $10 million public investment in the arts five years ago and the citizens of Houston are getting a 54% rate of return on their tax investment. What kind of proceeds from
John Whitney Payson, who purchased a painting by Vincent van Gogh for $80,000 in 1947, sold it for $53.9 million in 1988. If Mr. Payson had invested his $80,000 in another investment vehicle (such as
You are purchasing a factory for $450,000. Your projected cash flow streams from the factory will be $132,000 in year 1, $150,000 in year 2, and $280,000 in year 3. What is the rate of return on this
Best Foods forecasts the following cash flows on a special meat packing operation under consideration.What is the rate of return on this investment? Ao A1 A2 A3 ($15,000) $0 $8,200 $9,500
Consider a project that will bring in upfront cash inflows for the first two years but require paying some money to close the project in the third year.This is a simple borrowing project. Determine
Consider four projects with the following sequences of cash flows:(a) Identify all the simple investments.(b) Identify all the non-simple investments.(c) Compute the i* for each project using
Consider an investment project with the following net cash flows:Year Net Cash
Consider the investment project with the following net cash flows:[End of Year (n)
An investor bought 100 shares of stock at a cost of $10 per share. He held the stock for 15 years and then sold it for a total of $4,000. For the first three years, he received no dividends. For each
Consider the following sets of investment projects:(a) Classify each project as either simple or non-simple.(b) Compute the i* for Project A, using the quadratic equation.(c) Obtain the
Consider the following projects:(a) Classify each project as either simple or non-simple.(b) Identify all positive i*s for each project.(c) Plot the present worth as a function of interest rate
Consider the following financial data for a project:Initial investment…………………………………..........………….$20,000Project
A corporation is considering purchasing a machine that will save $200,000 per year before taxes. The cost of operating the machine, including maintenance, is $80,000 per year. The machine, costing
Consider an investment project with the following cash flows:n Cash
Consider the following project’s cash flows:n Cash
You are considering a CNC machine. This machine will have an estimated service life of 10 years with a salvage value of 10% of the investment cost. Its expected savings from annual operating and
A local government is considering promoting tourism in the city. It will cost $5,000 to develop a plan. The anticipated annual benefits and costs are as follows:Annual benefits: Increased local
A leading regional airline that is now carrying 54% of all the passengers that pass through the Southeast is considering the possibility of adding a new long‐range aircraft to its fleet. The
Oregon Machinery Company (OMC) has decided to acquire a screw machine. One alternative is to lease the machine on a three‐year contract for a lease payment of $22,000 per year with payments to be
Air Florida is considering two types of engines for use in its planes, each of which has the same life, same maintenance costs, and same repair record:Engine A costs $100,000 and uses 50,000 gallons
Wilson Machine Tools, Inc., a manufacturer of fabricated metal products, is considering the purchase of a high‐tech computer‐controlled milling machine at a cost of $95,000. The cost of
A machine costing $25,000 to buy and $3,000 per year to operate will save mainly labor expenses in packaging over six years. The anticipated salvage value of the machine at the end of six years is
You are considering an investment project with the following financial information:(a) Required investment = $500,000(b) Project life = 5 years(c) Salvage
Consider the following investment cash flows over a three€year life:(a) If all cash flows are mutually independent, compute E(NPW) and Var(NPW) at i = 10%.(b) If all annual cash flows are
Consider Problem 11.20. If you use a 25% risk€adjusted discount rate approach, would this project be justified?Data From Problem 11.20Consider the following investment cash flows over a
Consider Problem 11.21. If your risk€adjusted discount rate is 18%, is this project justifiable?Data From Problem 11.21Assume that we can estimate a project€™s cash flows as
Consider Problem 11.22. Determine the risk€adjusted discount rate at which the project breaks even.Data From Problem 11.22A consumer electronics firm is trying to decide whether to invest
CTI Corporation purchased a special-purpose turnkey stamping machine four years ago for $18,000. It was estimated at that time that this machine would have a life of 10 years and a salvage value of
Rework Problem 12.7, assuming the following additional information:The current book value of the old machine is $0 (fully depreciated).The new machine will be depreciated under a seven-year MACRS
A six-year old CNC machine that originally cost $8,000 has been fully depreciated, and its current market value is $1,500. If the machine is kept in service for the next five years, its O&M costs
Consider the following balance‐sheet entries for Delta Corporation:Balance Sheet Statement as of December 31,
Incomplete financial statements for ABC Company are as follows:Income StatementFor the Year Ended December 31, 2012Sales
If you invest $1,000 in a stock and its value is doubled in four years, what is the return on your stock investment?
The estimated beta (β) of a firm is 1.7. The market return (rm) is 14%, and the risk‐free rate (rf) is 7%. Estimate the cost of equity (ie).
A firm’s cost of equity (ie) is 25%. Its before‐tax cost of debt is 12%, and its marginal tax rate is 40%. The firm’s capital structure calls for a debt‐to‐equity ratio of 40%.
Consider the estimated beta values as of June 30, 2011, for the following companies:Coca Cola……………………………0.60Microsoft……………………………..0.80General
An automobile company is contemplating issuing stock to finance an investment in producing a new sport‐utility vehicle. The annual return to the market portfolio is expected to be 15% and the
Boston Metal Company (BMC), a small manufacturer of fabricated metal parts, must decide whether to compete to become the supplier of transmission housings for Gulf Electric. Gulf Electric produces
MG Cutting Systems is considering an investment project with the following parameters, where all cost and revenue figures are estimated in constant dollars:The project requires the purchase of a
Mount Manufacturing Company produces industrial and public€safety shirts. As is done in most apparel manufacturing, the cloth must be cut into shirt parts in accordance with patterns
The following is a comparison of the cost structure of a conventional manufacturing technology (CMT) system with that of a flexible manufacturing system (FMS) at one U.S. firm:(a) The
A manufacturing firm is considering two mutually exclusive projects. Both projects have an economic service life of one year with no salvage value. The first cost of Project 1 is $1,000, and the
A financial investor has an investment portfolio. A bond in her investment portfolio will mature next month and provide her $25,000 to reinvest. The choices for reinvestment have been narrowed to the
Juan Carols is considering two investment projects whose PWs are described as follows:Project 1: PW(10%) = 2X(X - Y), where X and Y are statistically independent discrete random variables with
You are considering two mutually exclusive projects with the following cash flows:(a) Compute the mean and variance of NPW distribution for each project using i = 12%. Assume that project cash flows
You are considering investing in one of two projects, which have the following returns and probabilities of occurrence:(a) Compute the mean return for each project.(b) Compute the variance of return
Consider an investment with the following projected cash flows:The distributions are assumed to be independent of each other.(a) Compute the mean of the NPW at i = 10%. Using just the mean value,
A consumer electronics firm is trying to decide whether to invest $18M in a new plant for expanding its output of cell phones. Management forecasts that the new expansion will generate incremental
Assume that we can estimate a project€™s cash flows as follows:In this case, each annual flow can be represented by a random variable with known mean and variance. Further assume complete
Your firm has purchased an injection molding machine at a cost of $100,000. The machine’s useful life is estimated to be eight years. Your accounting department has estimated the capital cost for
Recent technology has made possible a computerized vending machine that can grind coffee beans and brew fresh coffee on demand. The computer also makes possible such complicated functions as changing
Inter Cell Company wants to participate in the upcoming World’s Fair in Korea. To participate, the firm needs to spend $1.5 million in year 0 to develop a showcase. The showcase will produce a cash
Consider two investments with the following sequences of cash flows:(a) Compute the i* for each investment.(b) Plot the present-worth curve for each project on the same chart and find the
Consider two investments with the following sequences of cash flows:At MARR of 12%, which project would you select? Net Cash Flow Project A Project B п -$3,000 -$3,000 $1,500 $300 $1,200 $600 2 $600
Consider two investments with the following sequences of cash flows:(a) Compute the IRR for each investment.(b) At MARR = 15%, determine the acceptability of each project.(c) If A and B are
Consider two investments with the following sequences of cash flows:(a) Compute the IRR for each investment.(b) At MARR = 10%, determine the acceptability of each project.(c) If A and B are
With $10,000 available, you have two investment options. The first option is to buy a certificate of deposit from a bank at an interest rate of 10% annually for five years. The second choice is to
Consider the following two mutually exclusive investment projects:Determine the range of MARR where Project 2 would be preferred over Project 1 with €œdo-nothing€ alternative.(a)
A manufacturing firm is considering the following mutually exclusive alternatives:Determine which project is a better choice at MARR = 15% on the basis of the IRR criterion. Net Cash Flow Project B
Consider the following two mutually exclusive alternatives:(a) Determine the IRR on the incremental investment in the amount of $2,000.(b) If the firm€™s MARR is 10%, which alternative is
A plant engineer is considering two types of solar water-heating systems:The firm€™s MARR is 10%. On the basis of the IRR criterion, decide which system is the better choice. Item Model A
Fulton National Hospital is reviewing ways of cutting the costs for stocking medical supplies. Two new stockless systems are being considered to lower the hospital€™s holding and handling
Consider the following investment projects:Assume that MARR = 15%.(a) Compute the IRR for each project.(b) If the three projects are mutually exclusive investments, which project should be
Consider the following two investment situations:In 1980, when W.M. Company went public, 100 shares cost $1,650. That investment was worth $12,283,904 after 32 years (2012) with a rate of return of
Suppose we have four mutually exclusive projects, D1, D2, D3, and D4, whose internal rates of return on incremental investment between the projects is given as follows:IRR
Consider the following two mutually exclusive investment projects:Assume that MARR = 15%. Which project would be selected under an infinite planning horizon with project repeat ability likely,
A company has to decide between two machines that do the same job but have different lives.Net Cash FlowMachine A
Merco, Inc., a machinery builder in Louisville, Kentucky, is considering making an investment of $1,250,000 in a complete structural-beam-fabrication system. The increased productivity resulting from
Critics have charged that the commercial nuclear power industry does not consider the cost of “decommissioning,” or “mothballing,” a nuclear power plant when doing an economic analysis and
An electrical appliance company purchased an industrial robot costing $320,000 in year 0. The industrial robot, to be used for welding operations, is classified as a seven‐year MACRS recovery
A facilities engineer is considering a $50,000 investment in an energy management system (EMS). The system is expected to save $10,000 annually in utility bills for N years. After N years, the EMS
Hugh Health Product Corporation is considering the purchase of a computer to control plant packaging for a spectrum of health products. The following data have been collected:First cost = $130,000 to
Suppose a business is considering the purchase of a $40,000 machine whose operation will result in increased sales of $30,000 per year and increased operatingcosts of $10,000; additional profits will
Consider the following two mutually exclusive investment alternatives:(a) Determine the IRR on the incremental investment in the amount of $4,000. (Assume that MARR = 10%.)(b) If the
Consider the following two investment alternatives:The firm€™s MARR is known to be 15%.(a) Compute the IRR of Project B.(b) Compute the PW of Project A.(c) Suppose that Projects A
A city government is considering increasing the capacity of the current wastewater treatment plant. The estimated financial data for the project are as follows:Description
A local government is considering four possible countermeasures to reduce crimes in the municipal park. Since each option has a different program length of duration, all benefits and costs are
Consider the following two projects:(a) Calculate the profitability index for A1 and A2 at an interest rate of 6%.(b) Determine which project(s) you should accept (1) if you have enough money to
Consider the following two mutually exclusive projects:(a) Which project has the higher profitability index at i = 7%?(b) Which project would you choose if you can raise an unlimited amount
Atlanta Regional Commission is considering expanding Hartsfield (Atlanta) International Airport. Three options have been proposed to handle the growth expected at Hartsfield:Option 1: Build five new
Identify which of the following expenditures is considered as a capital expenditure that must be capitalized (depreciated):(a) Purchase land to build a warehouse at $300,000.(b) Purchased a copy
You purchased a machine four years ago at a cost of $5,000. It has a book value of $1,300. It can be sold now for $2,300, or it could be used for three more years, at the end of which time it would
A builder paid $120,000 for a house and lot. The value of the land was appraised at $65,000, and the value of the house at $55,000. The house was then torn down at an additional cost of $8,000 so
Nelson Company purchased equipment and incurred the following costs:Cash price = $55,000Sales taxes = $4,400Insurance during transit = $400Site preparation, installation, and testing = $2,300What
You purchased a new molding machine for $155,000 by trading in a similar machine that had a book value of $18,000. Assuming that the trade‐in allowance was $20,000 and that $85,000 cash was paid
You acquire a grinder priced at $65,000 by trading in a similar grinder and paying cash for the remaining balance. Assuming that the trade‐in allowance is $11,000 and the book value of the asset
To automate one of its production processes, Milwaukee Corporation bought three flexible manufacturing cells at a price of $400,000 each. When they were delivered, Milwaukee paid freight charges of
El Dorado Machinery Company purchased a delivery truck at a cost of $32,000 on February 8, 2012. The truck has a useful life of six years with an estimated salvage value of $5,000. Compute the annual
Consider the following data on an asset:Cost of the asset, I…………..$130,000Useful life, N…………...............5 yearsSalvage value, S………….......$20,000Compute the annual
Compute the double‐declining‐balance depreciation schedule for an asset with the following data:Cost of the asset, I…………..$80,000Useful life, N………….............8 yearsSalvage
Consider the following data on an asset:Cost of the asset, I…………..$38,000Useful life, N………….............6 yearsSalvage value, S…………..............$0Compute the annual
The double‐declining‐balance method is to be used for an asset with a cost of $90,000, estimated salvage value of $12,000, and estimated useful life of five years.(a) What is the depreciation for
Compute the 175% DB depreciation schedule for an asset with the following data:Cost of the asset, I…………..$25,000Useful life, N………….............5 yearsSalvage value,
Sanders LLC purchased new packaging equipment with an estimated useful life of five years. The cost of the equipment was $30,000, and the salvage value was estimated to be $3,000 at the end of five
New York Limousine Service owns 10 limos and uses the units‐of‐production method in computing depreciation on its limos. Each limo costing $32,000 is expected to be driven 200,000 miles and is
A truck for hauling coal has an estimated net cost of $85,000 and is expected to give service for 250,000 miles, resulting in a salvage value of $5,000. Compute the allowed depreciation amount for
A diesel‐powered generator with a cost of $60,000 is expected to have a useful operating life of 50,000 hours. The expected salvage value of this generator is $8,000. In its first operating year,
Ingot Land Company owns four trucks dedicated primarily to its landfill business. The company€™s accounting record indicates the following:Determine the amount of depreciation for each

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