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Engineering Economy 15th edition William G. Sullivan, Elin M. Wicks, C. Patrick Koelling - Solutions

Interest on municipal bonds is usually exempt from federal income taxes. The interest rate on these bonds is therefore an after-tax rate of return (ROR). Other types of bonds (e.g., corporate bonds) pay interest that is taxable for federal income tax purposes. Thus, the before-tax ROR on such bonds
The "Big-Deal" Company has purchased new furniture for their offices at a retail price of $100,000. An additional $20,000 has been charged for insurance, shipping, and handling. The company expects to use the furniture for 10 years (useful life = 10 years) and then sell it at a salvage (market)
Refer to the chapter opener and Example 7-14. As an alternative to the coal-fired plant, PennCo could construct an 800 MW natural gas-fired plant. This plant would require the same initial investment of $1.12 billion dollars to be depreciated over its 30-year life using the SL method with SV30 = 0.
If SL depreciation is used and the equipment is sold for $35,000 at the end of 10 years, the taxable gain on the disposal of the equipment is (a) $35,000 (b) $25,000 (c) $15,000 (d) $10,000
Cisco Systems is purchasing a new bar code-scanning device for its service center in San Francisco. The table that follows lists the relevant cost items for this purchase. The operating expenses for the new system are $10,000 per year, and the useful life of the system is expected to be five years.
Using the MACRS (GDS recovery period), if the equipment is sold in year five, the BV at the end of year five is equal to (a) $29,453 (b) $24,541 (c) $12,672 (d) $6,336
The air handling equipment just described is to be depreciated, using the MACRS with a GDS recovery period of five years. The BV of the equipment at the end of (including) year four is most nearly (a) $3,749 (b) $3,124 (c) $24,192 (d) $8,251
An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $60,000, and it has an estimated MV of $12,000 at the end of an estimated useful life of 14 years. Compute the depreciation amount in the third year and the BV at the end of the fifth year
The PW of the after-tax savings from the machine, in labor and materials only, (neglecting the first cost, depreciation, and the salvage value) is most nearly (using the after tax MARR) (a) $12,000 (b) $95,000 (c) $151,000 (d) $184,000 (e) $193,000
Assume the stamping machine will now be used for only three years, owing to the company's losing several government contracts. The MV at the end of year three is $50,000. What is the income tax owed at the end of year three owing to depreciation recapture (capital gain)? (a) $8,444 (b) $14,220 (c)
A cupola for a foundry was purchased for $3,000. $500 more was spent on its erection and commissioning. The estimated residual value after 10 years was $700. a. Calculate the annual rate of depreciation. b. Determine the amount of depreciation at the end of six years after the purchase of the
To estimate when your money will be worth half of what it is worth today, divide 72 by the expected average annual rate of inflation. If the long-term annual rate of inflation is 3%, in how many years will your money be worth half of its current value? What if the average annual inflation rate
Fred wants to set aside a fixed percentage of his salary to buy a new car at the end of five years from now. The car costs $15,000 now, and its price is expected to increase at the inflation rate of 3% per year. His first deposit will be made one year from now and his present salary of $40,000 will
A large corporation's electricity bill amounts to $400 million. During the next 10 years, electricity usage is expected to increase by 75%, and the estimated electricity bill 10 years hence has been projected to be $920 million. Assuming electricity usage and rates increase at uniform annual rates
A university's budget amounts to $100,000 million. Over the next 10 years, the budget is expected to increase by 50% as the result of an expansion program. The estimated budget ten years hence is projected to be $500,000 million. Assuming budget increment at uniform annual expansion over the next
Your younger brother is very concerned about investment performance, but he is willing to tolerate some risk. He decides to invest $100,000 in a mutual fund that will earn 10% per year. The proceeds will be accumulated as a lump sum and paid out at the end of year 10. Based on the data given in
A commercial building design cost $89/square-foot to construct eight years ago (for an 80,000-square-foot building). This construction cost has increased 5.4% per year since then. Presently, your company is considering construction of a 125,000-square-foot building of the same design. The cost
Twenty years ago your rich uncle invested $10,000 in an aggressive (i.e., risky) mutual fund. Much to your uncle's chagrin, the value of his investment declined by 18% during the first year and then declined another 31% during the second year. But your uncle decided to stick with this mutual fund,
A woman desires to have $400,000 in a savings account when she retires in 20 years. Because of the effects of inflation on spending power, she stipulates that her future "nest egg" will be equivalent to $400,000 in today's purchasing power. If the expected average inflation rate is 7% per year and
A bank is lending $20,000 today, to be repaid in a lump sum at the end of 20 years with interest at 8.5% (= im) compounded annually. What is the real rate of return, assuming that the general price inflation rate is 4% annually.
In 2005, the average cost to construct a 150,000-barrel-a-day oil refinery was $2.4 billion (excluding any interest payments). This capital invest-ment is spread uniformly over a five-year construction cycle (i.e., the refinery starts producing products in 2010). Assume end-of-year cash-flow
In January of 1980, a Troy ounce of gold sold for $850 (an all-time high). Over the past 28 years, suppose the CPI has grown at a compounded annual rate of 3.2%. Today a Troy ounce of gold sells for $690. a. In real terms, with 1980 as the reference year, what is today's price of gold per ounce in
Your rich aunt is going to give you an end-of-year gift of $1,000 for each of the next 10 years. a. If general price inflation is expected to average 6% per year during the next 10 years, what is the equivalent value of these gifts at the present time? The real interest rate is 4% per year. b.
Suppose it costs $15,000 per year (in early 2010 dollars) for tuition, room, board, and living expenses to attend a public university in the Southeastern United States. a. If inflation averages 6% per year, what is the total cost of a four-year college education starting in 2020 (i.e., 10 years
Suppose coal experiences a 3% increase per year in real terms over the foreseeable future. The I cost of 1,000 cubic feet of coal is now $6,000. a. What will be the cost in real terms of 1,000 cubic feet of coal in 20 years? b. If the general price inflation rate for the next 20 years is expected
Refer to Example 4-8. If inflation is expected to average 3% per year over the next 60 years, your purchasing power will be less than $1,107,706. a. When f = 3% per year, what is the purchasing power of this future sum of money in today's dollars when you reach age 80? b. Repeat Part (a) when
Four hundred pounds of copper are used in a typical 2,200-square-foot newly constructed house. Today's copper price is $3.75 per pound. a. If copper prices are expected to increase 8.5% per year (on average), what is the cost of copper going to be in a new 2,400-square-foot house built 10 years
The cost of first-class postage has risen by about 5% per year over the past 30 years. The U.S. Postal Service introduced a one-time forever stamp in 2008 that cost 41 cents for first-class postage (one ounce or less), and it will be valid as first-class postage regardless of all future price
Refer to Problem 5-56. If the government expects inflation to average 3% per year, what is I the equivalent uniform annual savings in fuel (jet fuel |savings will be $2.5 billion one year from now). MARR remains at 7% per year (im).
With interest rates on the rise, many Americans are wondering what their investment strategy should be. A safe (i.e., a virtually risk-free) and increasingly popular way to keep pace with the cost of living is to purchase inflation-indexed government bonds. These so called I-bonds pay competitive
The capital investment for a new highway paving machine is $838,000. The estimated annual expense, in year zero dollars, is $92,600. This expense is estimated to increase at the rate of 6.3% per year. Assume that f = 4.5%, N = 7 years, MV at the end of year seven is 15% of the capital investment,
A mechanical workshop has two different machines used for forging. Both the machines perform to a similar degree of same accuracy. Machine A costs $10,000 initially, whereas machine B costs $12,000. It has been estimated that the cost of maintenance will be $500 for machine A and $200 for machine B
The cost of conventional medications for diabetes has risen by an average of 13.1% per year over the past four years. During this same period of time, the cost of a specialty drug for rheumatoid arthritis (RA) has increased 22.5% per year. If these increases continue into the foreseeable future, in
Determine the present worth (at time 0) of the following series of cash flows using a geometric gradient. The real interest rate is 5% per year.
XYZ rapid prototyping (RP) software costs $20,000, lasts one year, and will be expensed (i.e., written off in one year). The cost of the upgrades will increase 10% per year, starting at the beginning of year two. How much can be spent now for an RP software upgrade agreement that lasts three years
In mid-2006, a British pound sterling (the monetary unit in the United Kingdom) was worth 1.4 euros (the monetary unit in the European Union). If a U.S. dollar bought 0.55 pound sterling in 2006, what was the exchange rate between the U.S. dollar and the euro?
In a certain foreign country in 2005, the local currency (the 'Real') was pegged to the U.S. dollar at the rate of $1 U.S. = 1 Real. The Real was then devalued over the next five years so that $1 U.S. = 2 Real. A bank in the Northeastern United States bought assets in this country valued at 100
An international corporation located in Country A is considering a project in the United States. The currency in Country A, say X, has been strengthening relative to the U.S. dollar; specifically, the average devaluation of the U.S. dollar has been 2.6% per year (which is projected to continue).
A certain commodity cost 0.5 pound sterling in the United Kingdom. In U.S. denominated dollars, this same item can be purchased for 85 cents. The exchange rate is 1 pound sterling = $1.80 U.S. a. Should this commodity be purchased in the United Kingdom or in the United States? b. If 100,000 items
A finance company invests in two different countries, India and China, and requires a 20% rate of return (before taxes) in US dollars on project investments in these two countries. a. If the project in India is projected to average 8% annual devaluation relative to the dollar, what rate of return
A U.S. company is considering a high-technology project in a foreign country. The estimated economic results for the project (after taxes), in the foreign currency (T-marks), is shown in the following table for the seven-year analysis period being used. The company requires an 18% rate of return in
Sanjay has 100 euros to spend before he flies back to the United States. He wishes to purchase jewelry priced at $160 (U.S.) in a duty-free shop at the airport. Euros can be bought for $1.32 and sold for $1.24. The owner of the duty-free shop tells Sanjay that the jewelry can be purchased for 100
An automobile manufacturing company in Country X is considering the construction and operation of a large plant on the eastern seaboard of the United States. Their MARR = 20% per year on a before-tax basis. (77iis is a market rate relative to their currency in Country X.) The study period used by
Health care costs are reportedly rising at an annual rate that is triple the general inflation rate. The current inflation rate is running at 4% per year. In 10 years, how much greater will health care costs be compared to a service/commodity that increases at exactly the 4% general inflation rate?
Your company must obtain some laser measurement devices for the next six years and is considering leasing. You have been directed to perform an actual-dollar after-tax study of the leasing approach. The pertinent information for the study is as follows: Lease costs: First year, $80,000; second
The furnace of a boiler in a power plant cost $100,000 five years ago. The furnace had the capacity to produce 70X106 kcal/hour. Now, a furnace with a capacity of 100X10 kcal/hour is desired. With a general price inflation rate of 5% per year, and assuming a cost capacity factor that reflects
In a refrigeration system, a small compressor, including condenser, costs $5,000 to purchase and install. It has a useful life of 20 years and will incur annual maintenance expenses of $200 per year in real (year-zero) dollars during this period. An expansion device replacement will be required at
A $25,000 investment in a machine is proposed. The project is expected to have a life of six years and no salvage value. The estimated annual income from the project is $10,000 (time 0 dollars). The investment will be depreciated by the MACRS (CDS) method based on a five-year recovery period. A 40%
A company manufactures mother boards for various computer manufacturers. Design changes in computer processors, which are expected to increase sales, will require changes in their manufacturing operations. The cost basis of new equipment required is $500,000 (MACRS three-year property class).
You have been assigned the task of analyzing whether to purchase or lease some transportation equipment for your company. The analysis period is six years, and the base year is year zero (b = 0). Other pertinent information is given in Table P8-45. Also,a. The contract terms for the lease specify a
Chrysler is considering a cost reduction program with its major suppliers wherein the suppliers must reduce the cost of the components that they furnish to Chrysler by 5% each year. (The total amount of savings would increase each year.) The initial costs for setting up the program include the
This case study is a justification of a computer system for, the ABC Company. The following are known data: • The combined initial hardware and software cost is $80,000. • Contingency costs have been set at $15,000. These are not necessarily incurred. • A service contract on the hardware
Develop a spreadsheet to verify that the following table entries are correct (to the nearest whole percent).
Which of these situations would you prefer? a. You invest $2,500 in a certificate of deposit that earns an effective interest rate of 8% per year. You plan to leave the money alone for five years, and the general price inflation rate is expected to average 5% per year. Income taxes are ignored. b.
Refer to Example 8-9. Sara has decided that saving more than 12% of her annual salary was unrealistic. She is considering postponing her retirement until 2027, but still wishes to have $500,000 (in 1997 spending power) at that time. Determine what percentage of her annual salary Sara will have to
Because of tighter safety regulations, an improved air filtration system must be installed at a plant that produces a highly corrosive chemical compound. The capital investment in the system is $260,000 in present-day dollars. The system has a useful life of 10 years and is in the MACRS (GDS)
Repeat the analysis for a reduced study period of five years.
Suppose the cost of electricity is expected to increase at the rate of 6% per year. How will this new information change your recommendation? Use the original eight-year study period in your analysis.
A redesign of the assembly line would only require 1,300 horsepower output. Determine the best combination of motors given this reduced horsepower requirement.
A machine cost $3,200 on January 1, 2000, and $5,200 on January 1, 2004. The average inflation rate over these four years was 8% per year. What is the true percentage increase in the cost of the machine from 2000 to 2004? (a) 26.45% (b) 54.12% (c) 7.00% (d) 17.58% (e) 35.11%
Two alternatives, A and B, are under consideration. Both have a life of five years. Alternative A needs an initial investment of $17,000 and provides a net revenue of $4,000 per year for five years. Alternative B requires an investment of $19,000 and has an annual net revenue of $5,000. All
How much life insurance should Stan Moneymaker buy if he wants to leave enough money to his family so that they get $25,000 per year forever in constant dollars as of the year of his death? The interest rate from the life insurance company is 7% per year, while the inflation rate is expected to be
Annual expenses for two projects have been estimated by a project manager as follows:If the average general price inflation rate is expected to be 4% per year and the real rate of interest is 9% per year, show which alternative has the least negative equivalent worth in the base period.
$80 in 1950 was worth $80 but in the year 2010 the same amount of money is worth only $8. a. What was the compounded average annual inflation rate (loss of purchasing power) during this period of time? b. A hundred dollars invested in a bond in 1950 was worth $5,000 in 2010. In view of your answer
The price of cotton sky-rocketed during the Civil War because of Union naval blockades of Confederate ports. This was a primary reason the South experienced 4,000% inflation from 1861 to 1865 (four years). Specifically, what cost 1 cent in 1861 cost $40 in 1865. What was the equivalent annual
A businessman's profits, earned from his business over the past four years, are shown in the accompanying table. During this time, the CPI has performed as indicated. Determine the annual profit in year-zero dollars (b = 0), using the CPI as the indicator of general price inflation.
An electronics components manufacturer is considering the replacement of a machine required in its assembly line. A planning horizon of 8 years is to be used in the replacement study. The old machine (defender) has a current market value of $25,000. If the defender is retained, it is anticipated to
An existing robot is used in a commercial material laboratory to handle ceramic samples in the high-temperature environment that is part of several test procedures. Due to changing customer needs, the robot will not meet future service requirements unless it is upgraded at a cost of $2,000. Because
A steel pedestrian overpass must either be reinforced or replaced. Reinforcement would cost $22,000 and would make the overpass adequate for an additional five years of service. If the overpass is torn down now, the scrap value of the steel would exceed the removal cost by $14,000. If it is
The corporate average fuel economy - (CAFE) standard for mileage is currently (27.5 miles per gallon of gasoline (the defender) for passenger cars. To conserve fuel and reduce air pollution, suppose the U.S. Congress sets the CAFE standard at 36 miles per gallon (the challenger) in 2010.
Use the PW method to select the better of the following alternatives:Assume that the defender was installed five years ago. The MARR is 10% per year. Definition of alternatives: A: Retain an already owned machine (defender) in service for eight more years. 8: Sell the defender and lease a new one
A water pump was purchased by a mining company in the year 2006. Because of increasing maintenance costs for this pump, a new pump is being considered. The cost data of the defender (present pump) and the challenger (new pump) are given below:Suppose a $10,000 MV is available now for the defender.
A high pressure turbine in a gas power plant has the following net cash flows and abandonment values over its useful life (see Table P9-15). The firm's MARR is 12% per year. Determine the optimal time for the turbine to be abandoned if its current MV is $25,000 and it won't be used for more than
Consider a piece of equipment that initially cost $8,000 and has these estimated annual expenses and MV:If the after-tax MARR is 7% per year, determine the after-tax economic life of this equipment. MACRS (GDS) depreciation is being used (five-year property class). The effective income tax rate is
A current asset (defender) is being evaluated for potential replacement. It was purchased four years ago at a cost of $62,000. It has been depreciated as a MACRS (GDS) five-year property-class asset. The present MV of the defender is $12,000. Its remaining useful life is estimated to be four years,
The PW of the ATCFs through year k, FWk, for a defender (three-year remaining useful life) and a challenger (five-year useful life) are given in the following table:Assume the after-tax MARR is 12% per year. On the basis of this information, answer the following questions: a. What are the economic
A pharmaceutical company has some existing semiautomated production equipment that they are considering replacing. This equipment has a present MV of $57,000 and a BV of $30,000. It has five more years of straight-line depreciation available (if kept) of $6,000 per year, at which time its BV would
An existing robot can be kept if $2,000 is spent now to upgrade it for future service requirements. Alternatively, the company can purchase a new robot to replace the old robot. The following estimates have been developed for both the defender and the challenger. The company's before-tax MARR is
It is being decided whether or not to replace an existing piece of equipment with a newer, more productive one that costs $80,000 and has an estimated MV of $20,000 at the end of its useful life of six years. Installation charges for the new equipment will amount to $3,000; this is not added to the
Five years ago a chemical plant invested $90,000 in a pumping station on a nearby river to provide the water required for their production process. Straight-line depreciation is employed for tax purposes, using a 30-year life and zero salvage value. During the past five years, operating costs have
. A hydraulic press was installed 10 years ago at a capital investment cost of $70,000. This press presently has a market value of $14,000. If kept, the press has an economic life of three years, operating expenses of $14,000 per year, and a market value of $10,000 at the end of year (EOY) three.
A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a present MV of $57,000 and a BV of $27,000. It has five more years of depreciation available under MACRS (ADS) of $6,000 per year for four years and $3,000 in year
Five years ago, a company in New Jersey installed a diesel-electric unit costing $50,000 at a remote site because no dependable electric power was available from a public utility. The company has computed depreciation by the straight-line method with a useful life of 10 years and a zero salvage
Extended Learning Exercise There are two customers requiring three-phase electrical ser-j vice, one existing at location A and a new customer at location B. The load at location A is known to be 1110 kVA, and at location B it is contracted to be 280 kVA. Both loads are expected to remain constant
Extended Learning Exercise A truck was purchased four years ago for $65,000 to move raw materials andfinished goods between a production facility and four remote warehouses. This truck (the defender) can be sold at the present time for $40,000 and replaced by a new truck (the challenger) with a
Refer to Example 9-4. By how much would the MARR have to change before the economic life decreases by one year? How about to increase the economic life by one year?
Create a spreadsheet to solve Problem 9-9. What percent reduction in the annual expenses of the defender would result in a delay of its replacement by the challenger?In problem
Determine how much the annual lease amount of the challenger can increase before the defender becomes the preferred alternative.
A company has two options concerning a machine whose present market value is estimated at $12,000. The first option is to retain the machine for its remaining service life of 5 years and immediately replacing it with a new machine whose initial cost, life, market value, and running costs are
Suppose the study period is reduced to five years. Will this change the replacement decision?
Before committing to a 10-year lease, it was decided to consider one more alternative. Instead of simply augmenting the existing generator with a new 40-kW unit, this alternative calls for replacing the 80-kW generator with two 40-kW units (for a total of three 40-kW units). The company selling the
Machine A was purchased last year for $18,000 and had an estimated MV of $2,000 at the end of its six-year life. Annual operating costs are $1,600. The machine will perform satisfactorily over the next five years. A salesman for another company is offering a replacement, Machine B, for $14,000,
A company is considering replacing a machine that was bought six years ago for $60,000. The machine, however, can be repaired and its life extended by five more years. If the current machine is replaced, the new machine will cost $45,000 and will reduce the operating expenses by $8,000 per year.
A corporation purchased a machine for $60,000 five years ago. It had an estimated life of 10 years and an estimated salvage value of $9,000. The current BV of this machine is $34,500. If the current M V of the machine is $40,500 and the effective income tax rate is 29%, what is the after-tax
The management of a firm is considering the replacement of existing equipment. The data for the analysis of the challenger are initial investment = $80,000, there is no annual maintenance cost for the first four years, but in years 5 and 6 it will be $15,000 and then $25,000 in year 7, increasing
In a replacement analysis for a vacuum seal on a spacecraft, the following data are known about the challenger: the initial investment is $12,000; there is no annual maintenance cost for the first three years, however, it will be $2,000 in each of years four and five, and then $4,500 in the sixth
A water treatment plant uses a water filter id system (WFS) to clean and purify the water for a power plant. The power plant has been using a similar type of water filtering system over the past several years. The installed cost of new WFS has remained relatively constant at $100,000. Records of
A high-speed electronic assembly machine was purchased two years ago for $50,000. At the present time, it can be sold for $25,000 and replaced by a newer model having a purchase price of $42,500; or it can be kept in service for a maximum of one more year. The new assembly machine, if purchased,
A biogas plant has a five-year-old equipment that was initially purchased for $80,000. The equipment can be kept in service for an additional five years or it can be sold for $45,000 and replaced with new equipment. The purchase price of the replacement equipment is $65,000. The estimated market
The replacement of a planing machine is being considered by the Reardorn Furniture Company. (There is an indefinite future need for this type of machine.) The best challenger will cost $30,000 for installation and will have an estimated economic life of 12 years and a $2,000 MV at that time. It is

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