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engineering economy

Engineering Economy 17th Global Edition William G. Sullivan ,Elin M. Wicks ,C. Patrick Koelling - Solutions

8-37. 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
8-36. Apex, Inc. is a U.S.-based firm that is in the process of buying a medium-sized company in Brazil. Because the Brazilian company sells its services to the global marketplace, revenues are dollar denominated. Its costs, however, are expressed in the Brazilian currency. If Apex anticipates a
8-35. A company requires a 26% internal rate of return(before taxes) in U.S. dollars on project investments in foreign countries. (8.6)a. If the currency of Country A is projected to average an 8% annual devaluation relative to the dollar, what rate of return (in terms of the currency there) would
8-34. A certain commodity cost 0.5 pound sterling in the United Kingdom. In U.S. denominated dollars, this same item can be purchased for 95 cents. The exchange rate is 1 pound sterling = $1.80 U.S. (8.6)a. Should this commodity be purchased in the United Kingdom or in the United States?b. If
8-33. 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
8-32. In a certain foreign country in 2009, 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
8-31. A health services firm is thinking about purchasing a large autoclave for $180,000. The autoclave is expected to generate $60,000 in its first year of operation. This amount will increase by 5% per year (so it would be$63,000 in year 2). Furthermore, the autoclave has a useful life of 8 years
8-30. 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
8-29. 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
8-28. Two mutually exclusive alternatives are being considered. The MARR is 15% per year. General inflation is 5.5%/year. Based on the data below, perform an appropriate analysis to select the most economical alternative. State your assumptions. (8.3)Parameter Alternative A Alternative B Initial
8-27. The capital investment for a new highway paving machine is $950,000. The estimated annual expense, in year zero dollars, is $92,600. This expense is estimated to increase at the rate of 5.7% per year. Assume that f = 4.5%, N = 7 years, MV at the end of year 7 is 10% of the capital investment,
8-26. Annual tuition increases at a large university are shown below:2008 13% 2013 9%2009 4.6% 2014 12%2010 6% 2015 8%2011 6% 2016 6%2012 9% 2017 5.6%These increases take place in the fall semester of each year.The annual tuition expense for 2007 was $5,000. (8.4)a. What is the tuition expense for
8-25. Refer to Problem 5-56. If the government expects inflation to average 3% per year, what is 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).
8-24. Doris plans to save $5,000 per year for the next 35 years. Her money will be deposited in a stock market index fund that has a 0.5% annual management fee. If this fund earns 6% per year, how much will Doris save by investing in this fund instead of an actively managed mutual fund that has a
8-23. 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. (8.2)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
8-22. 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. (8.2)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
8-21. Suppose natural gas experiences a 2.1%increase per year in real terms over the foreseeable future. The cost of a 1,000 cubic feet of natural gas is now$7.20. (8.2)a. What will be the cost in real terms of 1,000 cubic feet of natural gas in 20 years?b. If the general price inflation rate
8-20. Suppose it costs $18,000 per year (in early 2014 dollars) for tuition, room, board, and living expenses to attend a public university in the Southeastern United States. (8.2)a. If inflation averages 8% per year, what is the total cost of a four-year college education starting in 2024 (i.e.,
8-19. 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. (8.2)a. In real terms, with 1980 as the reference year, what is today’s price of gold
8-18. In 2009, the average cost to construct a 160,000-barrel-a-day oil refinery was $2.6 billion(excluding any interest payments). This capital investment is spread uniformly over a five-year construction cycle(i.e., the refinery starts producing products in 2014).Assume end-of-year cash-flow
8-17. Alfred Smith wants to purchase life insurance that will guarantee his family $64,000 (in R-dollars) per year in bond interest income forever. The interest rate (im) from corporate bonds is expected to pay 7.5% per year, and the inflation rate is expected to average 2% per year. How much life
8-16. A woman desires to have $800,000 in a savings account when she retires in 25 years. Because of the effects of inflation on spending power, she stipulates that her future “nest egg” will be equivalent to $800,000 in today’s purchasing power. If the expected average inflation rate is 6%
8-15. A barrel of oil has a current cost of $100/barrel. If general inflation is 2%/year and oil has a real escalation rate of 5.5%/year, what will a barrel of oil cost in actual dollars eight years from now? (8.2.3)
8-14. 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
8-13. 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
8-12. Your older brother is concerned more about investment safety than about investment performance.For example, he has invested $200,000 in safe 10-year corporate AAA bonds yielding an average of 5% per year, payable each year. His effective income tax rate is 30%, and inflation will average 3%
8-11. A large corporation’s electricity bill amounts to $480 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 $1,000 million. Assuming electricity usage and rates increase at uniform
8-10. Shane works for a government agency in New South Wales making $80,000 per year. He is now being transferred to a branch office in Hobart. The salary reduction associated with this transfer is 10%. Shane is not insulted by this reduction in pay and accepts his new location and salary gladly.
8-9. A recent college graduate has received the annual salaries shown in the following table over the past four years. During this time, the CPI has performed as indicated. Determine the annual salaries in year-zero dollars (b = 0), using the CPI as the indicator of general price inflation.
8-8. What is the real interest rate if the combined rate is 12% and the inflation is 2%? (8.2.3)
8-7. The incredible shrinking $50 bill in 1957 was worth$50, but in 2007 it is worth only $6.58. (8.2)a. What was the compounded average annual inflation rate (loss of purchasing power) during this period of time?b. Fifty dollars invested in the stock market in 1957 was worth $1,952 in 2007. In
8-6. Annual expenses for two alternatives have been estimated on different bases as follows:Alternative A Alternative B Annual Expenses Annual Expenses End of Estimated in Estimated in Real Year Actual Dollars Dollars with b = 0 1 $120,000 $100,000 2 132,000 110,000 3 148,000 120,000 4 160,000
8-5. Re-work Problem 4-89 when the tuition increase for your sophomore year is 10%; for your junior year, 12%; and for your senior year, 8%. Your parents’ savings account earns 4% for the first two years, then it increases to 6% for the last two years. (4.13 and 8.2)
8-4. The Smiths save $32,000 per year for retirement.They are now in theirmid-thirties, and they expect to have$1 million in today’s dollars saved by the time they’re in their mid-sixties. If their market interest rate is 7% per year and inflation averages 2% a year, is their financial plan
8-3. Determine the present worth (at time 0) of the following series of cash flows using a geometric gradient.The real interest rate is 4% per year. (8.2)EOY 3 4 5 6 . . . 25 Cash Flow $1,000 $1,100 $1,210 $1,331 . . . $8,140
8-2. Suppose you have $240,000 cash today and you can invest it to become a millionaire in 12 years. What is the present purchasing power equivalent of this $1,000,000 when the average inflation rate over the first five years is 6% per year, and over the last seven years it will be 9% per year?
8-1. The seasonal energy efficiency ratio (SEER)is 13 for a new heating and air conditioning system that costs $4,400 to install. A higher SEER (14) system is available for $5,200. The more efficient system with a SEER of 14 will save 10,000,000 Btu per year in energy consumption. Assume the cost
7-85. Two insulation thickness alternatives have been proposed for a process steam line subject to severe weather conditions. One alternative must be selected. The estimated installed cost and annual energy savings in heat loss are given below.Thickness Installed Cost Annual Savings Life 2 cm
7-84. Given a MARR of 10%, which alternative should the company select? (7.10)Alternative IRR PW(10%)A 18.2% $12,105 B 15.6% $12,432(a) A (b) B (c) Do nothing
7-83. 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)
7-82. 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
7-81. The taxable income for year three is most nearly(a) $5,010 (b) $16,450 (c) $28,880(d) $41,120 (e) $70,000
7-80. The total before-tax cash flow in year five is most nearly (assuming you sell the machine at the end of year five):(a) $9,000 (b) $40,000 (c) $70,000(d) $80,000 (e) $110,000
7-79. Suppose for some year the income of a small company is $110,000; the expenses are $65,000; the depreciation is $25,000; and the effective income tax rate = 40%. For this year, the ATCF is most nearly(a) −$8,900 (b) $4,700 (c) $13,200(d) $29,700 (e) $37,000
7-78. Acme Manufacturing makes their preliminary economic studies using a before-tax MARR of 18%.More detailed studies are performed on an after-tax basis.If their effective tax rate is 40%, the after-tax MARR is(a) 6% (b) 7% (c) 11% (d) 13%
7-77. Your company just purchased a bar-code system for$70,000. It has a five-yearMACRS class life. The expected market value of the bar-code system in 3 years is $32,000.What is the gain (or loss) when this asset is sold at end year 3?(a) $11,840 (b) $5,120 (c) −$1,600(d) $11,120
7-76. If the federal income tax rate is 35% and the state tax rate is 5% (and state taxes are deductible from federal taxes), the effective income tax rate is(a) 35% (b) 37.5% (c) 38.3%(d) 40%
7-75. The air handling equipment just described is to be depreciated, using the MACRS with a GDS recovery period of seven years. The BV of the equipment at the end of (including) year four is most nearly(a) $3,749 (b) $3,124 (c) $5,000(d) $8,251
7-74. Air handling equipment that costs $12,000 has a life of eight years with a $2,000 SV. What is the SL depreciation amount for each year?(a) $1,500 (b) $1,000 (c) $1,200(d) $1,250
7-73. A small pump costs $16,000 and has a life of eight years and a $2,000 SV at that time. If the 200% DB method is used to depreciate the pump, the BV at the end of year four is(a) $9,000 (b) $8,000 (c) $6,000(d) $5,000
7-72. 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
7-71. Using the MACRS (GDS recovery period), the depreciation charge permissible at year 6 is equal to(a) $9,812 (b) $6,336 (c) $4,912 (d) $0
7-70. Using the SL method, the BV at the end of the depreciable life is(a) $11,811 (b) $10,000 (c) $5,000 (d) $0
7-69. Using the SL method, the depreciation on the equipment over its depreciable life period is(a) $10,500 (b) $9,500 (c) $8,000(d) $7,000
7-68. The recovery period of the asset, using the GDS guidelines, is(a) 10 years (b) 7 years (c) 5 years(d) 3 years
7-67. If MACRS depreciation is used, the recovery period of the equipment using the GDS guidelines is(a) 3 years (b) 5 years (c) 7 years(d) 10 years A wood products company has decided to purchase new logging equipment for $100,000 with a trade-in of its old equipment. The old equipment has a BV of
7-66. 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
7-65. Using the SL method, the BV at the end of the depreciable life is(a) $0 (b) $25,000 (c) $35,000(d) $50,000
7-64. Using the SL method, the annual depreciation on the equipment is(a) $50,000 (b) $51,500 (c) $52,500(d) $55,000
7-63. If the autoclave is sold during the third year of ownership, the allowable depreciation charge for the third year is(a) $25,000 (b) $33,338 (c) $22,215(d) $11,108 An oil refinery has decided to purchase some new drilling equipment for $550,000. The equipment will be kept for 10 years before
7-62. The BV at the end of the second year is(a) $27,771 (b) $41,667 (c) $116,675(d) $33,325
7-61. The depreciation amount in the second year is(a) $50,000 (b) $66,675 (c) $33,338(d) $55,563
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. The capacity factor estimate of the
7-60. Refer to the chapter opener and Example
7-59. 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
7-58. Create a spreadsheet to solve Problem 7-24. What would the MV of M1 have to be (at the end of year five)for the firm to select M1? (7.9)
7-57. A bowling alley costs $500,000 and has a useful life of 10 years. Its estimated MV at the end of year 10 is $20,000. Create a spreadsheet that calculates the depreciation for years 1–10 using (i) the SL method, (ii)the 200% DB method, and (iii) the MACRS method(GDS class life = 10 years).
7-56. A company with an effective income tax rate and a capital gains tax of 40% and a MARR of 12% must choose between two mutually exclusive projects. Determine which project should be selected by conducting a present worth analysis (7.9)
7-55. A Roth IRA enables an individual to invest after-tax dollars during the accumulation phase of a retirement plan. The money is then income tax free when it is withdrawn during retirement. A tax-deductible IRA, on the other hand, provides an up-front tax deduction for the annual contribution,
7-54. A 529-state-approved Individual Retirement Account (IRA) permits parents to invest tax-free dollars into their children’s college education fund (this money may only be used for educational expenses). Another popular plan, the Roth IRA, requires after-tax dollars to be invested in a savings
7-53. Determine the after-tax yield (i.e., IRR on the ATCF) obtained by an individual who purchases a$10,000, 10-year, 10% nominal interest rate bond. The following information is given: (7.7)• Interest is paid semi-annually, and the bond was bought after the fifth payment had just been received
7-52. A $5,000 balance in a tax-deferred savings plan will grow to $50,313.50 in 30 years at an 8% per year interest rate. What would be the future worth if the $5,000 had been subject to a 28% income tax rate? (7.7)
7-51. When you are young, invest in a Roth IRA. Instead of getting a tax break when you put money aside as in most 401(k) plans, savers in Roth IRAs get totally tax free withdrawals when they retire. You should use your time (e.g., 30 years) to build tax-free retirement funds.To illustrate the
7-50. Extended Learning Exercise You have the option to purchase or lease a five-axis horizontal machining center. Any revenues generated from the operation of the machine will be the same whether it is leased or purchased. Considering the information given, should you lease or purchase the
7-49. An injection molding machine can be purchased and installed for $75,000. It has a GDS recovery period of five years under the MACRS, but it will only be kept in service for four years. The net savings that can be attributed to this machine is estimated to be $25,000 in the first year, and to
7-48. Refer to Example 7-15. Show that the PW of the annual EVA amounts by the new machinery is the same as the PW of the ATCF amounts ($17,208) given in Table 7-6. (7.10, 7.11)
7-47. AMT, Inc., is considering the purchase of a digital camera for maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be
7-46. Allen International, Inc., manufactures chemicals.It needs to acquire a new piece of production equipment to work on production for a large order that Allen has received. The order is for a period of three years, and at the end of that time the machine would be sold.Allen has received two
7-45. A manufacturing process can be designed for varying degrees of automation. The following is relevant cost information:Annual Annual Power First Labor and Maintenance Degree Cost Expense Expense A $10,000 $9,000 $500 B 14,000 7,500 800 C 20,000 5,000 1,000 D 30,000 3,000 1,500 Determine which
7-44. A research and development company has an effective income tax rate of 40%. Recaptured depreciation is also taxed at the rate of 40%. The company must choose one of the following mutually exclusive machines for testing and data collection. The after-tax MARR is 10% per year. Which machine
7-43. Alternative Methods I and II are proposed for a security operation. The following is comparative information:Method I Method II Initial investment $10,000 $40,000 Useful (ADR) life 5 years 10 years Terminal market value $1,000 $5,000 Annual expenses $14,500 $7,000 Determine which is the
7-42. A firm must decide between two silicon layer chip designs from Intel. Their effective income tax rate is 20%, and MACRS depreciation is used. If the desired after-tax return on investment is 10% per year, which design should be chosen? State your assumptions. (7.10)Design A Design B Capital
7-41. Two alternative machines will produce the same product, but one is capable of higher-quality work, which can be expected to return greater revenue. The following are relevant data:Machine A Machine B Capital investment $25,000 $40,000 Life 10 years 6 years Terminal BV (and MV) $2,000 $0
7-40. Individual industries will use energy as efficiently as it is economical to do so, and there are several incentives to improve the efficiency of energy consumption. To illustrate, consider the selection of a new water pump. The pump is to operate 800 hours per year.Pump A costs $2,000, has an
7-39. Two fixtures are being considered for a particular job in a manufacturing firm. The pertinent data for their comparison are summarized in Table P7-39.The effective federal and state income tax rate is 25%. Depreciation recapture is also taxed at 25%. If the after-tax MARR is 8% per year,
7-38. Storage tanks to hold a highly corrosive chemical are currently made of material Z26. The capital investment in a tank is $30,000, and its useful life is eight years. Your company manufactures electronic components and uses the ADS under MACRS to calculate depreciation deductions for these
7-37. An industrial coal-fired boiler for process steam is equipped with a 10-year-old electrostatic precipitator (ESP). Changes in coal quality have caused stack emissions to be in noncompliance with federal standards for particulates. Two mutually exclusive alternatives have been proposed to
7-36. The expected annual maintenance expense for a new piece of equipment is $10,000. This is Alternative A.Alternatively, it is possible to perform the maintenance every fifth year at a cost of $50,000 (Alternative B). In either case, maintenance will be performed in the fifth year so that the
7-35. The following information is for a proposed project that will provide the capability to produce a specialized product estimated to have a short market (sales) life:• Capital investment is $1,000,000. (This includes land and working capital.)• The cost of depreciable property, which is
7-34. Refer to Problem 6-79. The alternatives all have a MACRS (GDS) property class of three years. If the effective income tax rate is 40% and the after-tax MARR = (1 − 0.4)(12%) = 7.2% per year, which alternative should be recommended? Is this the same recommendation you made when the
7-33. Your company has purchased equipment (for$50,000) that will reduce materials and labor costs by$14,000 each year for N years. After N years, there will be no further need for the machine, and because the machine is specially designed, it will have no MV at any time. The IRS, however, has
7-32. An auto-component company is considering the introduction of a new product line. The initial investment required for this project is $800,000, and annual maintenance costs are anticipated to be $60,000. Annual operating cost will be in direct proportion to the level of production at $10 per
7-31. The CFO of Acme Manufacturing is considering the purchase of a special diamond-tipped cutting tool.This tool has the following initial costs to put into service.Acme will use cash to pay for all of these expenses, some of which was borrowed on a long-term credit line with the local bank.
7-30. The Greentree Lumber Company is attempting to evaluate the profitability of adding another cutting line to its present sawmill operations. They would need to purchase two more acres of land for $30,000 (total). The equipment would cost $130,000 and could be depreciated over a five-year
7-29. Your company has just signed a three-year nonrenewable contract with the city of New Orleans for earthmoving work. You are investigating the purchase of heavy construction equipment for this job. The equipment costs $200,000 and qualifies for five-year MACRS depreciation. At the end of the
7-28. Nordique Fab is an Arizona company dedicated to circuit board design and fabrication. It has just acquired new workstations and modeling software for its three“Valley of the Sun” design facilities, at a cost of $480,000 per site. This cost includes the hardware, software, transportation,
7-27. Liberty Airways is considering an investment of$800,000 in ticket purchasing kiosks at selected airports.The kiosks (hardware and software) have an expected life of four years. Extra ticket sales are expected to be 60,000 per year at a discount price of $40 per ticket. Fixed costs, excluding
7-26. A manual assembly operation at an automobile company currently requires $150,000 per year in labor costs. A robot can be purchased and installed to automate this operation, and the robot will cost $280,000 with no MVat the end of its seven-year life. The robot, if acquired, will be
7-25. Two different printing machines are being considered in a company. Printer A would be purchased while Printer B would be leased. The company will replace any printer selected at this time after three years (i.e., the planning horizon for this evaluation is three years).The MACRS depreciation
7-24. Refer to Example 6-10. Work this problem on an after-tax basis when the MARR is 12% per year.The effective income tax rate is 40%, and MACRS depreciation is appropriate with a property class of five years. Recall that the market values of M1 and M2 are zero at the end of years five and eight,

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