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engineering economy

Engineering Economy 17th Edition William Sullivan, Elin Wicks, C Koelling - Solutions

8-12. Your older brother is concerned more about investment safety than about investment performance. For example, he has invested $100,000 in safe 10-year corporate AAA bonds yielding an average of 6% per year, payable each year. His effective income tax rate is 33%, and inflation will average 3%
8-11. A large corporation’s electricity bill amounts to $400 million. During the next 10 years, electricity usage is expected to increase by 65%, and the estimated electricity bill 10 years hence has been projected to be $920 million. Assuming electricity usage and rates increase at uniform
8-10. Paul works for a government agency in southern California making $70,000 per year. He is now being transferred to a branch office in Tennessee. The salary reduction associated with this transfer is 11%. Paul is not insulted by this reduction in pay and accepts his new location and salary
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. (8.2)
8-8. What is the real interest rate if the combined rate is 14% and the inflation is 2.5%? (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
8-4. The Smiths save $16,000 per year for retirement. They are now in their mid-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 6% 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 5% 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 $100,000 cash today and you can invest it to become a millionaire in 15 years. What is the present purchasing power equivalent of this $1,000,000 when the average inflation rate over the first seven years is 5% per year, and over the last eight years it will be 8% 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
7-84. 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 Your company is contemplating
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-year MACRS 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
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
7-60. 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
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) ALT 1 ALT 2 Initial cost $11,000 $33,000 Uniform annual
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
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 biotech 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 cryogenic freezers for its tissue samples. The after-tax MARR is 12% per year. Which freezer should be selected
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 $20,000 $30,000 Life 12 years 8 years Terminal BV (and MV) $4,000 $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
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. Your company is considering the introduction of a new product line. The initial investment required for this project is $500,000, and annual maintenance costs are anticipated to be $35,000. Annual operating cost will be in direct proportion to the level of production at $8.50 per unit, and
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 $425,000 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,
7-26. An assembly operation at a software company currently requires $100,000 per year in labor costs. A robot can be purchased and installed to automate this operation, and the robot will cost $200,000 with no MV at the end of its 10-year life. The robot, if acquired, will be depreciated using SL
7-25. Two different copying machines are being considered in your company. The Mortar copier would be purchased while the Xrocks copier would be leased. The company will replace any copier selected at this time after three years (i.e., the planning horizon for this evaluation is three years). The
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
7-23. An injection molding machine can be purchased and installed for $90,000. It is in the seven-year GDS property class and is expected to be kept in service for eight years. It is believed that $10,000 can be obtained when the machine is disposed of at the end of year eight. The net annual value
7-22. A company is considering the purchase of a capital asset for $100,000. Installation charges needed to make the asset serviceable will total $30,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $10,000. The asset will be
7-21. A firm can purchase a centrifugal separator (5-year MACRS property) for $20,000. The estimated salvage value is $3,000 after a useful life of six years. Operating and maintenance (O&M) costs for the first year are expected to be $2,000. These O&M costs are projected to increase by $1,000 per
7-20. The Ingersoll Engineering Company is considering the purchase of a gas flow meter. Its purchase price is $9,500 and another $500 will be spent shipping and installing this device. Use of the meter is expected to result in a $9,000 annual increase in revenue, and operating expenses are
7-19. A company purchases an industrial laser for $150,000. The device has a useful life of four years and a salvage value (market value) at the end of those four years of $50,000. The before-tax cash flow is estimated to be $80,000 per year. (7.4,7.9)a. You, of course, suggested applying the
7-18. A corporation in 2017 expects a gross income of $500,000, total operating expenses of $400,000, and capital investments of $20,000. In addition the corporation is able to declare $60,000 of depreciation charges for the year. What is the expected taxable income and total federal income taxes
7-17. A concrete and rock crusher for demolition work has been purchased for $60,000, and it has an estimated SV of $10,000 at the end of its five-year life. Engineers have estimated that the following units of production (in m3 of crushed material) will be contracted over the next five years. EOY
7-16. A special-purpose machine is to be depreciated as a linear function of use (units-of-production method). It costs $35,000 and is expected to produce 150,000 units and then be sold for $5,000. Up to the end of the third year, it had produced 60,000 units, and during the fourth year it produced
7-15. A manufacturer of aerospace products purchased three flexible assembly cells for $500,000 each. Delivery and insurance charges were $35,000, and installation of the cells cost another $50,000. (7.4, 7.8)a. Determine the cost basis of the three cells.b. What is the class life of the cells?c.
7-14. During its current tax year (year one), a pharmaceutical company purchased a mixing tank that had a fair market price of $120,000. It replaced an older, smaller mixing tank that had a BV of $15,000. Because a special promotion was underway, the old tank was used as a trade-in for the new one,
7-13. A piece of construction equipment (asset class 15.0) was purchased by the Jones Construction Company. The cost basis was $300,000.a. Determine the GDS and ADS depreciation deductions for this property. (7.4)b. Compute the difference in PW of the two sets of depreciation deductions in Part (a)
7-12. A bowling alley costs $500,000 and has an estimated life of 10 years (SV10 = $20,000).a. Determine the depreciation for years one through 10 using: (i) the straight-line method; (ii) the 200% declining balance method; and (iii) the MACRS method (ADR guideline period = 10 years). A table
7-11. Your company has purchased a large new truck-tractor for over-the-road use (asset class 00.26). It has a cost basis of $180,000. With additional options costing $15,000, the cost basis for depreciation purposes is $195,000. Its MV at the end of five years is estimated as $40,000. Assume it
7-10. A crane rental company has acquired a new heavy-duty crane for $300,000. The company calculates depreciation on this equipment on the basis of number of rentals per year, and the salvage value of the crane at the end of its 10-year life is $30,000. If the crane is rented an average of 120
7-9. A global positioning system (GPS) receiver is purchased for $3,000. The IRS informs your company that the useful (class) life of the system is seven years. The expected market (salvage) value is $200 at the end of year seven. (7.3, 7.4)a. Use the straight-line method to calculate depreciation
7-8. 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
7-7. You have a tax basis of $80,000 and a useful life of five years and no salvage value. Provide a depreciation schedule (dk for k = 1 to 5) for 200% declining balance with switchover to straight line. Specify the year to switchover. (7.3.3)
7-6. The “Big-Deal” Company has purchased new furniture for their offices at a retail price of $125,000. 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
7-5. A new barcode reading device has an installed cost basis of $24,750 and an estimated service life of seven years. It will have a zero salvage value at that time. The 200% declining balance method is used to depreciate this asset. (7.3)a. What will the depreciation charge be in year seven?b.
7-4. Explain how the cost basis of depreciable property is determined. (7.2)
7-3. Explain the difference between real and personal property. (7.2)
7-2. What conditions must a property satisfy to be considered depreciable? (7.2)
7-1. How are depreciation deductions different from other production or service expenses such as labor, material, and electricity? (7.2)
6-87. Consider the savings plans for two investors—we’ll call them Mary and Bill—who began investing 10 years apart. Both put the same amount of money aside ($100 per month for 20 years for a total of $24,000). Mary and Bill earned the same interest rate, which was 8% compounded monthly. Mary
6-86. Consider the mutually exclusive alternatives given in the table below. The MARR is 10% per year. Alternative XYZ Capital $500,000 $250,000 $400,000 investment (thousands) Uniform annual $131,900 $40,690 $44,050 savings (thousands) Useful life 5 10 20 suming repeatability, which alternative
6-85. Using a MARR of 15%, the preferred Alternative is: (a) Do Nothing (b) Alternative A (c) Alternative B (d) Alternative C (e) Alternative D (f) Alternative E
6-84. The IRR for Alternative A is most nearly: (a) 30% (b) 15% (c) 36% (d) 10% (e) 20%
6-83. Using a MARR of 15%, the PW of the investment in A when compared incrementally to B is most nearly: (a) −$69,000 (b) −$21,000 (c) $20,000 (d) $61,000 (e) $53,000

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