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engineering economy
Engineering Economy 17th Global Edition William G. Sullivan ,Elin M. Wicks ,C. Patrick Koelling - Solutions
5-45. Your boss has just presented you with the summary in the accompanying table of projected costs and annual receipts for a new product line. He asks you to calculate the IRR for this investment opportunity. What would you present to your boss, and how would you explain the results of your
5-44. To purchase a used automobile, you borrow$10,000 from Loan Shark Enterprises. They tell you the interest rate is 1% per month for 35 months. They also charge you $200 for a credit investigation, so you leave with $9,800 in your pocket. The monthly payment they calculated for you is$10,000
5-43. Toyota will bring hybrid electric automobiles to market next year priced at $30,000 (this includes a $7,500 federal tax credit). At $2.00 per gallon of gasoline, it will take 10 years to recoup the difference in price between a base model Toyota Camry and its four-cylinder gasoline-only
5-42. Sergeant Jess Frugal has the problem of running out of money near the end of each month (he gets paid once a month). Near his army base there is a payday lender company, called Predatory Lenders, Inc., that will give Jess a cash advance of $350 if he will repay the loan a month later with a
5-41. Nowadays it is very important to reduce one’s carbon “footprint” (how much carbon we produce in our daily lifestyles). Minimizing the use of fossil fuels and instead resorting to renewable sources of energy (e.g., solar energy) are vital to a “sustainable”lifestyle and a lower
5-40. Use the ERR method to evaluate the economic worth of the diagram shown below. The value of the external reinvestment rate, ∈, is 8% per year. The MARR= 10% per year. (5.7)0 1 2 3 4 5 6 7 8$3,500$1,500 EOY A = $138 per year
5-39. Stan Slickum has a used car that can be bought for$8,000 cash or for a $1,000 down payment and $800 per month for 12 months.What is the effective annual interest rate on the monthly payment plan? (5.6.1)
5-38. A loan of $3,000 for a new, high-end laptop computer is to be repaid in 15 end-of-month payments(starting one month from now). The monthly payments are determined as follows.Loan principal $3,000 Interest for 15 months at 1.5% per month 675 Loan application fee 150 Total $3,825 Monthly
5-37. The city of Oak Ridge is considering the construction of a four kilometer (km) greenway walking trail. It will cost $1,000 per km to build the trail and $300 per km per year to maintain it over its 20-year life. If the city’s MARR is 7% per year, what is the equivalent uniform annual cost
5-36. A parking garage has a capital investment cost of$2.1 million (not including land). One year later $1.2 million will be spent on finishing work on the garage. It will cost $2 million to tear down and dispose of the garage at the end of its 25-year useful life. If the MARR is 25% per year,
5-35. Each year in the United States nearly 5 billion pounds of discarded carpet end up in land fills. In response to this situation, a carpet manufacturer has decided to start a take-back program whereby obsolete carpet is reclaimed at the end of its useful life (about 7 years). The remanufactured
5-34. The required investment cost of a new, large shopping center is $50 million. The salvage value of the project is estimated to be $20 million (the value of the land). The project’s life is 15 years and the annual operating expenses are estimated to be $15 million. The MARR for such projects
5-33. Stan Moneymaker has been informed of a major automobile manufacturer’s plan to conserve on gasoline consumption through improved engine design. The idea is called “engine displacement,”and it works by switching from 8-cylinder operation to 4-cylinder operation at approximately 40 miles
5-32. Your company is considering the introduction of a new product line. The initial investment required for this project is $650,000, and annual maintenance costs are anticipated to be $54,000. Annual operating costs will be directly proportional to the level of production at $12.80 per unit, and
5-31. An environmentally friendly green home(99% air tight) costs about 8% more to construct than a conventional home. Most green homes can save 15% per year on energy expenses to heat and cool the dwelling. For a $250,000 conventional home, how much would have to be saved in energy expenses per
5-30. “It’s easier to make money when interest rates in the economy are low.” To illustrate this point, compute the capital recovery amounts (CR) for a $1 million project when interest rates are 3%, 6%, and 12% per year. Assume no residual value at the end of a useful life of 15 years.(5.5)
5-29. Combined-cycle power plants use two combustion turbines to produce electricity. Heat from the first turbine’s exhaust is captured to heat water and produce steam sent to a second steam turbine that generates additional electricity. A 968-megawatt combined-cycle gas fired plant can be
5-28. A 50-kilowatt gas turbine has an investment cost of $40,000. It costs another $14,000 for shipping, insurance, site preparation, fuel lines, and fuel storage tanks. The operation and maintenance expense for this turbine is $450 per year. Additionally, the hourly fuel expense for running the
5-27. A company is considering constructing a plant to manufacture a proposed new product. The land costs$300,000, the building costs $600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per
5-26. The ownership and operating expenses for a typical automobile total $9,713 per year in 2017.Fifty-five percent of this is the capital recovery amount (depreciation plus finance charges). Fuel-related operating expense is based on driving 16,000 miles per year and it is assumed that it costs
5-25. A simple, direct space heating system is currently being used in a professional medical office complex. An upgraded “variable air-volume system” retrofit can be purchased and installed for$200,000 (investment cost). Its power savings in the future will be 500,000 kilo-Watt hours per year
5-24. An asset has an initial capital investment of $10 million. Its terminal value at the end of a twelve-year life is –$4 million (i.e., it costs more to dispose of this asset than it is worth in the marketplace). The MARR is 18% per year. What is the capital recovery amount of this asset? (5.5)
5-23. Fill in Table P5-23 below when P = $10,000, S = $2,000 (at the end of four years), and i = 15% per year. Complete the accompanying table and show that the equivalent uniform CR amount equals $3,102.12. (5.5)
5-22. What are the PW and FW of a 25-year geometric cash-flow progression increasing at 10% per year if the first year amount is $8,400 and the interest rate is 20% per year? (5.4)
5-21. Determine the FW of the following engineering project when the MARR is 10% per year. Is the project acceptable? (5.4)Proposal A Investment cost $15,000 Expected life 8 years Market (salvage) valuea −$2,500 Annual receipts $8,800 Annual expenses $5,800 a A negative market value means that
5-20. Your firm is thinking about investing $200,000 in the overhaul of a manufacturing cell in a lean environment. Revenues are expected to be $30,000 in year one and then increasing by $10,000 more each year thereafter. Relevant expenses will be $10,000 in year one and will increase by $5,000 per
5-19. Vidhi is investing in some rental property in Collegeville and is investigating her income from the investment. She knows the rental revenue will increase each year, but so will the maintenance expenses. She has been able to generate the data that follows regarding this investment
5-18. Ms. Moody wants to make 12% nominal interest compounded quarterly on a bond investment. She has an opportunity to purchase a 6%, $20,000 bond that will mature in 15 years and pays quarterly interest. This means that she will receive quarterly interest payments on the face value of the bond
5-17. A city is spending $60 million on a new sewage system. The expected life of the system is 50 years, and it will have no market value at the end of its life. Operating and maintenance expenses for the system are projected to average $0.2 million per year. If the city’s MARR is 6%per year,
5-16.a. What is the CW, when i = 15% per year, of $6,000 per year, starting in year one and continuing forever;and $20,000 in year five, repeating every four years thereafter, and continuing forever? (5.3)b. When i = 15% per year in this type of problem, what value of N, practically speaking,
5-15. The Western Railway Company (WRC) has been offered an 80-year contract to haul a fixed amount of coal each year fromWyoming to Illinois. Under the terms of the agreement, WRC will receive $3,200,000 now in exchange for its hauling services valued at $375,000 at the end of year (EOY) one,
5-14. The cash-flow diagram below has an internal rate of return of 25%. What is the value of Y if perpetual service is assumed? (5.3.3)EOY Y Y Y Y 0 1 2 3 4 5 `$1,000,000$500,000$500,000
5-13. Bill Mitselfik has purchased a bond that was issued by Acme Chemical. This bond has a face value of $1,000 and pays a dividend of 10% per year, compounded semi-annually. Bill bought the bond three years ago at face value and there are seven years remaining until the bond matures. Bill wishes
5-12. A bond with a face value of $10,000 pays interest of 5% per year. This bond will be redeemed at its face value at the end of 15 years. How much should be paid now for this bond when the first interest payment is payable one year from now and a 4% yield is desired? (5.3.2)
5-11. Last month Tim purchased $20,000 of U.S.Treasury bonds (their face value was $10,000). These bonds have a 25-year maturity period, and they pay 1.5%interest every three months (i.e., the APR is 6%, and Tim receives a check for $300 every three months). But interest rates for similar
5-10. A corporate bond pays 5% of its face value once per year. If this $5,000 10-year bond sells now for $5,500, what yield will be earned on this bond? Assume the bond will be redeemed at the end of 10 years for $5,000. (5.3.2)
5-9. A new six-speed automatic transmission for automobiles offers an estimated 4%improvement in fuel economy compared to traditional four-speed transmissions in front-wheel drive cars. If a four-speed transmission car averages 40 miles per gallon and gasoline costs $5.00 per gallon, how much extra
5-8. The Ford Motor Company has redesigned its best selling truck by substituting aluminum for steel in many key body parts. This saves 700 pounds of weight and decreases gas consumption. The fuel consumption will be 24 miles per gallon (mpg), up from 19 mpg of the previous year’s model. Ford
5-7. Determine the present worth of the following cash flows if the interest rate is 9% per year: (5.3)End of 0 1 2 3 4 Year Cash −20,000 −35,000 48,000 67,800 −5,000 Flow
5-6. A large induced-draft fan is needed for an upgraded industrial process. The motor to drive this fan is rated at 100 horsepower, and the motor will operate at full load for 8,760 hours per year. The motor’s efficiency is 92%. Because the motor is fairly large, a demand charge of $92 per
5-5. What is the capitalized worth of a project that has an indefinitely long study period and dollar cash flows that repeat as shown in the following figure. The interest rate is 10% per year. (5.3)
5-4. Suppose that you have just completed the mechanical design of a high-speed automated palletizer that has an investment cost of $8,000,000. The existing palletizer is quite old and has no salvage value. The market value for the new palletizer is estimated to be $500,000 after eight years. Two
5-3. An award is being established, and it will pay $25,000 every three years, with the first installment being paid in three years. The award will be given for an indefinitely long period of time. If the interest rate is 2% per annum, what lump-sum amount of money (invested now) will be required
5-2. Lignin is a basic component of almost any plant that grows, so it is one of the most abundant organic compounds in the world. Almost anything derived from oil can be made out of lignin. The question is“can we do it cost-effectively and consistently?” A startup company has developed a
5-1. Sydney Tools is considering investment in five independent projects, any profitable combination of them is feasible.Sydney Tools has $100 million available to invest, and these funds are currently earning 10% interest annually from municipal bonds. If the funds available are limited to $100
153. Start saving early! Put $100 per month into an account with a 7% annual interest rate. Assume monthly compounding. If you are now 27 years old, how much will this account be worth when you are age 67? (4.7)(a) $240,000 (b) $281,000 (c) $262,000(d) $277,000
152. The best way to break the 100,000 mile mark for your car is to schedule regular oil and filter changes.Annual savings are estimated to be $6,000 over the 15- year life of your car. If interest is 8% per year compounded continuously, what is the future equivalent value of your savings?
151. Suppose a friend of yours invests $100 each month in an individual retirement account (IRA) for a decade and earns an unbelievable APR of 12% a year (1% per month) on her investment. She will end up with $100(F/A, 1%, 120) = $100 (230.0387) = $23,003.87 after 10 years. If you decide to invest
150. Adding a small amount to your monthly home mortgage payment will shorten the life of your loan.Adding $10 per month to your $540 monthly mortgage payment will trim how many months from a 30 year, 5%mortgage of $100,000? Select the closest answer. (4.7)(a) 25 months (b) 19 months (c) 13
149. On a $200,000, 30- year fixed mortgage, the monthly payment will be approximately how much when the nominal interest rate on the mortgage is 4.2%? (4.7)(a) $568 (b) $980 (c) $918(d) $1,000 (e) $895
148. If you invest $7,000 at 12% compounded continuously, how much would it be worth in three years? (4.16)(a) $9,449 (b) $4,883 (c) $10,033(d) $9,834 (e) $2,520
147. A bank advertises mortgages at 12% compounded continuously. What is the effective annual interest? (4.16)(a) 12.36% (b) 12.55% (c) 12.75%(d) 12.68% (e) 12.00%
146. The effective annual interest rate is given to be 19.2%. What is the nominal interest rate per year (r)if continuous compounding is being used? Choose the closest answer below. (4.16)(a) 19.83% (b) 18.55% (c) 17.56%(d) 16.90%
145. If you borrow $5,000 to buy a car at 12%compounded monthly, to be repaid over the next four years, what is your monthly payment? (4.15)(a) $131 (b) $137 (c) $1,646(d) $81 (e) $104
144. What is the principal remaining after 20 monthly payments have been made on a $20,000 five-year loan?The annual interest rate is 12% nominal compounded monthly. (4.15)(a) $10,224 (b) $13,333 (c) $14,579(d) $16,073 (e) $17,094
143. Sixty monthly deposits are made into an account paying 6% nominal interest compounded monthly. If the objective of these deposits is to accumulate $100,000 by the end of the fifth year, what is the amount of each deposit? (4.15)(a) $1,930 (b) $1,478 (c) $1,667(d) $1,430 (e) $1,695
142. Bill Mitselfik borrowed $10,000 to be repaid in quarterly installments over the next five years. The interest rate he is being charged is 12% per year compounded quarterly. What is his quarterly payment? (4.15)(a) $400 (b) $550 (c) $650(d) $800
141. A cash flow at time zero (now) of $9,982 is equivalent to another cash flow that is an EOY annuity of$2,500 over five years. Each of these two cash-flow series is equivalent to a third series, which is a uniform gradient series. What is the value of G for this third series over the same
140. Consider the following sequence of year-end cash flows:EOY 1 2 3 4 5 Cash $8,000 $15,000 $22,000 $29,000 $36,000 Flow What is the uniform annual equivalent if the interest rate is 12% per year? (4.11)(a) $20,422 (b) $17,511 (c) $23,204(d) $22,000 (e) $12,422
139. Your monthly mortgage payment (principal plus interest) is $1,500. If you have a 30- year loan with a fixed interest rate of 0.5% per month, how much did you borrow from the bank to purchase your house? Select the closest answer. (4.7)(a) $154,000 (b) $180,000 (c) $250,000(d) $300,000 (e)
138. Every year you deposit $2,000 into an account that earns 2% interest per year. What will be the balance of your account immediately after the 30th deposit? (4.7)(a) $44,793 (b) $60,000 (c) $77,385(d) $81,136 (e) $82,759
137. When you were born, your grandfather established a trust fund for you in the Cayman Islands.The account has been earning interest at the rate of 10%per year. If this account will be worth $100,000 on your 25th birthday, how much did your grandfather deposit on the day you were born? (4.6)(a)
136. If you borrow $3,000 at 6% simple interest per year for seven years, how much will you have to repay at the end of seven years? (4.2)(a) $3,000 (b) $4,511 (c) $1,260(d) $1,511 (e) $4,260
135. If Enrico is more daring with his retirement investment savings and feels he can average 10% per year, how much will he have accumulated for retirement at the end of the 10- year period? (4.17)
134. Enrico has planned to have $40,000 at the end of 10 years to place a down payment on a condo. Property taxes and insurance can be asmuch as 30% of the monthly principal and interest payment (i.e., for a principal and interest payment of $1,000, taxes and insurance would be an additional
133. After Enrico’s car is paid off, he plans to continue setting aside the amount of his car payment to accumulate funds for the car’s replacement. If he invests this amount at a rate of 3% compounded monthly, how much will he have saved by the end of the initial 10- year period? (4.17)
132. Higher interest rates won’t cost you as much to drive a car as do higher gasoline prices. This is because automobile loans have payment schedules that are only modestly impacted by Federal Reserve Board interest-rate increases. Create a spreadsheet to compare the difference in monthly
131. Refer to Example 4- 23. Suppose the cash-flow sequence continues for 10 years (instead of four).Determine the new values of P, A, and F. (4.12)
130. A $15,000 investment is to be made with anticipated annual returns as shown in the spreadsheet in Figure P4-130. If the investor’s time value of money is 10% per year, what should be entered in cells B11, B12, and B13 to obtain present, annual, and future equivalent values for the
129. Create a spreadsheet that duplicates Table 4- 1.Make it flexible enough that you can investigate the impact of different interest rates and principal loan amounts without changing the structure of the spreadsheet. (4.7)
128. Jaffer’s credit card spending has soared in the last year. His credit card company has just offered him a scheme to repay his outstanding debt through 18 monthly payments of $212 each. A financial manager at the bank assures him that this repayment schedule translates into an effective
127. A wine seller determines that his newly acquired bottle of rare Bordeaux will increase in value at the rate of 3.5% per annum with continuous compounding. He bought the bottle for $160 and wants to sell it when it is worth at least $600. How many years will he have to hold on to the bottle?
126. Greta wants to borrow $22,000 from the bank to buy a car. The loan will have to be repaid in 40 monthly installments at an annual interest rate of 9% with monthly compounding. (4.17)a. What is the monthly payment on Greta’s car loan?b. Develop an estimate of Greta’s monthly expenses on her
125. An economist has calculated that the real value of gold has appreciated by a factor of 7 in the last 40 years.What is the implied annual rate of return on an investment in gold made 40 years ago, if compounding is assumed to be continuous? (4.16)
124. Mark each statement true (T) or false (F), and fill in the blanks in Part (e). (all sections)a. T F The nominal interest rate will always be less than the effective interest rate when r = 10%and M =∞.b. T F A certain loan involves monthly repayments of $185 over a 24- month period. If r =
123. Indicate whether each of the following statements is true (T) or false (F). (all sections)a. T F Interest is money paid for the use of equity capital.b. T F (A/F, i%,N) = (A/P, i%,N) + i.c. T F Simple interest ignores the time value of money principle.d. T F Cash-flow diagrams are analogous to
122. Will receives $4,000 from his aunt when he turns 21 and he immediately invests the money in a savings account. The account earns 12% annual interest, with continuous compounding. He gets his first job after 5 years. (4.16)a. Determine the accumulated savings in this account at the end of 5
121. James receives $6,000 when he turns 12 and wants his fund to become $12,000 by the time he turns 18 in order to pay for college.What is the required continuously compounded annual interest rate? (4.16)
120. What is the future value of a series of 15 quarterly payments of $400 each if the interest rate is 12% per annum compounded continuously? (4.16)
119. A student takes out a loan to pay for her 4- year degree. She borrows $20,000 from her bank and is to repay the loan in equal monthly installments over 10 years, beginning with the first month after the 4- year degree is completed. The bank charges her an interest rate of 9% per annum
118. Alice deposited $200 into her employee pension fund every month for 10 years until retirement. The interest rate on this fund was 6% per year compounded continuously. What was the accumulated amount at the time when Alice retired from her job? (4.16)
117. Carlos buys a bond that will pay him $1,000 after 3 years. It accumulates interest at an annual interest rate of 7% with continuous compounding. What is the value of this bond today? (4.16)
116. Find the value of the unknown quantity Z in the following diagram, such that the equivalent cash outflow equals the equivalent cash inflows when r = 20%compounded continuously: (4.16)Z Z0 1A $500/year Years 2 3 4 5 6 7 8 9
115. If a nominal interest rate of 8% is compounded continuously, determine the unknown quantity in each of the following situations: (4.16)a. What uniform EOY amount for 10 years is equivalent to $8,000 at EOY 10?b. What is the present equivalent value of $1,000 per year for 12 years?c. What is
114. You owe your credit card company $2,500. It charges you an APR of 36%. (4.15, 4.16)a. If you repay this amount over 2 years with monthly compounding, how high will your monthly payment be?b. If you repay this amount over 2 years with continuous compounding, how high will your monthly repayment
113. If you face an effective annual interest rate of 10%, what must the nominal interest be? Assume that interest is continually compounded. (4.16)
112. The PHC is offering a prize of $5,000 per week for four years. If the interest rate is 5.2%, compounded weekly, what is the present equivalent value of the prize?What is the future equivalent value at the end of four years? (4.15)
111. Suppose you owe $1,100 on your credit card.The annual percentage rate (APR) is 18%, compounded monthly. The credit card company says your minimum monthly payment is $19.80. (4.15)a. If you make only this minimum payment, how long will it take for you to repay the $1,100 balance(assuming no
110. The government has introduced a scheme to help you to buy a house. Earlier, you could buy a $250,000 home through a 25% deposit paid at one go, followed by a mortgage loan for the remainder of the value, repaid over 100 monthly payments at 12% per annum. Now you can get a mortgage on a
109. You can invest $1,000 in bonds that accrue interest at the annual rate of 12% compounded monthly, but the principal and interest are only returned after 5 years.Alternatively, you could invest $1,000 in bonds that accrue interest at the annual rate of 9% compounded monthly, but the principal
108. Several banks offer inflation-linked savings accounts, which pay interest on deposits equal to the sum of a fixed interest rate and an inflation-linked rate. (4.15)a. If the savings account pays a fixed nominal interest rate of 3% and inflation is 3%, what is the total interest rate on the
107. You borrow $5,000 from your bank, which you must repay in the next 48 months through monthly installments at an APR of 6%. Alternatively, you can repay the loan in 60 months, but the APR is now 9%. (4.14, 4.15)a. What is your monthly payment if you repay the loan in 48 months?b. What is your
106. A store offers you an unbelievably good deal on a premium washing machine, advertised as being worth $1,200. You can buy the machine in 6 monthly installments of $200 at a 0% rate of interest! However, it seems that this deal is a little too good to be true. A friend warns you that you are
105. When buying a home theatre system from your local electronics store, you are offered one of two choices:pay $1,400 for the system outright, or pay $200 as an initial deposit and take a loan to pay off the rest over the next year. The remainder of the amount may be paid off in monthly
104. You set up a trust fund for your 8- year-old child, which is to pay out $10,000 when she turns 18. You make quarterly payments into this account for the next 10 years, which accumulate interest at a nominal rate of 16% per year, compounded quarterly. Calculate the size of each quarterly
103. You repay a student loan of $20,000 in equal monthly installments over 5 years at a nominal interest rate of 24%, compounded on a monthly basis. The interest rate remains constant over this entire period of time.What is the monthly repayment amount? (4.15)
102. Compute the frequency of compounding in each of the following situations. (4.14)a. 20% APR, 21.9% effective annual interest.b. 20% APR, 22.1% effective annual interest.
101. New financial regulations have forced banks to reveal the effective annual interest rate they charge on credit card balances. This was introduced because customers facing 35% annual interest rates with weekly compounding, gravely underestimated the high effective interest rates that they were
100. Your new credit card has a low nominal interest rate of 4%, but it is compounded daily. What is the effective annual rate? (4.14)
99.a. If you are told that your effective annual interest rate is 10%, what is the nominal interest rate compounded quarterly?b. What is the effective annual interest rate if the nominal interest rate is 7%, and the frequency of compounding is once a month?c. How much time would it take for your
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