Questions and Answers of Engineering Economy

When the risk-free return is 3.5%, what is the cost of equity capital for a company whose stock has a historical beta factor of 0.92 and the security market indicates that the premium above the
What dividend growth rate would be required to produce a cost of equity capital of 8% when the common stock price is $140 per share and the dividend is $4.76 per share?
BBK Industries plans to sell 2 million shares of its common stock for $80 per share, with an annual dividend of $1.90 per share. Determine the lower cost of equity capital under the following
Harris International currently pays a dividend of $3.24 per share on its preferred stock that sells for $54 per share. In order to raise capital to purchase a smaller competitor, the company plans to
Which form of financing has the lower after-tax cost, debt or equity? Why?
An international pharmaceutical company is initiating a new project that requires $2.5 million in debt capital. The current plan is to sell 20 year bonds that pay 4.2% per year, payable quarterly, at
Engineers at a semiconductor company developed an improved front end-of-line (FEOL) formulation process that requires an investment of $6 million. The company plans to issue $6 million worth of
To understand the advantage of debt capital from a tax perspective in the United States, determine the beforetax and approximated after-tax weighted average costs of capital if a project is funded
Determine the WACC for Delta Corporation, which manufactures miniature triaxial accelerometers for space-restricted applications. The financing profile, with interest rates, is as follows: $3 million
Alpha Engineering invested $30 million using a D-E mix of 65%–35% for the development, marketing, and delivery of a web-based training program for project management. Determine the return on the
A public corporation in which you own common stock reported a WACC of 10.7% for the year in its annual report to stockholders. The common stock that you own has averaged a total return of 6% per
Seven different financing plans with their D-E mixes and costs of debt and equity capital for a new innovations project are summarized below. Use the data to determine what mix of debt and equity
Tiffany Baking Co. wants to arrange for $37.5 million in capital for manufacturing a new baked potato chip product line. The current financing plan is 60% equity and 40% debt capital. Calculate the
Nano-Technologies bought out RT-Micro using financing as follows: $16 million from mortgages, $4 million from retained earnings, $12 million from cash on hand, and $30 million from bonds. Determine
Nucor Corp. manufactures generator coolers for nuclear and gas turbine power plants. The company completed a plant expansion through financing that had a debt/equity mix of 40%–60%. If $15 million
A new cross-country, trans-mountain water pipeline needs to be built at an estimated first cost of $200,000,000. The consortium of cooperating companies has not fully decided the financial
Five independent projects were ranked in decreasing order by two measures€”rate of return (ROR) and present worth (PW)€”to determine which should be funded with the total initial
State whether each of the following involves debt financing or equity financing:(a) A bond issue for $3,500,000 by a city-owned utility(b) An initial public offering (IPO) of $35,000,000 in common
The owner of a small pipeline construction company wants to determine how much he should bid in his attempt to win his first “big” contract. He estimates that his cost to complete the project
Lodi Enterprises uses an after-tax MARR of 15% per year. If the company’s effective tax rate (federal, state, and local taxes) is 38%, determine the company’s before-tax MARR.
An alternative has the following cash flows: benefits = $50,000 per year; disbenefits = $27,000 per year; costs = $25,000 per year. The B/C ratio is closest to:(a) 0.92(b) 0.96(c) 1.04(d) 2.00
After 15 years of employment in the airline industry, John started his own consulting company to use physical and computer simulation in the analysis of commercial airport accidents on runways. He
For each of the following factors, state if it will raise or lower the MARR:(a) Higher risk(b) Company wants to expand into a competitor’s area(c) Higher corporate taxes(d) Limited availability of
State how the opportunity cost sets the MARR when, because of limited capital, only one alternative can be selected from two or more.
Identify the two primary sources of capital and state what is meant by each.
Of the following words, the one not related to ethics is:(a) Virtuous(b) Honest(c) Lucrative(d) Proper
The statements contained in a code of ethics are variously known as all of the following, except:(a) Canons(b) Norms(c) Standards(d) Laws
Cost-effectiveness analysis (CEA) differs from benefit/cost analysis (B/C) in that:(a) CEA cannot handle multiple alternatives(b) CEA compares alternatives on the basis of a specific outcome rather
The estimated first cost of a permanent national monument is $2 million with annual benefits and disbenefits estimated at $360,000 and $42,000, respectively. The B/C ratio at 6% per year is closest
For the two independent projects shown, determine which, if any, should be funded at i = 10% per year using the B/C ratio method:(a) Fund neither(b) Fund X(c) Fund Y(d) Fund both X and Y Alternative
A permanent flood-control dam is expected to have an initial cost of $2.8 million and an annual M&O cost of $20,000. In addition, minor reconstruction will be required every 5 years at a cost of
The first cost of grading and spreading gravel on a short rural road is expected to be $700,000. The road will have to be maintained at a cost of $25,000 per year. Even though the new road is not
From the PW, AW, and FW values shown, the conventional B/C ratio is closest to:(a) 1.27(b) 1.33(c) 1.54(d) 2.76 AW, $/Year 16,275 11,197 40,000 PW, $ FW, $ 259,370 178,441 637,496 First cost M&O cost
All of the following are examples of unethical behavior, except:(a) Deception(b) Withholding information(c) Lying(d) Offering engineering services at a lower cost than a competitor
In evaluating three mutually exclusive alternatives by the B/C method, the alternatives were ranked A, B, and C, respectively, in terms of increasing cost, and the following results were obtained for
All of the following cash flows can be identified as benefits, except:(a) Longer tire life because of smooth pavement(b) $200,000 annual income to local businesses because of tourism created by water
All of the following are primarily associated with public sector projects, except:(a) Low interest rates(b) Stocks(c) Benefits(d) Infinite life
When a B/C analysis is conducted, the benefits and costs:(a) Must be expressed in terms of their present worth values(b) Must be expressed in terms of their annual worth values(c) Must be expressed
When comparing different-life alternatives by the B/C method, the alternatives should be compared over:(a) The life of the shorter-lived alternative(b) The life of the longer-lived alternative(c) The
Consider the four independent projects outlined below. At 5% per year and a 15-year study period,(a) Determine which projects are acceptable,(b) The value of the annual M&O cost
Use the estimates from Problem 9.39 (repeated below) to answer the questions asked concerning the extraction of rare metals in a National Wildlife Preserve. Utilize the B/C method, a 5-year study
There are two potential locations to construct an urgent care walk-in clinic to serve rural residents. The DN alternative is an option since the clinic is not a requirement; it would be a convenience
For the FOUNDATION Fieldbus H1 installation analyzed in Problem 9.27, do the following: (Data is repeated below.)(a) Find the PI for the first 6 years of operation.(b) Find the required
In most developed countries, laws that prohibit texting-while-driving (TWD) have been enacted. Hambara and Associates, a systems engineering consulting company, has won the contract to assist the
An engineering student has only 45 minutes before the final exam in her Engineering Economy class. She needs help in understanding cost effectiveness analysis because she knows from the
There are a number of techniques to help people stop smoking, but their cost and effectiveness vary widely. One accepted measure of effectiveness of a program is €œpercentage of enrollees
Various techniques have been proposed to curb cross-border drug smuggling into a country. The costs of implementing each strategy along a particularly rugged section of the border are indicated
Several alternatives are under consideration to enhance security at a county jail. Since the alternatives serve different areas of the facility, all that are economically attractive will be
In order to safeguard the public health, environment, public beaches, water quality, and economy of south San Diego County, California, and Tijuana, Mexico, federal agencies in the United States and
You have been requested to compare four mutually exclusive alternatives using the B/C method and the results shown. Which alternative, if any, do you recommend? AB/C Ratlo When Compared Equivalent
From the information shown for possible location of campgrounds and lodging at a national park, determine which project, if any, should be selected from the six mutually exclusive projects. Selected
The city of Valley View, California, is considering various proposals regarding the disposal of used tires. All proposals involve shredding, but the benefits differ in each plan. An incremental B/C
Four mutually exclusive, direct benefit alternatives are compared using the B/C method. Which alternative, if any, should be selected? AB/C Ratio When Compared with Initial Alternative Investment,
The Department of Defense is considering three sites in the National Wildlife Preserve for extraction of rare metals. The cash flows associated with each site are summarized. The extraction period is
Three alternatives identified as X, Y, and Z were evaluated by the B/C method. The analyst calculated project B/C values of 0.92, 1.34, and 1.29. The alternatives are listed in the order of
A public-private partnership has been formed between a city, county, and construction/management company to attract a professional athletic team to the area. Assume you are the engineer with the
A public utility in a medium-size city is considering two cash rebate programs to achieve water conservation. Program 1, which is expected to cost an average of $60 per household, provides a rebate
Solar and conventional power alternatives are available to provide energy for monitoring equipment at a remote irrigation canal site. The estimates associated with each alternative have been
Locations under consideration for a border patrol station have their costs estimated by the federal government. Use the B/C ratio method at an interest rate of 6% per year to determine which location
There are two potential locations to construct an urgent care walk-in clinic to serve rural residents. Use B/C analysis to determine which location, if any, is better at an interest rate of 8% per
A state agency is considering two mutually exclusive alternatives for upgrading the skills of its technical staff. Alternative 1 involves purchasing software that will reduce the time required to
Two relatively inexpensive alternatives are available for reducing potential earthquake damage at a top secret government research site. The cash flow estimates for each alternative are given below.
The city engineer and economic development directors are evaluating two sites for construction of a multipurpose sports arena. The sites are downtown (DT) and southwest (SW) of the metropolitan area.
One of two alternatives will be selected to reduce flood damage in a rural community in central Arizona. The estimates associated with each alternative are available. Use B/C analysis at a discount
Two alternatives, identified as X and Y, are evaluated using the B/C method. Alternative Y has a higher total cost than X. If the B/C ratios are 1.2 and 1.0 for alternatives X and Y, respectively,
Dickinson, a large oil and gas drilling and operating corporation, has invested over the past 6 years in the installation and operation of a FOUNDATION Fieldbus H1 (FF H1) system developed by
When red light cameras are installed at high-risk intersections, rear-end collisions go up, but all other types of accidents go down, including those involving pedestrians. Analysis of traffic
In United States airspace, the average number of commercial aircraft in the sky on an average morning is 4000. There are another 16,000 planes on the ground. Aerospace company Rockwell-Collins
With an installed capacity in excess of 11,000 MW, the Belo Monte dam complex on the Xingu River in Brazil will be the world’s third largest hydroelectric dam. The project is expected to cost $16
From the following data for a PPP project, calculate the(a) Conventional, and(b) Modified benefit/ cost ratios using an interest rate of 6% per year and an infinite project period. To the People
Calculate the B/C ratio for the following cash flow estimates at a discount rate of 10% per year. Is the project justified?Item ...............................................EstimatePW of benefits,
The B/C ratio for a mosquito control program proposed by the Harris County Department of Health is reported to be 2.1. The person who prepared the report stated that the annual health benefits were
A consultant, after 3 months of work, reported that the modified B/C ratio for a city-owned hospital heliport project is 1.7. If the initial cost is $1 million and the annual benefits are $150,000,
The following estimates (in $1000 units) have been developed for a security system upgrade at Chicago’s O’Hare Airport.(a) Calculate the conventional B/C ratio at a discount rate of 10% per
An Army Corps of Engineers project for improving navigation on the Ohio River will have an initial cost of $6,500,000 and annual maintenance of $130,000. Benefits for barges and paddle wheel touring
A rural, agriculture-based city that has 17,000 households is required to install treatment systems for the removal of arsenic and other harmful chemicals from its drinking water. The annual cost is
The State Highway Department is considering a bypass loop that is expected to save motorists $820,000 per year in gasoline and other automobilerelated expenses. However, local businesses will
The State Legislative Budget Board approved adding 4000 surveillance cameras along the 800-mile Texas-Mexico border from El Paso to Brownsville at a cost of $300 per camera. In addition to the cost
The B/C ratio for a flood control project along the Swanee River was calculated to be 1.3. If the benefits were $500,000 per year and the maintenance costs were $200,000 per year, determine the
As part of the rehabilitation of the downtown area of a southern U.S. city, the Parks and Recreation Department expects to develop the space below several overpasses into basketball, handball,
The National Environmental Protection Agency has established that 2.5% of the median household income is a reasonable amount to pay for safe drinking water. For a median household income of $45,000
Officials from the City of Galveston and State of Texas gathered to celebrate the start of a beach restoration project that involves dumping sand and adding antierosion structures. The first cost of
The estimated annual cash flows for a proposed municipal government project are costs of $750,000 per year, benefits of $900,000 per year, and disbenefits of $225,000 per year. Calculate the
Where is the salvage value placed in a conventional B/C ratio? Why? How is it handled mathematically?
List two advantages of a public-private partnership (PPP).
Identify the following as primarily private or public sector characteristics:(a) Large investment(b) No profits(c) Funding from fees(d) MARR-based selection criteria(e) Low interest rate(f) Short
Identify the viewpoint (e.g., budget, government unit, citizen, business owner), and categorize the following cash flows as a benefit, disbenefit, or cost:(a) $600,000 annual income to area
Explain how the viewpoint established before a public sector analysis is started can turn an estimate from being categorized as a disbenefit to a cost, or vice versa.
Identify the following funding sources as primarily public or private.(a) Municipal bonds(b) Retained earnings(c) Sales taxes(d) Automobile license fees(e) Bank loans(f) Savings accounts(g) An
Identify the following projects as primarily public or private sector.(a) Bridge across Ohio River(b) Coal mine expansion(c) Baja 1000 race team(d) Consulting engineering firm(e) New county
In conducting a B/C analysis,(a) Why is it usually necessary to take a specific viewpoint in categorizing cost, benefit, dis-benefit estimates;(b) What are two specific viewpoints that you can
Five mutually exclusive cost alternatives that have infinite lives are under consideration for decreasing the fruit-bruising rates of a thin skin-fruit grading and packing operation (peaches, pears,
Based on the alternative ROR values (i*), the incremental ROR values (Î”i*), and the company€™s MARR of 16% per year, the alternative to select is:(a) A(b) B(c) C(d) DNJewel-Osco
If the alternatives are mutually exclusive and the MARR is 25% per year, the alternative to select is:(a) B(b) D(c) E(d) None of themQuestion is based on the following five alternatives that are
If the alternatives are mutually exclusive and the MARR is 15% per year, the alternative to select is:(a) Either B, D, or E(b) Only B(c) Only D(d) Only EQuestion is based on the following five
If the alternatives are independent and the MARR is 15% per year, the one(s) to select is (are):(a) Only D(b) Only D and E(c) Only B, D, and E(d) Only EQuestion is based on the following five
The incremental cash flow between two alternatives is shown below. The equation that can be used to correctly solve for the incremental rate of return is:(a) 0 = −20,000 + 3000(A∕P,Δi*,10) +
When comparing two mutually exclusive alternatives by the ROR method, if the rate of return on the alternative with the higher first cost is less than that of the lower first-cost alternative:(a) The
A chemical engineer working for a large chemical products company was asked to make a recommendation about which of three mutually exclusive revenue alternatives should be selected for improving the
When conducting an ROR analysis of mutually exclusive cost alternatives:(a) All of the projects must be compared against the do-nothing alternative(b) More than one project may be selected(c) An

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