Islamic University of Gaza

Faculty of Engineering
Industrial Engineering Department
EIND4303: Engineering Economy
Instructor: Mohammad Abuhaiba, Ph.D., P.E.
Teacher Assistants: Eng. Said Matar and Duaa' AbuDagga
Solution of Quiz (Problem 4.18):
It is estimated that a copper mine will produce 10,000 tons of ore
during the coming year. The production is expected to increase by
5% per year thereafter in each of the next six years. Profit per ton
will be $14 for years one through seven.
1. Draw a cash flow diagram for this copper mine operation from
the companys viewpoint.
2. If the company can earn 15% per year on its capital, what is
the future equivalent of the copper mines cash flows at the
end of year seven?
i=15%, f=5%, A=$14/ton * 10,000 ton= $140,000

A7 =A1 (1+.05)7 - 1

A3 =A1 (1+.05)2
A2=A1 (1+.05)
A1=140,000

A1 [1 - (P/F, i%, N) (F/P, f%, N)]

P=

i-f
140,000[1 - (P/F, 15%, 7) (F/P, 5%,7)]
=
.15-.05
140,000[1 - (.3759) (1.4071)]
=
.15-.05
F= P (F/P, 15%, 7)
= 659499.55*2.66= $1,754,268.81

= $659499.55

Problem 4.67:
You are the manager of a large crude oil refinery. As part of the
refining process, a certain heat exchanger must be replaced every
year. The replacement and downtime cost in the first year is
$175000. This cost is expected to increase due to inflation at a rate
of 8% per year for five years, at which time this particular heat
exchanger will no longer be needed. If the companys cost of capital
is 15% per year, how much could you afford to spend for a higher
quality heat exchanger so that these annual replacement and
downtime costs could be eliminated?
i=15% , f=5% , A= $175000
P=
=
=

A [1 - (P/F, i%, N) (F/P, f%, N)]

i-f
175000 [1 - (P/F, 15%,5) (F/P,8%,5)]
.15-.08
175000 [1 (.4323 ) (1.5869)]
.07

= $673660

You can afford to spend $673660 or less for a higher quality heat exchanger.

Home work solution Problem 4.33:

1 2 3 4 5

15

30

50
A=1000
A=10,000

A=10,000

P = -$1,000 (P/A, 10%, 5) - $10,000 (P/F, 10%, 15) - $10,000 (P/F, 10%, 30)
= -$1,000 (3.7908) - $10,000 (0.2394) - $10,000 (0.0573)
= -$6,757.80

A = -$6,757.80 (A/P, 10%, 50) = -$6,757.80 (0.1009) = -$681.86

Problem 4.81:

r = 12%; M = 12, i= (1+r/M) 12 -1= 0.1268 or 12.68%

P0 = $10,000(P/A, 12.68%, 6) (P/F, 12.68%, 11)
= $10,000 (4.034) (0.2689) = $10,847.43
(1 i ) N 1
(1 .1268) 6 1
=
=4.034
i (1 i ) N
.1268(1 .1268) 6
1 N
1
] =[
]11 =.2689
(P/F, 12.68%, 11) = [
1 .1268
1 i

(P/A, 12.68%, 6) =