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as they work on projects of all sizes. In other words, engineering economy

is at the heart of making decisions. These decisions involve the fundamental

elements of cash flows of money, time, and interest rates. This chapter introduc

es

the basic concepts and terminology necessary for an engineer to combine these

three essential elements in organized, mathematically correct ways to solve prob

lems

that will lead to better decisions

24 Chapter 1 Foundations of Engineering Economy

1.14 In order to build a new warehouse facility, the regional

distributor for Valco Multi-Position Valves

borrowed $1.6 million at 10% per year interest. If

the company repaid the loan in a lump sum

amount after 2 years, what was (a) the amount of

the payment, and (b) the amount of interest?

1.15 A sum of $2 million now is equivalent to $2.42

million 1 year from now at what interest rate?

1.16 In order to restructure some of its debt, General

Motors decided to pay off one of its short-term

loans. If the company borrowed the money 1 year

ago at an interest rate of 8% per year and the total

cost of repaying the loan was $82 million, what

was the amount of the original loan?

1.17 A start-up company with multiple nano technology

products established a goal of making a rate

of return of at least 30% per year on its investments

for the first 5 years. If the company acquired

$200 million in venture capital, how much

did it have to earn in the first year?

1.18 How many years would it take for an investment

of $280,000 to accumulate to at least $425,000 at

15% per year interest?

1.19 Valley Rendering, Inc. is considering purchasing a

new flotation system for recovering more grease.

The company can finance a $150,000 system at

5% per year compound interest or 5.5% per year

simple interest. If the total amount owed is due in

a single payment at the end of 3 years, (a) which

interest rate should the company select, and

(b) how much is the difference in interest between

the two schemes?

1.20 Valtro Electronic Systems, Inc. set aside a lump

sum of money 4 years ago in order to finance a

plant expansion now. If the money was invested in

a 10% per year simple interest certificate of deposit,

how much did the company set aside if the

certificate is now worth $850,000?

Simple and Compound Interest

1.21 Two years ago, ASARCO, Inc. invested $580,000

in a certificate of deposit that paid simple interest

of 9% per year. Now the company plans to invest

the total amount accrued in another certificate

that pays 9% per year compound interest. How

much will the new certificate be worth 2 years

from now?

1.22 A company that manufactures general-purpose

transducers invested $2 million 4 years ago in

high-yield junk bonds. If the bonds are now worth

company make on the basis of (a) simple interest

and (b) compound interest?

1.23 How many years would it take for money to triple

in value at 20% per year simple interest?

1.24 If Farah Manufacturing wants its investments to

double in value in 4 years, what rate of return

would it have to make on the basis of (a) simple

interest and (b) compound interest?

1.25 Companies frequently borrow money under an

arrangement that requires them to make periodic

payments of interest only and then pay the principal

all at once. If Cisco International borrowed

$500,000 (identified as loan A) at 10% per year

simple interest and another $500,000 (identified as

loan B) at 10% per year compound interest and

paid only the interest at the end of each year for

3 years on both loans, (a) on which loan did the

company pay more interest, and (b) what was the

difference in interest paid between the two loans?

Symbols and Terminology

1.26 All engineering economy problems will involve

which two of the following symbols: P, F, A, i, n?

1.27 Identify the symbols involved if a pharmaceutical

company wants to have a liability fund worth $200

million 5 years from now. Assume the company

will invest an equal amount of money each year

beginning 1 year from now and that the investments

will earn 20% per year.

1.28 Identify the following as cash inflows or outflows

to Anderson and Dyess Design-Build Engineers:

office supplies, GPS surveying equipment, auctioning

of used earth-moving equipment, staff

salaries, fees for services rendered, interest from

bank deposits.

1.29 Vision Technologies, Inc. is a small company that

uses ultra-wideband technology to develop devices

that can detect objects (including people)

inside buildings, behind walls, or below ground.

The company expects to spend $100,000 per year

for labor and $125,000 per year for supplies before

a product can be marketed. If the company

wants to know the total equivalent future amount

of the companys expenses at the end of 3 years at

15% per year interest, identify the engineering

economy symbols involved and the values for the

ones that are given.

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