Qatar University

College of Engineering
GENG 360: Engineering Economy

Fall 2009

Assignment 2_SOLUTION

Due Date: October 28, 2009 (WED.) at 2:00 PM Submission to Eng. Saads Mailbox

1. Atlantic Metals and Plastic uses austenitic nickel-chromium alloys to

manufacture resistance heating wire. The company is considering a new
annealing-drawing process to reduce costs. If the new process will cost $1.8
million now, how much must be saved each year to recover the investment in
6 years at an interest rate of 12% per year? (2.16)

A = 1.8(A/P,12%,6)
= 1.8(0.24323)
= $437,814

2. Omega Instruments has budgeted $300,000 per year to pay for certain ceramic
parts over the next 5 years. If the company expects the cost of the parts to
increase uniformly according to an arithmetic gradient of $10,000 per year,
what is it expecting the cost to be in year 1, if the interest rate is 10% per year?
(2.30)

300,000 = A1 + 10,000(A/G,10%,5)
300,000 = A1 + 10,000(1.8101)
A1 = $281,899

3. The future worth in year 10 of a geometric gradient series of cash flows was
found to be $80,000. If the interest rate was 15% per year and the annual rate
of increase was 9% per year, what was the cash flow amount in year 1? (2.44)

First convert future worth to P, then use Pg equation to find A1.

P = 80,000(P/F,15%,10)
= 80,000(0.2472)
= $19,776

19,776 = A1{1 [(1+0.09)10/(1+0.15)10}]}/(0.15 0.09)

19,776 = A1{6.9137}
A1 = $2860
4. San Antonio is considering various options for providing water in its 50-year
plan, including desalting. One brackish aquifer is expected to yield desalted
water that will generate revenue of $4.1 million per year for the first 4 years,
after which less production will decrease revenue each year by $50,000 per
year. If the aquifer will be totally depleted in 25 years, what is the present
worth of the desalting option at an interest rate of 6% per year? (3.34)

P = [4,100,000(P/A,6%,22) 50,000(P/G,6%,22)](P/F,6%,3)
+ 4,100,000(P/A,6%,3)
= [4,100,000(12.0416) 50,000(98.9412](0.8396)
+ 4,100,000(2.6730)
= $48,257,271