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Chapter 1
Foundations of Engineering Economy
1.1 If the alternative that is actually the best one is not even recognized as an
alternative, it obviously will not be able to be selected by using any economic
analysis tools.
1.4 The analysis techniques that are used in engineering economic analysis are only
as good as the accuracy of the cash flow estimates.
1.7 In engineering economy, the evaluation criterion is financial units (dollars, pesos,
etc).
1.10 Time value of money means that there is a certain worth in having money and that
worth changes as a function of time.
1.13 The term that describes compensation for “renting” of money is time value of
money, which manifests itself as interest.
1.16 Minimum attractive rate of return is the lowest rate of return (interest rate) on a
project that companies or individuals consider to be high enough to induce them
to invest their money.
1.31 The engineer is wrong, unless the MARR is exactly equal to the cost of capital.
Usually, the inequality ROR ≥ MARR > cost of capital is used, and the MARR is
established higher than the cost of capital so that profit, risk and other factors are
considered.
1
1.34 F = P + Pni
100,000 = 1000 + 1000(n)(0.1)
99,000 = 1000(n)(0.10)
n = 990 years
1.40 F = P + P(n)(i)
3P = P + P(n)(0.20)
n = 10 years
1.55 The difference between cash inflows and cash outflows is known as net cash
flow.
1.58 Assuming down is negative: down arrow of $40,000 in year 5; up arrow in year 0
identified as P =?; i = 15% per year.
1.64 For built-in spreadsheet functions, a parameter that does not apply can be left
blank when it is not an interior one. For example, if no F is involved when using
the PMT function, it can be left blank because it is an end parameter. When the
parameter involved is an interior one (like P in the PMT function), a comma must
be put in its position.
1.67 (a) Assuming that Carol’s supervisor is a trustworthy and ethical person himself,
going to her supervisor and informing him of her suspicion is probably the
best of these options. This puts Carol on record (verbally) as questioning
something she heard at an informal gathering.
(b) Another good option is to go to Joe one-on-one and inform him of her
concern about what she heard him say at lunch. Joe may not be aware he is on
the bid evaluation team and the potential ethical consequences if he accepts
the free tickets from Dryer.
2
1.73 F = P(1+i)n
16,000 = 8000(1 + i)9
21/9 = 1 + i
1.08 = 1 + i
i = 0.08 (8%)
Answer is (b)
1.76 2P = P + P(n)(0.05)
1 = 0.05n
n = 20
Answer is (d)
3
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 2
Factors: How Time and Interest Affect Money
2.1 (a) (F/P,10%,20) = 6.7275
(b) (A/F,4%,8) = 0.10853
(c) (P/A,8%,20) = 9.8181
(d) (A/P,20%,28) = 0.20122
(e) (F/A,30%,15) = 167.2863
2.10 A = 12,700,000(A/P,20%,8)
= 12,700,000(0.26061)
= $3,309,747
2.13 A = 20,000,000(A/P,10%,6)
= 20,000,000(0.22961)
= $4,592,200
1
A = $4,470,884.66
2.19 (a) A = 225,000(A/P,15%,4)
= 225,000(0.35027)
= $78,811
2.22 P = (280,000-90,000)(P/A,10%,5)
= 190,000(3.7908)
= $720,252
2.25 P = 2,100,000(P/F,10%,2)
= 2,100,000(0.8264)
= $1,735,440
2.28 P = 95,000,000(P/F,12%,3)
= 95,000,000(0.7118)
= $67,621,000
2.34 A = 10,000,000(A/P,10%,10)
= 10,000,000(0.16275)
= $1,627,500
2.37 A = 3,250,000(A/P,15%,6)
= 3,250,000(0.26424)
= $858,780
2.40 A = 5000(7)(A/P,10%,10)
= 35,000(0.16275)
= $5696.25
2
(b) F in year 5 for 2 known amounts
= -FV(9%,3,0,100000) - FV(9%,2,0,75000)
Answer is $65,495.05
2.46 F = P(F/P,10%,n)
3P = P(F/P,10%,n)
(F/P,10%,n) = 3.000
(b) Spreadsheet: enter each annual cost in adjacent cells and use the NPV
function to display P = $112,284
Calculators have no function for gradients; use the PV function on each cash
flow and add the five P values to get $112,284.55
F = 118,101(F/A,10%,5)
= 118,101(6.1051)
= $721,018
3
2.64 P = (23,000) 1 – (1.02/1.10)5
(0.10 – 0.02)
= $90,405
A = 790,491,225,000(A/P,8%,5)
= 790,491,225,000(0.25046)
= $197.986 billion (spreadsheet answer is $197,983,629,604)
A = 240,215(A/P,8%,5)
= 240,215(0.25046)
= $60,164
2.73 Solve for A1 in geometric gradient equation and then find cost in year 3
2.76 Since 4th deposit is known to be $1250, increase it by 5% each year to year one
A1 = 1250/(0.95)3
= $1457.94
2.79 F = 200,000(F/A,10%,6)
= 200,000(7.7156)
= $1,543,120
4
2.85 Find the future worth Fpaid of 3 payments in year 4
Fpaid = 2,000,000(F/A,8%,3)(F/P,8%,1)
= 2,000,000(3.2464)(1.08)
= $7,012,224
F7 = 1205.52(F/P,10%,7)
= 1205.52(1.9487)
= $2349.20
(b) A = 143,278(A/P,8%,8)
= 143,278(0.17401)
= $24,932
Spreadsheet:
5
2.94 In $ billion units,
F = 4.0658(F/A,14%,2)(F/P,14%,2) + 4.3462(F/A,14%,2)
= 4.0658(2.1400)(1.2996) + 4.3462(2.1400)
= $20.6084 billion
F8 = 15,000(F/A,8%,7) + 10,000(F/A,8%,4)
= 15,000(8.9228) + 10,000(4.5061)
= $178,903
A = 178,903(A/F,8%,8)
= 178,903(0.09401)
= $16,819
2.100 Find P in year -1for geometric gradient, than move to year 0 to find P
P-1 = (30,000) 1 – (1.05/1.10)8
(0.10 – 0.05)
= $186,454
F = P0 = 186,454(F/P,10%,1)
= 186,454(1.10)
= $205,099
2.103 Find P in year –6 using arithmetic gradient factor and then find F today
F = 50,044.20(F/P,12%,6)
= 122,439(1.9738)
= $98,777
2.106 (a) Add and subtract $2400 and $2600 in periods 3 and 4, respectively, to use
gradient
6
30,000 = 2000 + 200(3.0045) – 2400(0.7513)( 0.18744)
-2600(0.6830)( 0.18744) + x(0.7513)(0.18744)
+ 2x(0.6830)( 0.18744)
2.109 (a) Find P in year 4 for the geometric gradient, (b) Spreadsheet
then move all cash flows to future
F = 500,000(F/A,12%,4)(F/P,12%,16) + P4(F/P,12%,16)
= 500,000(4.7793)(6.1304) + 8,773,844(6.1304)
= $68,436,684
2.115 A = 10,000,000((A/P,15%,7)
= $2,403,600
Answer is (a)
2.118 F = 50,000(F/P,18%,7)
= 50,000(3.1855)
= $159,275
Answer is (b)
7
10,000 = 2x(0.8264) + x(0.6830)
2.3358x = 10,000
x = $4281
Answer is (a)
Deposit year = 20 - 8 = 12
Answer is (d)
8
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 3
Nominal and Effective Interest Rates
3.1 (a) Nom i/semi = 0.02*2 = 4% (b) Nom i/year = 0.02*4 = 8%
(c) Nom i/2 years = 0.02*8 = 16%
3.4 (a) year; (b) quarter; (c) day; (d) continuous (period length is zero); (e) hour
3.22 F = 242,000(F/P,1.5%,48)
= 242,000(2.0435)
= $494,527
1
3.31 P = 51(100,000)(0.25)(P/A,0.5%,60)
= (1,275,000)(51.7256)
= $65,950,140
A = 203,340(A/P,12%,5)
= 203,340(0.27741)
= $56,409
3.43 Find cost of treatments after one year, then monthly equivalent A over 5 years
A = 126,825(A/P,1%,60)
= 126,825(0.02224)
= $2821 per month
P = [140,000 + 140,000(0.20)](P/A,3.03%,12)
= 168,000(9.9362)
= $1,669,282
3.49 F = 9000(F/A,1%,24)
= 9000(26.9735)
= $242,762
2
3.52 (a) A = 48,000 – 2000(P/G,1.5%,7)(P/F,1.5%,5)(A/P,1.5%,12)
= 48,000 – 2000(19.4018)(0.9283)(0.09168)
= $44,698
(b)
F = 100,000(F/A,1.26%,24)
= 100,000{[1 + 0.0126)24 –1]/0.0126}
= 100,000(27.8213)
= $2,782,130
3
3.73 P = 30(P/A,0.5%,60)
= $1552
Answer is (b)
Answer is (a)
4
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 4
Present Worth Analysis
4.1 The do-nothing alternative is not an option (1) when it is absolutely required that
one of the defined alternatives be selected (such as for legal purposes), and (2)
when each alternative has only cost cash flow estimates.
(b) X is in all bundles as the mutually exclusive selection. The two independent
projects have 22 = 4 bundles. The 4 viable options are:
X only XD XE XDE
4.13 Interest rate of 12% per year compounded monthly is 1% per month.
PW = -950 + 70(P/A,1%,36)
= -950 + 70(30.1075)
= $+1157.53
Since PW > 0, the service is financially justified
1
PWB = -140,000 – 8,000(P/A,12%,3) + 40,000(P/F,12%,3)
= -140,000 – 8,000(2.4018) + 40,000(0.7118)
= $-130,742
Select method A
4.19 (a) Monetary units are in $1000. Calculate PW values to select the pull system.
(b) By spreadsheet, enter the following into single cells to display the PW values.
PWpull : = - PV(10%,8,-700000,100000)-1500000
PWpush : = - PV(10%,8,-600000,50000)-2250000-PV(10%,3,,-500000)
4.22 (a) For Allison (A), use i = 1% per month and n = 60 months to calculate PW.
2
(b) A spreadsheet solution follows; select Joshua’s plan
No, the bond investment did not make the target rate since PW < 0.
3
Semiannual interest rate expected is 6%/2 = 3%.
No, the bond investment does not make the target rate since PW < 0.
4
PWFRC function: = - 235000 - PV(10%,4,-27000,20000)
For asphalt, repave after 10 years and re-start maintenance charge in year 12.
(b) Maintenance costs are incurred over 5 years only; there are none for concrete.
Now, select the asphalt option by a large margin.
PWC = $-375,000
5
+(F/P,12%,3)+1] +25,000
= -200,000(5.4736) - 500[3.8969 + 2.7731 + 1.9738 + 1.4049 + 1] + 25,000
= $-1,075,244
Select proposal B.
6
CC = AW/i; select alternative E. Monetary values are in $1000 units.
By spreadsheet, enter the following into single cells to display the CC values
Answer: Select alternative E.
4.67 CC = A/i
7
A = 10,000(A/F,10%,5)
= 10,000(0.16380)
= $-1638
CC = -1638/0.10
= $-16,380
Answer is (b)
8
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 5
Annual Worth Analysis
5.1 AW = -7,000,000(A/P,15%,3) - 860,000
= -7,000,000(0.43798) - 860,000
= $-3,925,860
5.4 In $ millions,
AW = -172,218,000(A/P,6%,3)
= -172,218,000(0.37411)
= $-64,428,476
(b) AW = CR + A of AOC
= -603,112 – 350,000 – 25,000(A/G,12%,12)
= -603,112 – 350,000 - 25,000(4.1897)
= $-1,057,855
1
5.13 (a) AWplastic = -0.90(110)(43,560)(A/P,8%,20)
= -4,312,440(0.10185)
= $-439,222
AWrubber = -2.20(110)(43,560)(A/P,8%,30)
= -10,541,520(0.08883)
= $-936,403
(a) Monetary terms in $ million. From AW, project clearly makes 10% per year.
AW = -170(A/P,10%,20) + 85(1-0.225)
= -170(0.11746) + 65.875
= $+45.90 ($+45.9 million)
2
5.19 (a) AW evaluation indicates chamber 490G to be more economic.
(c) By spreadsheet for part (b) use the PMT functions at different P values.
490G: = -PMT(10%,2,-250000,25000)-3000
Display: $-135,143
5.22 AW = PW(i)
5.25 (a) Determine amount needed at end of year 20, followed by A to accumulate
this future amount.
F = A(F/A,8%,20)
300,000 = A(45.7620)
A = $6556 per year
3
By spreadsheet, enter = -PMT(8%,20,,300000) to display $6556.
(b) P = 24,000(P/A,8%,30)
= 24,000(11.2578)
= $270,187
270,187 = A(F/A,8%,20)
= A(45.7620)
A = $5904 per year
AW = {[-150,000(P/A,10%,4) - 25,000(P/G,10%,4)](P/F,10%,2)
- [225,000(P/A,10%,4)(P/F,10%,6)]}(A/P,10%,10)
= {[-150,000(3.1699) – 25,000(4.3781)](0.8264)
-[225,000(3.1699)(0.5645)]}(0.16275)
= $-144,198
Spreadsheet
4
5.31 In $ million units. Effective annual i = (1.025)4 – 1 = 10.381%.
Select B
Answer is (d)
5
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 6
Rate of Return Analysis
6.1 (a) The highest possible is infinity
(b) The lowest possible is -100%
0 = -400,000(F/A,i*,10) + 270,000/i*
(b) Solve for i* by spreadsheet using the FV function and GOAL SEEK. For
example, place a guess i* in cell B1and set up the single-cell function
= -FV($B$1,10,-400000) + 270000/$B$1
Display is i* = 5.29% per year
1
6.13 0 = -3,000,000 + 1,500,000(P/A,i*,3)
(P/A,i*,3) = 2.0000
6.25 (a) The rate of return on the increment has to be larger than 18%
(b) The rate of return on the increment has to be smaller than 10%
(c) Two samples follow with approximate ROR values of 10% for X
and 18% for Y
2
6.31 This is an incremental ROR analysis to find ∆i*
Select P
Select robot Y
3
(b) MARR = 16%
D to DN: ∆i* = 15% < MARR eliminate D
A to DN: ∆i* = 13% < MARR eliminate A
B to DN: ∆i* = 23% > MARR eliminate DN
E to B: ∆i* = -16% < MARR eliminate E
C to B: ∆i* = 25% > MARR eliminate B
Select C
6.43 (a) Select A and C with project ROR > MARR = 15.5%
(c) Same as part (b) above, except last comparison against MARR = 14%
(b) Cumulative
Year Net Cash Flow, $ Cash Flow, $
0 -40,000 -40,000
1 32,000 -8000
2 18,000 +10,000
3 -2000 +8000
4 -1000 +7000
There is one sign change in the cumulative cash flow series; only one positive i*
value is indicated
4
(a) From net cash flows, there are two possible i* values
(b) From cumulative cash flow, sign starts negative and changes twice. Norstrom’s
criterion is not satisfied, there may be up to two i* values.
(b) Cumulative
Year Net CF, $ CF, $
0 -17,000 -17,000
1 -20,000 -37,000
2 4,000 -33,000
3 -11,000 -44,000
4 32,000 -12,000
5 47,000 +35,000
6.55 Tabulate net cash flow and cumulative cash flow values
Cumulative
Year Cash Flow, $ Cash Flow, $
0 0 0
1 -5000 -5,000
2 -5000 -10,000
3 -5000 -15,000
4 -5000 -20,000
5 -5000 -25,000
6 -5000 -30,000
7 +9000 -21,000
8 -5000 -26,000
9 -5000 -31,000
10 -5000 + 50,000 +14,000
(a) Cash flow rule of signs test (Descartes’ rule): three possible ROR values
Cumulative cash flow test (Norstrom’s criterion): one positive ROR value
5
(c) Hand solution: MIRR with ir = 20% and ib = 8%
Spreadsheet solution: Enter cash flows for years 0 through 10 into cells
B2 through B12, The function = MIRR(B1:B11,8%,20%) displays
i′ = 7.90%
(d) Hand solution: In applying the ROIC procedure, all F values are negative
except the last one. Therefore, i″ is used in all equations. The ROIC EROR
(i″) is the same as the internal ROR value (i*) of 6.29% per year.
Spreadsheet solution: Use Figure 6.7 as a model and apply GOAL SEEK to
obtain i″ = 6.29%
6
6.58 (a) Hand solution: ROIC procedure with ir = 14%
PW0(F/P,i′,4) + FW4 = 0
-8893(1 + i′)4 + 12,445 = 0
(1 + i′)4 = 1.3994
i′ = 8.76%
Spreadsheet solution:
7
6.61 Answer is (b)
Answer is (a)
8
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 7
Benefit/Cost Analysis and Public Sector Projects
7.1 It is best to take a limited viewpoint in determining benefits and disbenefits
Because, in the broadest sense, benefits and disbenefits will usually exactly off-
set each other.
7.4 Under a DBOMF contract, the contractor is responsible for managing the cash
flows for the project and the government unit remains responsible for obtaining
capital and operating funds for the project.
AW of B – D = 3800 – 6750(A/F,10%,20)
= 3800 – 6750(0.01746)
= $3682
B/C = 3682/1927
= 1.91
(b) Let P = minimum first cost
The first cost must > $27,941,000 to force B/C < 1.0
1
7.16 Let P = initial cost
D = 1100(85) = $93,500
C = 750,000(A/P,0.5%,36)
= 750,000(0.03042)
= $22,815
2
AWprimary = 2(A/P,6%,40) + 2.1
= 2(0.06646) + 2.1
= $2.23
Select site N
3
7.31 Rank by increasing AW of total costs; order is: DN, EC, NS
NS to EC:
∆B = 130,000 – 110,000 = $20,000
∆D = 18,000 – 26,000 = $-8000
∆C = 86,387 - 54,410 = $31,977
Select method EC
G to DN = 1.15 eliminate DN
J to G = 1.07 eliminate G
I to J = 1.07 eliminate J
L to I = ?
Answer is (a)
4
7.43 B/CX = (110,000 – 20,000)/(60,000 + 45,000)
= 0.86 reject X
Answer is (a)
Answer is (b)
Answer is (d)
5
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 8
Breakeven, Sensitivity, and Payback Analysis
8.1 (a) QBE = 1,000,000/(9.90 – 4.50)
= 185,185 units
(b) Profit = R – TC
= 9.90(150,000) – 1,000,000 – 4.50(150,000)
= $-190,000 (loss)
(c) Profit = R – TC
= 9.90(480,000) – 1,000,000 – 4.50(480,000)
= $1,592,000
8.7 (a) Plot shows maximum quantity at about 1350 units. Profit is about $20,000.
Qp = -b/2a = -29.8/2(-0.011)
= 1355 units
1
Max profit = -b2/4a + c = -29.82 / 4(-.011) - 8
= $20,175 per month
8.10 (a) Using the relation PW = 0, select different i values and solve for n. Details for
i = 8% and 15% are shown.
(b) Retention ranges from 8 to 20 years for varying i values. This is a perfect
example where the spreadsheet is easier. Use the NPER function.
2
8.16 Let x = square yards per year to break even
8.25 (a) Let T = number of tons. Solve relation AW1 = AW2 for T.
If tonnage is less than breakeven, select machine 2 since the slope is steeper.
At 1000 tons, select machine 1.
(b) Set up the VC relation for each machine and solve for T in AW1 = AW2 .
SOLVER can be used to find breakeven with the constraint AW1 = AW2.
3
8.28 (a) Solve relation Revenue - Cost = 0 for Q = number of filters per year
Since 5000 < 7248, outsourcing is the correct choice; slope of 30Q is larger
4
8.31 AWcont = -130,000(A/P,15%,5) -30,000 + 40,000(A/F,15%,5)
= -130,000(0.29832) -30,000 + 40,000(0.14832)
= $-62,849
Lowest cost for batch will occur when the interest rate is the lowest (5%)
and life is longest (10 years)
Since batch AW is more costly, the batch system will never be less expensive
than the continuous option.
The decision is sensitive; replace the existing process only if the estimate of
$18,000 is reliable.
5
8.37 (a) AW1 = -10,000(A/P,i%,8) - 600 - 100(A/F,i%,8) - 1750(P/F,i%,4)(A/P,i%,8)
AW2 = -17,000(A/P,i%,12) - 150 - 300(A/F,i%,12)
- 3000(P/F,i%,6)(A/P,i%,12)
(b) Spreadsheet solution requires that the PW value is first determined using the
NPV function over the LCM of 24 years and then converting it to an AW value
using the PMT function. Spreadsheet follows.
6
Percent Savings for A, Savings for B,
variation $ per year AWA $ per year AWB Selection
-40% 9,000 $-10,871 7,800 $-9,486 B
-20 12,000 -7,871 10,400 -6,886 B
0 15,000 -4,871 13,000 -4,286 B
20 18,000 -1,871 15,600 -1,686 B
40 21,000 1,129 18,200 914 A
Spreadsheet solution: PMT functions display AW values with savings variation
added to end of function.
8.43 (a) Set up the general AW relation for D103 and determine AW for the three
scenarios.
Strategy P S n AW
Pess -500,000 50,000 1 $-504,000
ML -400,000 40,000 3 -152,761
Opt -300,000 30,000 5 -78,226
7
np = 40,000/10,000
= 4 years
Machine 2:
np = 90,000/15,000
= 6 years
(b) Machine 1:
-40,000 + 10,000(P/A,10%,np) = 0
(P/A,10%,np) = 4.0000
Machine 2:
-90,000 + 15,000(P/A,10%,np) = 0
(P/A,10%,np) = 6.0000
8.52 Set up the PW relation and use trial and error or spreadsheet for np.
8
8.55 (a) Determine i* from AW relations
(b) First of all, an ROR analysis always requires an incremental analysis over the
LCM of 10 years. The i2* = 26.55% is not correctly used in the fashion
shown here. Furthermore, this analysis assumes a return of 26.55% is made
from years 6 through 10, which may not be correct for these funds.
8.58 Both the fixed cost and variable cost of alternative X are higher than those of
alternative Y. Therefore, it can never be favored.
Answer is (a)
Answer is (d)
9
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 9
Replacement and Retention Decisions
9.1 The defender refers to the currently-owned, in-place asset while the challenger
refers to the equipment/process that is under consideration as its replacement.
9.7 The ESL of the defender is 3 years with the lowest AW of $-85,000.
9.10 Add AW values for first cost, operating cost, and salvage value; select lowest AW.
1
AW6 = -65,000(A/P,10%,6) – [50,000 + 10,000(A/G,10%,6)]
+ 20,000(A/F,10%,6)
= $-84,568
-0.38803 RV = 4941.05
RV = $12,734
RV = $21,954
9.28 Only 2 options; replace defender, buy challenger now or retain defender for 3 years.
3
9.34 Answer is (b)
9.37
Years for Years for AW, cash flows, $ per year Option
Option
Defender Challenger Year 1 Year 2 Year 3 AW, $/year
A 0 3 -73,000 -73,000 -73,000 -73,000
B 1 2 -74,000 -84,000 -84,000 -80,192
C 2 1 -74,000 -74,000 -84,000 -76,880
Option A: AW = $-73,000
Answer is (a)
4
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 10
Effects of Inflation
10.1 Inflated dollars are converted into constant value dollars by dividing by one plus
the inflation rate per period for however many periods are involved.
1
10.16 if per month = 24/12 = 2%. Use inflated rate equation to solve for real rate i.
PWA = 2,100,000(P/F,16.48%,2)
= 2,100,000(0.73705)
= $1,547,806
2
10.31 Buying power = 1,800,000/(1 + 0.038)20 = $853,740
F = 40,000(F/P,5%,3)
= 40,000(1.1576)
= $46,304
Select process X
3
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 11
Estimating Costs
11.1 Elements of first cost include equipment cost, delivery charges, installation cost,
insurance coverage, and training of personnel for equipment use.
11.13 From Table, index value in 2003 = 6695; index value in 2012 = 9290
Ct = 30,000,000(9290/6695)
= $41,628,000
Cost2002 = $243
11.22 C2 = 9500(450/250)0.32
= 9500(1.207)
= $11,466
1.04C1 = C1 (Q2/Q1)x
1.04 = (0.50)x
log 1.04 = x log 0.50
x = -0.0566
1
11.34 T12 = T1Ns
s = log 0.85/log 2
= -0.234
T12 = (56)12-0.234
= 31.3 months
2
(b) Spreadsheet solution: Select to make inhouse.
11.43 Compare last year’s allocation based on flight traffic with this year’s based on
baggage traffic. Significant change took place.
Last year; This year; Percent
flight basis baggage basis change
DFW $330,000 $343,620 + 4.1%
YYZ 187,500 218,371 +16.5
MEX 150,000 105,363 – 29.7
Answer is (b)
Answer is (a)
Answer is (d)
Answer is (c)
3
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 12
Depreciation Methods
12.1 Depreciation is a tax-allowed deduction in the equation Taxes = (income –
expenses – depreciation)(tax rate)
12.4 Productive life – Time the asset is actually expected to provide useful service.
Tax recovery period – Time allowed by tax laws to depreciate the asset’s value to
salvage (or zero).
Book recovery period – Time used on company accounting books for depreciation
to salvage (or zero)
1
12.10 (a) Depreciation charge is determined from the change in book value
Since the asset has a 5-year life 2 more years of depreciation will reduce
BV to salvage value.
2
(b) SL: D10 = (100,000 - 12,500)/10 = $8750
DDB: D10 = 0, since n = 7 years
Fairfield hopes to sell it for $452,183, or 13.3%, more than they paid for it.
3
12.31 d = 1/5 = 0.20, For year 2, by DB method
New SL depreciation
12.34 Verify the following MACRS rates using the modified DDB-to-SL switching.
t 1 2 3 4 5 6__
dt 0.20 0.32 0.192 0.1152 0.1152 0.0576
4
d5: Use the SL rate for n = 5
d6 = d5 /2 = 0.0576
or
d6 = 1 – 0.9424 = 0.0576
12.40 (a) Determine the cost depletion factor in $/1000 tons and multiply by yearly
tonnage.
pt = 2,900,000/100 = $29,000 per 1000 tons
(b) Cost depletion is limited by the total first cost, which is $2.9 million. Since
only $2.03M has been depleted, all 5 years’ depletion is acceptable.
Answer is (a)
Answer is (b)
5
12.49 Salvage value is always $0 for the MACRS method.
Answer is (a)
Answer is (b)
6
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 13
After-Tax Economic Analysis
D2 = 0.4445(1900) = $845
D4 = 0.0741(1900) = $141
1
Year GI E P and S CFBT D TI Taxes CFAT
0 $-1900 $-1900 $-1900
1 $800 $-100 0 700 $633 $ 67 $23 677
2 950 -150 0 800 845 -45 -16 816
3 600 -200 0 400 281 119 42 358
4 300 -250 700 750 141 -91 -32 782
DR = 15,000 – 13,824
= $1176
2
13.22 Calculate taxes = GI – E – (TI + DR)(Te) for each year and add. System 2 has
lower total taxes by $26,600. Spreadsheet solution follows.
P and
Year Rate D, $ TI, $ Taxes, $
CFBT, $
0 -200,000
1 75,000 0.2000 40,000 35,000 13,300
2 75,000 0.3200 64,000 11,000 4,180
3 75,000 0.1920 38,400 36,600 13,908
4 75,000 0.1152 23,040 51,960 19,745
5 75,000 0.1152 23,040 51,960 19,745
6 75,000 0.0576 11,520 63,480 24,122
7 75,000 0 0 75,000 28,500
8 75,000 0 0 75,000 28,500
Total $152,000
3
MACRS is preferable with the lower PWtax value.
13.28 (a) Defender: Capital loss = BV - Sales price = [300,000 – 2(60,000)] - 100,000
= $-80,000
13.31 The debt portion of $15 million represents 40% of the total.
4
13.37 (a) WACCA = 0.5(9%) + 0.5(6%) = 7.5%
Plan A cost of debt goes up from 6% to 7.4%; Plan B maintains the same cost.
13.40 (a) Determine the after-tax cost of debt capital and WACC.
13.43 Find BVt -1 = BV1; solve for NOPAT; find TI from NOPAT; solve for E from TI.
5
D2 = 550,000(0.4445)
= $244,475
122,055 = GI - E - D
= 700,000 - E - 244,475
E = $333,470
Answer is (b)
TI = GI - E – D
10,000 = 30,000 – D
D = $20,000
Answer is (d)
Answer is (b)
6
Solution to every third end-of-chapter problem
Basics of Engineering Economy, 2nd edition
Leland Blank and Anthony Tarquin
Chapter 14
Alternative Evaluation Considering
Multiple Attributes and Risk
14.1 Wi = 1/6 = 0.1667
Attribute Importance
1 9.0
2 1.0
3 3.0
4 6.0
5 10.0
6 4.8
33.8
Attribute Wi______
1 9/33.8 = 0.27
2 1/33.8 = 0.03
3 3/33.8 = 0.09
4 6/33.8 = 0.18
5 10/33.8 = 0.30
6 4.8/33.8 = 0.14
14.7 Estimates are for the future in engineering economic evaluations. Decision making under
risk is, therefore, always present in any conclusion.
1
14.10 Determine the probability values for N.
N 0 1 2 3 4_ ≥5_
P(N) 0.12 0.56 0.26 0.032 0 .022 0.006
Cell,
Xi, $ P(Xi) Xi × P(Xi), $
600 0.06 36
800 0.10 80
1000 0.09 90
1200 0.15 180
1400 0.28 392
1600 0.15 240
1800 0.07 126
2000 0.10 200
1.00 1344
14.19 A simulation similar to Example 14.6 is performed. MARR varies from 7% to 10% with
a 0.25 probability each. Use a lookup table for MARR (columns E and F) coupled with
the RAND() function. For CFAT, use RANDBETWEEN(4000,7000). PW values
(column M) for the simulation shown are positive 23 of the 30 trials.
Conclusion: The project appears economically viable under both certainty and risk.
2
14.22 Wenv = 50/(100 + 75 + 50) = 50/225 = 0.22
Answer is (c)
X = 79 = (81 + 74 + 83 + 66 + x5)/5
395 = 304 + x5
x5 = 91
Answer is (b)