ENGINEERING ECONOMICS PRACTICE PROBLEMS

1. A college student borrows $1500 during his senior year. The loan is to be repaid in 20 equal
quarterly installments. The interest rate is 5% per year with the first payment to be made 3 years
after the date of the loan. What will be the approximate amount of the quarterly payment?

(A) $91
(B) $98
(C) $106
(D) $112

Solution

F1 = P1 ( F P,5%,3)
= ($1500) (1 + 0.05 )
3

= $1736.44

P1 is the initial loan and F1 is the amount to be paid on the loan when the first payment is due.
Convert the effective annual interest rate into an effective rate per period.
m
⎛ r⎞
ie = ⎜1 + ⎟ − 1
⎝ m⎠
4
⎛ r⎞
0.05 = ⎜1 + ⎟ − 1
⎝ 4⎠
4
⎛ r⎞
⎜1 + ⎟ = 1.05
⎝ 4⎠
r
1 + = 1.01227
4
r
= 0.01227
4
The future worth has become a present worth (let F1 = P2). Convert P2 into 20 uniform
payments.

A = P2 ( A P,0.01227, 20 )
⎛ ( 0.01227 )(1 + 0.01227 )20 ⎞
= ( $1736.44 ) ⎜ ⎟
⎜ (1 + 0.01227 )
20
− 1 ⎟
⎝ ⎠
= $98.44

Answer is (B).

Copyright 2006 Professional Publications, Inc. Engineering Economics Practice Problems - 1

2. A $10,000 loan is to be repaid at the rate of $200 per month, with an annual effective interest
rate of 19.56% charged against the unpaid balance. What principal remains to be paid after the
third payment?

(A) $8900
(B) $9200
(C) $9500
(D) $9800

Solution

Convert the effective annual interest rate into an effective rate per period.

m
⎛ r⎞
ie = ⎜1 + ⎟ − 1
⎝ m⎠
12
⎛ r ⎞
0.1956 = ⎜1 + ⎟ − 1
⎝ 12 ⎠
12
⎛ r ⎞
⎜1 + ⎟ = 1.1956
⎝ 12 ⎠
r
1 + = 1.014999
12
r
= 0.014999
12

The future worth of the two payments when the second payment is made is

Fpayments = A ( F A,0.014999,3)
⎛ (1 + 0.014999 )3 − 1 ⎞
= ( $200 ) ⎜ ⎟
⎜ 0.014999 ⎟
⎝ ⎠
= $609.04

The future worth of the original loan when the second payment is made is

Floan = P ( F P,0.014999,3)
= ( $10,000 )(1 + 0.014999 )
3

= $10, 456.75

The principle remaining on the loan is the future worth of the loan minus the future worth of the
payments.

Floan − Fpayments = $10,456.75 − $609.04 = $9847.71

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Answer is (D).

3. Assume an effective interest rate of 15% per year compounded annually. An investment
requires $1500 at the end of each year for the next 5 years plus a final investment of $3000 in 5
years. What is the equivalent lump sum investment now?

(A) $6100
(B) $6500
(C) $8000
(D) $8700

Solution

Calculate a present worth.

P = A ( P A,0.15,5 ) + F ( P F ,0.15,5 )
⎛ (1 + 0.15 )5 − 1 ⎞
= ( $1500 ) ⎜ ⎟ + ( $3000 )(1 + 0.15 )
−5

⎜ ( 0.15 )(1 + 0.15 ) ⎟

5
⎝ ⎠
= $5028.23 + $1491.53 = $6519.76

Answer is (B).

4. The fixed costs incurred by a manufacturing plant are $200,000 per year. Variable costs are
60% of the annual sales. If annual sales are $300,000, the annual profit/loss is

(A) $66,000 profit

(B) $66,000 loss
(C) $80,000 profit
(D) $80,000 loss

Solution

net revenue = sales − ( fixed costs + variable costs )

= $300,000 − ( $200,000 + ( 0.60 )( $300,000 ) )
= $300,000 − $380,000
= −$80,000

Answer is (D).

Copyright 2006 Professional Publications, Inc. Engineering Economics Practice Problems - 3

5. What annual investment is required at 8% per year compounded annually to accumulate to
$100,000 at the end of 20 years?

(A) $1400
(B) $2100
(C) $2200
(D) $5400

Solution

F = $100,000 = A ( F A,8%, 20 ) = A ( 45.7620 )

(The factor comes from the NCEES FE Reference Handbook.)

$100,000
A= = $2185.22
45.7620

Answer is (C).

6. Maintenance expenditures for a structure with a 20-year life will be disbursed as periodic
outlays of $1000 at the end of the fifth year, $2000 at the end of the tenth year, and $3500 at the
end of the fifteenth year. Using an annual interest rate of 10%, the equivalent uniform annual
cost for the 20-year period is most nearly

(A) $253
(B) $262
(C) $281
(D) $297

Solution

Convert each of the costs into a present cost.

P = ($1000) ( P F ,0.10,5 ) + ($2000) ( P F ,0.10,10 ) + ($3500) ( P F ,0.10,15 )

Each of these factors is in the NCEES FE Reference Handbook.

P = ( $1000 )( 0.6209 ) + ( $2000 )( 0.3855 ) + ( $3500 )( 0.2394 )

= $620.90 + $771 + $837.90 = $2229.80

Convert the present worth to an effective uniform annual cost.

EUAC = P ( A P,0.10, 20 )

Use the factor table in the NCEES FE Reference Handbook for 10%.

Copyright 2006 Professional Publications, Inc. Engineering Economics Practice Problems - 4

 EUAC = ( $2229.80 )( 0.1175 ) = $262.00

Answer is (B).

7. A piece of machinery costs $900. After 5 years, the salvage value is $300. Annual
maintenance costs are $50. If the interest rate is 8%, the equivalent uniform annual cost is most
nearly

(A) $220
(B) $300
(C) $330
(D) $350

Solution

EUAC = −$900 ( A P,8%,5 ) + $300 ( A F ,8%,5 ) − $50

(These factors are in the NCEES FE Reference Handbook.)

EUAC = ( −$900 )( 0.2505 ) + ( $300 )( 0.1705 ) − $50

= −$225.45 + $51.15 − $50 = −$224.30

Answer is (A).

8. An investor is to receive an annuity of $1000 per year for 15 years, with the first payment to
be made on March 1, 2011. The investor offers to sell the annuity on March 1, 2008. With
interest at 3.5% compounded annually, what is a fair price?

(A) $10,500
(B) $10,800
(C) $10,900
(D) $11,500

Solution

P3 /1/ 2011 = $1000 ( P A,0.035,15 )

⎛ (1 + 0.035 )15 − 1 ⎞
= ( $1000 ) ⎜ ⎟
⎜ ( 0.035 )(1 + 0.035 )15 ⎟
⎝ ⎠
= $11,517.41

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 P3 /1/ 2008 = P3 /1/ 2011 ( P F ,0.035, 2 )
= ( $11,517.41)(1 + 0.035 )
−2

= $10,751.63

Answer is (B).

9. A promissory note calling for payments of $1100 at the end of each year for the next 13 years
is offered for sale for $10,400. The prospective rate of return is most nearly

(A) 4.7%
(B) 4.8%
(C) 4.9%
(D) 5.0%

Solution

P = A ( P A, i,13)
⎛ (1 + i )13 − 1 ⎞
$10, 400 = ( $1100 ) ⎜ ⎟
⎜ i (1 + i )13 ⎟
⎝ ⎠

This is difficult to solve explicitly. Use a trial and error approach with the four answer choices.

⎛ (1 + 0.047 )13 − 1 ⎞
( $1100 ) ⎜⎜ ⎟ = $10,522
⎟
( )( )
13
⎝ 0.047 1 + 0.047 ⎠
⎛ (1 + 0.048 ) − 1 ⎞
13

( $1100 ) ⎜⎜ ⎟ = $10, 458

⎟
⎝ ( 0.048 )(1 + 0.048 ) ⎠
13

⎛ (1 + 0.049 )13 − 1 ⎞
( $1100 ) ⎜⎜ ⎟ = $10395
⎟
( )( )
13
⎝ 0.049 1 + 0.049 ⎠
⎛ (1 + 0.050 ) − 1 ⎞
13

( $1100 ) ⎜⎜ ⎟ = $10,333
⎟
⎝ ( 0.050 )(1 + 0.050 ) ⎠
13

i = 4.9% produces the value closest to $10,400.

Answer is (C).

10. One type of road surface will cost $12,000 per unit distance. Average annual maintenance is
estimated at $300, with resurfacing required every 18 years at a cost of $5,000. The capitalized
cost of perpetual service, using an effective annual interest of 3.5%, is most nearly

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(A) $26,300
(B) $26,400
(C) $26,600
(D) $27,500

Solution

Convert the resurfacing cost into a uniform annual cost.

Aresurface = $5000 ( A F ,0.035,18 )

⎛ 0.035 ⎞
= ( $5000 ) ⎜ ⎟
⎜ (1 + 0.035 ) − 1 ⎟
18
⎝ ⎠
= $204.08

The total annual cost is

A = Aresurface + Aupkeep = $204.08 + $300 = $504.08

The capitalized cost is the present worth of all the costs.

P = A ( P A,0.035, ∞ ) + Pinitial cost

$504.08
= + $12,000
0.035
= $26, 402.29

Answer is (B).

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