Engineering Economy

ASSIGNMENT 3: Evaluating a single project

5.3

Total present equivalent: PW = A∗ ( PA , MARR , N )=$ 12.5 M∗( PA , 20 % , 3)

3
M ∗( 1+ 20 % ) −1
Josh’s total bonus ¿ 0.1 %∗PW =0.1 %∗$ 12.5 3
=$ 26,331.02
20 %∗( 1+20 % )
5.11

7
MARR= =1.75 % per 3−month, 30( years)=120(3−month periods)
4

The current value of Jim's bond: V N =C∗

¿
( PF ,i % , N )+ rZ∗( PA , i% , N )
120
150∗( 1+1.75 % ) −1
¿ $ 10,000∗( 1+1.75 % )−120 + $ 120
=$ 8,750
1.75 %∗( 1+ 1.75 % )
5.16

A1=$ 1,500 A2=$ 10,000∗ ( FA ,10 % , 4)∗( PF ,10 % ,1)=$ 1,955.82

a) The capitalized worth:

( ) ( )
P P A 1 A 2 $ 1,500 $ 1,955.825
CW ( 10 % )= A 1 , 10 % , ∞ + A 2 , 10 % , ∞ = + = + =$ 34,588.25
A A i i 10 % 10 %

b) “Forever” means ( AP ; 10 % ; N ) ≈ 0.1→ Using Table C−13 , we have N =80.

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 Engineering Economy

5.18

¿
Total equivalent money in 2014: P4 =F 4−$ 3 M =$ 10 M ∗ ( FP , 5 % , 4)−$ 3 M =$ 9,155,062.5
The capitalized worth:

CW =C W 1+ C W 2=$ 250,000∗ ( PA ,5 % , ∞)+ X∗( FA ,5 % ,5)∗( PA ,5 % , ∞)

X∗0.05
5
∗1
$ 250,000 ( 1.05 ) −1 .
→ + =$ 9,155,062.5 → X=$ 1,147,967.16
0.05 0.05

5.19

Year Revenue Expenses Profit

1 $ 6,000 $ 3,100 $ 2,900
2 $ 6,200 $ 3,300 $ 2,900
3 $ 6,300 $ 3,500 $ 2,800
Convert: A=$ 2,900 ; G=$−100 ( defer 1 year ) ; F6 =$−2,000
4 $ 6,400 $ 3,700 $ 2,700
5 $ 6,500 $ 3,900 $ 2,600
The future worth of Vidhi’s projected net income (profit):
6 $ 6,600 $ 6,100 $ 500
7
8
$ 6,700 $ 4,300
$ 6,800 $ 4,500
$ 2,400
$ 2,300
FW =F W 1+ F W 2 + F W 3¿ A ( FA ,6 % , 10)+G ( GF ,6 % , 9)+ F ( FP , 6 % , 4 )
6

$ 100 9
9 $ 6,900 $ 4,700 $ 2,200 10 ∗( 1.06 ) −1
2,900∗( 1.06 ) −1 6%
−$ 2,000∗( 1.06 ) ¿ $ 31,547.17
4
¿$ −
10 $ 7,000 $ 4,900 $ 2,100 6% 6 %∗( 1.06 )
9

5.22

Present worth:
PW (10 %)=$
[ (
1,020∗ 1 –
P
F )(F
, 10 % , 20 ∗ , 2 % , 20
P )] =$ 9,933.82
0.10 – 0.02

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 Engineering Economy

Future worth: FW (10 % )=$ 9,935∗ ( FP , 10 % , 20)=$ 66,829.80

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 Engineering Economy

5.23

TABLE P5-23
Investment Opportunity Cost Loss in Value of Capital Recovery Amount
Year PW(10%) of CRA
Beginning of Year of Interest Asset during Year (CRA) for Year
−1
1 $ 10,000 $ 1,500 $ 3,000 $ 3,000+$ 1,500=$ 4,500 $ 4,500∗( 1.15 )
−2
2 $ 10,000−$ 3,000=$ 7,000$1,050 $ 2,000 $ 1,050+$ 2,000=$ 3,050 $ 3,050∗( 1.15 )
−3
3 $ 7,000−$ 2,000=$ 5,000 $750 $ 2,000 $ 750+$ 2,000=$ 2,750 $ 2,750∗(1.15 )
−4
4 $ 5,000−$ 2,000=$ 3,000 $450 $1,000 $ 1,450 $ 1,450∗( 1.15 )

Let $ X be the Capital Recovery Amount of Year 4.

We have: ∑ PW of CRA=CR∗( PA ,15 % , 4 )
4
−1 −2 −3 −4 3,102.12∗( 1.15 ) −1
→ $ 4,500∗( 1.15 ) + $ 3,050∗( 1.15 ) + $ 2,750∗( 1.15 ) + $ X∗( 1.15 ) =$ 4
0.15∗( 1.15 )
−4
→ X=$ 1,449.98 ≈ $ 1,450 → PW of CRA =$ X∗( 1.15 ) =$ 8,856.49

Check again:

( ) ( )
4
A A 10,000∗0.15∗(1.15 ) 2,000∗0.15
CR (15 % )=I ∗ , i % , N −S∗ , i % , N =$ −$ =$ 3,102.12
P F 4
( 1.15 ) −1
4
( 1.15 ) −1
5.34

P
A ( )P
( )
We have: $ 10 M =$ 2.8 M ∗ ,i %, 4 + $ 5 M∗ , i % , 4 → $ 10 M =$ 2.8
F
M ∗( 1+ i% )4 −1
i %∗( 1+i % )
4
+ $ 5 M∗( 1+i % )− 4

→ i=18.48 % ≥ 15 %=MARR
Therefore this option is feasible.

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 Engineering Economy

5.38

( )
15
P 255∗( 1+i % ) −1
5.47 We have: $ 3,000=$ 255∗ ,i % , N =$ 15
→ i=3.2 %
A i %∗( 1+ i% )
Nominal annual rate=r %=12∗i %=38.4 %

(
Effecttive rate=i eff %= 1+
N)
r N 12
−1=( 1.032 ) −1=0.459=45.9 % per year

Convert:
- Month 1-3: a decreasing arithmetic gradient with A=$ 500,000∧G=$ 200,000
- Month 4: a payment of F=$ 2,500,000
- Month 5-9: an increasing arithmetic gradient with A=$ 100,000∧G=$ 50,000

IRR method:

PW (i % )=0=$ 500 K∗ ( PA ,i % ,3)−$ 200 K∗( GP , i% ,3)−[ $ 2.5 M + $ 100 K∗( PA , i % , 7)+ $ 50 K∗( GP , i% , 6)]∗( FP , i
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 Engineering Economy

Using SHIFT SOLVE in Vinacal, we find out the values of i% are: 4.09% and 31.82%
We test some values of integer for i%: Trial interest rates PW
4% $ 2,175.18
5% −$ 21,130.29
31 % −$ 5,479.09
32 % $ 1,182.77

We then find the exact value for i% by using linear interpolation method:

For 4 % <i< 5 % :
AB dA 5 %−4 % i−4 %
= → =
BC de −$ 21,130.29−$ 2,175.18 0−$ 2,175.18
→ i=4.02 %

For 31 %< i<32 % :

AB dA 32 %−31 % i−31%
= → =
BC de $ 1,182.77−(−$ 5,479.09) 0−(−$ 5,479.09)
→ i=31.82 %

( )( ) ( )
N N
P F F
ERR method: ∑ E k , ε % , k ∗ , i % , N =¿ ∑ Rk , ε % , N −k ¿
k=0 F P k=0 P

We have: $ 2.4 M∗( , 8 % , 4 )∗( ,i % , 10)

P F '
F P

[ A
'
G ] '
[ 9
A
'
G ]
¿ $ 500 K∗( , i % ,3 )−$ 200 K∗( , i % ,3 ) ∗( 1.08 ) − $ 150 K∗( , i % ,7 ) + $ 50 K∗( , i ' % , 6) ∗( 1.08 )
P P P P 6

'
→ i %=7.6 %

5.51,

a. PW (i % )=−$ 4,900+ $ 1,875

P
A ( )
,i % ,5 =0 →−$ 4,900+ $ 1,875

tatal investment $ 4,900

[
( 1+i )5−1
i ( 1+i )5 ]
=0 → i=26.41 %

b. Simple payback period= = =2.61 years

annual savings $ 1,875
Thus, the simple payback period of the call center is 3 years. (round up to the integer year)
c. The call center IRR will be single and profitable project if the call center MARR is lesser than the IRR i
% = 26.41% and the value of simple payback may indicate an unacceptable project in terms of
liquidity. Thus, yes, there is a conflict in an answers to part a and b.
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 Engineering Economy

1 1
d. We have: simple payback rate of return= = =33.33 %
θ 3
Therefore, the simple payback rate of return is 33.33%, and it is more than the IRR of the given call enter
project.

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 Engineering Economy

5.53

PW ( i % )=−$ 100,000+ $ 20,000∗

'
( PA , i % ,5)+ $ 10,000∗( GP , i % , 5)+$ 10,000∗( PF , i % ,5)=0
' ' '

−With i’=20 % , we have : PW ( 20 % ) =$ 12,891−With i’=25 % , we have : PW ( 25 % ) =−$ 897

→ Therefore20 % <i<25 %
−¿ Using linear interpolation, the IRR for the investment of the AMT project will be:
25 %−20 % i−20 %
= → i=24.7 %
−$ 897−$ 12,891 0−$ 12,891

EOY Cumulative Cash Flow

1 −$ 100,000+$ 20,000=−$ 80,000<0
2 −$ 80,000+ $ 30,000=−$ 50,000<0
3 −$ 50,000+$ 40,000=−$ 10,000< 0
4 −$ 10,000+$ 50,000=$ 40,000> 0

 At the end of Year 4, the sign of cumulative cash flow changes. Therefore, the simple payback period
is 4 years
Although this project is profitable (since IRR > MARR), it is not acceptable since the simple payback
period is 4 years is more than the maximum allowable simple payback period of 3 years. Therefore, the
AMT project is not recommended.

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 Engineering Economy

a.

[ ]
5
( 1+ i1 ) −1
( i ) PW =−$ 1,000+ $ 300 (
P
A )
, i1 % ,5 =0 →−$ 1,000+ $ 300
i 1 ( 1+i 1 )
5
=0 →i 1=15.24 %

[
( ii ) PW = −$ 1,000+ $ 300 ( PA ,i % , 5)]∗( FP ,10 % , 4)=0 →−$ 1,000+ $ 300 ( PA ,i % , 5)=0
2 2

→ i2 =i1=15.24 %

[
( iii ) PW = −$ 5,000+$ 1,500 ( PA , i % ,5)]( PF , 10 % 4 )=0 → (5 ) [−$ 1,000+ $ 3000 ( PA ,i % , 5)]=0
3 3

→ i3 =i2 =i1 =15.24 %

(i) Net cash (ii) Net cash (iii) Net cash

Year flow Year flow Year flow
0 -$1,000 0 -$1,000 0 -$5,000
1 $300 1 $300 1 $1,500
2 $300 2 $300 2 $1,500
3 $300 3 $300 3 $1,500
4 $300 4 $300 4 $1,500
5 $300 5 $300 5 $1,500
IRR 15.24% IRR 15.24% IRR 15.24%

b.
- At EOY = 0:

( i ) PW ( 10 % )=−$ 1,000+$ 300 ( PA , 10 % , 5)=$ 137.24

( ii ) PW ( 10 % )=−$ 1,000 ( , 10 % , 4 )+ $ 300 ( ,10 % ,5 )∗( ,10 % , 4 )=$ 93.73
P P P
F A F
- At EOY = 4:

( ii ) PW ( 10 % )=−$ 1,000+ $ 300 ( PA ,10 % ,5)=$ 137.24( iii ) PW ( 10 %) =−$ 5,000+ $ 1,500( PA , 10 % , 5)=$ 686.2
→ Alternative 3 is selected ¿ maximize PW ( 10 % ) . Though ,the PW ( IRR=15.3 % ) will remain zero
for all the three situations . Maximum present worth is obtained∈cash flow (iii ).

All exercises are extracted from Engineering Economy 15th Edition as mentioned in the syllabus. Page 9