Ghulam Ishaq Khan Institute of Engineering Sciences and Technology

School of Management Sciences

Engineering Economics (MS-291)

Fall-2022

Instructor: Dr. Muhammad Ullah

Assignment # 1

Due Date: 16:59 hours by Tuesday, October 18, 2022

[Late submissions will not be accepted]

Name: Student ID:

Instructions:

 This is an individual assignment.

 The assignment must be submitted in a hard file cover.
 Solve step-by-step and show you calculations.
 Total Marks = 20 (weight 10%)
1. [2 Marks] Is Rs.100 you receive in one year worth more today if the interest rate is 20% or if
it is 10% p.a?

2. [2 Marks] You have just won a 10 million rupees lottery. You are informed that you will be
paid 1 million per year for 10 years. Did you actually win Rs. 10 million if you can invest the
money at a 10% p.a interest rate? Show your calculations using the formula.

3. [2 Marks] Assume there are three cash flows that are economically equivalent to each other.
The present worth P of cash flow#1 is $9,982 at t=0. Cash flow#2 consists of end of the year
annuities of $2,500 over five years. The first annuity is at t=1. Cash flow#3 is a uniform
gradient series. In this series, the base amount at t=1 is 0 and the constant gradient G is at
t=2. What is the value of G for this third series over the same five-year time interval? Use the
factor table.

4. [2 Marks] A company wants to upgrade its assembly line by installing new machinery. For
the installation, the company needs to have $2.1 billion available 5 years from now. The
company decided to set aside uniformly increasing amounts of money each year to meet its
goal. If the amount set aside at the end of year 1 is $50 million, how much will the constant
increase G have to be each year? Assume the investment account grows at a rate of 18% per
year.

5. [2 Marks] Loadstar Sensors is a company that makes load/force sensors based on capacitive
sensing technology. The company wants to have $28 million for a plant expansion 4 years
from now. If the company has already set aside $12 million in an investment account for the
expansion, how much more must the company add to the account next year (i.e., 1 year from
now) so that it will have the $28 million 4 years from now? The account earns interest at
12% per year.

6. [2 Marks] You are offered an annuity that will pay $24,000 per year for 11 years (the first
payment will occur one year from today). If you feel that the appropriate discount rate is
13%, what is the annuity worth to you today?

7. [2 Marks] What value of x in the below cash flow will make the annual worth from year 1
through 7 equal to 300/year if the interest rate is 10%/year?

Year Cash Flow Year Cash Flow

0 200 4 x
1 200 5 200
2 200 6 200
3 200 7 200
8. [2 Marks] A company borrowed $900,000 for installing energy-efficient lighting and safety
equipment in one of its manufacturing facility. The terms of the loan were such that the
company could pay interest only at the end of each year for up to 5 years, after which the
company would have to pay the entire amount due. If the interest rate on the loan was 12%
per year and the company paid only the interest for 4 years, determine the following:

a) The amount of each of the four interest payments.

b) The amount of the final payment at the end of year 5

9. [2 Marks] El Paso Water Utilities (EPWU) purchases surface water for treatment and
distribution to EPWU customers from El Paso County Water Improvement District during
the irrigation season. A new contract between the two entities resulted in a reduction in future
price increases in the cost of water from 8% per year to 4% per year for the next 20 years. If
the cost of water next year (which is year 1 of the new contract) will be $260 per acre-foot,
what is the present worth of the savings (in $/acre-ft) to the utility between the old and new
contracts? Let the interest rate equal 6% per year.

10. [2 Marks] Mr. Ali is retiring after 15 years and he is planning for his retirement. He will need
Rs. 50,000 for 15 years after his retirement. Thus he wants to start saving by depositing an
equal amount in his saving account starting from next year until his retirement. Find the
equal amount that should be deposited in the account if the account is paying a compound
interest of 20% per year. Use the formula method and show the cash flow diagram.