Blank 3e ISM Ch04

Solutions to end-of-chapter problems
Basics of Engineering Economy, 3rd edition

Leland Blank and Anthony Tarquin
Chapter 4
Present Worth Analysis
4.1 What is the main difference between mutually exclusive and independent
alternatives?
When evaluating mutually exclusive alternatives, only one can be accepted. On the
other hand, when evaluating independent alternatives, more than one can be
accepted, subject to budget limitations.
4.2 What is the difference in cash flows between revenue and cost alternatives?
Revenue alternatives have revenue, cost, and possibly savings cash flow estimates.
Cost alternatives assume the revenue is the same for all alternatives; therefore, they
have only cost cash flows. A cost alternative can have a savings cash flow estimate.
4.3 What is meant by do-nothing alternative?
The do-nothing alternative means that the status-quo should be maintained, that is, if
none of the alternatives under consideration are economically attractive, all of them
should be rejected.
4.4 State two conditions under which the do-nothing alternative is not an option.
The do-nothing alternative is not an option (1) when it is absolutely required that
one of the defined alternatives be selected (e.g., legal purposes), and (2) when each
alternative has only cost cash flow estimates.
4.5 You are conducting an evaluation of three mutually exclusive alternatives for a long-
term manufacturing process. What time period is required for conducting a present
worth analysis if the estimated lives are 3, 4, and 6 years, respectively?
The analysis must be conducted for the least common multiple of years, which is 12.
4.6 Two methods can be used for producing expansion anchors. Method A costs $80,000
initially and will have a $15,000 salvage value after 3 years. The operating cost with
this method will be $30,000 per year. Method B will have a first cost of $120,000, an
operating cost of $8000 per year, and a $40,000 salvage value after its 3-year life. At
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
1
the MARR of 12% per year, which method should be used on the basis of a present
worth analysis?
PWA = –80,000 – 30,000(P/A,12%,3) + 15,000(P/F,12%,3)

= –80,000 – 30,000(2.4018) + 15,000(0.7118)
= $–141,377
PWB = –120,000 – 8,000(P/A,12%,3) + 40,000(P/F,12%,3)

= –120,000 – 8,000(2.4018) + 40,000(0.7118)
= $–110,742
Select Method B
4.7 The manager of a canned-food processing plant is trying to decide between two
different labeling machines. The photocell unit will have a first cost of $26,000, an
AOC of $4800, and a service life of 4 years. The capacitive sensor unit will cost
$32,000 to buy and install and an estimated AOC of $2100 during its 4-year life. At an
interest rate of 9% per year, which is economically better on the basis of PW values?
PWPhoto = –26,000 – 4,800(P/A,9%,4)

= –26,000 – 4,800(3.2397)
= $–41,551
PWCap = –32,000 – 2100(P/A, 9%, 4)

= –32,000 – 2100(3.2397)
= $–38,803
Select Capacitive
4.8 A software package created by Navarro & Associates can be used for analyzing and
designing three-sided guyed towers and three- and four-sided self-supporting towers.
A single-user license will cost $4000 per year. A site license has a one-time cost of
$15,000. A structural engineering consulting company is trying to decide between
two 5-year strategies: first, to buy one single-user license now and one each year for
the next four years, or second, to buy a site license now. Determine which strategy
should be adopted at a MARR of 12% per year for a 5-year planning period using
the present worth method.
PWsingle = –4000 – 4000(P/A,12%,4)

= –4000 – 4000(3.0373)
= $–16,149
PWsite = $–15,000
Buy the site license
2
4.9 You and your sister just inherited from your grandparents a commercial rental
building on the northwest business corridor of a major city. Fortunately, it is fully
leased, but it badly needs a new roof. Two types of material can be used on the 1500
square meters of roof surface. Asphalt shingles will cost $14 per square meter
installed and are guaranteed for 10 years. Fiberglass shingles will cost $17 per
square meter installed and are guaranteed for 20 years. If the fiberglass shingles are
selected, the owner will be able to sell the building for an estimated $4500 more than
if the asphalt shingles are used. Which shingles should be installed if you use a
MARR of 16% per year and you two have agreed to sell the building in 10 years? (a)
Solve using tabulated factors. (b) Write the spreadsheet relations and PV function
that will find the PW values.
(a) PWasphalt = – (1,500)(14)

= $–21,000
PWfibcrglass = – (1,500)(17) + 4,500(P/F,16%,10)

= –25,500 + 4,500(0.2267)
= $–24,480
Use asphalt
(b) For asphalt relation: = –1500*14

For fiberglass, add relation and PV function: = – 1500*17 – PV(16%,10,4500)
4.10 The CFO of Marta Aaraña Cement Industries knew 10 years ago that many of the
diesel-fueled systems in its quarries would need replacement at an estimated cost
of $18 million now. There were two alternative ways to prepare financially for the
replacement cost. Alternative A was to build a fund with an initial amount of $1
million starting 1 year later, i.e., 9 years ago, and the commitment of 10% increases
through the 10th year. The fund was estimated to earn at 5.25% per year. Alterna-
tive B was to do nothing then and borrow the estimated $18 million at an interest
rate of 4% per year for 5 years when the replacements were purchased, i.e., now.
The CFO chose alternative A, build the fund.
The replacements and the invoice arrived today with a price tag of $18
million. Was selecting alternative A 10 years ago the financially better decision
based on the equivalent worth of the two plans today?
First, determine if today’s value of deposits over 10 years equals the $18 million
target. Use Pg equation to find P with g = 0.1 and i = 0.0525, then find F. Monetary
terms are in $ million.
PWA = 1{[1– (1.1/1.0525)10]/–0.0475}

= 1{–0.5549/–0.0475}
= 11.68236 ($11,682,360)
3
FWA = 11.68236(F/P,5.25%,10)
= 11,68236(1.66810)
= $19.4873 ($19,487,300)
Alternative B: PWB = $18,000,000
Today’s worth is $1,487,300 over the target of $18 million, plus the loan payments
for 5 years have been avoided. The decision for A was financially correct, given the
facts and no inflation considered.
4.11 The Bureau of Indian Affairs provides various services to American Indians and
Alaska Natives. The Director of Indian Health Services is working with chief
physicians at some of the 230 clinics nationwide to select the better of two medical
X-ray system alternatives to be located at secondary-level clinics. At 5% per year,
select the more economical system. Solve using (a) tabulated factors, and (b)
single-cell spreadsheet functions, as instructed.
X-ray System Del Medical Siemens

First cost, $ −250,000 −224,000
Annual operating cost, $/year −231,000 −235,000
Overhaul in year 3, $ — −26,000
Overhaul in year 4, $ −140,000 —
Salvage value, $ 50,000 10,000
Expected life, years 6 6
(a) Monetary units are in $1000. Calculate PW values to select Siemens.
PWDel = –250 – 231(P/A,5%,6) –140(P/F,5%,4) + 50(P/F,5%,6)

= –250 –231(5.0757) – 140(0.8227) + 50(0.7462)
= $–1500.355 ($–1,500,355)
PWSie = –224 – 235(P/A,5%,6) – 26(P/F,5%,3) + 10(P/F,5%,6)

= –224 –235(5.0757) – 26(0.8638) + 10(0.7462)
= $–1431.786 ($–1,431,786)
(b) By spreadsheet, enter the following into single cells to display the PW values.
PWDel : = – PV(5%,6,–231000,50000) –250000 – PV(5%,4,–140000)
PWSie : = – PV(5%,6,–235000,10000) –224000 – PV(5%,3,–26000)
4.12 The Briggs and Stratton Commercial Division designs and manufactures small
engines for golf turf maintenance equipment. A robotics-based testing system will
ensure that their new signature guarantee program entitled “Always Insta-Start”
does indeed work for every engine produced. Compare the two systems at a MARR
4
of 10% per year. Solve using (a) tabulated factors, and (b) single-cell spreadsheet
functions, as instructed.
System Pull Push

First cost, $ −1,500,000 −2,250,000
Annual M&O cost, $/year −700,000 −600,000
Rebuild cost in year 3, $ 0 −500,000
Salvage value, $ 100,000 50,000
Estimated life, years 8 8
(a) Monetary units are in $1000. Calculate PW values to select the pull system.
PWpull = –1500 – 700(P/A,10%,8) + 100(P/F,10%,8)

= –1500 – 700(5.3349) + 100(0.4665)
= $–5187.780 ($–5,187,780)
PWpush = –2250 – 600(P/A,10%,8) + 50(P/F,10%,8) – 500(P/F,10%,3)

= –2250 – 600(5.3349) + 50(0.4665) – 500(0.7513)
= $–5803.265 ($–5,803,265)
(b) Enter these single-cell functions to display PW values.
PWpull : = – PV(10%,8,–700000,100000)–1500000
PWpush : = – PV(10%,8,–600000,50000)–2250000–PV(10%,3,–500000)
4.13 PEMEX, Mexico’s petroleum corporation, has an estimated budget for oil and gas
exploration that includes equipment for three offshore platforms as shown. Use PW
analysis to select the best alternative at a MARR of 15% per year. Select platform
X, Y, or Z using (a) tabulated factors, and (b) single-cell spreadsheet functions, as
instructed.
Platform X Y Z
First cost, $ million −300 −450 −510
M&O, $ million per year −320 −290 −230
Salvage value, $ million 75 50 90
Estimated life, years 20 20 20
(a) Monetary units are in $ million. Calculate PW values to select platform Z.
PWX = –300 – 320(P/A,15%,20) + 75(P/F,15%,20)

= –300 – 320(6.2593) + 75(0.0611)
= $–2298.3935 ($–2.298 billion)
PWY = –450 – 290(P/A,15%,20) + 50(P/F,15%,20)
= –450 – 290(6.2593) + 50(0.0611)
= $–2262.142 ($–2.262 billion)
5
PWZ = –510 – 230(P/A,15%,20) + 90(P/F,15%,20)
= –510 – 230(6.2593) + 90(0.0611)
= $–1944.14 ($–1.944 billion)
(b) Enter the PV functions to display PW values in $ million units.
PWX: = – PV(15%,20,–320,75) –300

PWY: = – PV(15%,20,–290,50) –450
PWZ: = – PV(15%,20,–230,90) –510
4.14 A company that manufactures and markets integrated systems for analysis of
genetic variation and function is considering the mutually exclusive projects
shown, all of which can be considered to be viable for only 10 years. If the
company’s MARR is 15% per year, determine which should be selected on the
basis of a present worth analysis. Financial values are in $1000 units.
Project W X Y Z
First cost, $ −1400 −2000 −4200 −6300
Annual net income, $/year 320 510 1000 1300
Salvage value, $ 9 5 7 7
Monetary units are $1000. Calculate PW values; select largest PW; Project Y.

PWW = –1400 + 320(P/A,15%,10) + 9(P/F,15%,10)
= –1400 + 320(5.0188) + 9(0.2472)
= $208.2408
PWX = –2000 + 510(P/A,15%,10) + 5(P/F,15%,10)

= –2000 + 510(5.0188) + 5(0.2472)
= $560.824
PWY = –4200 + 1000(P/A,15%,10) + 7(P/F,15%,10)

= –4200 + 1000(5.0188) + 7(0.2472)
= $820.5304
PWZ = –6300 + 1300(P/A,15%,10) + 7(P/F,15%,10)

= –6300 + 1300(5.0188) + 7(0.2472)
= $226.1704
Select Project Y
4.15 A new family of small robots are available that have a compact footprint and a
large work envelope that provides ease of use and short cycle times. Two are under
consideration as part of a process to manufacture blowdown control valves for
cooling towers. Process X costs $80,000 initially and will have a $15,000 salvage
value after 3 years. The operating cost with this robot will be $30,000 in year 1,
6
increasing by $4000 each year. Process Y will have a first cost of $120,000, an
operating cost of $8000 in year 1, increasing by $6500 each year, and a $40,000
salvage value after its 3-year life. At an interest rate of 12% per year, which
process should be used on the basis of a present worth analysis?
PWX = –80,000 – [30,000(P/A,12%,3) + 4000(P/G,12%,3)] + 15,000(P/F,12%,3)

= –80,000 – [30,000(2.4018) + 4000(2.2208)] + 15,000(0.7118)
= $–150,260
PWY = –120,000 – [8,000(P/A,12%,3) + 6500(P/G,12%,3)] + 40,000(P/F,12%,3)

= –120,000 – [8,000(2.4018) + 6500(2.2208)] + 40,000(0.7118)
= $–125,178
Select Process Y
4.16 A public water utility is trying to decide between two different sizes of pipe for a
new water main. A 250-mm line will have an initial cost of $155,000, whereas a
300-mm line will cost $210,000. Since there is more head loss through the 250-mm
pipe, the pumping cost is expected to be $3000 more per year than for the 300-mm
line, and the extra cost is expected to increase by $15 each year. If the lines are
expected to last for 30 years, which size should be selected on the basis of a present
worth analysis using a MARR of 10% per year?
PW250 = –155,000 – [3000(P/A,10%,30) + 15(P/G,10%30)]

= –155,000 – [3000(9.4269) + 15(77.0766)]
= $–184,437
PW300 = $–210,000
Install the 250 mm pipe
4.17 A metallurgical engineer is considering two materials as the additive to a

manufacturing process as shown. Which material should be selected on the basis of
a PW comparison at an interest rate of 12% per year?
Material Nickel-Cadmium Aluminum-Beryllium

First cost, $ −15,000 −35,000
M&O costs, $/year −9,000 −7,000
Increase in cost each year, $/year 730 325
Life, years 5 5
(a) PWNC = –15,000 – [9000(P/A,12%,5) + 730(P/G,12%,5)] + 2000(P/F,12%,5)

= –15,000 – [9000(3.6048) + 730(6.3970)] + 2000(0.5674)
= $–50,978
7
PWAB = –35,000 – [7000(P/A,12%,5) + 325(P/G,12%,5)] + 10,000(P/F,12%,5)
= –35,000 – [7000(3.6048) + 325(6.3970)] + 10,000(0.5674)
= $–56,639
Select Nickel-Cadmium (NC)
(b) Spreadsheet solution; select NC alternative
4.18 The TechEdge Corporation offers two forms of 4-year service contracts on its
closed-loop water purification system used in the manufacture of semiconductor
packages for microwave and high-speed digital devices. The Professional Plan has
an initial fee of $52,000 with annual fees starting at $1000 in contract year 1 and
increasing by $500 each year. Alternatively, the Executive Plan costs $62,000 up
front with annual fees starting at $5000 in contract year 1 and decreasing by $500
each year. The initial charge is considered a setup cost for which there is no
salvage value expected. Evaluate the plans at a MARR of 9% per year. Solve using
(a) factors, and (b) a spreadsheet.
(a) PWProf = –52,000 – 1000(P/A,9%,4) – 500(P/G,9%,4)

= –52,000 – 1000(3.2397) – 500(4.5113)
= $–57,495
PWExec = –62,000 – 5000(P/A,9%,4) + 500(P/G,9%,4)

= –62,000 – 5000(3.2397) + 500(4.5113)
= $–75,943
Select the Professional Plan
8
(b) A spreadsheet solution follows; select the Professional plan.
4.19 In order to retain high-performing engineers, a large semiconductor company

provides corporate stock as part of the compensation package. In one particular
year, the company offered 1000 shares of either class A or class B stock. The class
A stock was selling for $30 per share at the time, and stock market analysts
predicted that it would increase at a rate of 6% per year for the next 5 years. Class
B stock was selling for $20 per share, but its price was expected to increase by
12% per year. At a return rate of 8% per year, which stock should the engineers
select on the basis of a present worth analysis and a 5-year planning horizon?
Find Pg for each stock and select higher value
PgA = 30,000{1 – [(1 + 0.06)/(1 + 0.08)]5}/(0.08 – 0.06)

= $133,839
PgB = 20,000{1 – [(1 + 0.12)/(1 + 0.08)]5}/(0.08 – 0.12)

= $99,710
Select class A stock
4.20 An investment broker that Ava trusts recommended that she purchase a $50,000,
15-year municipal bond that generates a dividend of 4% per year payable quarterly.
She will pay a discounted amount of $45,000 now for the bond. In general, Ava
hopes to make 8% per year compounded quarterly on her investments. Using the
PW value, determine if this is a financially advantageous investment for her. Solve
with (a) factors, and (b) one single-cell spreadsheet function.
I = (50,000)(0.04)/4
= $500 every 3 months
(a) PW = 500(P/A,2%,60) + 50,000(P/F,2%,60) – 45,000

= 500(34.7609) + 50,000(0.3048) – 45,000
= $–12,380
(b) Function is = – PV(2%,60,500,50000) – 45000
Conclusion: Not a financially sound investment since PW < 0 at 2% per quarter.
9
4.21 Navistar Electric issued 1000 debenture bonds 3 years ago with a face value of
$5000 each and a bond interest rate of 8% per year payable semiannually. The
bonds have a maturity date of 20 years from the date they were issued. If the
interest rate in the marketplace is 10% per year compounded semiannually,
determine the present worth today of one bond.
There are 17 years or 34 semiannual periods remaining in the life of the bond.
I = 5000(0.08)/2
= $200 every 6 months
PW = 200(P/A,5%,34) + 5000(P/F,5%,34)
= 200(16.1929) + 5000(0.1904)
= $4190.58
4.22 An engineer planning for his retirement thinks that the rates of return in the
marketplace will decrease before he retires. Therefore, he plans to invest in
corporate bonds. He plans to buy a $50,000 bond that has a coupon rate of 12% per
year payable quarterly with a maturity date 20 years from now.
a. How much should he be able to sell the bond for in 5 years if the market rate of
return is 8% per year compounded quarterly?
b. If he invests all the dividends he receives at a rate of return of 12% per year
compounded quarterly, what is the total amount he will have immediately after
he sells the bond 5 years from now?
(a) I = (50,000)(0.12)/4
= $1500 per quarter
Five years from now there will be 15(4) = 60 payments left. Find PW5.
PW5 = 1500(P/A,2%,60) + 50,000(P/F,2%,60)

= 1500(34.7609) + 50,000(0.3048)
= $67,381
(b) Total = 1500(F/A,3%,20) + 67,381

= 1500(26.8704) + 67,381
= $107,687
4.23 Jamal bought a 5%, $1000, 20-year bond for $925. He received semiannual interest
for 8 years, then sold it immediately after the 16th interest payment for $800. Did
Jamal make the return of 5% per year compounded semiannually that he wanted?
Solve using (a) factors, and (b) a spreadsheet.
(a) Semiannual bond payment is 1000(0.05)/2 = $25 per 6 months. Semiannual

interest rate is 5%/2 = 2.5%.
10
PW = –925 + 25(P/A,2.5%,16) + 800(P/F,2.5%,16)
= –925 + 25(13.0550) + 800(0.6736)
= $–59.74
No, the bond investment did not make the target rate since PW < 0.
(b) Spreadsheet solution follows. Also, the single-cell function

= – 925 – PV(2.5%,16,25,800) will display the same result.
4.24 An investor believes that future stock market returns are going to decline.
Therefore, he decided to invest in some fixed-income securities. He paid $19,000
for a corporate bond with a face value of $20,000. The bond has an interest rate of
10% per year payable yearly. If the investor plans to sell the bond immediately
after receiving the fourth dividend payment, what is the minimum he will have to
receive in order to make a return of 14% per year? Solve using (a) tabulated
factors, and (b) the GOAL SEEK tool on a spreadsheet.
(a) Let R = amount received
I = 20,000(0.10) = $2000 per year
19,000 = 2000(P/A,14%,4) + R(P/F,14%,4)

R(0.5921) = 19,000 – 2000(2.9137)
R = $22,248
The investor would have to sell the bond for $22,247 to make 14% per year.
(b) Final GOAL SEEK template is shown with B7 the target cell for PW = 0 and
C2 the changing cell that displays $22,248.
11
4.25 Two processes can be used for producing a polymer that reduces friction loss in
engines. Process T will have a first cost of $700,000, an operating cost of $60,000
per year, and a salvage value of $80,000 after its 2-year life. Process W will have a
first cost of $1,350,000, an operating cost of $25,000 per year, and a $120,000
salvage value after its 4-year life. Process W will also require updating at the end
of year 2 at a cost of $90,000. Which process should be selected on the basis of a
present worth analysis at a MARR of 12% per year?
PWT = –700,000 – 60,000(P/A,12%,4) – 620,000(P/F,12%,2) + 80,000(P/F,12%,4)

= –700,000 – 60,000(3.0373) – 620,000(0.7972) + 80,000(0.6355)
= $–1,325,622
PWW = –1,350,000 – 25,000(P/A,12%,4) – 90,000(P/F,12%,2)

+ 120,000(P/F,12%,4)
= –1,350,000 – 25,000(3.0373) – 90,000(0.7972) + 120,000(0.6355)
= $–1,421,421
Select process T
4.26 Virgin Galactic is considering two materials for certain parts in a reusable space
vehicle: carbon fiber reinforced plastic (CFRP) and fiber reinforced ceramic
(FRC). The costs are shown below. Which should be selected on the basis of a
present worth comparison if MARR = 10% per year? (a) Solve using tabulated
factors. (b) (Spreadsheet exercises) Solve using single-cell functions. (c) Using
your spreadsheet functions, will the selection change if the estimated life of the
CFRP material is 4, rather than 2, years?
Material CFRP FRC

First cost, $ −205,000 −235,000
Maintenance cost, $/year −29,000 −27,000
Life, years 2 4
12
(a) PWCFRP = –205,000 – 29,000(P/A,10%,4) – 203,000(P/F,10%,2)
+ 2000(P/F,10%,4)
= –205,000 – 29,000(3.1699) – 203,000(0.8264) + 2000(0.6830)
= $–463,320
PWFRC = –235,000 – 27,000(P/A,10%,4) + 20,000(P/F,10%,4)

= –235,000 – 27,000(3.1699) + 20,000(0.6830)
= $–306,927
Select material FRC
(b) PWCFRP function: = – 205000 – PV(10%,4,–29000,2000) + PV(10%,2,203000)
PWFRC function: = – 235000 – PV(10%,4,–27000,20000)
(c) PWCFRP function: = – 205000 – PV(10%,4,–29000,2000), which

displays a PWCFRP of $–295,560.
Select CFRP. The selection does change.
4.27 An engineer is considering two different liners for an evaporation pond that will
receive salty concentrate from a brackish water desalting plant. A plastic liner will
cost $0.90 per square foot initially and require replacement in 15 years when
precipitated solids will have to be removed from the pond using heavy equipment.
This removal will cost $500,000. A rubberized elastomeric liner is tougher and,
therefore, is expected to last 30 years, but it will cost $2.20 per square foot. If the
size of the pond is 110 acres (1 acre = 43,560 square feet), which liner is more cost
effective on the basis of a present worth comparison at a MARR of 8% per year?
Compare PW of costs over 30 years.
PWPlastic = – (0.90)(110)(43,560) – [(0.90)(110)(43,560) + 500,000](P/F,8%,15)

= – 4,312,440 – [4,312,440 + 500,000](0.3152)
= $–5,829,321
PWRubberized = – (2.20)(110)(43,560)
= $–10,541,520
Select plastic liner
4.28 Machines that have the following costs are under consideration for a robotized
welding process. Use an interest rate of 10% per year and PW analysis to
determine which machine should be selected. Show (a) factor, and (b) spreadsheet
solutions, as instructed. (c) Use your spreadsheet to determine if the choice is
13
different when management restricts all evaluations to a 3-year study period.
Assume the market value of Y remains at $95,000.
Machine X Machine Y
First cost, $ −250,000 −430,000
AOC, $ per year −60,000 −40,000
Life, years 3 6
(a) PWX = –250,000 – 60,000(P/A,10%,6) – 180,000(P/F,10%,3) +

70,000(P/F,10%,6)
= –250,000 – 60,000(4.3553) – 180,000(0.7513) + 70,000(0.5645)
= $–607,037
PWY = –430,000 – 40,000(P/A,10%,6) + 95,000(P/F,10%,6)

= –430,000 – 40,000(4.3553) + 95,000(0.5645)
= $–550,585
Select machine Y
(b) Spreadsheet solution to select machine Y.
(c) PWX function: = – PV(10%,3,–60000,70000) – 250000, which

displays $–346,619
PWY function: = – PV(10%,3,–40000,95000) – 430000, which
displays $–458,099
Select machine X; the decision does change.
4.29 A sports mortgage is the brainchild of Stadium Capital Financing Group, a

company headquartered in Chicago, Illinois. It is an innovative way to finance
cash-strapped sports programs by allowing fans to sign up to pay a “mortgage”
over a certain number of years for the right to buy good seats at football games for
several decades with season ticket prices locked in. The locked-in price period is
50 years in California. Assume you and your brother went to UCLA.
14
Your brother, Harold, purchases a $50,000 mortgage and pays for it now to
get season tickets for $290 each for 50 years, while you, being a three-time
alumnus of the same university, are able to buy season tickets at $390 in year 1,
with prices increasing by $20 per year for 50 years. (a) Which of you made the
better deal at an interest rate of 8% per year? (b) What should Harold have been
willing to pay UCLA up front for the mortgage to make the two plans exactly
equivalent economically? (Assume Harold has no reason to give extra money to
UCLA at this point and that the seats are the same level and next to each other.)
(a) PWHarold = –50,000 – 290(P/A,8%,50)

= –50,000 – 290(12.2335)
= $–53,548
PWYou = –390(P/A,8%,50) – 20(P/G,8%,50)

= –390(12.2335) – 20(139.5928)
= $–7563
You made a far better choice, economically.
(b) Let MX = ‘mortgage’ cost for Harold for equivalence of plans
–7,563 = –MX – 290(P/A,8%,50)

Mx = 7563 – 290(12.2335)
= $4015
Harold should pay only $4015, not $50,000, economically speaking.
4.30 An electric switch manufacturing company has to choose one of three different
assembly methods. Method A will have a first cost of $40,000, an annual operating
cost of $9000, and a service life of 2 years. Method B will cost $80,000 to buy and
will have an annual operating cost of $6000 over its 4-year service life. Method C
will cost $130,000 initially with an annual operating cost of $4000 over its 8-year
life. Methods A and B will have no salvage value, but Method C will have some
equipment worth an estimated $12,000. Which method should be selected using
present worth analysis at a MARR of 10% per year?
PWA = –40,000[1+ (P/F,10%,2) + (P/F,10%,4) + (P/F,10%,6)] – 9000(P/A,10%,8)

= –40,000 [1 + 0.8264 + 0.6830 + 0.5645] – 9000(5.3349)
= $–170,970
PWB = –80,000[1 + (P/F,10%,4)] – 6000(P/A,10%,8)

= –80,000[1 + 0.6830] – 6000(5.3349)
= $–166,649
15
PWC = –130,000 – 4000(P/A,10%,8) + 12,000(P/F,10%,8)
= –130,000 – 4000(5.3349) + 12,000(0.4665)
= $–145,742
Select method C
4.31 Compare the following machines on the basis of their present worth values. Use i =
12% per year. (a) Make the computations using factors. (b) (Spreadsheet exercise)
Develop the single-cell functions that display the PW values for the New and Used
alternatives.
Machine New Used

First cost, $ −44,000 −23,000
Annual operating cost, $ −7,000 −9,000
Annual repair cost, $ −210 −350
Overhaul after 10 years, $ −1,900 —
Life, years 14 7
(a) PWnew = –44,000 – 7,210(P/A,12%,14) – 1900(P/F,12%,10) + 4,000(P/F,12%,14)

= –44,000 – 7,210(6.6282) – 1900 (0.3220) + 4,000(0.2046)
= $–91,583
PWused = –23,000 – 9350(P/A,12%,14) – 23,000(P/F,12%,7) + 3000(P/F,12%,7)

+ 3000(P/F,12%,14)
= –23,000 – 9350(6.6282) – 23,000(0.4523) + 3000(0.4523)
+ 3000(0.2046)
= $–93,406
Buy the new machine
(b) New machine: = – 44000 – PV(12%,14,–7210,4000) – PV(12%,10,–1900)

Used machine: = – 23000 – PV(12%,14,–9350,3000) – PV(12%,7,–20000)
4.32 Carl and Susan Jacks have invested their savings for some years earning at a rate of
6% per year to purchase, for cash, a mid-sized SUV for their family. After much
searching online and several showroom visits, two options are the finalists. The
estimates below include all first cost elements (purchase, extended warranty, taxes,
license, etc.) and AOC (insurance, fuel, regular maintenance, etc.). Perform a
spreadsheet-based FW evaluation at 6% per year on two time bases and select the
more economical vehicle. Carl wants to plan using a 10-year horizon and Susan
believes they will get tired of a SUV after 5 years. She wants a shorter planning
horizon.
a. Ten-year LCM with the repurchase of another Cadillac in year 5 for $65,000,
which is $10,000 more than the first purchase.
16
b. Five-year study period (SP) assuming the resale value is 20% of the first cost for
both SUVs.
c. Is the selection different between the LCM- and SP-based analyses?
SUV Toyota Lexus GM Cadillac

First cost, $ −65,000 −55,000
AOC, year 1, $ −8,500 −9,750
Increase in AOC, %/year 2 3
Salvage value, end of life, $ 10,000 11,000
Replacement in year 5, $ — −65,000
Life, years 10 5
Spreadsheet follows with analysis for 10-year and 5-year evaluations.
(a) LCM of 10 years. Select Toyota Lexus since FW of costs is smaller.
(b) SP of 5 years. Select GM Cadillac since FW of costs is smaller.
(c) Selections are different, because there is a lower FW of costs over 5 years for
GM Cadillac due, in part, to no re-purchase at a higher price in year 5.
4.33 Akash Uni-Safe in Chennai, India, makes Terminator fire extinguishers. The
company needs replacement equipment to form the neck at the top of each
extinguisher during production. Select between two metal-constricting machines.
Use the corporate MARR of 15% per year with (a) present worth analysis using
tabulated factors, (b) future worth analysis using tabulated factors, and (c) a
spreadsheet for PW and FW as requested above.
17
Machine D E
First cost, $ −62,000 −77,000
AOC, $ per year −15,000 −21,000
Life, years 4 6
(a) PW analysis requires an LCM of 12 years to select machine D.
PWD = –62,000[1 + (P/F,15%,4)+(P/F,15%,8)] – 15,000(P/A,15%,12)

+ 8,000[(P/F,15%,4)+(P/F,15%,8) + (P/F,15%,12)]
= –62,000[1 + 0.5718 + 0.3269] – 15,000 (5.4206)
+ 8,000[0.5718 + 0.3269 + 0.1869]
= $–190,344
PWE = –77,000[1 + (P/F,15%,6)] – 21,000(P/A,15%,12)

+ 10,000[(P/F,15%,6) + (P/F,15%,12)]
= –77,000[1 + 0.4323] – 21,000(5.4206) + 10,000[0.4323 + 0.1869]
= $–217,928
(b) Calculate the FW from PW values over the 12-year LCM, or set up FW
relations directly from cash flow estimates. Select machine D.
FWD = PWD(F/P,15%,12)
= –190,344(5.3503)
= $–1,018,398
FWE = PWE(F/P,15%,12)
= –217,928(5.3503)
= $–1,165,980
(c) A spreadsheet solution for parts (a) and (b) follows.
4.34 HJ Heinz Corporation is constructing a distribution facility in Italy for products

such as Heinz Ketchup, Jack Daniel’s sauces, HP steak sauce, and Lea & Perrins
Worcestershire sauce. A 15-year life is expected for the structure. The exterior of
the building is not yet selected. One alternative is to use concrete walls as the
18
façade and paint them. This will require painting now and every 5 years at a cost of
$80,000 each time. Another alternative is an anodized metal exterior attached to the
concrete wall. This will cost $200,000 now and require only minimal maintenance
of $500 every 3 years. A metal exterior is more attractive and will have a resale
value of an estimated $25,000 more than concrete 15 years from now. Painting (for
concrete) or maintenance (for metal) will be performed in the last year of
ownership to promote selling the property. Use future worth analysis and MARR =
12% per year to select the exterior finish (a) using tabulated factors, and (b) a
spreadsheet.
(a) Use C for painted concrete and M for metal exterior.

FWC = –80,000[(F/P,12%,15)+(F/P,12%,10)+(F/P,12%,5)+1]
= –80,000[5.4736 + 3.1058 + 1.7623 + 1]
= $–907,336
FWM = –200,000(F/P,12%,15) – 500[(F/P,12%,12)+(F/P,12%,9)+(F/P,12%,6)

+(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 the painted concrete exterior.
(b) Spreadsheet follows to select the painted concrete exterior.
4.35 Raytheon, a defense contractor, has been asked by the police department of
Middletown to estimate and analyze the life-cycle costs for a proposed drone
surveillance system to monitor traffic patterns and congestion within the central
thoroughfares of the city. The list includes the following categories: R&D costs
(R&D), nonrecurring investment costs (NRI), recurring investment costs (RI),
scheduled and unscheduled maintenance costs (Maint), equipment usage costs
(Equip), and disposal costs (Disp). The costs (in $ million units) for the 20-year life
cycle have been estimated. Calculate the present worth at a MARR of 7% per year.
19
Year R&D NRI RI Maint Equip Disp
0 5.5 1.1
1 3.5
2 2.5
3 0.5 5.2 1.3 0.6 1.5
4 10.5 3.1 1.4 3.6
5 10.5 4.2 1.6 5.3
6–10 6.5 2.7 7.8
11 on 2.2 3.5 8.5
18–20 2.7
PW of LCC = – 6.6 – 3.5(P/F,7%,1) – 2.5(P/F,7%,2) – 9.1(P/F,7%,3)

– 18.6(P/F,7%,4) – 21.6(P/F,7%,5) – 17(P/A,7%,5)(P/F,7%,5)
– 14.2(P/A,7%,10)(P/F,7%,10) – 2.7(P/A,7%,3)(P/F,7%,17)
= – 6.6 – 3.5(0.9346) – 2.5(0.8734) – 9.1(0.8163) – 18.6(0.7629)
– 21.6(0.7130) – 17(4.1002)(0.7130) – 14.2(7.0236)(0.5083)
– 2.7(2.6243)(0.3166)
= $–151,710,860
4.36 Three different plans were presented to the Alphabet Corporation for operating an
identity-theft scanning system. Plan A involves renewable 1-year contracts with
payments of $1 million at the beginning of each year. Plan B is a 2-year contract
that requires four payments of $600,000 each, with the first one made now and the
other three at 6-month intervals. Plan C is a 3-year contract that entails a payment
of $1.5 million now and a second payment of $0.5 million 2 years from now.
Assuming that the company could renew any of the plans under the same payment
conditions, determine which plan is best on the basis of a PW analysis at a MARR
of 6% per year compounded semiannually.
i/year = (1 + 0.03)2 – 1 = 6.09%; use LCM = 6 years or 12 6-month periods.
PWA = –1,000,000 – 1,000,000(P/A,6.09%,5)

= –1,000,000 – 1,000,000(4.2021)
= $–5,202,100
PWB = –600,000 – 600,000(P/A,3%,11)

= –600,000 – 600,000(9.2526)
= $–6,151,560
PWC = –1,500,000 – 500,000(P/F,3%,4) – 1,500,000(P/F,3%,6)

– 500,000(P/F,3%,10)
= –1,500,000 – 500,000(0.8885) – 1,500,000(0.8375) – 500,000(0.7441)
= $–3,572,550
Select plan C
20
4.37 A military unit received two proposals for a project to design, build, and maintain
barracks for soldiers in training. Proposal A involves an off-the-shelf “bare-bones”
design and standard-grade construction of walls, windows, doors, and other features.
With this option, heating and cooling costs will be greater, maintenance costs will be
higher, and replacement will occur earlier than proposal B. The initial cost for A will
be $750,000. Heating and cooling costs will average $6000 per month with
maintenance costs averaging $2000 per month. Minor remodeling will be required in
years 5, 10, and 15 at a cost of $150,000 each time in order to render the units usable
for 20 years. They will have no salvage value. Proposal B will include tailored design
and construction costs of $1.3 million initially with estimated heating and cooling costs
of $3000 per month and maintenance costs of $1000 per month. There will be no
salvage value at the end of the 20-year life. Which proposal should be accepted on the
basis of a life-cycle cost analysis at a MARR of 0.5% per month?
LCCA = –750,000 – (6000 + 2000)(P/A,0.5%,240) – 150,000[(P/F,0.5%,60)

+ (P/F,0.5%,120) + (P/F,0.5%,180)]
= –750,000 – (8000)(139.5808) – 150,000[(0.7414) + (0.5496) + (0.4075)]
= $–2,121,421
LCCB = –1,300,000 – (3000 + 1000)(P/A,0.5%,240)

= –1,300,000 – (4000)(139.5808)
= $–1,858,323
Select proposal B
4.38 The Health Department of Winter Park plans to develop an upgraded software
system to assist medical personnel in the treatment of opioid-addicted patients. A
program cost estimation approach (discussed earlier in section 1.8) has been used
to make estimates for a 10-year progam with categories of development,
programming, operating, and support costs. There are three alternatives under
consideration, identified as A (tailored system), B (adapted system), and C (current
system). The cost estimates are summarized below. Perform a life-cycle cost
analysis to identify the best alternative at 8% per year using (a) tabulated factors
first, then (b) a spreadseet to verify your selection.
Alternative Cost Component Estimated Cost and Time Frame

A Development $250,000 now, $150,000 years 1–4
Programming $45,000 now, $35,000 years 1–2
Operation $50,000 years 1–10
Support $30,000 years 1–5
B Development $10,000 now
Programming $45,000 year 0, $30,000 years 1–3
Operation $80,000 years 1–10
Support $40,000 years 1–10
C Operation $175,000 years 1–10
21
(a) LCCA = –250,000 – 150,000(P/A,8%,4) – 45,000 – 35,000(P/A,8%,2)
–50,000(P/A,8%,10) – 30,000(P/A,8%,5)
= –250,000 – 150,000(3.3121) – 45,000 – 35,000(1.7833)
–50,000(6.7101) – 30,000(3.9927)
= $–1,309,517
LCCB = –10,000 – 45,000 – 30,000(P/A,8%,3) – 80,000(P/A,8%,10)

– 40,000(P/A,8%,10)
= –10,000 – 45,000 – 30,000(2.5771) – 80,000(6.7101
–40,000(6.7101)
= $–937,525
LCCC = –175,000(P/A,8%,10)
= –175,000(6.7101)
= $–1,174,268
Select alternative B
(b) Spreadsheet follows to verify selection of B.
4.39 Robert became quite well-to-do as founder and president of Carlson Auto Paint and
Supply, Inc. (CAPS). Now, he wants to start a permanent fund to support research
directed toward improved sustainability of painted surfaces at his alma mater. He
plans to contribute money now so that $100,000 per year can be withdrawn each
year forever, beginning in year 6. If the fund earns interest at a rate of 8% per year,
how much money must be donated now?
CC = [(100,000/0.08)](P/F,8%,5)
= 1,250,000(0.6806)
= $850,750
22
4.40 Determine the capitalized cost of $100,000 now and $50,000 per year in years 1
through infinity at (a) an interest rate of 10% per year, and (b) an interest rate of
10% per year compounded continuously.
(a) CC = 100,000 + 50,000/0.10

= $600,000
(b) i per year = e0.10 – 1 = 10.517%
CC = 100,000 + 50,000/0.10517
= $575,421
4.41 Joe and Marylyn Hardwick, both graduates of a small, private university in
Vermont, have decided they can contribute $50,000 every 5 years forever to the
university, initially during their lives and thereafter through a charitable foundation
they have already established. Their contribution will begin 5 years from now.
Determine the capitalized cost of the infinite series of contributions at an interest
rate of 8% per year.
Convert F in year 5, 10, … to a 5-year A series; then divide by i.
A = 50,000(A/F,8%,5)
= 50,000(0.17046)
= $8523
CC = 8523/0.08 = $106,538
4.42 Compare the alternatives shown on the basis of their capitalized costs using a
MARR of 10% per year.
Alternative M N
First cost, $ −150,000 −800,000
Annual operating cost, $ per year −50,000 −12,000
Salvage value, $ 8,000 1,000,000
Life, years 5 ∞
For M, first find AW and then divide by i to find CC.
AWM = –150,000(A/P,10%,5) – 50,000 + 8000(A/F,10%,5)

= –150,000(0.26380) – 50,000 + 8000(0.16380)
= $–88,260
CCM = –88,260/0.10
= $–882,600
23
CCN = – 800,000 – 12,000/0.10
= $–920,000
Select alternative M
4.43 A patriotic group of firefighters is raising money to erect a permanent (i.e., infinite life)
monument in New York City to honor those killed in the line of duty. The initial cost
of the monument will be $1,500,000 and the annual maintenance will cost $5000.
There will be an additional one-time cost of $20,000 in 2 years to add names of those
who were missed initially. At an interest rate of 6% per year, how much money must
they raise now in order to construct and maintain the monument forever?
CC = –1,500,000 – 5000/0.06 – 20,000(P/F,6%,2)

= –1,500,000 – 5000/0.06 – 20,000(0.8900)
= $–1,601,133
4.44 The president of Biomed Products is considering a long-term contract to outsource

maintenance and operations that will significantly improve the energy efficiency of
their imaging systems. The payment schedule has two large payments in the first
years with continuing payments thereafter. The proposed schedule is $200,000
now, $300,000 four years from now, $50,000 every 5 years, and an annual amount
of $8000 beginning 15 years from now and continuing indefinitely. Determine the
capitalized cost at 8% per year.
Monetary terms are in $1000 units.
CC = –200 – 300(P/F,8%,4) – 50(A/F,8%,5)/0.08 – (8/0.08)(P/F,8%,14)

= –200 – 300(0.7350) – 50(0.17046)/0.08 – (8/0.08)(0.3405)
= $–561.088 ($–561,088)
4.45 Yvonne’s father was a true believer in “giving back.” He endowed a program 35
years ago to help students receive degrees when they are short on funds. (a) How
much money was contributed 35 years ago if it earned at a rate of 10% per year
(with no withdrawals) and is now sufficient to provide a perpetual income of
$10,000 annually beginning this year, year 35? (b) If Yvonne wants to start her
own scholarship fund that generates $10,000 annually starting next year, what is
the amount she must contribute if earnings remain at 10% per year?
(a) Determine PW in year -1; then find PW 34 years earlier.
PW–1 = CC–1 = 10,000/0.10 = 100,000
PW–35 = 100,000(P/F,10%,34)
= 100,000(0.0391)
= $3910
(b) CCnow = 10,000/0.10 = $100,000
24
4.46 Assume that 25 years ago your dad invested $200,000, plus $25,000 in years 2
through 5, and $40,000 per year from year 6 until now. At a very good interest rate
of 12% per year, determine (a) the present worth in year 0 (i.e., 25 years ago), and
(b) the annual amount that can be withdrawn forever starting next year (year 26), if
no additional investments are made.
(a) PW–25 = 200,000 + 25,000(P/A,12%,4)(P/F,12%,1)

+ 40,000(P/A,12%,20)(P/F,12%,5)
= 200,000 + 25,000(3.0373)(0.8929) + 40,000(7.4694)(0.5674)
= $437,326
(b) Find FW value in year 0 (25 years after PW–25), which is the CC base, and
multiply by i.
A = FW0 × i
= [200,000(F/P,12%,25) + 25,000(F/A,12%,4)(F/P,12%,20)
+ 40,000(F/A,12%,20)](0.12)
= [200,000(17.0001) + 25,000(4.7793)(9.6463) + 40,000(72.0524)](0.12)
= 7,434,680(0.12)
= $892,161 per year, forever
4.47 An aggressive stockbroker claims an ability to consistently earn 12% per year on
an investor’s money. Believing the broker, you invest $10,000 now, $30,000 three
years from now, and $8000 per year for 5 years starting 4 years from now. (a) How
much money can you withdraw every year forever, beginning 20 years from now?
(b) What is the capitalized cost of your investments if the $8000 per year
investment is expected to continue for an unspecified time into the future instead of
just 5 years?
(a) Find future value in year 19, which is the CC base; then multiply by i.
F19 = 10,000(F/P,12%,19) + 30,000(F/P,12%,16) + 8000(F/A,12%,5)(F/P,12%,11)

= 10,000(8.6128) + 30,000(6.1304) + 8000(6.3528)(3.4785)
= $446,826
A = 446,826(0.12)
= $53,619 per year, forever
(b) CC = 10,000 + 30,000(P/F,12%,3) + (8000/0.12)(P/F,12%,3)

= 10,000 + 30,000(0.7118) + 66,667(0.7118)
= $78,807
4.48 A company that makes food-friendly silicone (for use in cooking and baking pan
coatings) is considering four independent projects shown, all of which can be
considered to be viable for only 10 years. The company’s MARR is 15% per year.
(a) Determine which projects to implement. Financial values are in $1000 units. (b)
25
(Spreadsheet exercise) Use GOAL SEEK to determine the required first cost of
project D to just accept it. Is this a maximum or minimum required first cost?
Project A B C D
First cost, $ −1200 −2000 −5000 −7000
Annual net income, $/year 200 400 1100 1300
Salvage value, $ 5 6 8 7
(a) Compare PW values against DN PW = $0; select all with PW ≥ 0. Monetary

units are $1000.

PWA = –1200 + 200(P/A,15%,10) + 5(P/F,15%,10)
= –1200 + 200(5.0188) + 5(0.2472)
= $–195.004 (Reject)
PWB = –2000 + 400(P/A,15%,10) + 6(P/F,15%,10)

= –2000 + 400(5.0188) + 6(0.2472)
= $9.003 (Accept)
PWC = –5000 + 1100(P/A,15%,10) + 8(P/F,15%,10)

= –5000 + 1100(5.0188) + 8(0.2472)
= $522.658 (Accept)
PWD = –7000 + 1300(P/A,15%,10) + 7(P/F,15%,10)

= –7000 + 1300(5.0188) + 7(0.2472)
= $–473.830 (Reject)
(b) Sample solution: Enter net income values into cells B2-B12 (in $1000 units).
Use NPV function in cell B14 to display PW = –$473.870. GOAL SEEK
template changes cell B2 to force cell B14 to equal 0.00.
Result is a maximum first cost of $–6526.13 ($–6,526,130)
4.49 An engineer calculated the PW values for four alternatives to develop a remotely
controlled vibrations control system for offshore platform application. The results
in the table use a MARR of 14% per year. Determine which alternative(s) should
be selected if (a) the alternatives are mutually exclusive, and (b) if the projects are
independent.
Alternative I J K L
Life, n, years 3 4 12 6
PW over n years, $ 16.08 31.12 −257.46 140.46
PW over 6 years, $ 26.94 15.78 −653.29 140.46
PW over 12 years, $ 39.21 60.45 −257.46 204.46
26
(a) Use LCM of 12 years; select L with PW = $204.46
(b) Use PW over life of each alternative; select I, J and L with PW > 0
4.50 The product development group of a high-tech electronics company developed five
proposals for new products. The company wants to expand its product offerings, so
it will undertake all projects that are economically attractive at the company’s
MARR of 20% per year. The cash flows (in $1000 units) associated with each
project are estimated. Which projects, if any, should the company accept on the
basis of a present worth analysis, under the following conditions?
a. There is no budget restriction.
b. (Spreadsheet exercise) No more than $1.2 million (i.e., $1200 in $1000 units)
can be invested and the initial investment of project 2 was corrected to be $
−400, with other estimates remaining as shown. (Hint: Use PV function results
to obtain bundle PW values.)
Project 1 2 3 4 5
Initial investment, $ −400 −510 −660 −820 −900
M&O cost, $/year −100 −140 −280 −315 −450
Revenue, $/year 360 235 400 605 790
Salvage value, $ — 22 — 8 95
Life, years 3 10 5 8 4
(a) PW1 = –400 + (360 – 100)(P/A,20%,3)

= –400 + 260(2.1065)
= $147.69 ($147,690) Accept
PW2 = –510 + (235 – 140)(P/A,20%,10) + 22(P/F,20%,10)

= –510 + 95(4.1925) + 22(0.1615)
= $–108.160 ($–108,160) Reject
PW3 = –660 + (400 – 280)(P/A,20%,5)

= –660 + 120(2.9906)
= $–301.128 ($–301,128) Reject
PW4 = –820 + (605 – 315)(P/A,20%,8) + 8(P/F,20%,8)

= –820 + 290(3.8372) + 8(0.2326)
= $294.649 ($294,649) Accept
PW5 = –900 + (790 – 450)(P/A,20%,4) + 95(P/F,20%,4)

= –900 + 340(2.5887) + 95(0.4823)
= $25.977 ($25,977) Accept
Projects 1, 4 and 5 are acceptable with PW > 0
27
(b) With an initial investment for project 2 of $–400, PW2 = $1.84; it is now
acceptable. Project 3 is eliminated from further consideration. Functions are of
the format = NPV(20%,first_year:last_year) + investment
Of the 24 = 16 bundles, only 5 plus the DN option qualify; all others have an
investment > $1200. For the PW of a bundle, add the PW values for projects in
the bundle.
Select project 4 only with the largest PW.
4.51 Analon Health, a midsized health care company in Toronto, is considering the
addition of one or more of four new services in hospitals. The total amount of
investment capital available for new ventures is $800,000. Analon uses a 5-year
project recovery period and a MARR of 20% per year. All cash flows are in $1000
units. (a) Using tabulated factors, determine which one(s) should be undertaken on
the basis of a PW analysis. (b) Make the selection using a spreadsheet and PV
functions.
Services R1 S2 T3 U4
Initial development, $ −200 −400 −500 −700
M&O cost, $/year −50 −200 −300 −400
Revenue, $/year 150 450 520 770
(a) Of the 24 = 16 possible bundles, there are 7 within the $800,000 budget limit, as
follows: DN; R1; S2; T3; U4; as well as combination bundles of R1,S2, and
R1,T3. Money values are in $1000 units.
28
PWDN = $0
PWR1 = –200 + (150 – 50)(P/A,20%,5)
= –200 + 100(2.9906)
= $99.06 ($99,060)
PWS2 = –400 + (450 – 200)(P/A,20%,5)
= –400 + 250(2.9906)
= $347.650 ($347,650)
PWT3 = –500 + (520 – 300)(P/A,20%,5)
= –500 + 220(2.9906)
= $157.932 ($157,932)
PWU4 = –700 + (770 – 400)(P/A,20%,5)
= –700 + 370(2.9906)
= $406.522 ($406,522)
PWR1,S2 = 99.060 + 347.650
= $446.710 ($446,710)
PWR1,T3 = 99.060 + 157.932
= $256.992 ($256,922)
Select product lines R1 and S2 with the highest PW of $446.710
(b) Spreadsheet verifies selection of R1 and S2.
4.52 Based on PW values, determine which of the following independent projects

should be selected for investment if $240,000 is available and the MARR is 10%
per year. (NCF = net cash flow)
Project Initial Investment, $ NCF, $/Year Life, Years

A −100,000 50,000 8
B −125,000 24,000 8
C −120,000 75,000 8
D −220,000 39,000 8
E −200,000 82,000 8
29
Develop the bundles with less than $240,000 investment, and select the one with
the largest PW value.
Bundle Projects Initial investment, $ NCF, $/year PW at 10%, $

1 A –100,000 50,000 166,746
2 B –125,000 24,000 3,038
3 C –120,000 75,000 280,118
4 D –220,000 39,000 –11,938
5 E –200,000 82,000 237,464
6 AB –225,000 74,000 169,784
7 AC –220,000 125,000 446,864
8 DN 0 0 0
PW1 = –100,000 + 50,000(P/A,10%,8)

= –100,000 + 50,000(5.3349)
= $166,746
PW2 = –125,000 + 24,000(P/A,10%,8)

= –125,000 + 24,000(5.3349)
= $3038
PW3 = –120,000 + 75,000(P/A,10%,8)

= –120,000 + 75,000(5.3349)
= $280,118
PW4 = –220,000 + 39,000(P/A,10%,8)

= –220,000 + 39,000(5.3349)
= $–11,939
PW5 = –200,000 + 82,000(P/A,10%,8)

= –200,000 + 82,000(5.3349)
= $237,462
All other PW values are obtained by adding the respective PW for bundles 1-5.
Conclusion: Select PW = $446,864, which is bundle 7 (projects A and C) with

$220,000 total investment.
4.53 Dwayne has four independent vendor proposals to contract the nationwide oil
recycling services for the Ford Corporation manufacturing plants. All combinations
are acceptable, except that vendors B and C cannot both be chosen. Revenue
sharing of recycled oil sales with Ford is a part of the requirement. Develop all
possible mutually exclusive bundles under the additional following restrictions and
select the best projects. The corporate MARR is 10% per year.
30
a. Initially determine PW values for each vendor using tabulated factors and
spreadsheet functions.
b. A maximum of $4 million can be spent.
c. A larger budget of $5.5 million is allowed, but no more than two vendors can be
selected.
d. There is no limit on investment.
Life, Annual Net Revenue,

Vendor Initial Investment, $ Years $/Year
A −1.5 million 8 360,000
B −3.0 million 10 600,000
C −1.8 million 5 620,000
D −2.0 million 4 630,000
(a) PW for each project using factors.
PWA = –1,500,000 + 360,000(P/A,10%,8) = $420,564

PWB = –3,000,000 + 600,000(P/A,10%,10) = $686,760
PWC = –1,800,000 + 620,000(P/A,10%,5) = $550,296
PWD = –2,000,000 + 630,000(P/A,10%,4) = $–2,963 (not acceptable)
Spreadsheet: Enter the following to display the project PW values.
A: = – PV(10%,8,360000) –1500000 Display: $420,573

B: = – PV(10%,10,600000) –3000000 Display: $686,740
C: = – PV(10%,5,620000) –1800000 Display: $550,288
D: = – PV(10%,4,630000) –2000000 Display; $–2,985 (not acceptable)
Formulate acceptable bundles from the 24 = 16 possibilities, without both B and C

and select projects with largest total PW of a bundle.
(b) With, b = $4 million, select projects A and C with PW = $970,860.

(Note: These PW values use the factor results above.)
Investment
Bundle , PW, $
$ million
DN 0 0
A –1.5 420,564
B –3.0 686,760
C –1.8 550,296
AC –3.3 970,860
31
(c) For b = $5.5 million, select projects A and B with PW = $1,107,313.
Investment
Bundle , PW, $
$ million
DN 0 0
A −1.5 420,564
B −3.0 686,760
C −1.8 550,296
AB −4.5 1,107,324
AC −3.3 970,860
(d) With no-limit, select all with PW > 0. Select projects A, B and C.
4.54 From the PW values shown for four mutually exclusive alternatives, the one(s) to
select is:
Alternative PW at 8%, $
A −25,000
B −12,000
C 10,000
D 15,000
a. Only A
b. Only D
c. Only A and B
d. Only C and D
Answer is (b)
4.55 The present worth of $50,000 now, $10,000 per year in years 1 through 15, and
$20,000 per year in years 16 through infinity at 10% per year is closest to:
a. Less than $169,000
b. $169,580
c. $173,940
d. $195,730
PW = 50,000 + 10,000(P/A,10%,15) + [20,000/0.10](P/F,10%,15)

= $173,941
Answer is (c)
32
4.56 At a return of 10% per year, the amount you must deposit in your retirement
account each year for years 0 through 9 (i.e., 10 deposits) if you want to withdraw
$50,000 per year forever beginning 30 years from now is closest to:
a. $4239
b. $4660
c. $4974
d. $5471
CC = [50,000/0.10](P/F,10%,20)(A/F,10%,10)
= $4662.33
Answer is (b)
Problems 4.57 through 4.59 are based on the following estimates for two mutually
exclusive alternatives. The cost of money is 10% per year.
Machine X Y
Initial cost, $ −66,000 −46,000
Annual cost, $/year −10,000 −15,000
Life, years 6 3
4.57 The present worth of machine X is closest to:

a. $−65,270
b. $−87,840
c. $−103,910
d. $−114,310
PWX = –66,000 –10,000(P/A,10%,6) + 10,000(P/F,10%,6)

= –66,000 –10,000(4.3553) + 10,000(0.5645)
= $–103,908
Answer is (c)
4.58 In comparing the machines on a present worth basis, the present worth of machine
Y is closest to:
a. $−65,270
b. $−97,840
c. $−103,910
d. $−114,310
LCM is 6 years.
PWY = –46,000 –15,000(P/A,10%,6) – 22,000(P/F,10%,3) + 24,000(P/F,10%,6)
= –46,000 –15,000(4.3553) – 22,000(0.7513) + 24,000(0.5645)
= $–114,310
Answer is (d)
33
4.59 The capitalized cost of machine X is closest to:
a. $−103,910
b. $−114,310
c. $−1,039,080
d. $−238,580
CCX = [–66,000(A/P,10%,6) – 10,000 + 10,000(A/F,10%,6)]/0.10

= [–66,000(0.22961) – 10,000 + 10,000(0.12961)]/0.10
= $–238,582
Answer is (d)
Problems 4.60 through 4.62 are based on the following estimates for four independent
projects. The cost of money is 8% per year.
Project Initial Investment, $ PW, $

1 −20,000 2,400
2 −35,000 9,200
3 −40,000 −7,300
4 −55,000 11,400
4.60 If the investment budget is $75,000, all of the following mutually exclusive
bundles should be evaluated, except:
a. DN
b. 2,4
c. 2,3
d. 1,2
Answer is (b)
4.61 If only two projects may be selected with no more than $100,000 invested, the
projects selected are:
a. 1 and 2
b. 3 and 4
c. 2 and 3
d. 2 and 4
Bundle 2,4 invests $90,000 with the largest PW = $20,600.

Answer is (d)
4.62 You learned of a serious error in estimation for project 3. Its PW is actually $2500,
not $−7300. If only two projects may be selected with no more than $100,000
invested, the projects selected are now:
a. 2 and 3
b. 3 and 4
c. 2 and 4
d. None of these
34
The bundle of 2 and 4 still has the largest PW at $20,600.
Answer is (c)
4.63 A $20,000 collateral bond has a coupon rate of 7% per year payable quarterly. The
bond matures 30 years from now. At a market interest rate of 7% per year
compounded semiannually, the amount and frequency of the bond interest
payments is:
a. $1400 per year
b. $1400 per quarter
c. $350 per year
d. $350 per quarter
I/quarter = 20,000(0.07)/4
= $350
Answer is (d)
4.64 A $25,000 mortgage bond with an interest rate of 6% per year payable
semiannually is due 12 years from now. The present worth of the bond at an
interest rate of 10% per year payable semiannually is closest to:
a. $18,100
b. $18,925
c. $19,330
d. $22,155
I = 25,000(0.06)/2
= $750 every six months
PW = 750(P/A,5%,24) + 25,000(P/F,5%,24)
= 750(13.7986) + 25,000(0.3101)
= $18,101
Answer is (a)
4.65 As part of your inheritance, you received a bond that will pay interest of $700
every 6 months for 15 years. If the coupon rate is 7% per year, the face value of the
bond is:
a. $10,000
b. $20,000
c. $30,000
d. $40,000
700 = V(0.07)/2
V = $20,000
Answer is (b)
35
4.66 You own a $50,000 corporate bond with a bond interest rate of 6% payable
monthly that is due 10 years from now. If you want to sell it today and realize a
rate of return of 12% per year compounded monthly, the amount you must receive
is closest to:
a. $32,575
b. $33,125
c. $35,250
d. $38,550
I = 50,000(0.06)/12
= $250 per month
PW = 250(P/A,1%,120) + 50,000(P/F,1%,120)
= 250(69.7005) + 50,000(0.3030)
= $32,575
Answer is (a)
36

Blank 3e ISM Ch04

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Blank 3e ISM Ch04

Uploaded by

Copyright:

Available Formats

Solutions to end-of-chapter problems

Basics of Engineering Economy, 3rd edition

4.3 What is meant by do-nothing alternative?

PWA = –80,000 – 30,000(P/A,12%,3) + 15,000(P/F,12%,3)

PWB = –120,000 – 8,000(P/A,12%,3) + 40,000(P/F,12%,3)

PWPhoto = –26,000 – 4,800(P/A,9%,4)

PWCap = –32,000 – 2100(P/A, 9%, 4)

PWsingle = –4000 – 4000(P/A,12%,4)

Buy the site license

(a) PWasphalt = – (1,500)(14)

PWfibcrglass = – (1,500)(17) + 4,500(P/F,16%,10)

(b) For asphalt relation: = –1500*14

PWA = 1{[1– (1.1/1.0525)10]/–0.0475}

Alternative B: PWB = $18,000,000

X-ray System Del Medical Siemens

(a) Monetary units are in $1000. Calculate PW values to select Siemens.

PWDel = –250 – 231(P/A,5%,6) –140(P/F,5%,4) + 50(P/F,5%,6)

PWSie = –224 – 235(P/A,5%,6) – 26(P/F,5%,3) + 10(P/F,5%,6)

PWDel : = – PV(5%,6,–231000,50000) –250000 – PV(5%,4,–140000)

PWSie : = – PV(5%,6,–235000,10000) –224000 – PV(5%,3,–26000)

System Pull Push

PWpull = –1500 – 700(P/A,10%,8) + 100(P/F,10%,8)

PWpush = –2250 – 600(P/A,10%,8) + 50(P/F,10%,8) – 500(P/F,10%,3)

(b) Enter these single-cell functions to display PW values.

(a) Monetary units are in $ million. Calculate PW values to select platform Z.

PWX = –300 – 320(P/A,15%,20) + 75(P/F,15%,20)

(b) Enter the PV functions to display PW values in $ million units.

PWX: = – PV(15%,20,–320,75) –300

PWX = –2000 + 510(P/A,15%,10) + 5(P/F,15%,10)

PWY = –4200 + 1000(P/A,15%,10) + 7(P/F,15%,10)

PWZ = –6300 + 1300(P/A,15%,10) + 7(P/F,15%,10)

PWX = –80,000 – [30,000(P/A,12%,3) + 4000(P/G,12%,3)] + 15,000(P/F,12%,3)

PWY = –120,000 – [8,000(P/A,12%,3) + 6500(P/G,12%,3)] + 40,000(P/F,12%,3)

PW250 = –155,000 – [3000(P/A,10%,30) + 15(P/G,10%30)]

Install the 250 mm pipe

4.17 A metallurgical engineer is considering two materials as the additive to a

Material Nickel-Cadmium Aluminum-Beryllium

(a) PWNC = –15,000 – [9000(P/A,12%,5) + 730(P/G,12%,5)] + 2000(P/F,12%,5)

Select Nickel-Cadmium (NC)

(b) Spreadsheet solution; select NC alternative

(a) PWProf = –52,000 – 1000(P/A,9%,4) – 500(P/G,9%,4)

PWExec = –62,000 – 5000(P/A,9%,4) + 500(P/G,9%,4)

Select the Professional Plan

4.19 In order to retain high-performing engineers, a large semiconductor company

Find Pg for each stock and select higher value

PgA = 30,000{1 – [(1 + 0.06)/(1 + 0.08)]5}/(0.08 – 0.06)

PgB = 20,000{1 – [(1 + 0.12)/(1 + 0.08)]5}/(0.08 – 0.12)

Select class A stock

(a) PW = 500(P/A,2%,60) + 50,000(P/F,2%,60) – 45,000

(b) Function is = – PV(2%,60,500,50000) – 45000

Conclusion: Not a financially sound investment since PW < 0 at 2% per quarter.

PW5 = 1500(P/A,2%,60) + 50,000(P/F,2%,60)

(b) Total = 1500(F/A,3%,20) + 67,381

(a) Semiannual bond payment is 1000(0.05)/2 = $25 per 6 months. Semiannual

(b) Spreadsheet solution follows. Also, the single-cell function

(a) Let R = amount received

I = 20,000(0.10) = $2000 per year

19,000 = 2000(P/A,14%,4) + R(P/F,14%,4)

PWT = –700,000 – 60,000(P/A,12%,4) – 620,000(P/F,12%,2) + 80,000(P/F,12%,4)

PWW = –1,350,000 – 25,000(P/A,12%,4) – 90,000(P/F,12%,2)

Material CFRP FRC

PWFRC = –235,000 – 27,000(P/A,10%,4) + 20,000(P/F,10%,4)

Select material FRC

(b) PWCFRP function: = – 205000 – PV(10%,4,–29000,2000) + PV(10%,2,203000)