Arab Academy for Science, Technology and Maritime Transport

8. Consider the following cash-flow diagram. Industrial and Management Engineering Department
Course: NE-364 Engineering Economy

Sheet #3
Money-Time Relationship: Uniform Series

1. A person wishes to accumulate $5,000 over a period of 15 years so that a cash payment can be made
for a new roof on a summer cottage. To have this amount when it is needed, annual payments will be
made into a savings account that earns 8% interest per year. How much must each annual payment
be? Draw a cash flow diagram.

2. It is estimated that a certain piece of equipment can save $22,000 per year in labor and materials cost.
a. If P=$1,000, A=$200, and i=12%, then N=?
The equipment has an expected life of five years and no market value. If the company must earn a
b. If P=$1,000, A=$200, and N=10 years, then i=?
15% annual return on such investments, how much could be justified now for the purchase of this
piece of equipment? Draw a cash-flow diagram from the company's viewpoint.
9. Today the average undergraduate student is responsible for paying off a $3,800 balance on his/her
credit card. Suppose the monthly interest rate is 2% (24% APR). How many months will it take to
repay the $3,800 balance, assuming monthly payments of $100 are made and no additional expenses
3. You purchase special equipment that reduces defects by $10,000 per year on an item. This item is
are charged to the credit card?
sold on contract for the next five years. After the contract expires, the special equipment will save
approximately $3,000 per year for five years. You assume that the machine has no market value at the
end of 10 years. How much can you afford to pay for this equipment now if you require a 20% annual
return on your investment? All cash flows are end-of-year amounts.

4. A credit card company wants your business. If you accept their offer and use their card, they will
deposit 1% of your monetary transactions into a savings account that will earn a guaranteed 5% per
year. If your annual transactions total an average of $20,000, how much will you have in this savings
plan after 15 years.

5. The cost to equip a large cruise ship with security cameras is $200,000. If the interest rate is 10% per
year and the cameras have a life of 8 years, what is the equivalent annual cost of security cameras?

6. A 35 year-old person wants to accumulate $900,000 by age 75. How much will she need to save each
month, starting one month from now, if the interest rate is 0.75% per month?

7. The engineering department at a leading university decides to implement an energy-saving program

by reducing its usage of electricity for lighting and heating the department buildings. The department
wants to save $300,000 at the end of 3 years. Electricity costs $0.25/kWh.

a. By how much must annual electricity be reduced to meet the savings goal? Assume uniform
annual electricity consumption and a 0% interest rate.
b. Repeat part (a) when the annual interest rate is 10%.
c. Why is the answer to part (b) less than the answer to part (a)?