Engineering Economy – Assignment # 3 -

Solution

Dr. Araby Ibrahim

1) The Bureau of Indian Affairs provides various services to American Indians and Alaskan
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 6% per year, select the more economical system using
the present worth analysis method.

PW(Del) = -250,000 -231,000 (P/A, 6%, 6) -140,000 (P/F, 6%, 4) +50,000 (P/F, 6%, 6)

PW(Siemens) = -224,000 -235,000 (P/A, 6%, 6) -26,000 (P/F, 6%, 3) +10,000 (P/F, 6%, 6)

Then select the less negative or the more positive

2) 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 using the present worth analysis
method the plans at a MARR of 9% per year.

Professional:::
PW = -52,000 – [5000(P/A, 9%, 4) - 500 (P/G, 9%, 4)]
Executive:::
PW = -62,000 – [1000(P/A, 9%, 4) + 500 (P/G, 9%, 4)]
Then select the less negative or the more positive
3) A company is currently considering the addition of a new process to its activities. Two
alternatives (A and B) are available for the equipment needed to establish this new
process as follows:

A B

Purchasing Price (LE) 26,000 39,000

Productivity (Units /hour) 42 63

Expected Life (years) 8 8

Salvage Value (LE) 3,000 5,000

The company operates 8 hours per day for 300 working days per year. The profit per unit
regardless of the equipment cost is LE 0.32, and all quantities produced are expected to be
sold regardless of their volume. For an annual interest rate of 8%, define the alternative to
be chosen using the annual worth analysis method.

4) An environmental engineer must recommend one of two methods for monitoring high colony
counts of E. coli and other bacteria in watershed area “hot spots.” Estimates are tabulated, and
the MARR is 10% per year.
 a) Use LCM and present worth analysis to select the better method.

a) LCM =6
PW (B) = -250,000 -20,000 (P/A,10%, 6)
PW(A) = -100,000 – [30,000(P/A,10%, 3)+5000(P/G,10%, 6)] - [30,000(P/A,10%,
3)+5000(P/G,10%, 6)] *(P/F, 10%, 3) – 100,000*(P/F, 10%, 3)
Then select the less negative or the more positive

5) Carlotta, the general manager for Woodsome appliance company Plant #A14 in Mexico City
has 4 independent projects she can fund this year to improve surface durability on stainless
steel products. The project costs and 12% per year PW values are available. What projects are
acceptable if the budget limit is (a) no limit, and (b) $60,000?

The solution method is the same as in the next problem

6) Chloe has $7,000 to spend on as many as 3 electronic features to enhance revenue from the
telemarketing business she operates on weekends. Use the PW method to determine which of
these independent investments are financially acceptable at 6% per year compounded monthly.
All are expected to last 3 years.
Limit = $7000
N = 3*12 = 36 months
i = 6/12 = 0.5 per month
combinations::: A , W , F, AF, WF are OK
AW, AWF are not OK
Then find PW (0.5%) for every combination and select the best one
PW(A) = -4500 + 220 (P/A, 0.5%, 36)
PW(W) = -3000 + 200 (P/A, 0.5%, 36)
PW(F) = -2200 + 140 (P/A, 0.5%, 36)
PW(AF) = PW(A) + PW(F)
PW(WF) = PW(W) + PW(F)

Any negative in the combinations is rejected

Select the largest positive combination

7) A 600-ton press used to produce composite material fuel cell components for automobiles
using proton exchange membrane (PEM) technology can reduce the weight of enclosure parts
up to 75%. At MARR = 12% per year, calculate (a) capital recovery and (b) annual revenue
required. Installed cost = $3.8 million, n=12 years, Salvage value = $250,000, Annual
operating costs = $350,000 to start increasing by $25,000 per year.

a) CR = [-3.8 (A/P, 12%,12) + 0.25 (A/F, 12%, 12)] * 1000000

b) AW = CR - [0.35+0.025(A/G,12%, 12)] * 1000000

8) A certain industrial firm desires an economic analysis to determine which of two different
machines should be purchased. Each machine is capable of performing the same task in a
given amount of time. Use the following data to determine which machine you would
choose if the interest rate is 8%. (You have to use the annual worth analysis method)

Alternative Machine X Machine Y

First cost ($) 50,000 90,000
Annual maintenance cost ($) 1,800 1,200
Salvage value ($) 15,000 25,000
Estimated life (Years) 3 6
 9) A suburban taxi company is considering buying taxis with diesel engines instead of
gasoline engines. The cars average 50,000 km a year, with a useful life of 3 years for the
taxi with the gas engine and 4 years for the diesel taxi. Other comparative information is
as follows:

Vehicle Fuel cost Mileage, in Annual Annual End-of-useful-

cost per liter km/liter repairs insurance cost life resale value

Diesel $13,000 $0.48 35 $300 $500 $2,000

Gasoline $12,000 $0.51 28 $200 $500 $3,000

Determine the more economical choice using the annual worth analysis method if interest is 6%.

10) A broadband service company borrowed $2 million for new equipment and repaid the loan in
amounts of $200,000 in years 1 and 2 plus a lump sum amount of $2.2 million at the end of
year 3. What was the interest rate on the loan?

2000000 = 200,000(P/A, i*,2) + 2.2(P/F, i*,3)

By trial and error and then interpolation you can get i*
11) A large food corporation is considering the development and production of four types of
beverages. The type of markets, margins of profit, sales volume and technology needed are
quite different in each case. The following table summarizes the economic aspects of the
alternative projects.

Alternatives

Type 1 Type 2 Type 3 Type 4

Equipment Costs $ 597,500 446,100 435,700 249,800

Installation Costs $ 250,000 150,000 200,000 100,000

Expected Annual Profits $ 212,000 145,000 168,000 100,000

Individual ROR % 13 12 15 18

Project Life (Years) 6 6 6 6

If MARR is 13% per year, which alternative is the most profitable using the incremental
ROR method?
12) Three mutually exclusive alternatives are being considered.

A B C

Initial investment ($) 50,000 22,000 15,000

Annual net income ($) 5,093 2,077 1,643

Computed ROR % 7 8 9

Each alternative has a 20-years useful life with no salvage value. If the minimum attractive
rate of return is 7%, which alternative should be selected (if any)? You have to use the
Incremental ROR method.

13) As groundwater wells age, they sometimes begin to pump sand (and they become known as
“sanders”), and this can cause damage to downstream desalting equipment. This situation
can be dealt with by drilling a new well at a cost of $1,000,000 or by installing a tank and
self-cleaning screen ahead of the desalting equipment. The tank and screen will cost
$230,000 to install and $61,000 per year to operate and maintain. A new well will have a
pump that is more efficient than the old one, and it will require almost no
maintenance, so its operating cost will be only $18,000 per year. If the salvage values are
estimated at 10% of the first cost, use a present worth relation to (a) calculate the
 incremental rate of return and (b) determine which alternative is better at a MARR of 6%
per year over a 20-year study period.

14) The five alternatives shown here are being evaluated by the rate of return method.
 15) An oil company plans to purchase a piece of vacant land on the corner of two busy
streets for $70,000. On properties of this type, the company may install
businesses of four different types.

Cost of Improvements
Plan (Does not include the $70,000 Type of Business

cost of land)
Conventional gas station with service facilities for
A $ 75,000
lubrication, oil changes, etc.

Automatic car wash facility with gasoline pump

B 230,000
island in front

C 30,000 Discount gas station (no service bays)

D 130,000 Gas station with low cost, quick car wash facility

In each case, the estimated useful life of the improvements is 15 years. The salvage value for
each is estimated to be the $70,000 cost of the land. The computed ROR % and the net
annual income, after paying all operating expenses, are projected as follows:
 Plan Net Annual Income Computed ROR %

A $23,300 15

B 44,300 12.9

C 10,000 9

D 27,500 12

If the oil company expects a 10% minimum attractive rate of return on its
investments, which plan (if any) should be selected? You have to use the Incremental
ROR method.