Assignment No1 Marks 10

1: List the four essential elements involved in decision making in engineering economic
analysis.
The four main types of engineering economic decisions are.
Service improvement.
Equipment and process selection.
Equipment replacement,
Cost reduction.
The factors of time and uncertainty are the defining aspects of any investment project.
2: What is meant by (a) limited capital funds and (b) sensitivity analysis?
Limited capital funds refers to a situation where there is a constraint on the amount of
money available for investment or expenditure.
In engineering economic analysis, it means that there is a finite amount of capital or financial
resources that can be allocated towards different alternatives or projects.
This limitation requires careful consideration and prioritization of investment options based
on their potential returns and economic viability.
Sensitivity analysis is a technique used in engineering economic analysis to assess the impact
of changes in certain variables or assumptions on the overall outcome or results of a project
or decision. It helps to understand how sensitive the results are to variations in key factors
such as costs, revenues, interest rates, or other relevant parameters. By conducting
sensitivity analysis, engineers and decision-makers can identify the most critical variables and
assess the robustness of their decisions in different scenarios.

3 List three measures of worth that are used in engineering economic analysis
When it comes to engineering economic analysis, we use three common measures of worth
to evaluate different alternatives:
Net Present Value (NPV):
NPV measures the difference between the present value of cash inflows and outflows
associated with a project or investment.
Internal Rate of Return (IRR):
IRR represents the discount rate at which the present value of cash inflows equals the
present value of cash outflows. It is used to assess the rate of return or profitability of an
investment.
Benefit-Cost Ratio (BCR):
BCR compares the present value of benefits to the present value of costs associated with a
project or investment.
4: Identify the following factors as either economic (tangible) or noneconomic (intangible): first
cost, leadership, taxes, salvage value, morale, dependability, inflation, profit, acceptance,
ethics, interest rate.
Economic (Tangible) Factors:
First cost: This refers to the initial cost or investment required for a project or asset.
Taxes: These are financial obligations imposed by the government on individuals or
entities based on their income, property, or transactions.
Salvage value: It represents the estimated value of an asset at the end of its useful life
or when it is sold.
Non-economic (Intangible) Factors:
Leadership: This pertains to the qualities and skills of individuals in guiding and
inspiring others towards a common goal.
Morale: It refers to the overall mood, satisfaction, and motivation of individuals
within a group or organization.
Dependability: This reflects the reliability and consistency of a product, system, or
individual in delivering expected results.
Inflation: It represents the general increase in prices of goods and services over time,
reducing the purchasing power of money.
Acceptance: This relates to the level of approval, agreement, or willingness of
individuals or groups to embrace a particular idea, product, or change.
Ethics: Ethics refers to the principles of right and wr-------------------------------------------
ong conduct, guiding individuals' behavior and decision-making.
Interest rate: This is the cost of borrowing money or the return on investment,
expressed as a percentage.
5. If a company sets aside $1,000,000 now into a contingency fund, how much will the
company have in 2 years, if it does not use any of the money and the account grows at
a rate of 10% per year?
Data:
P=1,000,000
I=10%=0.1
N=2
Formula:
F=p (1+i)^N
F=1,000,000(1+0.1)^2
F=1210000
The company in 2 years =1210000.

6. Iselt Welding has extra funds to invest for future capital expansion. If the selected
investment pays simple interest, what interest rate would be required for the amount
to grow from $60,000 to $90,000 in 5 years?
Data:
Initial value=60000
Final value=90000
Time= (n) =5 Years
Formula:
F=P+P (t)
Re-arrange Formula:
F-P= (p) (t)
90000-60000 = (60000+5)i
30000=300000i
I=3000/300000

I=0.1=10%
7: To finance a new product line, a company that makes high-temperature ball bearings
borrowed $1.8 million at 10% per year interest. If the company repaid the loan in a
lump sum amount after 2 years, what was (a) the amount of the payment and (b) the
amount of interest?
Data:
F=1.8 million
I=10%=0.1
N=2
Formula:
P=f(1+i)^-n
P=180000091+0.1)^-2
P=1487603.3=the amount of payment.
b: The amoun of interest:
F-P=1487603-1800000
-312397 I
I=312397
8. Because market interest rates were near all-time lows at 4% per year, a hand
tool company decided to call (i.e., pay off) the high-interest bonds that it issued 3
years ago. If the interest rate on the bonds was 9% per year, how much does the
company have to pay the bond holders? The face value (principal) of the bonds is
$6,000,000.
Data:
P=600,000
N= 3 years
I = 9% = 0.9
Formula:
F=P(1+i)^-n
F=6000,000(1+0.9)^-3
F = 874763.085
 9. A solid waste disposal company borrowed money at 10% per year interest to
purchase new haulers and other equipment needed at the company-owned landfill
site. If the company got the loan 2 years ago and paid it off with a single payment
of $4,600,000, what was the principal amount P of the loan?
Data:
F = 4600000
N = 2 years
I = 10% = 0,1
Formula :
P = F (1+i) ^ n
4600000(1+0.1)^2
P = 55660000

10. If interest is compounded at 20% per year, how long will it take for $50,000 to
accumulate to $86,400?
Data:
P = 50000
F = 86400
I = 20% = 0.2
Formula:
F = P (1+i)^-n
86400/50000=(1+0.1)^-n
1.728=1.2
T=3 years
11. To make CDs look more attractive than they really are, some banks advertise
that their rates are higher than their competitors’ rates; however, the fine print
says that the rate is a simple interest rate. If a person deposits $10,000 at 10% per
year simple interest, what compound interest rate would yield the same amount
of money in 3 years?
Data:
P = 10000
N=3
I = 105 = 0.1
Formula:
F = P + (P) (T) (i)
F= 10000 + (10000) (3) (0,1)
10000+3000 =13000
Part b:
F = P (1+i)^n
13000 = 10000 (1+i)
Log 13 = (1+i) 3 log
0,1139 = 3 log (1+i)
3(0.3797 = log (1+i)
1+I = 1.091
I=9.1%
12. CASE STUDY REFRIGERATOR SHELLS Background Large refrigerator manufacturers such as
Whirlpool, General Electric, Frigidaire, and others may subcontract the molding of their plastic
liners and door panels. One prime national subcon-tractor is Innovations Plastics. Because of
improvements in mechanical properties, the melded plastic can sustain increased vertical and
horizontal loading, thus significantly reducing the need for attached metal anchors for some
shelving. However, im-proved molding equipment is needed to enter this market now. The
company president wants a recommendation on whether Innovations should offer the new
technology to the major manufacturers and an estimate of the necessary capital investment to
enter this market. You work as an engineer for Innovations. At this stage, you are not expected
to perform a complete engineering eco-nomic analysis, for not enough information is available.
You are asked to formulate reasonable alternatives, determine what data and estimates are
needed for each one, and ascertain what criteria (economic and noneconomic) should be
utilized to make the final decision. Information Some information useful at this time is as
follows:
• The technology and equipment are expected to last about 10 years before new methods are
developed.
• Inflation and income taxes will not be considered in the analysis.
• The expected returns on capital investment used for the last three new technology projects
were compound rates of 15%, 5%, and 18%. The 5% rate was the criterion for enhancing an
employee-safety system on an existing chemical-mixing process.
• Equity capital financing beyond $5 million is not possible. The amount of debt financing and
its cost are unknown.
• Annual operating costs have been averaging 8% of first cost for major equipment.
• Increased annual training costs and salary requirements for handling the new plastics and
operating new equipment can range from $800,000 to $1.2 million. There are two
manufacturers working on the new- generation equipment. You label these options as
alternatives A and B
Case Study Exercises.
Use the first four steps of the decision-making process to generally describe the
alternatives and identify what economic-related estimates you will need to complete an
engineering economy analysis for the president.

We need to describe the alternatives and identify the economic related estimates.

For Alternative A,
We'll need estimates for the capital investment required to develop the new technology.
This includes costs for the molding equipment, training, and potential salary requirements.
We should also consider the expected returns on the capital investment and the annual
operating costs.

For Alternative B,
we'll need similar estimates for the capital investment, training costs, and salary
requirements. Additionally, we should gather information on the expected returns on the
investment and the annual operating costs specific to this alternative.
To complete an engineering economy analysis for the president, we'll need more detailed
data on the costs involved, potential returns, and any other economic factors that could
impact the decision.

2. Identify any noneconomic factors and criteria to be considered in making the

alternative selection.
When it comes to making the alternative selection, we should also consider noneconomic
factors and criteria. These factors can include things like environmental impact, social
responsibility, safety considerations, and any legal or regulatory requirements. It's
important to take into account the broader implications of each alternative beyond just the
economic aspects. By considering both economic and noneconomic factors, we can make a
more well-rounded and informed decision.
3. During your inquiries about alternative B from its manufacturer, you learn that this
company has already produced a prototype molding machine and has sold it to a company in
Germany for $3 million (U.S. dollars). Upon inquiry, you further discover that the German
company already has unused capacity on the equipment for manufacturing plastic shells. The
company is willing to sell time on the equipment to Innovations immediately to produce its
own shells for U.S. delivery. This could allow immediate market entry into the United States.
Consider this as alternative C, and develop the estimates necessary to evaluate C at the same
time as alternatives A and B.
Answer.
So, in addition to alternatives A and B, we have an interesting option called alternative C.
This involves purchasing time on a molding machine that has already been sold to a
German company. By using their unused capacity, Innovations can produce its own shells
for U.S. delivery, allowing for immediate market entry.
To evaluate alternative C, we'll need to gather some estimates. First, we need to determine
the cost of purchasing time on the molding machine from the German company. This cost
will depend on factors such as the duration of usage, the rate charged by the German
company, and any additional fees or agreements involved.
Next, we should estimate the potential returns from entering the U.S. market immediately.
This would involve analyzing the demand for the shells in the U.S., the pricing and sales
projections, and any potential market risks or competition.

By comparing the costs of alternative C to the potential returns, we can evaluate its viability
alongside alternatives A and B. Remember, these estimates will require more detailed
information, but this gives us a general idea of what we need to consider

Name: Danish Norr

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