Engineering Economy

Table of Contents
CHAPTER 4 (ASSIGNMENT 1).............................................................................................................2
CHAPTER 4 (ASSIGNMENT 2).............................................................................................................5
CHAPTER 5 (ASSIGNMENT 3)...........................................................................................................10
Engineering Economy S22024

CHAPTER 4 (ASSIGNMENT 1)
Problem 4.2
What is the future equivalent of $1,000 invested at 6% simple interest per year for 3½ years?

Answer:
Givens: P = $1,000
N = 3½ years
i = 6%
Amount = P+ P x N x i=$ 1,000+ $ 1,000 x 3.5 x 0.06=$ 1,210
Hence, after 3½ years period the furniture equivalent of $1,210

Problem 4.8
Jonathan borrowed $10,000 at 6% annual compound interest. He agreed to repay the loan with
five equal annual payments at end-of-years 1–5. How much of the annual payment is interest,
and how much principal is there in each annual payment?

Answer:
Givens P = $10,000
:
N = 5 years
i = 6%
Amount = P (A/P, i%, N) = $10,000(A/P, 6%, 5) = $10,000 x 0.2374 = $2,374
($2,373.96 with the formula)
The principal amount in each annual payment:
Perio Remaining
Interest Payment Principal Payment Total
d (EoY)
1 $600 $1,773.96 $2,373.96 $8,226.04
2 $493.56 $1,880.40 $2,373.96 $6,345.63
3 $380.74 $1,993.23 $2,373.96 $4,352.41
4 $261.14 $2,112.82 $2,373.96 $2,239.59
5 $134.38 $2,239.59 $2,373.96 0

Problem 4.9
Suppose you contribute $10 per week ($520 per year) into an interest-bearing account that earns
6% a year (compounded once per year). That’s probably one less pizza per week! But if you
contribute faithfully each week into this account, how much money would you have saved
through the compounding of interest by the end of 15 years?

Answer:
Givens: A = $10/ week = $520/year
Engineering Economy S22024

N = 15 years
i = 6%
F = A (F/A, 6%, 15) = $520 x 23.276 = $12,103.52
Hence, we would save $12,103.52 through the compounding of interest by the end of 15 years

Problem 4.10
A lump-sum loan of $5,000 is needed by Chandra to pay for college expenses. She has obtained
small consumer loans with 12% interest per year in the past to help pay for college. But her
father has advised Chandra to apply for a PLUS student loan charging only 8.5% interest per
year. If the loan will be repaid in full in five years, what is the difference in total interest
accumulated by these two types of student loans?

Answer:
Givens P = $5,000
:
N = 5 years
i1 = 12%
i2 = 8.5%
For consumer loans with i1 = 12%:
F1 = P (F/P, 12%, 5) = $5,000 x 1.7623 = $8,811.50
I1 = F1 – P = $8,811.50 – $5,000 = $3,811.5
For PLUS student loan with i2 = 8.5%:
F2 = P (F/P, 8.5%, 5) = $5,000 x (1 + 0.085)5 = $7,518.28
I2 = F2 – P = $7,518.28 – $5,000 = $2,518.28
(I1> I2) => The difference between two loans: D = $3,811.5 - $2,518.2 = $1293.3
Hence, Chandra should listen to her father and change to a PLUS student loan since it saves
more money

Problem 4.12
A 12-cylinder heavy-duty diesel engine will have a guaranteed residual value of $1,000 in 5
years. Today (year 0) the equivalent worth of this engine is how much if the interest rate is 9%
per year?

Answer:
Givens F = $1,000
:
N = 5 years
i = 9%
P = F(P/F, 9%, 5) = $1,000 x 0.6499 = $649.9
Hence, today (year 0) the engine worth is $649.9
Engineering Economy S22024

Problem 4.13
You just inherited $10,000. While you plan to squander some of it away, how much should you
deposit in an account earning 5% interest per year if you’d like to have $10,000 in the account in
10 years?

Answer:
Givens: F = $10,000
N = 10 years
i = 5%
P = F (P/F, 5%, 10) = $10,000 x 0.6139 = $6,139
Hence, you should deposit $6,139 into the account

Problem 4.24
The Dominion Freight Company has invested $50,000 in a new sorting machine that is expected
to produce a return of $7,500 per year for the next 10 years. At a 7% annual interest rate, is this
investment worthwhile?

Answer:
Givens P0 = $50,000
:
A = $7,500
N = 10 years
i = 7%
P = A (P/A, 7%, 10) = $7,500 x 7.024 = $52,680 > P0 = $50,000
PW= P - P0
Hence, the investment is worthwhile (PW>0)

Problem 4.30
Luis wants to have $2,000,000 in net worth when he retires. To achieve this goal, he plans to
invest $10,000 each year (starting one year from now) into an account that earns 10% interest
compounded annually. The amount of time before Luis can retire as a multimillionaire is how
many years?

Answer:
Givens: F = $2,000,000
A = $10,000
i = 10%
F = A (F/A, 10%, N)  $2,000,000 = $10,000 x (F/A, 10%, N)
F = A (F/A, 10%, N)  (F/A, 10%, N) = 200
F = A (F/A, 10%, N)  N  32 years
Hence, Luis needs 32 years before he can retire as a multimillionaire
Engineering Economy S22024

CHAPTER 4 (ASSIGNMENT 2)
Problem 4.31
Twelve payments of $10,000 each are to be repaid monthly at the end of each month. The
monthly interest rate is 2%.
a. What is the present equivalent (i.e., P0) of these payments?
b. Repeat Part (a) when the payments are made at the beginning of the month. Note that the
present equivalent will be at the same time as the first monthly payment.
c. Explain why the present equivalent amounts in Parts (a) and (b) are different.
Answer:
Givens: A = $10,000
N = 12 months
i = 2%
(a) The present equivalent when the payments are made at the end of each month:
P = A (P/A, 2%, 12) = $10,000 x 10.5753 = $105,753
(b) The present equivalent when the payments are made at the beginning of each month:
P = A + A (P/A, 2%, 11) = $10,000 + $10,000 x 9.7868 = $107,868
(c)
In (a): payment is made at the end of month, meaning that the present equivalent includes total P 0
plus interest.
In (b): payment is made at the beginning of month, meaning there is no interest of P0 added.
Hence, (b) has higher present equivalent because the cash flows are not as far into the future, so
less discounting will occur compared to (a)

Problem 4.52
You have just inherited $100,000 as a lump-sum amount from your distant aunt. After depositing
the money in a practically risk-free certificate of deposit (CD) earning 5% per year, you plan to
withdraw $10,000 per year for your living expenses. How many years will your $100,000 last in
view of these withdrawals? (Hint: It is longer than 10 years!)
Answer:
Givens: P = $100,000 i = 5%
A = $10,000 A = P (A/P, 5%, N)
 $10,000 = $100,000 (A/P, 5%, N)
Engineering Economy S22024

A = P (A/P, i%, N)  (A/P, 5%, N) = 0.1 A = P (A/P, i%, N)  N = 14.2

N
5 % x ( 1+5 % ) Hence, $100,000 will last for about 14 years
A = P (A/P, i%, N)  N = 0.1 in view of these withdrawals
( 1+5 % ) −1
Problem 4.54
Kris borrows some money in her senior year to buy a new car. The car dealership allows her to
defer payments for 12 months, and Kris makes 48 end-of-month payments thereafter. If the
original note (loan) is for $28,000 and interest in 0.5% per month on the unpaid balance, how
much will Kris’ payment be?
Answer:
Givens P = $28,000
:
i = 0.5%
N1 = 12 months
N2 = 48 months
The future equivalent of the annuity as of 12 months:
F12 = P (F/P, i%, N1) = $28,000 (F/P, 0.5%, 12) = $28,000 x 1.0617 = $29,728
The payment of Kris per month:
A = F12 (A/P, i%, N2) = $29,728 (A/P, 0.5%, 48) = $29,728 x 0.0235 = $698.796
Hence, Kris will pay $698.796 per month for 48 months

Problem 4.57
What lump sum of money must be deposited into a bank account at the present time so that $500
per month can be withdrawn for five years, with the first withdrawal scheduled for six years
from today? The interest rate is 3/4% per month. (Hint: Monthly withdrawals begin at the end of
the month 72.)
Answer:
Givens: A = $500
i = 3/4% = 0.75% per month
N1 = 5 years = 60 months
N2 = 6 years = 72 months
The equivalent amount as the end of five years:
F60 = P60 = A (P/A, i%, N1) = $500 (P/A, 0.75%, 60) = $500 x 48.1734 = $24,086.7
The lump sum of money must be deposited:
P0 = F60 (P/F, i%, N2) = $24,086.7 (P/F, 0.75%, 72) = $14,064.2
Engineering Economy S22024

Hence, $14,064.2 need to be deposited into a bank account at the present time

Problem 4.66
Transform the cash flows on the left-hand side of the accompanying diagram (see Figure P4-66)
to their equivalent amount, F, shown on the right-hand side. The interest rate is 8% per year.

Answer:
F = A (F/A, 8%, 4) (F/P, 8%,1) + A (P/A, 8%, 2)
F = $100 x 4.5061 x 1.0800 + $100 x 1.7833 = $664.99

Problem 4.77
Refer to the accompanying cash-flow diagram (see Figure P4-77), and solve for the unknown
quantity in Parts (a) through (d) that makes the equivalent value of cash outflows equal to the
equivalent value of the cash inflow, F.

a. If F = $10,000, G = $600, and N = 6, then i = ?

b. If F = $10,000, G = $600, and i = 5% per period, then N = ?
c. If G = $1,000, N = 12, and i = 10% per period, then F = ?
d. If F = $8,000, N = 6, and i = 10% per period, then G = ?
Answer:

{[ ]}
(a) F = P (F/P, i%, N) 6
1 ( 1+i ) −1
F = P  $10,000 = $600
{[ ]}
N −6
1 ( 1+i ) −1 i i
F=G −N
i i
Engineering Economy S22024

F = P (F/P, i%, N)  i% = 7.86% (b) F = P (F/P, i%, N)

{[ ]}
N
1 ( 1+i ) −1
F=G −N
i i

{ [ ]}
N
1 ( 1+5 % ) −1
 $10,000 = $600 −N
5% 5%
F = P (F/P, i%, N)  N = 6.1 periods
b) or: F = 600(P/G,5%,N)(F/P,5%,N) = 10000

 N = 6, F = 600(11.968)(1.3401) = 9622.99 < 10000

 N =7, F = 600(16.232)(.4071) = 13704.03 > 10000

Thus 6 < N <7

Using linear interpolation:
(N – 6) / (10000 – 9622.99) = (7-6) / (13704.03 – 9622.99) => N = 6.1 periods
(c)
G NG $ 1,000 −12 x $ 1,000 $ 1,000
F = ( F / A ,i % , N )− = ( F / A , 10 % ,12 ) = x 21.3843
i i 10 % 10 % 10 %
−12 x $ 1,000
10 %
F = $93,843
(d)
G NG Fi Fi $ 8,000 x 10 %
F= ( F / A ,i % , N )− G= = = =
i i ( F / A , i % , N )−N ( F / A , 10 % , 6 )−6 7.7156−6
$466.3

Problem 4.91
An electronic device is available that will reduce this year’s labor costs by $8,000. The
equipment is expected to last for 10 years. Labor costs increase at a rate of 5% per year and the
interest rate is 10% per year.
a. What is the maximum amount that we could justify spending for the device?
b. What is the uniform annual equivalent value (A) of the labor costs over the eight-year period?
Answer:
Givens: A = $8,000
i = 10%
f = 5%
Engineering Economy S22024

N1 = 10 years
N2 = 8 years
(a) The maximum amount we could justify spending is:
A [ 1−( P/ F ,i % , N 1 ) ( F /P , f , N 1 ) ] $ 8,000 [ 1−( P/ F , 10 % , 10 ) ( F/ P , 5 % , 10 ) ]
P = = =
i−f 0.1−0.05
$ 8,000 x ( 1−0.3855 x 1.6289 )
0.05
P = $59,529.45
(b) Uniform annual equivalent value (A) of the labor costs over the eight-year period is:
A = P (A/P, i%, N2) = $59,529.45 (A/P, 10%, 8) = $59,529.45 x 0.1874 = $11,155.82

Problem 4.97
Determine the present equivalent value of the cash-flow diagram of Figure P4-97 (p. 180) when
the annual interest rate, ik, varies as indicated.

Answer:
P = $1,000 (P/F, 8%, 1) + $2,000 (P/F, 8%, 1) (P/F, 10%, 1) + $1,000 (P/F, 8%, 1)2 (P/F, 10%, 1)
(P/F, 6%, 1) + $2,000 (P/F, 8%, 1)2 (P/F, 10%, 1)2 (P/F, 6%, 1)2
 P = $1,000 x 0.9259 + $2,000 x 0.9259 x 0.9091 + $1,000 x 0.9259 2 x 0.9091 x 0.9434 +
$2,000 x 0.92592 x 0.90912 x 0.94342
 P = $4,605.79
Hence, the present value is $4,605.79
Problem 4.116
Find the value of the unknown quantity Z in the following diagram, such that the equivalent cash
outflow equals the equivalent cash inflows when r = 20% compounded continuously:
Engineering Economy S22024

Answer:
Assume the equivalent cash inflow equal to cash outflow and year 9 as the equivalent point
Givens: A = $500 Cách khác: Z (F/P, 20%, 1) + A (F/A, 20%, 5) = Z (F/P, 20%,
4)
i = r = 20% Cash inflow = Cash outflow
We have:
 Z (F/P, 20%, 9) = A (F/A, 20%, 5) + Z (F/P, 20%, 6)
 Z (F/P, 20%, 9) = $500 (F/A, 20%, 5) + Z (F/P, 20%, 6)
 Z x 6.0496 = $500 x 7.7609 + Z x 3.3201  Z = $1,421.67

CHAPTER 5 (ASSIGNMENT 3)
Problem 5.3
Josh Ritchey has just been hired as a cost engineer by a large airlines company. Josh’s first idea
is to stop giving complimentary cocktails, wine, and beer to the international flying public. He
calculates this will save 5,000,000 drinks per year, and each drink costs $0.50, for a total of $2.5
million per year. Instead of complimentary drinks, Josh estimates that the airlines company can
sell 2,000,000 drinks at $5.00 per drink. The net savings would amount to $12.5 million per
year! Josh’s boss really likes the idea and agrees to give Josh a lumpsum bonus now equaling
0.1% of the present equivalent worth of three years of net savings. If the company’s MARR is
20% per year, what is Josh’s bonus? (5.3)
Answer:
PW(20%) = $12.5 x 106 x (P/A, 20%, 3) = $12.5 x 106 x 2.1065 = $26,331,250
Bonus = 0.1% x PW(20%) = 0.1% x $26,331,250 = $26,331
Hence, John’s bonus will be $26,331

Problem 5.11
Last month Jim purchased $10,000 of U.S. Treasury bonds (their face value was $10,000). These
bonds have a 30-year maturity period, and they pay 1.5% interest every three months (i.e., the
APR is 6%, and Jim receives a check for $150 every three months). But interest rates for similar
Engineering Economy S22024

securities have since risen to a 7% APR because of interest rate increases by the Federal Reserve
Board. In view of the interest-rate increase to 7%, what is the current value of Jim’s bonds? (5.3)
Answer:
Givens: Z = C = $10,000
r = 1.5%
30 x 12
N = = 120
3
months
7
i = = 1.75%
4
VN = C(P/F, i%, N) + rZ(P/A, i%, N)
VN= $10,000(P/F, 1.75%, 120) + $10,000 (0.015) (P/A, 1.75%,120)
VN= $10,000 x 0.1247 + $10,000 x 0.015 x 50.0171
VN = $1,247 + $7,502.57
VN = $8,749.57
Hence, in view of the interest-rate increase to 7%, the current value of Jim’s bonds is $8,749.57

Problem 5.16
a. What is the CW, when i = 10% per year, of $1,500 per year, starting in year one and
continuing forever; and $10,000 in year five, repeating every four years thereafter, and
continuing forever? (5.3)
b. When i = 10% per year in this type of problem, what value of N, practically speaking, defines
“forever”? (5.3)
Answer:
(a)
$ 1,500 $ 10,000
CW(10%) = + ( A / F , 10 % , 4 ) (P /F ,10 % , 1)
10 % 10 %
CW(10%) = $15,000 + $100,000 x 0.2155 x 0.9091
CW(10%) = $15,000 + $19,591.105 = $34,591.105
(b)
By examining the (A/P, i%, N) factor as N increases, the factor approaches a value of i. For i =
10%, the (A/P, 10%, 80) factor is 0.1. Hence, for this problem, N = 80 years is, for practical
purposes, “forever”.
Engineering Economy S22024

Problem 5.18
A foundation was endowed with $15,000,000 in July 2010. In July 2014, $5,000,000 was
expended for facilities, and it was decided to provide $250,000 at the end of each year forever to
cover operating expenses. The first operating expense is in July 2015, and the first replacement
expense in July 2014. If all money earns interest at 5% after the time of endowment, what
amount would be available for the capital replacements at the end of every fifth year forever?
(Hint: Draw a cash-flow diagram first.) (5.3)
Answer:
Let X be the amount for capital replacements at the end of every fifth year forever

Amount of money after July 2014: $15,000,000 (1 + 5%)4 - $5,000,000 = $13,232,594

$13,232,594 = $250,000 (P/A, 5%, ∞) + X (A/F, 5%, 5)(P/A, 5%, ∞)

 $13,232,594 = $250,000 (20) + 0.181 X (20)
 X = $2,274,197 every 5 years
Hence, $2,274,197 would be available for the capital replacements at the end of every fifth year
forever
Engineering Economy S22024

Problem 5.19
Vidhi is investing in some rental property in Collegeville and is investigating her income from
the investment. She knows the rental revenue will increase each year, but so will the
maintenance expenses. She has been able to generate the data that follows regarding this
investment opportunity. Assume that all cash flows occur at the end of each year and that the
purchase and sale of this property are not relevant to the study. If Vidhi’s MARR = 6% per year,
what is the FW of Vidhi’s projected net income? (5.4)

Answer:

Yea
Revenue Expense Net Income (Revenue – Expense)
r

1 $6,000 $3,100 $2,900

2 6,200 3,300 2,900

3 6,300 3,500 2,800

4 6,400 3,700 2,700

5 6,500 3,900 2,600

6 6,600 6,100 500

7 6,700 4,300 2,400

8 6,800 4,500 2,300

9 6,900 4,700 2,200

10 7,000 4,900 2,100

Engineering Economy S22024

From the cash flow, let A = $2,900, G = -$100 (delay by 1 year), F6 = -$2,000
P0 = A (P/A, 6%,10) + G (P/G, 6%, 9) (P/F, 6%, 1) + F6 (P/F, 6%, 6)
 P0 = $2,900 x 7.3601 – $100 x 24.5768 x 0.9434 – $2,000 x 0.7050
 P0 = $17,615.71
FW = P0 (F/P, 6%, 10) = $17,615.71 x 1.7908 = $31,546.21
Hence, the FW of Vidhi’s projected net income is $31,546.21
Problem 5.22
What are the PW and FW of a 20-year geometric cash-flow progression increasing at 2% per
year if the first-year amount is $1,020 and the interest rate is 10% per year? (5.4)
Answer:
PW(10%) =
$ 1,020−$ 1,020 ( P /F , 10 % , 20 ) ( F / P , 2 % , 20 ) $ 1,020−$ 1,020 x 0.1486 x 1.4859
= =¿
0.10 – 0.02 0.10−0.02
$9,934.75
FW(10%) = PW(10%) (F/P, 10%, 20) = $9,934.75 x 6.7275 = $66,836

Problem 5.23
Fill in Table P5-23 below when P = $10,000, S = $2,000 (at the end of four years), and i = 15%
per year. Complete the accompanying table and show that the equivalent uniform CR amount
equals $3,102.12. (5.5)
Engineering Economy S22024

Answer:
Opportunity Cost of Capital Recovery Amount
Investment at Interest Loss in Value of Assets for Year
Year
BOY (= Investment x (P/F, During Year (= Opportunity Cost + Loss
15%, 1)) in Value)
1 $10,000 $1,500 $3,000 $4,500
2 $7,000 $1,050 $2,000 $3,050
3 $5,000 $750 $2,000 $2,750
4 $3,000 $450 $1,000 $1,450

We have:
CR(15%) = I (A/P, 15%, 4) − S (A/F, 15%, 4)
CR(15%) = $10,000 (0.3503) − $2,000 (0.2003)
CR(15%) = $3,102.12