Solutions to end-of-chapter problems

Basics of Engineering Economy, 2nd edition

Leland Blank and Anthony Tarquin

Chapter 1
Foundations of Engineering Economy
1.1

If the alternative that is actually the best one is not even recognized as an
alternative, it obviously will not be able to be selected by using any economic
analysis tools.

1.2

Non-economic factors are (b), (c), (e) and (f): morale, goodwill, public
acceptance and aesthetics, respectively.

1.3

Revenues and costs are examples of cash flows.

1.4

The analysis techniques that are used in engineering economic analysis are only
as good as the accuracy of the cash flow estimates.

1.5

The do-nothing alternative represents the as-is or status quo condition.

1.6

Evaluation criterion refers to the measurement standard or procedure that is used

to determine which alternative is best.

1.7

In engineering economy, the evaluation criterion is financial units (dollars, pesos,

etc).

1.8

Intangible factors are non-economic considerations that may have to be taken into
account in identifying the best alternative.

1.9

Examples of intangible factors are goodwill, morale, convenience, friendship,

implementation know-how, aesthetics, public acceptance

1.10

Time value of money means that there is a certain worth in having money and that
worth changes as a function of time.

1.11

Interest is a manifestation of the time value of money.

1.12

The most important fundamental dimension in economic analysis is time because

of time value of money.

1.13

The term that describes compensation for renting of money is time value of
money, which manifests itself as interest.

1.14

When an interest rate does not include the time period, the time period is assumed
to be one year.

1.15

The original amount of money in a loan transaction is known as the principal.

1.16

Minimum attractive rate of return is the lowest rate of return (interest rate) on a
project that companies or individuals consider to be high enough to induce them
to invest their money.

1.17

When the yield on a U.S. Government Bond is 3% per year, investors are
expecting the inflation rate to be near zero.

1.18

(a) Payment = 1,600,000(1.10)(1.10) = $1,936,000

(b) Interest = total amt paid principal
= 1,936,000- 1,600,000
= $336,000

1.19

(a) Equivalent cost in 1 year = 38,000 + 38,000(0.10)

= $41,800
(b) Since $41,600 is less than $41,800, the firm should remodel 1ater (i.e. 1 year
from now).

1.20

P = 50,000/1.08
= $46,296.30

1.21

Rate of return = (1,450,000/10,000,000)(100%)

= 14.5% per year

1.22

Rate of return = (45/966)(100%)

= 4.7%

1.23

Rate of increase = [(29 22)/22](100%)

= 31.8%

1.24

Interest rate = (275,000/2,000,000)(100%)

= 13.75%

1.25

Rate of return = (2.3/6)(100%)

= 38.3%

1.26

F = P(1 + i)
2,360,000 = 2,000,000(1 + i)
i = 0.18
(18%)

1.27

F = P(1 + i)
53,000,000 = P(1 + 0.10)
2

P = $48,181,818
1.28

Amount of earnings in year one = 400,000,000(0.25)

= $100,000,000

1.29

Amt at end of year 1 = 280,000(1.15) = $322,000

Amt at end of year 2 = 322,000(1.15) = $370,300
Amt at end of year 3 = 370,300(1.15) = $425,845

< $425,000
< $425,000
> $425,000

Time = 3 years
1.30

MARR is set relative to the cost of capital.

1.31

The engineer is wrong, unless the MARR is exactly equal to the cost of capital.
Usually, the inequality ROR MARR > cost of capital is used, and the MARR is
established higher than the cost of capital so that profit, risk and other factors are
considered.

1.32

(a) Amt owed; compound interest = 150,000(1.05)(1.05)(1.05)

= $173,644
Amt owed; simple interest = P + Pni
= 150,000 + 150,000(3)(0.055)
= 150,000 + 24,750
= $174,750
Company should accept 5% compound interest rate
(b) Difference = 174,750 173,644
= $1106

1.33

F = P + Pni
850,000 = P + P(4)(0.10)
1.4P = 850,000
P = $607,143

1.34

F = P + Pni
100,000 = 1000 + 1000(n)(0.1)
99,000 = 1000(n)(0.10)
n = 990 years

1.35

Follow plan 4, Figure 1.3 as a model.

A is 9900 2000 = $7900
B is 7900(0.10) = $790
3

C is 7900 + 790 = $8690

D is 8690 2000 = $6690
1.36

F = P + Pni
35,000 = P + P(3)(0.07)
1.21P = 35,000
P = $28,925.60

1.37

P(1.20)(1.20) = 20,000
P = $13,888.89

1.38

(a) Interest rate = 900,000/6,000,000 = 0.15 = 15% per year

(b) Total due after 1 year = 6,000,000 + 900,000 = $6,900,000
Interest charged for 2nd year = 6,900,000(0.15) = $1,035,000

1.39

(a)

(b)

F = P + Pni
2,800,000 = 2,000,000 + 2,000,000(4)(i)
Interest = 10% per year
F = P(1 + i) (1 + i) (1 + i) (1 + i)
2,800,000 = 2,000,000(1 + i)4
(1 + i)4 = 1.4000
log(1 + i)4 = log1.400
4log(1 + i) = 0.146
log(1 + i) = 0.0365
(1 + i) = 100.0365
(1 + i) = 1.0877
i = 8.77%

1.40

F = P + P(n)(i)
3P = P + P(n)(0.20)
n = 10 years

1.41

(a) F = P + P(n)(i)
2P = P + P(4)(i)
i = 25%
(b)

F = P(1 + i) (1 + i) (1 + i) (1 + i)
2P = P(1 + i)4
2 = (1 + i)4
log 2 = log(1 + i)4
0.301 = 4 log(1 + i)
log(1 + i) = 0.0753
(1 + i) = 100.0753
i = 18.93%
4

1.42

(a) Loan A: interest/year = 500,000(0.10) = $50,000

Loan B: interest/year = 500,000(0.10) = $50,000
The same amount of interest was be paid on each loan
(b) There was no difference paid between the two loans

1.43

All engineering economy problems will involve i and n

1.44

P = $13,000; F = $26,000; i = 6.8% per year; n = ?

1.45

P = $1000; F = $1270; n = 3; i = ?

1.46

P = $50,000; F = ?; i = 15%; n = 3

1.47

F= $200,000,000; n = 5; i = 12% per year; A = ?

1.48

A = $225,000; n = 3; i = 15% per year; F = ?

1.49

F = $400,000; n = 2; i = 20% per year; P = ?

1.50

P = $225,000; n = 4; i = 15% per year; A = ?

1.51

P = $1,800,000; n = 6; i = 12% per year; A = ?

1.52

P = $16,000,000; A = $3,800,000; i = 18% per year; n = ?

1.53

End-of-period-convention means end-of-interest period. It does not mean end of

the calendar year.

1.54

Period refers to interest period.

1.55

The difference between cash inflows and cash outflows is known as net cash
flow.

1.56

Office supplies = outflow; GPS surveying equipment = outflow;

Auctioning of used earth-moving equipment = inflow;
Staff salaries = outflow; Fees for services rendered = inflow;
Interest from bank deposits = inflow

1.57

The following items are inflows: salvage value, sales revenues, cost reductions
by subcontractors.

The following items are outflows: income taxes, loan interest, rebates to dealers,
accounting services.
1.58

Assuming down is negative: down arrow of $40,000 in year 5; up arrow in year 0

identified as P =?; i = 15% per year.

1.59

Assuming down is negative: down arrow of $10,000 in year 0; up arrows in the

amount of $3000 in years 1 through 5; i = 10% per year; arrow in year 5
identified as F = ?.

1.60

Assuming down is negative: down arrow in year 0 identified as P=?; i = 15%

per year; up arrows in years 1 thru 5 in the amount of $75,000 - $30,000 =
$45,000

1.61

(a) FV is F (b) PMT is A (c) NPER is n

1.62

(a)
(b)
(c)
(d)

1.63

(a) FV(i%,n,A,P) finds the future value, F

(b) IRR(first_cell:last_cell) finds the compound interest rate, i
(c) PMT(i%,n,P,F) finds the equal periodic payment, A
(d) PV(i%,n,A,F) finds the present value, P

1.64

For built-in spreadsheet functions, a parameter that does not apply can be left
blank when it is not an interior one. For example, if no F is involved when using
the PMT function, it can be left blank because it is an end parameter. When the
parameter involved is an interior one (like P in the PMT function), a comma must
be put in its position.

1.65

A common moral is a fundamental belief held by virtually all people. A personal

moral is the translation of a common moral into that which an individual believes
and uses as guidance for their own decisions and actions.

1.66

A code of ethics can be used as an evaluation measure for the decision and actions
of an individual who works in the discipline that honors the code.

1.67

(a) Assuming that Carols supervisor is a trustworthy and ethical person himself,
going to her supervisor and informing him of her suspicion is probably the
best of these options. This puts Carol on record (verbally) as questioning
something she heard at an informal gathering.
(b) Another good option is to go to Joe one-on-one and inform him of her
concern about what she heard him say at lunch. Joe may not be aware he is on

(d) IRR is i

(e) PV is P

F = ?; i = 8%; n = 10; A = $2000; P = $-10,000

A = ?; i = 12%; n = 30; P = $16,000; F = 0
P = ?; i = 9%; n = 15; A = $1000; F = $700
n = ?; i = 8.5%; A = $5000; P = $-50000; F = $20000 (calculator function)

the bid evaluation team and the potential ethical consequences if he accepts
the free tickets from Dryer.
1.68
1.69

Explain your own situation and what you think an ethical action might be.
Amount now = 10,000 + 10,000(0.10)
= $11,000
Answer is (c)

1.70

Answer is (a)

1.71

Move both cash flows to year 0 and solve for i

1000(1 + i) = 1345.60/(1 + i)
(1 + i)2 = 1345.60/1000
(1 + i) = 1.16
i = 16%
Answer is (d)

1.72

F in year 2 at 20% compound interest = P(1.20)(1.20) = 1.44P

For simple interest, F = P + Pni = P(1 + ni)
P(1 + 2i) = 1.44P
(1 + 2i) = 1.44P
i = 22%
Answer is (c)

1.73

F = P(1+i)n
16,000 = 8000(1 + i)9
21/9 = 1 + i
1.08 = 1 + i
i = 0.08
(8%)
Answer is (b)

1.74

Answer is (c)

1.75

Let i = compound rate of increase:

268 = 200(1 + i)5
(1 + i)5 = 268/200
(1 + i) = (1.34)0.2
(1 + i) = 1.0602
i = 6.02%
Answer is (b)

1.76

2P = P + P(n)(0.05)
1 = 0.05n
n = 20
Answer is (d)

1.77

Only a parameter at the end of the string can be omitted without an entry or
comma. Answer is (d).