Omar D.

Cesar 12- April-2016

BSCE 3-3

PROBLEM SET #1
(Engineering Economics)

5-2. Stan Moneymaker has been informed of a major automobile manufacture’s plan to
conserve on gasoline consumption through improved engine design. The idea is called “engine
displacement”, and it works by switching from 8-cylinder operation to 4-cylinder operation at
approximately 40 miles per hour. Engine displacement allows enough power to accelerate from
a standstill and to climb hills while also permitting the automobile to cruise at speeds over 40
miles per hour with little loss in driving performance.
The trade literature studied by Stan makes the claim that the engine displacement option
will cost the costumer an extra $1,200 on the automobile’s sticker price. This option is expected
to save 4 miles per gallon 9an average of in-town and highway driving). A regular 8-cylinder
engine in the car that Stan is interested in buying gets an average of 20 miles per gallon of
gasoline. If Stan drives approximately 1,200 miles per month, how many months of ownership
will be required to make this $1,200 investment pay for itself? Stan’s opportunity cost capital (i)
is 0.5% per month, and gasoline costs $2.00 per gallon. (5.3)

Given:
Investment Cost: $1,200 n: ?
i: 0.5% or 0.05 per month
Solution:
Average= 20 miles per gallon
Savings= 24 miles per gallon
1 𝑔𝑎𝑙𝑙𝑜𝑛 1200 𝑚𝑖𝑙𝑒𝑠 $2
( )( )( ) = $100 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
24 𝑚𝑖𝑙𝑒𝑠 1 𝑚𝑜𝑛𝑡ℎ 1 𝑔𝑎𝑙𝑙𝑜𝑛

1 𝑔𝑎𝑙𝑙𝑜𝑛 1200 𝑚𝑖𝑙𝑒𝑠 $2

( )( )( ) = $120 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
20 𝑚𝑖𝑙𝑒𝑠 1 𝑚𝑜𝑛𝑡ℎ 1 𝑔𝑎𝑙𝑙𝑜𝑛

Monthly Savings:
$120 - $100 = $20
Using PW Method
(1.05)𝑛 −1
0 = −1200 + 20 ( )
0.05(1.05) 𝑛

n = 245 months
Omar D. Cesar 12- April-2016
BSCE 3-3

5-4. Evaluate machine XYZ on the basis of the PW method when the MARR is 12% per year.
Pertinent cost data are as follows: (5.3)

Machine XYZ
Investment cost $13,000
Useful life 15 years
Market value $3,000
Annual operating expenses $100
Overhaul cost – end of 5th year $200
Overhaul cost – end of 10th year $550

Solution:
Overhaul cost – end of 15th year = $1050
Overhaul cost – end of 5th year = $200
Overhaul cost – end of 10th year = $550
Using PW method:
= -$13,000 – $1,050 – $100(P/A, 12%, 15) +$ 3,000(P/F, 12%, 15)
(1+12%)15 −1
=−$1,300 − $1,050 − $100 ( ) + $ 3,000(1 + 12%)−15
12%(1+12%)15

= -$13,000 – $1,050 – $100(6.8109) +$ 3,000(0.1827)

= -$14,183

5-8.A company is considering constructing a plant to manufacture a proposed new product. The
land costs $300000, the building costs $600000, the equipment costs $250000, and $100000
additional working capital is required. It is expected that the product will result in sales of
$750000 per year for 10 tears, at which time the land can be sold for $400000, the building for
$350000, and the equipment for $50000. All of the working capital would be recovered at the
end of year 10. The annual expenses for labor, materials, and all other items are estimated to
total $475000. If the company requires a MARR of 15% per year on projects of comparable risk,
determine if it should invest in the new product line. Use the PW method.
Given:
Investment cost: $300,000 + $600,000 + $250,000 + $100,000 = $1,250,000
Annual revenue: $750,000
Annual expenses: $475,000
Market value: $400,000 +$350,000 + $50,000 = $80,0000
N: 10 year
Omar D. Cesar 12- April-2016
BSCE 3-3

MARR: 15% per year

Solution:
Using PW method
= -$1250000 + ($750,000 – $475,000) (P/A, 15%, 10) +$ 80000(P/F, 15%, 10)
(1+15%)10 −1
=−$1250000 − $275,000 ( ) + $ 3000(1 + 15%)−10
15%(1+15%)10

=-$1250000 – $275,000(5.0188) + $3000(0.2472)

= $327909.14

5-12.
A) A company has issued 10-year bonds, with a face value of $1000000 in $1000 units.
Interest at 8% is paid quarterly. If an investor desires to earn 12% nominal interest
(compounded quarterly) on $10000 worth of these bonds, what would the purchase price
have to be? (5.3)

Given:
Z: $1000000
R: 8%
I: 12%
C: $10000
N: 10 years or 40quarterly

Solution:
Vn = C (P/F, i%, N) + rZ (P/A, i%, N)
= 10000 (1.12)-40 + 0.08 (1000000) (8.2438)
= $659610

B) If the company plans to redeem these bonds in total at the end of 10 years and
establishes a sinking fund that earn 8%, compounded semi-annually, for this purpose,
what is the annual cost of interest and redemption? (5.5)