Engineering Economy

Chapter 5

 

1. Your company needs a small front-end loader for handling bulk materials at the Wide place plant. It can be leased from the dealer for three years for $4050 per year including all maintenance. It can also be purchased for $14,000. You expect the loader to last for six years and to have a salvage value of $3000. You predict that maintenance will cost $400 the first year and increase by $200 per year in each year after the first. Your MARR is 15% per year. (a) Use AW analysis to determine whether to lease or buy the loader.

 

2. You have identified three alternatives for a small project at your plant. Any of the alternatives would save about $30,000 per year in operating costs. (a) Use AW analysis and an MARR of 15% per year to determine which alternative to select.

 

Alternative	F	G	H
Initial Cost, $	40,000	50,000	60,000
Salvage Value, $	4000	6000	9000
Annual Cost, $/year	8000	6000	4000
Life, years	3	4	5

 

 

3. ABC Drinks purchases its 355ml cans in large bulk from China. The finish on the anodized aluminum surface is produced by mechanical finishing technology called Brushing and Bread Blasting

 

Use MARR = 8%

 

Alternatives

 

Brush: P=-$400,000, n = 10years, S = $50,000, AOC =-$50,000 in year 1 decreasing by $5000 annually starting in year 2

 

Bread Blasting: P=-$300,000, n = Permanent, S =0, AOC =-$50,000

 

Select between the two alternatives

4. A contractor has been awarded the contract to construct a six miles long tunnel in the mountain of western Wisconsin. During the five year period, the contractor will need water from the nearby stream. He will construct a pipe line to convey the water to the main construction yard. An analysis of the various pipe sizes is as follows:

 

Pipe sizes

2” 3” 4” 6”

 

Installed cost of pipeline and pump $22000 $23000 $25000 $30000

 

Cost per hour for pumping $1.20 $0.65 $0.50 $0.40

 

 

The pipe and the pump will have a salvage value at the end of five years equal to the cost to remove them. The pump will operate 2000 hours per year. The lowest rate at which the contractor is willing to invest is 7%. Select the best Pipe using Annual Worth

 

5. The expansion of the Wide-place Mall is delayed over the issue of parking. There is not enough now to support the new facility and more must be added. Let’s suppose that there are 3 options: buying more land, filling wetlands at the rear of the site, or building a multilevel garage on the present lot. Assume a forty-year planning horizon and an interest rate of 9% per year. Use Annual worth analysis and the data below to determine which option should be selected.

 

	Purchase Land	Fill Wetlands	Garage
Initial Cost, $	$12,000,000	$19,000,000	$44,000,000
Annual Benefit, $ per year	0	0	4,000,000 (parking fees)
Annual Cost, $ per year	200,000	160,000	2,900,000

 

 

 

Text Book Problems

6. Problem 5.24

 

7. Problem 5.28 (Use Spread sheet only to solve this)

 

 

Chapter 6

8. Two years ago, you bought 100 shares of XYZ stock at $60 per share. The stock paid a dividend of $6 per share per quarter. If you sell the shares now for $98 per share, what is your annual ROR on this investment?

9. At the end of 1987, you bought a piece of land for $35,000. In addition to the $35,000, you paid $1,700 in closing costs (costs associated with the purchase and title registration). For the years 1988 through 2002, you paid, on average, $950 in property taxes at the end of each year. At the end of 2003, you sold the land for $120,000. A sale time, you paid a 6% commission to the realtor and $1,600 was your share of the closing costs. What was the ROR on this investment?

 

 

10. UW-Stout is considering which of two devices to install to reduce costs in a particular situation. Both devices (A and B) cost $1000, have useful lives of 10years and no salvage value.

 

Device A: Annual savings of $300

 

Device B: Annual savings of $400 in the first year but will decline $50 annually.

 

If MARR is 7%, which device should Stout purchase? Use (A-B)

 

 

11. In your uncle’s will, you are to choose of the following two alternatives

 

Alternative 1: $2000 cash

 

Alternative 2: $150 now plus $100 per month for twenty months

 

a. At what rate of return are the two alternatives equivalent?

b. If you think the rate of return in (a) is too low, which alternative will you select?

 

 

 

Chapter 7

12. Two machines are considered for purchase. Assume 10% interest, Use Benefit Cost analysis.

Machine X Machine Y

 

Initial Cost $200 $700

Uniform annual benefit $95 $120

Salvage value $50 $150

Useful life in years 6 12

 

a. Which machine should be bought?

b. List the decision guideline for single project

c. List the selection rule for incremental analysis

 

13. Which of the following alternatives will you select using benefit to cost ratio?

 

A: First cost = $560, Annual benefit = $140, Salvage value = $40

 

B: First cost = $340, Annual benefit = $100, Salvage value = $0

 

C: First cost = $120, Annual benefit = $40, Salvage value = $40

 

Each alternative has 6 years useful live. Assume MARR = 10%