Problem 1.1
Discuss the importance of alternative identification in the engineering economic
process.
Problem 1.2
Which of the following would be considered noneconomic factors in deciding which type
of power plant to build: (a) equipment cost; (b) morale; (c) goodwill; (d) salvage value;
(e) public acceptance; and (f) aesthetics?
Problem 1.3
In economic analysis, revenues and costs are examples of what?
Problem 1.4
The analysis techniques that are used in engineering economic analysis are only as good
as what?
Problem 1.5
What is meant by the do-nothing alternative?
Problem 1.6
What is meant by the term evaluation criterion?
Problem 1.7
What evaluation criterion is used in economic analysis?
Problem 1.8
What is meant by the term intangible factor?
Problem 1.9
Give three examples of intangible factors.
Problem 1.10
What is meant by the term time value of money?
Problem 1.11
Interest is a manifestation of what general concept in engineering economy?
Problem 1.12
Of the fundamental dimensions length, mass, time, and electric charge, which one is the
most important in economic analysis? Why?
Problem 1.13
The term that describes compensation for “renting” money is what?
Problem 1.14
When an interest rate statement does not include a time period, e.g., 3%, the time period
is assumed to be what?
Problem 1.15
The original amount of money in a loan transaction is known as what?
Problem 1.16
What is meant by the term minimum attractive rate of return (MARR)?
Problem 1.17
When the yield on a U.S. Government Bond is 3% per year, investors expect the inflation
rate to be approximately what?
Problem 1.18
In order to build a new warehouse facility, the regional distributor for Valco Multi-
position Valves borrowed $1.6 million at 10% per year interest. If the company repaid the
loan in a lump sum amount after two years, what was (a) the amount of the payment, and
(b) the amount of interest?
Problem 1.19
A medium-size consulting engineering firm is trying to decide whether it should remodel
its office now or wait and do it one year from now. If the firm does it now, the cost will
be $38,000. The interest rate is 10% per year.
a. What would the cost have to be one year from now to render the decision indifferent?
b. If the cost one year from now is $41,600, should the firm remodel now or later?
Problem 1.20
At an interest rate of 8% per year, $50,000 one year hence is equivalent to how much
now?
Problem 1.21
Bennett Industries invested $10,000,000 in a co-venture one year ago. One year later,
Bennett realized a profit of $1,450,000. What annual rate of return does this represent?
Problem 1.22
Trucking giant Yellow Corp agreed to purchase rival Roadway for $966 million in order
to reduce so-called back-office costs, that is, payroll and insurance, by $45 million per
year. If the savings are realized as planned, what is the rate of return on the investment?
Problem 1.23
If Ford Motor Company’s profits increased from 22 cents per share to 29 cents per share
in the April-June quarter compared to the previous quarter, what was the rate of increase
in profits for that quarter?
Problem 1.24
A broadband service company borrowed $2 million for new equipment and repaid the
principal of the loan plus $275,000 interest after 1 year. What was the interest rate on the
loan?
Problem 1.25
A design-build engineering firm completed a pipeline project wherein the company
realized a profit of $2.3 million in one year. If the amount of money the company
invested was $6 million, what was the rate of return on the investment?
Problem 1.26
A sum of $2 million now is equivalent to $2.36 million one year from now at what
interest rate?
Problem 1.27
Last year, Lee Industries decided to restructure some of its debt by paying off one of its
short-term loans. To do so, the company borrowed the money one year ago at an interest
rate of 10% per year. If the total cost of repaying the loan was $53 million, what was the
amount of the original loan?
Problem 1.28
A start-up company with multiple nanotechnology products established a goal of making
a rate of return of at least 25% per year on its investments for the first five years. If the
company acquired $400 million in venture capital, how much did it have to earn in the
first year?
Problem 1.29
How many years does it take for an investment of $280,000 to accumulate to at least
$425,000 at 15% per year interest?
Problem 1.30
The MARR used for a project’s acceptance or rejection is set relative to what cost?
Problem 1.31
An engineer told you that a project is economically acceptable when it’s rate of return
equals or exceeds the corporation’s cost of capital. Is this correct? Explain your answer.
Problem 1.32
Valley Rendering, Inc. is considering the purchase of a new flotation system for
recovering more grease. The company can finance a $150,000 system at 5% per year
compound interest or 5.5% per year simple interest.
a. If the total amount owed is due in a single payment at the end of 3 years, which interest
rate should the company select?
b. How much is the difference in interest between the two schemes?
Problem 1.33
Valtro Electronic Systems, Inc. set aside a lump sum investment four years ago in order
to finance a plant expansion now. The money returned 10% per year simple interest. How
much did the company set aside if the investment is now worth $850,000?
Problem 1.34
At 10% per year simple interest, how long will it take for a deposit of $1000 now to
accumulate to $100,000?
Problem 1.35
Fill in the missing values A through D in the table for a loan of $10,000, if the interest
rate is compounded at 10% per year.
End of
Year
Interest
for Year
Total Owed
at End of Year
End-of-Year
Payment
Total Owed
after Payment
0
—
—
—
10,000
1
1000
11,000
2000
9,000
2
900
9,900
2000
A
3
B
C
2000
D
Problem 1.36
An engineer who was in the business of customizing software for small construction
companies repaid a loan that she got 3 years ago at 7% per year simple interest. If the
amount she repaid was $35,000, what was the principal amount of the loan?
Problem 1.37
How much can you borrow today if you promise to repay $20,000 two years from today
at a compound interest rate of 20% per year?
Problem 1.38
A design-build-operate engineering company borrowed $6 million for 3 years so that it
can purchase new equipment. The interest is compounded and the total amount owed will
be paid in a single lump sum amount at the end of the 3-year period. The interest at the
end of the first year will be $900,000.
a. What is the interest rate on the loan?
b. How much interest will be charged at the end of the second year?
Problem 1.39
A company that manufactures general-purpose transducers invested $2 million four years
ago in high-yield junk bonds. If the bonds are now worth $2.8 million, what rate of return
per year did the company make on the basis of (a) simple interest, and (b) compound
interest?
Problem 1.40
How many years would it take for money to triple in value at 20% per year simple
interest?
Problem 1.41
If Aquatronics Inc. wants its investments to double in value in 4 years, what rate of return
would it have to make on the basis of (a) simple interest, and (b) compound interest?
Problem 1.42
Companies frequently borrow money under an arrangement that requires them to make
periodic payments of “interest only” and then pay the principal all at once. If Cisco
International borrowed $500,000 (identified as loan A) at 10% per year simple interest
and another $500,000 (identified as loan B) at 10% per year compound interest and paid
only the interest at the end of each year for three years on both loans, (a) on which loan
did the company pay more interest, and (b) what was the difference in interest paid
between the two loans?
Problem 1.43
All engineering economy problems will involve which two of the following symbols: P,
F, A, i, n?
Problem 1.44
Define the economy symbols to determine how many years it would take for $13,000 to
double in size at a compound interest rate of 6.8% per year.
Problem 1.45
At 9% per year simple interest, $1000 is equivalent to $1270 in three years. Define the
symbols for the compound interest rate per year that would make this equivalence
correct, i.e., $1000 now and $1270 in 3 years.
Problem 1.46
Define the symbols involved when a construction company wants to know how much
money it can spend 3 years from now to purchase a new truck in lieu of spending $50,000
now. The compound interest rate is 15% per year.
Problem 1.47
Identify the symbols involved if a pharmaceutical company wants to have a liability fund
worth $200 million five years from now. Assume the company will invest an equal
amount of money each year beginning one year from now and that the investments will
earn 12% per year.
Problem 1.48
Vision Technologies, Inc. is a small company that uses ultra-wideband technology to
develop devices that can detect objects (including people) inside of buildings, behind
walls, or below ground. The company expects to spend $100,000 per year for labor and
$125,000 per year for supplies before a product can be marketed. If the company wants to
know the total equivalent future amount of the company’s expenses at the end of 3 years
at 15% per year interest, identify the engineering economy symbols involved and the
values for the ones that are given.
Problem 1.49
Corning Ceramics expects to spend $400,000 to upgrade equipment two years from now.
If the company wants to know the equivalent value now of the planned expenditure,
identify the symbols and their values, assuming Corning’s minimum attractive rate of
return is 20% per year.
Problem 1.50
Sensotech, Inc., a maker of micro-electromechanical systems, believes it can reduce
product recalls by 10% if it purchases new software for detecting faulty parts. The cost of
the new software is $225,000. Identify the symbols involved and the values for the
symbols that are given in determining how much the company would have to save each
year to recover its investment in 4 years at a minimum attractive rate of return of 15% per
year.
Problem 1.51
Atlantic Metals and Plastics uses austenitic nickel-chromium alloys to manufacture
resistance heating wire. The company is considering a new annealing-drawing process to
reduce costs. The new process will cost $1.8 million dollars now. Identify the symbols
that are involved and the values of those that are given, if the company wants to know
how much it must save each year to recover the investment in 6 years at an interest rate of
12% per year.
Problem 1.52
Phillips Refining plans to expand capacity by purchasing equipment that will provide
additional smelting capacity. The cost of the initial investment is expected to be
$16 million. The company expects revenue to increase by $3.8 million per year after the
expansion. If the company’s MARR is 18% per year, how long will it take for the
company to recover its investment? Identify the engineering economy symbols involved
and their values.
Problem 1.53
What does the term “end-of-period convention” mean? What does it not mean?
Problem 1.54
In the phrase “end–of–period convention,” the word “period” refers to what?
Problem 1.55
The difference between cash inflows and cash outflows is known as what?
Problem 1.56
Identify the following as cash inflows or outflows to Anderson and Dyess Design-Build
Engineers: office supplies, GPS surveying equipment, auctioning of used earth-moving
equipment, staff salaries, fees for services rendered, interest from bank deposits.
Problem 1.57
Identify the following as cash inflows or outflows to Honda: income taxes, loan interest,
salvage value, rebates to dealers, sales revenues, accounting services, and cost reductions
by subcontractors.
Problem 1.58
Construct a cash flow diagram to find the present worth of a future outflow of $40,000 in
year 5 at an interest rate of 15% per year.
Problem 1.59
Construct a cash flow diagram for the following cash flows: $10,000 outflow at time
zero, $3000 per year inflow in years 1 through 5 at an interest rate of 10% per year, and
an unknown future amount in year 5.
Problem 1.60
Kennywood Amusement Park spends $75,000 each year in consulting services for ride
inspection and maintenance recommendations. New actuator element technology enables
engineers to simulate complex computer-controlled movements in any direction.
Construct a cash flow diagram for determining how much the park could afford to spend
now on the new technology if the cost of annual consulting services will be reduced to
$30,000 per year? Assume the park uses an interest rate of 15% per year and it wants to
recover its investment in 5 years.
Problem 1.61
Write the engineering economy symbol that corresponds to each of the following
spreadsheet functions.
a. FV
b. PMT
c. NPER
d. IRR
e. PV
Problem 1.62
What are the values of the engineering economy symbols P, F, A, i, and n in the
following spreadsheet or TVM calculator functions? Use a “?” for the symbol that is to
be determined.
a. FV(8%,10,2000,−10000)
b. PMT(12%,30,16000)
c. PV(9%,15,1000,700)
d. n(8.5,5000,−50000,20000)
Problem 1.63
State the purpose for each of the following built-in spreadsheet functions:
a. FV(i%,n,A,P)
b. IRR(first_cell:last_cell)
c. PMT(i%,n,P,F)
d. PV(i%,n,A,F)
Problem 1.64
In a built-in spreadsheet function, if a certain parameter does not apply, under what
circumstances can it be left blank and when must a comma be entered in its place?
Problem 1.65
Explain the relation between a common moral and a personal moral.
Problem 1.66
What is one primary use of a code of ethics for a specific discipline of professional
practice?
Problem 1.67
Yesterday, Carol, an engineer with Hancock Enterprises, was at lunch with several work
friends. Joe, a person Carol has known for a year or so from similar lunches, proudly
mentioned that he got a free flight and tickets to a major league playoff game two weeks
from now in a distant city. Joe happened to also mention the company; it is Dryer. Carol
is aware that Dryer is one of the prime bidders on a major contract to be evaluated by
Hancock next month. Upon inquiry, Carol learned that both she and Joe are on the bid
evaluation committee. Carol suspects that someone in Dryer has offered Joe the tickets as
a consideration for Joe’s favorable evaluation of their bid.
a. Carol has determined that she could do one of several things about the situation:
recommend to Joe directly that he refuse the tickets; show Joe the NSPE Code of Ethics
for Engineers and let him make his own decision; go to Joe’s supervisor and tell her of
the situation; go to her own supervisor and inform him of her suspicion; write an e-mail
to Joe with a copy to her supervisor recommending that Joe consider the ethical dilemma
involved for him; do nothing. Considering only these actions, select the one you think is
the best and explain why you chose it.
b. Identify other options for Carol’s response at this time and determine if one of them is
better than her options outlined above.
Problem 1.68
Watch the video mentioned in Example 1.14. Give an example of a situation that you
have experienced at a restaurant, retailer, or some other business that sells to the public.
In your view, what should the business have done to be more ethical in their dealings
with the public?
Video URL: http://www.bostonglobe.com/business/specials/fish
Problem 1.69
At a compound interest rate of 10% per year, $10,000 one year ago is equivalent to this
amount now:
a. $8,264
b. $9,091
c. $11,000
d. $12,100
Problem 1.70
All of the following are intangible factors except:
a. Taxes
b. Goodwill
c. Morale
d. Convenience
Problem 1.71
Amounts of $1000 one year ago and $1345.60 one year hence are equivalent at the
following compound interest rate per year:
a. 12.5% per year
b. 14.8% per year
c. 17.2% per year
d. None of the above
Problem 1.72
The simple interest rate per year required to accumulate the same amount of money in
2 years at 20% per year compound interest is:
a. 20.5%
b. 21%
c. 22%
d. 23%
Problem 1.73
An investment of $8,000 nine years ago has accumulated to $16,000 now. The compound
rate of return earned on the investment is closest to:
a. 6%
b. 8%
c. 10%
d. 12%
Problem 1.74
In most engineering economy studies, the best alternative is the one which:
a. Will last the longest time
b. Is the easiest to implement
c. Costs the least
d. Is the most politically correct
Problem 1.75
The cost of tuition at a public university was $200 per credit hour 5 years ago. The cost
today (exactly 5 years later) is $268. The annual rate of increase is closest to:
a. 4%
b. 6%
c. 8%
d. 10%
Problem 1.76
The time it would take for money to double at a simple interest rate of 5% per year is
closest to:
a. 10 years
b. 12 years
c. 15 years
d. 20 years
Problem 1.77
For the spreadsheet built-in function PV(i%,n,A,F), the only parameter that can be
completely omitted is:
a. i%
b. n
c. A
d. F
Solution 1.1
If the alternative that is actually the best one is not even recognized as an alternative, it
Solution 1.2
Solution 1.3
Solution 1.4
The analysis techniques that are used in engineering economic analysis are only as good
Solution 1.5
Solution 1.6
Solution 1.7
etc).
Solution 1.8
Solution 1.9
Examples of intangible factors are goodwill, morale, convenience, friendship,
Solution 1.10
Solution 1.11
Solution 1.12
Solution 1.13
The term that describes compensation for “renting” of money is time value of money,
Solution 1.14
Solution 1.15
Solution 1.16
Minimum attractive rate of return is the lowest rate of return (interest rate) on a project
Solution 1.17
When the yield on a U.S. Government Bond is 3% per year, investors are expecting the
Solution 1.18
Solution 1.19
Solution 1.20
Solution 1.21
Solution 1.22
Solution 1.23
Solution 1.24
Solution 1.25
Solution 1.26
F = P(1 + i)
Solution 1.27
Solution 1.28
Solution 1.29
Amt at end of year 1 = 280,000(1.15) = $322,000 < $425,000
Solution 1.30
Solution 1.31
The engineer is wrong, unless the MARR is exactly equal to the cost of capital. Usually,
Solution 1.32
Solution 1.33
Solution 1.34
Solution 1.35
Follow plan 4, Figure 1.3 as a model.
Solution 1.36
Solution 1.37
Solution 1.38
Solution 1.39
Solution 1.40
Solution 1.41
Solution 1.42
The same amount of interest was be paid on each loan
(b)
Solution 1.43
Solution 1.44
Solution 1.45
Solution 1.46
Solution 1.47
Solution 1.48
Solution 1.49
Solution 1.50
Solution 1.51
Solution 1.52
Solution 1.53
End-of-period-convention means end-of-interest period. It does not mean end of the
Solution 1.54
Solution 1.55
Solution 1.56
Office supplies = outflow; GPS surveying equipment = outflow;
Solution 1.57
The following items are inflows: salvage value, sales revenues, cost reductions by
Solution 1.58
Assuming down is negative: down arrow of $40,000 in year 5; up arrow in year 0
Solution 1.59
Solution 1.60
Assuming down is negative: down arrow in year 0 identified as P=?; i = 15% per year; up
Solution 1.61
Solution 1.62
Solution 1.63
Solution 1.64
For built-in spreadsheet functions, a parameter that does not apply can be left blank when
Solution 1.65
A common moral is a fundamental belief held by virtually all people. A personal moral is
Solution 1.66
Solution 1.67
(a) Assuming that Carol’s supervisor is a trustworthy and ethical person himself, going to
Solution 1.68
Solution 1.69
Solution 1.70
Solution 1.71
Move both cash flows to year 0 and solve for i
Solution 1.72
F in year 2 at 20% compound interest = P(1.20)(1.20) = 1.44P For simple interest,
Solution 1.73
Solution 1.74
Solution 1.75
Let i = compound rate of increase:
Solution 1.76
Solution 1.77