CHAPTER 9
1. Explain why economic analysis is important for systems engineering?
Refer to the introduction section of the chapter, Systems design requires capital
2. What is interest? Compare simple interest rate and compound interest rate.
3. Taking a loan from the bank, there are two options, option 1: interest rate is 8% and
compound monthly; option 2: annual interest rate is 15% and compound quarterly, which
option should the borrower choose?
For the same amount of the money P, the end of year total for the option 1 is
4. How many years does it take for a deposited sum to double itself, given the interest rate
of 10%, compound annually?
5. What annual compound interest rate is necessary for a deposit to triple itself in 10 years ?
6. Assuming the interest rate is 5% compounding annually,
a. What is the present equivalent cost of an overhaul cost of $2,000 that will occur 5
years from now?
b. The initial investment is $20,000, what is the annual equal amount of saving over
the 5 year period to justify this investment?
7. The same amount of money occurs at different time point, the amount occurring first has
a higher equivalent value than the one occurring the next? Is it statement true or false?
Justify your answer.
8. A company has a loan of $150,000, the annual compound interest rate is 5%. The
company begin to pay back at the end of the first year, at an equal amount, and hope to
pay if off after 10 years. What is the annual equal amount of the payment?
9. For question 8, if there is no payment for the first year, and company starts to pay back at
the end of second year, and pay it off after 10 years, what is the annual equal amount of
the payment?
This question is kind of tricky, since no payment is paid at end of the first year, so after
first year, the new amount of the P becomes
10. The HFS department is considering two computer servers for their lab, server A cost
$7,000 initially and has a salvage value of $1,500 after 10 years; server B cost $5,000
initially and has a salvage value of $1,000 after 10 years of use. Assuming that they both
satisfy the needs for the department, giving the annual compound interest rate of 5%,
what server should be chosen?
11. For a 5 year investment project, the initial investment at time 0 is $100, 000; and the
investment at beginning of the second year is $80,000; the annual revue after the second
investment is $50,000 (from year 2 to year 5), the salvage value after year 5 is $70,000.
Assuming annual interest rate is 5% compound, should this project be invested?
Using the present value criterion,
12. Calculate the rate of return for the following project. For a 5 year investment project, the
initial investment at time 0 is $100, 000; and the investment at beginning of the second
year is $80,000; the annual revue after the second investment is $50,000 (from year 2 to
year 5), the salvage value after year 5 is $70,000. (Hint: rate of return makes the net value
of the project equals 0).
13. The following table shows the money flow for a project, with compound
annually.
Year 0 1 2 3 4 5
Money
flow
-1000 200 250 250 250 250
Is this project feasible?
14. A company is planning to build a 10000 sq ft wareshouse in 3 years. Option 1 is to buy a
land for $80,000 and build a temporary warehouse on it, the cost is $70/square foot; after
three years, it is estimated that the company can sell the land for $90,000, and sell the
warehouse for $120,000; option 2 is to rent a warehouse, the annual rent rate is $150/sq
foot, and pay annually. Which option the company should take? Draw the money flow
diagram and solve it using PE, FE and AE criterion. (The annual compound rate is 10%).
Option 1:
Option 2:
15. A person borrowed $20,000 at the beginning the year 1, every year he is required to pay
$4,000 so it is paid off after 10 years. What is the compound annual interest rate? (hint:
use linear interpolation)
16. Company XYZ is considering buying a new power supply equipment, currently there are
two types of equipment are under consideration: Type A: initial cost is $14,000, the
salvage value is $2,000 after 4 years, the hour cost is $.84/hour and the annual
maintenance fee is $1,200; Type B: initial cost is $5,500, no salvage cost after 4 years, it
requires hourly cost of $.67/hour and a human labor fee of $.8/hour. Assuming interest
rate is 10% compound annually, how many hours per year the equipment needs to be
used to make two types break even?
: number of hours per year
17. A company has a production capacity 50,000 ton annually, the annual fix cost is
$8,000,000, and the sale price for each ton is $1,500, tax and other cost are 10% of the
sale price, the variable cost is $1,150/ton. What is the annual percentage of the
production capacity to make it break even?