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Engineering Economy

Leland Blank, Anthony Tarquin

Chapter 1

Foundations of Engineering Economy - all with Video Answers

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Chapter Questions

01:25

Problem 1

List the four essential elements involved in decision making in engineering economic analysis.

Manik Pulyani
Manik Pulyani
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Problem 2

What is meant by (a) limited capital funds and (b) sensitivity analysis?

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Problem 3

List three measures of worth that are used in engineering economic analysis.

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00:03

Problem 4

Identify the following factors as either economic (tangible) or noneconomic (intangible): first cost, leadership, taxes, salvage value, morale, dependability, inflation, profit, acceptance, ethics, interest rate.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 5

Stefanie is a design engineer with an international railroad locomotive manufacturing company in Illinois. Management wants to return some of the engineering design work to the United States rather than export all of it to India, where the primary design work has been accomplished for the last decade. This transfer will employ more people locally and could improve the economic conditions for families in and around Illinois.

Stefanie and her design team were selected as a test case to determine the quality and speed of the design work they could demonstrate on a more fuel-efficient diesel locomotive. Neither she nor any of her team members have done such a significant design job, because their jobs had previously entailed only the interface with the subcontracted engineers in India. One of her team members had a great design idea on a key element that will improve fuel efficiency by approximately $15 \%$. She told Stefanie it came from one of the Indiangenerated documents, but that it would probably be okay for the team to use it and remain silent as to its origin, since it was quite clear the U.S. management was about to cancel the foreign contract. Although reluctant at first, Stefanie did go forward with a design that included the efficiency improvement, and no mention of the origin of the idea was made at the time of the oral presentation or documentation delivery. As a result, the Indian contract was canceled and full design responsibility was transferred to Stefanie's group.

Consult the NSPE Code of Ethics for Engineers (Appendix C) and identify sections that are points of concern about Stefanie's decisions and actions.

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Problem 6

Consider the common moral precept that stealing is wrong. Hector is with a group of friends in a local supermarket. One of Hector's buddies takes a high-energy drink from a six-pack on the shelf, opens it, drinks it, and returns the empty can to the package, with no intention of paying for it. He then invites the others to do the same, saying, "It's only one drink. Others do it all the time." All the others, except Hector, have now consumed a drink of their choice. Personally, Hector believes this is a form of stealing. State three actions that Hector can take, and evaluate them from the personal moral perspective.

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Problem 7

While going to work this morning off site from his office, an engineer accidently ran a stop sign and was in a car accident that resulted in the death of a 5 -year-old child. He has a strong belief in the universal moral that it is wrong to do serious harm to another person. Explain the conflict that can arise for him between the universal moral and his personal moral about doing serious harm, given the accident was deemed his fault.

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Problem 8

Claude is a fourth-year engineering university student who has just been informed by his instructor that he made a very low grade on his Spanish language final test for the year. Although he had a passing score prior to the final, his final grade was so low that he has now flunked the entire year and will likely have to extend his graduation another semester or two.

Throughout the year, Claude, who hated the course and his instructor, has copied homework, cheated on tests, and never seriously studied for anything in the course. He did realize during the semester that he was doing something that even he considered wrong morally and ethically. He knew he had done badly on the final. The classroom was reconfigured for the final exam in a way that he could not get any answers from classmates, and cell phones were collected prior to the exam, thus removing texting possibilities to friends outside the classroom who might help him on the final exam. Claude is now face to face with the instructor in her office. The question to Claude is, "What have you been doing throughout this year to make passing scores repeatedly, but demonstrate such a poor command of Spanish on the final exam?"

From an ethical viewpoint, what options does Claude have in his answer to this question? Also, discuss some of the possible effects that this experience may have upon Claude's future actions and moral dilemmas.

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Problem 9

RKI Instruments borrowed $$\$ 3,500,000$$ from a private equity firm for expansion of its manufacturing facility for making carbon monoxide monitors/ controllers. The company repaid the loan after 1 year with a single payment of $$\$ 3,885,000$$. What was the interest rate on the loan?

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06:00

Problem 10

Emerson Processing borrowed $$\$ 900,000$$ for installing energy-efficient lighting and safety equipment in its La Grange manufacturing facility. The terms of the loan were such that the company could pay interest only at the end of each year for up to 5 years, after which the company would have to pay the entire amount due. If the interest rate on the loan was $12 \%$ per year and the company paid only the interest for 4 years, determine the following:
(a) The amount of each of the four interest payments
(b) The amount of the final payment at the end of year 5

Charles Carter
Charles Carter
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00:50

Problem 11

Which of the following 1 -year investments has the highest rate of return?
(a) $$\$ 12,500$$ that yields $$\$ 1125$$ in interest,
(b) $$\$ 56,000$$ that yields $$\$ 6160$$ in interest, or
(c) $$\$ 95,000$$ that yields $$\$ 7600$$ in interest.

Jeffrey Russell
Jeffrey Russell
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Problem 12

A new engineering graduate who started a consulting business borrowed money for 1 year to furnish the office. The amount of the loan was $$\$ 23,800$$, and it had an interest rate of $10 \%$ per year. However, because the new graduate had not built up a credit history, the bank made him buy loan-default insurance that cost $5 \%$ of the loan amount. In addition, the bank charged a loan setup fee of $$\$ 300$$. What was the effective interest rate the engineer paid for the loan?

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Problem 13

When the inflation rate is expected to be $8 \%$ per year, what is the market interest rate likely to be?

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Problem 14

The symbol $P$ represents an amount of money at a time designated as present. The following symbols also represent a present amount of money and require similar calculations. Explain what each symbol stands for: PW, PV, NPV, DCF, and CC.

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Problem 15

Identify the four engineering economy symbols and their values from the following problem statement. Use a question mark with the symbol whose value is to be determined.

Thompson Mechanical Products is planning to set aside $$\$ 150,000$$ now for possibly replacing its large synchronous refiner motors whenever it becomes necessary. If the replacement is not needed for 7 years, how much will the company have in its investment set-aside account, provided it achieves a rate of return of $11 \%$ per year?

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Problem 16

Identify the four engineering economy symbols and their values from the following problem statement. Use a question mark with the symbol whose value is to be determined.

Atlas Long-Haul Transportation is considering installing Valutemp temperature loggers in all of its refrigerated trucks for monitoring temperatures during transit. If the systems will reduce insurance claims by $$\$ 100,000$$ two years from now, how much should the company be willing to spend now, if it uses an interest rate of $12 \%$ per year?

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Problem 17

Identify the four engineering economy symbols and their values from the following problem statement. Use a question mark with the symbol whose value is to be determined.

A green algae, Chlamydomonas reinhardtii, can produce hydrogen when temporarily deprived of sulfur for up to 2 days at a time. A small company needs to purchase equipment costing $$\$ 3.4$$ million to commercialize the process. If the company wants to earn a rate of return of $10 \%$ per year and recover its investment in 8 years, what must be the net value of the hydrogen produced each year?

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Problem 18

Identify the four engineering economy symbols and their values from the following problem statement. Use a question mark with the symbol whose value is to be determined.

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. At an interest rate of $15 \%$ per year, what is the total equivalent future amount of the company's expenses at the end of 3 years?

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Problem 19

What is meant by end-of-period convention?

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Problem 20

Identify the following as cash inflows or outflows to commercial air carriers: fuel cost, pension plan contributions, fares, maintenance, freight revenue, cargo revenue, extra-bag charges, water and sodas, advertising, landing fees, seat preference fees.

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Problem 21

Many credit unions use semiannual interest periods to pay interest on customer savings accounts. For a credit union that uses June 30 and December 31 as its semiannual interest periods, determine the end-of-period amounts that will be recorded for the deposits shown in the table.
$$
\begin{array}{cc}
\text { Month } & \text { Deposit, \$ } \\
\hline \text { Jan } & 50 \\
\text { Feb } & 70 \\
\text { Mar } & - \\
\text { Apr } & 120 \\
\text { May } & 20 \\
\text { June } & - \\
\text { July } & 150 \\
\text { Aug } & 90 \\
\text { Sept } & - \\
\text { Oct } & - \\
\text { Nov } & 40 \\
\text { Dec } & 110 \\
\hline
\end{array}
$$

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Problem 22

For a company that uses a year as its interest period, determine the net cash fl ow that will be recorded at the end of the year from the cash fl ows shown.
Table can't copy

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Problem 23

Construct a cash flow diagram for the following cash flows: $$\$ 25,000$$ outflow at time $$0, \$ 9000$$ per year inflow in years 1 through 5 at an interest rate of $10 \%$ per year, and an unknown future amount in year 5 .

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Problem 24

Construct a cash flow diagram to find the present worth in year 0 at an interest rate of $15 \%$ per year for the following situation.
$$
\begin{array}{cc}
\text { Year } & \text { Cash Flow, } \mathbf{\$} \\
\hline 0 & -19,000 \\
1-4 & +8,100 \\
\hline
\end{array}
$$

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03:52

Problem 25

Construct a cash flow diagram that represents the amount of money that will be accumulated in 15 years from an investment of $$\$ 40,000$$ now at an interest rate of $8 \%$ per year.

Kian Manafi
Kian Manafi
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Problem 26

At an interest rate of $15 \%$ per year, an investment of $$\$ 100,000$$ one year ago is equivalent to how much now?

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00:00

Problem 27

During a recession, the price of goods and services goes down because of low demand. A company that makes Ethernet adapters is planning to expand its production facility at a cost of $$\$ 1,000,000$$ one year from now. However, a contractor who needs work has offered to do the job for $$\$ 790,000$$ if the company will do the expansion now instead of 1 year from now. If the interest rate is $15 \%$ per year, how much of a discount is the company getting?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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Problem 28

As a principal in the consulting firm where you have worked for 20 years, you have accumulated 5000 shares of company stock. One year ago, each share of stock was worth $$\$ 40$$. The company has offered to buy back your shares for $$\$ 225,000$$. At what interest rate would the firm's offer be equivalent to the worth of the stock last year?

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01:28

Problem 29

A design/build engineering company that usually gives year-end bonuses in the amount of $$\$ 8000$$ to each of its engineers is having cash flow problems. The company said that although it could not give bonuses this year, it would give each engineer two bonuses next year, the regular one of $$\$ 8000$$ plus an amount equivalent to the $$\$ 8000$$ that each engineer should have gotten this year. If the interest rate is $8 \%$ per year, what will be the total amount of bonus money the engineers should get next year?

Linh Vu
Linh Vu
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Problem 30

University tuition and fees can be paid by using one of two plans.
Early-bird: Pay total amount due 1 year in advance and get a $10 \%$ discount.
On-time: Pay total amount due when classes start.
The cost of tuition and fees is $$\$ 10,000$$ per year.
(a) How much is paid in the early-bird plan?
(b) What is the equivalent amount of the savings compared to the on-time payment at the time that the on-time payment is made?

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02:30

Problem 31

If a company sets aside $$\$ 1,000,000$$ now into a contingency fund, how much will the company have in 2 years, if it does not use any of the money and the account grows at a rate of $10 \%$ per year?

Jonathan Tapiwa
Jonathan Tapiwa
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04:19

Problem 32

Iselt Welding has extra funds to invest for future capital expansion. If the selected investment pays simple interest, what interest rate would be required for the amount to grow from $$\$ 60,000$$ to $$\$ 90,000$$ in 5 years?

Grant Mansfield
Grant Mansfield
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Problem 33

To finance a new product line, a company that makes high-temperature ball bearings borrowed $$\$ 1.8$$ million at $10 \%$ per year interest. If the company repaid the loan in a lump sum amount after 2 years, what was (a) the amount of the payment and ( $b$ ) the amount of interest?

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Problem 34

Because market interest rates were near all-time lows at $4 \%$ per year, a hand tool company decided to call (i.e., pay off) the high-interest bonds that it issued 3 years ago. If the interest rate on the bonds was $9 \%$ per year, how much does the company have to pay the bond holders? The face value (principal) of the bonds is $$\$ 6,000,000$$.

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Problem 35

A solid waste disposal company borrowed money at $10 \%$ per year interest to purchase new haulers and other equipment needed at the companyowned landfill site. If the company got the loan 2 years ago and paid it off with a single payment of $$\$ 4,600,000$$, what was the principal amount $P$ of the loan?

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Problem 36

If interest is compounded at $20 \%$ per year, how long will it take for $$\$ 50,000$$ to accumulate to $$\$ 86,400$$ ?

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Problem 37

To make CDs look more attractive than they really are, some banks advertise that their rates are higher than their competitors' rates; however, the fine print says that the rate is a simple interest rate. If a person deposits $$\$ 10,000$$ at $10 \%$ per year simple interest, what compound interest rate would yield the same amount of money in 3 years?

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Problem 38

Give three other names for minimum attractive rate of return.

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Problem 39

Identify the following as either equity or debt financing: bonds, stock sales, retained earnings, venture capital, short-term loan, capital advance from friend, cash on hand, credit card, home equity loan.

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Problem 40

What is the weighted average cost of capital for a corporation that finances an expansion project using $30 \%$ retained earnings and $70 \%$ venture capital? Assume the interest rates are $8 \%$ for the equity financing and $13 \%$ for the debt financing.

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Problem 41

Managers from different departments in Zenith Trading, a large multinational corporation, have offered six projects for consideration by the corporate office. A staff member for the chief financial officer used key words to identify the projects and then listed them in order of projected rate of return as shown below. If the company wants to grow rapidly through high leverage and uses only $10 \%$ equity financing that has a cost of equity capital of $9 \%$ and $90 \%$ debt financing with a cost of debt capital of $16 \%$, which projects should the company undertake?
$$
\begin{array}{lc}
\text { Project ID } & \begin{array}{c}
\text { Projected ROR, } \\
\text { \% per year }
\end{array} \\
\hline \text { Inventory } & 30 \\
\text { Technology } & 28.4 \\
\text { Warehouse } & 19 \\
\text { Products } & 13.1 \\
\text { Energy } & 9.6 \\
\text { Shipping } & 8.2 \\
\hline
\end{array}
$$

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Problem 42

State the purpose for each of the following built-in spreadsheet functions.
(a) PV( $i \%, n, A, F$ )
(b) FV( $i \%, n, A, P$ )
(c) $\operatorname{RATE}(n, A, P, F)$
(d) IRR(first_cell:last_cell)
(e) PMT( $i \%, n, P, F$ )
(f) $\operatorname{NPER}(i \%, A, P, F)$

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Problem 43

What are the values of the engineering economy symbols $P, F, A, i$ and $n$ in the following functions? Use a question mark for the symbol that is to be determined.
(a) $\operatorname{NPER}(8 \%,-1500,8000,2000)$
(b) FV( $7 \%, 102000,-9000$ )
(c) RATE( $10,1000,-12000,2000$ )
(d) PMT( $11 \%, 20,14000$ )
(e) $\operatorname{PV}(8 \%, 15,-1000,800)$

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Problem 44

Write the engineering economy symbol that corresponds to each of the following spreadsheet functions.
(a) PMT
(b) FV
(c) NPER
(d) PV
(e) IRR

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Problem 45

In a built-in spreadsheet function, if a certain parameter is not present, (a) under what circumstances can it be left blank and (b) when must a comma be entered in its place?

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06:16

Problem 46

Sheryl and Marcelly both invest $$\$ 1000$$ at $10 \%$ per year for 4 years. Sheryl receives simple interest and Marcelly gets compound interest. Use a spreadsheet and cell reference formats to develop relations that show a total of $$\$ 64$$ more interest for Marcelly at the end of the 4 years. Assume no withdrawals or further deposits are made during the 4 years.

AG
Ankit Gupta
Numerade Educator
05:35

Problem 47

The concept that different sums of money at different points in time can be said to be equal to each other is known as:
(a) Evaluation criterion
(b) Equivalence
(c) Cash flow
(d) Intangible factors

Puneet Prajapati
Puneet Prajapati
Numerade Educator
01:01

Problem 48

The evaluation criterion that is usually used in an economic analysis is:
(a) Time to completion
(b) Technical feasibility
(c) Sustainability
(d) Financial units (dollars or other currency)

Vysakh M
Vysakh M
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Problem 49

All of the following are examples of cash outflows, except:
(a) Asset salvage value
(b) Income taxes
(c) Operating cost of asset
(d) First cost of asset

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Problem 50

In most engineering economy studies, the best alternative is the one that:
(a) Will last the longest time
(b) Is most politically correct
(c) Is easiest to implement
(d) Has the lowest cost

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08:38

Problem 51

The following annual maintenance and operation (M\&O) costs for a piece of equipment were collected over a 5 -year period: $$\$ 12,300, \$ 8900$$, $$\$ 9200, \$ 11,000$$, and $$\$ 12,100$$. The average is $$\$ 10,700$$. In conducting a sensitivity analysis, the most reasonable range of costs to use (i.e., percent from the average) is:
(a) $\pm 5 \%$
(b) $\pm 11 \%$
(c) $\pm 17 \%$
(d) $\pm 25 \%$

Barsha Rana
Barsha Rana
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Problem 52

At an interest rate of $10 \%$ per year, the equivalent amount of $$\$ 10,000$$ one year ago is closest to:
(a) $$\$ 8264$$
(b) $$\$ 9091$$
(c) $$\$ 11,000$$
(d) $$\$ 12,000$$

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02:30

Problem 53

Assume that you and your best friend each have $$\$ 1000$$ to invest. You invest your money in a fund that pays $10 \%$ per year compound interest. Your friend invests her money at a bank that pays $10 \%$ per year simple interest. At the end of 1 year, the difference in the total amount for each of you is:
(a) You have $$\$ 10$$ more than she does
(b) You have $$\$ 100$$ more than she does
(c) You both have the same amount of money
(d) She has $$\$ 10$$ more than you do

Katelyn Chen
Katelyn Chen
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02:15

Problem 54

The time it would take for a given sum of money to double at $4 \%$ per year simple interest is closest to:
(a) 30 years
(b) 25 years
(c) 20 years
(d) 10 years

Hubert Agamasu
Hubert Agamasu
Numerade Educator

Problem 55

All of the following are examples of equity financing, except:
(a) Mortgage
(b) Money from savings
(c) Cash on hand
(d) Retained earnings

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Problem 56

To finance a new project costing $$\$ 30$$ million, a company borrowed $$\$ 21$$ million at $16 \%$ per year interest and used retained earnings valued at $12 \%$ per year for the remainder of the investment. The company's weighted average cost of capital for the project was closest to:
(a) $12.5 \%$
(b) $13.6 \%$
(c) $14.8 \%$
(d) $15.6 \%$

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