College of engineering

Engineering Economy

Homework #2

3.4 Standby power for water utility pumps and other

electrical devices is provided by diesel-powered
generators. As an alternative, the utility can use natural
gas to power the generators, but it will be a few years
before the gas is available at remote sites. The utility
estimates that by switching to gas, it will save $22,000
per year, starting 3 years from now. At an interest rate of
8% per year, determine the present worth in year 0 of
the projected savings that will occur in years 3 through
10.
P=22000( P / A ,8 , 8)( P /F , 8 , 2)

22000(5.7466)(0.8573)
$ 108384

3.11 Two engineering graduates who recently got married

are planning for their early retirement 20 years from now.
They believe that they will need $2,000,000 in year 20. Their
plan is to live on one of their salaries and invest the other.
They already have $25,000 in their investment account. ( a )
How much will they have to invest each year if the account
grows at a rate of 10% per year? ( b ) If the maximum they
have available to invest each year is $40,000, will they reach
their goal of $2 million by year 20?
(a)2000000=25000( F / P ,10 ,20)+ A( F / A , 10 , 20)

2000000=25000(6.7275)+ A (57.2750)
A=$ 31983 per year

( b ) They will exceed their goal by $ 459,188

3.24

New actuator element technology enables engineers

to simulate complex computer-controlled movements in any

direction. If the technology results in cost savings in the

design of amusement park rides, what is the future worth in
year 5 of savings of $70,000 now and $20,000 per year in
years 1 through 3 at an interest rate of 10% per year?
F=70000(F /P , 10 , 5)+ 20000( P/ A , 10 , 3)( F / P ,10 ,5)
70000(1.6105)+ 20000(2.4869)(1.6105)

$ 192838

3.44 A private equity fi rm purchased a cable company and

assumed the companys debt as part of the transaction. The

deal was structured such that the private equity fi rm
received $3 million immediately after the deal was closed (in
year 0) through the sale of some assets. This year (year 1)
income was $3.36 million, and it is projected to increase by
12% each year through expansion of the customer base.
What was the present worth in the year of purchase of the
income stream over a 10-year period? The firms expected
rate of return for any purchase is 15% per year.
(First method is finding Pg in year 1 and the move it to year
0
Second method is handling initial $3 million separately and
start gradient in year 1)
Pg ,1=3 {1 [(1+0.12)/(1+0.15)]11}/(0.15 0.12)
3 {1 0.74769 }/0.03
$ 25.2309
P 0=25.2309(F / P ,15 ,1)

25.2309(1.15)
$ 29.0156($ 29015600)

4.5

Identify the compounding period for the following

interest statements: ( a ) 3% per quarter; ( b ) 10% per year,
compounded semiannually; ( c ) nominal 7.2% per year,

compounded monthly; ( d ) effective 3.4% per quarter,

compounded weekly; and ( e ) 2% per month, compounded
continuously.
a- Quarter, b- Semiannual, c- Month, d-Week, e-Continuous

4.28 Irvin Aerospace of Santa Ana, California, was awarded

a 5-year contract to develop an advanced space capsule
airbag landing attenuation system for NASAs Langley
Research Center. The companys computer system uses f
uid structure interaction modeling to test and analyze each
airbag design concept. What is the present worth of the
contract at 16% per year, compounded quarterly, if the
quarterly cost in years 1 through 5 is $2 million per quarter?
P=2000000(P / A , 4 , 20)

2000000(13.5903)
$ 27180600

4.33 In October 2009, Wal-Mart started selling caskets on

its website that undercut many funeral homes. Prices ranged
from $999 for steel models such as Dad Remembered to
$3199 for the Sienna Bronze casket. Part of the business
model is to get people to plan ahead, so the company is
allowing people to pay for the caskets over a 12-month
period with no interest. An individual purchased a Sienna
Bronze casket and made 12 equal monthly payments (in
months 1 through 12) at no interest. How much did this
person save each month compared to another person who
paid an interest rate of 6% per year, compounded monthly?
A 0 =3199/12

$ 266.58 per month

A 0.5 =3199( A/ P , 0.5 , 12)

3199(0.08607)

 $ 275.34 per month

Savings=275.34 266.58

$ 8.76 per month

4.52

U.S. Steel is planning a plant expansion that is

expected to cost $13 million. How much money must the
company set aside now in a lump-sum investment to have
the money in 2 years? Capital funds earn interest at a rate of
12% per year, compounded continuously.
i=e 0.12 1
0.127512.75 per year
P=13000000( P /F ,12.75 ,2)

Find factor value by interpolation , formula,spreadsheet .

P=13000000(0.7866) = $10226105