Assignment 2:

1) Three mutually exclusive design alternatives are being considered. The estimated cash
flows for each alternatives are given next. The MARR is 20% per year. At the conclusion
of the useful life, the investment will be sold.

A B C
Investment cost $28,000 $55,000 $40,000
Annual expenses $15,000 $13,000 $22,000
Annual revenues $23,000 $28,000 $32,000
Market value $6,000 $8,000 $10,000
Useful life 10 yrs 10 yrs 10 yrs
IRR 26.4% 24.7% 22.4%

2) Consider the following mutually exclusive alternatives:

Alternative A Alternative B
Investment cost $780,000 $1,840,000
Net Annual receipts $138,060 $311,000

Both alternatives have a useful life of 10 years and no market value at that time. The MARR
is 10% per year. Use the FW method to identify the most profitable course of action.

3) The following cash flow estimates have been developed for two small, mutually
exclusive investment alternatives:

End of Year Alternative A Alternative B

0 -$2,500 -$4,000
1 $750 $1,200
2 $750 $1,200
3 $750 $1,200
4 $750 $1,200
5 $2,750 $3,250

The MARR =12% per year.

a. What the AW of alternative 1?
b. What is the AW of alternative 2?
c. What is the AW of the incremental net cash flow?
d. Given your answers for parts a through c, which alternative should be selected?

4) Consider the three mutually exclusive projects that follows. The firm’s MARR is 10% per
year.

EOY Project 1 Project 2 Project 3

0 -$10,000 -$11,000 -$8,500
1-3 $5,125 $5,400 $4,450
a) Calculate each project’s PW
 b) Determine the IRR of each project.
c) Which project would you recommend?
d) Why might one project have the highest PW while a different project has the largest
IRR?

5) Consider the following two mutually exclusive alternatives for reclaiming a deteriorating
inner-city neighborhood (one of them must be chosen).

End of Year Alternative X Alternative Y

0 -$100,000 -$100,000
1 $50,000 $0
2 $51,000 $0
3 $60,000 $205,760
IRR 27.19% 27.19%

a. If MARR is 15% per year, which alternative is better?

b. What is the IRR on the incremental cash flow i.e., ∆(𝑌 − 𝑋)?
c. If MARR is 27.5% per year, which alternative is better?
d. What is the simple payback period for each alternative?
e. Which alternative would you recommend?

6) Two mutually exclusive alternatives are being considered for the environmental
protection equipment at a petroleum refinery. One of these alternatives must be
selected. The estimated cash flows for each alternatives are as follows:

Alternative A Alternative B
Capital investment $20,000 $38,000
Annual expenses $5,500 $4,000
Market value $1,000 $4,200
Useful life 5 years $10 years

a. Which environmental protection equipment alternative should be selected? The

firm’s MARR is 20% per year. Assume the equipment will be needed indefinitely.
b. Assume the study period is shortened to five years. The market value of alternative B
after 5 years is estimated to be $15,000. Which alternative would you recommend?
7) A certain U.S. government savings bond can be purchased for $7,500. This bond will be
worth $10,000 when it matures in 5 years. As an alternative, a 60-month certificate of
deposit (CD) can be purchased for $7,500 from a local bank, and the CD yields 6.25%
per year. Which is the better investment if your personal MARR is 5% per year?
8) An environmentally friendly green home (99% air tight) cost about 8% more to
construct than a conventional home. Most green homes can save 15% per year on
energy expenses to heat and cool the dwelling. For a $250,000 conventional home, how
much would have to be saved in energy expenses per year when the life of the home is
30 years and the interest rate is 10% per year? Assume the additional cost of a green
home has now value at the end of 30 years. (refer chap. 5)
9) A 50-kilowatt gas turbine has an investment cost of $40,000. It costs another $14,000
for shipping, insurance, site preparation, fuel lines, and fuel storage tanks. The
operation and maintenance expenses for this turbine is $450 per year. Additionally, the
hourly fuel expense for running the turbine is $7.50 per hour, and the turbine is
 expected to operate 3,000 hours each year. The cost of dismantling and disposing of the
turbine at the end of its 8-year life is $8,000.

a) If the MARR=15% per year, what is the annual equivalent life cycle cost of the gas
turbine?
b) What percent of annual life cycle cost is related to fuel?

10) Anderson County has 35 older-model school buses that will be salvaged for $5,000
each. These buses cost $144,000 per year for fuel and maintenance. Now the country
will purchase 35 new school buses for $40,000 each. They will travel an average of 2000
miles per day for a total of 360,000 mile per year. These new buses will save $10,000
per year in fuel (compared with the older buses) for the entire group of 35 buses. If the
new buses will be driven for 15 years and the county’s MARR is 6% per year, what is
equivalent uniform annual cost of the new buses if they have negligible market value
after 15 years.
11) To purchase a used automobile, you borrow $8,000 from Loan Shark Enterprises. They
tell you the interest rate being charged is 1% per month for 35 months. They also charge
you $200 for credit investigation, so you leave with $7800 in your pocket. The monthly
payment they calculated for you is:

[$8,000(0.01) (35) + $8,000] ÷35=$308.57/month

If you agree to these terms and sign their contract, what is the actual APR (annual
percentage rate) that you are paying?

12) Your boss has just presented you with the summary in the accompanying table of
projected costs and annual receipts for a new product line. He asks you to calculate the
IRR for this investment opportunity. What would you present to your boss, and how
would you explain the results of your analysis? The company‘s MARR is 10% per year.

End of
Net Cash Flow ($)
Year
0 -450,000
1 -42,000
2 92,000
3 386,000
4 614,600
5 -202,200
13) A small company purchased now for $23,000 will lose $1,200 each year the first four
years. An additional $8,000 invested in the company during the fourth year will result in
a profit of $5,500 each year from the fifth year through the fifteenth year. At the end of
15 years, the company can be sold for $33,000.

a) Determine IRR
b) Calculate the FW if MARR=12%
c) Calculate the ERR when E=12%
14) While studying for the engineering economy final exam, you and two friends find
yourselves craving a fresh pizza. You can’t spare the time to pick up the pizza and
must have it delivered. “Pick-UP-Sticks” offers a 1-1/4-inch-thick (including toppings),
20-inch square pizza with your choice of two toppings for $15 plus 5% sales tax and a
$1.50 delivery charge (no sales tax on delivery charge). “Fred’s” offers the round,
deep-dish Sasquatch, which is 20 inches in diameter. It is 1-3/4 inches thick, includes
two toppings, and costs $17.25 plus 5% sales tax and free delivery.
a. What is the problem in this situation? Please state it in an explicit and precise
manner.
b. Systematically apply the seven principles of engineering economy to the problem you
have defined in part a.
c. Assuming that your common unit of measure is dollars (i.e. cost), what is the better
value for getting a pizza based on the criterion of minimizing cost per unit of volume?
15) A large wood products company is negotiating a contract to sell plywood overseas.
The fixed cost that can be allocated to the production of plywood is $900,000 per
month. The variable cost per thousand board feet is $131.50. The price charged will
be determined by p=$600-(0.05)D per 1000 board feet.
a. For this situation determine the optimal monthly sales volume for this product
and calculate the profit (or loss) at the optimal volume.
b. What is domain of profitable demand during a month?
16) In the packaging department of a large aircraft parts distributor, a fairly reliable
estimate of packaging and processing costs can be determined by knowing the
weight of an order. Thus, the weight is a cost driver that accounts for a sizable
fraction of the packaging and processing costs at this company. Data for the past 10
orders are given as follows:

Packaging and Processing Costs ($), y Weight (Pounds),x

97 230
109 280
88 210
86 190
123 320
114 300
112 280
102 260
107 270
86 190

a. Estimate the b0 and b1 coefficients, and determine the linear regression

equation to fit these data.
b. What is the correlation coefficient (R)?
c. If an order weighs 250 lb, how much should it cost to package and process it?