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Some Practice Questions in Engineering Economics

Some Practice Questions in Engineering Economics. Bruce A. Black Department of Electrical and Computer Engineering Rose -Hulman Institute of Technology. Cash Flow and Equivalence. Time Value of Money

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Some Practice Questions in Engineering Economics

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  1. Some Practice Questions in Engineering Economics Bruce A. Black Department of Electrical and Computer Engineering Rose-Hulman Institute of Technology

  2. Cash Flow and Equivalence • Time Value of Money Money can be invested at interest, so a given amount received today is worth more than the same amount received in the future.

  3. Example 1 Fifteen years ago $1000 was deposited in a bank account, and today it is worth $2370. The bank pays interest semi-annually. What was the nominal annual interest rate paid on this account?

  4. Example 2 A company puts $25,000 down and will pay $5,000 every year for the 10-year life of a machine. If the salvage value is zero and the interest rate is 10% compounded annually, what is the present value of the machine?

  5. Example 3 A machine costs $20,000 today and has an estimated scrap cash value of $2,000 after eight years. Inflation is 8% per year. The effective annual interest rate on money invested is 8%. How much money has to be set aside each year to replace the machine with an identical model eight years from now?

  6. Example 4 An oil company is planning to install a new pipeline to connect storage tanks to a processing plant 1500 m away. The connection will be needed for the forseeable future. Both 80 mm and 120 mm pipes are being considered. The annual interest rate is 8%.

  7. 80 mm pipe120 mm pipe Initial cost $1500 $2500 Service life 12 years 12 years Salvage value $ 200 $ 300 Annual maint. $ 400 $ 300 Pump cost/hr. $2.50 $1.40 Pump operation 600 hr./yr. 600 hr./yr.

  8. Disregarding the initial and replacement pipe costs, what is the capitalized cost of the maintenance and pumping costs for the 80 mm pipe? • What is the approximate uniform annual cost of the 80 mm pipe, considering all costs and expenses? • What is the depreciation allowance for the 120 mm pipe in the first year? Use MACRS depreciation assuming a 10-year life.

  9. Comparison of Alternatives • Present Worth Mutually exclusive alternatives, same lives • Annual Cost Assumes infinite renewal • Rate of Return Interest rate that makes the present value zero • Benefit-Cost Applies to public works projects. PW(benefits)/PW(costs) • Break Even Does not use time-value of money by tradition

  10. Example 5 Warehouse A with a life of 10 years can be constructed now for $100,000 with no repair costs, and a salvage value of $10,000. Alternatively, warehouse B with a life of 12 years can be constructed for $70,000 now, with a salvage value of $5,000, but requires $18,000 of repairs every three years. Both have equal usefulness and are needed indefinitely. Assuming the cost of money is 6%, which warehouse is a better deal and by how much per year?

  11. Example 6 You purchased a lot for building your house four years ago for $20,000. Each year you paid $220 in property taxes. Each year you spent $80 in maintaining the lot. Now you are selling the lot and will get $25,000 after deducting the selling expenses. What is the rate of return on your investment?

  12. Are there any questions?

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