1-) Write down the principles of engineering economy and explain them shortly.

Answer 1
a) Develope the alternatives: The final choice is among alternative. The alternatives need to be
idientified and then defined for subsequent analysis.
b) Focus on differences : Only differences in expected future outcomes among the alternatives
should be considered in the decision
c) Use consistent viewpoint: The prospective outcomes of the alternatives should be developed
from a defined view point.
d) Use a common unit of view point : This will make easier the analysis and compertion of
alternatives.
e) Consider all relevant criteria : Selection of a preferred alternative requires the are of a criterion
( or several criteria)
f) Make uncertainty explicit : Uncertainity is available in estimating the future outcomes of the
alternatives and should be recognized in compersion.
g) Revisit your decision : initial projected outcomes of the selected alternative should be
compered with actual results achieved.

2-) indicated whether each of the following statment is true (T) or false (F).
T F Shaft maintenance can be classifed into fixed cost.
T F Interest is money paid for the use of equity capital.
T F IRR is the rate of return at which NPV is maximum.
T F Sink fund function spreads a future value evenly over time.
T F The costs for blasting material can be classified into variable costs.


3-) It is estimatet that a copper mine will produce 10000 tons of ore during the coming year.
Production is expected to increase by 5 % per year thereafter in each of the following four years.
Profit per ton will be $14 for years one through five.
a) Draw a cash-flow diagram for this copper mine operation from the companys viewpoint.
b) If the company can earn 15 % per year on its capital, what is the net future value of the
copper mines cash flows at the end of year five ?
F=P(1+i)
N





Answer 3
Years 1 2 3 4 5
Production 10000 10500 11025 11576.2 12155
Profit , $ 140000 147000 154350 162067 170170

NFV = 140000*[1+ 0.15]
1
+147000*[1+0.15]
2
+ 154350*[1+0.15]
3
+ 162067*[1+0.15]
4
+
170170*[1+0.15]5
= 161 000 + 194407 + 234 747 + 283 456 + 342 273 = $ 215 883


4-) The lignite produced from Ske field is used for domestic purposes. The selling price of lignite is
p=150-0.02*D TL. The fixed cost is 44 000 TL/year and the variable cost is 18 TL /ton.
a) What if the optimal amount of the yearly lignite production that maximizes profit for the
mine?
b) Determine breakeven points for profitable production of lignite.

( ) ( ) ( )( ) | |
( ) b
C b c a c a
D
F v v
b

=
+

2
4
2 / 1
2



Answer 4
A=150 , C
v
= 18 , b=0.02 , C
F
= 44 000
D* =
( )
b
c a
v
2

=
02 . 0 * 2
/ 18 / 150 ton ytl ton ytl
= 3300 ton / year
1
0
= is (a-C
v
) >0 150-18 =132 ytl/ton , yes
2
0
= is [ TR Ct ] >0 for D* =3300 ton/year {150*330-0.02 [3300]
2
} [44000 +
18*3300]
277200 130400 =173800 > 0, yes
D
1
=
( ) ( ) ( ) ( ) | |
( ) 02 . 0 * 2
44000 * 02 . 0 4 18 150 18 150
2 / 1
2

+
=
04 . 0
18 132

= 6250 ton/year
D
2
= (-132+118) /-0.04 =350 ton/year



5-) A capital investment of $ 79 000 000 can be made in a gold mining project that will produce an
annual revenue of $85 000 000 an annual operating cost of $32 000 000 for six years. The company is
willing to accept any project that will earn 15% per year on all invested capital. Draw a cash flow
diagram and show whether this is a desirable investment by using NPV method.
P = F(1+i)
-N


Answer 5

85 85 85 85 85 85

79 32 32 32 32 32 32 $ *1000 000

NPV = PV of cash flows PV of cash outflows
PV of cash inflows =$ 85 M *(P/A, 15 % , 6)
= 85 M * 3.7845 = $ 321 682 500
PV of cash outflows = $ 32 M *( P/A,15 % , 6)+$79M
= 32 M *3.7845 + $ 79 M
= $ 200 104 000
NPV = 321 682 500 200 104 000 $ 121 000 000
6-) Consider a mine where production rate is 1 000 000 tons/year, selling price of ore is $20/ton and
total cost of production is $8/ton. The mine has three million tons of reserve.
a) When the discount rate is 15 % , prepare a cash flow table, calculate net present value and also
profit/ton.
b) At the end of exploration works, the staff has found another three millions of tons of reserve,
making total amount of reserve six million tons. The mine has recommended two alternatives
to produce the ore. The first alternative suggests that the life of the mine can be extend over
six years [ in other words, three years are added to first three years while production rate
remains the same( 1 000 000 tons/year) ]. The second alternative suggests that the life of the
mine remains the same (three years) but the production rate is increased to 2 000 000
tons/year. f you were the person who is in charge of selecting the best alternative , which
alternative would you select ?

( Use NPV criterion and profit /ton in your choice ). What is the main conclusion that you draw
from this result ?
N

F P
|
.
|

\
|
+
=
1
1
,
( )
( ) (
(

+
+
=
N
N


A P
1
1 1



Answer 6
6/a
1 2 3
Revenue ( $/ton) 20 20 20
Cost ($/ton ) 8 8 8
Profit ( $/ton) 12 12 12

NPV
1
= $ 12 M (P/A,15,3)
= $ 12 M *2.2283 = $27.4 M
Profit/ton = 27.4 M/3M = 9.13 $/ton
6/b
NPV
1
= 12 M (P/A, 15 ,6) =12 M * 3.784 = 45.4 M 45.4/6 = 7.57 $/ton
NPV
2
= 24 M *2.283 = 54.8 M = 54.8/3 = 18.26 $/ton
Because profit /ton in (2) is greater than profit in (1) ,(2) is prefered. The main conclusion drawn this
reesult is that making production with high capacity is always advantageous over production with
longer life.

7-) Three mutually exclusive altenatives for mine investment are being evaluated, and their costs and
revenues are itemized in the following table.
Mutually Exclusive Alternatives
A B C
Capital investment, $ 4 620 000 2 420 000 6 380 000
Annual profit, $ 704 000 440 000 825 000
Market Value 0 0 0
Useful life ( years) 20 20 20

f the MARR is 5 % per year, determine which alternative should be selected by using incremental
analysis procedure.


Answer 7
a) Arrange the feasible alternatives based on increasing capital investment
B A C
Capital investment 2420 4620 6380
Profit 440 704 825
Project life, year 20 20 20
NPV 3062 4152 3900
IRR 17.5 14.2 11.5

b) Calculate IRR and NPV values
NPV
B
= -2420 +440*( P/A,5,20)
= -2420 + 440*12.46 = 3062
NPV
A
= -4620 +704 * (P/A,5,20)
= -4620 + 704*12.46 = 4152
NPV
c
= -6380 + 825*12.46
NPV
B
it is a base alternative
c ) Calculate the incremantal vaues
A-B C-A
Capital nvestment 2200 1760
Profit 264 121
IRR 10.4 3.3


NPV
9 =

IRR
B A
= -2200 + 264*(P/A,9,20)
= -2200 + 264*9.135 = 211.6
NPV
11 =

IRR
B A
= -2200 + 264*(P/A,11,20)
= -2200 + 264*7.962 = -98.0

6 . 211
9
) 0 . 98 ( 6 . 211
9 11 IRR
IRR=10.4 %
NPV
3 =

IRR
A C
= -1760 + 121*(P/A,3,20)
= -1760 + 121*14.926 = 46
NPV
4 =

IRR
A C
= -1760 + 121*(P/A,4,20)

= -1760 + 121*13.596 = -114.9

=


46
3
) 9 . 114 ( 46
3 4 IRR
IRR =3.3 %
IRR
(C-A)
= 3.3 < MARR = 5
Alternative C is discarded. Therefore A is prefered alternative because invested incremantal value
(2200) is justified at profit 264 with IRR > MARR

8-) A dozer costs $ 500 000 and has a useful life of 5 years. Its estimated market value at the end of
the 5 year is $20 000.
a) Determine depreciations for years between 1 and 5 using i) the SL method and ii) the 200% DB
method.
b) Compute the net present value of depreciation deduction for each year of the two methods. The
MARR is 10% per year. If a large NPV is desirable which method is preferred ?
d
k
= B(1-R)
k-1
R , d
k
= ( B-SV
N
)/Q, d
k
=(B-SV
N
) [2(N-k+1)/N(N+1)], d
k
= (B-SV
N
/N)


Answer 8
B=$500 000, N=5, SV=$20 000
a) SL method , d
k
= ( B-SV
N
)/N
d
1
=(500 000-20 000)/5 = 96 000 , d
2
= d
3
= d
4
= d
5
= 96 000
DB Method , R=2/N = 2/5=0.4 , d
k
= B(1-R)
k-1
* R
d
1
= 500 000 (1 0.4)
1-1
*0.4 = 200 000 , d
2
= 500 000*(0.6)
2-1
* 0.4 =120 000
d
3
= 500 000*(0.6)
3-1
* 0.4 = 72 000 , d
4
= 500 000*(0.6)
4-1
* 0.4 = 43 200 ,d5 = 500 000*(0.6)
5-1
* 0.4
= 25 920
b) NPV
SL
= 96 000 (P/A, 10 ,5) =96 000 * 3.791 = $ 363 936
NPV
DB
= 200 000 [1/(1+0.1)]
1
+ 120 000 [1/(1+0.1)]
2
+ 72 000 [1/(1+0.1)]
3
+ 43 200 [1/(1+0.1)]
4
+ 25 920 [1/(1+0.1)]
5

= 181818 + 99 173 + 54 095+ 25 506 + 16 094 =$ 380 686
NPV
DB
> NPV
SL
so DB method is prefered.
9-) A marble quarry is estimated to contain 900 000 tons of stone, and the X mining Company just
purchased this quarry for $ 1 800 000. If 100 000 tons of marble can be produced each year and the
average selling price per ton is $ 8.60 , calculate the first years depletion allowance for the cost
method.

Answer 9
Depletion unit = basis/ reserve = $ 1 800 000 / 400 000 tons = 2 $/ton
Depletion allowance for the first year = 100 000 tons * 2 $/ton = $ 200 000
10-) Consider a power plant that uses lignite as fuel. In this plant, the cost of producing electricity is
calculated by TC= 0.27 D
2
+0.3D + 12 where D is the amount of electricity produced ( in megawatts).
If the revenue obtained from the sale of electricity is TR = -0.2 D
2
+15D,
a) Determine the value of D that maximizes profit,
b) Show that profit has been maximized rather than minimized,
c) What is the range of profitable electricity production ?
Answer 10
a) Profit = TR TC = -0.2 D
2
+15D [ 0.27 D
2
+ 0.3D+12] = -0.2 D
2
-0.3D -12
= -0.47 D
2
+ 14.7 D -12
P / D = ( -0.47D
2
+14.7D -12)/ D = -0.94 D +14.7 = 0 D = 15.64 megawatt.
b)
2
P/ D
2
=-0.94 < 0 profit maximized.
c) a= -0.47 , b= 14.7, c= - 12 A = ac b 4 2 ^ = ) 12 * 47 . 0 ( * 4 2 ^ 7 . 4 = 13.91
D
1
= (-b-^)/2a = (-14.7-13.91)/(-0.94)=30.4 megawatt
D
2
= (-b+)/2
11-) A certain coal stripping operation presently uses three dozers for reclamation work. To reduce
costs, three alternatives are being considered for this job in the future : rebuild present equipment (A),
purchase new dozers (B), and employ a concrator (C). Details for the alternatives are given in the
following table. If the MARR is 8 % per year, which alternative should be selected? useNPV criterion.

A B C
Number of dozers 3 2 Not applicable
Capital investmen, $ 360 000 920 000 0
Annual costs, $:
Maintenance
Labor
Supplies

140 000
240 000
58 000

85 000
460 000
42 000

0
525 000
0
Useful liffe (years) 8 8 8
Salvage value,$ 0 120 000 0


Answer 11
A B C
CI 360 920 0
AC 438 287 525
Life 8 8 8
SV 0 120 0

NPV
A
= -360 -438*(P/A,8,8)
= -360 -438*5.747 = -2 877
NPV
B
= -920 -287*(P/A,8,8)+120*(P/F,8,8)
= -920 -287*5.747 + 120 *0.54 = -2 504
NPV
C
= -525*(P/A,8,8) = -525 * 5.747 = -3 017
Select the alternative with the least cost , select B.
12-) The following table shows annual cash flows for two mutually exclusive alternatives. If the
MARR is 15% than which alternative should be chosen? Use incrementl analysis.
Year Project A -Project B
0 -$10 000 -$10 000
1 +$1000 +$7000
2 +$5000 +$5000
3 +$6000 +$3000
4 +$7000 +$1000


Answer 12
Select A


13-) Two drilling machines can perform drilling equally well. The capital investment and annual
expenditures for these machines are given in the following table.
Drilling Machine A Drilling Machine B
Capital investment, $ 150 000 200 000
Annual expenditure, $ 18 000 10 000
Life, years 5 10
Salvage value, $ 2 000 0

If the MARR is 10 % , which machine should be selected ? Use repeatability assumption.

Answer 13

NPV
A
= -150 -150(P/F,10%,5) -18(P/A,10%,10) + 2(P/F,10%,5) + 2(P/F,10,10)
= -150 150*0.6209 18*6.145 + 2*0.6145 + 2*0386 = -351.7
NPV
B
= -200 -10(P/A,10%,10) = -200 -10*6.145 = -261.4
A B A-B
IRR 24.7 30.5 16.54
NPV 2.60 2.41 0

Select the alternative with the least cost , Select B.

14-) Write down unique characteristics of mining and explain them shortly.
Answer 14
Capital insensity mining ventures are extremely capital intensive - $500 M - $10 billion
Long production period-4.8 years even longer times ( 10-12) for enviromental considerations
High risks ( geological, engineering, economical and political risks)
Non-renewable resources. ( ore resources depletes new resource have to be fpund. closing mine has
on local communities)

15-) It is estimatet that a copper mine will produce 10000 tons of ore during the coming year.
Production is expected to increase by 5 % per year thereafter in each of the following four years.
Profit per ton will be $14 for years one through five.
a) Draw a cash-flow diagram for this copper mine operation from the companys viewpoint.
b) If the company can earn 20 % per year on its capital, what is the net future value of the
copper mines cash flows at the end of year five ?
F=P(1+i)
N




Answer 15
Years 1 2 3 4 5
Production 10000 10500 11025 11576.2 12155
Profit , $ 200000 210000 220500 234525 243100

NFV = 200 000*[1+ 0.15]
1
+210 000*[1+0.15]
2
+ 220500*[1+0.15]
3
+ 231525*[1+0.15]
4
+
243100*[1+0.15]5
=230 000 + 277725+ 335336 + 404937 + 488 947 = $ 1 736 945 $
16-) The lignite produced from Ske field is used for domestic purposes. The selling price of lignite is
p=150-0.02*D YTL. The fixed cost is 45000YTL/year and the variable cost is 20 YTL /ton.
a) What if the optimal amount of the yearly lignite production that maximizes profit for the
mine?
b) Determine breakeven points for profitable production of lignite.


( ) ( ) ( )( ) | |
( ) b
C b c a c a
D
F v v
b

=
+

2
4
2 / 1
2



Answer 16
A=150 , C
v
= 20 , b=0.02 , C
F
= 45 000
D* =
( )
b
c a
v
2

=
02 . 0 * 2
/ 20 / 150 ton ytl ton ytl
= 3250 ton / year
1
0
= is (a-C
v
) >0 150-20 =130 ytl/ton , yes
2
0
= is [ TR Ct ] >0 for D* = 3250 ton/year {150*3250 - 0.02 [3250]
2
} [4500 +
18*3250]
277200 130400 =166 250 > 0, yes
D
1
=
( ) ( ) ( ) ( ) | |
( ) 02 . 0 * 2
45000 * 02 . 0 4 20 150 20 150
2 / 1
2

+
=
04 . 0
32 . 115 130

+
= 367 ton/year
D
2
= (-130 115.32) /-0.04 = 6125 ton/year
17-) A capital investment of $ 80 000 000 can be made in a gold mining project that will produce an
annual revenue of $90 000 000 an annual operating cost of $30 000 000 for six years. The company is
willing to accept any project that will earn 15% per year on all invested capital. Draw a cash flow
diagram and show whether this is a desirable investment by using NPV method.
P = F(1+i)
-N
or
(

+
+
=
N
N
i i
i
A P
) 1 (
1 ) 1 (


Answer 17

90 90 90 90 90 90 90

80 30 30 30 30 30 30 30$ *1000 000


NPV = PV of cash flows PV of cash outflows
PV of cash inflows =$ 90 M *(P/A, 15 % , 6)
= 90 M * 3.7845 = $ 340 605 000
PV of cash outflows = $ 30 M *( P/A,15 % , 6)+$79M
= 32 M *3.7845 + $ 80 M
= $ 193 535 000
NPV = 321 682 500 200 104 000 $ 147 070 000
18- ) Indicate whether each of the following statements is true(T) or false (F).
T F as the discount rate increases, theNPV increases.
T F The greater the NPV, the richer the invstors become by undertaking a project.
T F The mutuallyt exclusive alternative with the highest IRR is chosen in incrimental analysis.
T F Book value is the estimated value of property at the end of its useful life.
T F Land is not a depriciable property.

19-) A capital investment of $ 100 000 can be made in a mining project that will produce an annual
revenue of $53 100 for five years and then a salvage value of $20 000. Annual expenses will be $30
000. If the MARR is 10 % per year, determine whether the project is acceptable by using the IRR
method.
P = F(1+i)
-N
or
(

+
+
=
N
N
i i
i
A P
) 1 (
1 ) 1 (


Answer 19








15
3
2

1

-1
-2
0
5
10
A
d
B
C
e
15680
-12620


NPV
A
= 0= - $100 000 +( $53 100 - $ 30 000)(P/A,i%,5)+$20 000(P/F,i%,5); i% =?
At i=5% : NPV = - $ 100 000 + $ 23 100 (4.3295) + $ 20 000 (0.7835) = $ 15 680
At i=15% : NPV = - $ 100 000 + $ 23 100 (3.3522) + $ 20 000 (0.4972) = - $ 12 620
de
dA
BC
BA
=
0 $ 15680 $
% 5 %
12620 $ 15680 $
% 5 % 15

=
+



%=5%+
28300 $
15680 $
10%
%=5% +5.5% =10.5%
20-) Consider the following two mutually exclusive alternatives related to a mining project, and
recommend which one should be chosen using NPV method. The MARR is 15% per year, and the
study period is 10 years. Assume repeatability is applicable.
A B
Capital investment $ 200 000 $ 300 000
Annual revenue 56 000 54 000
Market value 40 000 0
Useful life ( years) 5 10


Answer 20
NPV
A
= - 200 000 -200 000( P/F,15% , 5) + 56 000 [P/A,15%,10] + 40 000[P/F,15%,5] + 40
000[P/F,15%,10]
= - 200 000 99 400 + 281 053 + 19 888 + 9 888
=11 389
NPV
B
= -300 000 + 54 000 [P/A,15% , 10 ] = -28 947
A is chosen.

21-) A dozer costs $ 500 000 and has a useful life of 5 years. Its estimated market value at the end of
year 5 is $20 000. Determine depreciations for years between 1 and 5 using i) the SL method and ii)
DB method.

d
k
= B(1-R)
k-1
R , d
k
= ( B-SV
N
)/Q, d
k
=(B-SV
N
) [2(N-k+1)/N(N+1)], d
k
= (B-SV
N
/N)
Answer 21
i) SL method , d
k
(B-SVn) / N
d
1
= (500 000 20 000)/5 = 96 000, d
2
= d
3
= d
4
= d
5
= 96 000
ii) DB Method , R2/N =2/5=0.4 , d
k
= B ( 1-R)
k-1
*R
d
1
= 500 000 (1-0.4)
1-1
*0.4 = 200 000
d
2
= 500 000 (0.6)
2-1
* 0.4 = 120 000
d
3
= 500 000 (0.6)
3-1
* 0.4 =72 000
d
4
= 500 000 (0.6)
4-1
* 0.4 = 43 200
d
5
= 500 000 (0.6)
5-1
* 0.4 = 25 920

22-) Indicated whether each of the following statements is true (T) or false ( F) .
T F Insurance and tax are available costs
T F Profit maximization occurs when marginal cost is equal to marginal revenue
T F Breakeven points occur when total cost
T F NPV increase with increasing discount rate
T F IRR is internal rate that makes NPV zero

23-) Amining company produces nickel from a latheritic nickel deposit. The price of nickel is
$10 000/ton. The company manager thinks that the total cost function is Ct = 100 000 + 9 500 D +
0.5D
2
where D is the amount of metal proceduced. ( Total revenue is product of price and the amount
of nickel produced)
a) Derive profit function,
b) Find an optimal value of D making profit maximum,
c) Determine breakeven points for profitable production of nickel.
Answer 23
a) P= TR-Ct = 10 000*D [ 100 000 +9500 D + 0.5D
2
]
= 10 000*D -100 000 -9500D-0.5D
2
=0.5D
2
+500 D 100 000
b) P / D = -D + 500 = 0 D=500 ton
2
P/ D
2
= -1 (max attained)
c) TR =Ct = 10 000 D= 100 000 + 9500 D +0.5 D
2
0.5D
2
-500D+100 000= 0

D
1.2
=
5 . 0 * 2
) 100000 )( 5 . 0 ( 4 ) 500 ( ) 500 (
2

=
1
6 . 223 500
; D
1
= 276 ton , D
2
= 724 ton

24-) A mining firm has just purchased a new drilling machine that has a useful life of five years. The
engineer estimates that maintenancce cost for the machine during the five year will be $10 000. As the
machine will ages, maintenance costs are expected to increase at a rate of $ 1 000 per yaar over the
remaining life. Assume that maintance costs occur at the end of each year. The machine will at the end
of five years with a salvage value of $ 10 000. Draw cash flow diagram for the drilling machine.

Answer 24 $ 10 000



25-) Consider a mining project outlined in the following table( all dollars are in thousands).
Years 0 1 2 3 4 5
Capital
investment, $

103 581

Revenue 41 848 76 467 64 726 66 242 33 486
Operating
cost, $
21 965 31 379 31 379 31 379 6 168

When a discount rate of 16% is chosen , determine whether the project is feasable or not. Use NPV
method.
P = F(1+i)
-N




$10000 $11 000 $12 000 $13 000 $14 000


Answer 25
Year 0 1 2 3 4 5
profit -103 581 19 883 45 088 33 347 34 863 27 318

NPV = PV of cash[nflows-outflows]
5 4 2 1 0
) 16 . 0 1 (
27318
) 16 . 0 1 (
33347
) 16 . 0 1 (
45088
) 16 . 0 1 (
19883
) 16 . 0 1 (
103581
+
+
+
+
+
+
+
+
+
= NPV
= -103 581 + 17140.5 + 21364 + 19254.5 + 13006.4 + 33507.7 = $692 100 project is feasable

26-) A capital investment of $ 80 000 000 can be made in a gold mining project that will produce an
annual revenue of $90 000 000 an annual operating cost of $30 000 000 for six years. What is the
projected IRR on this investment ? And if MARR is known to be 13%, is this investment justifiable ?
(

+
+
=
N
N
i i
i
A P
) 1 (
1 ) 1 (

Answer 26
Choose IRR
1
=70 % and IRR
2
80 %
NPV at 70 % NPV = $ 90 M (P/A,70 % , 6) -$ 30 M (P/A,70 % , 6) -$ 80 M (P/F,70%,6)
(P/A,70 % , 6) = [(1+0.7)
6
-1]/[0.70(1+0.8)
6
] = 23.13/16.89 =1.37
NPV at 70% = 90*1.37 30*1.37 -80 = $ 2.2 M
NPV at 80% (P/A,80%,6) = [ (1+0.8)
6
-1]/[0.80(1+0.80)
6
] = 33.012/27.209 = 1.213
NPV at 80% 90*1.213 -30*1.213 80 = -$ 26.4 M

A=2.2 M d B
IRR
70 % e 80 %
C= -26.4 M
de
dA
BC
BA
= BA= 80% -70 % =10%
BC = 2.2 M (-26.4 M) =28.6 M
dA = IRR % -70%
de = 2.2 M

% 8 . 70 % 70
6 . 28
2 . 2 * 10
%
2 . 2 $
% 70 %
6 . 28 $
% 10
= = + =

= IRR IRR
M
IRR

IRR%=70% > MARR = 13% project is feasable
27-) Given the following three mining project alternatives with MARR = 15 %, choose the best
alternative by using the incremental IRR procedure.
A B C
Capital investment ,$* 28 16 23.5
Annual net cash flow,$ 5.5 3.3 4.8
Salvage value , $ 1.5 0 0.5
Useful life( year) 10 10 10
*) All dollars are in millions
Order the feasable alternatives based on increasing capital investment
compute IRR orNPV
NPV
B
= -16 + 3.3*(P/A,10,15%) + 0(.) = 0.563
NPV
C
= -23.5 + 4.8( P/A,10 15%) + 0.5(P/F,10,15%) =0.715
NPV
A
= -28 + 5.5(P/A,10,15%) + 1.5(P/F, 10 ,15%) = -0.02
NPV
B
= 0 , B is a base alternative , Drop A from consideration due to NPV
A
< 0 calculate incremental
values.
NPV
C-B
= 0 = -7.5 +1.5 ( p/A,10 , i%) + 0.5(p/F , 10 ,i%) i=15.5%
i
C-B
= MARR , keep the alternative C as current best alternative , drop alternative B
from further consideration. Recommend thealternative C for investment.

28-) A mining company is considering to purchase a newforklift truck. There are two alternatives :
Alternative A costs $11 000, requires $ 2 000 per year in operating expense , and is expected to have a
3 year economic life. Its salvage value at the time is projected to be $ 4 000. Alternative B costs $15
000 but requires $1500 per year to operate. It is expected that its economic life wil be 5 years, with
salvage value of $4000. If MARR is 12% which alternative is superior? Use coterminated assumption.

P = F(1+i)
-N
or
(

+
+
=
N
N
i i
i
A P
) 1 (
1 ) 1 (

Answer 28
3 5

A B
NPV
A=
[-11000 2 000(P/A,12%,3)+4000(P/F,12% ,3)] *(P/F,12%,2) = -10 332
B C A
CI 16 23.5 28
ACF 3.3 4.8 5.5
SV 0 0.5 1.5
C-B
CI 7.5
ACF 1.5
SV 0.5

NPV
B
= -15 000 -1 5 000 ( P/A,12% ,5)+ 4 000 (P/F,12%,5) = -18 130
Choose alternative A as a minimum cost alternative.
29-) A mining company purchased a drilling machine at the cost of $ 140 000. The machine is
estimated to have 5 year useful life. At the end of the 5th year , the salvage value will be $ 20 000.
Calculate the depreciation expenses for the first ,second and third yeras using a) straight line method
and b) the 150% DB method.
d
k
= B(1-R)
k-1
R , d
k
= ( B-SV
N
)/Q, d
k
=(B-SV
N
) [2(N-k+1)/N(N+1)], d
k
= (B-SV
N
/N)
Answer 29
B = 140 000 , N = 5 , SV = 20 000
a) d
k
= (B-sv)/N = (140 000 20 000)/5 = 24 000 for 2010,2011 and 2012
b) d
k
= B(1-R)
k-1
*R
R = 1.5/N =1.5/5 = 0.3
k=1 d
1
= 140 000 (1 0.3)
1-1
*0.3 = 42 000
k=2 d
2
= 140 000 (1 0.3)
2-1
*0.3 = 29 400
k=3 d
2
= 140 000 (1 0.3)
3-1
*0.3 = 20 580
30-) A mining company operating a polymetalic deposit produces lead and Zinc which are sold at
$0.99/lb and $1.25/lb respectively. The mine manager thinks that the ttotal cost function is:
TC = 2 + 0.1D
pb
+ 0.15 D
Zn
+ 0.05 D
2
Zn
+ 0.05 D
Pb
D
Zn

Where DPb and DZn are outputs of lead and Zinc recpectively ( total revenue is product of price and
output of ore produced )
a) Derive the profit function for both products
b) Find the optimal value od D
Pb
and D
Zn
along with maximum profit
c) Make sure that profit is maximized at this point
Answer 30
TR
Pb
= 0.99*D
Pb
TR
Zn
= 1.25*D
Zn

P=TR-TC P
Zn
= TR
Zn
- TC
Zn

P
Pb
= 0.99*D
Pb
[ 2 + 0.1D
Pb
+0.15....+ 0.025D
Pb
D
Zn
] P
Zn
=1.25*D
Zn
[...]

P
Pb
/ D
Pb
= 0.89 0.1D
Pb
0.025 D
Zn
= 0 P
Zn
/ D
Zn
= 1.10 0.24D
Zn
0.025 D
Pb
=0

D
Zn
= 3.74 lb , D
Pb
= 7.96 Lb

2
P
Pb
/ D
2

Pb
= - 0.1
2
P
Zn
/ D
2

Zn
= - 0.24


31-) consider a mine with the following data :
Capital investment = $30 000 000,
Reserve = 6 000 000 ton
The selling price of the ore = $20/ton
Total cost of production = $8/ton and
The discount rate = 15%
For ore production the mine management suggests two alternatives on the production rate : the first
one with 1 000 000 ton/year and the second ne with 2 000 000 ton/year. If you were person who is in
charge of selecting the best alternative which alternative would you select? Assume that repeatability
is applicable.

Answer 31
N= 6 000 000 / 1 000 000 N = 6 000 000 / 2 000 000
= 6 years = 3 years
Annual profit = $ 12/ton*1 000 000 ton
=$ 12M/year
Annual profit : $12/ton * 2 000 000 ton
= $ 24M / year

0 A 6 0 B 3 6
NPV
A
= -$30 M +$ 12M ( P/A,15%,6) NPV
A
= -$30 M +$ 12M ( P/A,15%,6)
=-$30 M + $45.4 = $15.4 = -$30M - $19.7 M +$ 90.8 M = $41.5
Choose the alternative B

32-) An energy company wants to invest on a new hydro-electricity central ( HEC) that produces
electricity. The initial cost of the HEC is $10.5 million. The HEC will produce 40 million kwh with
81% efficiency per year. The goverment will buy the electricity at a price of 5 cent per kwh. After 30
years, the company is 12 % , determine the payback period of this project.
Answer 32
CI= $ 10.5 M P = 40 M *0.81 / 100 = $ 1.62 M
Year 0 1 2 3 4 5 6 7 8
PV of $ 1.62 M
At i=12%/yr
-10.5 1.45
1.29 1.15 1.03 0.92 0.82 0.73 0.65
Cumulative Pv at i=12%/yr
-9.05 -7.76 -6.61 -5.58 -4.66 -3.84 -3.11 -2.46
Year 9 10 11 12 13 14 15
PV of $ 1.62 M
At i=12%/yr
0.58 0.52 0.47 0.42 0.37 0.33 0.30
Cumulative Pv at i=12%/yr
-1.88 -1.36 -0.89 -0.47 -0.1 0.23 0.53

-$10.5M + $1.62 M + (P/A,12%,PB) = 0

(P/A,12%,PB) = 10.5/1.62 = 6.4815 PB=13.05 13 years

33-) Consider a hypotetical gold mine with 5 year life. Assume that the initial capital cost is $30 000
000, the annual revenue is $25 000 000 and the annual operating cost is $15 000 000 over 5 years. The
salvage value of the equipment at the end of five year is $30 000 000. The company will open up the
mine if it will earn at least 15% per year. Determine whether it is accepable by using Rate of Return
method.

Answer 33
At IRR = 10%
NPV = -$30 M + $ 25 M ( P/A ,10%,5) + 3M( P/F, 10%,5)
= $ 9.8 M
At IRR = 25%
NPV= -$30 M + $25 M (P/A , 25%,5) - $15(P/A,25%,5) + $3 M ( P/F, 25% 5)
= -$4.09 M
de
dA
BC
BA
=
M
IRR
M 8 . 9 $
% 10
9 . 13 $
% 15
= IRR = 20.6%

A=9.8 M d B
IRR
e 20% 25 %
C= -4.09 M