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Engineering Economics
Assignment No.2
th
Due Date: May 5 2015

Q. No. 1: The manager of a canned food processing plant must decide between two
different labeling machines. Machine A will have a first cost of $42,000, an annual
operating cost of $28,000, and a service life of 4 years. Machine B will cost $51,000
to buy and will have an annual operating cost of $17,000 during its 4-year life. At an
interest rate of 10% per year, which should be selected on the basis of a present worth
analysis?

Q. No. 2: A metallurgical engineer is considering two materials for use in a space

vehicle. All estimates are made. (a) Which should be selected on the basis of a
present worth comparison at an interest rate of 12% per year?
(b) At what first cost for the material not selected above will it become the more
economic alternative?
Material X Material Y
First cost, $ 15000 35000
Maintenance cost, $ per year 9000 7000
Salvage value 2000 20000
Life, years 5 5

Q. No. 3: A public water utility is trying to decide between two different sizes of pipe
for a new water main. A 250-mm line will have an initial cost of $155,000, whereas a
300-mm line will cost $210,000. Since there is more head loss through the 250-mm
pipe, the pumping cost is expected to be $3000 more per year than for the 250-mm
line. If the lines a expected to last for 30 years, which size should be selected on the
basis of a present worth analysis using an interest rate of 10% per year?

Q. No. 4: Machines that have the following costs are under consideration for a
robotized welding process. Using an interest rate of 10% per year, determine which
alternative should be selected on the basis of a present worth analysis.
Machine X Machine Y
First cost, $ 250,000 430,000
Annual operating cost 60,000 40,000
Salvage value 70,000 95,000
Life, years 3 6
Q. No. 5: A project involves an initial outlay of Rs. 30,00,000 and with the following
transactions for the next five years. The salvage value at the end of the life of the
project after five years is Rs. 2,00,000. Draw a cash flow diagram of the project and
find its present worth by assuming i = 15%, compounded annually.
End of Maintenance and Revenue
year operating cost
1 2,00,000 9,00,000
2 2,50,000 10,00,000
3 3,00,000 12,00,000
4 3,00,000 13,00,000
5 4,00,000 12,00,000

Q. No. 6: An industrial engineer is considering two robots for purchase by a fiber-

optic manufacturing company. Robot X will have a first cost of $80,000, an annual
maintenance and operation (M&O) cost of $30,000, and a $40,000 salvage value.
Robot Y will have a first cost of $97,000, an annual M&O cost of $27,000, and a
$50,000 salvage value. Which should be selected on the basis of a future worth
comparison at an interest rate of 15% per year? Use a 3- year study period.
Q. No. 7: In 2010, the city of Houston, Texas, collected $24,112,054 in fines from
motorists because of traffic violations caught by red-light cameras. The cost of operating the
system was $8,432,372. The net profit, that is, profit after operating costs, is split equally
(that is, 50% each) between the city and the operator of the camera system. What will be the
rate of return over a 3-year period to the contractor that paid for, installed, and operates the
system, if its initial cost was $9,000,000 and the profit for each of the 3 years is the same as
it was in 2010
Q. No. 8: P&G sold its prescription drug business to Warner-Chilcott, Ltd. for $3.1 billion.
If income from product sales is $2 billion per year and net profit is 20% of sales, what rate
of return will the company make over a 10-year planning horizon?
Q. No. 9: Determine the rate of return for the cash flows shown in the diagram.