Engineering Economy

Solution of HW2

Exercise 1:

PW = 0 at IRR
PW= -3,100 + 700(P/A, i, 5) =0 , so (P/A, i, 5) = 4.4286
From table of interest:
(P/A, 4%, 5) = 4.452
(P/A, 5%, 5) = 4.329
4% < i < 5% ∴
By interpolation: i = 4.19%

Exercise 2:

P= A(P/A,10%,10)+500(P/A,10%,infinity)*(P/F,10%,10)
P= 400(6.145) +500(10)*(0.3855)=4385.5
P=A/I
4385.5=A/0.1
A=438.5
choice (a)
 Solution of HW3

Exercise 1:

n Project A Project B Increment (B-A)

0 -$ 3,000 -$ 5,000 -5,000-(-3,000) = -$2,000
1 $1,350 $1,350 0
2 $1,800 $1,800 0
3 $1,500 $5,406 5,406-1,500 = 3,906
IRR 25% 25% ??

IRR (B-A) =?
PW = -2,000 + 3,906(P/F, i, 3) = 0
(P/F, i, 3) = 0.512
(1+i) ^-3 = 0.512, i = 0.25 = 25%
So, for option B to be better, IRR (B-A) >= MARR
25% >= MARR (choice a)

Exercise 2:
N = 5 years
MARR = 10%
Alternative A Alternative B Increment(B-A)
Initial cost -$25,000 -$35,000 -35,000-(-25,000) = -$10,000
Net annual income $7,500 $10,200 $10,200-$7,500=$2,700
IRR on cash flow 15% 14%
Life 5 years 5 years
PW (10%) $3,432.5 $3,668.2 ??

PW (B-A) = -10,000 + 2,700(P/A, 10%, 5) = -10,000 + 2,700(3.791) = $235.7 > 0

Thus, alternative B is economically better.

Exercise 3:
MARR = 10%, life of alternative A= 20 years, life of alternative B= 10 years
a) AW (A) = -1,300,000(A/P, 10%, 20) + 50,000 + 60,000(A/F, 10%, 20)
AW (A) = -1,300,000(0.1175) + 50,000 + 60,000(0.0175) = -$101,700

AW (B) = -800,000(A/P, 10%, 10) + 80,000 + 30,000(A/F, 10%, 10)

AW (B) = -800,000(0.1627) + 80,000 + 30,000(0.0627) = -$48,279

 AW (B) > AW (A) so alternative B is better.

b) when using the repeatability assumption, both alternatives should have their life
equal to the study period which is 20 years

The life of alternative B= 10 years, so alternative B should be repeated after 10 years

(Since its useful life is only 10 years, we will have to invest in it again after this
period is over, assuming that we’ll pay the same investment and that it will generate
the same annual income for the next 10 years and will have the same market value
in the end).

PW (B)= -800,000 – 800,000(P/F, 10%, 10) + 80,000(P/A, 10%, 20) + 30,000(P/F,

10%, 10) + 30,000(P/F, 10%, 20)
= -800,000 – 800,000(0.3855) + 80,000(8.514) + 30,000(0.3855) + 30,000(0.1486)
= -$411,257

The life of alternative A= 20 years so no need to repeat anything, just get its PW

PW=−1,300,000+50,000(𝑃/𝐴,10%,20)+60,000(𝑃/𝐹,10%,20)
PW=−1,300,000+50,000( 8.514) +60,000(0.1486)
PW=−$865,384

PW (B) – PW (A) = -411,257 – (-865,384) = 454,127 > 0

 Alternative B is the best option.

Solution of HW 4

Exercise 1:
Cost basis = $100,000
Annual output = 10,000 units
Expenses = $2.8/unit, so Annual expenses=$2.8*10,000= $28,000
Selling price = $5/unit, so Annual revenues= $5*10,000=$50,000
BTCF = annual revenues – annual expenses = $50,000 – $28,000 units
BTCF = $22,000

year BTCF (A) Dep. Dep. Taxable Income ATCF (E)

rate deduction income tax (D)
(B) (C)
=basis*rat A-B -t(C) A+D
e
0 -$100,000 - - - - -$100,000
1 $22,000 0.2 $20,000 $2,000 -$600 $21,400
2 $22,000 0.32 $32,000 -$10,000 $3,000 $25,000
3 $22,000 0.192 $19,200 $2,800 -$840 $21,160
4 $22,000 0.1152 $11,520 $10,480 -$3,144 $18,856
5 $22,000 0.1152/2 $5,760 $16,240 -$4,872 $17,128
5 $12,000 - - $480 -$144 $11,856

BV @ year 5 = Cost basis – accumulated depreciation

BV @ year 5 = 100,000 – (100,000*(0.2 + 0.32 + 0.192 + 0.1152 + 0.1152/2)) disposal
= $11,520
Gain (loss) at disposal = MV (year 5) – BV (year 5) = 12,000 – 11,520 = $480 (gain)

To calculate the PW of ATCF, we need to find the after tax MARR, using the equation:
After-tax MARR = Before-tax MARR (1-t)
Before-tax MARR = 20% , t = 30%
After-tax MARR = Before-tax MARR (1-t) = 0.2(1-0.3) = 0.14 = 14%

−1 −2 −3 −4
PW (14 % )=−100,000+21,400 ( 1+ 0.14 ) +25,000 ( 1+0.14 ) +21,160 (1+ 0.14 ) +18,856 ( 1+0.14 ) + ( 17,128+1
 PW (14%) = -100,000 + 18,771.9 + 19,236.7 + 14,282.4 + 11,164.3 + 15,053.4
PW (14%) = -$21,491.3 < 0

 After calculating the tax, the investment is clearly not a good idea.