Islamic University of Gaza

Faculty of Engineering
Industrial Engineering Department
EIND4303: Engineering Economy

Instructor: Mohammad Abuhaiba, Ph.D., P.E.

Teacher Assistants: Eng. Said Matar and Duaa' AbuDagga

Solution of Quiz (Problem 4.18):

It is estimated that a copper mine will produce 10,000 tons of ore during the coming
year. The production is expected to increase by 5% per year thereafter in each of the
next six years. Profit per ton will be $14 for years one through seven.
1. Draw a cash flow diagram for this copper mine operation from the company’s
viewpoint.
2. If the company can earn 15% per year on its capital, what is the future
equivalent of the copper mine’s cash flows at the end of year seven?

i=15%, f=5%, A=$14/ton * 10,000 ton= $140,000

A7 =A1 (1+.05)7 - 1

A3 =A1 (1+.05)2
A2=A1 (1+.05)
A1=140,000

0 1 2 3 4 7

A1 [1 - (P/F, i%, N) (F/P, f%, N)]

P= i-f
140,000[1 - (P/F, 15%, 7) (F/P, 5%,7)]
= .15-.05
140,000[1 - (.3759) (1.4071)]
= .15-.05 = $659499.55
F= P (F/P, 15%, 7)
= 659499.55*2.66= $1,754,268.81
Problem 4.67:
You are the manager of a large crude oil refinery. As part of the refining process, a
certain heat exchanger must be replaced every year. The replacement and downtime
cost in the first year is $175000. This cost is expected to increase due to inflation at a
rate of 8% per year for five years, at which time this particular heat exchanger will no
longer be needed. If the company’s cost of capital is 15% per year, how much could
you afford to spend for a higher quality heat exchanger so that these annual
replacement and downtime costs could be eliminated?

i=15% , f=5% , A= $175000

A [1 - (P/F, i%, N) (F/P, f%, N)]

P= i-f
175000 [1 - (P/F, 15%,5) (F/P,8%,5)]
= .15-.08

175000 [1 – (.4323 ) (1.5869)]

= .07 = $673660

You can afford to spend $673660 or less for a higher quality heat exchanger.
Home work solution Problem 4.33:

1 2 3 4 5 15 30

0 50
A=1000
A=10,000 A=10,000

P = -$1,000 (P/A, 10%, 5) - $10,000 (P/F, 10%, 15) - $10,000 (P/F, 10%, 30)
= -$1,000 (3.7908) - $10,000 (0.2394) - $10,000 (0.0573)
= -$6,757.80
A = -$6,757.80 (A/P, 10%, 50) = -$6,757.80 (0.1009) = -$681.86
Problem 4.81:

r = 12%; M = 12, i= (1+r/M) 12 -1= 0.1268 or 12.68%

P0 = $10,000(P/A, 12.68%, 6) (P/F, 12.68%, 11)

= $10,000 (4.034) (0.2689) = $10,847.43
(1  i ) N  1 (1  .1268) 6  1
(P/A, 12.68%, 6) = = =4.034
i (1  i ) N .1268(1  .1268) 6
1 N 1
(P/F, 12.68%, 11) = [ ] =[ ]11 =.2689
1 i 1  .1268