Engineering Economy

Sheet 2
1- A new street seeping equipment can be purchased for $ 75,000. its expected useful
life is 8 years, at which time its market value will be zero. Annual receipts less
expenses will approximately $20,000 per year over the 8 years study period. Use
the PW method and MARR of 15% to determine whether this is a good
investment?
2- You are faced with making a decision on a large investment proposal. The capital
investment amount is $640,000. Estimated annual revenue at the end of each year
in the eight years study period is $180,000. the estimated annual year end
expenses are $42,000 starting in year one. These expenses begin decreasing by
$4,000 per year at the end of year four and continue decreasing through end of
year eight. Assuming a $20,000 market value at the end of year eight and MARR =
20% per year, answer the following:
a- What is the PW of this proposal?
b- What your conclusion about the acceptability of this project?
3- Determine the FW of the following engineering project when MARR=12% per year.
Is this project attractive?
Investment Cost $15,000

Expected life time 6 years

Market (salvage) value - $2,000 *

Annual expenses $6,000

Annual receipt $11,000

* The negative market value means that the asset needs cost to dispose of an
asset.

4- A company is considering a plant to manufacture a proposed new product. The

land costs $300,000, building costs $600,000, the equipment costs $250,000,
$100,000 additional working capital is required. It is expected that the product will
result in sales of $750,000 per year for 10 years at which time the land can be sold
for $350,000, and the equipment for $50,000. The annual expenses for labor,
material and all other items are estimated to total $475,000. If the company
requires a MARR of 15% per year on the projects of comparable risk, determine if
it should invest in the new product line. Use AW method.
5- An assembly operation at a software Company now requires $115,000 per year in
labor costs. A robot can purchased and installed to automate this operation. The
robot will cost $250,000 and will have no market value at the end of the 10 years
study period. Maintenance and operation expenses of the robot are estimated to
 be $68,000 per year. Invested capital must earn at least 12% per year. Use the AW
method to determine if the robot a justifiable investment.
6- Calculate the pay bake period for the following project:

7- The pure Oil Company must install antipollution equipment in a new refinery to
meet the KSA clean air standards. Four designs alternatives are being considered,
which will capital investment and annual operating expenses as shown in the
table. Assuming a useful life of 10 years for each design, no market value, a
desired MARR of 10 % per year, and an analysis period of 10 years, determine
which design should be selected on the basis of PW method. Confirm your
selection by using the FW and AW methods.

Alternative Design

D1 D2 D3 D4

Capital Investment $650,000 $810,000 $1,290,000 $1,650,000

Annual expenses

Power cost $75,000 $75,000 $140,000 $146.000

Labor cost $50,000 $55,000 $75,000 $60,000

Maintenance cost $710,000 $650,000 $470,000 $420,000

Taxes and insurance cost $14,000 $17,000 $27,000 $30,000

8- A three design alternatives are being considered. The estimate sales and cost for
each alternative are given in the table. The MARR is 20% per year.
Alternative

A B C

Investment Cost $40,000 $70,000 $50,000

Estimated units to be sold 28,000
25,000 30,000
per year

Unit selling price ($/unit) $4.20 $5.50 $4.80

Variable cost ($/unit) $2.10 $2.50 $2.00

Annual expenses (fixed cost) $25.000 $40,000 $35,000

Market Value (Salvage $20,000

$20,000 $20,000
Value)
Useful Life (years) 10 10 10

Annual revenues are based on the number of units sold and selling price. Annual
expenses are based on fixed and variable costs. Determine which alternative is
preferable based on AW.

9- Two electrical motors are being considered to drive a centrifugal pump. One of the
motors must be selected. Each motor capable of driving 70 horse power (output)
to the pump operation. It is expected that the motor will be in use 1,000 hours per
year. The following data are available:
Motor A Motor B

Capital investment $1,400 $1,200

Electrical efficiency 0.9 0.8

Annual maintenance cost $180 $120

Useful life 3 years 5 years

10- A piece of production equipment is to be replaced immediately because it no

longer meets quality requirements for the end product. The two best alternatives
are a used piece of equipment (E1), an a new automatic model (E2). The economic
estimates for each are shown in the accompanying table.
Alternative

E1 E2

Capital cost $15,000 $66,000

Annual expenses $15,000 $10,000

Useful life 5 years 20 years

Market Value (Salvage Value) $20,000 $20,000

The MARR is 20% per year. Which alternative is preferred, based on the
repeatability assumption?