Applied Science University

Faculty of Engineering
Mechanical and Industrial Engineering
Engineering Economy [CH7+ CH8+ CH9]

Problems #3
P1. A project with capital investment requirement is $345,000 and the estimated market value of
the system after a six-year study period is $115,000. Annual revenues will be $120,000,
whereas additional annual expenses will be $22,000. You have been asked by management
to determine the IROR of this project and to make a recommendation. The corporation’s
MARR is 20% per year.

Answer: 22.16%.

P2. In July of 2012, Taylor purchased 2,000 shares of XYZ common stock for $75,000. He then
sold 1,000 shares of XYZ in July of 2013 for $39 per share. The remaining 1,000 shares
were finally sold for $50 per share in July 2014.
(a) Draw a cash-flow diagram of this situation.
(b)What was Taylor’s internal rate of return (IROR) on this investment?

Answer: 11.7%

P3. According to Descartes’ rule and Norstrom’s criterion, how many i* values are possible for
the cash flow (CF) sequence shown?

P4. Harley worked for many years to save enough money to start his own residential landscape
design business. The cash flows shown are those he recorded for the first 6 years as his
own boss. Find the external rate of return using the modified rate of return approach, an
investment rate of 15% per year, and a borrowing rate of 8%.

Answer: 7.9% per year

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P5. For the cash flow series below, calculate the external rate of return, using the return on
invested capital approach with an investment rate of 14% per year.

Answer: 26.1% per year

P6. Standby power for pumps at water distribution booster stations can be provided by either
gasoline or diesel-powered engines. The costs for the gasoline engines are as follows:

The incremental PW cash flow equation associated with (diesel – gasoline) is

0 = - 40,000 + 11,000(P /A , i ,15) + 16,000(P/ F , i ,15)

Determine the following:

(a) First cost of the diesel engines
(b) Annual M&O cost of the diesel engines
(c) Salvage value of the diesel engines

Answer: PDiesel = $-190,000 M&ODiesel = $-30,000 SDiesel = $39,000

P7. Chem-Tex Chemical is considering two additives for improving the dry-weather stability of
its low cost acrylic paint. Additive A has a first cost of $110,000 and an annual operating cost of
$60,000. Additive B has a first cost of $175,000 and an annual operating cost of $35,000. If the
company uses a 3-year recovery period for paint products and a MARR of 20% per year, which
process is economically favored? Use an incremental ROR analysis.

Answer: Δi* = 7.5% < MARR of 20%; select additive A

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P8. Konica Minolta plans to sell a copier that prints documents on both sides simultaneously,
cutting in half the time it takes to complete big commercial jobs. The costs associated with
producing chemically treated vinyl rollers and fi ber-impregnated rubber rollers are shown
below. Determine which of the two types should be selected by calculating the rate of return on
the incremental investment. Assume the company’s MARR is 40% per year.

Answer: Δi* = 45.6% per year

P9. Hewett Electronics manufactures amplified pressure transducers. It must decide between two
machines for a finishing operation. Select one for them on the basis of AW-based rate of return
analysis. The company’s MARR is 18% per year.

Answer: Δi* = 21.8%

P10. Ashley Foods, Inc. has determined that any one of five machines can be used in one phase
of its chili canning operation. The costs of the machines are estimated below, and all machines
are estimated to have a 4-year useful life. If the minimum attractive rate of return is 20% per
year, determine which machine should be selected on the basis of a rate of return analysis.

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P11. The benefits associated with a nuclear power plant cooling water filtration project located
on the Ohio River are $10,000 per year forever, starting in year 1. The costs are $50,000 in year
0 and $50,000 at the end of year 2. Calculate the B/C ratio at i =10% per year.

Answer: 1.1

P12. A project had a staged investment distributed over the 6-year contract period. For the cash
flows shown and an interest rate of 10% per year, determine the profitability index and determine
if the project was economically justified.

Answer: 1.12

P13. A consulting engineer is currently evaluating four different projects for the Department of
Housing and Urban Development. The future worth of costs, benefits, disbenefits is shown. The
interest rate is 10% per year. Determine which of the projects, if any, should be selected, if the
projects are mutually exclusive.

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