Chapitre 2.

Time Value of Money

Instructor: Christine SAAB References: Blank & Tarquin, Engineering Economy, 8th Edition. ISBN 0073523437, McGraw
Hill Education, 2017
Problem 1
A manufacturer of vehicles is considering the purchase of dual-axis
inclinometers for installation in a new line of tractors. The
distributor of the inclinometers is temporarily overstocked and is
offering them at a 40% discount from the regular cost of $142. If
the purchaser gets them now instead of 2 years from now, which is
when they will be needed, what is the present worth of the
savings per unit? The company would pay the regular price, if
purchased in 2 years. Assume the interest rate is 10% per year.
Problem 2
How much could a company afford to spend now on new
equipment in lieu of spending $200,000 one year from now and
$300,000 three years from now, if the company uses an interest
rate of 15% per year?
Problem 3
A company, which manufactures addressable electric actuators, is
planning to set aside $100,000 now and $150,000 one year from
now for possible replacement of the heating and cooling systems in
three of its larger manufacturing plants. If the replacement won’t
be needed for 4 years, how much will the company have in the
account, if it earns interest at a rate of 8% per year?
Problem 4
Syringe pumps often fail because reagents adhere to the ceramic
piston and deteriorate the seal. An integrated polymer dynamic
seal, has been developed. It provides a higher sealing force on the
sealing lip, resulting in extended seal life. One of the customers
expects to reduce downtime by 30% as a result of the new seal
design. If lost production would have cost the company $110,000
per year for the next 4 years, how much could the company afford
to spend now on the new seals, if it uses an interest rate of 12%
per year?
Problem 5
A company that makes self-clinching fasteners expects to purchase
new production-line equipment in 3 years. If the new units will cost
$350,000, how much should the company set aside each year, if
the account earns 10% per year.
Problem 6
The Public Service Board (PSB) awarded two contracts worth a
combined $ 1.07 million to improve a retention basin and
reconstruct the spillway that was severely damaged in a flood 2
years ago. The PSB said that, because of the weak economy, the
bids came in $ 950,000 lower than engineers expected. If the
projects are assumed to have a 20-year life, what is the annual
worth of the savings at an interest rate of 6% per year?
Problem 7
A university has initiated a license program with estimated fees
(revenues) are $ 80,000 for the first year with uniform increases to
a total of $200,000 by the end of year 9. Determine the gradient
and construct a cash flow diagram that identifies the base amount
and the gradient series.
Problem 8
Profits from recycling paper, cardboard, aluminum, and glass at a
liberal arts college have increased at a constant rate of $1100 in
each of the last 3 years. If this year’s profit (end of year 1) is
expected to be $6000 and the profit trend continues through year
5, (a) what will the profit be at the end of year 5 and (b) what is the
present worth of the profit at an interest rate of 8% per year?
Problem 9
Rolled ball screws are suitable for high-precision applications such
as water jet cutting. Their total manufacturing cost is expected to
decrease because of increased productivity, as shown in the table.
Determine the equivalent annual cost at an interest rate of 8% per
year.
Problem 10
A company wants to have $2.1 billion available 5 years from now to
finance production of a handheld ‘’electronic brain’’ that, based on
your behavior, will learn how to control nearly all the electronic
devices in your home, such as the thermostat, coffee pot, TV, and
sprinkler system. The company expects to set aside uniformly
increasing amounts of money each year to meet its goal. If the
amount set aside at th end of year 1 is $50 million, how much will
the constant increase G have to be each year? Assume the
investment account grows at a rate of 18% per year.
Problem 11
Determine the difference in the preset worth values of the
following two commodity contracts at an interest rate of 8% per
year.
Contract 1 has a cost of $10,000 in year 1; costs will escalate at a
rate of 4% per year for 10 years.
Contract 2 has the same cost in year 1, but costs will escalate at 6%
per year for 11 years.
Problem 12
A homeowner with a $100,000 mortgage and a 520 credit score
will pay $110,325 more in interest charges over the life of a 30-year
loan than a homeowner with the same mortgage and a credit score
of 720. How much higher would the interest rate per year have to
be in order to account for this much difference in interest charges,
if the $100,000 loan is repaid in a single lump-sum payment at the
end of 30 years?