NAME(Print) Abdulrahman Aldawsari

Homework Assignment 3
ENGT3600, Engineering Economics
Problem 5.7
You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for
manufacturing high-pressure hydraulic hoses. The parameters associated with each alternative
have been estimated. Which one should be selected on the basis of a present worth comparison at
an interest rate of 12% per year?
Alternative X Y
First cost, $ −45,000 −58,000
Maintenance cost, $/year −8,000 −4,000
Salvage value, $ 2,000 12,000
Life, years 5 5

Solution:

For Alternative X:

PW _x = Initial Cost+Maintenance Cost×(P/A,12%,5)−Salvage Value×(P/F,12%,5)

PW _x =45,000+8,000(P/A,12%,5)−2,000(P/F,12%,5)

Using factor values:

(P/A,12%,5) is approximately 3.6048

(P/F,12%,5) is approximately 0.5674

PW _x =45,000+8,000(3.6048)−2,000(0.5674) = 45,000+28,838.4-1134.8 = 72,703.6

For Alternative Y:
PW_y = Initial Cost+Maintenance Cost×(P/A,12%,5)−Salvage Value×(P/F,12%,5)
PW _y = 58,000+4,000(P/A,12%,5)−12,000(P/F,12%,5)

Using factor values:

(P/A,12%,5) is approximately 3.6048

(P/F,12%,5) is approximately 0.5674

PW _y = 58,000 + 4,000 (3.6048) − 12,000 (0.5674)=58,000 + 14419.2 – 6808.8 = 65,610.4

Comparison:

PW _X = $72,703.6 (Total equivalent expense of X)

PW_Y = $65,610.4 (Total equivalent expense of Y)

Given these calculations, Alternative Y is the more economical choice as it has a lesser total
equivalent expense ($65,610.4) compared to Alternative X ($72,703.6).

Problem 5.12
A software package created by Navarro & Associates can be used for analyzing and designing
three-sided guyed towers and three- and four-sided self-supporting towers. A single-user license
will cost $4000 per year. A site license has a one-time cost of $15,000. A structural engineering
consulting company is trying to decide between two alternatives: first, to buy one single-user
license now and one each year for the next 4 years (which will provide 5 years of service), or
second, to buy a site license now. Determine which strategy should be adopted at an interest rate
of 12% per year for a 5-year planning period using present worth evaluation.

Solution:

PW single= -4000 – 4000 (P/A,12%,4)

PW single= -4000 – 4000 (3.0373)
PW single= -4000 – 12149.2
PW single= -16,149.2

PW site=-15,000

It would be better to buy the site license as the present worth of costs is lower.

Problem 5.18
NASA is considering two materials for use in a space vehicle tracking station in Australia. The
estimates are shown below. Which should be selected on an economic basis of present worth
values at an interest rate of 10% per year?
 Material M FF
First cost, $ −205,000 −235,000
Maintenance cost, $/year −29,000 −27,000
Salvage value, $ 2,000 20,000
Life, years 2 4

Solution:

PWM= [ −first cost−maintenance cost×(P/A,10%,4)+

(first cost - salvage value)×(P/F,10%,2)+salvage value×(P/F,10%,4) ]

PWM =−205,000−29,000×(3.1699)+(−205,000+2,000)×(0.8264)+2,000×(0.6830)
PWM = $-463,320

PWFF= −first cost−maintenance cost×(P/A,10%,4)+salvage value×(P/F,10%,4)

PWFF = −235,000−27,000×(3.1699)+20,000×(0.6830)=$−306,927

PWFF =$-306,927
So,
The FF material should be selected

Problem 5.32
Determine the capitalized cost of a permanent roadside historical marker that has a first cost of
$78,000 and a maintenance cost of $3500 once every 5 years. Use an interest rate of 8% per year.

Solution:

Capitalized Cost = −first cost−[maintenance cost×(A/F,8%,5)/0.08]

CC=−78,000−[3,500/0.08×(0.17046)]

CC=$−85,458
Problem 6.7
Humana Hospital Corporation installed a new MRI machine at a cost of $750,000 this year in its
medical professional clinic in Cedar Park. This state-of-the-art system is expected to be used for
5 years and then sold for $125,000. Humana uses a return requirement of 25% per year for all of
its medical diagnostic equipment. As a bioengineering student currently serving a coop semester
on the management staff of Humana Hospital Corporation in Louisville, Kentucky, you are asked
to determine the minimum revenue required each year to realize the expected recovery and
return.
(a) What is your answer?
(b) If the AOC is expected to be $80,000 per year, what is the total revenue required to provide
for recovery of capital, the 25% return, and the annual expenses?

Solution:

(a) First find the present worth and then find its annual equivalent

PW = -750000 + 125000(P/F, 25%, 5) = -709040

Now
finding its annual equivalent revenue = PW (A/P, 25%, 5)

= 709040(A/P, 25%, 5) = 263,654

Hence you need a minimum revenue of $263,654 each year to realize the expected recovery and
return.

(b) If the AOC is expected to be $80,000 per year, total revenue required is the present
worth

PW = -750000 - 80,000(P/A, 25%, 5) + 125000(P/F, 25%, 5)

= -$924,182

Hence the required total revenue over 5 years is worth $924,182 now
Problem 6.18
An international textile company’s North America Division must decide which type of fabric
cutting machines it will use—straight knife or round knife. The estimates are summarized below.
Compare them on the basis of annual worth values at i = 10% per year.
Round Knife Straight Knife
First cost, $ −250,000 −170,000

AOC, $/year −31,000 −35,000

Overhaul in year 2, $ — −26,000

Salvage value, $ 40,000 10,000

Life, years 6 4

Solution:

a) Annual Worth for both types of knives:

AWRound= −first cost × (A/P,10%,6) – AOC + salvage value × (A/F,10%,6)

AWRound = −250,000 (0.22961) −31,000 + 40,000 (0.12961)
AWRound = $ −83,218
Now, using table to see factors: A/P, P/F, A/FA/P, P/F, A/F for 10%10%, n=2 and 4n=2 and 4

AWStaight = −first cost × (A/P,10%,4) – AOC – overhaul × (P/F,10%,2) × (A/P,10%,4) +

salvage value ×

(A/F,10%,6)

AWStaight =−170,000 (0.31547) − 35,000 − 26,000 (0.8264) (0.31547) + 10,000 (0.21547)

AWStaight = $−93,254

7.10
The Camino Real Landfill was required to install a plastic liner to prevent leachate from
migrating into the groundwater. The fill area was 50,000 m2 and the installed liner cost was $8
per m . In order to recover the investment, the owner charges to unload at the rates of $10 per
2

pick-up, $25 per dump-truck, and $70 per compactor-truck load. The fill area is adequate for 4
years. If the annual traffic is estimated to be 2500 pick-up loads, 650 dump-truck loads, and 1200
compactor-truck loads, what rate of return will the landfill owner make on the investment?

Solution:

PW0 = PW1
50,000 X 8 = 10 X 2,500 X (P/A, i*, 4) +25 X 650 X (P/A, i*,4) + 70 X 1,200 X (P/A , i* , 4)

400,000 = ( 25,000+ 16,250 + 84,000 ) X (P/A , i* , 4)

400,000 = 125,250 X (P/A , i* , 4)

(P/A , i* , 4)= 400,000/ 125,250 = 3.19361

From Compound interest Factor Tables, we can see that (P/A, 9%, 4) = 3.2397 and
(P/A, 10%, 4) =3.1699.

we can estimate i* using linear interpolation:

0.1−0.09
i* = X ( 3.19361−3.2397 )+ 0.09=0.0966=9.66 %
3.1699−3.2697

Solution 8.22

A company that manufactures amplified pressure transducers wishes to decide between the
machines shown—variable speed (VS) and dual speed (DS). Compare them on the basis of rate
of return and determine which should be selected if the MARR = 15% per year.

VS DS

First cost, $ −250,000 −225,000

AOC, $ per year −231,000 −235,000
Overhaul in year 3, $ — −26,000
 Overhaul in year 4, $ −39,000 —
Salvage value, $ 50,000 10,000
Life, years 6 6

Solution:

PW variable = [-250,000 - 231,000(P/A,15%,6) - 39,000 (P/F,15%,4) + 50,000(P/F,15%,6)]

PW variable = -250,000 - (231,000 * 3.7845) - (39,000 * 0.5718) + (50,000 * 0.4323)

PW variable = -1,325,607

PW dual = [-225,000 - 235,000(P/A,15%,6) - 26,000(P/F,15%,3) + 10,000(P/F,15%,6)]

PW dual = -225,000 - (235,000 * 3.7845) - (26,000 * 0.6575) + (10,000 * 0.4323)

PW dual = $-1,127,130

So, Dual speed Machine should be selected