Ghulam Ishaq Khan Institute of Engineering Sciences and

Technology
School of Management Sciences

Engineering Economics (MS-291)

Spring-2023

Instructor: Dr. Muhammad Ullah

Assignment # 2

Due Date: 16:59 hours by Tuesday, May 12, 2023

[Late submissions will not be accepted]

Name: ___________________________ ID: _____________ Section: __________

Instructions:
• This is an individual assignment.
• Submit the hand-written assignment on A4 pages. Do not submit in hard file covers.
• Solve step-by-step and show you calculations. You will get credit for the steps which
take you closer to the solution.
• Total Marks = 20
1. [Marks 2] A metallurgical engineer is considering two materials for use in a space vehicle.
All estimates are made. ( a ) Which should be selected on the basis of a present worth
comparison at an interest rate of 12% per year? ( b ) At what first cost for the material not
selected above will it become the more economic alternative?

2. [Marks 2] An industrial engineer is considering two robots for purchase by a fiber-optic

manufacturing company. Robot X will have a first cost of $80,000, an annual maintenance
and operation (M&O) cost of $30,000, and a $40,000 salvage value. Robot Y will have a
first cost of $97,000, an annual M&O cost of $27,000, and a $50,000 salvage value. Which
should be selected on the basis of a future worth comparison at an interest rate of 15% per
year? Use a 3-year study period.

3. [Marks 2] Compare the alternatives shown on the basis of their capitalized costs using an
interest rate of 10% per year.

4. [Marks 2] A patriotic group of firefighters is raising money to erect a permanent (i.e.,

infinite life) monument in New York City to honor those killed in the line of duty. The
initial cost of the monument will be $150,000, and the annual maintenance will cost $5000.
There will be an additional one-time cost of $20,000 in 2 years to add names of those who
were missed initially. At an interest rate of 6% per year, how much money must they raise
now in order to construct and maintain the monument forever?

5. [Marks 2] James developed the following two cash flow diagrams. The cash flows for
alternative B represent two life cycles of A. Calculate the annual worth value of each over
the respective life cycles to demonstrate that they are the same. Use an interest rate of 10%
per year.
6. [Marks 2] 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 $75,000. Humana uses a return
requirement of 24% per year for all of its medical diagnostic equipment. As a
bioengineering student currently serving a coop semester on the management staff of
Humana Corporation in Louisville, Kentucky, you are asked to determine the minimum
revenue required each year to realize the expected recovery and return.

7. [Marks 2] TT Racing and Performance Motor Corporation wishes to evaluate two

alternative CNC machines for NHRA engine building. Use the AW method at 10% per year
to select the better alternative.

8. [Marks 2] Compare two alternatives for a security system surrounding a power distribution
substation using annual worth analysis and an interest rate of 10% per year.

9. [Marks 2] For the cash flows shown, determine the rate of return.

10. [Marks 2] As groundwater wells age, they sometimes begin to pump sand (and they become
known as “sanders”), and this can cause damage to downstream desalting equipment. This
situation can be dealt with by drilling a new well at a cost of $1,000,000 or by installing a
tank and self-cleaning screen ahead of the desalting equipment. The tank and screen will
cost $230,000 to install and $61,000 per year to operate and maintain. A new well will have
a pump that is more efficient than the old one, and it will require almost no maintenance,
so its operating cost will be only $18,000 per year. If the salvage values are estimated at
10% of the first cost, use a present worth relation to ( a ) calculate the incremental rate of
return and ( b ) determine which alternative is better at a MARR of 6% per year over a 20-
year study period.