HW 2 Set 1 Keys
HW 2 Set 1 Keys
HW 2 Set 1 Keys
The solutions to all sets of HW 2 will uploaded on Moodle on the same day after the class.
Late submission will not be accepted. Early submission may be arranged.
Show your work for full credit.
1. Two different alternatives shown in the table below are being considered by Kal Tech
Engineering systems. Assume that alternatives X and Y are replaced at the end of their lives.
Data
Initial Cost
Uniform Annual Benefits
Useful Life in Years
MARR
Alternative X Alternative Y
$6,000
$1,500
$810
$ 230
20
10
12%
2. An engineering freshman wants to purchase a laptop computer for use during the 4 years
that she plans to study engineering at Texas Tech. After looking around a bit, she finds that
a well-equipped laptop with software can be purchased for $1,800 and that it should have a
market value of at least $300 if she wants to sell it when she graduates after 4 years.
Assume that maintenance and supplies will cost $100 each
. Use an interest rate
of 12%
with monthly compounding, and determine the present cost of owning and
operating the computer.
Hint:
= (1 + 0.12/12)6 1 = 6.152%
Answer: Face value = $1,000 (In the last period, the face value is returned). The annual cash
flow=Interest per year = 0.06 (1,000) = $60. Use the CF register of the calculator to
find the
$812.52.
4. The construction of a dam will cost $1,000 at time 0, $500 in year 1, $500 in year 2. It will be
completed at the end of year 2. Beginning in year 3, maintenance costs will be $100 per year
through year 10. From years 11 on, maintenance costs will be $150 per year forever. Find
the present worth of all the costs if = 10%.
1
300K
2
400K
3
500K
4
600K
5
1,000K
This one is straightforward. Use the CF register of the calculator to find the
IRR=10. 17%
3.
Barry, a Texas Crude Company engineer who did not take Engineering Economy while
studying at Tech, recommended that Texas Crude purchase a special tool to reduce the
cost of pumping oil out of the bayous of St. Martin Parish. As a result of Barry's
recommendation, Texas Crude purchased the tool for $30,000 on January 1, 2005. By
January 1, 2006, the tool had saved a total of $5,000 and went on line full time. After
going on line full time, the tool saved Texas Crude $9,000 each year for the next three
years and Barry was happy. However, Barry recommended the "el-cheapo" model (Barry
is a tightwad), and it started breaking down during the early part of year five, and ended
up by saving only $4,000 during year five. It was scrapped as being unusable at the
end of year five, and had a zero salvage value. Barry told his boss that his
recommendation had been correct, as it had saved Texas Crude $6,000 and that is a
savings of 20%.
Use a MARR of 10% and evaluate the effectiveness of the tool and the correctness of
Barry's recommendation.
Answer:
IRR=6.50%.
4. A 10-year, 12%, $1,000 bond that pays dividends quarterly can be purchased for $900.
If the bond is purchased and pays as scheduled, what effective rate of return will the
purchaser receive?
N = 10 years
Dividend rate = 12%
Dividends paid quarterly: Dividend
Amount = 1000 (0.12/4) = $30 (regular cash inflow). Number of quarterly periods,
N = 40 Face Value = $1000 (the final cash inflow). Purchase Price = $900 (this is
the PV or the initial cash outflow).
Use the CF register of the calculator to find the IRR=3.47%. This is the quarterly
rate of return. Nominal interest rate per year = 4 (3.47%) = 13.88%. Find the
effective interest rate using the ICONV function=14.61%.
A
-$450,000
-$15,000
$85,000
$45,000
Alternatives
B
-$615,000
-$10,000
$158,000
$65,000
Ans: Require an incremental ROR or IRR analysis to choose a better alternative between
the two given alternatives. The incremental cash flow is given below:
Year
Alt. BAlt. A
0
-$165,000
1 to 10
$78,000
10
$20,000 (Salvage Value)
First, find the incremental cash flow (B A). Then, using the CF function, find the
IRR=46.34%. Since IRR= 46.34%> MARR of 14%, choose the higher cost alternative,
i.e. Alt. B.
(a) Using the conventional payback period approach, determine which type of
equipment (A or B) the company should purchase.
(b) Consider the time value of money to be 12%. Use the benefit cost ratio approach
and determine which type of equipment (A or B) the company should procure.
The conventional payback period is the period of time it will take to recover the
initial investment out-lay.
Data
Year
Net Cash Flow
Cumulative
0
-$30,000
-$30,000
1
+$6,000
-$24,000
Equipment A
2
3
+$6,000
+$12,000
-$18,000
-$6,000
4
+$6,000
$0
5
+$25,564
-$25,564
4
-$7,000
-$7,000
5
+$26,610
+$19,610
0
-$55,000
-$55,000
1
+$24,000
+$31,000
Equipment B
2
3
+$10,000
+$21,000
+$21,000
$0