Worksheet for the course Industrial Management and Engineering Economics (Engineering

Economics part)

Part I: for the following questions give short answer according to the requirements intended

1. List the four essential elements involved in decision making in engineering economic
analysis.
2. What is meant by (a) limited capital funds and (b) sensitivity analysis?
3. List three measures of worth that are used in engineering economic analysis.
4. Identify the following factors as either economic (tangible) or noneconomic (intangible):
first cost, leadership, taxes, salvage value, morale, dependability, inflation, profit,
acceptance, ethics, interest rate.
5. How does depreciation affect a company’s cash flow?
6. What is the difference between book value and market value?
7. State the difference between book depreciation and tax depreciation.
8. State the difference between unadjusted and adjusted basis.
9. Explain why the recovery period used for tax depreciation purposes may be different from
the estimated n value in an engineering economy study.
10. When declining balance (DB) depreciation is applied, there can be three different
depreciation rates involved— d, dmax, and dt. Explain the differences between these rates.
11. What is the difference between mutually exclusive alternatives and independent projects?
12. (a) What is meant by the do-nothing alternative?
(b) When is the do-nothing alternative not an option?
13. (a) How many alternatives are possible from four independent projects identified as W, X,
Y, and Z?

(b) List all of the possibilities.

14. What is the difference between a revenue and a cost alternative?

15. What is meant by the term equal service?
16. What two approaches can be used to satisfy the equal-service requirement?
Part II: for the subsequent questions select a letter that contains the correct answer for each
question.

1. The concept that different sums of money at different points in time can be said to be equal
to each other is known as:
A. Evaluation criterion
B. Equivalence
C. Cash flow
D. Intangible factors
2. The evaluation criterion that is usually used in an economic analysis is:
A. Time to completion
B. Technical feasibility
C. Sustainability
D. Financial units (dollars or other currency)
3. All of the following are examples of cash outflows, except:
A. Asset salvage value
B. Income taxes
C. Operating cost of asset
D. First cost of asset
4. In most engineering economy studies, the best alternative is the one that:
A. Will last the longest time
B. Is most politically correct
C. Is easiest to implement
D. Has the lowest cost
5. At an interest rate of 10% per year, the equivalent amount of $10,000 one year ago is closest
to:
A. $8264
B. $9091
C. $11,000
D. $12,000
6. Assume that you and your best friend each have $1000 to invest. You invest your money
in a fund that pays 10% per year compound interest. Your friend invests her money at a
bank that pays 10% per year simple interest. At the end of 1 year, the difference in the total
amount for each of you is:
A. You have $10 more than she does
B. You have $100 more than she does
C. You both have the same amount of money
D. She has $10 more than you do
7. The time it would take for a given sum of money to double at 4% per year simple interest
is closest to:
A. 30 years
B. 25 years
C. 20 years
D. 10 years
8. To finance a new project costing $30 million, a company borrowed $21 million at 16% per
year interest and used retained earnings valued at 12% per year for the remainder of the
investment. The company’s weighted average cost of capital for the project was closest to:
A. 12.5%
B. 13.6%
C. 14.8%
D. 15.6%
Part III: for the following questions show the necessary steps

1. How much can A Software, Inc., afford to spend now on an energy management system if
the software will save the company $21,300 per year for the next 5 years? Use an interest
rate of 10% per year.
2. A manufacturer of off-road 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.
3. A family that won a $100,000 prize on America’s Funniest Home Videos decided to put
one-half of the money in a college fund for their child who was responsible for the prize.
If the fund earned interest at 6% per year, how much was in the account 14 years after it
was started?
4. One of the biggest vulnerabilities in a control system is network devices, such as Ethernet-
based network switches that are located in unsecured locations and accessible to everyone.
DeltaX switches, manufactured by Dahne Security, allow the user to automatically lock
and unlock the port access to all switches in the network. The company is considering
expanding its manufacturing lines now or doing it in 3 years. If the cost now would be $1.9
million, what equivalent amount could the company afford to spend in 3 years? The interest
rate is 15% per year.
5. A company that sells high-purity laboratory chemicals is considering investing in new
equipment that will reduce cardboard costs by better matching the size of the products to
be shipped to the size of the shipping container. If the new equipment will cost $220,000
to purchase and install, how much must the company save each year for 3 years in order to
justify the investment, if the interest rate is 10% per year?
6. How large are the end-of-year equal amounts that must be deposited into a project account
so that a balance of $75,000 will be available for withdrawal immediately after the 12th
annual deposit is made? The initial balance in the account is zero at the beginning of the
first year. The account pays 10% interest per year.
7. China spends an estimated $100,000 per year on cloud seeding efforts, which includes
using antiaircraft guns and rocket launchers to fi ll the sky with silver iodide. In the United
States, utilities that run hydroelectric dams are among the most active cloud seeders,
because they believe it is a cost-effective way to increase limited water supplies by 10% or
more. If the yields of cash crops will increase by 4% each year for the next 3 years because
of extra irrigation water captured behind dams during cloud seeding, what is the maximum
amount the farmers should spend now on the cloud seeding activity? The value of the cash
crops without the extra irrigation water would be $600,000 per year. Use an interest rate of
10% per year.
8. The Public Service Board (PSB) awarded two contracts worth a combined $1.07 million
to improve (i.e., deepen) 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?
9. The National Highway Traffic Safety Administration raised the average fuel efficiency
standard to 35.5 miles per gallon for cars and light trucks by the year 2016. The rules will
cost consumers an average of $434 extra per vehicle in the 2012 model year. If a person
purchases a new car in 2012 and keeps it for 5 years, how much must be saved in fuel costs
each year to justify the extra cost? Use an interest rate of 8% per year.
10. In an effort to reduce childhood obesity by reducing the consumption of sugared beverages,
some states have imposed taxes on soda and other soft drinks. A survey by Roland Sturm
of 7300 fifth-graders revealed that if taxes averaged 4 cents on each dollar’s worth of soda,
no real difference in overall consumption was noticed. However, if taxes were increased to
18 cents on the dollar, Sturm calculated they would make a significant difference. For a
student who consumes 100 sodas per year, what is the future worth of the extra cost from
4 cents to 18 cents per soda? Assume the student consumes sodas from grade 5 through
graduation in grade 12. Use an interest rate of 6% per year.
 11. ABC Supply Co. sells tamperproof, normally open thermostats (i.e., thermostat closes as
temperature rises). Annual cash flows are shown in the table below. Determine the future
worth of the net cash flows at an interest rate of 10% per year.
YEAR 1 2 3 4 5 6 7 8
INCOME, $1000 200 200 200 200 200 200 200 200
COST, $1000 90 90 90 90 90 90 90 90
12. 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?
13. What is the depreciation rate d t per year for an asset that has an 8-year useful life and is
straight line depreciated?
14. Pneumatics Engineering purchased a machine that had a first cost of $40,000, an expected
useful life of 8 years, a recovery period of 10 years, and a salvage value of $10,000. The
operating cost of the machine is expected to be $15,000 per year. The inflation rate is 6%
per year and the company’s MARR is 11% per year. Determine (a) the depreciation charge
for year 3, (b) the present worth of the third-year depreciation charge in year 0, the time of
asset purchase, and (c) the book value for year 3 according to the straight line method.
15. An asset that is book-depreciated over a 5-year period by the straight line method has BV3
= $62,000 with a depreciation charge of $26,000 per year. Determine (a) the first cost of
the asset and (b) the assumed salvage value.
16. Lee Company of Westbrook, Connecticut, manufactures pressure relief inserts for thermal
relief and low-flow hydraulic pressure relief applications where zero leakage is required.
A machine purchased 3 years ago has been book-depreciated by the straight line method
using a 5-year useful life. If the book value at the end of year 3 is $30,000 and the company
assumed that the machine would be worthless at the end of its 5-year useful life, (a) what
is the book depreciation charge each year and (b) what was the first cost of the machine?
17. A company owns the same asset in a two places, plant (Y) and plant (X). It has B =
$2,000,000 and a salvage value of 20% of B. For tax depreciation purposes, the plant A
country allows a straight line write-off over 5 years, while the plant B country allows SL
write-off over 8 years. The general managers of the two plants want to know the difference
in (a) the depreciation amount for year 5 and (b) the book value after 5 years.
18. Equipment for immersion cooling of electronic components has an installed value of
$182,000 with an estimated trade-in value of $40,000 after 15 years. For years 2 and 10,
use DDB book depreciation to determine (a) the depreciation charge and (b) the book value.
19. 16.20 A cooling-water pumping station at the LCRA plant costs $600,000 to construct, and
it is projected to have a 25-year life with an estimated salvage value of 15% of the
construction cost. However, the station will be book-depreciated to zero over a recovery
period of 30 years. Calculate the annual depreciation charge for years 4, 10, and 25, using
(a) straight line depreciation and (b) DDB depreciation. (c) What is the implied salvage
value for DDB?
20. A video recording system was purchased 3 years ago at a cost of $30,000. A 5-year
recovery period and DDB depreciation have been used to write off the basis. The system
is to be replaced this year with a trade-in value of $5000. What is the difference between
the book value and the trade-in value?
21. An engineer with Accenture Middle East BV in Dubai was asked by her client to help him
understand the difference between 150% DB and DDB depreciation. Answer these
questions if B = $180,000, n=12 years, and S = $30,000. (a) What are the book values after
12 years for both methods? (b) How do the estimated salvage and these book values
compare in value after 12 years? (c) Which of the two methods, when calculated correctly
considering S = $30,000, writes off more of the first cost over 12 years?
22. Exactly 10 years ago, Boyditch Professional Associates purchased $100,000 in depreciable
assets with an estimated salvage of $10,000. For tax depreciation, the SL method with n =
10 years was used, but for book depreciation, Boyditch applied the DDB method with n =
7 years and neglected the salvage estimate. The company sold the assets today for $12,500.
(a) Compare the sales price today with the book values using the SL and DDB methods.
(b) If the salvage of $12,500 had been estimated exactly 10 years ago, determine the
depreciation for each method in year 10.
23. A company that manufactures magnetic membrane switches is investigating two
production options that have the estimated cash flows shown ($1 million units). Which one
should be selected on the basis of a present worth analysis at 10% per year?

24. 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 economical alternative?

25. To retain high-performing engineers, a large semiconductor company provides corporate

stock as part of the compensation package. In one particular year, the company offered
1000 shares of either class A or class B stock. The class A stock was selling for $30 per
share at the time, and stock market analysts predicted that it would increase at a rate of 6%
per year for the next 5 years. Class B stock was selling for $20 per share, but its price was
expected to increase by 12% per year. At an interest rate of 8% per year, which stock should
the engineers select on the basis of a present worth analysis and a 5-year planning horizon?
26. The Murphy County Fire Department is considering two options for upgrading its aging
physical facilities. Plan A involves remodeling the fi re stations on Alameda Avenue and
Trowbridge Boulevard that are 57 and 61 years old, respectively. (The industry standard is
about 50 years of use for a station.) The cost for remodeling the Alameda station is
estimated at $952,000 while the cost of redoing the Trowbridge station is $1.3 million. Plan
B calls for buying 5 acres of land somewhere between the two stations, building a new fi
 re station, and selling the land and structures at the previous sites. The cost of land in that
area is estimated to be $366,000 per acre. The size of the new fi re station would be 9000
square feet with a construction cost of $151.18 per square foot. Contractor fees for
overhead, profit, etc. are expected to be $340,000, and architect fees will be $81,500.
(Assume all of the costs for plan B occur at time 0.) If plan A is adopted, the extra cost for
personnel and equipment will be $126,000 per year. Under plan B, the sale of the old sites
is anticipated to net a positive $500,000 five years in the future. Use an interest rate of 6%
per year and a 50- year useful life for the remodeled and new stations to determine which
plan is better on the basis of a present worth analysis.
27. Delcon Properties is a commercial developer of shopping centers and malls in various
places around the country. The company needs to analyze the economic feasibility of
rainwater drains in a 60-acre area that it plans to develop. Since the development won’t be
started for 3 years, this large open space will be subject to damage from heavy
thunderstorms that cause soil erosion and heavy rutting. If no drains are installed, the cost
of refilling and grading the washed out area is expected to be $1500 per thunderstorm.
Alternatively, a temporary corrugated steel drainage pipe could be installed that will
prevent the soil erosion. The cost of the pipe will be $3 per foot for the total length of
7000 feet required. Some of the pipe will be salvageable for $4000 at the end of the 3-year
period between now and when the construction begins. Assuming that thunderstorms occur
regularly at 3-month intervals, starting 3 months from now, which alternative should be
selected on the basis of a present worth comparison using an interest rate of 4% per quarter?
28. A public water utility is trying to decide between two different sizes of pipe for a new water
main. A 250-mm line will have an initial cost of $155,000, whereas a 300-mm line will
cost $210,000. Since there is more head loss through the 250-mm pipe, the pumping cost
is expected to be $3000 more per year than for the 250-mm line. If the lines are expected
to last for 30 years, which size should be selected on the basis of a present worth analysis
using an interest rate of 10% per year?
29. An electric switch manufacturing company has to choose one of three different assembly
methods. Method A will have a first cost of $40,000, an annual operating cost of $9000,
and a service life of 2 years. Method B will cost $80,000 to buy and will have an annual
operating cost of $6000 over its 4-year service life. Method C will cost $130,000 initially
 with an annual operating cost of $4000 over its 8-year life. Methods A and B will have no
salvage value, but method C will have some equipment worth an estimated $12,000. Which
method should be selected? Use present worth analysis at an interest rate of 10% per year.
30. Midwest Power and Light operates 14 coal-fired power plants in several states around the
United States. The company recently settled a lawsuit by agreeing to pay $60 million in
mitigation costs related to acid rain. The settlement included $21 million to reduce
emissions from barges and trucks in the Ohio River Valley, $24 million for projects to
conserve energy and produce alternative energy, $3 million for Chesapeake Bay, $2 million
for Shenandoah National Park, and $10 million to acquire ecologically sensitive lands in
Appalachia. The question of how to distribute the money over time has been posed. Plan
A involves spending $5 million now and the remaining $55 million equally over a 10-year
period (that is, $5.5 million in each of years 1 through 10). Plan B requires expenditures of
$5 million now, $25 million 2 years from now, and $30 million 7 years from now.
Determine which plan is more economical on the basis of a present worth analysis over a
10-year period at an interest rate of 10% per year.
31. A wealthy businessman wants to start a permanent fund for supporting research directed
toward sustainability. The donor plans to give equal amounts of money for each of the next
5 years, plus one now (i.e., six donations) so that $100,000 per year can be withdrawn each
year forever, beginning in year 6. If the fund earns interest at a rate of 8% per year, how
much money must be donated each time?
32. Bob, a philanthropist, is not sure what rate of return his gifts may realize once donated to
his favorite charity. Determine the capitalized cost of $10,000 every 5 years forever,
starting 5 years from now at an interest rate of (a) 3% and (b) 8% per year. (c) Explain the
significant difference between the two capitalized costs.
33. Find the capitalized cost of a present cost of $300,000, annual costs of $35,000, and
periodic costs every 5 years of $75,000. Use an interest rate of 12% per year.
34. Because you are thankful for what you learned in engineering economy, you plan to start
a permanent scholarship fund in the name of the professor who taught the course. You plan
to deposit money now with the stipulation that the scholarships be awarded beginning 12
years from now (which happens to be the exact time that your daughter plans to begin
college). The interest that is accumulated between now and year 12 is to be added to the
principal of the endowment. After that, the interest that is earned each year will be awarded
as scholarship money. If you want the amount of the scholarships to be $40,000 per year,
how much must you donate now if the fund earns interest at a rate of 8% per year?