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Engineering Economy Assignment 4

Chapter 5 Present Worth Analysis
Due Date:
5.8 Lennon Hearth Products manufactures glass-door fireplace screens that have two types
of mounting brackets for the frame. An L-shaped bracket is used for relatively small
fireplace openings, and a U-shaped bracket is used for all others. The company includes
both types of brackets on the box with the product, and the purchaser discards the one
not needed. The cost of these two brackets with screws and other parts is $3.50. If the
frame of the fireplace screen is redesigned, a single universal bracket can be used that
will cost $1.20 to make. However, retooling will cost $6000. In addition, inventory write-
downs will amount to another $8000. If the company sells 1200 fireplace units per year,
should the company keep the old brackets or go with the new ones, assuming the
company uses an interest rate of 15% per year and it wants to recover its investment in
5 years? Use the present worth method.
(PWold = $-14,079, PWnew = $-18,827; Keep old brackets)
5.11 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 the present worth method of evaluation.
(PWsingle = $-16,149, PWsite = $-15,000; Buy the site license)
5.16 Three different plans were presented to the GAO by a high-technology facilities manager
for operating a small weapons production facility. Plan A would involve renewable 1-year
contracts with payments of $1 million at the beginning of each year. Plan B would be a
2-year contract, and it would require four payments of $600,000 each, with the first one
to be made now and the other three at 6-month intervals. Plan C would be a 3-year
contract, and it would entail a payment of $1.5 million now and another payment of $0.5
million 2 years from now. Assuming that the GAO could renew any of the plans under
the same conditions if it wants to do so, which plan is better on the basis of a present
worth analysis at an interest rate of 6% per year, compounded semiannually? (PWA =
$-5,202,100, PWB = $-6,151,560, PWC = $-3,572,550; Select plan C)

5.19 A small strip-mining coal company is trying to decide whether it should purchase or lease a
new chamshell. If purchased, the shell will cost $150,000 and is expected to have a
$65,000 salvage value in 6 years. Alternatively, the company can lease a clamshell for
$30,000 per year, but the lease payment will have to be made at the beginning of each
year. If the clamshell is purchased, it will be leased to other strip-mining companies
whenever possible, and activity that is expected to yield revenues of $12,000 per year. If
the company’s minimum attractive rate of return is 15% per year, should the clamshell be
purchased or leased on the basis of a future worth analysis? (FWpurchase = $-176,921,
FWlease =$-302,003; Purchase the clamshell)
5.33 Compare the alternatives shown below on the basis of their capitalized costs, using an
interest rate 12% per year, compounded quarterly. (CCE = $237,700, CCF= $-347,010, CCG
= $433,333; Select alternative G.)
Alternative E Alternative F Alternative G
First cost, $ -200,000 -300,000 -900,000
Quarterly income, $/quarter 30,000 10,000 40,000
Salvage value, $ 50,000 70,000 100,000
Life, years 2 4 ∞

5.41 A window frame manufacturer is searching for ways to improve revenue from its triple-
insulated sliding windows, sold primarily in the far northern areas of the United States.
Alternative A is an increase in TV and radio marketing. A total of $300,000 spent now is
expected to increase revenue by $60,000 per year. Alternative B requires the same
investment for enhancements to the in-plant manufacturing process that will improve the
temperature retention properties of the seals around each glass pane. New revenues start
slowly for this alternative at an estimated $10,000 the first year, with growth of $15,000 per
year as the improved product gains reputation among builders. The MARR is 8% per year,
and the maximum evaluation period is 10 years for either alternative. Use both payback
analysis and present worth analysis at 8% (for 10 years) to select the more economical
alternative. State the reason(s) for any difference in the alternative chosen between the two
analyses. (Payback: Alt A is between 6 and 7 years Alt B is between 7 and 8 years; Select
A , PW for 10 yrs: Alt A: PW = $102,606 Alt B: PW = $156,753; Select B)