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Defense University, Engineering College

Department Of Production Engineering


Engineering Economics and Cost Estimation (PE 5012)
Exercises on chapter 1and 2
1. How do you determine A/F factor if you had only a table of

a) F/P factor b) P/F factor c) F/A factor d) A/P factor

2. What will be the amount of accumulated by each of the following present investment?

a) Birr 10,000 in 10 years at 12% compounded annually.


b) Birr 20,000 in 12 years at 5% compounded semi-annually

3. What sum of money now is equivalent to 12500 birr four years hence, if interest is 12 %
compounded annually?

4. a) You deposit $3,000 in a savings account that earns 9% simple interest per year. How many
years will it take to double your balance? If instead you deposit $3,000 in another savings
account that earns 8% interest compounded yearly, how many years will it take to double your
balance?

(b) Assume that $90 invested a year ago will return $110 a year from now. What is the annual
interest rate in this situation?

5. Maria is buying an automobile that costs $15,000. She will pay $5000 immediately and the
remaining $10,000 in four annual end-of-year principal payments of $2500 each. In addition to
the $2500, she must pay 12% interest on the unpaid balance of the loan each year. Draw a cash
flow diagram to represent this situation.

6. Ato Zenebe wants to help provide a college education for his young daughter. He can afford
to invest birr 600/yr for the next 4 years, beginning on the girl's fourth birth day. He wishes to
give his daughter 4000 birr on her 18th, 19th, 20th, and 21st birthdays, for a total of 16,000birr.
Assuming 5% interest, what uniform annual investment will he have to make on the girl's 8th
through 17th birthdays? Wishes to give his daughter $4000 on her 18th, 19th, 20th, and 21st
birthdays, for a total of $16,000. Assuming 5% interest, what uniform annual investment will he
have to make on the girl's 8th through 17th birthdays?
7. a) A Visa credit card issued through commercial bank of Ethiopia carries an interest rate of
1% per month on the unpaid balance. Calculate the effective rate per semiannual period.
b) If the card’s interest rate is stated as 3.5% per quarter, find the effective
Semiannual and annual rates.

8. Derive an expression for uniform series compound amount factor.

9.The annual demand for an item that can be either purchased or produced is 3,600units. Cost
associated with each alternative are as follows:

Purchase Produce
Item cost $3.90 $3.75
Purchase cost per purchase 15.00 -
Set up cost per set up - 175.00
Holding cost per item per 1.25 1.25
year
Production rate per year - 15,000

Should the item be manufactured or purchased? What is the economic lot size for the least- cost
alternative?

10. Akaki basic metals Industry is planning to expand its production operation. It has identified
three different technologies for meeting the goal. The initial outlay and annual revenues with
respect to each of the technologies are summarized below. Suggest the best technology which is
to be implemented based on the present worth method of comparison assuming 20% interest rate,
compounded annually.
Initial outlay Annual revenue Life
(Birr) (Birr) (Years)

Technology 1 1,200,000 400,000 10


Technology 3 1,800,000 500,000 10
Technology 2 2,000,000 600,000 10

11. Debrezeit city needs an additional supply of water from Hora Lake. The city engineer has
selected two plans for comparison: a gravity plan (divert water at a point 6 miles up hora lake
and carry it through a pipeline by gravity to the city) and a pumping plan (divert water at a point
closer to the city and pump it to the city). The pumping plant would be built in two stages, with
half-capacity installed initially and the other half installed 10 years later. An analysis will assume
a 40-year life, 10% interest, and no salvage value. Costs are as follows:
Gravity Pumping

Initial investment $2,800,000 $1,400,000

Additional investment in None 200,000

10th year

Operation and maintenance 10,000/yr 25,000/yr

Power cost

Average first: 10 years None 50,000/yr

Average next : 30 years None 100,000/yr

Use an annual cash flow analysis to determine the more economical plan.

12. Homicho Ammunition Industry has the capacity to produce 190,000 units of 60mm mortar
bomb per year. At present, it is operating at 75% of capacity.

The factories annual income is 310, 000,000 birr. Annual fixed costs are 19,240,000 birr, and the
variable costs are equal to 370.84 birr per unit of product.

a. What is the factories annual profit or loss?

b. At what volume/quantity of sales does the firm breakeven?

13. An aircraft manufacturer uses 1,000,000 special rivets per year at a uniform rate. The rivets –
are made on a single –spindle automatic screw machine at the rate of 3,000per hour. The
manufacturing cost is 0.0052 birr per rivet and the storage cost is estimated to be 0.0008birr per
rivet per year. The set up cost is 40birr per set up .Calculate the economic production quantity
and the allowable variation in this quantity for a maximum deviation from the minimum cost of
5%.Assume the machine operates 1,700hours per year.

14. A state government is planning a hydroelectric project for a river basin. In addition to the
production of electric power, this project will provide flood control, irrigation, and recreation
benefits. The estimated benefits and the cost that are expected to be derived from this project as
follows:

Initial cost=80,000,000birr

Annual sale =6,000,000birr


Annual flood control savings =3,000,000 birr

Annual irrigation benefits =5,000,000 birr

Annual recreation benefits=2,000,000 birr

Annual operating and maintenance cost=3,000,000 birr

Life of the project=50 years

Check whether the state government should implement the project. (assume i=12%)

15. The FDRE government is planning a hydroelectric project for a river basin .in addition to the
production of electric power; this project will provide flood control, irrigation, and recreation
benefits. The estimated benefits and costs that are expected to be derived from the three
alternatives under consideration are as follows.

The interest rate is 9 % and the life of each project is estimated to be 50 years, by comparing the
BC ratios, determine which project should be selected.

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