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Engineering Economics
Assignment No.2

Q. No. 1: The manager of a canned food processing plant must decide between two
different labeling machines. Machine A will have a first cost of $42,000, an annual
operating cost of $28,000, and a service life of 4 years. Machine B will cost $51,000
to buy and will have an annual operating cost of $17,000 during its 4-year life. At an
interest rate of 10% per year, which should be selected on the basis of a present worth
analysis?

Q. No. 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?
Material X Material Y
First cost, $ 15000 35000
Maintenance cost, $ per year 9000 7000
Salvage value 2000 20000
Life, years 5 5

Q. No. 3: 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 a 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?
Q. No. 4: Machines that have the following costs are under consideration for a
robotized welding process. Using an interest rate of 10% per year, determine which
alternative should be selected on the basis of a present worth analysis.
Machine X Machine Y
First cost, $ 250,000 430,000
Annual operating cost 60,000 40,000
Salvage value 70,000 95,000
Life, years 3 6

Q. No. 5: A project involves an initial outlay of Rs. 30,00,000 and with the following
transactions for the next five years. The salvage value at the end of the life of the
project after five years is Rs. 2,00,000. Draw a cash flow diagram of the project and
find its present worth by assuming i = 15%, compounded annually.
 End of Maintenance and Revenue
year operating cost
1 2,00,000 9,00,000
2 2,50,000 10,00,000
3 3,00,000 12,00,000
4 3,00,000 13,00,000
5 4,00,000 12,00,000

Q. No. 6: Find the present worth of the following cash flow series. Assume i = 15%,
compounded annually.

End of year 0 1 2 3 4 5
Cash Flow –10,000 30,000 30,000 30,000 30,000 30,000

Q. No. 7: The cost of erecting an oil well is Rs. 1,50,00,000. The annual equivalent
yield from the oil well is Rs. 30,00,000. The salvage value after its useful life of 10
years is Rs. 2,00,000. Assuming an interest rate of 18%, compounded annually, find
out whether the erection of the oil well is financially feasible, based on the present
worth method.

Q. No. 8: The details of the feasibility report of a project are as shown below. Check
the feasibility of the project based on present worth method, using i = 20%.
Initial outlay = Rs. 50,00,000
Life of the project = 20 years.
Annual equivalent revenue = Rs. 15,00,000
Modernizing cost at the end of the 10th year = Rs. 20,00,000
Salvage value at the end of project life = Rs. 5,00,000.

Q. No. 9: A company has two alternatives for satisfying its daily travel requirements
of its employees for the next five years:
Alternative 1: Renting a vehicle at a cost of Rs. 10,00,000 per year.
Alternative 2: Buying a vehicle for Rs. 5,00,000 with an operating and maintenance
cost of Rs. 3,50,000 per year. The salvage value of the vehicle after five years is Rs.
1,00,000. Select the best alternative based on the present worth method using the
interest rate of 20%, compounded annually.

Q. No. 10: A working woman is planning for her retired life. She has 20 more years
of service. She would like to have an annual equivalent amount of Rs. 3,00,000,
starting from the end of the first year of her retirement. Find the single amount that
should be deposited now so that she receives the above mentioned annual equivalent
amount at the end of every year for 20 years after her retirement. Assume i = 15%,
compounded annually.