Engineering Economy

ASSIGNMENT 3: Evaluating a single project

• EE textbook, 15edition:
• Problems: 5.3, 5.11, 5.16, 5.18, 5.19, 5.22, 5.23, 5.34, 5.38, 5.47, 5.51, 5.53 & 5.60

5.3 A= saving $12.5 million each year for 3 years. Bonus 0.1% of PW. MARR=20%
Bonus = 0.001*PW=0.001*A(P/A, 20%, 3) = 0.001*12,5*106*2.1065 = $26,331.

5.11 Bond value C=Z= $10000, 30 years, r=1.5%/3month, Annual Percentage Rate =6%,
i= 7/4 =1.75%/3months. N= 30*12/3 = 120 payment periods.
VN = PW= C(P/F,I,N)+rZ(P/A,I,N) = 10,000 (P/F, 1.75%, 120) + 150 (P/A, 1.75%, 120) =
10,000 (0.1247) + 150 (50.0171) = $8,750

The worth of Jim’s bonds had dropped by $1,250 because of the increase in the marketplace
interest rates for long-term debt. With bonds, as the interest rate in the economy goes up,
the value of the bond decreases and vice versa.

5.16 CW? A1=1500/year forever, F5=10000/each 4 years forever, I =10%

(a) CW(10%) = A1/i + [F5 (A/F,i,4)]/i](P/F,I,1) =
= 1500/0.1+ [10000*0.2155*0.9091]/0.1 =
= $34,591

(b) Find the value for N define “forever”, so the

(A/P,10%,N) = 0.10. From Table C-13, N = 80
years.

5.18 i=5%
At July 2004, we have:
F2004 =10,000,000(F/P,i,4) -3,000,000
=10000000*1.2155 -3000000 = $9,155,000

F2004 = P2004 = 250000(P/A,i,) +X(A/F, i,5)(P/A, i, )

9,155,000 = 250,000(P/A,5%,∞) +
X(A/F,5%,5)(P/A,5%,∞) = 250,000 (20) +
X*0.181*20. so, X = $1,147,790 every 5 years .

[Type text] Page 1

 Engineering Economy

5.19 MARR=6%, FW10=?

$2600
Let A = $2,900,
G = −$100 (delayed 1 year),
F6 = −$2,000

PW0 = 2,900 (P/A,6%,10) –

100(P/G,6%,9)(P/F,6%,1) − 2,000(P/F,6%,6)
= 2,900 (7.3601) − 100 (24.5768) (0.9434) −
2,000 (0.7050) = $17,615.71.

FW10 = PW0(F/P, 6%, 10) = 17,615.71(1.7908) =

$31,546.21

5.22 Geometric CF A1 = $1,020, N=20 years, f = 2%, i = 10%

PW = 1,020[1 – (P/F, 10%, 20)(F/P, 2%, 20)]/(0.10 – 0.02) = $9,935

FW = $9,935(F/P, 10%, 20) = $66,838

5.23 I =P= $10,000, S =$2,000 end of 4 years, I =15%, CR =A =$3,102.12

Opportunity Cost = Investment at BOY* 15% = BOY (0.15)
Capital Recovery Amount = Opportunity Cost + Loss in Value During Year

P0 = 4,500 (P/F,15%,1) + 3,050 (P/F,15%,2) + 2,750 (P/F,15%,3) +1,450 (P/F, 15%, 4) =

4,500 (0.8696) + 3,050 (0.7561) + 2,750 (0.6575) + 1,450 (0.5718) = $ 8,856.54

A = $8,856.54 (A/P,15%,4) = $8,856.49 (0.3503) = $3,102.45

This same value can be obtained and confirmed with Equation:
CR(i%) = I (A/P, i%, N) − S (A/F, i%, N) = 10,000 (A/P,15%,4) −2,000 (A/F,15%,4) =
10,000 (0.3503) − 2,000 (0.2003) = $3,102.12

Note: The Annual Worth from the table and the CR amount from Equation (5-5) are the
same.

[Type text] Page 2

 Engineering Economy

5.34 I =$10,000,000, A = $2,800,000 each year for 4 years, S= $5,000,000, IRR?

(a) AW = 0 = −10,000,000(A/P, i′, 4) + 2,800,000 + 5,000,000(A/F, i′, 4)
Using interpolation, find i′ = 18.5%
(b) MARR =15%, IRR (18.5%) > MARR (15%). The plant should be built.

5.38.
3,000 = 255(P/A, i′, 15)
Using hit and trial, find i ′ = 3.2% per month
r = APR= 12 × 3.2% = 38.4% compounded
monthly
ieff = (1+0.384/12)12 – 1 = 0.459 or 45.9% per
year

5.47
Draw CF
IRR method:
PW(i'%) = 0 = 500,000(P/F,i'%,1) + 300,000(P/F,i'%,2) + [100,000 + 100,000(P/A,i'%,7) +
50,000(P/G,i'%,7)](P/F,i'%,3) − 2,500,000 (P/F,i'%,4).
Using hit and trial we find that

Using the interpolation,tThe multiple IRRs are: 4.09% and 31.8% per year.

ERR method, ↋ =8%

2,400,000(P/F,8%,4)(F/P,i'%,10) = 500,000(F/P,8%,9)+300,000(F/P,8%,8)
+100,000(F/P,8%,7) + 150,000(P/A,8%,6)(F/P,8%,6) + 50,000(P/G,8%,6)(F/P,8%,6)
After solving, the external rate of return is 7.6% per year.

5.51
Draw CF
a) IRR: PW =0=−4,900 + 1,875(P/A, i′, 5); so i′ = 26.4%
b) θ = 4,900 /1,875 = 3 years (to the integer year)
c) The IRR will signal an acceptable (profitable) project if the MARR is less than 26.4%
and the value of θ may indicate a poor project in terms of liquidity.
d) 1/ θ = 33.3%. This is the payback rate of return, and it over-estimates the actual
IRR.

[Type text] Page 3

 Engineering Economy

5.53 Using IRR, MARR =15%, payback period is 3 years

Draw CF
PW(i'%) = 0 = −100,000 + 20,000 (P/A,i'%,5) + 10,000 (P/G,i'%,5) + 10,000 (P/F,i'%,5)
I=20%, PW(20%) = $12,891 > 0, so i'% > 20%
I= 25%, PW(25%) = −$897 < 0, so i'% < 25%
By linear interpolation, i'% = IRR = 24.7% > MARR =15%

Although this project is

profitable (IRR > MARR), it
is not acceptable since θ = 4
years is greater than the
maximum allowable simple
payback period of 3 years.

5.60 (i) EOY0, (ii) EOY4 , (iii) EOY4

a. IRR
(i) PW0 =0 = -1000 + 300(P/A, i, 5)
i =15%, PW(15%) = -1000+300*3.3522 =5.66>0
i= 16%, PW(16%) = -1000+ 300(((1.16)5-1)/(0.16(1.16)5) =-17.8<0
Using interpolation, IRR = 15.3%.
(ii) PW4 = -1000 +300(P/A,i,5)

[Type text] Page 4

 Engineering Economy

(iii) PW4 = -5000 +1500(P/A,i,5)

Same procedure in (i), we have IRR = 15.3%
b. PW with MARR =10%
(i) PW0(10%) = -1000+300(P/A, 10, 5) = -1000+300*3.7908 =$137.24
(ii) PW0(10%) = -1000(P/F,10,4) + 300(P/A, 10, 5)(P/F,10, 4)=
= -1000*0.683+300*3.7908*0.683 = -683+776.2 =$93.75
(ii) PW4(10%) = -1000+300(P/A, 10, 5) = -1000 +300*3.7908 =$137.24
(iii) PW4(10%) = -5000+1500(P/A,10,5) = -5000+1500*3.7908= $686.2
Select (iii) at the year 4 to maximize PW(10%).
However, the PW(IRR=15.3%) would be zero for all three situations.

[Type text] Page 5