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Review materials for engineering economics

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Aditya Nugroho

1. The document provides 14 engineering economics review problems covering topics like loan calculations, alternative selection, cash flow analysis, rate of return calculations, and replacement analysis. 2. Problems 1-10 require calculations to determine the maximum loan amount, best investment alternative, rate of return, or other financial metrics. 3. Problems 11-14 involve alternative selection using techniques like incremental rate of return analysis, benefit-cost ratio, and opportunity cost approach to replacement analysis.

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Review Materials for Engineering Economics Submit your work by December 16, 2019: 5pm at the totte bag in front of lecturer room (all currency are in dollar) 1. A student has a job that gives her income of $250 per month. She decided that she will use the money to buy a car. When she is looking a car, she plans to buy a car with installment $250 per month for 36 months at 18% annual interest. What is the maximum car purchase price that she can afford with her loan? 2. When the student in no. 1 finds a car she likes, and the dealer offers to arrange the financing. His terms are 12% interest for 60 months and no down payment. The cars sticker price is $12,000. Can she afford to purchase this car with her $250 monthly income? 3. A firm is considering three mutually exclusive alternatives as part of a production improvement program. The alternatives are: A B C Installed cost $10,000 $15,000 $20,000 Uniform annual benefit $1,625 $1,530 $1,890 Useful life, in years 10 20 20 The salvage value at th end of the useful life of each alternative is zero. At th end of 10 years, Alternative A could be replaced with another A with identical cost and benefits. The maximum attrative rate of return is 6%. Which alternatuve should be selected? 4. The management of an electronic manufacturing firm believes it is desirable to automate its production facility. The automated equipment would have a 10-year life with no salvage value at the end of 10 years. The plant engineering department has surveyed the plant and suggested there are eight mutually exclusive alternatives available. Plan Initial cost (thousands $) Net annual benefit (thousands $) 1 -265 +51 2 -220 +39 3 -180 +26 4 -100 +15 5 -305 +57 6 -130 +23 7 -245 +47 8 -165 +33 If the firm expects a 10% rate of return, which plan, if any, whould it adopt? 5. A suburban taxi company instead is considering buying taxis with diesel engines instead gasoline engines. The cars average 50,000 km a year, with a useful life of 3 years for the taxi with the gas engine and 4 years for the diesel taxi. Other comparative information is as follows: Diesel Gasoline Vehicle cost $13,000 $12,000 Fuel cost per liter 48 cents 51 cents Mileage, in km/liter 35 28 Annual repairs $300 $200 Annual insurance premium $500 $500 End of useful life resale value $2,000 $3,000
Use an annual cash flow analysis to determine the more economical choice if interest is 6%. (100 cents equal to $1) 6. Consider the following two mutually exclusive alternatives: A B Cost $100 $150 Uniform annual benefit $16 $24 Useful life, in years 20 Alternative B may be replaced with an identical item every 20 years at the same $150 costs, and will have the same $24 uniform annual benefit. Using a 10% interest rate, and an annual cash flow analysis, determine which alternative should be selected? 7. Some equipment will be installed in a werehouse that a firm has leased for 7 years. There are two alternatives: A B Cost $100 $150 Uniform annual benefit $55 $61 Useful life, in years 3 4 At any time after the equipment is intalled, it has no salvage value. Assume that Alternative A and B will be replaced at the end of their useful lives by identical equipment with the same costs and benefits. For a 7-year analysis period and a 10% interest rate, use an anual cash flow analysis to determine which alternative should be selected. 8. Mr. Crap is buying a $12,375 automobile with a $3,000 down payment, followed by 36 monthly payments of $325 each. The down payment is paid immediately, and the monthly payments are due at the end of each month. What nominal annual interest rate is Mr. Crap paying? 9. A new machine can be purchased today for $300,000. The annual revenue from the machine is calculated to be $67,000, and the equipment will last 10 years. Expect the maintenance and operating cost to be $3,000 a year and to increase $600 per year. The salvage value of the machine will be $20,000. What is the rate of return for this machine? 10. Two investment opportunities are as follows: A B Cost $100 $150 Uniform annual benefit 22.25 25 End-of useful life salvage value 0 20 Useful life, in years 10 15 At the end of 10 years, Alt. B is not replaced. This, the comparison is 15 years of A versus 10 years of B. If the MARR is 10%, which alternative should be selected? 11. Consider four mutually exclusive alternatives, each having an 8-year useful life: A B C D Cost $1000 $800 $600 $500 Uniform annual benefit 122 120 97 122 Salvage value 750 500 500 0 If the minimum attractive rate of return is 8%, which alternative should be selected using incremental IRR? 12. Using benefir-cost ratio analysis, determine which one of the three mutually exclusive alternatives should be selected. A B C Cost $560 $340 $120 Uniform annual benefit 140 100 40
Salvage value 40 0 0 Each alternative has a 6-year useful life. Assume a 10% MARR. 13. The plant manager has just purchased a piece of unusual machinery for $10,000. Its resale value at the end of 1st year is estimated to be $3,000, because the device is sought by antique collectors, resale is rising at the rate of $500 per year. The maintenance cost is expected to be $300 per year for each of the first 3 year, and then it is expected to double each year after that. Thus the fourth-year maintenance will be $600; the fifth-year maintenance, $1,200, and so on. Based on a 15% MARR, what life of this machinery has the lowest EUAC? 14. A manufacturer is considering the replacement of one of its boring machines with a newer and more efficient one. The relevant details for both defender and challenger are as follows: Defender: the current book value of the old boring machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000. Challenger: the new boring machine can be purchased at a price of $150,000 and has an estimated useful life of seven years. It has an estimated salvage value of $50,000 and is expected to realize economic savings on electric power usage, labor and repair cost and to reduce the amount of reworks. In total, annual savings of $80,000 will be realized if the new machine is installed. The firm uses an MARR of 12%. Using the opprtunity-cost approach, address the following questions: a. What is the cash flow required for the new machine? b. What are the cash flows for the defender in the years zero to five? c. Should the firm purchase the new machine?

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Review materials for engineering economics

  • 1. Review Materials for Engineering Economics Submit your work by December 16, 2019: 5pm at the totte bag in front of lecturer room (all currency are in dollar) 1. A student has a job that gives her income of $250 per month. She decided that she will use the money to buy a car. When she is looking a car, she plans to buy a car with installment $250 per month for 36 months at 18% annual interest. What is the maximum car purchase price that she can afford with her loan? 2. When the student in no. 1 finds a car she likes, and the dealer offers to arrange the financing. His terms are 12% interest for 60 months and no down payment. The cars sticker price is $12,000. Can she afford to purchase this car with her $250 monthly income? 3. A firm is considering three mutually exclusive alternatives as part of a production improvement program. The alternatives are: A B C Installed cost $10,000 $15,000 $20,000 Uniform annual benefit $1,625 $1,530 $1,890 Useful life, in years 10 20 20 The salvage value at th end of the useful life of each alternative is zero. At th end of 10 years, Alternative A could be replaced with another A with identical cost and benefits. The maximum attrative rate of return is 6%. Which alternatuve should be selected? 4. The management of an electronic manufacturing firm believes it is desirable to automate its production facility. The automated equipment would have a 10-year life with no salvage value at the end of 10 years. The plant engineering department has surveyed the plant and suggested there are eight mutually exclusive alternatives available. Plan Initial cost (thousands $) Net annual benefit (thousands $) 1 -265 +51 2 -220 +39 3 -180 +26 4 -100 +15 5 -305 +57 6 -130 +23 7 -245 +47 8 -165 +33 If the firm expects a 10% rate of return, which plan, if any, whould it adopt? 5. A suburban taxi company instead is considering buying taxis with diesel engines instead gasoline engines. The cars average 50,000 km a year, with a useful life of 3 years for the taxi with the gas engine and 4 years for the diesel taxi. Other comparative information is as follows: Diesel Gasoline Vehicle cost $13,000 $12,000 Fuel cost per liter 48 cents 51 cents Mileage, in km/liter 35 28 Annual repairs $300 $200 Annual insurance premium $500 $500 End of useful life resale value $2,000 $3,000
  • 2. Use an annual cash flow analysis to determine the more economical choice if interest is 6%. (100 cents equal to $1) 6. Consider the following two mutually exclusive alternatives: A B Cost $100 $150 Uniform annual benefit $16 $24 Useful life, in years 20 Alternative B may be replaced with an identical item every 20 years at the same $150 costs, and will have the same $24 uniform annual benefit. Using a 10% interest rate, and an annual cash flow analysis, determine which alternative should be selected? 7. Some equipment will be installed in a werehouse that a firm has leased for 7 years. There are two alternatives: A B Cost $100 $150 Uniform annual benefit $55 $61 Useful life, in years 3 4 At any time after the equipment is intalled, it has no salvage value. Assume that Alternative A and B will be replaced at the end of their useful lives by identical equipment with the same costs and benefits. For a 7-year analysis period and a 10% interest rate, use an anual cash flow analysis to determine which alternative should be selected. 8. Mr. Crap is buying a $12,375 automobile with a $3,000 down payment, followed by 36 monthly payments of $325 each. The down payment is paid immediately, and the monthly payments are due at the end of each month. What nominal annual interest rate is Mr. Crap paying? 9. A new machine can be purchased today for $300,000. The annual revenue from the machine is calculated to be $67,000, and the equipment will last 10 years. Expect the maintenance and operating cost to be $3,000 a year and to increase $600 per year. The salvage value of the machine will be $20,000. What is the rate of return for this machine? 10. Two investment opportunities are as follows: A B Cost $100 $150 Uniform annual benefit 22.25 25 End-of useful life salvage value 0 20 Useful life, in years 10 15 At the end of 10 years, Alt. B is not replaced. This, the comparison is 15 years of A versus 10 years of B. If the MARR is 10%, which alternative should be selected? 11. Consider four mutually exclusive alternatives, each having an 8-year useful life: A B C D Cost $1000 $800 $600 $500 Uniform annual benefit 122 120 97 122 Salvage value 750 500 500 0 If the minimum attractive rate of return is 8%, which alternative should be selected using incremental IRR? 12. Using benefir-cost ratio analysis, determine which one of the three mutually exclusive alternatives should be selected. A B C Cost $560 $340 $120 Uniform annual benefit 140 100 40
  • 3. Salvage value 40 0 0 Each alternative has a 6-year useful life. Assume a 10% MARR. 13. The plant manager has just purchased a piece of unusual machinery for $10,000. Its resale value at the end of 1st year is estimated to be $3,000, because the device is sought by antique collectors, resale is rising at the rate of $500 per year. The maintenance cost is expected to be $300 per year for each of the first 3 year, and then it is expected to double each year after that. Thus the fourth-year maintenance will be $600; the fifth-year maintenance, $1,200, and so on. Based on a 15% MARR, what life of this machinery has the lowest EUAC? 14. A manufacturer is considering the replacement of one of its boring machines with a newer and more efficient one. The relevant details for both defender and challenger are as follows: Defender: the current book value of the old boring machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000. Challenger: the new boring machine can be purchased at a price of $150,000 and has an estimated useful life of seven years. It has an estimated salvage value of $50,000 and is expected to realize economic savings on electric power usage, labor and repair cost and to reduce the amount of reworks. In total, annual savings of $80,000 will be realized if the new machine is installed. The firm uses an MARR of 12%. Using the opprtunity-cost approach, address the following questions: a. What is the cash flow required for the new machine? b. What are the cash flows for the defender in the years zero to five? c. Should the firm purchase the new machine?