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5.1)
n Inflow Outflow Net Cash Flow
0 $0 $1,500,000 -$1,500,000
1 $650,000 $403,000 $247,000
2 $650,000 $403,000 $247,000
3 $650,000 $403,000 $247,000
8 $650,000 $403,000 $247,000
9 $650,000 $403,000 $247,000
10 $1,650,000 $403,000 $1,247,000
Annual cash inflow = $17 34, 000 $15 30, 000 $25 3,500 $215,500
5.3) Project cash flows over the project life
Cost of
n Cmax Demand Revenue Expense Bldg. NCF
0 - - 1,527,776 -$1,527,776
1 6,000,000 3,000,000 16,256,976 6,462,108 - 9,794,868
2 6,000,000 3,300,000 17,882,673 7,096,319 - 10,786,354
3 6,000,000 3,630,000 19,670,941 7,793,951 - 11,876,990
4 6,000,000 3,993,000 21,638,035 8,561,346 - 13,076,689
Fundamentals of Engineering Economics, 3rd ed. 2012
: The cost of building is given as if Cmax is being built from scratch. No credit is
given for the capacity already in place. This assumption could be rather unrealistic. In
that case, what we need to do is to identify the incremental cost of adding the additional
capacity above the existing capacity.
5.4)
The payback period lies between 1st and second years i.e., 1.67 years (Payback period is
the time when cumulative cash flows become zero). Ans.
5.5)
(a)
n Cash Flow Cost of funds (18%) Cumulative CF
0 -$22,000 $0 -$22,000
1 $4,500 -$22,000(0.18) = -$3,960 -$21,460
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Fundamentals of Engineering Economics, 3rd ed. 2012
(b)
Interest rate is 0%
Cumulative
n Net Cash Flow CF
0 -$22,000 -$22,000
1 $4,500 -$17,500
2 $12,670 -$4,830
3 $14,780 $9,950
4 $13,650 $23,600
5 $11,440 $35,040
6 $7,800 $42,840
The discounted payback period is between year 2 and 3.
5.6)
(a) Payback period: 1 years
Cumulative
n Net Cash Flow CF
0 -$65,000 -$65,000
1 $162,500 $97,500
2 $162,500 $260,000
3 $162,500 $422,500
4 $162,500 $585,000
5 $162,500 $747,500
6 $162,500 $910,000
7 $162,500 $1,072,500
8 $162,500 $1,235,000
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.7)
(a)It will take 3 years to recover the total investment.
Cost of funds
n Cash Flow 17% Cumulative CF
0 -$35,500 $0 -$35,500
1 $12,000 -$6,035 -$29,535
2 $12,000 -$5,021 -$22,556
3 $12,000 -$3,835 -$14,391
4 $12,000 -$2,446 -$4,837
5 $17,000 -$822 $11,341
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.8)
Cost of
funds
n Cash Flow (10%) Cumulative CF
0 -$23,000 $0 -$23,000
1 -$18,000 -$2,300 -$43,300
2 $13,000 -$4,330 -$34,630
3 $13,000 -$3,463 -$25,093
4 $13,000 -$2,509 -$14,602
5 $13,000 -$1,460 -$3,062
6 $13,000 -$306 $9,632
7 $13,000 $963 $23,595
8 $13,000 $2,360 $38,955
9 $13,000 $3,896 $55,851
10 $13,000 $5,585 $74,436
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Fundamentals of Engineering Economics, 3rd ed. 2012
A B C D
n CF Cum.CF CF Cum.CF CF Cum.CF CF Cum.CF
0 -$1,500 -$1,500 -$6,000 -$6,000 -$10,000 -$10,000 -$4,500 -$4,500
1 200 -1,300 2,000 -4,000 2,000 -8,000 5,000 500
2 300 -1,000 1,500 -2,500 2,000 -6,000 3,000 3,500
3 400 -600 1,500 -1,000 2,000 -4,000 -4,000 -500
4 500 -100 500 -500 5,000 1,000 1,000 500
5 300 200 500 0 5,000 6,000 1,000 1,500
6 300 500 1,500 1,500 2,000 3,500
7 300 800 3,000 6,500
8 300 1,100
(b) Project D does not have a unique payback period, as there are two payback
periodsone at year 2 and the other at period 4. However, if the project is
undertaken, we would say 4 years, because that is when the project truly is
financially in the clear.
A B C D
n CF Cum.CF CF Cum.CF CF Cum.CF CF Cum.CF
0 -$1,500 -$1,500 -$6,000 -$6,000 -$10,000 -$10,000 -$4,500 -$4,500
1 200 -1,450 2,000 -4,600 2,000 -9,000 5,000 50
2 300 -1,295 1,500 -3,560 2,000 -7,900 3,000 3,055
3 400 -1,025 1,500 -2,416 2,000 -6,690 -4,000 -640
4 500 -627 500 -2,158 5,000 -2,359 1,000 297
5 300 -390 500 -1,873 5,000 2,405 1,000 1,326
6 300 -129 1,500 -561 2,000 3,459
7 300 159 3,000 6,805
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Fundamentals of Engineering Economics, 3rd ed. 2012
8 300 474
5.10)
5.11)
n Cash Flow
0 -$18,000
1 $4,800
2 $6,350
3 $7,735
4 $7,500
5 $4,300
6 $7,000 + $1,800
5.12)
(a) There is an opportunity cost of $100,000 for land, which is tied up for this
project. This cost should be viewed as an investment required undertaking the
project. The $25,000 license fee is considered as one time up-front cost.
PW(15%) $1, 625, 000 $260, 000( P / A,15%,5) $494, 010( P / F ,15%, 6)
$539,865 0
(b) No discounted payback period exist as the initial investment is not fully
recovered at the end of the project period (or PW(15%) < 0)
5.13)
(a)
PW(10%) A $800 $3, 000( P / F ,10%,3)
$1, 453.9
PW(10%) B $1,800 $600( P / F ,10%,1)
$900( P / F ,10%, 2) $1, 700( P / F ,10%,3)
$766.49
PW(10%)C $1, 000 $1, 200( P / F ,10%,1)
$900( P / F ,10%, 2) $3,500( P / F ,10%,3)
$1282.3
PW(10%) D $6, 000 $1,900( P / A,10%, 2)
$2,800( P / F ,10%,3)
$598.91
5.14)
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Fundamentals of Engineering Economics, 3rd ed. 2012
Cumulative
n Inflow Outflow Net Cash Flow CF
0 $0 $1,500,000 -$1,500,000 -$1,500,000
1 $227,000 $157,000 $70,000 -$1,430,000
2 $227,000 $157,000 $70,000 -$1,360,000
5.15)
5.16)
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.17)
Cumulative
n Inflow Outflow Net Cash Flow CF
0 $0 $250,000 -$250,000 -$250,000
1 $160,000 $50,000 $110,000 -$140,000
2 $160,000 $50,000 $110,000 -$30,000
3 $160,000 $50,000 $110,000 $80,000
4 $160,000 $50,000 $110,000 $190,000
5 $160,000 $50,000 $110,000 $300,000
6 $160,000 $50,000 $110,000 $410,000
7 $160,000 $50,000 $110,000 $520,000
8 $160,000 $50,000 $110,000 $630,000
5.18)
Given: Initial cost $3, 000, 000 , annual savings $1, 200, 000 ,
Annual O&M costs $250, 000 , annual income taxes $150, 000 ,
Salvage value $200, 000 , useful life 10 years, MARR 18%
5.19)
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Fundamentals of Engineering Economics, 3rd ed. 2012
A( P / A, 6%, 40) $92, 000, 000 $150, 000( P / A1,5%, 6%, 40) $500, 000( P / A, 6%, 40)
$104, 256,511
A $6,929, 047.24
The ticket price is $6,929, 047.24 /100, 000 $69.29.
5.20)
5.21)
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.22)
(a) In part (b), it is determined that I = 20%. Then, the original cash flows of
the project is as follows:
Project
n An Balance
0 -$1,000 -$1,000
1 $100 -$1,100
2 $520 -$800
3 $460 -$500
4 $600 $0
(b)
5.23)
For Project B:
$650(1 i )2 $416
i 25%
Statement 3 is true.
For Statement 1 to be true, I would have to equal 0%, since $200(1 + i) +
$100 equal $300. So Statement 1 is false.
Statement 2 is false, since FW of Project C is $150.
Therefore, the correct answer is (c).
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.24)
5.25)
(a) From the project balance diagram, note that PW(24%)1 0 for project 1 and
PW(23%)2 0 for project 2.
5.26)
(a) In Part (b), it is determined that i= 10%.
n An Project Balance
0 -$1,000 -$1,000
1 $200 -$900
2 $490 -$500
3 $550 $0
4 -$100 -$100
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Fundamentals of Engineering Economics, 3rd ed. 2012
5 $200 $90
(b)
PB(i)2 $900(1 i) $490 $500
i 10%
PW(10%) $90( P / F ,10%,5) $55.88
5.27)
(a)
FW(15%) A $5, 000( F / P,15%,5) $500( F / P,15%, 4)
$500
$4, 691
FW(15%) B $5, 000( F / P,15%,5) $2, 000( F / P,15%, 4)
$3,500
$4, 741.10
FW(15%)C $5, 000( F / P,15%,5) $3, 000( F / P,15%, 2)
$13, 000
$14,960.71
FW(15%) D $5, 000( F / P,15%,5) $500( F / P,15%, 4)
$1, 250
$3, 676.97
FW(15%) E $5, 000( F / P,15%,3) $1, 000( F / P,15%, 2)
$2, 000
$831.87
(b),(c),(d)
Project A
Cost of
n Cash Flow funds Project Balance
0 -$5,000.0 $0 -$5,000
1 $500.0 -$750 -$5,250
2 $900.0 -$788 -$5,138
3 $1,000.0 -$771 -$4,908
4 $2,000.0 -$736 -$3,644
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Fundamentals of Engineering Economics, 3rd ed. 2012
Project B
Cost of
n Cash Flow funds Project Balance
0 -$5,000.0 $0 -$5,000
1 $2,000.0 -$750 -$3,750
2 -$3,000.0 -$563 -$7,313
3 $5,000.0 -$1,097 -$3,409
4 $5,000.0 -$511 $1,079
5 $3,500.0 $162 $4,741
Discounted payback period for project B 4 years
Project C
Cost of
n Cash Flow funds Project Balance
0 -$5,000.0 $0 -$5,000
1 $0.0 -$750 -$5,750
2 $0.0 -$863 -$6,613
3 $3,000.0 -$992 -$4,604
4 $7,000.0 -$691 $1,705
5 $13,000.0 $256 $14,961
Discounted payback period for project C - 4years
Project D
Cost of
n Cash Flow funds Project Balance
0 -$5,000.0 $0 -$5,000
1 $500.0 -$750 -$5,250
2 $2,000.0 -$788 -$4,038
3 $3,000.0 -$606 -$1,643
4 $4,000.0 -$246 $2,110
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Fundamentals of Engineering Economics, 3rd ed. 2012
Project E
Cost of
n Cash Flow funds Project Balance
0 -$5,000.0 $0 -$5,000
1 $1,000.0 -$750 -$4,750
2 $3,000.0 -$713 -$2,463
3 $2,000.0 -$369 -$832
Discounted payback period for project E - none
5.28)
(a)
PW(10%) A $100 $50( P / A,10%,3)
$100( P / F ,10%, 4)
$400( P / A,10%, 2)( P / F ,10%, 4)
$430.20
PW(10%) B $100 $40( P / A,10%,3)
$10( P / A,10%, 2)( P / F ,10%,3)
$12.51
PW(10%)C $100 $40( P / A,10%,3)
$0.53
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.29)
(a)
PW(0%) A 0
PW(18%) B $575( P / F ,18%,5) $251.34
PW(12%)C 0
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Fundamentals of Engineering Economics, 3rd ed. 2012
FW(0%) A 0
FW(18%) B $575
FW(12%)C 0
5.30)
(a)
PW(13%) $40, 000( P / A,13%,5)
$50, 000( P / A,13%,5)( P / F ,13%,5)
($60, 000 / 0.13)( P / F ,13%,10)
$372,103.72
(b)
PW(13%) A / i
A $372,103.72(0.13)
$48,373.48
5.31)
PW(12%) $1,106
$1,106( A / P,12%, 4)
CE(12%) $3, 034
0.12
ia (1 0.06 /12)12 1
6.17%
CE(6.17%) $25, 000 / 0.0617
$405,186.39
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Fundamentals of Engineering Economics, 3rd ed. 2012
(a)
P1 $10, 000, 000
$1, 000, 000( A / F ,5%,10)
P2
0.05
$1,590, 000
P3 $100, 000 / 0.05
$2, 000, 000
CE(5%) P1 P2 P3
$13,590, 000
(b)
P1 $10, 000, 000
$1, 000, 000( A / F ,5%,15)
P2
0.05
$926, 000
P3 $100, 000 / 0.05
$2, 000, 000
CE(5%) P1 P2 P3
$12,926, 000
(c)
10-year cycle with 10% of interest:
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.34) Given: Cost to design and build $650, 000 , rework cost $100, 000 every 10
years, new type of gear $50, 000 at the end of 5th year, annual operating costs
$30, 000 for the first 15 years and $35, 000 thereafter
(a)
PW(0.5%) $2, 460( P / A, 0.5%, 240)
$343,368.70
(b)
PW(0.5%) $2, 460( P / A, 0.5%, 480)
$447, 099.06
(c)
A
PW(0.5%)
i
$2, 460
A
0.005
$492, 000
Comments: Longer life means greater total benefit, but most of the benefit is
collected in the first 20 years.
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.36)
(a)
Select project A.
(b)
Project A
Cost of
n Cash Flow funds Project Balance
0 -$1000 $0 -$1,000
1 $912 -$250 -$338
2 $684 -$85 $262
3 $456 $65 $783
4 $228 196 $1,207
Project B
Cost of
n Cash Flow funds Project Balance
0 -$1,000 $0 -$1,000
1 $284 -$250 -$966
2 $568 -$242 -$640
3 $852 -$160 $53
4 $1,136 $13 $1,202
Project B is exposed to higher risk of loss if either project terminates at the end
of the year 2, according to the results below.
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.37)
(a)
PW(12%) A $1, 000, 000 $700, 000( P / A,12%, 2)
$183, 070
PW(12%) B $1, 200, 000 $700, 000( P / F ,12%,1)
$1, 000, 000( P / F ,12%, 2)
$222, 230
Select project B.
(b)
PW(22%) A $1, 000, 000 $700, 000( P / A, 22%, 2)
$44, 074
PW(22%) B $1, 200, 000 $700, 000( P / F , 22%,1)
$1, 000, 000( P / F , 22%, 2)
$45, 633
Select project B.
5.38)
(a)
PW(12%) A $5, 000 $2, 610( P / F ,12%,1)
$2,930( P / F ,12%, 2) $2,300( P / F ,12%,3)
$1,303.23
PW(12%) B $3, 200 $1, 210( P / F ,12%,1)
$1, 720( P / F ,12%, 2) $1,500( P / F ,12%,3)
$319.2
Select Project A.
(b)
FW(12%) A $1,303.23( F / P,12%,3)
$1,830.94
FW(12%) B $319.2( F / P,12%,3)
$448.44
Select Project A.
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.39)
(a)
PW(15%) A $4, 000 $400( P / F ,15%,1)
$7, 000( P / F ,15%, 2)
$1, 640.83
PW(15%) B $8,500 $11,500( P / F ,15%,1)
$400( P / F ,15%, 2)
$1,802.46
Select project B.
(b) Project B dominates Project A at any interest rate (0% to 46.7%.) as indicated
in the following present worth profile. Note however that for very high interest
rate(i> 46.7%), Project A is less undesirable than project B.
5.40)
(a)
PW(15%) A $15, 000 $9,500( P / F ,15%,1)
$12,500( P / F ,15%, 2) $7,500( P / F ,15%,3)
$7, 644.03
(b)
PW(15%) B $25, 000 X ( P / A,15%, 2)( P / F ,15%,1)
$9,300
X $24, 262.57
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Fundamentals of Engineering Economics, 3rd ed. 2012
(c) Note that the net future worth of the project is equivalent to its terminal project
balance.
PB(15%)3 $7, 643.7( F / P,15%,3)
$11, 625.30
(d) Select B, which has the greater PW.
5.41)
Project A:
12, 000 4, 000( P / F ,12%,1) 6, 000( P / F ,12%, 2) 8, 000( P / F ,12%,3)
2, 048.83
Project B:
10, 000 X ( P / F ,12%,1) 3, 000( P / F ,12%, 2) X ( P / F ,12%,3)
2, 048.83
X 6, 018.09
5.42)
(a) Project balances as a function of time are as follows:
Project Balances
n A D
0 -$2,500 -$5,000
1 -$2,100 -$6,000
2 -$1,660 -$7,100
3 -$1,176 -$3,810
4 -$694 -$1,191
5 -$163 $1,690
6 $421 $3,859
7 $763 $7,245
8 $1,139
FW(10%) A $1,139
FW(10%) D $7, 245
(c) Assuming a required service period of 8 years
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.43) Given: Required service period infinite, analysis period least common
multiple service periods (6 years)
Model A:
5.44)
(a) Without knowing the future replacement opportunities, we may assume that
both alternatives will be available in the future with the same investment and
expenses. We further assume that the required service period will be indefinite.
(b) With the common service period of 24 years,
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Fundamentals of Engineering Economics, 3rd ed. 2012
Project A:
Project B is preferred.
(c)
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Fundamentals of Engineering Economics, 3rd ed. 2012
Project B:
PW(12%)cycle $10, 000 $2,100( P / A,12%,3)
$1, 000( P / F ,12%,3)
$14,332
PW(12%) total $14,332[1 ( P / A, 40.49%, 4)]
$40, 642
Note : (1.12) 1 40.49%
3
Select project A.
(b)
Project A with 2 replacement cycles:
Project B with 4 replacement cycles where the 4th replacement cycle ends at
the end of first operating year:
5.46)
Method A:
$10, 000( A / F ,12%,5)
CE(12%) A $30, 000
0.12
$30, 000 $13,117.50
$43,117.5
Method B:
$90, 000( A / F ,12%,50)
CE(12%) B $75, 000
0.12
$75, 000 $312.50
$75,312.5
Since CE(12%) values above represent cost, project A is preferred.
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.47)
Standard Lease Option:
PW(0.5%)SL $5,500 $1,150( P / A, 0.5%, 24)
$1, 000( P / F , 0.5%, 24)
$30,560.10
Single Up-Front Option:
PW(0.5%)SU $31,500 $1, 000( P / F , 0.5%, 24)
$30, 612.82
Select the standard lease option, as you will save $52.72 in present worth.
5.48)
Machine A:
PW(13%) $75, 200 ($6,800 $2, 400)( P / A,13%, 6)
$21, 000( P / F ,13%, 6)
$101,891
Machine B:
PW(13%) $44, 000 $11,500( P / A,13%, 6)
$89,971
Machine B is a better choice.
5.49)
(a)
Required HP to produce 10 HP:
Motor A:
X1 10 / 0.85 11.765 HP
Motor B:
X 2 10 / 0.90 11.111 HP
Motor B:
11.111(0.7457)(1,500)(0.07) $869.97
Equivalent cost:
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.50) Since only Model B is repeated in the future, we may have the following
sequence of replacement cycles:
Option 1: Purchase Model A now and repeat Model A forever.
Option 2: Purchase Model B now and replace it at the end of year 2 by Model
A. Then repeat Model A forever.
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Fundamentals of Engineering Economics, 3rd ed. 2012
(a)
Option 1:
A $1,516.49
PW(15%) AAAL
i 0.15
$10,109.93
Option 2:
$1,516.49
PW(15%) BAAL $2,138.94 ( P / F ,15%, 2)
0.15
$8,901.21
Option 1 is a better choice.
(b) Let S be the salvage value of Model A at the end of year 2.
5.51)
Since either tower will have no salvage value after 20 years, we may select
the analysis period of 35 years:
If we assume an infinite analysis period, the present worth of each bid will be
[$80, 000 $1, 000( P / A,11%, 40)]( A / P,11%, 40)
PW(11%)Bid A
0.11
$90,341
$93, 497( A / P,11%,35)
PW(11%)Bid B
0.11
$95,985
Bid A is still preferred.
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.52)
Option 1: Non-deferred Plan (install remaining 7 units)
5.53)
Option 1: Tank/tower installation
PW(12%)1 $164, 000
Option 2: Tank/hill installation with the pumping equipment replaced at the
end of 20 years at the same cost
PW(12%) ($120, 000 $12, 000)
($12, 000 $1, 000)( P / F ,12%, 20)
$1, 000( P / F ,12%, 40) $1, 000( P / A,12%, 40)
$141,374
Option 2 is a better choice.
5.54)
Project A with repeating 2 times,
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.56)
Option 1: Process device A lasts only 4 years. You have a required service
period of 6 years. If you take this option, you must consider how you will
satisfy the rest of the required service period at the end of the project life. One
option would subcontract the remaining work for the duration of the required
service period. If you select this subcontracting option along with the device
A, the equivalent net present worth would be
Option 2: This option creates no problem because its service life coincides
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Fundamentals of Engineering Economics, 3rd ed. 2012
5.57)
(a)
Year Outflow
2011 $14,500,000
2012 $3,500,000
2013 $26,000,000
(b)
A( P / A,15%,10) FW(15%)
$49, 201, 250
A(5.0188) $49, 201, 250
A $9,803, 450
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