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17

An electric switch manufacturing company has to choose one of three different assembly methods. Method A w

first cost of $40,000, an annual operating cost of $9000, and a service life of 2 years. Method B will cost $80,000

and will have an annual operating cost of $6000 over its 4-year service life. Method C will cost $130,000 initially

annual operating cost of $4000 over its 8-year life. Methods A and B will have no salvage value, but method C w

some equipment worth an estimated $12,000. Which method should be selected? Use present worth analysis a

interest rate of 10% per year.

Answer

A B C

FC $ (40,000.00) $ (80,000.00) $ (130,000.00)

AC $ (9,000.00) $ (6,000.00) $ (4,000.00)

Salvage - - $ 12,000.00

i 10% 10% 10%

n 2 4 8

Year A B C

0 $ (40,000.00) $ (80,000.00) $ (130,000.00)

1 ($8,181.82) $0.00 $0.00

2 ($7,438.02) $0.00 $0.00

3 $0.00 $0.00 $0.00

4 $0.00 $0.00 $0.00

5 $0.00 ($54,641.08) $0.00

6 $0.00 $0.00 $0.00

7 $0.00 $0.00 $0.00

8 $0.00 $0.00 $0.00

PW $ (55,619.83) $ (134,641.08) $ (124,401.91)

5.18 Midwest Power and Light operates 14 coal-fi red power plants in several states around the United States

company recently settled a lawsuit by agreeing to pay $60 million in mitigation costs related to acid rain

settlement included $21 million to reduce emissions from barges and trucks in the Ohio River Valley, $2

million for projects to conserve energy and produce alternative energy, $3 million for Chesapeake Bay,

million for Shenandoah National Park, and $10 million to acquire ecologically sensitive lands in Appala

The question of how to distribute the money over time has been posed. Plan A involves spending $5 mi

and the remaining $55 million equally over a 10-year period (that is, $5.5 million in each of years 1 thro

Plan B requires expenditures of $5 million now, $25 million 2 years from now, and $30 million 7 years

now. Determine which plan is more economical on the basis of a present worth analysis over a 10-year p

an interest rate of 10% per year.

Answer

Plan A = spending $5 million now then $5.5 million at the top of every year through years 1 to 10. The

value of the $5 million being spent now = $5 million (as it is in the current point in time).

Present value of $5.5 million spend at the end of each year through years 1 to 10 will be determined usin

formula = P= A (P/A,i,n) where A = $5.5 million, i = 10% and n = 10 years. Using the compound intere

to determine the present worth factor, the factor for 10% and 10 years = 6.145

Thus, present value of $5.5 million spend at the end of each year through years 1 to 10 = A*present wor

= $5.5 million*6.145 = $33.7975 million. Total PV = $5 million+$33.7975 million = $38.7975 million

Thus, present value of $5.5 million spend at the end of each year through years 1 to 10 = A*present wor

= $5.5 million*6.145 = $33.7975 million. Total PV = $5 million+$33.7975 million = $38.7975 million

Present value of $25 million paid 2 years from now = F(P/F,i,n) where F = $25 million, i = 10% and n =

present worth factor = 0.8264. Thus present value of $25 million = 25*0.8264 = $20.66 million.

Present value of $30 million paid 7 years from now = F(P/F,i,n) where F = $30 million, i = 10% and n =

present factor = 0.5132. Thus present value =30*0.5132 = $15.396 million

As the present value of Plan A is lower, it is more economical. This is because, in present value terms, t

company is paying a lower amount of money in Plan A.

5.19

Machines that have the following costs are under consideration for a robotized welding process. Using an intere

10% per year, determine which alternative should be selected on the basis of a present worth analysis. Show (a

and (b) spreadsheet solutions.

Answer

Machine X Machine Y (a) hand

FC -250000 -430000 PWx

AC -60000 -40000

Salvage 70000 95000

i 10% 10%

n 3 6 PWy

Select Machine Y

(b) spreadsheet

Year

0

1

2

3

4

5

6

PW @ 10%

Select Machine Y

5.20 Throughout the present worth analyses, the decision between seawater and groundwater switched multiple tim

Examples 5.2 and 5.4. A summary is given here in $1 million units. The confusion about the recommended sour

UPW has not gone unnoticed by the general manager. Yesterday, you were asked to settle the issue by determi

first cost Xs of the seawater option to ensure that it is the economic choice over groundwater. The study period

the manager as 10 years, simply because that is the time period on the lease agreement for the building where

will be located. Since the seawater equipment must be refurbished or replaced after 5 years, the general manag

you to assume that the equipment will be purchased a new after 5 years of use. What is the maximum first cost

Angular Enterprises should pay for the seawater option?

the manager as 10 years, simply because that is the time period on the lease agreement for the building where

will be located. Since the seawater equipment must be refurbished or replaced after 5 years, the general manag

you to assume that the equipment will be purchased a new after 5 years of use. What is the maximum first cost

Angular Enterprises should pay for the seawater option?

Answer

To ensure that the seawater option is the economic choice over groundwater, PWs is set to equal $-33.16, and

the Xs.

-$33.16 = -$Xs - ($0.5 + $1.44) (P/A,12%,5) + $0.05Xs (P/F,12%,5) - $Xs(P/F,12%,5) - ($0.5 + $ 1.44) (P/A, 12%,5)

%, 5) + $0.05Xs (P/F,12%,10)

= - $1.5674Xs - $ 1.94 (5.6502) + $ 0.0445 Xs

$1.5229Xs = - $10.9614 + $33.16

Xs = $ 14.576 million

The maximum first cost that Angular Enterprises should pay for the seawater option is $14.576 million. Seawate

is selected if only if first cost less than $14.576 million.

5.21

Accurate airflow measurement requires straight unobstructed pipe for a minimum of 10 diameters upstream an

diameters downstream of the measuring device. In a field application, physical constraints compromise the pipe

so the engineer is considering installing the airflow probes in an elbow, knowing that flow measurement will be

accurate but good enough for process control. This is plan 1, which will be in place for only 3 years, after which

accurate flow measurement system with the same costs as plan 1 will be available. This plan will have a first cos

$26,000 with an annual maintenance cost estimated at $5000. Plan 2 involves installation of a recently designed

submersible airflow probe. The stainless steel probe can be installed in a drop pipe with the transmitter located

waterproof enclosure on the handrail. The first cost of this system is $83,000, but because it is accurate and mo

durable, it will not have to be replaced for at least 6 years. Its maintenance cost is estimated to be $1400 per ye

$2500 in year 3 for replacement of signal processing software. Neither system will have a salvage value. At an in

rate of 10% per year, which one should be selected on the basis of a present worth comparison?

Answer

Plan 1 Plan 2 Year

FC $ (26,000.00) $ (83,000.00) 0

AC $ (5,000.00) $ (1,400.00) 1

AddC $ - $ (2,500.00) 2

i 10% 10% 3

n 3 6 4

5

6

PW @ 10%

5.22

5.23

A sports mortgage is the brainchild of Stadium Capital Financing Group, a company headquartered in Chicago, I

is an innovative way to finance cash-strapped sports programs by allowing fans to sign up to pay a “mortgage” o

certain number of years for the right to buy good seats at football games for several decades with season ticket

locked in at current prices. In California, the locked-in price period is 50 years. Assume UCLA fan X purchases a $

mortgage and pays for it now to get season tickets for $290 each for 50 years, while fan Y buys season tickets at

year 1, with prices increasing by $20 per year for 50 years. (a) Which fan made the better deal if the interest rat

per year? (b) What should fan X be willing to pay up front for the mortgage to make the two plans exactly equiv

economically? (Assume he has no reason to give extra money to UCLA at this point.)

Fan X Fan Y Year

FP $ (130,000.00) $ - 0

AP $ (290.00) $ (290.00) 1

G - $ (20.00) 2

i 8% 8% 3

n 50 50 4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

PW @ 8%

5.24

5.25

An assistant to Stacy gave her the PW values for four alternatives they are comparing for the development of a

control vibration control system for offshore platform application. The results in the table use a MARR of 14% p

Determine which alternative(s) should be selected (a) if the alternatives are exclusive, and (b) if the projects are

independent.

ANSWER

i=14% I J K L

n 3 4 12 6

PW n 16.08 31.12 -257.46 140.46

PW 6 26.94 15.78 -653.29 140.46

PW 12 39.21 60.48 -257.46 204.46

LCM 12 Select L PW > 0 Select I, J, L

5.31

A wealthy businessman wants to start a permanent fund for supporting research directed toward sustainability

donor plans to give equal amounts of money for each of the next 5 years, plus one now (i.e., six donations) so th

$100,000 per year can be withdrawn each year forever, beginning in year 6. If the fund earns interest at a rate o

year, how much money must be donated each time?

ANSWER

n ∞ CC $ (850,729.00)

i 8%

A $ (100,000.00)

5.32

5.33 Find the capitalized cost of a present cost of $300,000, annual costs of $35,000, and periodic costs every 5 year

$75,000. Use an interest rate of 12% per year.

ANSWER

P $ (300,000.00) CC $ (690,047.75)

A $ (35,000.00)

Periodic $ (75,000.00)

n 5

i 12%

5.34

5.35

Compare the alternatives shown on the basis of their capitalized costs using an interest rate of 10% per year.

M N Year

FC $ (150,000.00) $ (800,000.00) 0

A $ (50,000.00) $ (12,000.00) 1

S $ 8,000.00 $ 1,000,000.00 2

n 5∞ 3

i 10% 10% 4

5

PW @ 10%

AW

CC

5.36

5.37

Because you are thankful for what you learned in engineering economy, you plan to start a permanent scholars

in the name of the professor who taught the course. You plan to deposit money now with the stipulation that th

scholarships be awarded beginning 12 years from now (which happens to be the exact time that your daughter

begin college). The interest that is accumulated between now and year 12 is to be added to the principal of the

endowment. After that, the interest that is earned each year will be awarded as scholarship money. If you want

amount of the scholarships to be $40,000 per year, how much must you donate now if the fund earns interest a

of 8% per year?

A $ (40,000.00) CC $ (214,441.43)

i 8%

F $ (500,000.00)

n 11

A i=10%

fferent assembly methods. Method A will have a

e of 2 years. Method B will cost $80,000 to buy

e. Method C will cost $130,000 initially with an

have no salvage value, but method C will have

selected? Use present worth analysis at an

0 1 2 3 4 5

B i=10%

0 1 2 3 4 5

$80,000 $80,000

n mitigation costs related to acid rain. The

d trucks in the Ohio River Valley, $24

gy, $3 million for Chesapeake Bay, $2

cologically sensitive lands in Appalachia.

ed. Plan A involves spending $5 million now

, $5.5 million in each of years 1 through 10).

s from now, and $30 million 7 years from

esent worth analysis over a 10-year period at

current point in time).

10 years. Using the compound interest table

rs = 6.145

33.7975 million = $38.7975 million

ow = $5 million.

ere F = $25 million, i = 10% and n = 2. The

25*0.8264 = $20.66 million.

million

is because, in present value terms, the power

X i=10%

botized welding process. Using an interest rate of

sis of a present worth analysis. Show (a) hand

$70,000

0 1 2 3 4 5

(-250,000 - 60,000(P/A,10%,6) -

180,000(P/F,10%,3) +

70,000(P/F,10%,6)) $60,000 $60,000 $60,000 $60,000 $60,000

$ (607,037.00)

(-430,000 - 40,000(P/A,10%,6) + $250,000 $250,000

95,000(P/F,10%,6))

$ (550,585.00)

Y i=10%

X Y

$ (250,000.00) $ (430,000.00)

$ (60,000.00) $ (40,000.00)

$ (60,000.00) $ (40,000.00) 0 1 2 3 4 5

$ (240,000.00) $ (40,000.00)

$ (60,000.00) $ (40,000.00) $40,000 $40,000 $40,000 $40,000 $40,000

$ (60,000.00) $ (40,000.00)

$ 10,000.00 $ 55,000.00 $430,000

$ (607,039.13) $ (550,585.40)

onfusion about the recommended source for

ere asked to settle the issue by determining the

ce over groundwater. The study period is set by

ease agreement for the building where the fab

placed after 5 years, the general manager told

of use. What is the maximum first cost that

water, PWs is set to equal $-33.16, and solve for

Plan 1 i=10%

hysical constraints compromise the pipe layout,

nowing that flow measurement will be less

e in place for only 3 years, after which a more 0 1 2 3 4 5

available. This plan will have a first cost of

olves installation of a recently designed

drop pipe with the transmitter located in a $5,000 $5,000 $5,000 $5,000 $5,000

,000, but because it is accurate and more

ce cost is estimated to be $1400 per year plus

ystem will have a salvage value. At an interest $26,000 $26,000

sent worth comparison?

$ (26,000.00) $ (83,000.00)

$ (5,000.00) $ (1,400.00)

$ (5,000.00) $ (1,400.00)

$ (31,000.00) $ (3,900.00)

$ (5,000.00) $ (1,400.00) 0 1 2 3 4 5

$ (5,000.00) $ (1,400.00)

$ (5,000.00) $ (1,400.00) $1,400 $1,400 $1,400 $1,400 $1,400

$ (67,310.49) $ (90,975.65) $2,500

Select Plan 1 $83,000

ng fans to sign up to pay a “mortgage” over a

for several decades with season ticket prices

ears. Assume UCLA fan X purchases a $130,000

years, while fan Y buys season tickets at $290 in

made the better deal if the interest rate is 8%

ge to make the two plans exactly equivalent

this point.)

Fan X Fan Y Fan X i=8%

$ (130,000.00) $ -

$ (290.00) $ (290.00)

$ (290.00) $ (286.00)

$ (290.00) $ (282.00)

$ (290.00) $ (278.00) 0 1 2 3 49 50

$ (290.00) $ (274.00)

$ (290.00) $ (270.00) $290 $290 $290 $290 $290

$ (290.00) $ (266.00)

$ (290.00) $ (262.00) $130,000 PW = -$ 133,547.71

$ (290.00) $ (258.00)

$ (290.00) $ (254.00)

$ (290.00) $ (250.00)

$ (290.00) $ (246.00) Fan Y i=8%

$ (290.00) $ (242.00)

$ (290.00) $ (238.00)

$ (290.00) $ (234.00)

$ (290.00) $ (230.00)

$ (290.00) $ (226.00) 0 1 2 3 49 50

$ (290.00) $ (222.00) $290 $310

$ (290.00) $ (218.00) $330

$ (290.00) $ (214.00)

$ (290.00) $ (210.00)

$ (290.00) $ (206.00)

$ (290.00) $ (202.00)

$ (290.00) $ (198.00)

$ (290.00) $ (194.00)

$ (290.00) $ (190.00)

$ (290.00) $ (186.00)

$ (290.00) $ (182.00)

$ (290.00) $ (178.00) $1,250 $1,270

$ (290.00) $ (174.00)

$ (290.00) $ (170.00) PW = -$ 6,339.57

$ (290.00) $ (166.00)

$ (290.00) $ (162.00)

$ (290.00) $ (158.00)

$ (290.00) $ (154.00)

$ (290.00) $ (150.00)

$ (290.00) $ (146.00)

$ (290.00) $ (142.00)

$ (290.00) $ (138.00)

$ (290.00) $ (134.00)

$ (290.00) $ (130.00)

$ (290.00) $ (126.00)

$ (290.00) $ (122.00)

$ (290.00) $ (118.00)

$ (290.00) $ (114.00)

$ (290.00) $ (110.00)

$ (290.00) $ (106.00)

$ (290.00) $ (102.00)

$ (290.00) $ (98.00)

$ (290.00) $ (94.00)

$ (133,547.71) $ (2,989.34)

Fan Y made the better deal

sults in the table use a MARR of 14% per year.

are exclusive, and (b) if the projects are

i=8% CC = -$ 850,729.00

research directed toward sustainability. The

, plus one now (i.e., six donations) so that

r 6. If the fund earns interest at a rate of 8% per

0 1 2 3 4 5

0 1 2 3 4 5

$300,000

M i=10%

ing an interest rate of 10% per year.

M N

$ (150,000.00) $ (800,000.00)

$ (50,000.00) $ (12,000.00) 0 1 2 3 4 5

$ (50,000.00) $ (12,000.00)

$ (50,000.00) $ (12,000.00) $50,000 $50,000 $50,000 $50,000 $50,000

$ (50,000.00) $ (12,000.00)

$ (42,000.00) $ (12,000.00)

$ (334,571.97) $150,000 CC = -$ 882,592.42

$ (88,259.24) $ (12,000.00)

$ (882,592.42) $ (920,000.00)

Select M

i=8% CC = -$ 214,441.43

you plan to start a permanent scholarship fund

money now with the stipulation that the

o be the exact time that your daughter plans to

2 is to be added to the principal of the 1 2 3 4 5 6

rded as scholarship money. If you want the

donate now if the fund earns interest at a rate

$40,000 $40,000 $40,000 $40,000 $40,000

6 7 8

C i=10%

$9,000 $9,000 $9,000

$40,000 PW = -$ 170,971.68

0 1 2 3 4 5

$130,000

6 7 8

PW = -$ 166,650.63

$70,000

$60,000

PW = -$ 607,039.13

$95,000

$40,000

PW = -$ 550,585.40

6

$5,000

PW = -$ 67,310.49

$1,400

PW = -$ 90,975.65

PW = -$ 133,547.71

PW = -$ 6,339.57

6 ∞

6 ∞

$75,000

N i=10% CC = -$ 920,000.00

$8,000

0 1 2 3 4 5 6

CC = -$ 882,592.42 $800,000

7 8 9 10 11

F= $500,000

$12,000

6 7 8

PW = -$ 145,741.62

###

$12,000

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