Solutions Manual for Engineering Economics

1 Solutions to end-of -chapter problems Engineering Economy, 7th edition Leland Blank and Anthony Tarquin Chapter 1 Foundations of Engineering Economy 1.1 The four elements are cash flows, time of occurrence of cash flows, interest rates, and measure of economic worth. 1.2 (a) Capital funds are money used to finance projects. It is usually limited in the amount of money available. (b) Sensitivity analysis is a procedure that involves changing various estimates to see if/how they affect the economic decision. 1.3 Any of the fo llowing are measures of worth: p resent worth, future worth, annual worth, rate of return, benefit/cost ratio, capitalized cost, payback period, economic value added. 1.4 F irst cost: e conomic ; leadership: non- economic ; taxes: economic ; salvage value: economic ; morale : non- economic ; dependability : non-economic ; inflation : economic ; profit : economic ; acceptance: non- economic; ethics: non- economic; interest rate : economic. 1.5 Many sections could be identified. Some are: I.b; II.2.a and b; III.9.a and b. 1.6 Example actions are: • Try to t alk them out of doing it now , explaining it is stealing • Try to get them to pay for their drinks • Pay for all the drinks himself • Walk away and not associate with them again 1.7 This is structured to be a discussion question; many responses are acceptable. It is an ethical question, but also a guilt -related situation. He can justify the result as an accident; he can feel justified by the legal fault and punishment he receives; he can get ang ry because it WAS an accident; h e can beco me tormented over time due to the stress caused by accidently causing a child’s death. 1.8 This is structured to be a discussion question; many responses are acceptable. Responses can vary from the ethical (stating the truth and accepting the consequences) to unethical (continuing to deceive himself and the instructor and devise some on- the-spot excuse). Lessons can be learned fro m the experience. A few of them are: • Think before he cheats again. • Think about the longer -term consequences of unethical decis ions. • Face ethical -dilemma situations honestly and make better decisions in real time. 2 Alternatively, Claude may learn nothing from the experience and c ontinue his unethical practices. 1.9 i = [(3,885,000 - 3,500,000)/3,500,000]*100% = 11% per year 1.10 (a) Am ount paid first four years = 900,000(0.12) = $108,000 (b) Final payment = 900,000 + 900,000(0.12) = $1,008,000 1.11 i = (1125/12,500)*100 = 9% i = (6160/56,000)*100 = 11% i = (7600/95,000)*100 = 8% T he $56,000 investment has the highest rate of return . 1.12 Interest on loan = 23,800(0.10) = $2,380 Default insurance = 23,800(0.05) = $1190 Set -up fee = $300 Total amount paid = 2380 + 1190 + 300 = $3870 Effective interest rate = (3870/23,800)*100 = 16.3% 1.13 The market interest rate is usually 3 – 4 % above the expected inflation rate. Therefore, Market rate is in the range 3 + 8 to 4 + 8 = 11 to 12% per year 1.14 PW = pres ent worth; PV = present value; NPV = net present value; DCF = discounted cash flow; and CC = capitalized cost 1.15 P = $150,000; F = ?; i = 11%; n = 7 1.16 P = ?; F = $100,000; i = 12%; n = 2 1.17 P = $3.4 million; A = ?; i = 1 0%; n = 8 1.18 F = ?; A = $100,000 + $125,000?; i = 15%; n = 3 1.19 End -of-period convention means that all cash flows are assumed to take place at the end of the in terest period in which they occur. 1.20 fuel cost : outflow ; pension plan contributions : outflow ; passenger fares : inflow ; m aintenance: outflow ; freight revenue: inflo w; cargo revenue: inflow ; extra bag charges: I nflow ; water and sodas: outflow ; advertising : outflow ; landing fees : outflow ; seat preference fees: i nflow . 3 1.21 End -of-period am ount for June = 50 + 70 + 120 + 20 = $260 End -of-period am ount for Dec = 150 + 90 + 40 + 110 = $390 1.22 Month Receipts, $1000 Disbursements, $1000 Net CF, $ 1000 Jan 500 300 +200 Feb 800 500 +300 Mar 200 400 -200 Apr 120 400 -280 May 600 500 +100 June 900 600 +300 July 800 300 +500 Aug 700 300 +400 Sept 900 500 +400 Oct 500 400 +100 Nov 400 400 0 Dec 1800 700 +1100 Net Cash flow = $2,920 ($2,920,000) 1.23 1.24