SOLUTION
MANUAL
b
, Solutions to end-of-chapter problems b b b
b Engineering Economy, 7th edition b b b
b Leland Blank and Anthony Tarquin b b b b
Chapter 1 b
Foundations of Engineering Economy b b b
1.1 The four elements are cash flows, time of occurrence of cash flows, interest rates, and
b b b b b b b b b b b b b b
measure of economic worth.
b b b b
1.2 (a) Capital funds are money used to finance projects. It is usually limited in the amount
b b b b b b b b b b b b b b b
of money available.
b b b
(b) Sensitivity analysis is a procedure that involves changing various estimates to see if/how
b b b b b b b b b b b b b
they affect the economic decision.
b b b b b
1.3 Any of the following are measures of worth: present worth, future worth, annual worth, rate
b b b b b b b b b b b b b b
bof return, benefit/cost ratio, capitalized cost, payback period, economic value added.
b b b b b b b b b b
1.4 First cost: economic; leadership: non-economic; taxes: economic; salvage value: economic;
b b b b b b b b b
morale: non-economic; dependability: non-economic; inflation: economic; profit: economic;
b b b b b b b b
acceptance: non-economic; ethics: non-economic; interest rate: economic.
b b b b b b b
1.5 Many sections could be identified. Some are: I.b; II.2.a and b; III.9.a and b.
b b b b b b b b b b b b b
1.6 Example actions are: b b
Try to talk them out of doing it now, explaining it is stealing
b b b b b b b b b b b b
Try to get them to pay for their drinks
b b b b b b b b
Pay for all the drinks himselfb b b b b
Walk away and not associate with them again
b b b b b b b
1.7 This is structured to be a discussion question; many responses are acceptable. It is an
b b b b b b b b b b b b b b
b ethical question, but also a guilt-related situation. He can justify the result as an accident;
b b b b b b b b b b b b b b
bhe can feel justified by the legal fault and punishment he receives; he can get angry because
b b b b b b b b b b b b b b b b
bit WAS an accident; he can become tormented over time due to the stress caused by
b b b b b b b b b b b b b b b
baccidently causing a child‟s death. b b b b
1.8 This is structured to be a discussion question; many responses are acceptable. Responses
b b b b b b b b b b b b
bcan vary from the ethical (stating the truth and accepting the consequences) to unethical
b b b b b b b b b b b b b
b(continuing to deceive himself and the instructor and devise some on-the-spot excuse).
b b b b b b b b b b b
Lessons can be learned from the experience. A few of them are:
b b b b b b b b b b b
Think before he cheats again. b b b b
Think about the longer-term consequences of unethical decisions.
b b b b b b b
Face ethical-dilemma situations honestly and make better decisions in real time.
b b b b b b b b b b
1
, Alternatively, Claude may learn nothing from the experience and continue his unethical
b b b b b b b b b b b
practices.
b
1.9 i = [(3,885,000 - 3,500,000)/3,500,000]*100% = 11% per year
b b b b b b b b
1.10 (a) Amount paid first four years = 900,000(0.12) = $108,000
b b b b b b b b b
(b) Final payment = 900,000 + 900,000(0.12) = $1,008,000
b b b b b b b b
1.11 i = (1125/12,500)*100 = 9%
b b b b
b i = (6160/56,000)*100 = 11%
b b b b
bi = (7600/95,000)*100 = 8%
b b b b
The $56,000 investment has the highest rate of return.
b b b b b b b b
1.12 Interest on loan = 23,800(0.10) = $2,380 b b b b b b
Default insurance = 23,800(0.05) = $1190
b b b b b b
Set-up fee = $300 b b b
Total amount paid = 2380 + 1190 + 300 = $3870
b b b b b b b b b b
Effective interest rate = (3870/23,800)*100 = 16.3%
b b b b b b b
1.13 The market interest rate is usually 3 – 4 % above the expected inflation rate. Therefore,
b b b b b b b b b b b b b b b
Market rate is in the range 3 + 8 to 4 + 8 = 11 to 12% per year
b b b b b b b b b b b b b b b b b b b
1.14 PW = present worth; PV = present value; NPV = net present value; DCF = discounted cash
b b b b b b b b b b b b b b b b
flow; and CC = capitalized cost
b b b b b b
1.15 P = $150,000; F = ?; i = 11%; n = 7
b b b b b b b b b b b
1.16 P = ?; F = $100,000; i = 12%; n = 2
b b b b b b b b b b b
1.17 P = $3.4 million; A = ?; i = 10%; n = 8
b b b b b b b b b b b b
1.18 F = ?; A = $100,000 + $125,000?; i = 15%; n = 3
b b b b b b b b b b b b b
1.19 End-of-period convention means that all cash flows are assumed to take place at the end of
b b b b b b b b b b b b b b b
the interest period in which they occur.
b b b b b b b
1.20 fuel cost: outflow; pension plan contributions: outflow; passenger fares: inflow;
b b b b b b b b b
maintenance: outflow; freight revenue: inflow; cargo revenue: inflow; extra bag charges:
b b b b b b b b b b b
Inflow; water and sodas: outflow; advertising: outflow; landing fees: outflow; seat
b b b b b b b b b b b
preference fees: inflow.
b b b
2
, 1.21 End-of-period amount for June = 50 + 70 + 120 + 20 = $260
b b b b b b b b b b b b b
End-of-period amount for Dec = 150 + 90 + 40 + 110 = $390
b b b b b b b b b b b b b b
1.22 Month Receipts, $1000 b Disbursements, $1000 b Net CF, $1000
b b
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
b b b b ($2,920,000)
1.23
1.24
3
MANUAL
b
, Solutions to end-of-chapter problems b b b
b Engineering Economy, 7th edition b b b
b Leland Blank and Anthony Tarquin b b b b
Chapter 1 b
Foundations of Engineering Economy b b b
1.1 The four elements are cash flows, time of occurrence of cash flows, interest rates, and
b b b b b b b b b b b b b b
measure of economic worth.
b b b b
1.2 (a) Capital funds are money used to finance projects. It is usually limited in the amount
b b b b b b b b b b b b b b b
of money available.
b b b
(b) Sensitivity analysis is a procedure that involves changing various estimates to see if/how
b b b b b b b b b b b b b
they affect the economic decision.
b b b b b
1.3 Any of the following are measures of worth: present worth, future worth, annual worth, rate
b b b b b b b b b b b b b b
bof return, benefit/cost ratio, capitalized cost, payback period, economic value added.
b b b b b b b b b b
1.4 First cost: economic; leadership: non-economic; taxes: economic; salvage value: economic;
b b b b b b b b b
morale: non-economic; dependability: non-economic; inflation: economic; profit: economic;
b b b b b b b b
acceptance: non-economic; ethics: non-economic; interest rate: economic.
b b b b b b b
1.5 Many sections could be identified. Some are: I.b; II.2.a and b; III.9.a and b.
b b b b b b b b b b b b b
1.6 Example actions are: b b
Try to talk them out of doing it now, explaining it is stealing
b b b b b b b b b b b b
Try to get them to pay for their drinks
b b b b b b b b
Pay for all the drinks himselfb b b b b
Walk away and not associate with them again
b b b b b b b
1.7 This is structured to be a discussion question; many responses are acceptable. It is an
b b b b b b b b b b b b b b
b ethical question, but also a guilt-related situation. He can justify the result as an accident;
b b b b b b b b b b b b b b
bhe can feel justified by the legal fault and punishment he receives; he can get angry because
b b b b b b b b b b b b b b b b
bit WAS an accident; he can become tormented over time due to the stress caused by
b b b b b b b b b b b b b b b
baccidently causing a child‟s death. b b b b
1.8 This is structured to be a discussion question; many responses are acceptable. Responses
b b b b b b b b b b b b
bcan vary from the ethical (stating the truth and accepting the consequences) to unethical
b b b b b b b b b b b b b
b(continuing to deceive himself and the instructor and devise some on-the-spot excuse).
b b b b b b b b b b b
Lessons can be learned from the experience. A few of them are:
b b b b b b b b b b b
Think before he cheats again. b b b b
Think about the longer-term consequences of unethical decisions.
b b b b b b b
Face ethical-dilemma situations honestly and make better decisions in real time.
b b b b b b b b b b
1
, Alternatively, Claude may learn nothing from the experience and continue his unethical
b b b b b b b b b b b
practices.
b
1.9 i = [(3,885,000 - 3,500,000)/3,500,000]*100% = 11% per year
b b b b b b b b
1.10 (a) Amount paid first four years = 900,000(0.12) = $108,000
b b b b b b b b b
(b) Final payment = 900,000 + 900,000(0.12) = $1,008,000
b b b b b b b b
1.11 i = (1125/12,500)*100 = 9%
b b b b
b i = (6160/56,000)*100 = 11%
b b b b
bi = (7600/95,000)*100 = 8%
b b b b
The $56,000 investment has the highest rate of return.
b b b b b b b b
1.12 Interest on loan = 23,800(0.10) = $2,380 b b b b b b
Default insurance = 23,800(0.05) = $1190
b b b b b b
Set-up fee = $300 b b b
Total amount paid = 2380 + 1190 + 300 = $3870
b b b b b b b b b b
Effective interest rate = (3870/23,800)*100 = 16.3%
b b b b b b b
1.13 The market interest rate is usually 3 – 4 % above the expected inflation rate. Therefore,
b b b b b b b b b b b b b b b
Market rate is in the range 3 + 8 to 4 + 8 = 11 to 12% per year
b b b b b b b b b b b b b b b b b b b
1.14 PW = present worth; PV = present value; NPV = net present value; DCF = discounted cash
b b b b b b b b b b b b b b b b
flow; and CC = capitalized cost
b b b b b b
1.15 P = $150,000; F = ?; i = 11%; n = 7
b b b b b b b b b b b
1.16 P = ?; F = $100,000; i = 12%; n = 2
b b b b b b b b b b b
1.17 P = $3.4 million; A = ?; i = 10%; n = 8
b b b b b b b b b b b b
1.18 F = ?; A = $100,000 + $125,000?; i = 15%; n = 3
b b b b b b b b b b b b b
1.19 End-of-period convention means that all cash flows are assumed to take place at the end of
b b b b b b b b b b b b b b b
the interest period in which they occur.
b b b b b b b
1.20 fuel cost: outflow; pension plan contributions: outflow; passenger fares: inflow;
b b b b b b b b b
maintenance: outflow; freight revenue: inflow; cargo revenue: inflow; extra bag charges:
b b b b b b b b b b b
Inflow; water and sodas: outflow; advertising: outflow; landing fees: outflow; seat
b b b b b b b b b b b
preference fees: inflow.
b b b
2
, 1.21 End-of-period amount for June = 50 + 70 + 120 + 20 = $260
b b b b b b b b b b b b b
End-of-period amount for Dec = 150 + 90 + 40 + 110 = $390
b b b b b b b b b b b b b b
1.22 Month Receipts, $1000 b Disbursements, $1000 b Net CF, $1000
b b
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
b b b b ($2,920,000)
1.23
1.24
3
