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