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ENGR 345-02

Engineering Economy
LEC UW 8:30-9:45 CP35 / SSE
Fall 2012

Prof. Hatem Elayat


Phone: 2615-3078
Office Hours: UW, 10:00-11:00
or by appointment, SSE 2029
Email: helayat@aucegypt.edu
TA: Irene Fahim, SSE 2004
Office Hrs: UW, 10:00-11:00 am
rico4000@aucegypt.edu
SYLLABUS

Course Description & Motivation


Engineering Economy involves formulating, estimating, and evaluating economic
outcomes of alternatives to realize a specified goal. It presents mathematical and practical
methods for evaluating decisions in the design and operation of engineering systems.
These methods support the selection and justification of design alternatives, operating
policies, and capital expenditure. The topics covered include time value of money,
evaluation methods, depreciation and inflation, cost benefit analysis, replacement
analysis, and notions on capital budgeting and sensitivity analysis. With the successful
completion of this course, you will be able to apply Engineering Economy concepts and
tools to select the most economically attractive alternative and to assess the feasibility of
engineering or business projects. This course will help you compliment your technical
knowledge with the ability to identify the most economically viable avenue to achieve the
objectives of your engineering project. It will help you make financially prudent
decisions in your day-to-day life. With a combination of lectures, exercises, real life
applications, I will introduce the key concepts and guides you through the required steps
to use Engineering Economy approaches relevant to you as a future-practicing Engineer.
Catalog Course Description
Economic and cost concepts, the time value of money, Single, multiple and series of cash,
flows, gradients, functional notation, nominal and effective interest rates, continuous
compounding, rates of return. Computation and applications, economic feasibility of
projects, worth of investments, comparison of alternatives. Replacement, depreciation
and break-even analysis. Introduction to risk analysis.
Prerequisites
MATH 231

Course Objectives
The primary goal of this course is to provide the students with the ability to apply
economic approaches to evaluate investment opportunities and to assess the feasibility of
engineering and business projects.
Course Outcomes
With the successful completion of this course you will be able to:
1. Apply the basic concepts of engineering economy as part of a decision making
process.
2. Derive and use the different engineering economy factors.
3. Evaluate investment opportunities and compare between alternatives using single and
combined engineering economy factors.
4. Perform a replacement study considering inflation and indirect cost allocation.
5. Use depreciation and depletion models.
6. Perform breakeven analysis and sensitivity analysis under uncertainty conditions.
7. Utilize spreadsheet functions to perform economic calculations.
Text
White, Case, Pratt and Agee, 2010, Principles of Engineering Economic Analysis, 5th
edition, John Wiley & Sons, Inc. ISBN 978-0-470-11396-7.
Software
We will use Microsoft Excel to assist in processing and analyzing data for assignments.
Use of Computers
Students can use their personal computers, iPads, or other computers to which they have
access. In addition to using computers, students should have a good engineering
calculator (TI 83 or TI 89) to use for some class assignments and quizzes.
Course Website: Blackboard
Lectures, handouts, assignments, announcements and other information will be available
on the course website on Blackboard. The following modules are included on
Blackboard:
1.
2.
3.
4.
5.
6.

Course outline
Lectures
Handouts
Review problems
Assignments
Projects

7. Solution to Quizzes & past exams


8. Grades
Email Policy
Please include in the subject line the course code ENGR 345 and a concise and clear
statement of purpose; otherwise it may be deleted, along with spam messages and
messages potentially containing viruses.
Lectures
I will use overheads during lectures and will put copies on Blackboard. Other details will
be given on the board. You should read the material before lecture so that you have some
idea of what will be discussed even if you don't understand everything. Please ask
questions as I go along. Most of our time will be spent covering more difficult material
rather than things you can understand easily. Class lectures definitely will not replace
reading the textbook. Handouts, will be posted on Blackboard
Course Requirement
1. Six review problem sets are posted on Blackboard and students are expected to
complete these sets, which will be reviewed in class.
2. Five spreadsheet assignments are posted on Blackboard and students are expected
to complete the assignments and turn them in on the due dates. No late
assignments will be accepted.
3. Unannounced quizzes will be given to students at regular intervals.
4. Each student is expected to complete a project and write a report describing the
work done. Students are required to turn in the reports on the due date and give an
oral presentation.
5. Two mid-term examinations and a final examination. The dates for these exams
are listed below.
Review Problems
At the end of every chapter there is a set of review problems, posted on Blackboard, and
their solution. The only way you can understand the subject material and do well in this
course is by actually solving problems. Hence, it is recommended that you solve the
review problems. Not only will this help you to understand the basic concepts but also
considerably reduce the amount of time you will need to solve a problem. Both of these
will benefit you when taking the examinations.
Spreadsheet Assignments
Five computer assignments will be given during the semester, and are posted on
Blackboard. You must use EXCEL to solve each assignment. Tentative due dates are
listed below. Assignments are posted on Blackboard. Assignments will be collected at the

beginning of class on the due date. Please turn in your assignment as you enter class.
Students who enter late should turn in their assignment when they arrive, not at the end of
the class after any review has taken place. Assignments turned in by students after the
due date will not receive any credit unless prior arrangements have been made.
Assignment
1
2
3
4
5

Tentative Due Date


October 10, 2012
October 21, 2012
November 11, 2012
November 28, 2012
December 12, 2012

Quizzes
Unannounced quizzes will be given at regular intervals covering recent material
discussed in class. No make up allowed if you miss a quiz.
If you miss a class because of illness, notify the department office (2615-3063, 26153153) immediately (same day). If a quiz is given that day, you will be given the quiz
at a later date provided: 1. You notified the department about your illness
immediately, 2. You provide a medical note from AUC Medical Clinic.
Missing class, because of travel or engagement in AUC activities requires prior
instructor written approval one week before that date.
Project
Students are divided into groups of 3-4 and are assigned a project were they are expected
to use some of the tools learned in this course. The project grade is determined based on:
1. Content
2. Written Report
3. Class Presentation
4. Student participation
The report must be type written (3 5 pages). No special cover required. Title sheet
stapled to the report is recommended. The report will be graded for writing style as well
as analysis, recommendations and conclusions.
The outline to be followed is:
Executive summary
Introduction
Analysis
Conclusions & recommendations
References
A 15 minutes power point presentation done as a group:
Describe the scope of your analysis
- What did you consider?

Results
- What is the economic merit of project?
Sensitivity/Monte Carlo simulation
- What conditions / assumptions effect your results?
Recommendations

Exams
The first midterm examination covers topics discussed in week 1-5. The second midterm
examination covers topics discussed in week 6-10. The final examination is
comprehensive. Students will be tested on material covered in class. All exams will be
closed book and notes.
If you miss an exam because of illness, notify the department office (2615-3063,
2615-3153) immediately (same day) & provide a medical note from AUC Medical
Clinic before a make-up exam will be allowed. Failure to do so will earn you zero
credit on the exam.
If you miss an exam because of travel or other circumstances, prior instructor written
approval is required one week before the exam.
Tentative Dates
Midterm Exam I will be given on Sunday October 7, 2012.
Midterm Exam II will be given on Wednesday November 14, 2012.
Final Exam will be given during Final week.
Class Participation
The student is expected to read the material to be discussed before the class meeting.
Several handouts will be distributed in class or posted on Blackboard to supplement the
textbook. These handouts will be discussed in class. Each student is responsible for the
material discussed and the instructions given in class even if he or she is absent. Always
bring your textbook and calculator or iPad to class. Active student participation in class
discussions is encouraged. Come to class prepared by reading the material assigned and
solving homework problems.
Grading
Spreadsheet Assignments
Quizzes
Project
Midterm 1
Midterm 2
Final Exam

10 %
10 %
10 %
20 %
20 %
30 %

The grades in ENGR 345 will be awarded as follows:


90% - 92.99% = A80% 82.99% = B70% 72.99% = C60% 64.99% = D
below 60% = F

93% or better = A
83% - 86.99% = B 87% - 89.99% = B+
73% - 76.99% = C 77% - 79.99% = C+
65% - 69.99% = D+

Topical Breakdown

Role of engineering economy in the decision making process


Nominal and effective interest rates and continuous compounding
Derivation of engineering economy factors and use of multiple factors
Present worth and capitalized cost evaluation
Equivalent uniform annual worth evaluation
Rate of return and Minimum attractive rate of return computation
Benefit/Cost ratio evaluation
Replacement analysis
Inflation, cost estimation and indirect cost allocation
Depreciation and depletion models
Break-even analysis and payback period
Minimum attractive rate of return
Sensitivity analysis and expected value decisions

Academic Dishonesty
Academic dishonesty is not tolerated at AUC and is subject to academic discipline
ranging from a mark of zero on the exam or assignment/quiz to dismissal from the
university.
Academic Regulations
Class policy regarding add, drops, incomplete, absences, cheating, etc. will be in accordance
with the university rules and regulations. Students will turn their cell phones off or put them on
vibrate mode while in class. They will not answer their phones in class or send text messages.
Important Dates
September
- This class begins Sunday September 2 2012
October
- Deadline to drop courses, October 24, 2012
- Eid El Edha (H) October 25 29, 2012
November
- Deadline for withdrawal from the semester (undergraduate) Sunday November 25, 2012

December
- Last day of regular classes, Thursday December 13, 2012
- Final Exams, December 15 20, 2012

Summary of Discrete Compounding Interest Factors


(F / P,i, n) = (1 + i)n
1
(P / F,i, n) =
(1 + i)n

(P / A,i, n) =

(1 + i)n 1
i(1 + i)n

(A / P,i, n) =

i(1 + i)n
(1 + i)n 1

(1 + i)n 1
(F / A,i, n) =
i
i
(A / F,i, n) =
(1 + i)n 1

(1 + i)n in 1
(P / G,i, n) =
i 2 (1 + i)n

1
n
(A / G,i, n) =
i (1 + i)n 1
1 (1 + j)n (1 + i) n
A1

i j
for
P =
nA1

1+ i

ieffective = (1 +

i j
i= j

r m
) 1
m

Period
interest Rate =

Nominal Annual interest Rate


Number of interest Rates per period

The number of interest periods (n) must be adjusted to match


the new frequency

Summary of Continuous Compounding Interest Factors


Find

Given

Factor

rn

P
F

ern

Symbol
(P / F, r, n)

(F / P, r, n)

ern 1
er 1

(F / A, r, n)

er 1
ern 1

(A / F, r, n)

ern 1
ern (er 1)

Effective Interest Rate in Continuous Compounding


ieff = er 1

Bonds
P = Vr (P/A, i, n) + F (P/F,i,n)
where
P = the purchase price of a bond
F = the sales price (redemption value) of a bond
V = the par or face value of a bond
r = the bond rate per interest period
i = the yield rate (return on investment or rate of return) per
interest period
n = the number of interest payments received by the bondholder
A = Vr = the interest or coupon payment received

(P / A, r, n)

Loans
1. Principal outstanding (unpaid principal) at beginning of period k
1 (1 + i)( n + k 1)
= A

2. Unpaid principal after making k payments


U k = A(P / A,i, n k)
3. Payoff quantity is the total amount required to payoff the loan at k
(including current payment & unpaid balance)
Payoffk = A + U k = A[1 + (P / A,i, n k)]
4. Interest in the k-th payment

I k = A 1 (1 + i)( n + k 1) = A [1 (P / F,i, n k + 1)] = iU k 1


5. Principal contained in the k-th payment

Ek = A(1 + i)( n + k 1) = A(P / F,i, n k + 1) = A I k

Capitalized Cost
P=

A
i

Annuity
1
1
P = A[
]
i i(1 + i)t
An annuity is an asset that pays a fixed sum each year for a
specified number of years. Present value of annuity. To to consider a growth g,
then replace A by A/(1+g) and I by (i-g)/1+g)

External Rate of Return ERR


n

R
r=0

n
jt

(1 + rt )

n t

= C jt (1 + i ' )n t
t =0

where

i'
R jt

is the ERR
Positive cash flow for investment j during period t

C jt Negative cash flow for investment j during period t

rt

Reinvestment rate for net positive cash flows occurring in


Period t, normally it is MARR

Savings / Investment Ratio SIR


n

SIR j (i) =

jt

(1 + i)t

jt

(1 + i)t

t =0
n

t =0

where
Is the savings / investment ratio for investment
Alternative j based on a MARR of i%

SIR j (i)
R jt

Positive cash flow for investment j during period t

C jt

Negative cash flow for investment j during period t

Depreciation
SL Depreciation
Dt
Bt

DB Depreciation Sum of the YearsDigits


Depreciation
Dt = (P F)/n
Dt = pBt-1
Dt = [{n-(t-1)}(P-F)] /
[n(n+1)/2]
t
Bt = F+(P F) [(n-t)(nBt = P t[(P = F)/n]
Bt = P(1=p)
t+1)]/[n(n+1)]

Expected Value:
E[X] = xi p(xi) or
i

xf (x)dx

Variance:
Var[X] = (xi - E[X]) 2p(xi) or

(x E(x))

f (x)dx

ENGR 345 Projects Guideline


Dr. Hatem Elayat
DELIVERABLES
Produce a technical report that describes the pertinent aspects of your project. The report
should consist of the following sections:
1. Executive Summary A one page description of your overall teams efforts and findings.
2. Introduction -- Overall description of the project (where, when, why, current status,
participants, etc.). How you collected data/information (interviews via phone or email or inperson), online material, journals, magazines, public records, etc.)
3. Project Details
- Financial aspects and feasibility planning aspects of the project (optional depends
on availability of information)
- How were the activities planned (this is optional depends on availability of
information)
- How was the project monitored and controlled (optional depends on availability of
information)
- A review of the project (any specific problems and challenges that were
encountered in the delivery of the project, any successes worth mentioning, etc.)
- Project learning: identify any additional lessons that could be learned from this
project for the benefit of future similar projects.
4. Overall discussion. This should be your teams overall critique of the project and how
it was managed. Discuss each item provided under Section 3 of the report. Here do
not just state what was done (as you did in Section 3) but add your opinion on
whether it was done right or wrong and why. This may include finance, evaluation,
planning, monitoring and control, planning and organization, how well the project
was managed in terms of relevant performance metrics (time delays, work quality,
etc.), project learning opportunities made available by the project, and any other
points of view you have about the project.
5. Summary and conclusions
6. Acknowledgements (of your data sources especially if they are individuals or
organization you actually communicated with via phone, email, or in person)
7. References (reports, journals, manuals, codes, etc.). Use a consistent style of
referencing citation and listing)
8. Appendices or Exhibits. The appendix should include a page showing the
organizational framework (team members, respective tasks, and linkages) used for
ENGR 345, Dr. Hatem Elayat, AUC

your study. You may add the team photo as an appendix.


Formatting specifications for the report preparation:
1. 2,000 to 5,000 words.
2. 1-inch margins
3. Use any font style or size
4. 1.5 spacing
Photos, figures, charts, etc. may be added but should be legible, and captions should be
provided. Also, Tables may be provided and table titles should be provided.
Kindly edit your report carefully for errors in grammar, sentence structure, etc. Also, please
check to ensure that your writing style is coherent, lucid, and technical.
Submissions should be in both soft copy and hard copy.
ORAL PRESENTATIONS
You will have 15 minutes for the presentation. You may present the material you submitted
in your report. Use Power Point presentation.

ENGR 345, Dr. Hatem Elayat, AUC

ENGR 345: Engineering Economy


Hatem Elayat
Mechanical Engineering Department American University in Cairo AUC
Spreadsheet Assignment 1
This assignment introduces you to basic engineering economy formulas and financial
functions that are included with Excel. Refer to lectures Module 2 (Time value of money)
posted on Blackboard p. 111 118, for additional detail on some of these functions.
You will become familiar with the following functions:
NOMINAL(effect_rate, npery) - computes nominal rate
EFFECT(nominal_rate, npery) - computes effective rate
RATE(nper,pmt,pv,fv,type,guess) - computes interest rate of an annuity (periodic
amounts are the 'pmt' values)
PV(rate,nper,pmt,fv,type) - computes present worth value of periodic amounts; does not
include any cash flow in year 0
FV(rate,nper,pmt,pv,type) - computes the future worth value of an periodic payments
NPV(rate,value1,value2, ...) - computes the PW of some non-uniform stream of cash
flows; does not include cash flow in year 0
Use Excel to solve the following problems:
Problem 1: Solve the following problems manually and then check your answers with
the appropriate financial function in Excel.
NOTE: The financial functions themselves may not be enough to solve the problems.
You may need to write equations that use the financial functions.
Part 1NOMINAL function - What quarterly interest rate is equivalent to an effective
annual rate of 8% per year, compounded quarterly?
Part 2EFFECT function - What effective interest rate per quarter is equivalent to a
nominal 12% per year, compounded monthly?
Part 3RATE function - If $5000 is invested now in a franchise that promises the
investment will be worth $10,000 in 3 years, what is the earned rate of return?
Part 4PV function - How much money can you borrow now if you promise to repay the
loan in 10 year-end payments of $3000, starting 1 year from now, if the interest rate is
18% per year?
Part 5FV function - How much money will you have 12 years from now if your take
your Christmas bonus of $2500 each year and buy shares in a stock mutual fund that
earns 16% per year?

Part 6 NPV function - For the cash flows shown, calculate the present worth in year 0.
Assume i = 14% per year.
Year
Cash Flow$

1
4000

2
3200

3
2400

4
1600

Problem 2
You borrow $100 for n years & you want to compare the following two rates:
- At 10% per year simple interest
- At 10% per year compound interest
Plot the amount owed after n years for both simple & compound interest, for n = 1, 2, ,
20, and compare on the same graph. (The x-axis should be n = 1, 2, , 20).
Discuss the results.
Problem 3
You borrow $100 for n years & you want to compare & plot the amount owed after n
years at the following compound rates, 5%, , 10%, 15%, & 20%. Plot the amount owed
versus n for all rates on the same graph. (The x-axis should be n = 1, 2, , 10).
Discuss the results.
Problem 4
For the Uniform Series Present Worth Factor (P/A, i, n), plot the following curves for
n = 1, 2, 10, and the compound interest i = 0%, 5%, 10%, 15%, & 20% on the same
graph. Discuss the results. (The x-axis should be n = 1, 2, , 10)

ENGR 345: Engineering Economy


Hatem Elayat
Mechanical Engineering Department American University in Cairo AUC
Spreadsheet Assignment 2
Use Excel to solve the following problems:
Problem 1
You are asked to compare the arithmetic and geometric gradient cash flow series. The
base amount A1 (an input variable entered by the user, use $1000), the compound interest
rate i is 10%, the constant G in the arithmetic series is 10% of A1, the percent change j in
the geometric series is 10%, and n = 0, 1, 2, 5. Plot the end of period amount versus the
period n for both the arithmetic and geometric series on the same graph. Discuss the
results.
Problem 2
Ahmad purchased a car for 150,000 EP. The down payment is 15,000; the balance is
financed over a 5-year period. Equal monthly payments are made. If the monthly interest
rate is 1%, prepare
A. A table showing the month, the interest paid, and the principal contained in each
month payment
B. Plot interest paid each month versus the period n = 1, 2, , 60. (The x-axis
should be n = 1, 2, , 60). Show on the graph the principal contained in each
month payment
Problem 3
Develop a general-purpose spreadsheet to calculate out the balance due, principal
payment, and interest payment for each period of the loan. The user inputs to the
spreadsheet will be the loan amount, the number of payments per year, the number of
years payments are made, and the nominal interest rate. Submit printouts of your analysis
of a loan in the amount of $15,000 at 8.9% nominal rate for 36 month and for 60 months
of payments.
Problem 4
You borrowed $5,000 from a bank, and you have to pay it back in 5 years. Interest is
8%/yr/yr. create the following table and complete for 5 years.
year

Amount
owed

Interest
owed

Total owed

Principal
Payment

Total
Payment

1
2
3
4
5
SUM
Set up the table to allow the user to change the amount and interest rate charged.
Problem 5

Repeat problem 4 and create a similar table if you pay the principal and interest in one
payment at the end of 5 years.
Problem 6
Repeat problem 4 and create a similar table if you pay interest due at the end of each year
and principal in one payment at the end of 5 years.

ENGR 345: Engineering Economy

Hatem Elayat

Mechanical Engineering Department American University in Cairo


AUC
Spreadsheet Assignment 3

1.

Brock Associates invested $80.000 in a business venture with the


following cash flow results.
EOY

CF $

EOY

CF $

EOY

CF $

-80,000

22,000

22,000

10,000

28,000

16,000

16,000

28,000

10,000

IF MARR is 12 % determine the following


a. Present worth
b. Annual worth
c. Future worth
d. Internal rate of return
e. External rate of return
f. Saving/ investment ration
g. Payback period without considering the time value of money

2.

Shrewd Endeavors, Inc. invested $70.000 in a business venture


with the following cash flow results.
EOY

CF $

EOY

CF $

EOY

CF $

-70,000

14,000

14

7,000

20,000

13,000

15

6,000

19,000

12,000

16

5,000

18,000

10

11,000

17

4,000

17,000

11

10,000

18

3,000

16,000

12

9,000

19

2,000

15,000

13

8,000

20

1,000

Assuming MARR to be 10 % determine the following


a- Present worth
b- Annual worth
c- Future Worth
d- Internal rate of return
e- External rate of return
f- Saving/ investment ration
g- Payback period without considering the time value of money
3.

An investment of $20.000 is to be made on a computer that will


last for 6 years and have a zero salvage value at that time.
Operating, maintenance, and software costs are projected to be
$15.000 the first 3 years and $20.000 the last 3 years. The
minimum attractive rate of return is specified to be 12%.
Determine for this investment the following.
a- Present worth
b- Annual worth
C-Future Worth

4.

A utility vehicle is purchased for $30.000, kept for 4 years, and


sold for $7500. Annual operating and maintenance costs were
$5000. Using a 10% minimum attractive rate of return, determine
the following.
a-Present worth
b-Annual worth
c-Future Worth

5.

Owners of an economy motel chain are considering building a


new 200-unit motel. The present worth cost of building the motel
is $8.000.000; the firm estimates furnishings for the motel will
cost an additional $800.000 and will require replacement every 5
years. Annual operating and maintenance costs for the facility are
estimated to be $800.000. The average rate for a unit is
anticipated to be $60/ day. A 15-year planning horizon is used by
the firm in evaluating new ventures of this type; a terminal
salvage value of 15% of the original building cost is anticipated;
furnishings are estimated to have no salvage value at the end of
each 5-year replacement interval. Assuming average daily
occupancy percentages of 50%, 60%, 70%, 80% for years 1
through 4, respectively, and 90% for the fifth and each remaining
year, MARR of 12%, 365 operating days/year, and ignoring the
cost of the land, should the motel be built? Base your decision
upon the following values.
a-Present worth
b-Annual worth
c-Future Worth
d-Internal rate of return
e-External rate of return
f-Saving/ investment ration

6.

A floor control project has a construction cost at t = 0 of


$2.000.000, an annual maintenance cost of $50.000, and a major
repair at 5-year intervals projected to cost $250.000 with the first
such repair occurring at t = 5. If interest is 8% annually,
determine the amount of money needed at t = 0 to provide for
construction and perpetual upkeep.

7.

A distillation column is purchased for $300.000. Operating and


maintenance costs for the first year are $30.000. Thereafter,
operating and maintenance costs increase by 10% / year over the
previous year's costs. At the end of 8 years the column is sold for
$50.000. During the life of the investment, revenue was produced
that could be related directly to the investment in the column. The
revenue the first year was $75.000. Thereafter, revenue increased
by $10.000 over the previous year's revenue. Using a MARR of
12%, determine the equivalent annual worth for the investment.

8.

What should be entered in cells B11 through B15 to obtain the


values for PW, AW, FW, IRR, and SIR using Excel? Determine
the values for PW, AW, FW, IRR, and SIR.
R/C

MARR=

0.1

Time

Cash flow

-$ 25,000.00

-$5000.00

$8000.00

$8000.00

$8000.00

$8000.00

10

$18000.00

11

PW=

12

AW=

13

FW=

14

IRR=

15

SIR=

ENGR 345: Engineering Economy


Hatem Elayat
Mechanical Engineering Department American University in Cairo AUC
Spreadsheet Assignment 4
1. The PW of a project is uniformly distributed between $2,000 and $7,000. Using Excel,
perform a Monte Carlo simulation for 100 observations and calculate the E(PW) and the
V(PW).
2. The life of a project has a symmetric triangular distribution with a = 4, and b = 10.
Using Excel, perform a Monte Carlo simulation for 100 observations and calculate the
E(N) and the V(N).
3. A project is estimated to require an investment of $25,000, have a life of 5 years and 0
salvage value and have an annual net cash flow that can be described by a symmetric
triangular distribution with a = $5,000, and b = $12,000. If the minimum required rate of
return is 15%. Using Excel, perform a Monte Carlo simulation for 100 observations and
construct the distribution of the net PW. Calculate the E(PW) and the V(PW).
4. A certain project requires an investment of $10,000, and is expected to have a net
annual receipts minus disbursements of $2,800. The life of the project is 5 years, and the
salvage value is normally distributed with a mean of $2,000 and a standard deviation of
$1,000. Using Excel, perform a Monte Carlo simulation for 100 observations and
construct the distribution of the net PW. Calculate the E(PW) and the V(PW).

ENGR 345: Engineering Economy


Hatem Elayat
Mechanical Engineering Department American University in Cairo AUC
Spreadsheet Assignment 5
1. A high precision programmable router for shaping furniture components is
purchased by Henredon for $190,000. It is expected to last 12 years and have a
salvage value of $55,000. Calculate the depreciation and book value in each year:
A. Use the straight-line depreciation.
B. Use declining-balance depreciation with a rate that insures the book value
equals the salvage value.
C. Use double declining balance depreciation.
D. Use Sum-of-the years digits depreciation.
E. Plot the book value versus time for all four methods on the same graph. (xaxis is time, for 1 12 years, and y-axis is the book value).
2. A new proposed engineering building at AUC is to contain 10,000,000 square
feet. The total cost of the building (TC) is given by the following expression:

TC = (220 + 88X + 2X 2 )A
where X = number of floors, and A = floor area in ft2 / floor
A. Create a table (using Excel) that shows the total building cost, average cost,
and marginal cost for configurations ranging from floor 1 to 12 floors,
inclusive.
B. Plot the total cost versus number of floors (1 12). Based on the plot, what is
optimal number of floors for the building.
C. Demonstrate using differential calculus that your answer to part B is correct.

ENGR 345: Engineering Economy


Mechanical Engineering Department
American University in Cairo - AUC

Hatem Elayat

Review Problems Set 1


Time Value of Money Operations
1) How much money today is equivalent to $10,000 in '12 years, with interest at
10% compounded annually?
2) If $5000 is deposited into a fund paying 8% compounded annually, what sum will
be accumulated at the end of 10 years? What would be the sum accumulated at
the end of 5 years if the fund paid 16% compounded annually? What is suggested
regarding doubling the: interest rate and halving the length of the time period? If
you had $5000 available for investment and the two options were available, which
would you choose if you had to choose one of them? Justify your choice. If you
chose the shorter duration investment, what will you do with your accumulated
monies over the next 5-year period? Should the answer to this question influence
your choice?
3) If a fund pays 12% compounded annually, what single deposit now will
accumulate $12,000 at the end of the tenth year? If the fund pays 6% compounded
annually, what single deposit is required now in order to accumulate $6000 at the
end of the tenth year?
4) Maria deposits $1200, $500, and $2000 at t = 1,2, and 3, respectively. If the fund
pays 8% compounded per period, what sum will be accumulated in the fund at (a)
t = 3 and (b) t = 6?
5) Suppose you wanted to become a millionaire at retirement. If an annual
compound interest rate of 8% could be sustained over a 40-year period, how much
would have to be deposited yearly in the fund in order to accumulate $1 million?
What if the interest rate is 10%?, 12%?
6) Juan deposits $1000 in a savings account that pays 8% compounded annually.
Exactly 2 years later he deposits $3000; 2 years later he deposits $4000; and 4
years later he withdraws all of the interest earned to date and transfers it to a fund
ENGR 345, Dr. Hatem Elayat, AUC 1

that pays 10% compounded annually. How much money will be in each fund 4
years after the transfer?
7) A debt of $1000 is incurred at t = 0. What is the amount of four equal payments at
t = 1, 2, 3, and 4 that will repay the debt if money is worth 10% compounded per
period?
8) Five deposits of $500 each are made at t = 1, 2, 3, 4, and 5 into a fund. paying 6%
compounded per period. How much will be accumulated in the fund at (a) t = 5,
and B(b) t = 10?
9) What equal annual deposits must be made at t = 2, 3, 4, 5, and 6 in order to
accumulate $25,000 at t = 8 if money is worth 10% compounded annually?

ENGR 345: Engineering Economy


Mechanical Engineering Department
American University in Cairo - AUC

Hatem Elayat

Review Problems Set 2


Time Value of Money Operations
1)

John borrows $15,000 at 18% compounded annually; he pays off the loan over
a 5-year period with annual payments. Each successive payment is $700 greater
than the previous payment. How much was the first payment?

2)

Solve Problem 1 for the case in which each successive payment is to be 10%
greater than the previous payment.

3)

Yavuz wishes to make a single deposit P at t =0 into a fund paying 15%


compounded quarterly such that $1000 payments are received at t = 1, 2, 3, and
4 (periods are 3-month intervals), and a single payment of $7500 is received at t
= 12; What single deposit is required?

4)

Dr. Shieh deposits $3000 in a money market fund. The fund pays interest at a
rate of 12% compounded annually. Just 3 years after making the single deposit,
he withdraws one third the accumulated money in his account. Then, 5 years
after the initial deposit, he withdraws all of the accumulated money remaining in
the account. How much does, he withdraw 5 years after his initial deposit?

5)

David borrows $25,000 at 8% compounded quarterly. He wishes to repay the


money with 10 equal semiannual Installments. What must be the size of the
payment If the first payment is made 1 year after obtaining the $25,000?

6)

Barbara makes four consecutive annual deposits of $2000 in a savings account


that pays interest at a rate of 10% compounded semiannually. How much money
will be in the account 2 years after the last deposit?

7)

Mary Lib purchases a house for $250,000; a down payment of $20,000 is made
at the time of purchase; and the balance is financed at 12% compounded
monthly, with monthly payments made over a 10-year period.
a. What is the size of the monthly payments?
b. If the loan period had been 20 years, what would have been the size of the
monthly payments?

8)

It is desired to determine the size of the uniform series over the time period [2,
5] that is equivalent to the cash flow profile shown below using an interest rate
of 10%.

9)

Given the following cash flows, what single sum at t = 4 is equivalent to the
given data.
Assume i = 15%.

10)

Given the cash flow profiles shown below, determine the value of X such that
the two cash flow profiles are equivalent at 20% compounded annually.
EOY

CF (A)

CF(B)

-$12,000

$ -X

1,000

7,000

4,000

9,000

6,000

10,000

7,000

10,000

5,000

7,000

ENGR 345: Engineering Economy


Mechanical Engineering Department
American University in Cairo - AUC

Hatem Elayat

Review Problems Set 3


Practical Applications
1)

At t = 0, Martin borrows $5000 at 6%/period. Twelve equal payments are used


to repay the loan at t = 1, , 12. Determine the amount of interest included in
the fourth payment.

2)

Chris and Debbie borrow $10,000 at 7% compounded monthly. The loan is to


be paid off with 48 equal monthly payments. One month after making the
thirtieth payment, they decide to payoff the unpaid balance on the note. How
much should be repaid?

3)

Tom and Dale purchase a boat for $150,000; the down payment is $15,000; the
balance is financed over a 10-year period. Equal monthly payments are made.
Determine the amount of interest paid the first month if the monthly interest rate
is 1 %.

4)

Dr. Schultz is considering purchasing a bond having a face value of $2500 and
a bond rate of 10% payable semiannually. The bond has a remaining life of 8
years. How much should she pay for the bond in order to earn a return on
investment of 14% compounded semiannually? Assume the bond will be
redeemed for face value.

5)

Dr. Ramirez wishes to purchase a bond having a face value of $10,000 and a
bond rate of 15% payable annually. The bond has a remaining life of 8 years. In
order to earn a 20% rate of return on the investment, what amount should be paid
for the bond?

6)

Kristin buys a $2000 bond for $2100. The bond has a bond rate of 12% with
bond premiums paid annually. If the bond is kept for 8 years and sold for par
value, determine the equivalent annual yield rate (rate of return) for Kristin's
bond investment.

ENGR 345: Engineering Economy


Mechanical Engineering Department
American University in Cairo - AUC

Hatem Elayat

Review Problems Set 4


Comparison of Alternatives
1)

Consider the net cash flows (NCF) and salvage values (SV) for each of
Alternatives 1 and 2 having lives of 3 and 5 years, respectively.

EOY

Alternative 1
NCF1

Alternative 2

SV1

NCF2

SV2

-$60,000

$60,000

35,000

30,000

30,000

60,000

35,000

10,000

30,000

40,000

35,000

30,000

25,000

30,000

15,000

30,000

10,000

2)

-$100,000 $100,000

Alternatives 1, 2, and 3 have lives of 3, 4, and 6 years, respectively. Their net


cash flow (NCF) and salvage value (SV) profiles are as follows:

EOY

Alternative 1
NCF1

Alternative 2

SV1

NCF2

Alternative 3

SV2

NCF3

SV3

-$20,000

-$40,000

$40,000

-$70,000

$70,000

8,000

20,000

30,000

30,000

50,000

8,000

20,000

20,000

30,000

30,000

28,000

20,000

10,000

30,000

20,000

20,000

30,000

10,000

30,000

5,000

30,000

2,000

3)

Metal Salvage, Inc. has available three investment proposals A, B, and C,


having the cash flow profiles shown below. Proposals Band C are mutually
exclusive and Proposal C is contingent on Proposal A being chosen.
NCF(A)
Initial investment

NCF(B)

NCF(C)

$400,000

$600,000

$300,000

8 years

12 years

6 years

Annual receipts

$320,000

$380,000

$400,000

Annual disbursements

$230,000

$240,000

$400,000

Salvage value

$100,000

$200,000

$400,000

Life

4)

Consider the following investment decision.


Machine 1

Machine 2

First cost

$15,000

$20,000

Estimated life

5 years

10 years

Estimated annual revenues

$12,000

$14,000

Estimated annual operative costs

$6,000

$8,000

Estimated salvage value at end of 5 years

$1,500

$5,000

5)

Two mutually exclusive proposals, each with a life of 5 years, are under
consideration. MARR is 12%. Each proposal has the following cash flow
profile:
EOY

6)

NCF (A)

NCF (B)

-$30,000

-$42,000

9,300

12,625

9,300

12,625

9,300

12,625

9,300

12,625

9,300

12,625

The ABC Company is considering three investment proposals, A, B, and C.


Proposals A and B ate mutually exclusive, and Proposal C is contingent on
Proposal B. The cash flow for the investments over a 10-year planning horizon
are given below. The ABC Company has a budget limit of $1 million for
investments of the type being considered currently. MARR = 15%.

NCF (A)

NCF (B)

NCF (C)

Initial investment

$600,000

$800,000

$470,000

Planning horizon

10 years

10 years

10 years

Salvage values

$70,000

$130,000

$65,000

Annual receipts

$400,000

$600,000

$260,000

Annual disbursements
7)

$130,000

$270,000

$70,000

Consider the net cash flows of the following three alternatives. None is
renewable. MARR is 12%.
EOY

NCF (1)

NCF (2)

NCF (3)

-$3,000

-$4,000

-$6,000

1,000

4,000

3,000

1,500

2,000

3,000

3,000

4,000

6,000

ENGR 345: Engineering Economy


Hatem Elayat
Mechanical Engineering Department American University in Cairo AUC
Review Problems Set 5
Comparison of Alternatives
1-An aluminum extrusion plant manufactures a particular product at variable cost of
$0.04 per unit, including material cost. The fixed costs associated with manufacturing the
product equal $30.000/year. Determine the break- even value for annual sales if the
selling price per unit is (a) $0.40, (b) $0.30, and (c ) $0.20.
2- A manufacturing plant in Michigan has been contracting snow removal at a cost of
$400/day. The past 3 years have produced heavy snowfalls, resulting in the cost of snow
removal being of concern to the plant manager. The plant engineer has found that a snowremoval machine can be purchased for $25.000; it is estimated to have a useful life of 6
years, and a zero salvage value at that time. Annual costs for operating and maintaining
the equipment are estimated to be $5.000. Determine the break-even value for the number
of days per year that snow removal is required in order to justify the equipment, based on
a MARR of (a) 0%, (b) 10%, and (c) 15%.
3-The motor on a gasfired furnace in a small foundry is to be replaced. Three different
15- horsepower electric motors are being considered. Motor X sells for $2500 and has an
efficiency rating of 90%; motor Y sells for $1750 and has a rating of 85%; motor Z sell
for $1000 and is rated to be 80% efficient. The cost of electricity is $0.065/ kilowatthour. An8- year planning horizon is used, and zero salvage values are assumed for all
three motors. AMARR of 12% is to be used. Assume that the motor selected will be
loaded to capacity. Determine the range of values for annual usage of the motor (in
hours) that will lead to the preference of each motor. (Note: 0.746 Kilowatts= 1
horsepower).
4. Company W is considering investing $12,500 in a machine. The machine will last N
years, at which time it will be sold for L. Maintenance cost for this machine are estimated
to increase by 10% year over its life. The maintenance cost for the first year is estimated

to be $1500. The company has 10% MARR. Based on the probability distributions given
below for N and L; what is the expected equivalent uniform annual cost for the machine?
N

p(N)

$5,000

0.2

3,000

0.4

10

1,000

0.4

5. The Ajax Manufacturing company wishes to choose one of the following machines:
Machine 1

Machine 2

First cost

$10.000

$12.000

Planning horizon

6 years

6 years

Salvage value

$ 1.000

$ 1.000

Operating and maintenance cost for year K

800 + 80K

200+ 100K

MARR is 12%
A. Clearly specify the net cash flow profiles for each mutually exclusive alternative.
B. Determine which machine should be selected. Use the ranking approach and the
present worth method.
C. Repeat part (B) using the annual worth method.
D. Repeat part (B) using the future worth method.
E. Based on incremental cash flows, what is the discounted payback period?
F. Determine which machine should be selected. Use an incremental cash flow
approach and the internal rate of return method.
G. Repeat part (F) using external rate of return method.
H. Repeat part (F) using the saving/investment ratio method.
6. The telephone Company of America purchased a numerically controlled production
machine 5 years ago for $300,000. The machine currently has a trade-in value of $
70,000. If the machine is continued in use, another machine, X, must be purchased to
supplement the old machine. Machine X costs$200,000, has annual operating and

maintenance costs of $ 40,000, and will have a salvage value of $ 30,000 in 10 years. If
the old machine is retained, it will have annual operating and maintenance costs of $
70,000, has anticipated annial operating and maintenance costs of $70,000 and will have
a salvage value of $ 15,000 in 10 years.
Using a MARR of 15% and a present worth comparison, determine the preferred
economic alternative.
7. A highway construction firm purchased a particular earth-moving machine 3 years ago
for $ 125,000. The salvage value at the end of 8 years was estimated to be 35% of first
cost. The firm earns average annual gross revenue of $ 105,000 with the machine and the
average annual operating costs have been and are expected to be $ 65,000.
The firm now has opportunity to sell the machine for $70,000 and subcontract the work
normally done by the machine over the next 5 years. If the subcontracting is done, the
average annual gross revenue will remain$105,000 but subcontractor charge
$85,000 /end-of-years for these services.
If a 15% rate of return before taxes is desired, determine by the annual worth method
whether or not the firm should subcontract.

ENGR 345: Engineering Economy


Hatem Elayat
Mechanical Engineering Department American University in Cairo AUC
Review Problems Set 6
Depreciation & Cost Concepts
1. A mold for manufacturing medical supplies is purchased at the beginning of the fiscal
year for $30,000. The estimated salvage value after 10 years is $3000. Calculate the
depreciation deduction and the resulting unrecovered investment during each year of the
asset's life.
(a) Use traditional pre-1981 straight-line depreciation.
(b) Use traditional pre-1981200% declining balance switching to straight-line
depreciation.
(c) Use traditional pre-1981 sum of the years' digits depreciation.
2. A new engineering building of State University is to contain 10,000,000 square feet.
The total cost of the building (TC) is given by:
TC = (200 + 90 X + 2X2) A
Where X = number of floors
A = floor area in ft2/ per floor
a) Create a table shows the total building cost, average cost per floor, and
marginal cost per floor (using the difference equation approach)
b) Based on your table, what is optimal number of floors for the building? Justify
your answer based on the "total cost" column.
c) Justify your answer in part (b) based on the "marginal cost per floor" column.
d) Demonstrate, using differential calculus, that your answer in parts (b) and (c)
is correct. Note: For this part assume that X is continuous variable.
3. An oil refinery produces one base type of crude oil for southeastern U.S. market. The
two equations below give the relationships that approximate the total cost and the total
profit per week in dollars ( Note: This problem is for illustration purposes only; the total
cost function and the cost coefficients are not necessary realistic.)
Total cost, TC(x) = 50,000 + 20.2x + 0.0001x2, for x

0 = 0 otherwise

Total profit, TP (x) = S x TC(x)


Where x = amount of crude oil produced, barrels / week
S = sales price of crude oil, dollars / barrel = $ 35/ barrel
At what level of production in barrels/week is the cost/ barrel minimum? What is the
minimum cost/ barrel?
4. Production of particular type of annual crop is a function of fertilizer used and is given
by the following relationship:
P (t) = crop production, barrels/ acre
= 0.417 t ) - 0.00125 t2
Where t = amount of fertilizer used, pounds / acre
The crop can be sold at a price $ 15 / barrel. Given that one barrel pf crop weights
about 120 pounds, the total cost of the production is
TC (t) = $ (220 + 2t) per acre
a) How much fertilizer should the farmer use for this crop per acre of land to
maximize his annual profit?
b) What is maximum annual profit per acre of land for this crop?
c) Between what range of fertilizer application is a profit possible?
5. Assume the total annual inventory cost for a particular item carried un inventory is
TC (Q) = annual cost of ordering + annual cost
of carrying inventory, dollars / years
= Pc
Where

) + (0.60 Q + 150)

Pc = cost of preparing a purchase order (a constant value, regardless of the


quantity ordered)
= $ 15 per purchase order
Q = the number of items ordered each time a purchase order is placed.
A = total annual demand for this item = 2000 units
A/Q = the number of orders placed each year.

Note that the total annual inventory cost TC (Q) is a function of the order size q

a) Determine the value of Q that will minimize the total annual inventory cost(i>e>
determine the economic order quantity Q*)
b) What will be corresponding total annual inventory cost, TC (Q*) ?
c) For the economic order Q* , determine the number of orders that will be placed
each year.
d) If the cost of placing a purchase order is decreased by 50% what is the effect on
the economic order quantity?