Don Mariano Marcos Memorial State University

Mid La Union Campus

COLLEGE OF GRADUATE STUDIES
San Fernando City, La Union

Name: Daniel Jovin V. Valmores

Subject: Advance Engineering Economy
Professor: Dr. Albert P. Tablatin

PROBLEM SET

1-10. Often it makes a lot of sense to spend some money now so you can save more money in the
future. Consider filtered water. A high-tech water filter costs about $50 and can filter 7200
ounces of water. This will save you purchasing two 20-ounces bottles of filtered water every day,
each costing $1. The filter will need replacing every six months. How much will this filter save
you in years time?

2-22. Jerry Smiths residential air conditioning (AC) system has not been able to keep his house
cool enough in 90F weather. He called hi local AC maintenance person, who discovered a leak
in the evaporator. The cost to recharge the AC unit is $40 for gas and $45 for labor, but the leak
will continue and perhaps grow worse. The AC person cautioned that his service would have to
be repeated each year unless the evaporator is replaced. A new evaporator would run about $800-
$850.
Jerry reasons that fixing the leak in the evaporator on an annual basis is the way to go.
After all, it will take 10 years of leak repairs to equal the evaporators replacement cost.
Comment on Jerrys logic. What will you do?

3-40. A car rental agency is considering a modification in its oil change procedure. Currently, it
uses a type X filter, which costs $5 and must be changed every 7000 miles along with the oil
(5quarts). Between each oil change, one quart of oil must be added after each 1000 miles. The
proposed filter (type Y) has to be replaced every 5000 miles (along with 5 quarts of oil) but does
not require any additional oil between filter changes. If the oil costs $1.08 per quart, what is the
maximum acceptable price for the type Y filter?

4-110. On January 1, 2005, a persons savings account was worth $200,000. Every month
thereafter, this person makes a cash contribution of $676 to the account. If the fund is expected
to be worth $400,000 on January 1, 2010, what annual rate of interest is being earned on this
fund?
5-19. Vidhi is investing in some rental property in Collegeville and is investing her income from
the investment. She knows the rental revenue will increase each year, but so will the
maintenance expenses. She has been able to generate the data that follow regarding this
investment opportunity. Assume that all cash flows occur at the end of each year and that the
purchase and sale of this property are not relevant to the study. If Vidhis MARR = 6% per year,
what is the FW of Vidhis projected net income?

Year Revenue Year Expenses

1 $6000
2 6200
3 6300
4 6400
5 6500
6 6600
7 6700
8 6800
9 6900
10 7000
1 $3100
2 3300
3 3500
4 3700
5 3900
6 6100
7 4300
8 4500
9 4700
10 4900

6-15. Consider the three mutually exclusive projects that follow. The firms MARR is 10% per
year.

EOY Project 1 Project 2 Project 3

0 -$10,000 -$8,500 -$11,000
1-3 $5,125 $4,450 $5,400
a. Calculate each projects PW.
b. Determine the IRR of each project.
c. Which project would you recommend?
d. Why might one project have the highest PW while a different project has the largest IRR?

7-19. Suppose state income taxes and local income taxes are treated as expenses for purposes of
calculating federal taxable income and hence federal income taxes. Determine the effective
income tax rate when the federal income tax rate is 35%, the state income tax rate 6%, and the
local income tax t\rate is 1%.

9-24. Five years ago, a company in New Jersey installed a diesel-electric unit costing $50000 at a
remote site because no dependable electric power was available from a public utility. The
company has computed depreciation by the straight line method with a useful life of 10 years and
a zero salvage value. Annual operation and maintenance expenses are $16000, property taxes
and insurance cost another $3000 per year.
Dependable electric service is now available at an estimated annual cost of $30000. The
company in New Jersey wishes to know whether it would be more economical to dispose of the
diesel-electric unit now when it can be sold for $35000, or to wait 5 years when the unit would
have to be replaced anyway (with no MV). The company has an effective income tax rate of 50%
and tries to limit its capital expenditures to opportunities that will earn at least 15% per year after
income taxes. What would you recommend?
11-17. Two traffic signal systems are being considered for an intersection. One system costs
$32000 for installation and has an efficiency rating of 78%, requires 28kW power (output),
incurs a user cost of $0.24 per vehicle, and has a life of 10years. A second system costs $45000
to install, has an efficiency rating of 90%, requires 34 kW power (output), has a user cost of
$0.22 per vehicle, and has a life of 15 years. Annual maintenance costs are $75 and $100,
respectively. MARR = 10% per year. How many vehicles must use the intersection to justify
when electricity costs $0.08/kWh?

12-11. The purchase of a new piece of electronic measuring equipment for use in continuous
metal-forming process is being considered. If this equipment were purchased, the capital cost
would be $418000, and estimated savings are $148000 per year. The useful life of the equipment
in this application is uncertain. The estimated probabilities of different useful lives occurring are
shown in the following table. Assume that MARR = 15% per year before taxes and the market
value at the end of its useful life is equal to zero. Based on a before tax analysis,
a. What are the E(PW), V(PW), and SD(PW) associated with the purchase of the
equipment?
b. What is the probability that the PW is less than zero? Make a recommendation and
give your supporting logic based on the analysis results.

Useful life, Years(N) p(N)

3 0.1
4 0.1
5 0.2
6 0.3
7 0.2
8 0.1

13-10. The Shakey Company can finance the purchase of a new building costing $2 million with
a bond issue, for which it would pay $100000 interest per year, and then repay the $2 million at
the end of the life of the building. Instead of buying in this manner, the company can lease the
building by paying $125000 per year, the first payment being due one year from now. The
building would be fully depreciated for tax purposes over an expected life of 20 years. The
income tax rate is 40% for all expenses and capital gains and losses, and the firms after-tax
MARR is 5%. Use AW analysis based on equity (non borrowed) capital to determine whether
the firm should borrow and buy or lease if, at the end of 20 years, the building has the following
market values for the owner: (a) nothing, (b) $500000. Straight line depreciation will be used but
is allowable only if the company purchases the building.
14-10. Hiring an employee is always multi-attribute decision process. Most jobs possess a
diversity of requirements, and most applicants have a diversity of skills to bring to the job. Table
14-10 matches a set of desired attributes with capabilities of four job applicants for a job in a
pharmaceutical company. Use the tools of this chapter to examine the candidates.
Who would be chosen or eliminated using
a. Dominance (consider more years of experience preferred to fewer)
b. Satisfying
c. Disjunctive resolution
d. Lexicography with the following priorities: project management skills, general
attitude, years manufacturing experience, previous management experience, total
years experience
 Don Mariano Marcos Memorial State University
Mid La Union Campus
COLLEGE OF GRADUATE STUDIES
San Fernando City, La Union

Name: Daniel Jovin V. Valmores

Subject: Advance Engineering Economy
Professor: Dr. Albert P. Tablatin

SOLUTION

1-10.

Cost of water filter = $50 (to be replaced every six months)

Savings each day = 2 bottles/day x $1 = $2/day
Savings in a year = ($2/day) x (365 days/year) ($50 x 2) = $630/year

2-22.

Jerrys logic is correct if the AC system does not degrade in the next ten years (very unlikely).
Because the leak will probably get worse, two or more refrigerant re-charges per year may soon
become necessary. Jerrys strategy could be to continue re-charging his AC system until two re-
charges are required in a single year. Then he should consider repairing the evaporator (and
possibly other faulty parts of his system).

3-40.

Type X filter: cost = $5, changed every 7,000 miles along with 5 quarts oil between each oil
change 1 quart of oil must be added after each 1,000 miles

Type Y filter: cost = ?, changed every 5,000 miles along with 5 quarts of oil no additional oil
between filter changes

oil = $1.08 / quart

Common multiple = 35,000 miles

For filter X = 5 oil changes: 5($5 + 5($1.08) + 6($1.08)) = (5)$16.88 = $84.40

For filter Y = 7 oil changes: 7CY + 7(5)($1.08) = 7X + $37.8

$84.40 = 7CY + $37.8

$46.60 = 7CY

CY = $6.66
4-110.

5-19.

Let A = $2,900, G = $100 (delayed 1 year)

F6 = $2,000
P0 = $2,900 (P/A,6$,10) 100(P/G,6%,9)(P/F,6%,1) $2,000(P/F,6%,6)
= $2,900 (7.3601) $100 (24.5768) (0.9434) $2,000 (0.7050)
= $17,615.71
FW10 = $17,615.71(F/P, 6%, 10) = $17,615.71(1.7908) = $31,546.21

6-15.
(a) PW1(10%) = $2,745; PW2(10%) = $,2566; PW3(10%) = $2,429
(b) IRR1 = 25%; IRR2 = 26.5%; IRR3 = 22.2%
(c) Select Project 1 to maximize profitability.
(d) This is because the IRR method assumes reinvestment of cash flows at the IRR whereas the
PW method assumes reinvestment at the MARR.
7-19.
t = state + local + federal (1 state local)
= federal + (1 federal)(state) + (1 federal)(local)
= 0.35 + 0.65(0.06) + 0.65(0.01)
= 0.3955 (round it to 40%)

9-24.
Keep diesel-electric unit:

EOY BTCF DEPR. TI T(50%) ACTF

0 -$35000 - $10000 $5000 $30000
1-5 -$19000 $5000 -$24000 $12000 -$7000

AW(15%) = $30,000(A/P, 15%, 5) $7,000 = $15,949

MV BV = $35,000 $25,000 = $10,000, which is shown as an opportunity cost.
Buy power from a utility:

EOY BTCF DEPR. TI T(50%) ACTF

1-5 -$30000 - $30000 $15000 -$15000

AW(15%) = $15,000
Therefore, the company should consider buying power from the outside source and selling
the diesel-electric unit now.
11-17.
1) Assume salvage value for each system = 0
2) The difference in user cost will be projected as a savings for system #2.
Savings = $0.02/vehicle
3) There are approximately 8,760 hours/year

System 1: AW method
CR = $32,000(A/P,10%,10) = $5,206.40
Annual Maintenance = $75
(28kW)(8760 hr/yr)($0.08kWh)
Operation Cost = 0.78 = $25,157 per year

AC#1 = $5,206.40 + $75 + $25,157 = $30,438.40

System #2:
CR = $45,000(A/P,10%,15) = $5,917.5
Annual Maintenance = $100
(34kW)(8760 hr/yr)($0.08kWh)
Operation Cost = 0.90 = $26,475 per year

Let N = # vehicles using intersection

Savings per vehicle = ($0.24 $0.22) N = $0.02 N

AC#2 = $5,917.50 + $100 + $26,475 0.2N = $32,492.50 $0.02N

For Breakeven point:

$30,438.40 = $32,492.50 $0.02N and N = 102,705 cars per year

For ADT = Average Daily Traffic

N = 102705/365 = 282 vehicles/day (rounded to next highest integer)

12-11.

(a) PW(N) = $418,000 + $148,000 (P/A, 15%, N)

N PW(N) p(N) PW(N) p(N) [(PW(N)] [(PW(N)] p(N)

3 -$80,086 0.1 -8,009 6,413,767,396 641,376,739.6

4 4,540 0.1 454 20,611,600 2,061,160
5 78,126 0.2 15,625 6,103,671,876 1,220,734,375
6 142,106 0.3 42,632 20,194,115,236 6,058,234,571
7 197,739 0.2 39,548 39,100,712,121 7,820,142,424
8 246,120 0.1 24,612 60,575,054,400 6,057,505,440
E(PW)= $114,862.20 E[(PW)] = 21,800,054,709.80($)

V(PW) = 21,800.06x10^6 (114,862) = 8,606.78x10^6 ($)

SD(PW) = (8,606.78x10^6 )^ = $92,773

(b) Pr{PW < 0} = 0.1 (From work table above)

Recommend purchase of equipment: E(PW) = $114, 862 is favorable; SD(PW) = $92,773 is less
than the E(PW); and Pr{PW<0} = 0.1 is low.
13-10.
Based on the use of equity money of the firm.
t=0.40

Buy Yr. BTCF Depr. Taxable Income ATCF

Inc. Taxes
0 0 0
1-20 -$100,000 -$100,000 -$200,000 $80,000 -$20,000
If (a) 20 -2,000,000 -2,000,000
If (b) 20 -1,500,000 500,000 -200,000 -1,700,000

Capital gain = $2,000,000 $1,500,000 = $500,000

t=0.40

Lease Yr. BTCF Depr. Taxable Income ATCF

Inc. Taxes
1-20 -$125,000 -- -$125,000 $50,000 -$75,000

Annual Worths
Buy and (a) $0 salvage:
$20,000$2,000,000(A/F,5%,20) = $80.400 < $75.000
Therefore, Lease.
Buy and (b) $500,000 salvage:
$20,000 $1,700,000(A/F,5%,20) = $71.340> $75,000
Thus leasing is better for case a, but buying is better for case b.

14-10.
(a) Wright dominates Alott Alott is removed from further consideration.
(b) Only Wright meets the minimum performance levels for all attributes.
(c) All candidates would be retained under disjunctive resolution.
(d) Lexicography Based on project management skills (most important attribute), Busy is
eliminated. Looking next at general attitude, Surley is eliminated. Lastly, looking at years
manufacturing experience, Wright would be selected.