BERMUDO, CHARLES ANDREW B.

GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

Problem 1
Stan Moneymaker has the opportunity to purchase a certain U.S. Treasury bond that
matures in eight years and has a face value of 10,000. This means that Stan will receive 10,000
cash when the bond’s maturity date is reached. The bond stipulates a fixed nominal interest rate
of 8% per year, but interest payments made to the bondholder every three months, therefore,
each payment amounts to 2% of face value. Stan would like to earn 10% nominal interest
(compounded quarterly) per year on his investment, because interest rates in the economy have
risen since the bond was issued. How much should Stan be willing to pay for the bond?
Given:
C = Z = Php 10,000.00
r=2%
i = 10 % / 4 = 2.5 % per quarter
8 * 4 = 32 quarters of the bond’s life
Solution:

( PF ,i % , N )+ rZ ( PA , i % , N )
V N =C

P P
V =10,000 ( , 2.5 % , 32 )+ ( 0.02 )( 10,000 ) ( ,2.5 % ,32 )
N
F A

−32 (1+0.025)32−1
V N =10,000 ( 1+0.025 ) + ( 0.02 ) ( 10,000 ) [ ]
0.025(1+ 0.025)32
V N =4,537.71+ 4,369.8 4

V N =$ 8,907.5 5
Conclusion:
Stan should be willing to pay $ 8,907.55 for the bond.

Problem 2

GEAL201 ENGINEERING ECONOMICS

SY 2019-2020
BERMUDO, CHARLES ANDREW B.
GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

A bond with a face value of Php 5,000 pays interest of 8% per year. This bond will be
redeemed at par value at the end of its 20-year life, and the first interest payment is due one
year from now.
a) How much should be paid now for this bond in order to receive a yield of 10% per year
on the investment?
b) If this bond is purchased now for Php 4,600, what annual yield would the buyer receive?
Given:
C = Z = Php 5,000.00
r=8%
i = 10 %
N = 20
Solution:

V N =C ( PF ,i % , N )+ rZ ( PA , i % , N )
a)

V N =5,000 ( PF , 10 % , 20)+(0.08)(5,000)( PA , 10 % ,20)

( 1+ 0.1 )20−1
V N =5,000( 1+ 0.1)−20+ ( 0.08 )( 5,000 ) [ 20
]
0.1 ( 1+0.1 )
V N =743.22+3,405.43

V N =$ 4,148.65
Conclusion:
In order to receive a yield of 10% per year on the investment, he/she should pay $
4,148.65.

b) V N =4,600
( 1+i )20−1
4600=5,000 ( 1+ i )−20+(0.08)(5,000)[ 20
]
i ( 1+ i )

GEAL201 ENGINEERING ECONOMICS

SY 2019-2020
BERMUDO, CHARLES ANDREW B.
GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

4600 ( 1+0.1 )20−1

=(1+ 0.1)−20+ ( 0.08 ) [ 20
]
5000 0.1 ( 1+ 0.1 )
4600 1 0.8 0.08
= + −
5000 (1+i) 20
i i (1+i)20
i=0.08868=8.868 %
Conclusion:
The annual yield that the buyer would receive is 8.868 %.
Problem 3
Josh Ritchey has just been hired as a cost engineer by a large airlines company. Josh’s
first idea is to stop giving complimentary cocktails, wine, and beer to the international flying
public. He calculates this will save 5,000,000 drinks per year, and each drink costs $0.50, for a
total of $2.5 million per year. Instead of complimentary drinks, Josh estimates that the airlines
company can sell 2,000,000 drinks at $5.00 per drink. The net savings would amount to $12.5
million per year! Josh’s boss really likes the idea and agrees to give Josh a lump-sum bonus
now equaling 0.1% of the present equivalent worth of three years of net savings. If the
company’s MARR is 20% per year, what is Josh’s bonus?
Given:
Net Savings = 12.5 million
MARR = 20 %
n=3
Solution:
Present Value of Annuity Formula

1−(1+r )−n
A=P[ ]
r

1−( 1+ 0.2 )−3

A=12.5 [0.02 ]
=12.5 ( 2.106 )

A=26.331million
Josh’s bonus = 0.1 % of Present Value of three year’s net savings

GEAL201 ENGINEERING ECONOMICS

SY 2019-2020
BERMUDO, CHARLES ANDREW B.
GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

¿ 26.331 million ( 0.001 )

¿ $ 0.02633101852million=$ 26,331.019
Conclusion:
Josh’s bonus is $ 26, 331.019

Problem 4
 A new municipal refuse-collection truck can be purchased for Php 84,000. Its expected
useful life is six years, at which time its market value will be zero. Annual receipts less expenses
will be approximately Php 18,000 per year over the six-year study period. Use the PW method
and a MARR of 18% to determine whether this is a good investment.  
Given:
I = 84,000
A = 18,000
n=6
Solution:

PW = A ( PA , i% , n)−I
( 1+0.18 )6 −1
PW =18000
[ ]
0.18 ( 1+0.18 )6
−84,000

PW =62,956.84608−84,000=−21, 043.154
Conclusion:
Using the PW method, this is not a good investment.

GEAL201 ENGINEERING ECONOMICS

SY 2019-2020
BERMUDO, CHARLES ANDREW B.
GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

Problem 5
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 follows 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 Vidhi’s MARR=6% per year,
what is the FW of Vidhi’s projected net income?
Revenu
Year Year Expenses
e
1 6,000 1 3,100
2 6,200 2 3,300
3 6,300 3 3,500
4 6,400 4 3,700
5 6,500 5 3,900
6 6,600 6 6,100
7 6,700 7 4,300
8 6,800 8 4,500
9 6,900 9 4,700
10 7,000 10 4,900

Given:
A = 2,900

GEAL201 ENGINEERING ECONOMICS

SY 2019-2020
BERMUDO, CHARLES ANDREW B.
GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

G = 100
F6 = 2,000
Solution:

P0=2,900 ( PA , 6 % , 10)−100 ( GP ,6 % , 9 )( PF , 6 % ,1 )−2000( PF , 6 % , 6)

10 9
( 1+0.06 ) −1 ( 1+ 0.06 ) −0.06 ( 9 )−1
P0=2,900 [
( 0.06 ( 1+ 0.06 )) ([
10
] −100
( 0.06 ) 2
])
( 1+0.06 ) −2000(1+006)6
−1

P0=17,615.76831

F
FW 10=17,615.76831( , 6 % ,10) = 17,615.76831(1+0.06)10
P
FW 10=34,547.158
Conclusion:
The FW of Vidhi’s projected net income is 34,547.158.

Problem 6
A simple, direct space heating system is currently being used in a professional medical
office complex. An upgraded “variable air-volume system“ retrofit can be purchased and
installed for Php 200,000 (investment cost). Its power savings in the future will be 500,000 kilo-
watt hours per year over its estimated life of 8 years. The cost of electricity is Php 0.10 per kilo-
watt hour. If the firm’s cost of capital is 12% per year and the residual value of the system in 8
years is Php 20,000, should the new system be purchased? Use the present worth method.
Given:
I = 200,000
A = 500,000 * 0.10 = 50,000
N=8
i = 12 %
GEAL201 ENGINEERING ECONOMICS
SY 2019-2020
BERMUDO, CHARLES ANDREW B.
GC22
Department of Civil Engineering
Ateneo de Naga University

PROBLEM SET 6

EVALUATING A SINGLE PROJECT

S = 20,000
Solution:

PW = A ( PA , i% , n)+ S( PF , i% ,−n)−I
( 1+0.12 )8−1
PW =50,000
[ ]
0.12 ( 1+ 0.12 )
8
+20,000(1+ 0.12)−8−200,000

PW =248,381.65+ 8,077.66 – 200,000

PW =56 , 459.65≥ 0
Conclusion:
The new system should be purchased.

GEAL201 ENGINEERING ECONOMICS

SY 2019-2020