Chapter 1 Foundations of Engineering Economy
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1 Solutions Manual Solutions Manual Engineering Economy 7th Edition Leland Blank Instant download and all chapters Solutions Manual Engineering Economy 7th Edition Leland Blank SOLUTIONS MANUAL Solutions to end-of-chapter problems Engineering Economy, 7th edition Leland Blank and Anthony Tarquin Chapter 1 Foundations of Engineering Economy 1.1 The four elements are cash flows, time of occurrence of cash flows, interest rates, and measure of economic worth. 1.2 (a) Capital funds are money used to finance projects. It is usually limited in the amount of money available. (b) Sensitivity analysis is a procedure that involves changing various estimates to see if/how they affect the economic decision. 1.3 Any of the following are measures of worth: present worth, future worth, annual worth, race of return, benefit/cost ratio, capitalized cost, payback period, economic value added. 1.4 First cost: economic; leadership: non-economic; taxes: eco110111ic; salvage value: economic; morale: non-economic; dependability: non-economic; intlation: economic; profit: economic; acceptance: non-economic; ethics: non-economic; interest rate: economic. 1.5 Many sections could be identified. Some are: I.b; ll.2.a and b; a and b. 1.6 Example actions are: Try to talk them out of doing it 110\\1, explaining it is stealing Try to get them to pay for their drinks Pay for all the drinks himself Walk away and not associate with them again 1.7 This is structured to be a discussion question; many responses are acceptable. It is an ethical question, but also a guilt-related situation. He can justify the result as an accident; he can feel justified by the legal fault and punishment he receives; he can get angry because it WAS an accident; he can become tormented over time due to the stress caused by accidently causing a child's death. 1
2 1.8 This is structured 10 be a discussion question; many responses are acceptable. Responses can vary from the ethical (stating the truth and accepting the consequences) to unethical (continuing to deceive himself and the instructor and devise some on-the-spot excuse). Lessons can be learned from the experience. A few of them are: Think before he cheats again. Think about the longer-term consequences of unethical decisions. Face ethical-dilemma situations honestly and make better decisions in real time. 2
3 Alternatively, Claude may learn nothing from the experience and continue his unethical practices. 1.9 i = [(3,885,000-3,500,()()0)/3,500,()()0]* I 00% = I I o/o per year 1.10 (a) Amount paid first four years = 900,0()()(0.12) = $ I 08,000 (b) Final payment = 900, ,000(0.12) = $1,008,0()() 1.11 i = (I J 25/12,500)* 100 = 9% i = (6160/56,000)* I 00 = 11 % i = (76()()/95,000)* 100 = 8% The $56,000 investment has the highest rate of rerurn Interest on loan= 23,800(0.10) = $2,380 Default insurance= 23,8()()(0.05) = $1190 Set-up fee= $3()() Total amount paid = ()() = $3870 Effective interest rate= (3870/23,8()())* I()()= 16.3% 1.13 The market interest rate is usually 3-4 % above the expected inflation rate. Therefore, Market rate is in the range to = 11 to 12% per year 1.14 PW= present worth; PY= present value; NPV = net present value; DCF = discounted cash flow; and CC= capitalized cost 1.15 P = $150,000; F = 'l; i = I I%; n = P = 'I; F = $100,000; i = 12%; n = P = $3.4 million; A='?; i = I 0%; n = F = 't; A= $100,()()0 + $125,0()()?; i = 15%; n = End-of-period convention means that all cash flows are assumed to cake place at the end of the interest period in which they occur fuel cost: outflow; pension plan contributions: outflow; passenger fares: inflow; maintenance: outflow; freight revenue: inflow; cargo revenue: inflow; extra bag charges: Inflow; water and sodas: outflow; advertising: outflow; landing fees: outflow; seat preference fees: inflow. 3
4 1.21 End-of-period amount for June= = $260 End-of-period amount for Dec = = $ Month Receipts, SI 000 Disbursernencs. $ I 000 Net CF, s I 000 Jan Feb ar Apr May 600 5(Xl +100 June (Kl July (Xl Aug (Xl Sepe 9(Xl 5(Xl +4(Xl Oct Nov Dec l l(kl 1.23 Net Cash flow= $2,920 ($2,92(),()()()) I= 10% 1=? l Year 25, P=? i = 15% , 19, Year 4
5 1.25 i =8% F=? Year 40, Amount now = F = I 00,000 + I 00,000(0.15) = $115, Equivalent present amount = 1,000,()()0/( I ) = $869,565 Discount = 790,()(JO - 869,565 = $79, ()()0(40 )( I + i) = 225,()()0 l+i=l.125 i = = I 2.5o/o per year 1.29 Total bonus next year= 8,()()0 + 8,000( 1.08) = $16, (a) Early-bird payment = 10,000-10,()()0(0.10) = $90()() (b) Equivalent future amount = 9000( I ) = Savings = I 0,()() = $ F1 = 1,()()0,()()0 + I,(l<XJ,()()0(0.10) = I, I ()(),()()0 F2 = I, I 00,()()0 + I, I ()(),()()0(0.10) = S 1,210, ,(XJO = 60,()()(J + 60,0(X)(5)(i) 3()(),000 i = 30,0()() i = 0.10 (IOo/o per year) 1.33 (a) F = 1,8()(),000( I ) ( I ) = $2, 178,()()0 (b) Interest= 2, 178,0(X)- 1,800,000 = $378,0()() 5
6 1.34 F = 6,000,(XJO( I ) ( I ) ( I ) = $7,770, ,600,000 = P( I )( I ) P = $3,801, ,4(){) = 50,(XJO( I ) log (86,400/50,()(JO) = n(log 1.20) = n = 3 years 1.37 Simple: F = 10,(X)O + 10,000(3)(0.10) = $13,000 Compound: 13,0(Xl = I 0,0(){)( I + i) ( I + i) ( I + i) ( I + i)3 = 1.3(){)0 3log( I + i) = log 1.3 3log ( I + i) = log( I + i) = l+i=l.091 i = 9.1 % per year 1.38 Minimum attractive rate of return is also referred to as hurdle rate, cutoff rate, benchmark rate, and minimum acceptable rate of return bonds - debt; stock sales =equity; retained earnings -equi1y; venture capital - debt; short term loan - debt; capital advance from friend - debt; cash on hand - equity; credit card - debt; home equity loan - debt WACC = 0.30(8o/o) ( 13%) = I 1.5% 1.41 WACC = I 0%(0.09) + 90%(0.16) = I 5.3% The company should undertake the inventory, technology, and warehouse projects (a) PV(i%,n,A,F) finds the present value P (b) FV(i%,n,A,P) finds the future value F (c) RATE(n,A,P,F) finds the compound interest rate i (d) IRR(first_cell:last_cell) finds the compound interest rate i (e) PMT(i%,n,P,F) finds the equal periodic payment A (f) NPER(i%,A,P,F) finds the number of periods n 6
7 1.43 (a) NPER(8o/o,-1500,8000,2000): (b) FV(6%,I0,2000,-9000): (c) RATE(I0,1000,-12000,2000): (cl) PMT( I I %,20,, 14()()0): (e) PV(8%, 15,-10()(),800): i = 8o/o; A = $-15()(); P = $8()()(); F = $20()(); n =? i = 6%; n = IO; A = $20()(); P = $-90()(); F = '! n = 10; A= $1000; P = $-12,()()0; F = $2000; i =? i = I I%; n = 20; F = $14,()()(J; A =? i = 8%; n = 15; A= $-1000; F = $8()(); P = 't 1.44 (a) PNIT is A (b) FV is F (c) NPER is n (d) PV is P (e) lrr is i 1.45 (a) For built-in functions, a parameter that does not apply can be left blank when it is not an interior one. For example, if there is no F involved when using the PMT function co solve a particular problem, it can be left blank (omitted) because it is an end parameter. (b) When the parameter involved is an interior one (like Pin the PMT function), a comma muse be put in its position Spreadsheet shows relations only in cell reference format. Cell EI O will indicate $64 more than cell CI Answer is (b) 1.48 Answer is (d) 1.49 Answer is (a) 1.50 Answer is (d) A 8 c 0 E 1 Initial amount= 1000 I= Simple Compound 4 Year Interest, $ Total, $ interest, s Total, $ s O = SB$1 = $8$1 6 l = $BS1'$E$1 = C =$ES SE$l = = $BS1*$ES1 = C = $E6 SESl = E = $BS1'$E$1 = C7 + BS = $E7' SE$1 = E s 4 = $BS 1'$ E$1 = C =$ EB $E$ l = E Total "5UM(B6:89) = C9 =SUM[06:D9) = E Upper limit= ( 12,300 - I 0,700)/10,700 = I 5o/o Lower limit= ( I 0,700-8,9()())/10,7()() = 16.8% Answer is (c) 1.52 Amount one year ago= I 0,0()()/( I ) = $ Answer is (b) 7
8 1.53 Answer is (c) P = P + P(n)(0.04) I = n =25 Answer is (b) 1.55 Answer is (a) 1.56 WACC = 0.70(16%) (12%) = 14,8% Answer is (c) 8
9 Solution to Case Studies, Chapter 1 There is no definitive answer to case study exercises. The following are examples only. Renewable Energy Sources for Electricity Generation 3. LEC approximation uses ( 1.05) 11 = , X = P 11 + A 11 + C 11 and LEC last year= X(0.5847) = ( )(0.5847) X = $2.526 million Refrigerator Shells I. The first four steps are: Define objective, information collection, alternative definition and estimates, and criteria for decision-making. Objective: Select the most economic alternative that also meets requirements such as production rate, quality specifications, manufacturability for design specifications, etc. lnfonnation: Each alternative must have estimates for life (likely IO years), AOC and other costs (e.g., training), first cost, any salvage value, and the MARR. The debt versus equity capital question must be addressed, especially if more than $5 million is needed. Alternatives: For both A and B, some of the required data 10 perform an analysis are: P and S must be estimated. AOC equal to about 8o/o of P must be verified. Training and other cost estimates (annual, periodic, one-time) must be finalized. Confirm n = IO years for life of A and B. 1ARR will probably be in the 15% to 18 /o per year range. Criteria: Can use either present worth or annual worth to select between A and B. 2. Consider these and others like them: Debt capital availability and cost Competition and size of market share required Employee safety of plastics used in processing 9
10 3. Wirh the addition of C, chis is now a make/buy decision. Economic estimates needed are: J;> J;> Cose of lease arrangement or unit cost, whatever is quoted. Amount and length of ti me the arrangement is avai!able. Some non-economic factors may be: J;> J;> J;> Guarantee of available time as needed. Compatibility with current equipment and designs. Readiness of the company co enter the market now versus later 1 0
11 Solutions to end-of-chapter problems Engineering Economy, 7th edition Leland Blank and Anthony Tarquin Chapter 2 Factors: How Time and Interest Affect Money 2.1 (I) (P/F, 6o/o, 8) = (2)(A/P, 10%,10)= (3) (A/G, 15%,20) = (4) (1-VF,2%,30) = (5) (P/G,35%, 15) = P = 21,300(?/ A, I 0%,5) = 21,3()0(3.7908) = $80, Cost now= 142(0.60) =$85.20 Present worth at regular cost = 142(?/F, I 0%,2) = 142(0.8264) = $ Present worth of savings= = $ F = I ()(),O()()(F/P, I 0%,3) + 885,000 = I ()(),()()0( ) + 885,000 = $1,018, I()() 2.5 F = 50,000(F/P,6%, 14) = 5(),()()()(2.26()9) =$113,() F = 1,9()(),()(JO(F/P, 15%,3) F = 1,900,0()()( ) = $2,889, A= 220,000(A/P,IOo/o,3) = 220,()()0( I) = $88, P = 75,0()()(P/F, 12%,4) = 75,0()()(0.6355) = $47,663 1
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