Emerson Processing borrowed $900,000 for installing energy-effi cient lighting and safety

equipment in its La Grange manufacturing facility. The terms of the loan were such that the
company could pay interest only at the end of each year for up to 5 years, after which the
company would have to pay the entire amount due. If the interest rate on the loan was 12%
per year and the company paid only the interest for 4 years, determine the following: ( a)
The amount of each of the four interest payments (b) The amount of the fi nal payment at
the end of year 5 [$108,000, $1,008,000]
Identify the four engineering economy symbols and their values from the following problem
statement. Use a question mark with the symbol whose value is to be determined. Vision
Technologies, Inc., is a small company that uses ultra-wideband technology to develop
devices that can detect objects (including people) inside of buildings, behind walls, or below
ground. The company expects to spend $100,000 per year for labor and $125,000 per year
for supplies before a product can be marketed. At an interest rate of 15% per year, what is
the total equivalent future amount of the companys expenses at the end of 3 years?
At an interest rate of 15% per year, an investment of $100,000 one year ago is equivalent
to how much now?[ $115,000]
During a recession, the price of goods and services goes down because of low demand. A
company that makes Ethernet adapters is planning to expand its production facility at a cost
of $1,000,000 one year from now. However, a contractor who needs work has offered to do
the job for $790,000 if the company will do the expansion now instead of 1 year from now. If
the interest rate is 15% per year, how much of a discount is the company getting?
[ $869,565, $79,565]
As a principal in the consulting fi rm where you have worked for 20 years, you have
accumulated 5000 shares of company stock. One year ago, each share of stock was worth
$40. The company has offered to buy back your shares for $225,000. At what interest rate
would the fi rms offer be equivalent to the worth of the stock last year?
[12.5% per year]
If interest is compounded at 20% per year, how long will it take for $50,000 to accumulate to
$86,400?

[n=3 years, Hint: you may use log theory to find n]

The Moller Skycar M400 is a flying car known as a personal air vehicle (PAV) that is expected
to be FAA-certifi ed by December 31, 2011. The cost is $985,000, and a $100,000 deposit
will hold one of the fi rst 100 cars. Assume a buyer pays the $885,000 balance 3 years
after making the $100,000 deposit. At an interest rate of 10% per year, what is the effective
total cost of the PAV in year 3? [F=$1,018,100]
CGK Rheosystems makes high-performance rotational viscometers capable of steady shear
and yield stress testing in a rugged, compact footprint. How much could the company afford
to spend now on new equipment in lieu of spending $200,000 one year from now and
$300,000 three years from now, if the company uses an interest rate of 15% per year?
[P=$371,170]
Henry Mueller Supply Co. sells tamperproof, normally open thermostats (i.e., thermostat
closes as temperature rises). Annual cash fl ows are shown in the table below. Determine the
future worth of the net cash fl ows at an interest rate of 10% per year.
Year 1 2 3 4 5 6 7 8
Income, $1000 200 200 200 200 200 200 200 200
Cost, $1000 90 90 90 90 90 90 90 90

[ F=$1,257,949]

Profits from recycling paper, cardboard, aluminum, and glass at a liberal arts college have
increased at a constant rate of $1100 in each of the last 3 years. If this years profi t (end of
year 1) is expected to be $6000 and the profi t trend continues through year 5, ( a ) what will
the profi t be at the end of year 5 and ( b ) what is the present worth of the profi t at an
interest rate of 8% per year? [Profit in year 5 = 6000 + 1100(4) = $10,400

, P=$32,066]
Western Hydra Systems makes a panel milling machine with a 2.7-m-diameter milling head
that emits low vibration and processes stress-relieved aluminum panels measuring up to
6000 mm long. The company wants to borrow money for a new production/warehouse
facility. If the company offers to repay the loan with $60,000 in year 1 and amounts
increasing by $10,000 each year through year 5, how much can the company borrow at an
interest rate of 10% per year? [P = 60,000(P/A,10%,5) + 10,000(P/G,10%,5)

= 60,000(3.7908) + 10,000(6.8618) = $296,066]

Gesky Industrial Products manufactures brushless blowers for boilers, food service
equipment, kilns, and fuel cells. The company borrowed $18,000,000 for a plant expansion
and repaid the loan in seven annual payments of $3,576,420, with the fi rst payment made
1 year after the company received the money. What was the interest rate on the loan?
[18,000,000 = 3,576,420(P/A,i,7) (P/A,i,7) = 5.0330 From interest tables in P/A

column and n = 7, i = 9% per year.]

A start-up company that makes hydraulic seals borrowed $800,000 to expand its packaging
and shipping facility. The contract required the company to repay the investors through an
innovative mechanism called faux dividends, a series of uniform annual payments over a fi
xed period of time. If the company paid $250,000 per year for 5 years, what was the interest
rate on the loan? [800,000 = 250,000(P/A,i,5) (P/A,i,5) = 3.20 Interpolate between

16% and 18% interest tables or use a spreadsheet. By spreadsheet function, i =

16.99% 17% per year.]
You own a small engineering consulting company. If you invest $200,000 of the companys
money in a natural gas well that is expected to provide income of $29,000 per year, how
long must the well produce at that rate in order to get the money back plus a rate of return
of 10% per year? [200,000 = 29,000(P/A,10%,n) (P/A,10%,n) = 6.8966 Interpolate in

10% interest table or use a spreadsheet function to display n = 12.3 years.]

The net cash fl ow associated with development and sale of a new product is shown.
Determine the
present worth at an interest rate of 12% per year. The cash fl ow is in $1000 units.

[(a) P = -120(P/F,12%,1) - 100(P/F,12%,2) - 40(P/F,12%,3) + 50(P/A,12%,2)

(P/F,12%,3) + 80(P/A,12%,4)(P/F,12%,5) = -120(0.8929) - 100(0.7972) - 40(0.7118)
+ 50(1.6901)(0.7118) + 80(3.0373)(0.5674) = $-17,320]

Costs associated with the manufacture of miniature high-sensitivity piezoresistive pressure

transducers are $73,000 per year. A clever industrial engineer found that by spending
$16,000 now to reconfi gure the production line and reprogram two of the robotic arms, the
cost will go down to $58,000 next year and $52,000 in years 2 through 5. Using an interest
rate of 10% per year, determine ( a ) the equivalent annual cost of the manufacturing
operations and (b) the equivalent annual savings in years 1 through 5. [2 (a) A =

16,000(A/P,10%,5) + 52,000 + (58,000 52,000)(P/F,10%,1)(A/P,10%5) =

16,000(0.26380) + 52,000 + 6000(0.9091)(0.26380) = $57,660 per year (b) Annual
savings = 73,000 - 57,660 = $15,340 per year]
The expansion plans of Acme Granite, Stone & Brick call for the company to add capacity for
a new product in 5 years. The company wants to have $360,000 available before it
announces the product. If the company sets aside $55,000 now and $90,000 in year 2, what
uniform annual amount will it have to put in an account in years 3 through 5 to have the
$360,000? Assume the account earns interest at 8% per year. [ 360,000 =

55,000(F/P,8%,5) + 90,000(F/P,8%,3) + A(F/A,8%,3) 360,000 = 55,000(1.4693) +

90,000(1.2597) + A(3.2464) 3.2464A= 165,816 A = $51,076 per year]
Austin Utilities is planning to install solar panels to provide some of the electricity for its
groundwater desalting plant. The project would be done in two phases. The fi rst phase will
cost $4 million in year 1 and $5 million in year 2. This investment will result in energy
savings (phase 2) of $540,000 in year 3, $546,000 in year 4, and amounts increasing by
$6000 each year through year 10. Let i _ 10% per year.
(a) What is the future worth of the savings ?
(b) Is the cost of the solar project justifi ed by the savings? (Hint: Calculate the difference
between
savings and cost).
[(a) First calculate P and then convert to F. P2 = 540,000(P/A,10%,8) +

6000(P/G,10%,8) = 540,000(5.3349) + 6000(16.0287) = $2,977,018 F =

2,977,018(F/P,10%,8) = 2,977,018(2.1436) = $6,381,536 (b) Fcost =
-4,000,000(F/P,10%,9)
5,000,000(F/P,10%,8)
=
-4,000,000(2.3579)
5,000,000(2.1436) = $-20,149,600 Difference = -20,149,600 + 6,381,536 = $13,768,064 Therefore, cost is not justified by the savings. In fact, it is not even close
to being justified.]
Find the future worth in year 10 of $50,000 in year 0 and amounts increasing by 15% per
year through year 10 at an interest rate of 10% per year. [ Pg-1 = 50,000{1 [(1 + 0.15)/

(1 + 0.10)]11}/(0.10 0.15) = 50,000{-0.63063}/-0.05 = $630,630 F =

630,630(F/P,10%,11) = 630,630(2.8531) = $1,799,250]
A company that manufactures magnetic membrane switches is investigating two production
options that have the estimated cash fl ows shown ($1 million units). Which one should be
selected on the basis of a present worth analysis at 10% per year?

[PWIn-house = -30 + (14 5)(P/A,10%,5) + 2(P/F,10%,5) = -30 + (14 5)(3.7908) +

2(0.6209) = $5.359 ($5,359,000) PWContract = (3.1 2)(P/A,10%,5) = (3.1 2)

(3.7908) = $4.170 ($4,170,000)]
The Murphy County Fire Department is considering two options for upgrading its aging
physical facilities. Plan A involves remodeling the fi re stations on Alameda Avenue and
Trowbridge Boulevard that are 57 and 61 years old, respectively. (The industry standard is
about 50 years of use for a station.) The cost for remodeling the Alameda station is
estimated at $952,000 while the cost of redoing the Trowbridge station is $1.3 million. Plan B
calls for buying 5 acres of land somewhere between the two stations, building a new fi re
station, and selling the land and structures at the previous sites. The cost of land in that
area is estimated to be $366,000 per acre. The size of the new fi re station would be 9000
square feet with a construction cost of $151.18 per square foot. Contractor fees for
overhead, profi t, etc. are expected to be $340,000, and architect fees will be $81,500.
(Assume all of the costs for plan B occur at time 0.) If plan A is adopted, the extra cost for
personnel and equipment will be $126,000 per year. Under plan B, the sale of the old sites is
anticipated to net a positive $500,000 fi ve years in the future. Use an interest rate of 6%
per year and a 50- year useful life for the remodeled and new stations to determine which
plan is better on the basis of a present worth analysis. [ PWA = -952,000 - 1,300,000 -

126,000(P/A,6%,50) = -952,000 - 1,300,000 - 126,000(15.7619) = $-4,238,000 PWB

= -5(366,000) -9000(151.18) - 340,000 - 81,500 + 500,000(P/F,6%,5) = -3,612,120
+ 500,000(0.7473) = $-3,238,470 Select Plan B]
An electric switch manufacturing company has to choose one of three different assembly
methods. Method A will have a fi rst cost of $40,000, an annual operating cost of $9000, and
a service life of 2 years. Method B will cost $80,000 to buy and will have an annual operating
cost of $6000 over its 4-year service life. Method C will cost $130,000 initially with an annual
operating cost of $4000 over its 8-year life. Methods A and B will have no salvage value, but
method C will have some equipment worth an estimated $12,000. Which method should be
selected? Use present worth analysis at an interest rate of 10% per year. [ PWA =

-40,000[1+ (P/F,10%,2) + (P/F,10%,4) + (P/F,10%,6)] 9000(P/A,10%,8) = -40,000

[1 + 0.8264 + 0.6830 + 0.5645] 9000(5.3349) = $-170,970 PWB = -80,000[1 +
(P/F,10%,4)] 6000(P/A,10%,8) = -80,000[1 + 0.6830] 6000(5.3349) = $-166,649
PWC = -130,000 4000(P/A,10%,8) + 12,000(P/F,10%,8) = -130,000 4000(5.3349)
+ 12,000(0.4665) = $-145,742 Select Method C]
Accurate airfl ow measurement requires straight unobstructed pipe for a minimum of 10
diameters upstream and 5 diameters downstream of the measuring device. In a fi eld
application, physical constraints compromise the pipe layout, so the engineer is considering
installing the airfl ow probes in an elbow, knowing that fl ow measurement will be less
accurate but good enough for process control. This is plan 1, which will be in place for only 3
years, after which a more accurate fl ow measurement system with the same costs as plan 1
will be available. This plan will have a fi rst cost of $26,000 with an annual maintenance cost
estimated at $5000. Plan 2 involves installation of a recently designed submersible airfl ow
probe. The stainless steel probe can be installed in a drop pipe with the transmitter located
in a waterproof enclosure on the handrail. The fi rst cost of this system is $83,000, but
because it is accurate and more durable, it will not have to be replaced for at least 6 years.
Its maintenance cost is estimated to be $1400 per year plus $2500 in year 3 for replacement
of signal processing software. Neither system will have a salvage value. At an interest rate of
10% per year, which one should be selected on the basis of a present worth comparison?
[PW1 = -26,000 5000(P/A,10%,6) - 26,000(P/F,10%,3) = -26,000 5000(4.3553) -

26,000(0.7513) = $-67,310 PW2 = -83,000 1400(P/A,10%,6) - 2500(P/F,10%,3) =

-83,000 1400(4.3553) - 2500(0.7513) = $-90,976 Select Plan 1]