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    Solution Assigment Chapter 5

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    Hoang Thao Nhi
    This document discusses several engineering economy problems and solutions involving concepts like present worth, future worth, internal rate of return, annual worth, capitalized worth, benefit-cost ratios and other topics. Equations and calculations are provided for multi-year cash flows with varying amounts, interest rates, time periods and other variables.

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    © All Rights Reserved
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    Solution Assigment Chapter 5

    Uploaded by

    Hoang Thao Nhi
    60 views11 pages
    This document discusses several engineering economy problems and solutions involving concepts like present worth, future worth, internal rate of return, annual worth, capitalized worth, benefit-cost ratios and other topics. Equations and calculations are provided for multi-year cash flows with varying amounts, interest rates, time periods and other variables.

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    Solution-assigment-chapter-5

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    This document discusses several engineering economy problems and solutions involving concepts like present worth, future worth, internal rate of return, annual worth, capitalized worth, benefit-cost ratios and other topics. Equations and calculations are provided for multi-year cash flows with varying amounts, interest rates, time periods and other variables.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    60 views11 pages

    Solution Assigment Chapter 5

    Uploaded by

    Hoang Thao Nhi
    This document discusses several engineering economy problems and solutions involving concepts like present worth, future worth, internal rate of return, annual worth, capitalized worth, benefit-cost ratios and other topics. Equations and calculations are provided for multi-year cash flows with varying amounts, interest rates, time periods and other variables.

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    Engineering Economy

    INDIVIDUAL ASSIGNMENT – CHAP 05

    Total present equivalent: PW = A∗ ( PA , MARR , N )=$ 12.5 M∗( PA , 20 % ,3)=2.106∗$ 12. 5 M =$ 26.325 M
    Josh’s total bonus ¿ 0.1 %∗PW =0.1%∗$ 26.325=$ 26,325

    5-11

    N = 30 years

    r = 1.5%/ quater = 6%/ year

    Z = C = $10000

     Vn = $10,000 (P/F, 6%, 30) + $600 (P/A, 6%, 30) = ?

    If i = 7%, Vn = $10,000 (P/F, 7%, 30) + $600 (P/A, 7%, 30) = ?

    5-16

    i=10%/ year

    A = $1500/year

    F5 =$10000 in 5 years

    CW
    Engineering Economy
    $ 1500
    Present money by A1=$1500: P0=
    0.1

    The money in the end of first year by A5:

    A1=$10000(A/F, 10%, 5) =?

    $ 1500 A 1
     CW(10%)= + =?
    0.1 0.1
    b. Find the value for N for which A(P/A,10%,N) = CW (10%)
    From Table C-13, N = 80 years

    $15,000,000

    $5,000,000

    Cashflow sai:

    Total equivalent money in 2014:

    P4 =F¿4−$ 5 M =$ 15 M∗ ( FP , 5 % , 4)−$ 5 M =$ 15 M ∗( 1.216)−$ 5 M =$ 13.24 M


    The capitalized worth:

    CW =C W 1 +C W 2 =$ 250,000∗ ( PA , 5 % , ∞ )+ X∗( AF , 5 % , 5)∗( PA , 5 % , ∞ )


    $ 250,000 X∗0.1810
    → + =$ 15.24 M → X=$ 2,828,729.282
    0.05 0.05
    Engineering Economy

    Year Revenue Expense Net Income


    s
    1 6000 3100 2900
    2 6200 3300 2900
    3 6300 3500 2800
    4 6400 3700 2700
    5 6500 3900 2600
    6 6600 6100 500
    7 6700 4300 2400
    8 6800 4500 2300
    9 6900 4700 2200
    10 7000 4900 2100
    Engineering Economy

    5-22
    What are the PW and FW of a 20-year geometric cash-flow progression increasing at 2% per year if the
    first year amount is $1,020 and the interest rate is 10% per year? (5.4) – Nên dùng gradient tính PW khi
    biết A và G, => FW
    PW = [A – A(P/F,10%,20)(F/P,2%,20)] / (10%-2%) = [1020 – 1020(0.1486)(1.459)]/(0.08)
    = (1020 – 225.220)/0.08 = $9934.75

    FW = PW(F/P, 10%, 20) = 9934.75*6.728 = $66840.998

    5-23

    Year Investment of Opportunity Cost of Loss in Value of Capital Recovery


    Beginning of Interest (i=15%) Asset During Year Amount for Year
    Year
    1 10,000 10,000 (0.15) = 1,500 3,000 1,500 + 3,000 = 4,500
    2 10,000 – 3,000 = 7,000 (0.15) = 1,050 2,000 1,050 + 2,000 = 3,050
    7,000
    3 7,000 – 2,000 = 5,000 (0.15) = 750 2,000 750 + 2,000 = 2,750
    5,000
    4 5,000 – 2,000 = 3,000 (0.15) = 450 1,000 * 450 + 1,000 = 1,450
    3,000

    P0 = $4,500 (P/F,15%,1) + $3,050 (P/F,15%,2) + $2,750 (P/F,15%,3) +$1,450 (P/F, 15%, 4)


    Engineering Economy
    = $4,500 (0.8696) + $3,050 (0.7561) + $2,750 (0.6575) + $1,450 (0.5718) = $ 8,856.54

    A = $8,856.54 (A/P,15%,4) = $8,856.49 (0.3503) = $3,102.45

    Following equation (5-5) to check:

    CR(i%) = I (A/P, i%, N) − S (A/F, i%, N) = $10,000 (A/P,15%,4) − $2,000 (A/F,15%,4) = $10,000 (0.3503) − $2,000
    (0.2003) = $3,102.12

    5-34

    a/ Option 1: through annual worth method + linear interpolation

    Option 2: Through Excel Method


    Engineering Economy

    b) Yes, IRR (18%) > MARR (15%). The plant project is acceptable

    5-38

    Method 1: Calculator:
    Engineering Economy

    ( )
    15
    P 255∗(1+i % ) −1
    We have: $ 3,000=$ 255∗ ,i % , N =$ 15
    →i=3.2%
    A i %∗( 1+i % )

    Method 2: Interpolation:

    Nominal annual rate=r %=12∗i %=38.4 %

    ( )
    N
    r 12
    Effecttive rate=i eff %= 1+ −1=( 1.032 ) −1=0.459=45.9 % per year
    N
    Engineering Economy

    Option 1: Present Worth (PW) method + Linear Interpolation:

    Option 2: Through Excel Spreadsheet

    The Two IRR are 4% and 32% and this occur due to changes of sign in the net cash flow

    => the external rate of return i’ is 7.6% per year.


    Engineering Economy

    5-51.

    Solution:
    a) 0 = −$4,900 + $1,875(P/A, i′, 5)
    => i′ = 26.4%
    b) θ = $4,900 / $1,875 = 3 years (to the integer year)
    c) The IRR will signal an acceptable (profitable) project if the MARR is less than 26.4% and the value of
    θ may indicate a poor project in terms of liquidity.
    d) 1/ θ = 33.3%. This is the payback rate of return, and it over-estimates the actual IRR

    5-53
    PW(i'%) = 0 = −$100,000 + $20,000 (P/A,i'%,5) + $10,000 (P/G,i'%,5) + $10,000 (P/F,i'%,5)
    PW(20%) = $12,891 > 0,  i'% > 20%
    PW(25%) = −$897 < 0,  i'% < 25%
    By linear interpolation, i'% = IRR = 24.7%

    EOY Cumulative Cash Flow


    1 -100,000 + 20,000 = -80,000
    2 -80,000 + 30,000 = -50,000
    3 -50,000 + 40,000 = -10,000
    4 -10,000 + 50,000 = 40,000 > 0
     = 4 years
    Although this project is profitable (IRR > MARR), it is not acceptable since  = 4 years is greater than the maximum
    allowable simple payback period of 3 years.
    Engineering Economy

    5-60
    a. Calculate the IRR for each of the three cash-flow diagrams that follow. Use EOY zero for (i) and EOY
    four for (ii) and (iii) as the reference points in time. What can you conclude about “reference year shift”
    and “proportionality” issues of the IRR method?

    b. Calculate the PW at MARR = 10% per year at EOY zero for (i) and (ii) and EOY four for (ii) and (iii).
    How do the IRR and PW methods compare?

    a) Cash flow diagram (i)


    PW = 0 = -1000 + 300(P/A, I’%, 5)
    I’ = 15% => PW = $5.66
    I’ = 16% => PW = $ - 17.8
    We have 15% < I’ < 16% so we get (16% - 15%)/ [5.66 – (-17.8)] = (I’% - 15%)/ 5.66
    => I’% = 15.3%

    Cash flow diagram (ii)


    PW = 0 = -1000 + 300(P/A, I’’%, 5)
    I’’ = 15% => PW = $5.66
    I’’ = 16% => PW = $ - 17.8
    We have 15% < I’’ < 16% so we get (16% - 15%)/ [5.66 – (-17.8)] = (I’’% - 15%)/ 5.66
    => I’’% = 15.3%

    Cash flow diagram (iii)


    PW = 0 = -5000 + 1500(P/A, I’’’%, 5)
    I’’’ = 15% => PW = $28.23
    Engineering Economy

    I’’’ = 16% => PW = $ - 88.56


    We have 15% < I’’’ < 16% so we get (16% - 15%)/ [28.23 – (-88.56)] = (I’’’% - 15%)/ 528.23
    => I’’’% = 15.3%

    Hence, IRR = I’% = I’’% = I’’’% = 15.3%

    b) MARR = 10%
    (i) PW0 (10%) = -1000 + 300(P/A,10%,5) = -1000 + (300*3.791) = $137.3
    (ii) PW0 (10%) = -1000(P/F,10%,4) + 300(P/A,10%,5)(P/F,10%,4)
    = -1000(0.6830) + (300*3.791*0.6830) = $93.78
    (ii) PW4 (10%) = -1000 + 300(P/A, 10%, 5) = -1000 + (300*3.791) = $137.3
    (iii) PW4 (10%) = -5000 + 1500(P/A, 10%, 5) = -5000 + (1500*3.791) = $686.5
    So we select (iii) at EOY = 4 to maximize PW(10%)
    PW (15.3%) = 0 for all three cases

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