Blank 3e ISM Ch01

Solutions to end-of-chapter problems
Basics of Engineering Economy, 3rd edition

Leland Blank and Anthony Tarquin
Chapter 1
Foundations of Engineering Economy
1.1 In an economic analysis of alternatives, list three items that are typically included as part of
the evaluation.
Purchase cost, useful life, maintenance & operating costs, salvage value, inflation rate, and
interest rate.
1.2 What is the name of the alternative that represents the status quo?
The alternative that represents the status quo is called the do-nothing alternative.
1.3 What is the primary evaluation criterion used in engineering economic analysis?
The primary evaluation criterion is cost.
1.4 List three evaluation criteria besides initial cost that might be used for selecting the best
automobile to purchase.
Fuel rating, crash protection, acceleration, body styling, color, environmental impacts, and
resale value.
1.5 Identify the following factors as either economic (tangible) or noneconomic (intangible);
first cost, leadership, taxes, salvage value, morale, inflation, profit, acceptance by others,
interest rate.
First cost: economic; leadership: non-economic; taxes: economic; salvage value: economic;
morale: non-economic; inflation: economic; profit: economic; acceptance by others: non-
economic; interest rate: economic.
1.6 Identify the following factors as either tangible or intangible: sustainability, installation cost,
transportation cost, simplicity, resale value, rate of return, dependability, deflation rate, and
ethics.
Sustainability: intangible; installation cost: tangible; transportation cost: tangible;

simplicity: intangible; resale value: tangible; rate of return: tangible; dependability:
intangible; deflation rate: tangible; ethics: intangible.
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1.7 What is meant by the term time value of money?
Time value of money means that there is a certain worth in having money, and that worth
changes as a function of time.
1.8 Interest is a manifestation of what general concept in engineering economy?
Interest is a manifestation of the time value of money.
1.9 Of the fundamental dimensions length, mass, time, and electric charge, which one is the
most important in economic analysis? Why?
The most important fundamental dimension in economic analysis is time because of time
value of money.
1.10 Identify at least five areas of personal finances wherein you might use economic analysis in
the future.
Examples are: house purchase; car purchase, credit card (which ones to use); personal loans
(and their rate of interest and repayment schedule); investment decisions of all types; when
to sell a house or car.
1.11 In economic calculations, how is the time value of money recognized?
The time value of money recognized through payment of interest
1.12 A small Voice over Internet Protocol (VoIP) provider borrowed $2 million for new
equipment and repaid the principal of the loan plus $275,000 interest after 1 year. What
was the interest rate on the loan?
Interest rate = (275,000/2,000,000)*100

= 13.75%
1.13 In order to reduce so-called back-office costs, such as payroll and insurance costs, by
$45 million per year, trucking giant Yellow Corp. agreed to purchase rival Roadway LLC
for $966 million in cash. If the savings are realized as planned, what is the rate of return on
the investment?
Rate of return = (45/966)*100

= 4.7%
1.14 A small analytical laboratory borrowed $40,000 (the original amount or the principal) at an
interest rate of 8% per year to purchase a used Agilent gas chromatograph. If the lab repays
the loan plus interest in 1 year, how much must it pay at the end of the year?
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Amount due in one year = 40,000 + 40,000(0.08)
= 40,000 + 3,200
= $43,200
1.15 If the amount due now on a loan taken 1 year ago at an interest rate of 10% per year is
$18,000, what was the principal of the loan?
Amount due = principal + (principal)(interest rate)

18,000 = P + (P)(0.10)
1.1P = 18,000
P = $16,363.64
1.16 If you expect to receive an inheritance of $100,000 one year from now, how much money
would you be able to borrow now at an interest rate of 8% per year if you pledge the total
amount of the inheritance against the loan?
Future amount = principal + (principal)(interest rate)

100,000 = P + (P)(0.08)
1.08P = 100,000
P = $92,592.59
1.17 Assume you just invested $130,000 in a high-rise condo venture in downtown Austin, one
of the top 10 hottest real estate markets in the country. The developers promise a rate of
return of 21% per year for as long as you have your money invested. (a) How much interest
will you receive at the end of 1 year, and (b) what is the total amount you will have after
1 year?
(a) Interest = (principal)(interest rate)

= 130,000*0.21
= $27,300
(b) Total amount = Principal + Interest

= 130,000 + 27,300
= $157,300
1.18 Emerson Processing borrowed $900,000 for installing energy-efficient lighting and safety
equipment in its manufacturing facilities. The terms of the loan were such that the company
would pay interest only at the end of each year for 4 years, after which the company would
have to pay the annual interest and entire loan principal after 5 years. If the interest rate on
the loan was 12% per year and the company paid only the interest for 4 years, (a) what was
the amount of each of the four interest payments, and (b) what was the amount of the final
payment at the end of year 5?
(a) Amt paid first four years = 900,000(0.12)

= $108,000
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(b) Final payment = 900,000 + 900,000(0.12)
= $1,008,000
1.19 A start-up chemical company has an average cost of capital of 15% per year. Additionally,
it has a long-term goal of making at least a 20% per year rate of return on all investments;
however, because of market opportunity the ROR can be reduced for the current project by
3%. If the company acquired $50 million in venture capital, how much did it have to earn
in the first year?
Expected MARR = 20% + 15% – 3% = 32%

Earnings = 50,000,000(0.32)
= $16,000,000
1.20 Bradley Instruments borrowed $3,500,000 from a private equity firm for expansion of its
manufacturing facility for making carbon monoxide monitors/controllers. The company
repaid the loan after 1 year with a single payment of $3,885,000. What was the interest rate
on the loan?
interest rate = [(3,885,000 – 3,500,000)/3,500,000](100)

= 11% per year
1.21 A friend of yours borrowed $550 for video game purchases and repaid the principal of the
loan plus $75 interest after 1 year. (a) What was the interest rate on the loan? (b) During
the same year, you borrowed $8000 for lawn mowing equipment to make money on the
side and paid it off in 1 year for a total of $8600. How does your interest rate compare to
that of your friend?
(a) Interest rate = (75/550)(100)

= 13.64%
(b) Interest rate = (600/8000)(100)

= 7.5%
You paid slightly more than ½ as much as your friend.
1.22 A design-build engineering firm completed a pipeline project wherein the company
realized a profit of $2.3 million in year 1 and $750,000 in year 2. If the amount of money
the company had invested was $6 million both years, what was the rate of return on the
investment for each year?
Year 1, ROR = (2.3/6)(100) = 38.3%
Year 2, ROR = (0.75/6)(100) = 12.5%
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1.23 Which of the following 1-year investments has the highest rate of return: $12,500 that
yields $1125 in interest, $56,000 that yields $6160 in interest, or $95,000 that yields $7600
in interest?
ROR = (1125/12,500)(100) = 9%
ROR = (6160/56,000)(100) = 11%
ROR = (7600/95,000)(100) = 8%
Therefore, the $56,000 investment has the highest rate of return
1.24 A new engineering graduate who started a consulting business borrowed money for 1 year
to furnish the office. The amount of the loan was $23,800, and it had an interest rate of
10% per year. However, because the new graduate hadn’t built up a credit history, the bank
made him buy loan default insurance for 5% of the loan amount. In addition, the bank
charged a loan setup fee of $300. What was the effective interest rate the engineer paid for
the loan?
Interest on loan = 23,800(0.10) = $2,380

Default insurance = 23,800(0.05) = $1190
Set-up fee = $300
Total amount paid = 2380 + 1190 + 300
= $3870
Effective interest rate = (3870/23,800)(100)
= 16.3%
1.25 How many years does it take for an investment of $280,000 to total at least $425,000 if the
return is 15% per year (a) only on the original amount each year, and (b) on the total
accumulated amount each year?
(a) Interest paid each year = 280,000(0.15) = $42,000

Amt. at end of year 1 = 280,000 + 42,000 = $322,000 < $425,000
Amt. at end of year 2 = 280,000 + 84,000 = $364,000 < $425,000
Amt. at end of year 3 = 280,000 + 126,000 = $406,000 < $425,000
Amt. at end of year 4 = 280,000 + 168,000 = $448,000 > $425,000
Time = 4 years
(b) Amt. at end of year 1 = 280,000(1.15) = $322,000 < $425,000

Amt. at end of year 2 = 322,000(1.15) = $370,300 < $425,000
Amt. at end of year 3 = 370,300(1.15) = $425,845 > $425,000
Time = 3 years
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1.26 At an interest rate of 15% per year, an investment of $100,000 one year ago is equivalent to
how much now?
Amt. now is F = 100,000 + 100,000(0.15)

= $115,000
1.27 As a principal in the consulting firm 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 rate of return
would the firm’s offer be equivalent to the worth of the stock last year?
Let i = ROR
5000(40)(1 + i) = 225,000
1 + i = 225,000/200,000
1 + i = 1.125
i = 0.125 (12.5% per year)
1.28 At an interest rate of 8% per year, $10,000 today is equivalent to how much (a) 1 year from
now, and (b) 1 year ago?
(a) Equivalent future amount = 10,000 + 10,000(0.08)

= 10,000(1 + 0.08)
= $10,800
(b) Equivalent past amount = 10,000/1.08

= $9259.26
1.29 A medium-size consulting engineering firm is trying to decide whether it should replace its
office furniture now or wait and do it 1 year from now. If it waits 1 year, the cost is
expected to be $16,000. At an interest rate of 10% per year, what is the equivalent cost
now?
Equivalent cost now = 16,000/1.10

= $14,545.45
1.30 A design-build engineering company that usually gives year-end bonuses in the amount of
$8000 to each employee is having cash flow problems. The company said that although it
could not give bonuses this year, it would give each individual two bonuses next year; the
regular one of $8000 plus an amount equivalent to the $8000 they would have gotten this
year. If the interest rate is 6% per year, what will be the total amount of bonus money an
employee should receive next year?
Total bonus next year = 8,000 + 8,000(0.06)

= $16,480
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1.31 University tuition and fees can be paid using one of two plans:
Early-bird: Pay total amount due one year in advance and get a 10% discount
On-time: Pay total amount due when classes start
If the cost of tuition is $18,000 per year, determine (a) the tuition if paid in advance, and
(b) the equivalent amount of the early-bird savings compared to on-time payment.
(a) Early bird: payment = 18,000 – 18,000(0.10)

= $16,200
(b) Equivalent future is F = 16,200(1 + 0.10)

= $17,820
Savings = 18,000 – 17,820
= $180
1.32 An engineer told you that a project is economically acceptable when its rate of return
equals or exceeds the corporation’s cost of capital. Is this correct? Explain your answer.
The engineer is correct, if the MARR is exactly equal to the cost of capital. The engineer is
wrong, if a return greater than zero is required. Usually, the inequality ROR ≥ MARR >
cost of capital is used, and the MARR is established higher than the cost of capital so that
profit, risk and other factors are considered.
1.33 The MARR is not calculated like an ROR. What is the MARR used for in economic
analysis?
The MARR is used to make accept/reject decisions on projects and alternative selections.
1.34 Dawn is preparing a home office to perform subcontract projects for midsized architect
firms. She plans to use $15,000 of her own funds which currently generate a return of
4% per year. The remainder of financing will be provided by a $10,000 bank loan carrying
a 9% per year interest rate. She hopes to realize a return of 3% above the average cost of
capital to establish her office, and she realizes that the factors of inflation and risk should
also be considered. Her decision is to add another 2% per year to compensate for these
elements. What is the MARR she should use when evaluating projects?
Fraction of equity capital = 15,000/25,000 = 0.60

Fraction of debt capital = 10,000/25,000 = 0.40
WACC = 0.60(4%) + 0.40(9%)

= 6%
MARR = WACC + return above WACC + risk and inflation add-on

= 6% + 3% + 2%
= 11% per year
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1.35 Determine the WACC, MARR, and estimated ROR for the following situation at
Himalayan Air, Inc., which owns and operates oxygen bars across the United States and
Europe. The management plans a second major expansion of outlets with a hoped-for
return of 20% above cost of capital the first year of full operation. The first was very
successful with an excess revenue of $7 million on a $20 million investment during the first
year, leading to an ROR of 35%. Being more conservative due to market competition, the
return on the new expansion is estimated at 80% of the previously observed ROR. This
expansion will be funded using a 50-50 debt-equity mix. The equity funds currently return
6% per year and the debt financing will cost 9.7% per year. Is the expansion ROR expected
to exceed the MARR?
WACC = 0.50(6%) + 0.50(9.7%)

= 7.85%
MARR = 7.85% + 20% = 27.85%
Estimated expansion ROR = 0.8(35%) = 28%
Conclusion: Since 28% > 27.85%, the expansion is barely expected to meet the MARR
criterion. Any over-estimate in the ROR will make the expansion financial questionable.
1.36 In an effort to increase its customer base, a company set the project MARR at exactly the
WACC. If equity capital costs 9% per year and debt capital costs 11.75% for the project,
what is the equitydebt percentage mix of capital required to make the WACC = 10%?
Let X = percent equity capital
WACC = 10% = X(9%) + (1 – X)(11.75%)

(9 – 11.75)X = 10 – 11.75
X = 1.75/2.75
= 0.636 (63.6%)
Mix is 63.6% equity and 36.4% debt capital
1.37 Will and Ben Ice Cream plan to build a new mixing plant to serve customers in Mexico.
Because the company is in good financial shape with equity funds returning 11% per year,
the bank will charge an interest rate of 8% per year for the loan. An MARR that is 5% over
the WACC is required to proceed with the project, which sets the MARR at 14%. What
percentage of debt financing can the company assume to meet its MARR requirement?
Let X = percent debt capital
WACC = 14 – 5 = 9%
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WACC = 9% = X(8%) + (1 – X)(11%)
(8 – 11)X = 9 – 11
X = 0.667 (66.7%)
Mix is 66.7% debt and 33.3% equity capital
1.38 Raydeck International set aside a lump sum investment 4 years ago in order to finance a
plant expansion now. The money returned 10% per year simple interest. How much did the
company set aside if the investment is now worth $850,000?
F = principal + interest
= P + Pni
850,000 = P + P(4)(0.10)
1.4P = 850,000
P = $607,143
1.39 Dynamic Data LLC, a company that customizes software for construction cost estimates,
repaid a loan obtained 3 years ago at 7% per year simple interest. If the amount that
Dynamic Data repaid was $120,000, calculate the principal of the loan.
F = P + Pni
120,000 = P + P(3)(0.07)
1.21P = 120,000
P = $99,173.55
1.40 The Aberdeen Fixed Rate Fund pays a dividend of 10% per year simple interest. If you
invest $240,000 today, what total amount will you have accumulated at the end of 3 years?
F = 240,000 + 240,000(0.10)(3)
= $312,000
1.41 If EP Electronics sets aside $1,000,000 now into a contingency fund, how much will the
company have in 2 years if it doesn’t use any of the money and the account grows at a rate
of 10% per year?
F1 = 1,000,000 + 1,000,000(0.10)
= 1,100,000
F2 = 1,100,000 + 1,100,000(0.10)
= $1,210,000
or
F2 = 1,000,000(1.10)2
= $1,210,000
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1.42 Rambus Diagnostics has extra funds to invest for future capital expansion. If the selected
investment pays simple interest, what interest rate would be required for the amount to
grow from $60,000 to $90,000 in 5 years?
90,000 = 60,000 + 60,000(5)(i)

300,000 i = 30,000
i = 0.10 (10% per year)
1.43 You plan to place your savings into a high-yield account at your company’s Employee
Credit Union. How long will it take to double your money at 5% per year simple interest?
2P = P + P(0.05)(n)
P = P(0.05)(n)
n = 20 years
1.44 If your money earns compound interest at a generous 20% per year, how long will it take
$50,000 to accumulate to at least $85,000? Solve using two methods: (a) year-by-year
accumulated total, and (b) Equation [1.6].
(a) Amount Year 1 = 50,000 + 50,000(0.20) = $60,000< $85,000

Amount Year 2 = 60,000 + 60,000(0.20) = $72,000 < $85,000
Amount Year 3 = 72,000 + 72,000(0.20) = $86,400 > $85,000
Time = 3 years
85,000 = 50,000(1.20)n
1.70 = 1.20n
log 1.70 = n log 1.20
0.23045 = n(0.07918)
n = 2.9 years
1.45 In order to finance a new product line, a company that makes high-temperature ball
bearings borrowed $1.8 million at 10% per year compound interest. If the company repaid
the loan in a lump sum amount after 2 years, what was (a) the amount of the payment, and
(b) the amount and percentage of interest based on the original principal?
(a) Payment = 1,800,000(1 + 0.10)2

= $2,178,000
(b) Interest = 2,178,000 – 1,800,000

= $378,000
Percent of principal = (378,000/1,800,000)(100)

= 21%
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1.46 Fill in the missing values (A through D) for a loan of $10,000 if the interest rate is
compounded at 10% per year.
End of Interest Amount Owed End-of-Year Amount Owed
Year for Year After Interest Payment After Payment
0 — — — 10,000
1 1000 11,000 2000 9000
2 900 9900 2000 A
3 B C 2000 D
Follow calculations in Example 1.8
A is 9900 – 2000 = $7900

B is 7900(0.10) = $790
C is 7900 + 790 = $8690
D is 8690 – 2000 = $6690
1.47 Companies frequently borrow money under an arrangement that requires them to make
periodic payments of “interest only” and then pay the principal all at once at the end of the
loan period. If Cisco International borrowed $500,000 (identified as loan A) at 10% per
year simple interest and another $500,000 (identified as loan B) at 10% per year compound
interest and paid only the interest at the end of each year for 3 years on both loans, (a) on
which loan did the company pay more interest, and (b) what was the difference in interest
paid between the two loans?
(a) Loan A: interest/year = 500,000(0.10) = $50,000

Loan B: interest/year = 500,000(0.10) = $50,000
The same amount of interest was be paid on each loan
(b) There was no difference paid between the two loans
1.48 The NFL should update its online security systems now at a cost of $5 million to avert
cyberattacks by hackers. However, since there has been no breach thus far, the tendency is
to put off the upgrade and take the risk. If these costs are being inflated at 12% per year,
estimate the cost (a) next year, and (b) 2 years from now.
(a) Cost next year = 5,000,000(1.12) = $5,600,000
(b) Cost two years from now can be found using either of two relations.
Method 1: Cost in 2 years = 5,600,000(1.12)

= $6,272,000
or
Method 2: Cost in 2 years = 5,000,000(1.12)2
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1.49 Suppose you want to purchase a Dodge Ram 1500 pickup that costs $32,000 now, but you
don’t have the money. If the cost increases by 5% per year, and you plan to buy it for cash
in 5 years, estimate the future cost using two methods: (a) based on Equation [1.7], and
(b) the increased percentage shown in Figure 1.3.
(a) Cost in 5 years = 32,000(1 + 0.05)5

= 32,000(1.276)
= $40,832
(b) Cost in 5 years = 32,000 + 32,000(0.28)

= $40,960
1.50 You and your sister went shopping today for jeans. The pair she bought costs $49.95 and is
identical to a pair you purchased 2 years ago for $37.87. (a) Determine the numerical and
percentage increase in cost. (b) Determine the annual inflation rate of the cost increase and
compare your result to the increase indicated in Figure 1.3 (upper).
(a) Numerical increase = 49.95 – 37.87 = $12.08

Percentage increase = (12.08/37.87)(100) = 32%
(b) Use Equation [1.7]
Increase in cost: (1 + f)2 – 1 = 0.32

1 + f = 1.320.5
f = 0.1489 (14.89% per year)
Figure 1.3 indicates a cost increase of 32% when f = 15% per year, which is the same as
14.89%, rounded up.
1.51 An arc welder with AI software onboard costs $4500 today, $3750 last year, and $3400 one
year prior to that. Determine the 1-year rate of inflation for each year.
Last year: 4500 = 3750(1 + f)

1 + f = 1.20
f = 0.20 (20%)
Year before: 3750 = 3400(1 + f)

1 + f = 1.103
f = 0.103 (10.3%)
1.52 When the yield on a U.S. Treasury Bill, considered a “safe” investment, is 3% per year,
investors expect the inflation rate to be approximately what value?
When the yield is 3% per year on U.S. government bonds, investors expect the inflation rate
to be near zero.
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1.53 You have the $1200 to cover the discounted sales price of your favorite Shimano mountain
bike, but no safe storage area if you owned it today. The projected cost increase each year
is 5%. Determine the purchasing power of your $1200 if you wait (a) 2 years, and
(b) 5 years to spend it.
Based on Figure 1.3 Based on Equation [1.8]

(a) 2-year reduction in PP is 9% (a) PP = 1200/(1.05)2
PP = 1200(1 – 0.09) = $1092 = $1088
(b) 5-year reduction in PP is 22% (b) PP = 1200/(1.05)5

PP = 1200(1 – 0.22) = $936 = $940
1.54 Assume you received $500 for your birthday today and placed it in your no-interest
checking account for safe keeping. Determine the purchasing power 3 years in the future if
(a) f = 3.5% per year, and (b) f = 10% per year. (Round answers to the nearest dollar.)
(c) How much more dollar purchasing power was lost with the higher inflation rate?
(a) PP3 = 500/(1.035)3

= 500/1.1087
= $451
(b) PP3 = 500/(1.10)3

= 500/1.3310
= $376
(c) Additional lost PP = 451 – 376 = $75
1.55 McDougal’s LTD is a food products wholesaler operating in Costa Rica and Mexico where
the inflation rate has historically averaged 3% and 5% per year, respectively. The company
maintains a cash amount of $500,000 in each country’s banks in case of emergency needs.
(a) Use Figure 1.3 to estimate the purchasing power after 1 year and 2 years of the
$500,000 in each country. (b) (Spreadsheet exercise) If assigned by the instructor, use a
spreadsheet and the approach of Example 1.9 to plot the purchasing power over a 10-year
period for both inflation rates.
(a) Costa Rica: PP after 1 and 2 years at f = 3% per year
PP1 = 500,000(1 – 0.03) = $485,000
PP2 = 500,000(1 – 0.06) = $470,000
Mexico: PP after 1 and 2 years at f = 5% per year
PP1 = 500,000(1 – 0.05) = $475,000
PP2 = 500,000(1 – 0.09) = $455,000
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(b) (Spreadsheet exercise)
Develop the relations = 500000/(1 + f)^n where f = 0.03 and 0.05, respectively and
n = 0, 1,…, 10; then insert a line chart of the PP results. The chart should look something
like the one below.
1.56 Continental Airlines operates in and out of many countries. Country A has a low inflation
rate of 3% per year while country B has a high rate of 30% per year. A $1 million fund is
maintained in each country for emergency purchases to repair disabled aircraft. (a) Use a
formula to determine the purchasing power after 2, 4, and 5 years if the funds are not
utilized. (b) (Spreadsheet exercise) Use a spreadsheet to plot the diminishing purchasing
power curves, if assigned by your instructor. (c) With the dramatic effect of 30% inflation,
if you were president of Continental Airlines, how would you manage this situation?
(a) Country A with f = 3%
PP2 = 1,000,000/(1.03)2 = $942,596

PP4 = 1,000,000/(1.03)4 = $888,487
PP5 = 1,000,000/(1.03)5 = $862,609
Country B with f = 30%
PP2 = 1,000,000/(1.30)2 = $591,716

PP4 = 1,000,000/(1.30)4 = $350,128
PP5 = 1,000,000/(1.30)5 = $269,329
(b) (Spreadsheet exercise)

Develop the relations = 1000000/(1 + f)^n where f = 0.03 and 0.30, respectively and
n = 0, 1, …, 5; then insert a line chart of the PP results. The chart should look something
like the one below.
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(c) No answer is provided since it is meant to be a discussion question.
1.57 Every engineering economy problem will involve at least how many symbols?
It will involve at least four symbols.
1.58 Thompson Mechanical Products is planning to set aside $150,000 now for possibly
replacing its large synchronous refiner motors whenever it becomes necessary. If the
replacement isn’t needed for 7 years, how much will the company have in its investment
set-aside account if it achieves a rate of return of 11% per year?
P = $150,000; F = ?; i = 11%; n = 7
1.59 Atlas Long-Haul Transportation is considering the installation of Valutemp temperature

loggers in all of its refrigerated trucks for monitoring temperatures during transit. If the
systems will reduce insurance claims by $100,000 two years from now, how much should
the company be willing to spend now, if it uses an MARR of 12% per year?
P = ?; F = $100,000; i = 12%; n = 2
1.60 Determine the amount of money FrostBank might loan a housing developer who will repay
the loan 2 years from now by selling eight lots at $240,000 each. Assume the bank’s
interest rate is 10% per year.
P = ?; F = 8(240,000) = $1,920,000; n = 2; i = 0.10
1.61 Bodine Electric, based in Des Moines, Iowa, USA, makes gear motors with a three-stage,
selectively hardened gearing cluster that is permanently lubricated. If the company borrows
$20 million for a new distribution facility in Europe, how much must it pay back each year
to repay the loan in six equal annual payments at an interest rate of 10% per year?
P = $20,000,000; A = ?; n = 6; i = 0.10
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1.62 DubaiWorks manufactures angular contact ball bearings for pumps that operate in harsh
environments. The company invested $2.4 million in a process that resulted in net profits of
$760,000 per year for 5 consecutive years. What rate of return did the company make?
P = $2,400,000; A = $760,000: n = 5; i = ?
1.63 How many years will it take for your investment to be 1.5 times as much as what you
deposit now, if the return is 5% per year?
P = P; F = 1.5P; i = 5%; n = ?
1.64 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. What is the total equivalent future
amount of the company’s expenses at the end of 3 years at 15% per year interest?
A = $225,000; n = 3; i = 15% per year; F = ?
1.65 Fifteen years ago your grandfather invested $10,000 in a stock fund to pay for your college
education. Each year thereafter, he deposited $3000 into the fund. If the investments grew
at a rate of 8% per year over the 15 years, how much is in the fund now?
P = $10,000; A = $3,000; i = 0.08; n = 15; F = ?
1.66 What does the term end-of-period convention mean? What does it not mean?
End-of-period-convention means end-of-interest period. It does not mean end of

the calendar year.
1.67 Identify the following as cash inflows or outflows to a commercial air carrier: fuel cost,
pension plan contributions, fares, maintenance, freight revenue, cargo revenue, extra-bag
charges, cost of snacks, web-based advertising, landing fees, and seat-preference fees.
Fuel cost - outflow, pension plan contributions - outflow, passenger fares - inflow,
maintenance - outflow, freight revenue - inflow, cargo revenue - inflow, extra-bag charges –
inflow, snacks - outflow, web-based advertising - outflow, landing fees - outflow, seat
preference fees – inflow
1.68 Identify the following as cash inflows or outflows to a privately owned water company:
well drilling, maintenance, water sales, accounting, government grants, issuance of bonds,
energy cost, pension plan contributions, heavy equipment purchases, used-equipment sales,
stormwater fees, and discharge permit revenues.
16
Well drilling: outflow; maintenance: outflow; water sales: inflow; accounting: outflow;
government grants: inflow; issuance of bonds: inflow; energy cost: outflow; pension plan
contributions: outflow; heavy equipment purchases: outflow; used-equipment sales:
inflow; stormwater fees: inflow; discharge permit revenues: inflow.
1.69 Many credit unions use semiannual interest periods to pay interest on customer savings
accounts. For a credit union that uses June 30 and December 31 as its semiannual interest
periods, determine the end-of-interest period total deposit amounts that will be recorded for
the cash flows shown below.
Month Deposit, $
Jan 50
Feb 70
Mar —
Apr 120
May 20
June —
July 150
Aug 90
Sept —
Oct —
Nov 40
Dec 110
End-of-period amount for June = 50 + 70 + 120 + 20

= $260
End-of-period amount for Dec = 150 + 90 + 40 + 110
= $390
1.70 List three different types of cost estimation and give an example of each type different than
those mentioned in this chapter.
Product – motorcycle; Project – bridge upgrade; operation – delivery truck, driver and fork
lift; system – develop and implement a pension program for all employees.
1.71 Identify the type of cost estimation that is associated with each of the following: new
suspension bridge, bicycle manufacturing, identity theft deterrent by a nationwide bank
corporation, monthly lubrication of heat-sensitive bearings, writing a textbook on
engineering economy, 3-D printer.
New suspension bridge - project, bicycle manufacturing - product, identity theft deterrent
by a nationwide bank corporation - system, monthly lubrication of heat-sensitive bearings -
operation, writing a textbook on engineering economy - project, 3d printer - product.
17
1.72 Construct a cash flow diagram for the following cash flows: $25,000 outflow at time zero,
$9000 per year inflow in years 1 through 5 at an interest rate of 10% per year, and an
unknown future amount in year 5.
Assuming down is negative: down arrow of $25,000 in year 0; up arrows in the amount of
$9000 in years 1 through 5; i = 10% per year; arrow in year 5 identified as F=? (either
direction).
1.73 Construct a cash flow diagram to find the present worth in year 0 for the following series at
i = 15% per year.
Year Cash Flow, $
0 −19,000
1–4 +8,100
Assuming down is negative: up arrow in year 0 identified as P = ?; down arrow of $19,000

in year 0; up arrows in the amount of $8100 in years 1 through 4; i = 15% per year.
1.74 Construct a cash flow diagram to find the rate of return on an investment of $60,000 made
today and accumulated to an amount of $95,000 in 5 years.
Assuming down is negative: down arrow of $60,000 in year 0; up arrow of $95,000 in year
5; i = ?
1.75 Write the engineering economy symbol that is displayed when each of the following
spreadsheet functions are entered.
a. PV
b. PMT
c. NPER
d. IRR
e. FV
f. RATE
(a) PV is P; (b) PMT is A; (c) NPER is n; (d) IRR is i; (e) FV is F; (f) RATE is i
1.76 State the purpose for each of the following built-in spreadsheet functions.
a. PV(i%,n,A,F)
b. FV(i%,n,A,P)
c. RATE(n,A,P,F)
d. IRR(first_cell:last_cell)
e. PMT(i%,n,P,F)
f. NPER(i%,A,P,F)
(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 for equal periodic payments A
18
(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
1.77 For the following spreadsheet functions, (a) write the values of the engineering economy
symbols P, F, A, i, and n, using a ? for the symbol that is to be determined, and (b) state
whether the displayed answer will have a positive sign, a negative sign, or it can’t be
determined from the entries.
1. = FV(8%,10,3000,8000)
2. = PMT(12%,20,−16000)
3. = PV(9%,15,−1000,600)
4. = NPER(10%,−290,12000)
5. = FV(5%,5,500,−2000)
(a) (1) F = ?; i = 8%; n = 10; A = $3000; P = $8000

(2) A = ?; i = 12%; n = 20; P = $–16,000; F = 0
(3) P = ?; i = 9%; n = 15; A = $–1000; F = $600
(4) n = ?; i = 10%; A = $–290; P = 0; F = $12,000
(5) F = ?; i = 5%; n = 5; A = $500; P = $–2000
(b) (1) negative

(2) positive
(3) positive
(4) positive (years)
(5) can’t determine if 5% per year will cover the 5 withdrawals of $500
1.78 In a built-in spreadsheet function, if a certain parameter does not apply, under what
circumstances can it be left blank, and when must a comma be entered in its place?
For built-in spreadsheet functions, a parameter that does not apply can be left blank when it
is not an interior one. For example, if no F is involved when using the PMT function, it can
be left blank because it is an end parameter. When the parameter involved is an interior one
(like P in the PMT function), a comma must be entered in its position.
1.79 Emily and Madison both invest $1000 at 10% per year for 4 years. Emily receives simple
interest and Madison gets compound interest. Use a spreadsheet and cell reference formats
to develop relations that show a total of $64 more interest for Madison at the end of the
4 years. Assume no withdrawals or further deposits are made during the 4 years.
Spreadsheet shows relations only in cell reference format. Cell E10 will indicate $64 more
than cell C10.
19
1.80 Assume you pay the reduced amount of $4750 for a corporate stock that has a market value
of $5000. The stock pays an annual dividend of 4% of its market value. Since this is
primarily a dividendpaying stock, you estimate that you will sell the stock 10 years from
now at the current $5000 market value. Develop spreadsheet functions that display the
following results:
a. Total amount of the dividends paid to you.
b. Equivalent future worth after 10 years of the dividends at i = 6% per year.
c. Present worth now (year 0) of the original purchase price, dividends and proceeds when
the stock is sold after 10 years, if i = 6% per year. Observe the sign on the result and
explain what it means to you financially.
d. Rate of return on this entire investment over a 10-year period. (Note: The answer
displayed here should confirm your response to the question in part c.)
(a) The function = 10*0.04*5000 displays the total dividends of $2000
(b) The function = – FV(6%,10,200) displays an F of $2636.16
(c) The function = – PV(6%,10,200,5000) – 4750 displays a P of $–486.01. This means you
did not make 6% on the investment.
(d) The function = RATE(10,200,-4750,5000) displays a i value of 4.64%, which verifies

that the return is less than 6% per year.
1.81 A Harley-Davidson bike you hope to own in the future costs $12,000 today. If the inflation
rate is expected to be 4.5% per year, determine the estimated cost using a spreadsheet
function for each of the next 5 years.
Use the FV function with i = f. Enter the year numbers 1-5 in cells A2 through A6 and
develop the functions = – FV(4.5%,year_cell,12000) where ‘year_cell’ is a reference to the
cell containing the year numbers 1-5. To the nearest dollar, the displays should be:
$12,540; $13,104; $13,694; $14,310; and $14,954.
20
1.82 Explain the relation between a common moral and a personal moral.
A common moral is a fundamental belief held by virtually all people. A personal moral is
the translation of a common moral into that which an individual believes and uses as
guidance for their own decisions and actions.
1.83 What is one primary use of a code of ethics for a specific discipline of professional
practice?
A code of ethics can be used as an evaluation measure for the decision and actions of an
individual who works in the discipline that honors the code.
1.84 Yesterday, Carol, an engineer with Hancock Enterprises, was at lunch with several work
friends. Joe, a person Carol has known for a year or so from similar lunches, proudly
mentioned that he got a free flight and tickets to a major league playoff game two weeks
from now in a distant city. Joe happened to also mention the company: it is Dryer. Carol is
aware that Dryer is one of the prime bidders on a major contract to be evaluated by
Hancock next month. Upon inquiry, Carol learned that both she and Joe are on the bid
evaluation committee. Carol suspects that someone in Dryer has offered Joe the tickets as a
consideration for Joe’s favorable evaluation of their bid.
a. Carol has determined that she could do one of several things about the situation:
recommend to Joe directly that he refuse the tickets; show Joe the NSPE Code of Ethics
for Engineers and let him make his own decision; go to Joe’s supervisor and tell her of
the situation; go to her supervisor and inform him of her suspicion; write an e-mail to
Joe with a copy to Carol’s supervisor recommending that Joe consider the ethical
dilemma involved for him; do nothing. Considering only these actions, select one you
think is the best and explain why you chose it.
b. Identify other options for Carol’s response at this time and determine if one of them is
better than her options outlined above.
(a) Assuming that Carol’s supervisor is a trustworthy and ethical person himself, going to
her supervisor and informing him of her suspicion is probably the best of these options.
This puts Carol on record (verbally) as questioning something she heard at an informal
gathering.
(b) Another good option is to go to Joe one-on-one and inform him of her concern about
what she heard him say at lunch. Joe may not be aware he is on the bid evaluation team
and the potential ethical consequences if he accepts the free tickets from Dryer.
1.85 Stefanie is a design engineer with an international railroad locomotive manufacturing

company in the state of Illinois. Management wants to return some of the engineering
design work to the United States rather than export all of it to India, where their primary
design work has been completed for the last decade. This transfer will employ more people
locally and could improve the economic conditions for families in and around Illinois.
Stefanie and her design team were selected as a test case to determine the quality and
speed of the design work they could demonstrate on a more fuel-efficient diesel
21
locomotive. None of her team members or she has done such a significant design job
themselves, because their jobs had previously entailed only the interface with the
subcontracted engineers in India. One of her team members had a great design idea on a
key element that will improve fuel efficiency by approximately 15%. She told Stefanie it
came from one of the Indiangenerated documents, but that it would probably be okay for
the team to use it and remain silent as to its origin, since it was quite clear the U.S.
management was about to cancel the foreign contract. Though reluctant at first, Stefanie
did go forward with a design that included the efficiency improvement and made no
mention of the origin of the idea during the oral presentation or documentation delivery. As
a result, the Indian contract was canceled and full design responsibility was transferred to
Stefanie’s group.
Consult the NSPE Code of Ethics for Engineers and identify sections that are points
of concern about Stefanie’s decisions and actions.
Many sections could be identified; however, III.9.a and b are likely the most applicable.
Some others are: I.2 and 5, and II.2.a and b.
1.86 All of the following are examples of cash outflows except:

a. Asset salvage value
b. Income taxes
c. Operating cost of asset
d. First cost of asset
Answer is (a)
1.87 An example of an intangible factor is:

a. Taxes
b. Cost of materials
c. Morale
d. Rent
Answer is (c)
1.88 At an interest rate of 10% per year, the equivalent amount of $10,000 one year ago is
closest to:
a. $8264
b. $9095
c. $11,000
d. $12,000
Amount one year ago = 10,000/(1+ 0.10) = $9090.90

Answer is (b)
22
1.89 In most engineering economy studies, the best alternative is the one that:
a. Will last the longest time
b. Is most politically correct
c. Is easiest to implement
d. Has the lowest cost
Answer is (d)
1.90 The time it would take for a given sum of money to double at 4% per year simple interest is
closest to:
a. 30 years
b. 25 years
c. 20 years
d. 10 years
2P = P + P(n)(0.04)
1 = 0.04n
n = 25
Answer is (b)
1.91 The compound interest rate per year at which amounts of $1000 one year ago and $1345.60
one year hence are equivalent is closest to:
a. 8.5% per year
b. 10.8% per year
c. 20.2% per year
d. None of the above
Move both cash flows to year 0 and solve for i
1000(1 + i) = 1345.60/(1 + i)
(1 + i)2 = 1345.60/1000
(1 + i) = 1.16
i = 0.16 (16%)
Answer is (d)
1.92 The simple interest rate per year that will accumulate the same amount of money in 2 years
as a compound interest rate of 20% per year is closest to:
a. 20.5%
b. 21%
c. 22%
d. 25%
For compound interest at 20%, in 2 years F = P(1.20)(1.20) = 1.44P
For simple interest, F = P + Pni = P(1 + ni) = P(1 + 2i)
23
Equate the two relations.
P(1 + 2i) = 1.44P
(1 + 2i) = 1.44
i = 0.22 (22%)
Answer is (c)
1.93 A company that utilizes carbon fiber 3-D printing wants to have money available two years
from now to add new equipment. The company currently has $650,000 in a capital account
and it plans to deposit $200,000 now and another $200,000 one year from now. The total
amount available in two years, provided it returns a compounded rate of 15% per year, is
closest to:
a. $1,354,125
b. $1,324,125
c. $1,325,500
d. $1,050,000
Amount available = total principal in year 0 + interest for 2 years + principal added year 1
+ interest for 1 year
= 850,000(1+0.15)2 + 200,000 (1+0.15)
= 1,124,125 + 230,000
= $1,354,125
Answer is (a)
1.94 If inflation has been steady at 3.2% per year for 4 years, the reduction in purchasing power
over the 4 years is closest to:
a. 6%
b. 12%
c. 14%
d. 22%
Purchasing power reduction = [1 – 1/(1.032)4](100)

= [1 – 0.8816](100)
= 0.1184 (11.84%)
Answer is (b)
1.95 For the spreadsheet built-in function PV(i%,n,A,F), the only parameter that can be
completely omitted is:
a. i%
b. n
c. A
d. F
Only a parameter at the end of the string can be omitted without an entry or comma; it is F
in the PV function.
Answer is (d).
24

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Solutions to end-of-chapter problems

Basics of Engineering Economy, 3rd edition

The primary evaluation criterion is cost.

Sustainability: intangible; installation cost: tangible; transportation cost: tangible;

1.8 Interest is a manifestation of what general concept in engineering economy?

Interest is a manifestation of the time value of money.

1.11 In economic calculations, how is the time value of money recognized?

The time value of money recognized through payment of interest

Interest rate = (275,000/2,000,000)*100

Rate of return = (45/966)*100

Amount due = principal + (principal)(interest rate)

Future amount = principal + (principal)(interest rate)

(a) Interest = (principal)(interest rate)

(b) Total amount = Principal + Interest

(a) Amt paid first four years = 900,000(0.12)

Expected MARR = 20% + 15% – 3% = 32%

interest rate = [(3,885,000 – 3,500,000)/3,500,000](100)

(a) Interest rate = (75/550)(100)

(b) Interest rate = (600/8000)(100)

You paid slightly more than ½ as much as your friend.

Year 1, ROR = (2.3/6)(100) = 38.3%

Year 2, ROR = (0.75/6)(100) = 12.5%

Therefore, the $56,000 investment has the highest rate of return

Interest on loan = 23,800(0.10) = $2,380

(a) Interest paid each year = 280,000(0.15) = $42,000

(b) Amt. at end of year 1 = 280,000(1.15) = $322,000 < $425,000

Amt. now is F = 100,000 + 100,000(0.15)

(a) Equivalent future amount = 10,000 + 10,000(0.08)

(b) Equivalent past amount = 10,000/1.08

Equivalent cost now = 16,000/1.10

Total bonus next year = 8,000 + 8,000(0.06)

(a) Early bird: payment = 18,000 – 18,000(0.10)

(b) Equivalent future is F = 16,200(1 + 0.10)

Fraction of equity capital = 15,000/25,000 = 0.60

WACC = 0.60(4%) + 0.40(9%)

MARR = WACC + return above WACC + risk and inflation add-on

WACC = 0.50(6%) + 0.50(9.7%)

MARR = 7.85% + 20% = 27.85%

Estimated expansion ROR = 0.8(35%) = 28%

Let X = percent equity capital

WACC = 10% = X(9%) + (1 – X)(11.75%)

Mix is 63.6% equity and 36.4% debt capital

Let X = percent debt capital

Mix is 66.7% debt and 33.3% equity capital

90,000 = 60,000 + 60,000(5)(i)

(a) Amount Year 1 = 50,000 + 50,000(0.20) = $60,000< $85,000

(a) Payment = 1,800,000(1 + 0.10)2

(b) Interest = 2,178,000 – 1,800,000

Percent of principal = (378,000/1,800,000)(100)

Follow calculations in Example 1.8

A is 9900 – 2000 = $7900

(a) Loan A: interest/year = 500,000(0.10) = $50,000

The same amount of interest was be paid on each loan

(b) There was no difference paid between the two loans

(a) Cost next year = 5,000,000(1.12) = $5,600,000

Method 1: Cost in 2 years = 5,600,000(1.12)

Method 2: Cost in 2 years = 5,000,000(1.12)2

(a) Cost in 5 years = 32,000(1 + 0.05)5

(b) Cost in 5 years = 32,000 + 32,000(0.28)

(a) The function = 100.045000 displays the total dividends of $2000