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Engineering Economics

The document discusses several topics related to engineering economics including: 1. The importance of identifying and evaluating multiple alternatives when making economic decisions to select the most beneficial option. 2. Noneconomic factors like morale, goodwill, and public acceptance that should be considered in addition to economic factors like costs when deciding projects. 3. The time value of money, which refers to how the value of money changes over time due to interest, inflation, and returns on investments.

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Dawnald Fortin Pepito
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76 views2 pages

Engineering Economics

The document discusses several topics related to engineering economics including: 1. The importance of identifying and evaluating multiple alternatives when making economic decisions to select the most beneficial option. 2. Noneconomic factors like morale, goodwill, and public acceptance that should be considered in addition to economic factors like costs when deciding projects. 3. The time value of money, which refers to how the value of money changes over time due to interest, inflation, and returns on investments.

Uploaded by

Dawnald Fortin Pepito
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Final exam

ES-9/ ES-6 (Engineering Economy)

1. Discuss the importance of alternative identification in the engineering economic process.


 Engineering economics is the branch of economics which helps in evaluating and then
deciding which alternative is most economical. The benefits and gains an alternative
over time are calculated and then economic feasibility of the alternative is evaluated.
 Resources are limited and every option opted does have an opportunity cost associated
with the benefit loss of the next best alternative which is not opted. Whenever a
decision must be taken, the decision maker must choose from several alternatives. Now,
it is very important that the person should clearly and correctly evaluated these
alternatives economically, so that the resource could be invested in most beneficial
option.
2. Which of the following would be considered noneconomic factors in deciding which type of
power plant to build: (a) equipment cost; (b) morale; (c) goodwill; (d) salvage value; (e) public
acceptance; and (f) aesthetics?

3. What is meant by the term time value of money?

4. In order to build a new warehouse facility, the regional distributor for Valsic Multi-position
Valves borrowed $1.6 million at 10% per year interest. If the company repaid the loan in a lump
sum amount after two years, what was (a) the amount of the payment, and (b) the amount of
interest?
5. A medium-size consulting engineering firm is trying to decide whether it should remodel its
office now or wait and do it one year from now. If the firm does it now, the cost will be $38,000.
The interest rate is 10% per year.
a. What would the cost have to be one year from now to render the decision
indifferent?
b. If the cost one year from now is $41,600, should the firm remodel now or later?
6. How many years does it take for an investment of $280,000 to accumulate to at least $425,000
at 15% per year interest?
7. A design-build engineering firm completed a pipeline project wherein the company realized a
profit of $2.3 million in one year. If the amount of money the company invested was $6 million,
what was the rate of return on the investment?
8. An employee at Probix Co. borrows $10,000 on May 1 and must repay a total of $10,700 exactly
1 year later. Determine the interest amount and the interest rate paid.
9. NeoBat makes auto batteries available to General Motors dealers through privately owned
distributorships. In general, batteries are stored throughout the year, and a 5% cost increase is
added each year to cover the inventory carrying charge for the distributorship owner. Assume
you own the City Center NeoBat facility. Make the calculations necessary to show which of the
following statements are true and which are false about battery costs.
A. The amount of $98 now is equivalent to a cost of $105.60 one year from now.
B. A truck battery cost of $200 one year ago is equivalent to $205 now.
C. A $38 cost now is equivalent to $39.90 one year from now.
D. A $3000 cost now is equivalent to $2887.14 one year ago.
E. The carrying charge accumulated in 1 year on an investment of $2000 worth of batteries
is $100.
10. Foxtrend, Inc. is considering the purchase of a new flotation system for recovering more grease.
The company can finance a $150,000 system at 5% per year compound interest or 5.5% per year
simple interest. a. If the total amount owed is due in a single payment at the end of 3 years,
which interest rate should the company select? b. How much is the difference in interest
between the two schemes?
11. An engineer who was in the business of customizing software for small construction companies
repaid a loan that she got 3 years ago at 7% per year simple interest. If the amount she repaid
was $35,000, what was the principal amount of the loan?
12. How much money should you be willing to pay now for a guaranteed $600 per year for 9 years
starting next year, at a rate of return of 16% per year?
13. Elastro Plastics has major fabrication plants in Texas and Hong Kong. The president wants to
know the equivalent future worth of $1 million capital investments each year for 8 years,
starting 1 year from now. Elastro capital earns at a rate of 14% per year.
14. A mechanical contractor has four employees whose combined salaries through the end of this
year are $250,000. If he expects to give an average raise of 5% each year, calculate the present
worth of the employees’ salaries over the next 5 years. Let per year.
15. A. Demonstrate the concept of equivalence using the different loan repayment plans described
below. Each plan repays a $5000 loan in 5 years at 8% interest per year.
Plan 1: Simple interest, pay all at end. No interest or principal is paid until the end of
year 5. Interest accumulates each year on the principal only.
Plan 2: Compound interest, pay all at end. No interest or principal is paid until the end of
year 5. Interest accumulates each year on the total of principal and all accrued
interest.
Plan 3: Simple interest paid annually, principal repaid at end. The accrued interest is
paid each year, and the entire principal is repaid at the end of year 5.
Plan 4: Compound interest and portion of principal repaid annually. The accrued interest
and one-fifth of the principal (or $1000) is repaid each year. The outstanding
loan balance decreases each year, so the interest for each year decreases.
Plan 5: Equal payments of compound interest and principal made annually. Equal
payments are made each year with a portion going toward principal repayment
and the remainder covering the accrued interest. Since the loan balance
decreases at a rate slower than that in plan 4 due to the equal end-of-year
payments, the interest decreases, but at a slower rate.

B. Make a statement about the equivalence of each plan at 8% simple or compound interest, as
appropriate.

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