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INDE301 - HW #3 Zeina Farhat - 202003311

This document contains three engineering economics problems involving present worth analysis, capitalized cost calculation, and incremental rate of return analysis. For the first problem, the author calculates the present worth of three switch assembly methods and determines that Method C should be selected as it has the highest present worth. For the second problem, the author calculates the capitalized cost of a project with given present, annual, and periodic costs. For the third problem, the author performs an incremental rate of return analysis to determine which of two chemical additives is economically favored for a company, and finds that additive A should be selected.

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Zeina Farhat
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104 views

INDE301 - HW #3 Zeina Farhat - 202003311

This document contains three engineering economics problems involving present worth analysis, capitalized cost calculation, and incremental rate of return analysis. For the first problem, the author calculates the present worth of three switch assembly methods and determines that Method C should be selected as it has the highest present worth. For the second problem, the author calculates the capitalized cost of a project with given present, annual, and periodic costs. For the third problem, the author performs an incremental rate of return analysis to determine which of two chemical additives is economically favored for a company, and finds that additive A should be selected.

Uploaded by

Zeina Farhat
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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INDE301 – HW #3

Zeina Farhat – 202003311

1. An electric switch manufacturing company has to choose one of three different


assembly methods. Method A will have a first 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 as a salvage value. 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)) – 9,000(P/A,10%,8)


PWA=-40,000(1+0.8264+0.6830+0.5645)-9000(5.3349)
PWA= -170,970 $

PWB=-80,000(1+(P/F,10%,4))-6,000(P/A,10%,8)
PWB=-80,000(1+0.6830)-6,000(5.3349)
PWB=-166,649 $

PWC=-130,000-4,000(P/A,10%,8) +12,000(P/F,10%,8)
PWC =-130,000-4,000(5.3349) + 12,000(0.4665)
PWC=-145,742 $

Method C should be selected as it results in the highest present value between the three
methods.

2. Find the capitalized cost of a present cost of $300,000, annual costs of $35,000, and
periodic costs every 5 years of $75,000. Use an interest rate of 12% per year.

𝑖
𝐴 = 𝐹[(1+𝑖)𝑛 −1] meaning A=F(A/F,i,n)
CW=A/i
CC=-300,000-(35,000/0.12)-(75,000(A/F,12%,5)/0.12)
CC=-300,000-291,666.67-(75,000(0.15741)/0.12)
CC=-591,666.67 – 98,381.25
CC=-680,047.92 $

The capitalized cost is approximately -680,048$

3. Chem-Tex Chemical is considering two additives for improving the dry-weather


stability of its low-cost acrylic paint. Additive A has a first cost of $110,000 and an
annual operating cost of $60,000. Additive B has a first cost of $175,000 and an annual
operating cost of $35,000. If the company uses a 3-year recovery period for paint
product sand a MARR of 20% per year, which process is economically favored? Use an
incremental ROR analysis.

Year A B B-A
0 -110,000 -175,000 -65,000
1 -60,000 -35,000 25,000
2 -60,000 -35,000 25,000
3 -60,000 -35,000 25,000
IRR 7.50%

MARR= 20% and 7.50<20


Therefore, the IRR value calculated in the table above is less than MARR.
The process economically favored is the one with lower initial cost meaning we
should select the additive A.

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