Engineering Economy

ASSIGNMENT 4: COMPARISON AND SELECTION AMONG ALTERNATIVES

6.1
a ¿ Since Revenue> Expenses , we calculate the annual profit :
A1=$ 200,000−$ 50,000 0=$ 150,000
A2=$ 100,000−$ 50,000 0=$ 0 50,0000
A3 =$ 200,000−$ 100,000=$ 100,000
−We then calculatethe PW of each alternative :

( P
) P
( )
P W 1=−$ 300,000+ $ 150,000∗ , 20 % , 10 +$ 50,000 0∗ , 20 % , 10 =−
A F

P W =−$ 450,000+ $ 50,000 0∗( ,20 % ,10 ) + $ 50,000 0∗( ,20 % ,10 ) =−
P P
2
A F

P W =−$ 300,000+ $ 100,000∗( , 20 % ,10 )+$ 100,000∗( , 20 % , 10 )=−

P P
3
A F

Both investments of alternative 2 and 3 returns negative values, therefore they cannot be acceptable (based on Rule
1). The only alternative left – alternative 1 – is acceptable and thus, selected because PW > 0.
b) Within the available capital investment budget, alternative 1 is the only available one to select since the others
require an additional amount of money.
c) I use Rule 1 of Section 6.2.2 (maximizing the profitability by choosing the largest positive PW value at i = MARR)

6.2

Since Revenue> Expenses , we calculate the annual profit :

A1=$ 450,000−$ 200,000=$ 250,000
A2=$ 400,000−$ 180,000=$ 220,000
A3 =$ 300,000−$ 150,000=$ 150,000
−We calculate the PW of each alternative :

( P
) P
( )
P W 1=−$ 800,000+ $ 250,000∗ ,10 % ,10 +$ 100,000∗ , 10 % , 10 =$ 774,696.11
A F

P W =−$ 600,000+ $ 220,000∗( , 10 % ,10 ) +$ 80,000 0∗( ,10 % ,10 )=$ 782,648.23
P P
2
A F

P W =−$ 400,000+ $ 150,000∗( ,10 % ,10 ) + $ 60,000 0∗( ,10 % ,10 ) =$ 584,817.66
P P
3
A F
−We calculate the AW of each alternative :

( A
) A
( )
A W 1=−$ 800,000∗ ,10 % , 10 + $ 250,000+ $ 100,000∗ , 10 % , 10 =$ 126,078.22
P F

A W =−$ 600,000∗( ,10 % , 10)+ $ 220,000+ $ 80,000 0∗( ,10 % ,10 )=$ 127,372.39
A A
2
P F

A W =−$ 400,000∗( , 10 % , 10 ) +$ 150,000+ $ 60,000 0∗( ,10 % ,10 )=$ 088,666.57

A A
3
P F
−We calculate the FW of each alternative :

( F
) (
F
)
F W 1 =−$ 800,000∗ , 10 % ,10 +$ 250,000∗ , 10 % , 10 + $ 100,000=$ 2, 009,362.18
P A

F W =−$ 600,000∗( , 10 % , 10 ) +$ 220,000∗( , 10 % , 10 )+ $ 80,000 0=$ 2,029,987.94

F F
2
P A

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 Engineering Economy

F W 3 =−$ 400,000∗ ( FP ,10 % , 10)+ $ 150,000∗( FA , 10 % ,10)+$ 60,000 0=$ 1,413,116.71

→ All three methods conclude that : Alternative 2is the best selectionbased on Rule 1(Sec .6.2 .2)

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 Engineering Economy

6.4
Assuming that the annual costs∧revenues does not change .
−First , we calculate thetotal annualrevenue :
R1=20,000∗$ 4 .5=$ 5 80,000R2=20,000∗$ 5 .5=$ 150,000 0
R3=20,000∗$ 4.5=$ 112,500
−Then , we calculate thetotal annual cost :
C 1=F1 +V 1=$ 20,000+20,000∗$ 2.5=$ 5 60,000
C 2=F2 +V 2=$ 30,000+20,000∗$ 3 .5=$ 120,000 0
C 3=F3 +V 3 =$ 40,000+20,000∗$ 1.5=$ 577,500
−Last , we calculatethe total annual profit :
A1=R 1−C1 =$ 20,000 A2=R 2−C 2=$ 30,000 0 A3 =R 3−C 3=$ 25,000

−We calculate the AW of each alternative :

( A
) A
( )
A W 1=−$ 50,000∗ ,15 % , 8 + $ 20,000+ $ 25,000∗ ,15 % ,8 =$ 10,678.75
P F

A W =−$ 75,000∗( ,15 % , 8) + $ 30,000+ $ 25,000∗( ,15 % ,8 )=$ 15,107.50

A A
2
P F

A W =−$ 60,000∗( , 15 % , 8 )+ $ 25,000+ $ 25,000∗( ,15 % , 8) =$ 23,450.25

A A
3
P F
→ Alternative 3 is most preferable based on Rule 1.

6.19 We use the IRR method∧the incremental analysis .

−First , we need ¿ rank thetwo alternatives ∈order of increasing
capital investment , thusevaluating theincremental cash flow ∆ ( A−B ) :
Generator B Generator A ∆ (A−B)
Capital investment $80,000 $100,000 $20,000
Market value $10,000 $35,000 $25,000
Annual expenses $5,000 $3,000 $(2,000)
Useful life 10 years 10 years 10 years
The alternative with the least capital investment will become thebase
alternative ,∈this caseisthe generator B .
−Next , we calculate the IRR by letting the PW ∆ ( A− B) (i ' % )=0.
P '
( P '
)
→ 0=−$ 20,000−(−$ 2,000 )∗ , i % ,10 +$ 25,000∗ , i % ,10
' 10
2,000∗( 1+i % ) −1
A
−10
F ( )
+$ 25,000∗( 1+i % )
' '
→ 0=PW ∆ ( A− B) (i %)=−$ 20,000+ $ 10
i %∗( 1+i % )
' '

'
Using trial∧error , we found out that :11 %<i %<12 % .
'
By applying the interpolation method , we can find the exact value of IRR i %=11.46 % > MARR=10 % .
→ The alternative A is preferred since the increment is justified∧the IRR exceeds the MARR .

All exercises are extracted from Engineering Economy 15th Edition as mentioned in the syllabus. Page 3
 Engineering Economy

6.28

a) We need to determine the study period, which is equal to the least

common multiple of the two useful lives (in this case =LCM(10,15) = 30).
10 years 10 years 10 years
A A A
15 years 15 years
B B
30 years
We then calculate the PW values of the two alternatives:

P W A =−$ 9,000∗ 1+
[ ( P
F )( P
)] ( P
)
,5 % ,10 + , 5 % ,20 −$ 5,000∗ ,5 % , 30 =−$ 94,779. 48
F A

B
F [ ( ] P
A [FP P
F ]
P W =−$ 8,000∗ 1+ ,5 % , 15) −$ 6,000∗( , 5 % , 30 )+$ 1,000∗ ( ,5 % ,15 )+( , 5 % , 30 ) =−$ 103,370.5
P

→ Alternative A gives a lower cost ( smaller absolute value of PW ) , thereforeshould be preferred by Rule 2(Sec . 6.2.2)
b) The study period is now 15 years, which made it 5 years of leasing motor A, therefore the annual expenses for the
last 5 studying years of motor A will be the annual leasing cost.

10 years 5-year lease for $12,000/year

A A
15 years
B
We then calculate the FW values of the two alternatives:

[ ( FP , 5 % , 10)−$ 5,000∗( FA ,5 % ,10)]∗( FP ,5 % , 5)−$ 17,000∗( FA , 5 % , 5)=−$ 192,910.75

F W A = −$ 9,000∗

F W =−$ 8,000∗( , 5 % , 15 )−$ 6,000∗( , 5 % , 15 )+$ 1,000=−$ 145,102.81

F F
B
P A
→ Alternative B gives a lower cost ( smaller absolute value of FW ) , thereforeshould be preferred by Rule 2(Sec .6.2 .2)

6.29

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 Engineering Economy

a) We need to determine the study period, which is equal to the least

common multiple of the two useful lives (in this case =LCM(3,5) = 15).
−We calculate the total annual expenses for each motor :
60∗0.746
AA= ∗800∗$ 0.07+ $ 160=$ 2,945.07
0.9
60∗0.746
A B= ∗800∗$ 0.07+ $ 100=$ 3,233.2
0.8

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 Engineering Economy

−We then calculatethe PW for each motor :

[ (
PW A =$ 1,200∗ 1+
P
F)( P
F )( P
F )( P
F )] (P
)
, 8 % ,3 + , 8 % ,6 + , 8 % , 9 + , 8 % ,12 −$ 2,945.07∗ , 8 % , 15 =−$ 29,193.9
A

B
F[ ( F ]
PW =$ 1,000∗ 1+ ,8 % ,5 )+ ( , 8 % ,10 ) + $ 3,233.2∗( , 8 % , 15 )=−$ 29,818.3
P P P
A
→ Alternative A gives a lower cost ( smaller absolute value of PW ) , thereforeshould be preferred by Rule 2(Sec . 6.2.2)
b) The basic trade-off that lower the cost of Motor A is the useful life. Although smaller cost was spent, Motor A can
only be used for 3 years and would need to reinvest more frequently.

6.32

a) PW method :

( PA , 15 % , 9)+ $ 25,000∗( PF ,15 % ,6)−$ 66,000

PW A =−$ 272,000−$ 28,800∗

PW =−$ 346,000−$ 19,300∗( , 15 % , 9 )+ $ 40,000∗( , 15 % , 9 )=−$ 426,7

P P
B
A F
→ Alternative B gives a lower cost (smaller absolute value of PW), therefore
it should be preferred by Rule 2 (Sec. 6.2.2)

b) IRR method :
- First, we need to rank the two alternatives in order of increasing capital
investment, thus evaluating the incremental cash flow ∆ (B− A):

The alternative withthe least capital investment will become thebase alternative ,∈this caseis the alternative A .

Cash flow for IRR & ERR: −Next , we calculate the IRR by letting the PW ∆ (B −A ) (i ' % )=0.

Using trial∧error , we found out that :22 %<i ' %<23 % .

EOY ∆ ( A−B) '
0 $ (74,000)
By interpolation method , we can find the value of IRR i %=22.51% > MARR=15 %
1 $ 9,500 → The alternative B is preferred since theincrement is justified∧IRR exceeds MARR.
2 $ 9,500
3 $ 9,500 c) ERR method :ϵ =15 %
4 $ 9,500
- First, we need to find the PW of all cash outflows and the FW of all cash inflows:
5 $ 9,500
6 $ (15,500) PW outflows =$ 74,000+ $ 15,500∗ ( FP , ϵ , 6)=$ 80,701.078
7 $ 75,500
8 $ 75,500 → The alternative B is preferred since theincrement is justified∧IRR exceeds MARR.
9 $ 115,500
d) Leasing the crane for Alternative A for 9 years, means there will only be annual costs
of $94,800 per year (including the annual leasing cost $66,000 + the annual expenses
$28,800)

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 Engineering Economy

−We calculate the AW of Alternative B :

A W B=−$ 346,000∗ ( AP , 15 % , 9)−$ 19,300+ $ 40,000∗( AF , 15 % , 9)=−$ 89,429.65

→ Alternative B gives a lower cost ( smaller absolute value of AW ) , thereforeshould be preferred by Rule 2 ( Sec . 6.2 .2 ) .
Thus , leasing crane A should not be preferred , but we should prefer purchasing crane A .

6.34 −We calculate the annual profit for each alternative :

A1=$ 500−$ 150=$ 350∧ A 2=$ 600−$ 200=$ 400.

a) PW method:

[ F ] A
(
PW A =−$ 2,000∗ 1+
P P
[F
,15 % ,5 ) + $ 350∗( ,15 % ,10 )+ $ 25,000∗ ( ,15 %
P

PW =−$ 346,000−$ 19,300∗( , 15 % , 9 )+ $ 40,000∗( , 15 % , 9 )=−$ 426,7

P P
B
A F
→ Alternative B gives a lower cost (smaller absolute value of PW), therefore
it should be preferred by Rule 2 (Sec. 6.2.2)

b) Rate of Return method :

alternatives
−Equating the AW of thetwo respective useful lives :
their

AW 1= AW 2 →−$ 2,000∗ ( AP ,i % ,5)+ $ 350+ $ 400∗( FA ,i % , 5)=−$ 2,800∗( AP , i % ,10 )+ $ 400

' ' '

5 10
2,000∗i %∗( 1+i % ) 2,800∗i %∗( 1+ i % )
' ' ' ' '
400∗i %
→−$ 5
+ $ 350+ $ 5
=−$ 10
+$ 400
( 1+i' % ) −1 ( 1+ i' % ) −1 ( 1+i ' % ) −1
' '
Using hit ∧trial , we know that :18 % <i % <19 % . By interpolation method :i %=19.584 %> MARR=15 %

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 Engineering Economy

6.45

a) Because the repeatability is assumed, we need to calculate the AW based on

their own useful lives:

( AP ,15 % ,5)−$ 14,000+ $ 8,000∗( FA ,15 % ,5)=−$ 16,989.

A W 1=−$ 14,000∗

A W =−$ 65,000∗( ,15 % , 20) −$ 9,000+$ 13,000∗( , 15 % , 20 )=−$ 19,2

A A
2
P F
→ Alternative A gives a lower cost (smaller absolute value of AW), therefore it
should be preferred by Rule 2 (Sec. 6.2.2).

b) CI: remaining net value of unused investment & MV: market value at EOY 5

−¿ We first need to calculate the new imputed martket value for Alternative B:

[ ( AP , 15 % , 20 )−$ 13,000∗( AF , 15 % ,20 )]∗( PA ,15 % ,15 )=$ 59,979.96

Market value of CI = $ 65,000∗

Market value of MV =$ 13,000∗( , 15 % , 15 )=$ 1,597.63

P
F
Imputed market value =Market value of CI + Market value of MV =$ 59,979.96+$ 1,597.63=$ 61,577.59

−¿ We then re-calculate the AW value for Alternative B with coterminated assumption:

A W '2=−$ 65,000∗ ( AP ,15 % , 5)−$ 9,000+$ 61,577.59∗( AF , 15 % , 5)=−$ 19,257.60= A W 2

Explain:

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 Engineering Economy

APPENDIX: CASH FLOW FOR EACH PROBLEMS

For 6.1 and 6.2:

For 6.4:

For 6.19:

For 6.28:

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 Engineering Economy

For 6.29:

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 Engineering Economy

For 6.32:

For 6.34:

For 6.45:

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