The Islamic University of Gaza-IUG

Faculty of Engineering-Industrial Engineering Department

Engineering Economy EIND 4303

Homework chapter 5

  1. You are faced with making a decision on a large capital investment proposal. The capital investment amount is $640,000. Estimated annual revenue at the end of each year in the eight-year study period is $180,000. The estimated annual year-end expenses are $42,000 starting in year one. These expenses begin decreasing by $ 4,000 per year at EOY four and continue decreasing through EOY eight. Assuming $20,000 market value at EOY eight and a MARR= 12% per year, answer the following question:
  1. What is the PW of this proposal?
  2. What is your conclusion about the acceptability of this proposal?
  1. A city is spending $20 million on a new sewage system. The expected life of the system is 40 years, and it will have no market value at the end of its life. Operating and maintenance expenses for the system are projected to average $0.6 million per year. If the city's MARR is 8% per year, what is the capitalized worth of the system?
  1. Fill in the following table when P= $10,000, S= $2,000 (at the of four years), and i = 15% per year. Complete the accompanying table and show that the equivalent uniform CR amount, equals $3,102.12

year / Investment Beginning of Year / Opportunity Cost of Interest (i =15%) / Loss in Value of Asset During Year / Capital Recovery Amount for Year
1 / $10,000 / …………… / $3,000 / ……………
2 / …………… / …………… / $2,000 / ……………
3 / …………… / …………… / $2,000 / ……………
4 / …………… / …………… / …………… / ……………
  1. An environmentally friendly green home (99% air tight) costs about 8% more to construct than a conventional home. Most green homes can save 15% per year on energy expenses to heat and cool the dwelling. For a $250,000 conventional home, how much would have to be saved in energy expenses per year when the life of the home is 30 years and the interest rate is 10% per year ? Assume the additional cost of a green home has no value at the end of 30 years?
  1. Your boss has just presented you with the summery in the accompanying table of projected costs and annual receipts for a new product line. He asks you to calculate the IRR for this investment opportunity. What would you present to your boss, and how would you explain the results of your analysis? ( It is widely known that the boss likes to see graphs of PW versus interest rate for this type of problem.) the company's MARR is 10% per year.

End of year / Net Cash Flow
0 / -$450,000
1 / - 42,500
2 / +92,800
3 / +386,000
4 / +614,600
5 / -$202,200
  1. Calculate the IRR for each of the three cash-flow diagrams that follow. Use EOY zero for (1) and EOY four for (2) and (3) as references points in time. What can you conclude about " reference your shift" and " proportionality" issues of the IRR method?
  2. Calculate the PW at MARR= 10% per year at EOY zero for (1) and (2) and EOY four for (2) and (3). How do the IRR and PW methods compare?