ENGINEERING ECONOMY

AND ACCOUNTING FOR

ENGINEERS
SME 4833

EXERCISE
CHAPTER 2
Prepared by:
KHAIRUL RAZMIN B. ABDURAKMAN
BACHELOR OF MECHANICAL ENGINEERING
SX105558MMD03
SPACE PENANG

PROBLEM 1

SOLUTION
i = 12%
0

10

11

12

13

14

15 (year)

Ao = 2,000
G = 60

Am = 1,000
P = 10,000

F = 2,000

= 10,000
=

, %, ) = 2,000(

, 12%, 15) = 2,000 (6.8109) = 13,621.8

, %, ) = 1,000(

, 12%, 15) = 1,000(6.8109) = 6,810.9

= ( , %, ) = 2,000( , 12%, 15) = 2,000(0.1827) = 365.4

= ( , %, )(

, %, ) = 60( , 12%, 11)( , 12%, 4)

= 60(23.1288)(0.6355) = 886.48

= 10,000 13,621.8 6,810.9 365.4 886.48 = 31,684.58

PROBLEM 2

SOLUTION

i = 12%
G 1= 8,000

A1 = 80,000

10

11

12

13

14

(year)

A2 = 3,000
G 2= 500

P = 20,000
=

, %, )

= 20,000
=
=
=
=

(
(
(
(

, %, ) = 80,000(

, 12%, 14) = 80,000(6.6282) = 530,256.00

, %, ) = 3,000(
, %, ) = 8,000(
, %, )(

, 12%, 14) = 3,000(6.6282) = 19,884.60

, 12%, 14) = 8,000(31.3624) = 250,899.20

, %, ) = 500(

, 12%, 13)( , 12%, 1)

= 500(28.7024)(0.8929) = 12,814.19

= 20,000 + 530,256.00 19,884.60 + 250,899.20 12,814.19 = 728,456.41

= 728,456.41(

, 12%, 14) = 728,456.41(0.15087) = 109,902.22

PROBLEM 3

SOLUTION
i = 12%
A1 = 20,000

P = 5,000

10

11

12

13

14

15

16

17

18

19

20 (year)

5,000

A2 = 5,000
G = 1,000
A3 = 8,000

15,000

a)
=

= 5,000
=

, %, )(

, %, ) = 20,000(

, 12%, 19)(

, 12%, 1)

= 20,000(7.3658)(0.8929) = 131,538.46
=

= (
=

, %, ) = 5,000(

, 12%, 8) = 5,000(4.9676) = 24,838.00

, %, ) = 15,000( , 12%, 7) = 15,000(0.4523) = 6,784.50

, %, )(

, %, ) = 8,000(

, 12%, 11)(

, 12%, 8)

= 8,000 (5.9377)(0.4039) = 19,185.90

= ( , %, )(

, %, ) = 1,000 ( , 12%, 11)( , 12%, 8)

= 1,000(23.1288)(0.4039) = 9,341.72
=

, %, ) = 8,000(

, 12%, 20) = 5,000(0.1037) = 518.50

= 5,000.00 + 131,538.46 24,838.00 6,784.50 19,185.90 9,341.72 518.50

= 65,869.84

#
4

b)
=

, %, ) = 65,869.84(

, 12%, 20) = 65,869.84(0.13388) = 8,818.65

, %, ) = 65,869.84(

c)
=

d)

, 12%, 12) = 65,869.84(3.8960) = 256,628.90

According to the calculation from (c), the expected value of the project for year 12 is RM
256,628.90. If some company offered to buy the project at that year at the price of RM 25,000.00,
the offer should be rejected because the price offered was below from the expected value.

PROBLEM 4

SOLUTION
F = 20,000
i = 12%
A1 = 10,000
G1 = 2,000

10

11

12

13

14

15

16

17

18

19

20 (year)

G2 = 1,000
40,000

A2 = 2,000

P = 100,000

i)
=

= 100,000.00
=
=

(
(

, %, ) = 10,000(
, %, )(

, 12%, 20) = 10,000(7.4694) = 74,694.00

, %, ) = 2,000(

, 12%, 19)(

, 12%, 1)

= 2,000 (7.3658)(0.8929) = 13,153.85

=
=

(
(

, %, ) = 2,000(
, %, )(

, 12%, 20) = 2,000(44.9676) = 89,935.20

, %, ) = 1,000(

, 12%, 19)( , 12%, 1)

= 1,000 (42.9979)(0.8929) = 38,392.82

=

, %, ) = 40,000 (

, 12%, 10) = 40,000(0.3220) = 12,880.00

= ( , %, ) = 8,000( , 12%, 20) = 20,000(0.1037) = 2,074.00

= 100,000.00 + 74,694.00 13,153.85 + 89,935.20 38,392.82 12,880.00 + 2,074.00

= 2,276.53

#
6

ii)
(

, %, ) = 2,276.53(

, 12%, 20) = 2,276.53(0.13388) = 304.78

iii)
=

, %, ) = 2,276.53 10,000.00(

, 12%, 15)

= 2,276.53 10,000(0.1827) = 449.53

iv)
i1-10= 12%, i11-20 = 15%
=

= 100,000.00
=

, %, ) +

= 10,000(

, %, )(

, 12%, 10) + 10,000(

, %, )
, 15%, 10)(

, 15%, 10)

= 10,000(5.6502) + 10,000(5.0188)(0.2472) = 68,908.47

=

, %, )(

= 2,000 (

, %, )

, 12%, 9)(

, %, )(

, 12%, 1) 2,000(

, %, )

, 15%, 10)(

, 15%, 10)

= 2,000 (5.3282)(0.8929) 2,000(5.0188)(0.2472) = 11,996.39

=

, %, ) +

= 2,000(

, %, )(

, 12%, 10) + 2,000(

, %, )

, 15%, 10)(

, 15%, 10)

= 2,000(20.2541) + 2,000 (16.9795)(0.2472) = 48,902.86

=

, %, )(

= 1,000 (

, %, )

, %, )(

, 12%, 9)( , 12%, 1) 1,000(

, %, )

, 15%, 10)(

, 15%, 10)

= 1,000 (17.3563)(0.8929) 1,000(16.9795)(0.2472) = 19,694.77

=

, %, ) = 40,000(

, 12%, 10) = 40,000(0.3220) = 12,880.00

= ( , %, ) = 20,000( , 15%, 20) = 20,000(0.0611) = 1,222.00

= 100,000.00 + 68,908.47 11,996.39 + 48,902.86 19,694.77 12,880.00 + 1,222.00

=

The performance of the machine become worsen after the growth rate increasing to 15% after year 10
because the present value given a negative sign means the machine is unprofitable.
7

PROBLEM 5

SOLUTION
i = 12%
A1 = 40,000,000
G 1= 1,000,000

F = 5,000,000

10

(year)

G 2= 120,000
A2 = 2,000,000
8,000,000

P = 50,000,000

F = 5,000,000
i = 12%
A1 = 40,000,000

10

(year)

G 1= 1,000,000
G 2= 120,000
A2 = 2,000,000

8,000,000

P = 50,000,000
8

i)
=

= 5,000,000.00
(

, %, )(

, %, ) = 40,000,000(

, 12%, 9)(

, 12%, 1)

= 40,000,000(5.3282)(0.8929) = 190,301,991.20
=

, %, ) = 2,000,000 (

, %, )(

, 12%, 10) = 2,000,000(5.6502) = 11,300,400.00

, %, ) = 1,000,000 (

, 12%, 9)(

, %, 1)

= 1,000,000(17.3563)(0.8929) = 15,497,440.27
=

= (

, %, ) = 120,000(

, 12%, 10) = 120,000(20.2541) = 2,430,492.00

, %, ) = 8,000,000( , 12%, 5) = 8,000,000(0.5674) = 4,539,200.00

= ( , %, ) = 5,000,000( , 12%, 10) = 5,000,000(0.3220) = 1,610,000.00

= 5,000,000.00 + 190,301,991.20 11,300,400.00 15,497,440.27 2,430,492.00

4,539,200.00 + 1,610,000.00
= 153,144,458.90

ii)
(

, %, ) = 148,958,598.40(

, 12%, 2)

= 153,144,458.90(1.2544) = 192,104,409.30

iii)
(

= (3 1)(

) = (2)(1,000,000) = 2,000,000 =

= (3 1)(

)+

= (2)(120,000) + 2,000,000 = 2,240,000 =

, %, ) = 40,000,000 (

, 12%, 7) = 40,000,000(4.5638) = 182,552,000.00

, %, ) = 2,000,000(

, 12%, 7) = 2,000,000(4.5638) = 9,127,600.00

, %, ) = 2,240,000(

, 12%, 7) = 2,240,000(4.5638) = 10,222,912.00

, %, ) = 1,000,000(

, 12%, 7) = 1,000,000 (11.6443) = 11,644,300.00

, %, ) = 120,000 (

= (

, 12%, 7) = 120,000(11.6443) = 1,397,316.00

, %, ) = 8,000,000( , 12%, 3) = 8,000,000(0.7118) = 5,694,400.00

= ( , %, ) = 5,000,000( , 12%, 7) = 5,000,000(0.4523) = 2,261,500.00

= 182,552,000.00 9,127,600.00 10,222,912.00 11,644,300.00 1,397,316.00

5,694,400.00 + 2,261,500.00
= 146,726,972.00

iv)
=

, %, ) = 148,958,598.40(

, 12%, 7)

= 153,144,458.90(2.2107) = 338,556,455.30
=

From the calculation above, found that the value of project at year 7 of project life is RM
338,556,455.30. If some company offered to buy the project with price of RM 150 million, the offer
should be rejected because the offered price was below from the expected value.

10

PROBLEM 6

SOLUTION
A Alternative:
0

10

(year)

AA

P = 50,000

12.90%
= 6.45% = 0.0645
2

= 6.45% = 0.0645

For every 6 month payment, n = 2 X 10 = 20

= (

, %, ) = 50,000 (

i%
6.00
6.45
7.00

, 6.45%, 20)

A/P, n = 20
0.08718
x
0.09439

0.09439
7.00 6.45
=
0.09439 0.08718 7.00 6.00
0.09439
0.00721

0.55
1.00

= 0.09439 0.55(0.00721) = 0.0904245

= (
=

, %, ) = 50,000(0.0904245) = 4,521.23
,

11

B Alternative:
0

10

AB
P = 50,000

12.85%
= 3.2125% = 0.032125
4

= 3.2125% 2 = 0.06425

= 1+

0.06425
2

1 = 0.065282 = 6.5282%

For every 6 month payment, n = 2 X 10 = 20

= (

, %, ) = 50,000(

i%
6.00
6.5282
7.00

, 6.45%, 20)

A/P, n = 20
0.08718
x
0.09439

0.09439
7.00 6.5282
=
0.09439 0.08718
7.00 6.00
0.09439
0.00721

0.4718
1.00

= 0.09439 0.4718(0.00721) = 0.0909883

= (
=

, %, ) = 50,000(0.0909883) = 4,549.42
,

From the calculation above, found that the A alternative is more economic compare to the B
alternative because A alternative given the lowest installment for every 6 month payment method.

12

PROBLEM 7

SOLUTION

10

11

12

(month)

P = 1,500
F
(

12%
= 1% = 0.01
12

= 1+

0.1
12

1 = 0.104713 = 1.04713%

= 1.04713% 12 = 12.56556%

For 1st year outstanding debt, n = 1

= ( , %, ) = 1,500( , 12.56556%, 1)

i%
12.00
12.56556
14.00

F/P, n = 1
1.1200
x
1.1400

1.1400
14.00 12.56556
=
1.1400 1.1200
14.00 12.00
1.1400
0.02

= 0.71722

= 1.1400 0.71722(0.02) = 1.1256556

= ( , %, ) = 1,500(1.1256556) = 1,688.48

13

PROBLEM 8

SOLUTION

10

11

12

(month)

P = 1,500
F
(

12%
= 1% = 0.01
12

= 1+

0.1
12

1 = 0.104713 = 1.04713%

= 1.04713% 12 = 12.56556%

For 1 year outstanding debt, n = 1

= ( , %, ) = 1,500( , 12.56556%, 1)

i%
12.00
12.56556
14.00

F/P, n = 1
1.1200
x
1.1400

1.1400
14.00 12.56556
=
1.1400 1.1200
14.00 12.00
1.1400
0.02

= 0.71722

= 1.1400 0.71722(0.02) = 1.1256556

= ( , %, ) = 1,500(1.1256556) = 1,688.48

14

PROBLEM 9

SOLUTION
A Alternative:
0

10

(year)

AA

P = 50,000

12.90%
= 6.45% = 0.0645
2

= 6.45% = 0.0645

For every 6 month payment, n = 2 X 10 = 20

= (

, %, ) = 50,000 (

i%
6.00
6.45
7.00

, 6.45%, 20)

A/P, n = 20
0.08718
x
0.09439

0.09439
7.00 6.45
=
0.09439 0.08718 7.00 6.00
0.09439
0.00721

0.55
1.00

= 0.09439 0.55(0.00721) = 0.0904245

= (
=

, %, ) = 50,000(0.0904245) = 4,521.23
,

15

B Alternative:
0

10

AB
P = 50,000

12.85%
= 3.2125% = 0.032125
4

= 3.2125% 2 = 0.06425

= 1+

0.06425
2

1 = 0.065282 = 6.5282%

For every 6 month payment, n = 2 X 10 = 20

= (

, %, ) = 50,000(

i%
6.00
6.5282
7.00

, 6.45%, 20)

A/P, n = 20
0.08718
x
0.09439

0.09439
7.00 6.5282
=
0.09439 0.08718
7.00 6.00
0.09439
0.00721

0.4718
1.00

= 0.09439 0.4718(0.00721) = 0.0909883

= (
=

, %, ) = 50,000(0.0909883) = 4,549.42
,

From the calculation above, found that the A alternative is more economic compare to the B
alternative because A alternative given the lowest installment for every 6 month payment method.

16

PROBLEM 10

SOLUTION
0

(year)

A = 200
P

12%
= 4% = 0.04
4

= 4% 1 = 4%

= 1+

0.04
1 = 0.04 = 4%
1

For monthly installment, n = 4 X 12 = 48

= ( , %, ) = 200( , 4%, 48)

n = 20
45
48
50

P/A
20.7200
x
21.4822

21.4822
50 48
=
21.4822 20.7200 50 45
21.4822
0.7622

= 0.4

= 21.4822 0.4(0.7622) = 21.17732

= ( , %, ) = 200(21.17732) = 4,235.46

#
17

(year)

A
P = 4,235.46

12%
= 6% = 0.06
2

= 6% 1 = 6%

= 1+

0.06
1 = 0.06 = 6%
1

For monthly installment, n = 4 X 12 = 48

= ( , %, ) = 4,235.46( , 6%, 48)

n
45
48
50

P/A
0.06470
x
0.06344

0.06344
50 48
=
0.06344 0.06470 50 45
0.06344
= 0.4
0.00126
= 0.06344 0.4(0.00126) = 0.063944

= ( , %, ) = 4,235.46(0.063944) = 270.83

18

PROBLEM 11

SOLUTION
1st Alternative:
P = 100,000

10

11

12

(month)

F
12%
= 1% = 0.01
12

= 1+

0.01
12

1 = 0.010046 = 1.0046%

= 1.0046% 12 = 12.0552%

For 1 year payment, n = 1

= ( , %, ) = 100,000 ( , 12.0552%, 1)

i%
12.00
12.0552
14.00

F/P, n = 1
1.1200
x
1.1400

1.1400
14.00 12.0552
=
1.1400 1.1200
14.00 12.00
1.1400
0.02

= 0.9724

= 1.1400 0.9724 (0.02) = 1.120552

= ( , %, ) = 100,000 (1.120552) = 112,055.20

=

.
19

2nd Alternative:
P = 100,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 (month)

F
12%
= 1% = 0.01
12

= 1+

0.01
24

1 = 0.010048 = 1.0048%

= 1.0048% 24 = 24.1152%

For 2 year payment, n = 2

= ( , %, ) = 100,000 ( , 24.1152%, 2)

i%
24.00
24.1152
25.00

F/P, n = 2
1.5376
x
1.5625

1.5625
25.00 24.1152
=
1.5625 1.5376
25.00 24.00
1.5625
0.0249

= 0.8848

= 1.5625 0.8848 (0.0249) = 1.54046848

= ( , %, ) = 100,000 (1.54046848)
=

20

Investment:

F
i = 15%

2 (year)

P = 100,000

= ( , %, ) = 100,000( , 15%, 2) = 100,000(8.1371) = 813,710.00

=

From the calculation above, the best solution for the company is 2nd alternative because its more
profitable compare to the 1st alternative. Even the total payment for 2nd alternative is much higher, the
company still can earn a profit about RM 659,663.15 from the investment after loan payment.

21