Professional Documents
Culture Documents
in Engineering Economics
Bruce A. Black
Department of Electrical and Computer
Engineering
Rose-Hulman Institute of
Technology
Example 1
Fifteen years ago $1000 was
deposited in a bank account, and
today it is worth $2370. The bank
pays interest semi-annually.
What was the nominal annual
interest rate paid on this account?
Example 2
A company puts $25,000 down and
will pay $5,000 every year for the
10-year life of a machine.
If the salvage value is zero and the
interest rate is 10% compounded
annually, what is the present
value of the machine?
Example 3
A machine costs $20,000 today and
has an estimated scrap cash value
of $2,000 after eight years. Inflation
is 8% per year. The effective annual
interest rate on money invested is
8%. How much money has to be set
aside each year to replace the
machine with an identical model
eight years from now?
Example 4
An oil company is planning to
install a new pipeline to connect
storage tanks to a processing plant
1500 m away. The connection will
be needed for the forseeable
future. Both 80 mm and 120 mm
pipes are being considered. The
annual interest rate is 8%.
Comparison of
Alternatives
Present Worth
Mutually exclusive alternatives, same lives
Annual Cost
Assumes infinite renewal
Rate of Return
Interest rate that makes the present value zero
Benefit-Cost
Applies to public works projects. PW(benefits)/PW(costs)
Break Even
Does not use time-value of money by tradition
Example 5
Warehouse A with a life of 10 years can be
constructed now for $100,000 with no repair
costs, and a salvage value of $10,000.
Alternatively, warehouse B with a life of 12 years
can be constructed for $70,000 now, with a
salvage value of $5,000, but requires $18,000 of
repairs every three years. Both have equal
usefulness and are needed indefinitely.
Assuming the cost of money is 6%, which
warehouse is a better deal and by how much per
year?
Example 6
You purchased a lot for building your
house four years ago for $20,000.
Each year you paid $220 in property
taxes. Each year you spent $80 in
maintaining the lot. Now you are
selling the lot and will get $25,000
after deducting the selling expenses.
What is the rate of return on your
investment?