Engineering Economics Tutorial Questions Unit #1 

 
Introductory basics: 
 
1.1 List the four essential elements involved in decision
making in engineering economic analysis.

1.2 What is meant by (a) limited capital funds and

(b) sensitivity analysis?

1.3 List three measures of worth that are used in engineering

economic analysis.

Ethics:

Stefanie is a design engineer with an international railroad locomotive manufacturing company in Illinois.
Management wants to return some of the engineering design work to the United States rather than export all of
it to India, where the primary design work has been accomplished for the last decade. This transfer will employ
more people locally and could improve the economic conditions for families in and around Illinois.
Stefanie and her design team were selected as a test case to determine the quality and speed of the design work
they could demonstrate on a more fuel-efficient diesel locomotive. Neither she nor any of her team members
have done such a significant design job, because their jobs had previously entailed only the interface with the
subcontracted engineers in India. One of her team members had a great design idea on a key element that will
improve fuel efficiency by approximately 15%. She told Stefanie it came from one of the Indian generated
documents, but that it would probably be okay for the team to use it and remain silent as to its origin, since it
was quite clear the U.S. management was about to cancel the foreign contract. Although reluctant at first,
Stefanie did go forward with a design that included the efficiency improvement, and no mention of the origin of
the idea was made at the time of the oral presentation or documentation delivery. As a result, the Indian contract
was cancelled and full design responsibility was transferred to Stefanie’s group. Consult the JIE Code of Ethics
for Engineers and identify sections that are points of concern about Stefanie’s decisions and actions.
 
Interest Rate and Rate of Return

1. Which of the following 1-year investments has the highest rate of return?
(a) $12,500 that yields $1125 in interest,
(b) $56,000 that yields $6160 in interest, or
(c) $95,000 that yields $7600 in interest.

2. Emerson Processing borrowed $900,000 for installing energy-efficient lighting and safety equipment in
its La Grange manufacturing facility. The terms of the loan were such that the company could pay
interest only at the end of each year for up to 5 years, after which the company would have to pay the
entire amount due. If the interest rate on the loan was 12% per year and the company paid only the
interest for 4 years, determine the following: (a) The amount of each of the four interest payments
(b) The amount of the final payment at the end of year 5

3. A new engineering graduate who started a consulting business borrowed money for 1 year to furnish
the office. The amount of the loan was $23,800, and it had an interest rate of 10% per year. However,
because the new graduate had not built up a credit history, the bank made him buy loan-default
insurance that cost 5% of the loan amount. In addition, the bank charged a loan setup fee of $300.
(a) What was the effective interest rate the engineer paid for the loan?

(b) When the inflation rate is expected to be 8% per year, what is the market interest rate likely to be?

Terms and Symbols

1. The symbol P represents an amount of money at a time designated as present. The following symbols
also represent a present amount of money and require similar calculations. Explain what each symbol
stands for: PW, PV, NPV, DCF, and CC.
 2. Identify the four engineering economy symbols and their values from the following problem statement.
Use a question mark with the symbol whose value is to be determined. Thompson Mechanical Products
is planning to set aside $150,000 now for possibly replacing its large synchronous refiner motors
whenever it becomes necessary. If the replacement is not needed for 7 years, how much will the
company have in its investment set-aside account, provided it achieves a rate of return of 11% per
year?

Cash Flows

1. What is meant by end-of-period convention?

2. Identify the following as cash inflows or outflows to commercial air carriers: fuel cost, pension plan
contributions, fares, maintenance, freight revenue, cargo revenue, extra-bag charges, water and sodas,
advertising, landing fees, seat preference fees.

3. For a company that uses a year as its interest period, determine the net cash flow that will be recorded
at the end of the year from the cash flows shown.

Month Receipts, $1000 Disbursements, $1000

Jan 500 300
Feb 800 500
Mar 200 400
Apr 120 400
May 600 500
June 900 600
July 800 300
Aug 700 300
Sept 900 500
Oct 500 400
Nov 400 400
Dec 1800 700

Equivalence

1. During a recession, the price of goods and services goes down because of low demand. A company that
makes Ethernet adapters is planning to expand its production facility at a cost of $1,000,000 one year
from now. However, a contractor who needs work has offered to do the job for $790,000 if the
company will do the expansion now instead of 1 year from now. If the interest rate is 15% per year,
how much of a discount is the company getting?

2. University tuition and fees can be paid by using one of two plans. Early-bird: Pay total amount due 1
year in advance and get a 10% discount. On-time: Pay total amount due when classes start. The cost of
tuition and fees is $10,000 per year.

(a) How much is paid in the early-bird plan?

(b) What is the equivalent amount of the savings compared to the on-time payment at the time that the
on-time payment is made?

Simple and Compound Interest

1. Iselt Welding has extra funds to invest for future capital expansion. If the selected investment pays
simple interest, what interest rate would be required for the amount to grow from $60,000 to $90,000 in 5 years?

2. If interest is compounded at 20% per year, how long will it take for $50,000 to accumulate to $86,400?

MARR and Opportunity Cost

1. Managers from different departments in Zenith Trading, a large multinational corporation, have offered
six projects for consideration by the corporate office. A staff member for the chief financial officer
used key words to identify the projects and then listed them in order of projected rate of return as
shown below. If the company wants to grow rapidly through high leverage and uses only 10% equity financing
that has a cost of equity capital of 9% and 90% debt financing with a cost of debt capital of 16%, which projects
should the company undertake?

Project ID Projected ROR, % per year

Inventory 30
Technology 28.4
Warehouse 19
Products 13.1
Energy 9.6
Shipping 8.2

2. What is the weighted average cost of capital for a corporation that finances an expansion project using
30% retained earnings and 70% venture capital? Assume the interest rates are 8% for the equity
financing and 13% for the debt financing.

Spreadsheet Functions

1. State the purpose for each of the following built-in spreadsheet functions.
(a) PV( i% , n , A , F )
(b) FV( i %, n , A , P )
(c) RATE( n , A , P , F )
(d) IRR(fi rst_cell:last_cell)
(e) PMT( i %, n , P , F )
(f ) NPER( i %, A , P , F )

2. What are the values of the engineering economy symbols P , F , A , i , and n in the following functions?
Use a question mark for the symbol that is to be determined.
(a) NPER (8%,_ 1500,8000,2000)
(b ) FV (7%,102000,_ 9000)
(c) RATE (10,1000,_ 12000,2000)
(d ) PMT (11%,20,,14000)
(e) PV (8%,15,_ 1000,800)

3. Sheryl and Marcelly both invest $1000 at 10% per year for 4 years. Sheryl receives simple interest and
Marcelly gets compound interest. Use a spreadsheet and cell reference formats to develop relations that
show a total of $64 more interest for Marcelly at the end of the 4 years. Assume no withdrawals or further
deposits are made during the 4 years.