Optional FE review:
Engineering economics
Chris Rehmann

Engineering economics
• Discounted cash flow (e.g., equivalence, PW, equivalent annual worth, FW, rate of return)
• Cost (e.g., incremental, average, sunk, estimating)
• Analyses (e.g., breakeven, benefit cost, life cycle)
• Uncertainty (e.g., expected value and risk)

Discounted cash flow: FEIM 1
A savings and loan offers a 5.25% rate per annum compounded daily. The effective annual rate is most nearly
A. 1.43%
B. 5.25%
C. 5.39%
D. 19.2%
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Discounted cash flow

Discounted cash flow: Example 1
You invest $100,000 in a fund that generates 3% interest annually. After 18 years, you will have most nearly
A. $1.70
B. $170,243
C. $240,812
D. $520,196

Discounted cash flow: Example 2
You invest $100,000 in a fund that generates 4% interest annually. The number of years it will take to have
$200,000 is most nearly
A. 3
B. 17
C. 18
D. 25

Discounted cash flow: Example 3
A fund generates 6% interest annually. If after 18 years you want $500,000, the amount you need to invest today is most nearly
A. $95,384
B. $175,172
C. $240,385
D. $471,698

Discounted cash flow: Example 4
You invest $100,000 in a fund that generates interest annually. If after 18 years you want $500,000, the interest rate would need to be most nearly
A. 1.1%
B. 9.4%
C. 22.2%
D. 109.4%

Discounted cash flow: Example 5
You save $2000 each year and put it into a fund that generates 2% interest each year. When you retire in 50 years, you will have most nearly
A. $5380
B. $102,000
C. $169,159
D. $8,675,309

Discounted cash flow: PPI #6
How much money must you invest today in order to withdraw $1000 per year for 10 years if the interest rate is 12%?
A. $4800
B. $5650
C. $5808
D. $6145
E. $10,000
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Discounted cash flow: PPI #7
You are considering buying a $25,000 machine that will save $15,000 each year. If the effective annual interest rate is 18%, what is the discounted payback period, in years, on the investment in the machine?
A. 1.67
B. 1.75
C. 2.16
D. 3.17
E. 3.67

Discounted cash flow: PPI #8
What is the present worth of a $100 annuity (i.e., annual payment) starting at the end of the third year and continuing to the end of the fourth year, if the annual interest rate is 8%?
A. $122
B. $153
C. $160
D. $162
E. $165

Discounted cash flow: PPI #9
Consider a project which involves investing $100,000 now and $100,000 at the end of one year. Revenues of
$150,000 will be generated at the end of years 1 and 2.
What is the net present value of the project if the effective annual interest rate is 10%?
A. −$150,000
B. −$50,910
C. $0
D. $43,270
E. $69,420

Discounted cash flow: NLESG #7-6
The rate of return for a $10,000 investment that will pay
$1000/year for 20 years is most nearly
A. 6.8%
B. 7.2%
C. 7.8%
D. 8.2%
NLESG = Newnan, Lavelle, and Eschenbach, 10 th edition, Study Guide

Cost: PPI #23
An electric pump that provides 200 hp with 85% efficiency is being considered for purchase. The cost is $3200, and the maintenance costs $50/year. The life expectancy is 14 years. The pump will be used for 400 h/year. The cost of electricity is $0.04/kWh (1 hp =
0.746 kW). If the pump has no salvage value and straight line depreciation is used, what is most nearly the monthly cost?
A. $234.60
B. $238.20
C. $647.60
D. $667.60
E. $687.60

Cost: NLESG #6-30
A proposed bridge has an indefinite life. The initial cost of the bridge is $3,750,000, and the annual maintenance cost is $25,000.
The deck will be resurfaced every 10 years for $900,000, and anticorrosion paint will be applied every 5 years for $250,000. If the interest rate is 8%, what is the equivalent uniform annual cost?
A. $129,725
B. $165,000
C. $429,725
D. $3,915,000

Cost: NLESG #11-7±
A dairy is planning to purchase 10 delivery trucks. Each will cost
$18,000. If the recovery period is 5 years, then according to the modified accelerated cost recover system, the depreciation in year
3 will be most nearly
A. $2074
B. $3456
C. $3600
D. $5760

Analyses: EIT exam TV
A company considers selling an auto part. Making the part would incur an annual operating cost of $500,000 and a materials cost of $67/unit. The expected price is
$125/unit. The number of units to be sold to break even is most nearly
A. 2604
B. 4000
C. 4001
D. 8621

Analyses: NLESG #9-27
What is the smallest acceptable annual income from a project that has a $70,000 investment cost and a
$70,000 salvage value if the life is 15 years and the minimum attractive rate of return is 20%?
A. $0
B. $4667
C. $14,000
D. $70,000

Uncertainty: NLESG #10-2
Acme Insurance offers a policy that pays $1000 for lost luggage on a cruise. It pays this amount in 1 of 200 policies it sells. What is the minimum amount Acme must charge for this policy to make at least $10 dollars per policy?
A. $10
B. $15
C. $20
D. $60

Uncertainty: NLESG #10-1
A company is considering the purchase of some equipment, which will cost $500,000 and last eight years. The savings per year and the salvage value are uncertain, as follows:
Savings per year
Salvage value p = 20%
$65,000
$40,000 p = 50% p = 25% p = 5%
$82,000 $90,000 $105,000
$55,000 $65,000 $ 75,000
If the interest rate is 6%, the net present worth of the equipment is most nearly
A. -$104,066
B. $42,472
C. $357,060
D. $1,771,191
E. $53,747,185