1. The IslamicUniversityof Gaza-IUG
Facultyof Engineering-Industrial EngineeringDepartment
EngineeringEconomy EIND4303
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:
a. What is the PW of this proposal?
b. What is your conclusion about the acceptability of this proposal?
2. 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?
3. 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 …………… …………… …………… ……………
2. The IslamicUniversityof Gaza-IUG
Facultyof Engineering-Industrial EngineeringDepartment
EngineeringEconomy EIND4303
4. 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?
5. 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
6.
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?
