EGG 307: Engineering Economics
Homework No. 10: Sample Solutions.
Q1.
Problem 8-6
Calculate and compare the PW value of the two alternatives
Alternative A
:
Cash flows are in “actual dollars”, therefore calculate PW based on the “market” interest rate,
i
c
=
r
+
f
+
f
= 0.09 + 0.06 + (0.09)(0.06) = 0.1554
Î
15.54%
PW(Alt. A) = -120,000(P/F, 15.54%, 1) -132,000(P/F, 15.54%, 2) -148,000(P/F, 15.54%, 3)
-160,000(P/F, 15.54%, 4)
= -$388,466
(Using formulae)
Alternative B
:
Cash flows are in “real dollars”, therefore calculate PW based on the “real” interest rate,
= 9%
PW(Alt. B) = -100,000(P/A, 9%, 4) - 10,000(P/A, 9%, 4)
= -100,000(3.2397) - 10,000(4.511)
= -$369,080
(Using factors from tables)
Hence,
Alternative B
has lower present worth of costs.
Q2.
Problem 8-58
All cash flows are in “actual dollars”, therefore calculate PW based on the “market” interest rate,
=
+
+
= 0.098 + 0.02 + (0.098)(0.02) = 0.12
Î
12%
PW(Alt. A) = -27,000 + 4,000(P/A, 12%, 5) = -$2,581