EGG 307: Engineering Economics: Solution to Homework No. 6
Spring 2009
Homework Problems:
Chapter 5 Problem
:
5-34
Chapter 6 Problems
:
6-4;
6-47;
6-55.
Notes: (1) For Problem 5-34, use the trial-and-error method to compute the IRR.
(2) For Problem 6-4, use the AW method and confirm your results using the PW method.
(3) For Problem 6-47, assume the useful lives for both designs is infinity (not
83 and 92 years).
(4) For Problem 6-55, use the PW method (not
the IRR method). Ignore the IRR information given.
Solutions:
5-34(a)
To estimate lower limit value of
i
, ignore the salvage value and find
NPW = -10,000,000 + 2,800,000(P/A,
i
, 4) = 0
Therefore, (P/A,
i
, 4) = 10,000,000/2,800,000 = 3.5714
From tables, the nearest interest rate that gives (P/A,
i
, 4) close to 3.5714 is 5%
To estimate upper limit value of
i
, use A = $2,800,000 + $5,000,000/4 = $4,050,000
Therefore, (P/A,
i
, 4) = 10,000,000/4,050,000 = 2.4691
From tables, the nearest interest rate that gives (P/A,
i
, 4) close to 2.4691 is 20%