Exam+IIA+Solutions

Exam+IIA+Solutions - ISyE 3025 Professor Nagi Gebraeel...

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Engineering Economy Spring 2011 Professor Nagi Gebraeel Solution to Exam IIA 1. [10] The heat loss through the windows of a home is estimated to cost the homeowner $412 per year in wasted energy. Thermal windows will reduce the heat loss by 93% and can be installed for $1 , 232. The windows will have no salvage value at the end of their estimated life of 8 years. Determine the net Present Worth value of the windows if the interest rate is 10%. (a) $412 (b) $812 X (c) $1 , 044 (d) $1 , 834 Solution: We can treat the annual savings of ($412 · 0 . 93) as a revenue stream and solve for net Present Worth as follows. NPW = - 1 , 232 + 0 . 93 · 412( P/A, 10% , 8) = - 1 , 232 + 0 . 93 · 412 · 5 . 3349 = $812 . 12 . 2. [5] A company is considering two alternatives, one of which must be implemented. Of the two projects, Project “A” has the higher maintenance cost, but Project “B” has the higher investment cost. After performing an incremental analysis the resulting incremental IRR was 17 . 6%. Which alternative is preferred if the minimum attractive rate of return is 20%. (Hint: Recall the first step in incremental analysis is arranging the alternatives in ascending order of initial investment) (a) A X (b) B (c) The company is indifferent between A and B (d) Cannot be determined from the information given. Solution: Since one of the alternatives must be implemented, we know that “do nothing” is not an option and should not be our first “defender”. Our first “defender” then is A because it has the lower investment cost. The incremental IRR from A to B is less than the MARR so we should reject Project B and choose Project A. 3. [5] Consider the following cash flow diagram. What is the value of X if the internal rate of return is 15%? [Negative cash flow of $400 in year 0 and positive cash flow of X in years 1 and 2] (a) $246 X (b) $255 (c) $281 (d) $290 Solution: The following equation describes the cash flow diagram: 400 = X ( P/A, 15% , 2) . Solving for X gives the answer:
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Exam+IIA+Solutions - ISyE 3025 Professor Nagi Gebraeel...

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