ENG106 MT Soln 11

# ENG106 MT Soln 11 - Name(please print Luks Gutume ENG 106...

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Name (please print) Luks Gutume ENG 106 – Engineering Economics Midterm Winter 2011 You may use four sheets of hand-written notes. No other reference materials, calculators or other electronic devices are allowed. State any assumptions, show all your work and explain where appropriate. You may use shorthand notation, e.g., (P/A, 5%, 3), where helpful. Do not use Excel functions. The test has four problems and 100 points. 1. Chifung consumes 10 kg of rice per year and plans to continue at this rate for many, many years. He just ran out of rice, so will make a quick run to COSTCO to replenish his supply. COSTCO currently offers rice in 10-kg bags at \$20 each, and 50-kg bags at \$85 each. Chifung’s market interest rate is 6% per year, and the price of rice is expected to increase at the general inflation rate of 2% per year. a) (15 pts) Using present worth as the basis for comparison, set up all the relationships needed to determine whether Chifung should purchase the 10-kg bag or the 50-kg bag. Need a common analysis period. For long-term need, different lives (one year for 10-kg bag and 5 years for 50-kg bag) and stable “technology” – rice isn’t changing dramatically – the LCM of five years is a good choice. Could use either actual \$ or year-zero \$, but the latter is easier so will do so below. Must use i’ to make equivalence calcs with constant \$: i’ = (1+i)/(1+fbar)-1 = (1.06)/(1.02) – 1 10-kg bag, purchased at the beginning of each of next five years: PW = -\$20[ 1 + (P/A, i’, 4)] 50-kg bag, purchased now: PW = -\$85 b) (15 pts) Repeat the analysis in (a), using annual equivalent worth as the basis for comparison. Again, set up all the relationships needed. Relationships using the computational advantages of AEW in this case will receive more credit. Easiest approach: Find AEWs in year-zero \$ of the “first copies” for the two alts, so the AEWs will

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ENG106 MT Soln 11 - Name(please print Luks Gutume ENG 106...

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