Mansoura University Engineering Economy [ENG221]

Faculty of Engineering Electro. & Comm. Eng. Program

Assignment 4 ― Present Worth Analysis

Q1) You have been asked to evaluate two alternatives, X and Y, that may increase plant
capacity for manufacturing high-pressure hydraulic hoses. The parameters associated with
each alternative have been estimated. Which one should be selected on the basis of a
present worth comparison at an interest rate of 12% per year? Why is yours the correct
choice?

Alternative X Y
Fist cost, $ -45,000 -58,000
Maintenance cost, $/year -8,000 -4,000
Salvage value, $ 2,000 12,000
Life, years 5 5

Q2) One of two methods must be used to produce expansion anchors. Method A costs
$80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost
with this method will be $30,000 per year. Method B will have a first cost of $120,000, an
operating cost of $8000 per year, and a $40,000 salvage value after its 3-year life. At an
interest rate of 12% per year, which method should be used on the basis of a present worth
analysis?

Q3) A software package created by Navarro & Associates can be used for analyzing and
designing three-sided guyed towers and three- and four-sided self-supporting towers. A
single-user license will cost $4000 per year. A site license has a one-time cost of $15,000.
A structural engineering consulting company is trying to decide between two alternatives:
first, to buy one single-user license now and one each year for the next 4 years (which will
provide 5 years of service), or second, to buy a site license now. Determine which strategy
should be adopted at an interest rate of 12% per year for a 5-year planning period using
present worth evaluation.

Q4) A company that makes food-friendly silicone (for use in cooking and baking pan
coatings) is considering the independent projects shown, all of which can be considered to
be viable for only 10 years. If the company’s MARR is 15% per year, determine which
should be selected on the basis of a present worth analysis. Financial values are in $1000
units.

A B C D
First cost, $ -1,200 -2,000 -5,000 -7,000
Annual net income, $/year 200 400 1,100 1,300
Salvage value, $ 5 6 8 7

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Q5) Sales of bottled water in the United States totaled 34.0 gallons per person in 2014.
Evian, a high-quality natural spring water, costs about 60¢ per bottle, while a local brand
of purified municipal water may cost only 25¢ per bottle. On average, a local municipal
water utility may provide drinkable tap water for $2.90 per 1000 gallons. If the average
person drinks two bottles of water per day or uses 5 gallons per day to obtain the same
amount of water from the tap, what are the present worth values per person for 1 year of
drinking tap water versus bottled water using (a) Evian, and (b) local-brand bottled water?

Q6) Lego Group in Bellund, Denmark manufactures Lego toy construction blocks. The
company is considering two methods for producing special-purpose Lego parts. Method 1
will have an initial cost of $400,000, an annual operating cost of $140,000, and a life of 3
years. Method 2 will have an initial cost of $600,000, an operating cost of $100,000 per
year, and a 6-year life. Assume 10% salvage values for both methods. Lego uses an
MARR of 15% per year. Which method should it select on the basis of a present worth
analysis?

Q7) The product development group of a high-tech electronics company developed five
proposals for new products. The company wants to expand its product offerings, so it will
undertake all projects that are economically attractive at the company’s MARR of 20% per
year. The cash flows (in $1000 units) associated with each project are estimated. Which
projects, if any, should the company accept on the basis of a present worth analysis?

Project A B C D E
Initial investment, $ -400 -510 -660 -820 -900
Operating cost, $/year -100 -140 -280 -315 -450
Revenue, $/year 360 235 400 605 790
Salvage value, $ --- 22 --- 80 95
Life, years 3 10 5 8 4
Q8) An electric switch manufacturing company is trying to decide between three different
assembly methods. Method A has an estimated first cost of $40,000, an annual operating
cost (AOC) of $9000, and a service life of 2 years. Method B will cost $80,000 to buy and
will have an AOC of $6000 over its 4-year service life. Method C costs $130,000 initially
with an AOC of $4000 over its 8-year life. Methods A and B will have no salvage value,
but Method C will have equipment worth 10% of its first cost. Perform both (a) future
worth, and (b) present worth analyses to select the method at i = 10% per year.

Q9) Determine the capitalized cost of a permanent roadside historical marker that has a
first cost of $78,000 and a maintenance cost of $3500 once every 5 years. Use an interest
rate of 8% per year.

Q10) What is the present worth difference between an investment of $10,000 per year for
50 years and an investment of $10,000 per year forever at an interest rate of 10% per year?

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