CHAPTER 4 Solutions Manual

For

Basics of Engineering Economy, 1e

Leland Blank, PhD, PE
Texas A&M University
and
American University of Sharjah, UAE

Anthony Tarquin, PhD, PE

University of Texas at El Paso

PROPRIETARY MATERIAL.
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4- 1

Chapter 4
4.1 Do-nothing (DN) represents the status quo and is understood to always be an option.
If one of the projects absolutely must be selected, the DN alternative is present, it
simply will not be selected when the final selection is made.
4.2 (a) Do-nothing, which is to leave in place the existing equipment. Annual costs for
equipment used now, its estimated remaining life, and an interest rate at which
the evaluation will be performed.
(b) Cost series, since all estimates are cost cash flows.
(c) Conversion to a revenue series requires annual revenue or savings estimates so that
net cash flows can be calculated.
4.3 Independent projects are compared against the MARR, not each other; mutually
exclusive alternatives compete with each other for selection. Additionally, each
independent project usually accomplishes a different objective, whereas mutually
exclusive alternatives are different ways to accomplish the same objective.
4.4 (a) A, B and C are mutually exclusive; D and E are independent.
(b) X is in all bundles as the mutually exclusive selection. The two independent
projects have 22 = 4 bundles. The 4 viable options are:
X only

XD

XE

XDE

4.5 Of the 24 = 16 bundles possible, there are 12 acceptable bundles.

DN
12
123

1
13
124

2
14

3
23

4
24

4.6 PW = -200,000 + (40,000 5000)(P/A,10%,5) + 10,000(P/G,10%,5)

= -200,000 +35,000(3.7908) + (10,000(6.8618)
= $+1296
Excel: enter cash flows for years 0 through 5 and use the NPV function.
4.7 12% per year compounded monthly is 1% per month. Since PW > 0, the service is
financially justified.
PW = -600 + 30(P/A,1%,24)
= -600 + 30(21.2434)
= $+37.30

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4.8 Determine if the deposits F value in year 10 equals the $20 million target amount.
First use Equation [2.7] to find P with g = 0.1 and i = 0.0525. all monetary terms are
in $ million.
P = 1{[1- (1.1/1.0525)10]/-0.0475}
= 1{-0.5549/-0.0475}
= 11.68236
F = 11.68236(F/P,5.25%,10)
= 11,68236(1.66810)
= $19.4873 million
The deposits fall short of the target by $512,700. A spreadsheet solution follows.

4.9 Subscripts are C for contract service and B for Burling Coop installed.
PWC = -75,000(P/A,6%,3) 100,000(P/A,6%,2)(P/F,6%,3)
= -75,000(2.6730) 100,000(1.8334)(0.8396)
= $- 354,407
PWB = -150,000 60,000(P/A,6%,5)
= $-402,744
The contract service is a better deal with a smaller PW of costs.
4.10 Semiannual bond dividend is 1000(0.05)/2 = $25 per 6 months. Semiannual interest
rate is 5%/2 = 2.5%.
PW = -825 + 25(P/A,2.5%,16) + 800(P/F,2.5%,16)
= -825 + 25(13.0550) + 800(0.6736)
= $+40.26
Yes, the bond investment does make over the target rate since PW > 0. A spreadsheet
solution follows.

4- 3

4.11 Semiannual bond dividend is 10,000(0.05)/2 = $250 per 6 months. Semiannual

interest rate expected is 6%/2 = 3%.
PW = -9000 + 250(P/A,3%,40) + 10,000(P/F,3%,40)
= -9000 + 250(23.1148) + 10,000(0.3066)
= $-155
No, the bond investment does not make the target rate since PW < 0. A spreadsheet
solution follows.

4.12 (a) Calculate the face value V using Equation [4.1]. Carla gets this amount.
1000 = V(0.04)/4
V = $100,000
(b) Based on dividends paid quarterly at 4% per year, and V = $100,000, solve the
relation PW = 0 for the number of quarters n.
0 = -100,000 + 1,000(P/A,1%,n) + 100,000(P/F,1%,n)
For n = 60: -100,000 + 1,000(44.9550) + 100,000(0.5504) = $0.
Maturity is 60/4 = 15 years.
By spreadsheet enter = -PV(1%,60,1000,100000)-100000 into a single cell to
display $0.00, indicating that n = 60 quarters.

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(c) Purchase price was $95,000. The quarterly rate earned is i% in the PW relation.
PW = -95,000 + 1,000(P/A,i ,60) + 100,000(P/F,i,60)
Solve manually by trial and error using the interest factors.
i = 1%: PW = $+4995
i = 1.25%: PW = $-5505
By interpolation, the earned quarterly rate is 1.11%. Use Equation [3.2].
Effective annual rate = (1.0111)4 -1 = 4.51% per year
For a rapid spreadsheet solution, enter into single cells,
=RATE(60,1000,-95000,100000) to display the nominal rate of 1.11% as the
quarterly rate, then enter =EFFECT(4.44%,4) to display 4.51%. (This does not
use the NPV function; it uses the rate of return function to find i.)
4.13

Bottled: Cost/mo = -1($1/gal)(30 days/mo) = $30

PW = -30(P/A,0.5%,12)
= -30(11.6189)
= $-348.57
Filtered: Cost/mo = -2($0.27/gal)(30 days/mo) = $16.20
PW = -16.20(P/A,0.5%,12)
= $-188.23
Tap:

Cost/mo = -5($2.75/1000 gal)(30 days/mo) = $0.4125

PW = -0.4125(P/A,0.5%,12)
= $-4.79

4.14 Monetary units are in $1000. Calculate PW values to select the pull system.
PWpull = -1500 700(P/A,10%,8) + 100(P/F,10%,8)
= -1500 700(5.3349) + 100(0.4665)
= $-5187.780 ($-5,187,780)
PWpush = -2250 600(P/A,10%,8) + 50(P/F,10%,8) 500(P/F,10%,3)
= -2250 600(5.3349) + 50(0.4665) 500(0.7513)
= $-5803.265 ($-5,803,265)
By spreadsheet, enter the following into single cells to display the PW values.
PWpull: =-PV(10%,8,-700000,100000)-1500000
PWpush: =-PV(10%,8,-600000,50000)-2250000-PV(10%,3,,-500000)

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4.15 Monetary units are in $1000. Calculate PW values to select Siemens.

PWDel = -250 231(P/A,5%,6) -140(P/F,5%,4) + 50(P/F,5%,6)
= -250 -231(5.0757) 140(0.8227) + 50(0.7462)
= $-1500.355 ($-1,500,355)
PWSie = -224 235(P/A,5%,6) - 26(P/F,5%,3) + 10(P/F,5%,6)
= -224 -235(5.0757) 26(0.8638) + 10(0.7462)
= $-1431.786 ($-1,431,786)
By spreadsheet, enter the following into single cells to display the PW values.
PWDel: =-PV(5%,6,-231000,50000)-250000 - PV(5%,4,,-140000)
PWSie: =-PV(5%,6,-235000,10000)-224000 - PV(5%,3,,-26000)
4.16 Monetary units are in $ million. Calculate PW values to select alternative B.
PWA = -200 450(P/A,12%,20) + 75(P/F,12%,20)
= -200 - 450(7.4694) + 75(0.1037)
= $-3553.4525 ($-3.55 billion)
PWB = -350 - 275(P/A,12%,20) + 50(P/F,12%,20)
= -350 - 275(7.4694) + 50(0.1037)
= $-2398.90 ($-2.40 billion)
PWC = -475 400(P/A,12%,20) + 90(P/F,12%,20)
= -475 - 400(7.4694) + 90(0.1037)
= $-3453.427 ($-3.45 billion)
By spreadsheet, enter the following to display the PW values in $ million units.
PWA: = -PV(12%,20,-450,75)-200
PWB: = -PV(12%,20,-275,50)-350
PWC: = -PV(12%,20,-400,90)-475
4.17 PWProf = -52,000 - 1000(P/A,9%,4) 500(P/G,9%,4)
= -52,000 - 1000(3.2397) 500(4.5113)
= $-57,495
PWExec = -62,000 - 5000(P/A,9%,4) + 500(P/G,9%,4)
= -62,000 - 5000(3.2397) + 500(4.5113)
= $-75,943
Select the Professional Plan. A spreadsheet solution follows.

4- 6

4.18 For Harold (H), use i = 1% per month and n = 60 months to calculate the PW.
PWH = -40,000 - 5000(P/A,1%,60) + 10,000(P/F,1%,60)
= -40,000 - 5000(44.9550) + 10,000(0.5504)
= $-259,271
For Gwendelyn (G), use effective semiannual i and n = 10 to calculate the PW.
Effective i = (1.01)6 -1 = 6.152%
PWG = -60,000 13,000(P/A,6.152%,10) + 8,000(P/F,6.152%,10)
= -60,000 13,000(7.30737) + 8,000(0.55045)
= $-150,592
Select Gwendelyns plan. A spreadsheet solution follows.

4.19 (a) Use LCM = 6 years for PW analysis to select method A.

PWA = -100,000[1+(P/F,10%,3)] -30,000(P/A,10%,6) -5,000[(P/G,10%,3)
+(P/G,10%,3)(P/F,10%,3)]
= -100,000[1.7513] -30,000(4.3553) -5,000[2.3291+(2.3291)(0.7513)]
= $-326,184

4- 7

PWB = -250,000 20,000(P/A,10%,6)

= -250,000 20,000(4.3553)
= $-337,106
(b) Use n = 3 in all calculations and do not repurchase A. Still select method A,
now by a larger margin.
PWA = -100,000 -30,000(P/A,10%,3) -5,000(P/G,10%,3)
= -100,000 -30,000(2.4869) -5,000(2.3291)
= $-186,253
PWB = -250,000 20,000(P/A,10%,3)
= -250,000 20,000(2.4869)
= $-299,738
A spreadsheet solution for parts (a) and (b) follows.

4.20

PWA = -100,000 -150,000(P/F,10%,3)

-30,000(P/A,10%,3) - 5,000(P/G,10%,3)
- [40,000(P/A,10%,3) + 5,000(P/G,10%,3)](P/F,10%,3)
= -100,000 150,000(0.7513)
-30,000(2.4869) - 5,000(2.3291)
- [40,000(2.4869) + 5,000(2.3291)](0.7513)
= $-382,433
PWB = -250,000 20,000(P/A,10%,6)
= -250,000 20,000(4.3553)
= $-337,106
Select method B, which is a change from the previous choice.

4.21 (a) PWC = -375,000 -200(P/A,8%,13)(P/F,8%,7)

= -375,000 200(7.9038)(0.5835)
= $-375,922
For asphalt, repave after 10 years and re-start maintenance charge in year 12.

4- 8

PWA = -250,000[1+(P/F,8%,10)] 2500(P/A,8%,9)[(P/F,8%,1)+(P/F,8%,11)]

= -250,000[1.4632] 2500(6.2469)[0.9259 + 0.4289]
= $-386,958
Select the concrete option, with a marginal advantage.
(b) Maintenance costs are incurred over 5 years only; there are none for concrete.
Now select the asphalt option by a large margin.
PWC = $-375,000
PWA = -250,000 2500(P/A,8%,4)(P/F,8%,1)
= -250,000 2500(3.3121)(0.9259)
= $-257,667
A spreadsheet solution for parts (a) and (b) follows.

4.22 (a) LCM is 6 years for R and T evaluation. Select vendor T.

PWR = -75,000[1+(P/F,10%,2)+(P/F,10%,4)] 27,000(P/A,10%,6)
= -75,000[1 + 0.8264 + 0.6830] 27,000(4.3553)
= $-305,798
PWT = -125,000[1+(P/F,10%,3)] + 30,000[(P/F,10%,3)+(P/F,10%,6)]
-12,000(P/A,10%,6)
= -125,000[1 + 0.7513] + 30,000[0.7513+0.5645] 12,000(4.3553)
= $-231,702
(b) Re-purchase R after 2 years. Rental is paid at the end of each year.
PWR = -75,000[1+(P/F,10%,2)] 27,000(P/A,10%,3)
= - 75,000[1 + 0.8264)] 27,000(2.4869)
= $-204,126
4- 9

PWT = -125,000 + 30,000(P/F,10%,3) -12,000(P/A,10%,3)

= -125,000 + 30,000(0.7513) 12,000(2.4869)
= $-132,304
PWrent = -50,000(P/A,10%,3)
=$-124,345
Rental option is the cheapest for a 3-year period. A spreadsheet solution follows.

4.23 (a) PW analysis requires an LCM of 12 years. Select machine D.

PWD = -62,000[1+(P/F,15%,4)+(P/F,15%,8)] 15,000(P/A,15%,12)
+ 8,000[(P/F,15%,4)+(P/F,15%,8)+(P/F,15%,12)]
= -62,000[1 + 0.5718 + 0.3269] 15,000 (5.4206)
+ 8,000[0.5718 + 0.3269 + 0.1869]
= $-190,344
PWE = -77,000[1+(P/F,15%,6)] 21,000(P/A,15%,12)
+ 10,000[(P/F,15%,6)+P/F,15%,12)]
= -77,000[1 + 0.4323] 21,000(5.4206) + 10,000[0.4323 + 0.1869]
= $-217,928
(b) Calculate the FW from PW values over the 12-year LCM, or set up FW
relations directly from cash flow estimates. Select machine D.
FWD = PWD(F/P,15%,12)
= -190,344(5.3503)
= $-1,018,398
FWE = PWE(F/P,15%,12)
= -217,928(5.3503)
= $-1,165,980
A spreadsheet solution for parts (a) and (b) follows.

4- 10

4.24

PWD = -62,000 - 30,000(P/F,15%,4) -15,000(P/A,15%,5)

= -62,000 - 30,000(0.5718) -15,000(3.3522)
= $-129,437
PWE = -77,000 - 21,000(P/A,15%,5) + 10,000(P/F,15%,5)
= -77,000 - 21,000(3.3522) + 10,000(0.4972)
= $-142,424
Select machine D. This is the same decision previously determined.

4.25 Calculate FW in 15 years to select the 35% more efficient freezer.

FW20% = -150(F/P,10%,15) - 115(F/A,10%,15)
= -150(4.1772) - 115(31.7725)
= $-4280
FW35% = -340(F/P,10%,15) - 80(F/A,10%,15)
= -340(4.1772) - 80(31.7725)
= $-3962
4.26 FWC = -80,000[(F/P,12%,15)+(F/P,12%,10)+(F/P,12%,5)+1]
= -80,000[5.4736 + 3.1058 + 1.7623 + 1]
= $-907,336

4- 11

FWM = -200,000(F/P,12%,15) 500[(F/P,12%,12)+(F/P,12%,9)+(F/P,12%,6)

+(F/P,12%,3)+1] +25,000
= -200,000(5.4736) - 500[3.8969 + 2.7731 + 1.9738 + 1.4049 + 1] + 25,000
= $-1,075,244
Select the concrete exterior by a future worth amount of approximately $168,000.

4.27 Calculate the LCC to select alternative A. All monetary terms are in $ million units.
LCCT = -250 - 150(P/A,8%,3) - 45 - 35(P/A,8%,2) -50(P/A,8%,10)
- 30(P/A,8%,4)
= -250 150(2.5771) 45 35(1.7833) -50(6.7101) 30(3.3121)
= $-1178.8485
($1,178,848,500)
LCCA = -10 - 45 - 30(P/A,8%,3) - 100(P/A,8%,10) - 40(P/A,8%,10)
= -10 45 - 30(2.5771) - 100(6.7101) - 40(6.7101)
= $-1071.7270
($-1,071,727,000)
LCCC = -190(P/A,8%,10)
= -190(6.7101)
= $-1274.919
($-1,274,919,000)

4- 12

4.28 LCC is determined by spreadsheet much easier than by hand calculator. Select the
UPMOST system with the lower LCC.

To use factors, set up LCC relations to select UPMOST. Monetary units are $1000.
LCCEMOST = -25 -57(P/A,20%,10)
= -25 57(4.1925)
= $-263.972
($-263,972)
LCCUPMOST= -150[1+(P/F,20%,1)] - 120(P/A,20%,2) - 20(P/A,20%,3)
-130(P/A,20%,8)(P/F,20%,2)
+ [150(P/A,20%,8) + 50(P/G,20%,8)]((P/F,20%,2)
= -150[1 + 0.8333] 120(1.5278) 20(2.1065) 130(3.8372)(0.6944)
+ [150(3.8372) + 50(9.8831)](0.6944)
= -846.853 + 742.824
= $-104.029
($-104,029)
4.29 (a) Earning rate is 0.5% per month. Amount to accumulate by month 20(12) = 240
is the capitalized cost (CC) amount for $5000, which is an F value used to
calculate the monthly deposit A.
CC = A/i = 5000/0.005 = $1 million
A = F(A/F,0.5%,240)
= 1,000,000(0.00216)
= $2160 per month
By spreadsheet, enter =-PMT(0.5%,240,,1000000) to display $2164 per month.

4- 13

(b) Effective annual i = [(1.005)12 1](100%) = 6.1678% per year

A = 1,000,000(A/F,6.1678%,20)
= 1,000,000(0.026698)
= $26,698 per year
By spreadsheet, =-PMT(6.1678%,20,,1000000) displays the same amount.
4.30 Monetary terms are in $1000 units.
CC = -200 - 300(P/F,6%,4) - 50(A/F,6%,5)/0.06 - (8/0.06)(P/F,6%,14)
= -200 - 300(0.7921) - 50(0.1774)/0.06 - (8/0.06)(0.4423)
= $-644.437
($-644,437)
4.31 (a) CC = -85,000,000 550,000(A/F,8%,3) + 18,500,000
0.08
0.08
= -85,000,000 6,875,000(0.30803) + 231,250,000
= $+144,132,294
(b) Use Equation [4.3] to calculate A.
A = CC(i) = 144,132,294(0.08)
= $11,530,584
The A means that the toll road should have an equivalent annual cash
flow of approximately $11.53 million for the foreseeable future.
4.32 Find AW and then divide by i, according to Equation [4.2].
AW = -97,000(A/P,12%,4) - 10,000 + 20,000(A/F,12%,4)
= -97,000(0.32923) - 10,000 + 20,000(0.20923)
= $-37,751
CC = -37,751/0.12
= $-314,589
The CC value is the present worth of the computer system cost assuming its need will
last forever. That is, the function will be provided at the same costs as those used
here. This assumes that all costs will change the same as inflation and deflation over
time.
4.33 CC = 100,000 + 100,000/0.05
= $2,100,000

4- 14

4.34 Monthly rate is 0.18/12 = 0.015. Calculate total debt allowed in month n, then
determine the time to accumulate this amount.
CC = A/i = 500/0.015
= $33,333
1000(F/A,1.5%,n) = 33,333
By spreadsheet, enter =NPER(1.5%,-1000,,33333) to display n = 27.2 months. By
trial and error, n = 27.2 (interpolated) using the following.
For n = 25: 1000(F/A,1.5%,25) = $30,063
For n = 28: 1000(F/A,1.5%,28) = $34,482
Tom can spend at the $1000 per month rate for only 2 years and 3 months before
obligating himself to a $500 per month debt payment for the rest of his life!
4.35 Monetary terms are $ million units. Determine CC values to select undersea route.
CCland = -225 - 20/0.10 - [50(A/F,10%,40)]/0.10
= -225 - 20/0.10 - [50(0.00226)]/0.10
= $-426.13
($-426,130,000)
CCsea = -350 - 2/0.10
= $-370.0
($-370,000,000)
4.36 Monetary terms are $1000 units. Determine CC values of revenues minus costs to
select plan 2. (Note: Revenues do not come close to covering costs.)
CC1 = +190(P/A,6%,5) + 20(P/G,6%,5) + 270((P/A,6%,5)(P/F,6%,5)
+ [350/0.06](P/F,6%,10) - 40,000 8,000(P/F,6%,10) 250/0.06
= +190(4.2124) + 20(7.9345) + 270(4.2124)(0.7473)
+ [5833.33](0.5584) - 40,000 8,000(0.5584) 4166.67
= +5066.32 48,633.87
= $-43,567.552 ($-43,567,552)
CC2 = +260(P/A,6%,7) + 30(P/G,6%,7) + [440/0.06](P/F,6%,7)
- 42,000 - 300/0.06
= +260(5.5824) + 30(15.4497) + 7333.33(0.6651) 42,000 5,000
= +6792.315 47,000
= $-40,207.685 ($-40,207,685)
4.37 Monetary terms are $1000 units. Determine CC values of revenues minus costs to
select design B. Use Equation [4.2], CC = AW/i.
CCA = [+800 + 50(A/F,10%,6) - 2,500(A/P,10%,6) - 130]/0.10
= [+800 + 50(0.12961) - 2,500(0.22961) 130]/ 0.10
4- 15

CCA = $+102.4555/0/10
= $+1024.555

($+1,024,555)

CCB = [+625 + 20(A/F,10%,4) -1,100(A/P,10%,4) 65]/0.10

= [+625 + 20(0.21547) -1,100(0.31547) 65]/0.10
= 217.292/0.10
= +$2172.924 ($+2,172,924)
A spreadsheet solution follows.

4.38 Monetary terms are $1000 units. Determine CC values of to select wells.
CCdam = -10,000 25/0.05
= $-10,500
($-10,500,000)
CCwells = AW/i = (-1,500(A/P,5%,10) 120]/0.05
= -314.25/0.05
= $-6285.00
($-6,285,000)
By spreadsheet, enter the following into single cells to display the CC values. Select
wells alternative.
Dam: = -10000000 -25000/0.05
Display: CC = $-10,500,000
Wells: = (-PMT(5%,10,-1500000) -120000)/0.05 Display: CC = $-6,285,137
4.39 Quarterly interest rate is 12/4 = 3% with 4 quarters per year. Use Equation [4.2],
CC = AW/i; select alternative E. Monetary values are in $1000 units.
CCE = [-2000(A/P,3%,16) + 300 + 50(A/F,3%,16)]/0.03
= [-2000(0.07961) + 300 + 50(0.04961)]/0.03
= $+4775.35
($+4,775,350)
CCF = [-3000(A/P,3%,32) + 100 + 70(A/F,3%,32)]/0.03
= [-3000(0.04905) + 100 + 70(0.01905)]/0.03
= $-1527.217
($-1,527,217)

4- 16

CCG = -10,000 + 400/0.03

= $+3333.333
($+3,333,333)
By spreadsheet, enter the following into single cells to display the CC values ans
select alternative E.
E: = (-PMT(3%,16,-2000000,50000)+300000)/0.03 Display: $+4,775,295
F: = (-PMT(3%,32,-3000000,70000)+100000)/0.03 Display: $-1,526,886
G: = -10000000+400000/0.03
Display: $+3,333,333
4.40 Independent projects are considered one-time investments and are compared to the
MARR (not each other), so they are evaluated over their respective lives. Mutually
exclusive alternatives are assumed to be needed over multiple life cycles and are
compared to each other, thus the need for equal-service comparison.
4.41 (a) Select 2, 3 and 4 with PW > 0 at 12%.
(b) Of 24 = 16 bundles, list acceptable bundles and PW values. Select projects 2 and
3 with largest PW = $9000.
Bundle Investment
PW
DN
0
0
2
$-15,000
$ 8,500
3
-20,000
500
4
-40,000
7,600
23
-45,000
9,000
34
-60,000
8,100
4.42 Determine the PW for each project.
PWA = -1,500,000 + 360,000(P/A,10%,8) = $420,564
PWB = -3,000,000 + 600,000(P/A,10%,10) = $686,760
PWC = -1,800,000 + 620,000(P/A,10%,5) = $550,296
PWD = -2,000,000 + 630,000(P/A,10%,4) = $-2,963 (not acceptable)
By spreadsheet, enter the following to display the project PW values.
A: = -PV(10%,8,360000)-1500000
B: = -PV(10%,10,600000)-3000000
C: = -PV(10%,5,620000)-1800000
D: = -PV(10%,4,630000)-2000000

Display: $420,573
Display: $686,740
Display: $550,288
Display; $-2,985

Formulate acceptable bundles from the 24 = 16 possibilities, without both B and C

and select projects with largest total PW of a bundle.
(a) With, b = $4 million, select projects A and C with PW = $970,860.

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Bundle
DN
A
B
C
AC

Investment,
$ million
0
-1.5
-3.0
-1.8
-3.3

PW, $
0
420,564
686,760
550,296
970,860

(b) With, b = $5.5 million, select projects A and B with PW = $1,107,313.

Investment,
Bundle $ million
PW, $
DN
0
0
A
-1.5
420,564
B
-3.0
686,760
C
-1.8
550,296
AB
-4.5
1,107,313
AC
-3.3
970,860
(c) With no-limit, select all with PW > 0. Select projects A, B and C.
4.43 Hand calculate each projects PW using P/F factors since all cash flows are
different each year. Or, use a spreadsheet as follows.

Use b = $20,000 to formulate bundles from the 24 = 16 possibilities. Select projects

X and Z with PW = $4,856.

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Bundle Investment, $
DN
0
W
-5,000
X
-8,000
Y
-8,000
Z
-10,000
WX
-13,000
WY
-13,000
WZ
-15,000
XY
-16,000
XZ
-18,000
YZ
-18,000

PW, $
0
2,011
2,360
1,038
2,496
4,371
3,049
4,507
3,398
4,856
3,534

4.44 Determine PW values at 0.5% per month by spreadsheet using the PV

function =-PV(0.5%,36,revenue)-cost, or by hand, as follows.
PWauto = -4500 + 220(P/A,0.5%,36) = $2732
PWweb = -3000 + 200(P/A,0.5%,36) = $3574
PWfast = -2200 + 140(P/A,0.5%,36) = $2402
With 23 = 8 bundles and b = $7000, select the last two features (web interface and
fast search software) with PW = $5976.
Bundle Investment, $ PW, $
DN
0
0
Auto
-4500
2732
Web
-3000
3574
Fast
-2200
2402
Auto/fast
-6700
5134
Web/fast
-5200
5976
Problems for Test Review and FE Exam Practice
4.45 Answer is (b).
4.46 Answer is (c).
4.47 PW = -65,000[1+(P/F,12%,4)+(P/F,12%,8)] -15,000(P/A,12%,12)
+ 25,000[(P/F,12%,4)+(P/F,12%,8)+(P/F,12%,12)]
= -65,000[1 + 0.6355 + 0.4039] -15,000(6.1944)
+ 25,000[0.6355 + 0.4039 + 0.2567]
= $-193,075
Answer is (a).

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4.48 FW = -65,000[(F/P,12%,8)+(F/P,12%,4)] 15,000(F/A,12%,8)

+ 25,000[(F/P,12%,4)+1]
= -65,000[(2.4760) + (1.5735)] 15,000(12.2997)
+ 25,000[(1.5735) + 1]
= $-383,376
Answer is (a).
4.49 Answer is (d).
4.50 Answer is (b).
4.51 Answer is (c).
4.52 Answer is (a).
4.53 eff i = er 1 = e0.1 1 = 0.1052 or 10.52% and CC = AW/i
Answer is (d).
4.54 PWB = CCB = -90,000 4000/0.08
= -140,000
Answer is (d).
4.55 CC in year 5 = 40,000/0.10 = $400,000
PW = 400,000(P/F,10%,4)
= $273,200
Answer is (c).
4.56 Bond dividend = 50,000(0.06)/4 = $750 per quarter
Answer is (b).
4.57 Bond dividend = 20,000(0.04)/2 = $400
Answer is (a).
4.58 Bond dividend = 5000(0.05)/4 = $62.50 per quarter
PW = 62.50(P/A,1.5%,20) + 5000(P/F,1.5%,20)
= $4786
Answer is (c).

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