Chapter 5, Problem 5.

What is meant by the term equal service?

Chapter 5, Solution 5.

Equal service means that the alternatives end at the same time.
Chapter 5, Problem 6.

What two approaches can be used to satisfy the equal service requirement?
Chapter 5, Solution 6.

Equal service can be satisfied by using a specified planning period or by using the least
common multiple of the lives of the alternatives.
Chapter 5, Problem 7.

Define the term capitalized cost and give a real-world example of something that might
be analyzed using that technique.
Chapter 5, Solution 7.

Capitalized cost represents the present worth of service for an infinite time. Real world
examples that might be analyzed using CC would be Yellowstone National Park, Golden
Gate Bridge, Hoover Dam, etc.
Chapter 5, Problem 8.

Lennon Hearth Products manufactures glass-door fireplace screens that have two types of
mounting brackets for the frame. An L-shaped bracket is used for relatively small
fireplace openings, and a U-shaped bracket is used for all others. The company includes
both types of brackets in the box with the product, and the purchaser discards the one not
needed. The cost of these two brackets with screws and other parts is $3.50. If the frame
of the fireplace screen is redesigned, a single universal bracket can be used that will
cost$1.20 to make. However, retooling will cost $6000. In addition, inventory write-
downs will amount to another $8000. If the company sells 1200 fireplace units per year,
should the company keep the old brackets or go with the new ones, assuming the
company uses an interest rate of 15% per year and it wants to recover its investment in 5
years? Use the present worth method.

Chapter 5, Solution 8.

PWold = -1200(3.50)(P/A,15%,5)
= -4200(3.3522)
= $-14,079

PWnew = -14,000 – 1200(1.20)(P/A,15%,5)

= -14,000 – 1440(3.3522)
= $-18,827

Keep old brackets

Chapter 5, Problem 10.

Sales of bottled water in the United States totaled 16.3 gallons per person in 2004. Evian
Natural Spring Water costs 40¢ per bottle. A municipal water utility provides tap water
for $2.10 per 1000 gallons. If the average person drinks 2 bottles of water per day or
uses5 gallons per day in getting that amount of water from the tap, what are the present
worth values of drinking bottled water or tap water per person for 1 year? Use an interest
rate of6% per year, compounded monthly, and 30 days per month.

Chapter 5, Solution 10.

Bottled water: Cost/mo = -(2)(0.40)(30) = $24.00

PW = -24.00(P/A,0.5%,12)
= -24.00(11.6189)
= $-278.85

Municipal water: Cost/mo = -5(30)(2.10)/1000 = $0.315

PW = -0.315(P/A,0.5%,12)
= -0.315(11.6189)
Chapter 5, Problem 12.

A company that manufactures amplified pressure transducers is trying to decide between

the machines shown below. Compare them on the basis of their present worth values,
using an interest rate of 15% per year.

Variable Dual
Speed Speed
First cost, $ –250,000 –224,000
Annual operating cost, $/year –231,000 –235,000
Overhaul in year 3, $ — –26,000
Overhaul in year 4, $ –140,000 —
Salvage value, $ 50,000 10,000
Life, years 6 6
= $-3.66

Chapter 5, Solution 12.

PWvariable = -250,000 – 231,000(P/A,15%,6) – 140,000(P/F,15%,4) + 50,000(P/F,15%,6)

= -250,000 – 231,000(3.7845) – 140,000(0.5718) + 50,000(0.4323)
= $-1,182,656

PWdual = -224,000 –235,000(P/A,15%,6) –26,000(P/F,15%,3)

+ 10,000(P/F,15%,6)
= -224,000 –235,000(3.7845) –26,000(0.6575) + 10,000(0.4323)
= $-1,126,130

Select dual speed machine

Chapter 5, Problem 13.

NASA is considering two materials for use in a space vehicle. The costs are shown
below. Which should be selected on the basis of a present worth comparison at an interest
rate of 10% per year?

Material JX Material KZ
First cost, $ –205,000 –235,000
Maintenance cost, $/year –29,000 –27,000
Salvage value, $ 2,000 20,000
Life, years 2 4

Chapter 5, Solution 13.

PWJX = -205,000 – 29,000(P/A,10%,4) – 203,000(P/F,10%,2) + 2000(P/F,10%,4)

= -205,000 – 29,000(3.1699) – 203,000(0.8264) + 2000(0.6830)
= $-463,320

PWKZ = -235,000 – 27,000(P/A,10%,4) + 20,000(P/F,10%,4)

= -235,000 – 27,000(3.1699) + 20,000(0.6830)
= $-306,927

Select material KZ
Chapter 5, Problem 18.

The Department of Energy is proposing new rules mandating a 20% increase in clothes
washer efficiency by 2005 and a 35% increase by 2008. The 20% increase is expected to
add $100 to the current price of a washer, while the 35% increase will add $240 to the
price. If the cost for energy is $80 per year with the 20% increase in efficiency and $65
per year with the 35% increase, which one of the two proposed standards is more
economical on the basis of a future worth analysis at an interest rate of 10% per year?
Assume a 15-year life for all washer models.

Chapter 5, Solution 18.

FW20% = -100(F/P,10%,15) – 80(F/A,10%,15)

= -100(4.1772) – 80(31.7725)
= $-2959.52

FW35% = -240(F/P,10%,15) – 65(F/A,10%,15)

= -240(4.1772) – 65(31.7725)
= $-3067.74

20% standard is slightly more economical

Chapter 5, Problem 22.

The cost of painting the Golden Gate Bridge is $400,000. If the bridge is painted now and
every 2 years hereafter, what is the capitalized cost of painting at an interest rate of 6%
per year?

Chapter 5, Solution 22.

CC = -400,000 – 400,000(A/F,6%,2)/0.06
= -400,000 – 400,000(0.48544)/0.06
=$-3,636,267
Chapter 5, Solution 30.

CCpetroleum = [-250,000(A/P,10%,6) –130,000 + 400,000

+ 50,000(A/F,10%,6)]/0.10
= [-250,000(0.22961) –130,000 + 400,000
+ 50,000(0.12961)]/0.10
= $2,190,780

CCinorganic = [-110,000(A/P,10%,4) – 65,000 + 270,000

+ 20,000(A/F,10%,4)]/0.10
= [-110,000(0.31547) – 65,000 + 270,000
+ 20,000(0.21547)]/0.10
= $1,746,077

Petroleum-based alternative has a larger profit.

Chapter 5, Problem 36.

Determine the payback period for an asset that has a first cost of $40,000, a salvage value
of $8000 anytime within 10 years of its purchase, and generates income of $6000 per
year. The required return is 8% per year.

Chapter 5, Solution 36.

0 = - 40,000 + 6000(P/A,8%,n) + 8000(P/F,8%,n)

Try n = 9: 0 ≠ +1483
Try n = 8: 0 ≠ -1198
n is between 8 and 9 years
Chapter 5, Problem 39.

A new process for manufacturing laser levels will have a first cost of $35,000 with annual
costs of $17,000. Extra income associated with the new process is expected to be $22,000
per year. What is the payback period at (a) i = 0% and (b) i = 10% per year?
Chapter 5, Solution 39.

(a) n = 35,000/(22,000 – 17,000) = 7 years

(b) 0 = -35,000 + (22,000 – 17,000)(P/A,10%,n)

(P/A,10%,n) = 7.0000

n is between 12 and 13; therefore, n = 13 years.

Chapter 5, Problem 43.

A manufacturing software engineer at a major aerospace corporation has been assigned

the management responsibility of a project to design, build, test, and implement
AREMSS, a new-generation automated scheduling system for routine and expedited
maintenance. Reports on the disposition of each service will also be entered by field
personnel, then filed and archived by the system. The initial application will be on
existing Air Force in-flight refueling aircraft. The system is expected to be widely used
over time for other aircraft maintenance scheduling. Once it is fully implemented,
enhancements will have to be made, but the system is expected to serve as a worldwide
scheduler for up to 15,000 separate aircraft. The engineer, who must make a presentation
next week of the best estimates of costs over a 20-year life period, has decided to use the
life-cycle cost approach of cost estimations. Use the following information to determine
the current LCC at 6% per year for the AREMSS scheduling system.

Cost in Year ($ Millions)

Cost Category 1 2 3 4 5 6 on 10 18
Field study 0.5
Design of system 2.1 1.2 0.5
Software design 0.6 0.9
Hardware
purchases 5.1
Beta testing 0.1 0.2
User’s manual
development 0.1 0.1 0.2 0.2 0.06
System implemen-
tation 1.3 0.7
Field hardware 0.4 6.0 2.9
Training trainers 0.3 2.5 2.5 0.7
Software upgrades 0.6 3.0 3.7

Chapter 5, Solution 43.

LCC = – 2.6(P/F,6%,1) – 2.0(P/F,6%,2) – 7.5(P/F,6%,3) – 10.0(P/F,6%,4)

-6.3(P/F,6%,5) – 1.36(P/A,6%,15)(P/F,6%,5) -3.0(P/F,6%,10)
- 3.7(P/F,6%,18)
= – 2.6(0.9434) – 2.0(0.8900) – 7.5(0.8396) – 10.0(0.7921) -6.3(0.7473)
– 1.36(9.7122)(0.7473) -3.0(0.5584) - 3.7(0.3503)
= $-36,000,921
Chapter 5, Problem 46.

A mortgage bond with a face value of $10,000 has a bond interest rate of 6% per year
payable quarterly. What are the amount and frequency of the interest payments?

Chapter 5, Solution 46.

I = 10,000(0.06)/4 = $150 every 3 months

Chapter 5, Problem 54.

For the mutually exclusive alternatives shown below, determine which one(s) should be
selected.

Alternative Present Worth, $

A –25,000
B –12,000
C 10,000
D 15,000
(a) Only A
(b) Only D
(c) Only A and B
(d) Only C and D

Chapter 5, Solution 54.

Answer is (b)
Chapter 5, Problem 56.

A certain donor wishes to start an endowment at her alma mater that will provide
scholarship money of $40,000 per year beginning in year 5 and continuing indefinitely. If
the university earns 10% per year on the endowment, the amount she must donate now is
closest to
(a) $225,470
(b) $248,360
(c) $273,200
(d) $293,820

Chapter 5, Solution 56.

CC = [40,000/0.10](P/F,10%,4)
= $273,200
Answer is (c)
Chapter 5, Problem 57.

At an interest rate of 10% per year, the amount you must deposit in your retirement
account each year in years 0 through 9 (i.e., 10 deposits) if you want to withdraw $50,000
per year forever beginning 30 years from now is closest to
(a) $4239
(b) $4662
(c) $4974
(d) $5471

Chapter 5, Solution 57.

CC = [50,000/0.10](P/F,10%,20)(A/F,10%,10)
= $4662.33
Answer is (b)

Chapter 5, Problem 62.

The alternatives shown below are to be compared on the basis of their capitalized costs.
At an interest rate of 10% per year, compounded continuously, the equation that
represents the capitalized cost of alternative A is

Alternative A Alternative B
First cost, $ –50,000 –90,000
Annual cost, $/year –10,000 –4,000
Salvage value, $ 13,000 15,000
Life, years 3 6

(a) PWA = –50,000 – 10,000(P/A, 10.52%, 6) – 37,000(P/F, 10.52%, 3) + 13,000(P/F,

10.52%, 6)
(b) PWA = –50,000 – 10,000(P/A, 10.52%, 3) + 13,000(P/F, 10.52%, 3)
(c) PWA = [–50,000(A/P, 10.52%, 3) – 10,000 + 13,000(A/F, 10.52%, 3)]/0.1052
(d) PWA = [–50,000(A/P, 10%, 3) – 10,000 + 13,000(A/F, 10%, 3)]/0.10
Chapter 5, Solution 62.
Answer is (c)

Chapter 5, Problem 65.

A $10,000 bond has an interest rate of 6% per year payable quarterly. The bond matures
15 years from now. At an interest rate of 8% per year, compounded quarterly, the present
worth of the bond is represented by which of the equations below
(a) PW = 150(P/A,1.5%,60) + 10,000(P/F, 1.5%, 60)
(b) PW = 150(P/A,2%,60) + 10,000(P/F, 2%, 60)
(c) PW = 600(P/A,8%,15) + 10,000(P/F, 8%, 15)
(d) PW = 600(P/A, 2%, 60) + 10,000(P/F, 2%, 60)

Chapter 5, Solution 65.

Answer is (b)