Fundamentos de Ingenieria Economica, 2da Edicion 05

Chapter 5 Present-Worth Analysis
5.1)
(a), (b), (c)

n
Inflow
Outflow
Net Cash Flow
$0
$65,000
-$65,000
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
$215,500
$53,000
$162,550
Annual cash inflow = $17 34, 000 $15 30, 000 + $25 3,500 = $215, 500
5.2) Project cash flows over the project life
Cost of
n
Cmax
Demand
Revenue
Expense
Bldg.
NCF
1,527,776
-$1,527,776
6,000,000
3,000,000
16,256,976
6,462,108
9,794,868
6,000,000
3,300,000
17,882,673
7,096,319
10,786,354
6,000,000
3,630,000
19,670,941
7,793,951
11,876,990
6,000,000
3,993,000
21,638,035
8,561,346
13,076,689
6,000,000
4,392,300
23,801,838
9,405,481
14,396,358
14,302,870
6,000,000
4,831,530
26,182,022
10,334,029
12,000,000
5,314,683
28,800,224
11,355,432
17,444,793
12,000,000
5,846,151
31,680,247
12,478,975
19,201,272
12,000,000
6,430,766
34,848,271
13,714,872
21,133,399
10
12,000,000
7,073,843
38,333,099
15,074,359
23,258,739
11
12,000,000
7,781,227
42,166,408
16,569,795
25,596,613
12
12,000,000
8,559,350
46,383,049
18,214,775
28,168,274
13
12,000,000
9,415,285
51,021,354
20,024,252
30,997,102
32,535,510
14
12,000,000
10,356,814
56,123,490
22,014,678
15
24,000,000
11,392,495
61,735,839
24,204,145
1,545,123
1,573,302
37,531,693
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park.
ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage
in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
: The cost of building is given as if Cmax is being built from scratch. No credit is
given for the capacity already in place. This assumption could be rather unrealistic. In
that case, what we need to do is to identify the incremental cost of adding the additional
capacity above the existing capacity.
5.3)
(a) Payback period: 1 years
Cumulative
n
Net Cash Flow
CF
-$65,000
-$65,000
$162,500
$97,500
$162,500
$260,000
$162,500
$422,500
$162,500
$585,000
$162,500
$747,500
$162,500
$910,000
$162,500
$1,072,500
$162,500
$1,235,000
(b) Discounted payback period = 1 year.

n
Net Cash Flow
Cost of funds
Cumulative CF
-$65,000
$0
-$65,000
$162,500
-$9,750
$87,750
$162,500
$13,163
$263,413
$162,500
$39,512
$465,424
$162,500
$69,814
$697,738
$162,500
$104,661
$964,899
$162,500
$144,735
$1,272,134
$162,500
$190,820
$1,625,454
$162,500
$243,818
$2,031,772
5.4)
(a) It will take 3 years to recover the total investment.
2
Inflow
Outflow
Net Cash Flow
Cumulative CF
$0
$32,500
-$32,500
-$32,500
$12,000
$0
$12,000
-$20,500
$12,000
$0
$12,000
-$8,500
$12,000
$0
$12,000
$3,500
$12,000
$0
$12,000
$15,500
$17,000
$0
$17,000
$32,500
(b) It will take 4 years to recover the total investment.

n
Cash Flow
Cost of funds
Cumulative CF
-$32,500
$0
-$32,500
$12,000
-$4,550
-$25,050
$12,000
-$3,507
-$16,557
$12,000
-$2,318
-$6,875
$12,000
-$962
$4,163
$17,000
$583
$21,745
5.5)
(a) It will take 5 years to recover the total investment.
Cash Flow
Cumulative CF
-$10,000
-$10,000
-$15,000
-$25,000
$8,000
-$17,000
$8,000
-$9,000
$8,000
-$1,000
$8,000
$7,000
(b) The total investment is recovered in year 6 (or 5.19 years)

Cost of
funds
n
Cash Flow
(10%)
Cumulative CF
3
-$10,000
$0
-$10,000
-$15,000
-$1,000
-$26,000
$8,000
-$2,600
-$20,600
$8,000
-$2,060
-$14,660
$8,000
-$1,466
-$8,126
$8,000
-$813
-$939
$8,000
-$94
$6,968
5.6)
(a) Payback period
Project A: 5 years, Project B: 5 years, Project C: 4 years
B
CF
Cum.CF
CF
Cum.CF
CF
Cum.CF
CF
Cum.CF
-$1,500
-$1,500
-$6,000
-$6,000
-$10,000
-$10,000
-$4,500
-$4,500
200
-1,300
2,000
-4,000
2,000
-8,000
5,000
500
300
-1,000
1,500
-2,500
2,000
-6,000
3,000
3,500
400
-600
1,500
-1,000
2,000
-4,000
-4,000
-500
500
-100
500
-500
5,000
1,000
1,000
500
300
200
500
5,000
6,000
1,000
1,500
300
500
1,500
1,500
2,000
3,500
300
800
3,000
6,500
300
1,100
(b) Project D does not have a unique payback period, as there are two payback
periodsone at year 2 and the other at period 4. However, if the project is
undertaken, we would say 4 years, because that is when the project truly is
financially in the clear.
(c) Discounted payback period
Project A: 7 years, Project B: none, Project C: 5 years.
B
CF
-$1,500
Cum.CF
-$1,500
CF
-$6,000
C
Cum.CF
-$6,000
CF
Cum.CF
CF
-$10,000
-$10,000
-$4,500
Cum.CF
-$4,500
4
200
-1,450
2,000
-4,600
2,000
-9,000
5,000
50
300
-1,295
1,500
-3,560
2,000
-7,900
3,000
3,055
400
-1,025
1,500
-2,416
2,000
-6,690
-4,000
-640
500
-627
500
-2,158
5,000
-2,359
1,000
297
300
-390
500
-1,873
5,000
2,405
1,000
1,326
300
-129
1,500
2,000
3,459
300
159
3,000
6,805
300
474
-561
5.7)
n
Cash Flow
-$18,000
$4,800
$6,350
$7,735
$7,500
$4,300
$7,000 + $1,800
PW(9%) = $18, 000 + $4,800( P / F ,9%,1) + $6,350( P / F ,9%, 2)

+$7, 735( P / F ,9%,3) + $7,500( P / F ,9%, 4)
+$4,300( P / F ,9%,5) + $8,800( P / F ,9%, 6)
= $11, 076.22
5.8)
(a) There is an opportunity cost of $100,000 for land, which is tied up for this
project. This cost should be viewed as an investment required undertaking the
project. The $25,000 license fee is considered as one time up-front cost.
n
Inflow
Outflow
Net Cash Flow
Cumulative CF
$0
$1,625,000
-$1,625,000
-$1,625,000
$500,000
$240,000
$260,,000
-$1,365,000
5
$500,000
$240,000
$260,000
-$1,105,000
$500,000
$240,000
$260,000
-$845,000
$500,000
$240,000
$260,000
-$585,000
$500,000
$240,000
$260,000
-$325,000
$734,010
$240,000
$494,010
$169,010
Inflow for year 6: $500,000 + $100,000(F/P, 5%, 6) = $734,010

Outflow for year 0: $1,500,000 + $100,000 + $25,000 = $1,625,000
Outflow for years 1 - 6: (0.30 + 0.15 + 0.03)($500,000) = $240,000
PW(15%) = $1, 625, 000 + $260, 000( P / A,15%,5) + $494, 010( P / F ,15%, 6)
= $539,865 < 0
(b) No discounted payback period exist as the initial investment is not fully
recovered at the end of the project period (or PW(15%) < 0)
5.9)
(a)
PW(10%) A = $800 + $3, 000( P / F ,10%,3)
= $1, 453.9
PW(10%) B = $1,800 + $600( P / F ,10%,1)
+$900( P / F ,10%, 2) + $1, 700( P / F ,10%,3)
= $766.49
PW(10%)C = $1, 000 $1, 200( P / F ,10%,1)
+$900( P / F ,10%, 2) + $3,500( P / F ,10%,3)
= $1282.3
PW(10%) D = $6, 000 + $1,900( P / A,10%, 2)
+$2,800( P / F ,10%,3)
= $598.91
(b)
Not provided.
6
5.10)
Cumulative
n
Inflow
$0
1
2
Outflow
Net Cash Flow
CF
$227,000
$157,000
$70,000
-$1,430,000
$227,000
$157,000
$70,000
-$1,360,000
-$1,500,000
-$1,500,000
$1,500,000
33
$227,000
$157,000
$70,000
$810,000
34
$227,000
$157,000
$70,000
$880,000
35
$452,000
$157,000
$295,000
$1,175,000
PW (12%) = $1,500,000 + $70,000( P / A,12%,34) + $295,000( P / F,12%,35)

= $923,453
5.11)
Given: Estimated remaining service life = 25 years , current rental
income = $250,000 per year, O&M costs = $65,000 for the first year increasing
by $6,000 thereafter, salvage value = $200,000 , and MARR = 15% . Let A0 be the
maximum investment required to break even.
PW(15%) = $250, 000( P / A,15%,5) + $275, 000( P / A,15%,5)( P / F ,15%,5)
+$302,500( P / A,15%,5)( P / F ,15%,10)
+$332, 750( P / A,15%,5)( P / F ,15%,15)
+$366, 025( P / A,15%,5)( P / F ,15%, 20)
$65, 000( P / A,15%, 25) $6, 000( P / G,15%, 25) + $200, 000( P / F ,15%, 25)
= $1,116, 775
5.12)
7
P = $4,000 + $3,400(P / F,9%,1)

+$3,400(P / F,12%,1)(P / F,9%,1)
+$1,500(P / F,10%,1)( P / F,12%,1)( P / F,9%,1)
+$3,500(P / F,13%,1)(P / F,10%,1)( P / F,12%,1)( P / F,9%,1)
+$4,300( P / F,12%,1)( P / F,13%,1)( P / F,10%,1)(P / F,12%,1)(P / F,9%,1)
= $7,858.34
5.13)
Cumulative
n
Inflow
Outflow
Net Cash Flow
CF
$0
$250,000
-$250,000
-$250,000
$160,000
$50,000
$110,000
-$140,000
$160,000
$50,000
$110,000
-$30,000
$160,000
$50,000
$110,000
$80,000
$160,000
$50,000
$110,000
$190,000
$160,000
$50,000
$110,000
$300,000
$160,000
$50,000
$110,000
$410,000
$160,000
$50,000
$110,000
$520,000
$160,000
$50,000
$110,000
$630,000
PW(12%) = $250, 000 + $110, 000( P / A,12%,8)

= $296, 440
5.14)
Given: Initial cost = $3, 000, 000 , annual savings = $1, 200, 000 ,
Annual O&M costs = $250, 000 , annual income taxes = $150, 000 ,
Salvage value = $200, 000 , useful life = 10 years, MARR = 18%
PW(18%) = $3, 000, 000
+[$1, 200, 000 $250, 000
$150, 000]( P / A,18%,10)
+$200, 000( P / F ,18%,10)
= $633, 482
The project is a profitable one.
8
5.15)
PW(13%) A = $5, 000 + $5,800( P / F ,13%,1)
+$12, 400( P / F ,13%, 2) + $8, 200( P / F ,13%,3)
= $15,526.86
FW(13%) A = $15,526.86( F / P,13%,3)
= $22, 403.88
PW(13%) B = $2, 000 $4, 400( P / F ,13%,1)
+$7, 000( P / F ,13%, 2) + $3, 000( P / F ,13%,3)
= $1, 667
FW(13%) B = $1, 667( F / P,13%,3) = $2, 405.85
PW(13%)C = $4,500 $6, 000( P / F ,13%,1)
+$2, 000( P / F ,13%, 2) + $4, 000( P / F ,13%,3)
= $3,528.6
FW(13%)C = $3528.6( F / P,13%,3) = 5, 091.42
PW(13%) D = $3,500 + $1, 000( P / F ,13%,1)
+$5, 000( P / F ,13%, 2) + $6, 000( P / F ,13%,3)
= $5, 458.99
FW(13%) D = $5, 458.99( F / P,13%,3) = $7,876.76
5.16)
(a)
Year
Outflow
2008
$14,500,000
2009
$3,500,000
2010
$26,000,000
FW(15%) = $14,500, 000( F / P,15%, 2) + $3,500, 000( F / P,15%,1)

+$26, 000, 000
= $49, 201, 250
(b)
9
A( P / A,15%,10) = FW (15%)
= $49, 201, 250
A(5.0188) = $49, 201, 250
A = $9,803, 450
5.17)
PB(i)1 = $1, 000(1 + i ) + $200 = $900

i = 10%
5.18)
(a) In part (b), it is determined that I = 20%. Then, the original cash flows of
the project is as follows:
Project
Balance
An
-$1,000
-$1,000
$100
-$1,100
$520
-$800
$460
-$500
$600
$0
(b)
PB(i )3 = $800(1 + i ) + $460

= $500
$800i = $160
i = 20%
(c) Yes
10
5.19)
For Project B:
$650(1 + i ) 2 = $416
i = 25%
Statement 3 is true.
For Statement 1 to be true, I would have to equal 0%, since $200(1 + i) +

$100 equal $300. So Statement 1 is false.
Statement 2 is false, since FW of Project C is $150.

Therefore, the correct answer is (c).
5.20)
(a) From the project balance diagram, note that PW(24%)1 = 0 for project 1 and
PW(23%) 2 = 0 for project 2.
PW(24%)1 = $100 + $40( P / F , 24%,1) + $80( P / F , 24%, 2)
+ X ( P / F , 24%,3)
=0
PW(23%)2 = $100 + $30( P / F , 23%,1) + Y ( P / F , 23%, 2)
+$80( P / F , 23%,3)
=0
Solving for X and Y yields X = $29.96 and Y = $49.35 , respectively.
(b) Since PW(24%) = 0 , this implies that FW(24%) = PB(24%)3 = 0 .
(c)
a = 100 + 30 + 49.35 + 80 = $59.35

b = 100 + 40 + 80 + 29.96 = $49.96
c = 17.91%
5.21)
(a) In Part (b), it is determined that i= 10%.
An
Project Balance
-$1,000
-$1,000
$200
-$900
$490
-$500
$550
$0
11
-$100
-$100
$200
$90
(b)
PB(i) 2 = $900(1 + i ) + $490 = $500

i = 10%
PW(10%) = $90( P / F ,10%,5) = $55.88
5.22)
(a)
FW(15%) A = $5, 000( F / P,15%,5) + $500( F / P,15%, 4)
+ " $500
= $4,691
FW(15%) B = $5, 000( F / P,15%,5) + $2, 000( F / P,15%, 4)
+ " + $3,500
= $4, 741.10
FW(15%)C = $5, 000( F / P,15%,5) + $3, 000( F / P,15%, 2)
+ " + $13, 000
= $14,960.71
FW(15%) D = $5, 000( F / P,15%,5) + $500( F / P,15%, 4)
+ " + $1, 250
= $3, 676.97
FW(15%) E = $5, 000( F / P,15%,3) + $1, 000( F / P,15%, 2)
+ " + $2, 000
= $831.87
(b),(c),(d)
Project A
Cost of
n
Cash Flow
funds
Project Balance
-$5,000.0
$0
-$5,000
$500.0
-$750
-$5,250
$900.0
-$788
-$5,138
$1,000.0
-$771
-$4,908
$2,000.0
-$736
-$3,644
-$500.0
-$547
-$4,691
Discounted payback period for project A - none
12
Project B
Cost of
n
Cash Flow
funds
Project Balance
-$5,000.0
$0
-$5,000
$2,000.0
-$750
-$3,750
-$3,000.0
-$563
-$7,313
$5,000.0
-$1,097
-$3,409
$5,000.0
-$511
$1,079
$3,500.0
$162
$4,741
Discounted payback period for project B 4 years

Project C
Cost of
n
Cash Flow
funds
Project Balance
-$5,000.0
$0
-$5,000
$0.0
-$750
-$5,750
$0.0
-$863
-$6,613
$3,000.0
-$992
-$4,604
$7,000.0
-$691
$1,705
$13,000.0
$256
$14,961
Discounted payback period for project C - 4years
Project D
Cost of
n
Cash Flow
funds
Project Balance
-$5,000.0
$0
-$5,000
$500.0
-$750
-$5,250
$2,000.0
-$788
-$4,038
$3,000.0
-$606
-$1,643
$4,000.0
-$246
$2,110
$1,250.0
$317
$3,677
Discounted payback period for project D - 4years
13
Project E
Cost of
n
Cash Flow
funds
Project Balance
-$5,000.0
$0
-$5,000
$1,000.0
-$750
-$4,750
$3,000.0
-$713
-$2,463
$2,000.0
-$369
-$832
Discounted payback period for project E - none

5.23)
(a)
PW(10%) A = $100 + $50( P / A,10%,3)
$100( P / F ,10%, 4)
+$400( P / A,10%, 2)( P / F ,10%, 4)
= $430.20
PW(10%) B = $100 + $40( P / A,10%,3)
+$10( P / A,10%, 2)( P / F ,10%,3)
= $12.51
PW(10%)C = $100 $40( P / A,10%,3)
= $0.53
All projects are acceptable.

(b)
FW(10%) A = $430.20( F / P,10%, 6)
= $762.13
FW(10%) B = $12.51( F / P,10%,5)
= $20.15
FW(10%)C = $0.53( F / P,10%,3)
= $0.70
All projects are acceptable.

(c)
14
FW(i ) A = [$100( F / P,10%,3) + $50( F / A,10%,3)]( F / P,15%,3)

+[$100( F / P,15%, 2) + $400( F / A,15%, 2)]
= $777.08
FW(i ) B = [$100( F / P,10%,3) + $40( F / A,10%,3)]( F / P,15%,3)
+$10( F / P,15%, 2) + $10( F / P,15%,1)
= $23.66
FW(i )C = $100( F / P,10%,3)( F / P,15%,3)
$40( F / A,10%,3)( F / P,15%,3)
= $1.065
5.24)
(a)
PW(0%) A = 0
PW(18%) B = $575( P / F ,18%,5) = $251.34
PW(12%)C = 0
(b) Assume that A2 = $500.
PB(12%) 2 = $530(1.12) + $500 = X
X = $93.60
.
(c) The net cash flows for each project are as follows:
Net Cash Flow
-$1,000
-$1,000
-$1,000
$200
$500
$590
$200
$500
$500
$200
$300
-$106
$200
$300
$147
$200
$300
$100
Sample calculation for Project C:

PW(12%)0 = $1, 000
PW(12%)1 = $1, 000(1.12) + A1 = $530
Solving for A1 yields A1 = $590.
15
(d)
FW(0%) A = 0
FW(18%) B = $575
FW(12%)C = 0
5.25)
(a)
PW(13%) = $40, 000( P / A,13%,5)
+$50, 000( P / A,13%,5)( P / F ,13%,5)
+ ($60, 000 / 0.13)( P / F ,13%,10)
= $372,103.72
(b)
PW(13%) = A / i
A = $372,103.72(0.13)
= $48,373.48
5.26)
PW(12%) = $1,106
$1,106( A / P,12%, 4)
CE(12%) =
= $3, 034
0.12
Given: r = 6% compounded monthly, maintenance cost = $25,000 per year
5.27)
ia = (1 + 0.06 / 12)12 1
= 6.17%
CE(6.17%) = $25, 000 / 0.0617
= $405,186.39
5.28)
Given: Construction cost = $10,000,000, renovation cost = $1,000,000 every

10 years, annual O & M costs = $100,000 and i = 5% per year
(a)
16
P1 = $10, 000, 000

$1, 000, 000( A / F ,5%,10)
0.05
= $1,590, 000
P2 =
P3 = $100, 000 / 0.05

= $2, 000, 000
CE(5%) = P1 + P2 + P3
= $13,590, 000
(b)
P1 = $10, 000, 000
$1, 000, 000( A / F ,5%,15)
0.05
= $926, 000
P2 =
P3 = $100, 000 / 0.05

= $2, 000, 000
CE(5%) = P1 + P2 + P3
= $12,926, 000
(c)
10-year cycle with 10% of interest:

P1 = $10, 000, 000
$1, 000, 000( A / F ,10%,10)
0.10
= $627, 000
P3 = $100, 000 / 0.10
P2 =
= $1, 000, 000

CE(10%) = $11, 627, 000
15-year cycle with 10% of interest:
17
P1 = $10, 000, 000

$1, 000, 000( A / F ,10%,15)
0.10
= $315, 000
P3 = $100, 000 / 0.10
P2 =
= $1, 000, 000

CE(10%) = $11,315, 000
As interest rate increases, CE value decreases.
5.29) Given: Cost to design and build = $650, 000 , rework cost = $100, 000 every 10
years, new type of gear = $50, 000 at the end of 5th year, annual operating costs
= $30, 000 for the first 15 years and $35, 000 thereafter
$100, 000( A / F ,8%,10)

0.08
+$50, 000( P / F ,8%,5) + $30, 000( P / A,8%,15)
CE(8%) = $650, 000 +
$35, 000
( P / F ,8%,15)
0.08
= $1,165, 019
+
5.30)
(a)
PW(0.5%) = $2,160( P / A, 0.5%, 240)
= $301, 494.47
(b)
PW(0.5%) = $2,160( P / A, 0.5%, 480)
= $392,574.78
(c)
A
i
$2,160
A=
0.005
= $432, 000
PW(0.5%) =
Comments: Longer life means greater total benefit, but most of the benefit is
collected in the first 20 years.
18
5.31)
(a)
PW(25%) A = $1, 000 + $912( P / F , 25%,1)
+ $684( P / F , 25%, 2) + $456( P / F , 25%,3)
+ $228( P / F , 25%, 4) = $494.22
PW(25%) B = $1, 000 + $284( P / F , 25%,1)
+ $568( P / F , 25%, 2) + $852( P / F , 25%,3)
+ $1,136( P / F , 25%, 4) = $492.25
Select project A.
(b)
Project A
Cost of
n
Cash Flow
funds
Project Balance
-$1000
$0
-$1,000
$912
-$250
-$338
$684
-$85
$262
$456
$65
$783
$228
196
$1,207
Project B
Cost of
n
Cash Flow
funds
Project Balance
-$1,000
$0
-$1,000
$284
-$250
-$966
$568
-$242
-$640
$852
-$160
$53
$1,136
$13
$1,202
Project B is exposed to higher risk of loss if either project terminates at the end
of the year 2, according to the results below.
19
5.32)
(a)
PW(12%) A = $1, 000, 000 + $700, 000( P / A,12%, 2)

= $183, 070
PW(12%) B = $1, 200, 000 + $700, 000( P / F ,12%,1)
+$1, 000, 000( P / F ,12%, 2)
= $222, 230
Select project B.
(b)
PW(22%) A = $1, 000, 000 + $700, 000( P / A, 22%, 2)
= $44, 074
PW(22%) B = $1, 200, 000 + $700, 000( P / F , 22%,1)
+$1, 000, 000( P / F , 22%, 2)
= $45, 633
Select project B.
5.33)
(a)
PW(12%) A = $5, 000 + $2, 610( P / F ,12%,1)
+$2,930( P / F ,12%, 2) + $2,300( P / F ,12%,3)
= $1,303.23
PW(12%) B = $3, 200 + $1, 210( P / F ,12%,1)
+$1, 720( P / F ,12%, 2) + $1,500( P / F ,12%,3)
= $319.2
Select Project A.
(b)
FW(12%) A = $1,303.23( F / P,12%,3)
= $1,830.94
FW(12%) B = $319.2( F / P,12%,3)
= $448.44
Select Project A.
5.34)
(a)
20
PW(15%) A = $4, 000 + $400( P / F ,15%,1)

+$7, 000( P / F ,15%, 2)
= $1, 640.83
PW(15%) B = $8,500 + $11,500( P / F ,15%,1)
+$400( P / F ,15%, 2)
= $1,802.46
Select project B.
(b) Project B dominates Project A at any interest rate (0% to 46.7%.) as indicated
in the following present worth profile. Note however that for very high interest
rate (i > 46.7%), Project A is less undesirable than project B.
(X axis-interest rate, Y axis-PW(i) )
5.35)
(a)
PW(15%) A = $15, 000 + $9,500( P / F ,15%,1)

+$12,500( P / F ,15%, 2) + $7,500( P / F ,15%,3)
= $7, 644.03
(b)
PW(15%) B = $25, 000 + X ( P / A,15%, 2)( P / F ,15%,1)

= $9,300
X = $24, 262.57
(c) Note that the net future worth of the project is equivalent to its terminal project
balance.
21
PB(15%)3 = $7, 643.7( F / P,15%,3)

= $11, 625.30
(d) Select B, which has the greater PW.

5.36)
(a) Project balances as a function of time are as follows:
Project Balances
n
-$2,500
-$5,000
-$2,100
-$6,000
-$1,660
-$7,100
-$1,176
-$3,810
-$694
-$1,191
-$163
$1,690
$421
$3,859
$763
$7,245
$1,139
All figures above are rounded to nearest dollars.

(b) Knowing the relationship FW(i ) = PB(i ) N ,
FW(10%) A = $1,139
FW(10%) D = $7, 245
(c) Assuming a required service period of 8 years
PW(10%) B = $7, 000 $1,500( P / A,10%,8)
$1, 000( P / F ,10%,1) $500( P / F ,10%, 2)
$1,500( P / F ,10%, 7) $1,500( P / F ,10%,8)
= $17, 794
PW(10%)C = $5, 000 $2, 000( P / A,10%, 7)
$3, 000( P / F ,10%,8)
= $16,136
Select Project C.
22
5.37) Given: Required service period = infinite, analysis period = least common
multiple service periods (6 years)
Model A:
PW(12%)cycle = $11, 000 + $7,500( P / F ,12%,1)
PW(12%) total
+$8, 000( P / F ,12%, 2) + $5, 000( P / F ,12%,3)

= $5, 633.35
= $5, 633.35[1 + ( P / F ,12%,3)]
= $9, 643.11
Model B:
PW(12%)cycle = $25, 000 + $14,500( P / F ,12%,1)
PW(12%) total
+$18, 000( P / F ,12%, 2)

= $2, 296.65
= $2, 296.65[1 + ( P / F ,12%, 2)
+( P / F ,12%, 4)]
= $5,587.06
Model A is preferred.
5.38)
(a) Without knowing the future replacement opportunities, we may assume that
both alternatives will be available in the future with the same investment and
expenses. We further assume that the required service period will be indefinite.
(b) With the common service period of 24 years,
Project A:
PW(10%)cycle = $900 $400( P / A,10%,3)
PW(10%) total
+$200( P / F ,10%,3)
= $1, 744.48
= $1, 744.48[1 + ( P / A,33.10%, 7)]
= $6,302.63
Note that the effective interest rate for a 3-year cycle is
(1.10)3 1 = 33.10%
23
Project B:
PW(10%)cycle = $1,800 $300( P / A,10%,8)

+$500( P / F ,10%,8)
= $3,167.22
PW(10%) total = $3,167.22[1 + ( P / F ,10%,8)
+( P / F ,10%,16)]
= $5,334.03
Project B is preferred.
(c)
PW(10%) A = $1, 744.48

PW(10%) B = $1,800 $300( P / A,10%,3) + S ( P / F ,10%,3)
= $2,546.06 + 0.7513S
Let PW(10%) A = PW(10%) B and solve for S.
S = $1, 067
5.39)
(a) Assuming a common service period of 15 years
Project A:
PW(12%)cycle = $12, 000 $2, 000( P / A,12%,5)
PW(12%) total
+$2, 000( P / F ,12%,5)

= $18, 075
= $18, 075[1 + ( P / A, 76.23%, 2)]
= $34,151
Note : (1.12) 1 = 76.23%
5
Project B:
PW(12%)cycle = $10, 000 $2,100( P / A,12%,3)
PW(12%) total
+$1, 000( P / F ,12%,3)

= $14,332
= $14,332[1 + ( P / A, 40.49%, 4)]
= $40, 642
Note : (1.12) 1 = 40.49%
3
Select project A.
24
(b)
Project A with 2 replacement cycles:

PW(12%) = $18, 074 $18, 074( P / F ,12%,5)
= $28,329.67
Project B with 4 replacement cycles where the 4th replacement cycle ends at
the end of first operating year:
PW(12%) = $14,332[1 + ( P / F ,12%,3) + ( P / F ,12%, 6)]
[$10, 000 + ($2,100 $6, 000)( P / F ,12%,1)]
( P / F ,12%,9)
= $34,144.73
Project A is still a better choice.

5.40)
Method A:
$10, 000( A / F ,12%,5)
0.12
= $30, 000 + $13,117.50
CE(12%) A = $30, 000 +

= $43,117.5
Method B:
$90, 000( A / F ,12%,50)
0.12
= $75, 000 + $312.50
CE(12%) B = $75, 000 +
= $75,312.5
Since CE(12%) values above represent cost, project A is preferred.

5.41)
Standard Lease Option:

PW(0.5%)SL = $5,500 $1,150( P / A, 0.5%, 24)
+$1, 000( P / F , 0.5%, 24)

= $30,560.10
Single Up-Front Option:

PW(0.5%)SU = $31,500 + $1, 000( P / F , 0.5%, 24)
= $30, 612.82
25
Select the standard lease option, as you will save $52.72 in present worth.
5.42)
Machine A:
PW(13%) = $75, 200 ($6,800 + $2, 400)( P / A,13%, 6)
+$21, 000( P / F ,13%, 6)
= $101,891
Machine B:
PW(13%) = $44, 000 $11,500( P / A,13%, 6)
= $89,971
Machine B is a better choice.
5.43)
(a)
Required HP to produce 10 HP:

Motor A:
X 1 = 10 / 0.85 = 11.765 HP
Motor B:
X 2 = 10 / 0.90 = 11.111 HP
Annual energy cost:

Motor A:
11.765(0.7457)(1, 500)(0.07) = $921.18
Motor B:
11.111(0.7457)(1, 500)(0.07) = $869.97
Equivalent cost:
PW (8%) A = $800 $921.18( P / A,8%,15)
+$50( P / F ,8%,15)
= $8, 669
PW (8%) B = $1, 200 $869.97( P / A,8%,15)
+$100( P / F ,8%,15)
= $8, 614
26
Note: Power bill is paid at years end, not monthly.

Motor B is preferred.
(b) With 2,500 operating hours:
PW(8%) A = $800 $1,535.3( P / A,8%,15)
+$50( P / F ,8%,15)
= $13,925
PW(8%) B = $1, 200 $1, 449.96( P / A,8%,15)
+$100( P / F ,8%,15)
= $13,579
Motor B is still preferred.

5.44) Since only Model B is repeated in the future, we may have the following
sequence of replacement cycles:
Option 1: Purchase Model A now and repeat Model A forever.

Option 2: Purchase Model B now and replace it at the end of year 2 by Model
A. Then repeat Model A forever.
PW(15%) A = $6, 600 + $3,500( P / A,15%,3)
+$1, 000( P / F ,15%, 2) + $2, 000( P / F ,15%,3)
= $3, 462.3
AE(15%) A = $3, 462.3( A / P,15%,3)
= $1,516.49
PW(15%) B = $16,500 + $11, 000( P / F ,15%,1) + $12, 000( P / F ,15%, 2)
= $2,138.94
AE(15%) B = $2,138.94( A / P,15%, 2)
= $1,315.7
(a)
Option 1:
A $1,516.49
=
i
0.15
= $10,109.93
PW(15%) AAA" =
Option 2:
27
PW(15%) BAA" = $2,138.94 +
$1,516.49
( P / F ,15%, 2)
0.15
= $8,901.21
Option 1 is a better choice.
(b) Let S be the salvage value of Model A at the end of year 2.
$6,600 + $3,500( P / F ,15%,1) + ($4,500 + S )( P / F ,15%,2) = $2,138.94
Solving for S yields

S = $3,032.25
5.45)
Since either tower will have no salvage value after 20 years, we may select
the analysis period of 35 years:
PW(11%) Bid A = $80, 000 $1, 000( P / A,11%,35)
= $88,855
PW(11%) Bid B = $78, 000 $1, 750( P / A,11%,35)
= $93, 497
Bid A is a better choice.
If we assume an infinite analysis period, the present worth of each bid will be
[$80, 000 $1, 000( P / A,11%, 40)]( A / P,11%, 40)
0.11
= $90,341
PW(11%) Bid A =
$93, 497( A / P,11%,35)

0.11
= $95,985
PW(11%) Bid B =
Bid A is still preferred.

5.46)
Option 1: Non-deferred Plan (install remaining 7 units)

PW(12%)1 = $200, 000 $21, 000( P / A,12%,8)
= $304,320
Option 2: Deferred Plan
28
PW(12%) 2 = $100, 000( P / F ,12%, 2)

$6, 000( P / A,12%,3)( P / F ,12%, 2)
$160, 000( P / F ,12%,5)
$15, 000( P / A,12%,3)( P / F ,12%,5)
$140, 000( P / F ,12%,8)
= $258,982

5.47)
Alternative A: Once-for-all expansion
PW(15%) A = $30M $0.40M ( P / A,15%, 25)

+$0.85M ( P / F ,15%, 25)
= $32,559,839
Alternative B: Incremental expansion

PW(15%) B = $10 M $18M ( P / F ,15%,10)
$12 M ( P / F ,15%,15) + $1.5M ( P / F ,15%, 25)
$0.25M ( P / A,15%, 25)
$0.10 M ( P / A,15%,15)( P / F ,15%,10)
$0.10 M ( P / A,15%,10)( P / F ,15%,15)
= $17, 700, 745
Select alternative B.
5.48)
Option 1: Tank/tower installation

PW (12%)1 = $164, 000
Option 2: Tank/hill installation with the pumping equipment replaced at the

end of 20 years at the same cost
PW(12%) = ($120, 000 + $12, 000)
($12, 000 $1, 000)( P / F ,12%, 20)
+$1, 000( P / F ,12%, 40) $1, 000( P / A,12%, 40)
= $141,374

5.49)
Option 1: Process device A lasts only 4 years. You have a required service
period of 6 years. If you take this option, you must consider how you will
satisfy the rest of the required service period at the end of the project life. One
29
option would subcontract the remaining work for the duration of the required
service period. If you select this subcontracting option along with the device
A, the equivalent net present worth would be
PW(12%)1 = $100, 000 $60, 000( P / A,12%, 4)
+$10, 000( P / F ,12%, 4)
$100, 000( P / A,12%, 2)( P / F ,12%, 4)
= $383, 292
Option 2: This option creates no problem because its service life coincides
with the required service period.
PW(12%)2 = $150, 000 $50, 000( P / A,12%, 6)

+$30, 000( P / F ,12%, 6)
= $340,371
Option 3: With the assumption that the subcontracting option would be

available over the next 6 years at the same cost, the equivalent present worth
would be
PW(12%)3 = $100, 000( P / A,12%, 6)
= $411,141
With the restricted assumptions above, option 2 appears to be best alternative.
30

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Chapter 5 Present-Worth Analysis

(a), (b), (c)

Net Cash Flow

Net Cash Flow

(b) Discounted payback period = 1 year.

Net Cash Flow

Net Cash Flow

(b) It will take 4 years to recover the total investment.

(b) The total investment is recovered in year 6 (or 5.19 years)

PW(9%) = $18, 000 + $4,800( P / F ,9%,1) + $6,350( P / F ,9%, 2)

Net Cash Flow

Inflow for year 6: $500,000 + $100,000(F/P, 5%, 6) = $734,010

Net Cash Flow

PW (12%) = $1,500,000 + $70,000( P / A,12%,34) + $295,000( P / F,12%,35)

P = $4,000 + $3,400(P / F,9%,1)

Net Cash Flow

PW(12%) = $250, 000 + $110, 000( P / A,12%,8)

The project is a profitable one.

FW(15%) = $14,500, 000( F / P,15%, 2) + $3,500, 000( F / P,15%,1)

PB(i)1 = $1, 000(1 + i ) + $200 = $900

PB(i )3 = $800(1 + i ) + $460

For Statement 1 to be true, I would have to equal 0%, since $200(1 + i) +

Statement 2 is false, since FW of Project C is $150.

a = 100 + 30 + 49.35 + 80 = $59.35

PB(i) 2 = $900(1 + i ) + $490 = $500

Discounted payback period for project A - none

Discounted payback period for project B 4 years

Discounted payback period for project C - 4years

Discounted payback period for project D - 4years

Discounted payback period for project E - none

All projects are acceptable.

All projects are acceptable.

FW(i ) A = [$100( F / P,10%,3) + $50( F / A,10%,3)]( F / P,15%,3)

Sample calculation for Project C:

Given: r = 6% compounded monthly, maintenance cost = $25,000 per year

Given: Construction cost = $10,000,000, renovation cost = $1,000,000 every

P1 = $10, 000, 000

P3 = $100, 000 / 0.05

P3 = $100, 000 / 0.05

10-year cycle with 10% of interest:

= $1, 000, 000

15-year cycle with 10% of interest:

P1 = $10, 000, 000

= $1, 000, 000

$100, 000( A / F ,8%,10)

CE(8%) = $650, 000 +

PW(12%) A = $1, 000, 000 + $700, 000( P / A,12%, 2)

PW(15%) A = $4, 000 + $400( P / F ,15%,1)

(X axis-interest rate, Y axis-PW(i) )

PW(15%) A = $15, 000 + $9,500( P / F ,15%,1)

PW(15%) B = $25, 000 + X ( P / A,15%, 2)( P / F ,15%,1)

PB(15%)3 = $7, 643.7( F / P,15%,3)

(d) Select B, which has the greater PW.

All figures above are rounded to nearest dollars.

+$8, 000( P / F ,12%, 2) + $5, 000( P / F ,12%,3)

+$18, 000( P / F ,12%, 2)

PW(10%)cycle = $1,800 $300( P / A,10%,8)

PW(10%) A = $1, 744.48

+$2, 000( P / F ,12%,5)

+$1, 000( P / F ,12%,3)