0401301-Engineering Economics

Instructor: Dr. Saleh Abu Dabous

Problem 1
Using a 10% interest rate, compute B in the diagram.
400
300
100
0

200

4
B

2B
3B
4B

Solution
$400
$300
$200
$100

B
2B
3B
4B

P = $100 (P/A, 10%, 4) + $100 (P/G, 10%, 4)

= $100 (3.170 + 4.378)
= $754.80
Also:
P = 4B (P/A, 10%, 4) B (P/G, 10%, 4)
Thus,

4B (3.170) B (4.378) = $754.80

B = $754.80/8.30 = $90.94

Problem 2
Find the value of P for the following cash flow diagram
3000

1250
1000
750

500
250

4
i=10%

250

P=?

Solution:
P = $1,250 (P/A, 10%, 8) - $250 (P/G, 10%, 8) + $3,000 - $250 (P/F, 10%, 8)
= $1,250 (5.335) - $250 (16.029) + $3,000 - $250 (0.4665)
= $5,545

750

Problem 3
The following cash flow transactions are said to be equivalent in terms of economic desirability at an
interest rate of 12% compounded annually. Determine the unknown value A.

Solution:
Applying the principle of equivalence in order to make the two cash flows equivalent:
Cash flow number 1:
P0 = A (P/A, 12%, 4)
Cash flow number 2:
P0 = $150 (P/A, 12%, 5) + $150 (P/G, 12%, 5)
Since P0 of cash flow 1 = P0 of cash flow 2
A (3.037) = $150 (3.605) + $150 (6.397)
A = (540.75 + 959.55)/3.037
= $494