Engineering Economy Assignment 6

255330
Chapter 7 Rate of return Analysis : Single Alternative
Due Date:
7.7 Swagelok Enterprises is a manufacturer of miniature fittings and valves. Over a 5 year period,
the costs associated with one product line were as follows: first cost of $30,000 and annual
costs of $18,000. Annual revenue was $27,000, and the used equipment was salvaged for
$4000. What rate of return did the company make on this product?
(i = 17.9 %)
7.11 An entrepreneurial mechanical engineer started a tire shredding business to take advantage of a
Texas state law that out-laws the disposal of whole tires in sanitary landfills. The cost of the
shredder was $220,000. She spent $15,000 to get 460-volt power to the site and another
$76,000 in site preparation. Through contracts with tire dealers, she was paid $2 per tire and
handled an average of 12,000 tires per month for 3 years. The annual operating costs for labor,
power, repairs, etc., amounted to $1.05 per tire. She also sold some of the tire chips to septic
tank installers for use in drain fields. This endeavor netted $2000 per month. After 3 years, she
sold the equipment for $100,000. What rate of return did she make (a) per month and (b) per
year (nominal and effective)?
((a) i = 3.3% per month, (b) Nominal per year = 39.6% per month compounded yearly ,
Effective per year = 47.6% per year)
7.12 An Internet B to C company projected the cash flows (in millions). What annual rate of return will
be realized if the cash flows occur as projected?
(i = 5.2% per year )
Year Expenses, $ Revenue, $
0 -40 -
1 -40 12
2 -43 15
3 -45 17
4 -46 51
5 -48 63
6 - 10 -50 80

7.21 A charitable foundation received a donation from a wealthy building contractor in the amount of
1
 $5 million. It specifies that $200,000 is to be awarded each year for 5 years starting now (i.e., 6
awards) to a university engaged in research pertaining to the development of layered composite
materials. Thereafter, grants equal to the development of layered composite materials.
Thereafter, grants equal to the amount of interest earned each year are to be made. If the size
of the grants from year 6 into the indefinite future is expected to be $1,000,000 per year, what
annul rate of return is the foundation earning? (i = 13.2%)
7.27 A manufacturer of heavy-tow carbon fibers (used for sporting goods, thermoplastic compounds,
windmill blades, etc.) reported the net cash flows below. (a) Determine the number of possible
rate of return values, and (b) find all rate of return values between –50% and 120% (i = 24.4%
per year)
Year Net Cash Flow, $
0 -17,000
1 20,000
2 -5,000
3 8,000
7.31 An engineer working for GE invested his bonus money each year in company stock. His bonus
has been $5000 each year for the past 6 years (i.e., at the end of years 1 through 6). At the
end of year 7, he sold $9000 worth of his stock to remodel his kitchen (he didn’t purchase any
stock that year). In years 8 through 10, he again invested his $5000 bonus. The engineer sold
all his remaining stock for $50,000 immediately after the last investment at the end of year 10.
(a) Determine the number of possible rate of return values in the net cash flow series. (b) Find
the internal rate of return(s). (c) Determine the composite rate of return. Use a reinvestment rate
of 20% per year. (IRR = 6.3%, composite ROR = 6.3%)
7.34 For the high-temperature material project in Problem 7.29, determine the composite rate of return
if the reinvestment rate is 15% per year. The cash flows (repeated below) are in $1000 units.
(i’ = 35.7% per year)
Year Cash Flow, $
0 -5,000
1 4,000
2 0
3 0
4 20,000
5 -15,000