BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

TUTORIAL : Introduction to Engineering Economy

1. List the four essential elements involved in decision making in engineering economic
analysis.
Answer:
The four elements are cash flows, time of occurrence of cash flows, interest rates, and measure of
economic worth.

2. Explain the following term with suitable illustration:

a. Time Value of Money.
b. Economic Equivalence
c. Interest Rate
d. End of period convention
Answer:

3. You borrow RM 1,000 on 1 January and must repay a total of RM 1,200 exactly 1 year
later. Determine the interest amount and the interest rate paid.
Answer:
Interest paid = 1,200 - 1,000 = 200
Interest rate paid for one year

4. NAM Sdn Bhd plans to borrow RM 30,000 from a bank for 1 year at 8% interest for new
equipment. Compute the interest and the total amount due after 1 year.
Answer:
Interest = 30, 000 (0.08) = 2, 400
The total amount due is the sum of principal and interest.
Total due = 30, 000 + 2, 400 = 32, 400

5. RKI Instruments borrowed $3,500,000 from a private equity firm for expansion of its
manufacturing facility for making carbon monoxide monitors/controllers. The company
repaid the loan after 1 year with a single payment of $3,885,000. Determine the interest
rate on the loan.
Answer:
11% per year

1 by: Nor Akramin Mohamad

BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

6. Identify the four engineering economy symbols and their values from the following
problem statement. Use a question mark with the symbol whose value is to be determined.

Thompson Mechanical Products is planning to set aside $150,000 now for possibly
replacing its large synchronous refiner motors whenever it becomes necessary. If the
replacement is not needed for 7 years, how much will the company have in its
investment set-aside account, provided it achieves a rate of return of 11% per year?
Answer:
P = $150,000; F = ?; i = 11%; n = 7

A green algae, can produce hydrogen when temporarily deprived of sulfur for up to 2
days at a time. A small company needs to purchase equipment costing $3.4 million to
commercialize the process. If the company wants to earn a rate of return of 10% per
year and recover its investment in 8 years, what must be the net value of the hydrogen
produced each year?
Answer:
P = $3.4 million; A = ?; i = 10%; n = 8

7. Construct a cash flow diagram for the following cash flows:

$25,000 outflow at time 0, $9000 per year inflow in years 1 through 5 at an interest rate of
10% per year, and an unknown future amount in year 5.
Answer:

8. Construct a cash flow diagram that represents the amount of money that will be
accumulated in 15 years from an investment of $40,000 now at an interest rate of 8% per
year.
Answer:

9. Iselt Welding has extra funds to invest for future capital expansion. If the selected
investment pays simple interest, determine the interest rate would be required for the
amount to grow from $60,000 to $90,000 in 5 years.
Answer:
10 %

10. A solid waste disposal company borrowed money at 10% per year interest to purchase
new haulers and other equipment needed at the company owned landfill site. If the
company got the loan 2 years ago and paid it off with a single payment of $4,600,000,
determine the principal amount P of the loan.
Answer:
3, 801, 653

2 by: Nor Akramin Mohamad