GDB3023

ENGINEERING ECONOMICS & ENTREPRENEURSHIP

SEPTEMBER 2019
ASSIGNMENT #5 [CLO1]

4-30 Luis wants to have $2,000,000 in net worth when he retires. To achieve
this goal, he plans to invest $10,000 each year (starting one year from now)
into an account that earns 10% interest compounded annually. The amount
of time before Luis can retire as a multimillionaire is how many years?

Solution

Use the uniform series compound amount factor to find the equivalence between
$2,000,000 and $10,000 per year for N years:

$2,000,000 = $10,000(F/A, 10%, N)

$2,000,000 = $10,000[(1+ 0.1)N - 1]/ 0.1

200 = [(1 + 0.1)N - 1]/0.1

20 + 1 = (1.1)N

log(21) = N log(1.1)

N = 31.94 years (call it 32 years)

4-33 Automobiles of the future will most likely be manufactured largely with
carbon fibers made from recycled plastics, wood pulp, and cellulose.
Replacing half the ferrous metals in current automobiles could reduce a
vehicle’s weight by 60% and fuel consumption by 30%. One impediment to
using carbon fibers in cars is cost. If the justification for the extra
sticker price of carbon-fiber cars is solely based on fuel savings, how much
extra sticker price can be justified over a six-year life span if the carbon-
fiber car would average 39 miles per gallon of gasoline compared to a
conventional car averaging 30 miles per gallon? Assume that gasoline costs
$4.00 per gallon, the interest rate is 20% per year, and 117,000 miles are
driven uniformly over six years.

Solution

The carbon fiber automobile would average around 39 miles per gallon of gasoline.
The dollar savings in fuel per year is

117,000 117,000
𝐴=[ 6 − 6 ] ($4.00) = $600
30 39

The extra sticker price that can be afforded is $600(P/A, 20%, 6) = $1,995. This is not
a whole lot of room to wiggle compared to the sticker price of the conventional car. So
the cost of manufacturing carbon fiber automobiles must be made much more
competitive against conventional ferrous−aluminum car bodies and parts.
4-40 Qwest Airlines has implemented a program to recycle all plastic drink cups
used on their aircraft. Their goal is to generate $5 million by the end of
the recycle program’s five-year life. Each recycled cup can be sold for
$0.005 (1/2 cent).

(a) How many cups must be recycled annually to meet this goal? Assume
uniform annual plastic cup usage and a 0% interest rate.

(b) Repeat Part (a) when the annual interest rate is 15%.

(c) Why is the answer to Part (b) less than the answer to Part (a)?

Solution

(a) N = $1 million per year / $0.005 per cup = 200,000,000 cups per year

(b) N = $5 million (A/F, 15%, 5)/($0.005 per cup) = 148,300,000 cups per year.

(c) The compounding of interest.

4-45 The cost to equip a large cruise ship with security cameras is $500,000.
If the interest rate is 15% per year and the cameras have a life of six
years, what is the equivalent annual cost (A) of the security cameras?

Solution

A = $500,000(A/P, 15%, 6) = $500,000(0.2642) = $132,100

4-82 The heat loss through the exterior walls of a certain poultry processing
plant is estimated to cost the owner $3,000 next year. A salesperson from
Superfiber Insulation, Inc., has told you, the plant engineer, that he can
reduce the heat loss by 80% with the installation of $18,000 worth of
Superfiber now. If the cost of heat loss rises by $200 per year (uniform
gradient) after the next year and the owner plans to keep the present
building for 15 more years, what would you recommend if the interest rate
is 10% per year?

Solution

Savings in heat loss: $3,000(0.8) = $2,400 next year

Savings will increase by: $200(0.8) = $160 each year (gradient)

P0(savings) = $2,400(P/A,10%,15) + $160(P/G,10%,15)

= $2,400(7.6061) + 160(40.15)
= $24,678.64

The present equivalent value of the savings is greater than the installation cost of
$18,000. Therefore recommend installing the insulation.