INEN 303: Engineering Economic Analysis

Spring 2006: Group Quiz I

The best 6 out of 8 will be graded (Group 1 must do all questions).

Remember: cash flow diagram, formulas, then answers!!!

1. A publicly traded consulting engineering firm, Incubus, has six engineers and pays a bonus to each engineer at the end of the year based upon the company’s profit for that year. The bonus money represents 5% of the company’s profit. If the company’s initial investment was $1.2 million, what rate of return has it made on its investment if each engineer’s bonus has been $3,000 per year for the past 10 years? (Hint: (P/A, 24,10)= 3.6819, (P/A, 25, 10)= 3.5705, (P/A, 30, 10)= 3.0915, (P/A, 35, 10)= 2.7150)

2. An engineer, Shania Twain, has invested very well and plans to retire now because she ahs $2 million in her ORP investment account. How long will she be able to withdraw $100,000 per year (beginning one year from now) if her account earns interest at a rate of 4% per year? (Hint: (P/A, 4, 35)= 18.6646, (P/A, 4, 40)= 19.7928, (P/A, 4, 45)= 20.7200, (P/A, 4, 50)= 21.4822)

3. Nickelback Iron and Steel purchased a new machine for ram cambering large I-beams. The company expects to bend 80 beams at $2,000 per beam in each of the first 3 years, after which the company expect to bend 100 beams per year at $2,500 per beam through year 8. If the company’s minimum attractive rate of return is 10% per year what is the present worth of the expected income?

4. White Castle’s gross revenue was 70.5% of the total revenue over a certain 4-year period. If the total revenue was $5.4 billion per year for the first 2 years and $6.1 billion per year for the last 2 years, what was the equivalent annual worth of the gross revenue over that 4-year period at an interest rate of 8% per year?

5. Shrek and Donkey are considering purchasing a larger swamp so they can have more room for their growing families. The owner of the 1000-acre swamp, Bobby Boucher Jr., will sell it for $3,000 per acre if Shrek and Donkey will pay him in two payments—one payment now and another that is twice as large 3 years from now. If the transaction interest rate is 6% per year, what is the amount of the first payment?

6. Ron Burgandy is starting a new company that sells throat lozenges so you can have a voice to make a “wolverine purr”. Ron’s company borrows $40,000 at an interest rate of 9% per year and wishes to repay the loan over a 5-year period with annual payments of equal value for the first two payments and the third through the fifth payments will each have a value $2,000 greater than the value of the first payment. Determine the value of the first payment.

7. David Lightman is planning to lease a computer systems for his company, WG, that will cost (with service) $15,000 in year 1, $16,500 in year 2, and amounts increasing by 5% each year thereafter. Assume the lease payments must be made at the beginning of the year and that a 5-year lease is planned. What is the present worth (year 0) if the company uses a minimum attractive rate of return of 8% per year?

8. Edmond Dantes is planning to deposit $10,000 now, $9,000 one year from now, $8000, two years from now, and amounts decreasing thereafter by $500. What is the equivalent annual worth of these transactions over a 10 year period with an interest rate of 7%?