# Engineering Economic Paper

Engineering Economic
Complete the problems below using Excel:12.2 The Wellington Construction Company is considering acquiring a new earthmover. The mover’s basic price is \$90,000, and it will cost another \$18,000 to modify it for special use by the company. This earthmover falls into the MACRS five-year class. It will be sold after four years for \$30,000. The purchase of the earthmover will have no effect on revenues, but it is expected to save the firm \$35,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate (federal plus state) is 40%, and its MARR is 10%.(a) Is this project acceptable, based on the most likely estimates given?(b) Suppose that the project will require an increase in net working capital (spare-parts inventory) of \$5,000, which will be recovered at the end of year 4. Taking this new requirement into account, would the project still be acceptable?(c) If the firm’s MARR is increased to 18% and with the working capital requirement from (b) not in effect, what would be the required savings in labor so that the project remains profitable?12.9 Mike Lazenby, an industrial engineer at Energy Conservation Service, has found that the anticipated profitability of a newly developed water-heater temperature- control device can be measured by present worth with the formulaNPW = 4.028V(2X – \$11) – 77,860 where V is the number of units produced and sold and X is the sales price per unit. Mike also has found that the value of the parameter V could occur anywhere over the range from 1,000 to 6,000 units and that of the parameter X anywhere between \$20 and \$45 per unit. Develop a sensitivity graph as a function of the number of units produced and the sales price per unit.12.11 Susan Campbell is thinking about going into the motel business near Disney World in Orlando, Florida. The cost to build a motel is \$2,200,000. The lot costs \$600,000. Furniture and furnishings cost \$400,000 and should be recovered in eight years (seven-year MACRS property), while the motel building should be recovered in 39 years (39-year MACRS real property placed in service on January1st). The land will appreciate at an annual rate of 5% over the project period, but the building will have a zero salvage value after 25 years. When the motel is full (100% capacity), it takes in (receipts) \$4,000 per day, 365 days per year. Exclusive of depreciation, the motel has fixed operating expenses of \$230,000 per year. The variable operating expenses are \$170,000 at 100% capacity, and these vary directly with percent capacity down to zero at 0% capacity. If the interest is 10% compounded annually, at what percent capacity over 25 years must the motel operate in order for Susan to break even? (Assume that Susan’s tax rate is 31%.)12.19 A financial investor has an investment portfolio worth \$325,000. A bond in the portfolio will mature next month and provide him with \$22,500 to reinvest. The choices have been narrowed down tothe following two options.• Option 1: Reinvest in a foreign bond that will mature in one year. This will entail a brokerage fee of \$162. For simplicity, assume that the bond will provide interest of \$2,625, \$2,225, or \$1,825 over the one-year period and that the probabilities of these occurrences are assessed to be 0.20, 0.45, and 0.35, respectively.• Option 2: Reinvest in a \$22,500 certificate with a savings-and-loan association. Assume that this certificate has an effective annual rate of 8.4%.(a) Which form of reinvestment should the investor choose in order to maximize his expected financial gain?(b) If the investor can obtain professional investment advice from Salomon Brothers,Inc.,what would be the maximum amount the investor should pay for this service?

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