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1. A company is considering two alternatives for manufacturing a certain part. Method R will have a first cost of $40,000, an annual operating cost of $25,000, and a $10,000 salvage value after its five year life. Method S will have an initial cost of $100,000, an annual operating cost of $15,000, and a $12,000 salvage value after its 10 year life. At an interest rate of 12% per year, which alternative should be chosen?

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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1. A company is considering two alternatives for manufacturing a certain part. Method R will have a first cost of $40,000, an annual operating cost of $25,000, and a $10,000 salvage value after its five year life. Method S will have an initial cost of $100,000, an annual operating cost of $15,000, and a $12,000 salvage value after its 10 year life. At an interest rate of 12% per year, which alternative should be chosen?

2. Compare the alternatives shown below on the basis of a present-worth comparison. The interest rate is 16% per year:

Alternative I Alternative II
First Cost 147,000 56,000
AnnualCost 11,000 year 1: 30000 year 1
Inc $500 P/Y Inc $1,000 P/Y
Salvage Value 5,000 2,000
Life, Years 6 3

3. An alternative for manufacturing a certain part has a first cost of $50,000, an annual cost of $10,000, and a salvage value of $5,000 after its 10 year life. At an interest rate of 10% per year, what is the capitalized cost of the alternative?

4. A member of congress wants to know the capitalized cost of maintaining a proposed national park. The annual maintenance cost is expected to be $25,000. At an interest rate of 6% per year, what is the capitalized cost of the maintenance?

5. A dam will have a first cost of $5,000,000, an annual maintenance cost of $25,000 and minor reconstruction costs of $100,000 every five years. At an interest of 8% per year, what is the capitalized cost of the dam?

6. Compare the alternatives shown below on the basis of their capitalized costs, using an interest rate of 15% per year.
Alternative I Alternative II
First Cost 160,000 25,000
Annual Operating Cost 15,000 3,000
Salvage Value 1,000,000 4,000
Life, Years infinite 7

Rushforth Manufacturing has $100,000 to invest in either Project A or Project B. The folllowing data are available on these projects: Project A: Cost of equipment needed now $90,000 Working capital investement needed now $10,000 Annual cash operating inflows $30,000 Salvage value of equipment in 6 years $15,000 Project B: Cost of equipment needed now $40,000 Working capital investment needed now $60,000 Annual cash operating inflows $25,000 Salvage value of equipment in 6 years $10,000 Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%. The net present value of Project A is: The net present value of Project B is:

Engineering Economic Question:

Using a.) Present Worth analyses and b.) Equivalent annual worth analyses, decide which of two hydraulic systems you would recommend for purchase.

The first hydraulic system, A, requires annual operating, maintenance and repair cost of $1000 and it has a useful life of 15 years. Its initial cost is $35,000 and it has a salvage value of $6000 at the end of its useful life.

The second hydraulic system, B, has an initial cost of $18,000 and is expected to be unserviceable after ten years. It requires $500 annual operating, maintenance and repair cost and has a zero salvage value after its 10-year useful life.

Which would you recommend for purchase if you had to purchase one of these hydraulic systems? Assume the interest rate is 6%

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