Engineering Economy 16th Edition By Sullivan – Test Bank


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ExamName___________________________________SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.Answer the question.1)GoBulls Media is considering opening a new manufacturing facility to process and mailcoupons to 660,000 households in the Tampa Bay area. The new facility will require aninitial investment of$240,000and an annual operating cost of$22,000. It will have a$86,500salvage value after5years. Calculate the net present worth of this investment ifthe company’s minimum attractive rate of return is5% per year, compoundedmonthly.1)Answer:-$267,542.25Explanation:Effective interest rate=(1+r/M)M-1=(1+0.05/12)12-1=0.0512or5.12%PW=-240,000-22,000(P/A,5.12%,5)+86,500(P/F,5.12%,5)=-240,000-22,000(4.3152)+86,500(0.7791)=-267,542.252)Oregon Ducks, Inc. is considering buying licenses for 12 megahertz of wireless spectrum inthe 700 MHz range, which is suitable for delivering television to mobile phones. The 700MHz signals can travel long distances and more easily penetrate walls and other obstacles.The acquisition cost is$250million. In addition, because networks that operate in the 700MHz range are less expensive to build than those in other portions of the spectrum, Ducksestimates annual costs of$25million over the next7years and no salvage value. Duringthe same period, the company expects to generate annual revenue of$30million byoffering television and video to mobile-phone users. Calculate the net present worth ofthis investment, and determine the acceptability of the investment if the company’sminimum attractive rate of return is13% per year.2)Answer:The present worth is-$227,887,000.00, which is less than zero; therefore, theinvestment should be rejected.Explanation:PW=-250,000,000-25,000,000(P/A,13%,7)+30,000,000(P/A,13%,7)=-250,000,000-(25,000,000-30,000,000)(P/A,13%,7)=-250,000,000+22,113,000.00=-227,887,000.00The present worth is less than zero; therefore, the investment should be rejected.1
3)Sun Devil Inc. is building two small additions onto its corporate headquarters in Tempe inorder to maximize its operating efficiency. The additions, which total27,000square feet,will attach to the east and south sides of its existing 66,000-square-foot headquarters. Theconstruction costs are estimated to be$40per square feet. The company estimates$60,000per year in fixed costs (e.g., maintenance and insurance, etc.) and$3per square foot invariable costs (e.g., utilities, etc.) for the additional facility. The market value of theadditions is expected to be33% of the construction costs at the end of20years. Determinethe capital recovery cost and the EUAC of the two additions if the minimum attractive rateof return is4% per year.3)Answer:CR=$67,512.96EUAC=$208,512.96Explanation:I=$(27,000)(40)=1,080,000S=$(1,080,000)(0.33)=356,400CR=I (A/P, i%, n)-S (A/F, i%, n)=1,080,000(A/P,4%,20)-356,400(A/F,4%,20)=1,080,000(0.0736)-356,400(0.0336)=79,488.00-11,975.04=67,512.96EUAC=CR+60,000+(3)(27,000)=208,512.964)Boilermaker Brew Plc. and Hoosier Brewing Co. plan to combine their U.S. operations inan attempt to bolster their sagging sales in a tough domestic market. The two companieswill form a new unit called HoosierMaker. The companies expect to invest$120millionupfront to set up the new unit. HoosierMaker expects to garner revenue of$9.5millioneach year and spend$1.3million a year in costs, over the next7years. What is the futureworth of this investment if the companies’ rate of return is16% per year?4)Answer:-$245,550,020.00Explanation:FW=-120,000,000(F/P,16%,7)-1,300,000(F/A,16%,7)+9,500,000(F/A,16%,7)=-120,000,000(2.8262)+8,200,000(11.4139)=-245,550,020.005)The cost of building the gondola lift system that transports visitors from the tops of themountain peaks to the valley at the Zhangjiajie National Forest Park in China is$10.5million. The lift system will need an annual maintenance cost of$164,000, and theelevators will need to be replaced every5years with the estimated cost of$603,000, for anindefinite period of time. What is the capitalized worth of the lift system at an interest rateof16% per year?5)Answer:-$12,072,976.25Explanation:CW (16%)=-10,500,000-164,000/0.16-603,000[(A/F,16%,5)]/0.16=-10,500,000-1,025,000.00-603,000(0.1454)/0.16=-12,072,976.252
6)Longhorn Energy is planning a$340million expansion of two major pipelines in Texas.The Austin-based pipeline company will add 56 miles of 36-inch pipeline and 20,000horsepower of compression. The expansion will increase the capacity of the Katy pipelinein southeast Texas to more than 1.1 billion cubic feet per day from 700,000 million cubicfeet per day. Net revenue per cubic foot is$1.25and the pipeline is expected to have aresale value of28million at the end of year38. Determine the capital recovery cost of thisinvestment if the minimum attractive rate of return is14% per year.6)Answer:$47,912,000.00Explanation:CR=I (A/P, i%, n)-S (A/F, i%, n)=340,000,000(A/P,14%,38)-28,000,000(A/F,14%,38)=47,940,000.00-28,000.00=47,912,000.007)Aztec Corp., a clothing retailer, plans to open another 95 stores by the end of the year.Each new store will require an initial investment of$270,000and an annual operating costof$24,000. Each will have a$61,000salvage value after5years. The company expects togarner revenue of$36,000each year. What is the future worth of this investment if thecompany’s minimum attractive rate of return is13% per year, compoundedsemiannually?7)Answer:FW for each store is-$367,349.00.Explanation:Effective interest rate=(1+r/M)M-1=(1+0.13/2)2-1=0.1342or13.42%For Each store,FW=-270,000(F/P,13.42%,5)-24,000(F/A,13.42%,5)+36,000(F/A,13.42%,5)+61,000=-270,000(1.8769)+12,000(6.5345)+61,000=-367,349.003
8)Orangemen Lofts plans to add 300 luxury apartments to its complex in Cohoes. The cost ofthe land now is$16million including taxes and fees. The construction cost is expected tobe$64million including the cost of the central amenities. The annual maintenance andoperating cost is expected to be$450,000. The company also estimates the market value ofthe property to be72% of the construction price after11years. The average occupancy rateof88% is expected each year. What is a minimum monthly rent required to make thisinvestment economically acceptable if the company’s minimum attractive rate of return is6% per year, compounded monthly?8)Answer:$2343.4per monthExplanation:Effective interest rate=(1+r/M)M-1=(1+0.06/12)12-1=0.0617or6.17% per yearInitial investment=-(16,000,000)-(64,000,000)=-80,000,000Market value at the end of year11=(64,000,000)(0.72)=46,080,000To make this investment economically acceptable, the annual worth of monthlyrent (A) must be as great as the annual worth of costs each year.AW=(-80,000,000)(A/P,6.17%,11)+46,080,000(A/F,6.17%,11)-450,000=(-80,000,000*0.1279)+(46,080,000*0.0662-450,000)=-7,631,504.00per yearEffective interest rate=0.06/12=0.50or50.00% per monthEnd of year monthly rent equivalent=A(300)(0.88)(F/A,0.50%,12)=A(3256.5984) per yearA=-AW/ (3256.5984)=$2343.4per month9)BioPharm Inc. recently acquired Cow Biopharmaceuticals Inc., a producer of antibodiesand Cow-HB to prevent Hepatitis B re-infection in liver transplant patients. The companyplans to invest$3.5million in new manufacturing equipment. The Cow Biologics divisionis expected to generate revenue of$300,000and operating cost of$330,000each month.The new equipment is estimated to have a$700,000salvage value after7years. What is thefuture worth of this investment if the company’s minimum attractive rate of return is18%per year, compounded monthly.9)Answer:-$16,509,278.00Explanation:Effective interest rate=0.18/12=0.015or1.50% per monthFW=-3,500,000(F/P,1.50%,84)-330,000(F/A,1.50%,84)+300,000(F/A,1.50%,84)+700,000=-3,500,000(3.4926)-30,000(166.1726)+700,000=-16,509,278.004
10)Thai Savings Bank issues 100,000 bonds as a response to the Thai Central Bank’s initiativesto increase domestic saving. The bonds have a face value of$40,000each, a bond interestrate of8% per year payableannually, and a maturity date of14years. What is the currentprice of a bond, if the market interest rate is9% per year, compoundedsemiannually?10)Answer:$36,305.76Explanation:FromVN=C(P/F,i%,N)+rZ(P/A,i%,N)Wherei=(1+r/M)M-1=(1+0.09/(2))2-1=0.0920or9.20%r=(8%)/1=(8%)N=14Thus, present worth of the bond=40,000(P/F,9.20%,14)+3200(P/A,9.20%,14)=40,000(0.2917)+3200(7.6993)=36,305.7611)Consider the following cash flow. Determine the annual worth if the minimum attractiverate of return is9% per year.YearCash Flow, $YearCash Flow, $0-150,000615,000113,000715,400213,400815,800313,800916,200414,20010-1416,600514,6001517,00011)Answer:-$3656.81Explanation:AW=-150,000(A/P,9%,15)+13,000+400(P/G,9%,10)(A/P,9%,15)+[3600(F/A,9%,5)+400] (A/F,9%,15)=-150,000(0.1241)+13,000+400(24.3728)(0.1241)+[3600(5.9847)+400] (0.0341)=-18,615.00+13,000+1209.87+748.32=-3656.815
12)Determine the rate of return of the following cash flow using the ERR method and thereinvestment rate of4% per year.YearExpense, $Revenue, $YearExpense, $Revenue, $0140,000-632,00082,000132,00047,000732,00089,000232,00054,000832,00096,000332,00061,000932,000103,000432,00068,0001032,000110,000532,00075,0001132,000117,00012)Answer:ƍi=14.77%Explanation:ƍ
ƍ140,000(F/P,i, 11)=[15,000(P/A,4%, 11)+7000(P/G,4%, 11)] (F/P,4%, 11)140,000(F/P,i, 11)=[15,000(8.7605)+7000(40.3772)] (1.5395)140,000(1+i)11=637,426.74(1+i)11=4.55301+i=1.1477i=0.1477i=14.77%13)A new water treatment operation is being considered for the new automated watertreatment plant in South Africa. The system can be purchased and installed for$44.5million and requires additional annual operating and maintenance expenses of$2.7million over a22-year period. However, it will save an estimated$5.7million each yearfrom the reduced operational, environmental, and security risks. The company uses aMARR of12percent per year in its economic evaluations of the new system. The marketvalue of the system will be$4.45million at the end of22years. Write the correct equationto determine if this system should be installed using the IRR method.13)Answer:PW=0=-44.5+(-2.7+5.7)(P/A, i*%,22)+4.45(P/F, i*%,22)Explanation:Also, AW=0=-44.5(A/P, i*%,22)-2.7+5.7+4.45(A/F, i*%,22)If i*%L12%, the system should be installed.14)Kenny Pipe & Supply Inc., a wholesale distributor of plumbing supplies, pipe, valves, andfittings, plans to remodel its existing facility in the Birmingham, Alabama, location. Thefacility will require an initial remodeling cost of$370,000and a monthly operating andmaintenance cost of$30,000. It will have a$66,500salvage value after7years. What is thenet present worth of this investment if the company’s minimum attractive rate of return is6% per year, compounded monthly?14)Answer:-$2,379,852.95Explanation:Effective interest rate=0.06/12=0.0050or0.50%PW=-370,000-30,000(P/A,0.50%,84)+66,500(P/F,0.50%,84)=-370,000-30,000(68.453)+66,500(0.6577)=-2,379,852.956
15)The cost of building the RAMA IX suspension bridge in Thailand is$8million. The bridgewill need to be repainted every7years and resurfaced every9years, each for an indefiniteperiod of time. The cost of painting is expected to be$159,000and the cost of resurfacing isestimated to be$417,000. Determine the capitalized worth of the bridge at an interest rateof4% per year.15)Answer:-$9,488,397.50Explanation:CW (4%)=-8,000,000-159,000[(A/F,4%,7)]/0.04-417,000[(A/F,4%,9)]/0.04=-8,000,000-159,000(0.1266)/0.04-417,000(0.0945)/0.04=-9,488,397.5016)Sony Corporation has invested$5.6million in developing super-thin TVs based on new,organic light-emitting diode technology. The company plans to market the OLED TVs inan 11-inch size and produce 24,000 units for the first five years. The annual productionand operating cost is estimated at$350per unit and will be sold at$400per unit.Determine the internal rate of return for this investment if the study period is five years.16)Answer:2.34%Explanation:PW=0=-5,600,000+(50) (24,000) (P/A, i%, 5)Solve for i by interpolation.PW(2%)=-5,600,000+(1,200,000) (P/A,2%, 5)=56,151.41PW(3%)=-5,600,000+(1,200,000) (P/A,3%, 5)=-104,351.3817)Shin Satellite Corp. issues 10,000 debenture bonds with a face value of$26,000each and abond interest rate of18% per year payablesemiannually. The bonds have a maturity dateof10years. If the market interest rate is14% per year, compoundedsemiannually, what isthe present worth of one bond to a person who wants to purchase it and earn the marketrate?17)Answer:$31,508.36Explanation:FromVN=C(P/F,i%,N)+rZ(P/A,i%,N)Wherei=0.14/2=700or7.00%r=(18%)/2=(9%)N=20Thus, present worth of the bond=26,000(P/F,7%,20)+2340(P/A,7%,20)=6718.40+24,789.96=31,508.3618)A textile manufacturer plans to improve revenue from its heating blankets, sold primarilyin the northern areas of the United States by increasing its marketing activities. A total of$170,000spent now in marketing is expected to generate new revenue of$400,000per year.The MARR is6% per year and the evaluation period is9years. Use simple paybackanalysis to determine the acceptability of the marketing investment.18)Answer:1year(s)Explanation:Simple payback analysis ignores time value of money.Let N=simple payback period170,000=(400,000)(N)N=170,000/400,000=17
19)Determine the internal rate of return of the following cash flow.YearCash Flow, $YearCash Flow, $0-450,000656,000150,000757,000252,000858,000353,000959,000454,0001060,000555,0001161,00019)Answer:5.41%Explanation:PW=0=-450,000+50,000(P/A, i*%, 11)+[2000 (P/A, i*%, 10)+1000 (P/G, i*%,10)](P/F, i*%, 1)Solve for i by interpolation.PW(5%)=-450,000+50,000(P/A,5%, 11)+[2000 (P/A,5%, 10)+1000 (P/G,5%,10)](P/F,5%, 1)=10,173.58PW(6%)=-450,000+50,000(P/A,6%, 11)+[2000 (P/A,6%, 10)+1000 (P/G,6%,10)](P/F,6%, 1)=-8562.8620)The Bank of Tokyo-Mitsubishi issues 100,000 bonds as part of its liquidity and interest riskmanagement instrument. The bonds have a face value of$36,000each, a bond interest rateof12% per year payablesemiannually, and a maturity date of16years. The current priceof the bond is$69,662. Write the correct equation to determine if this bond should bepurchased using the IRR method, assuming an investor has a MARR of4% per year,compoundedquarterly.20)Answer:PW=69,662=36,000(P/F, i*%,32)+2160(P/A, i*%,32)Explanation:FromVN=C(P/F,i%,N)+rZ(P/A,i%,N)r=(12%)/2=(6%)N=32The price of the bond equals the present worth of the bond.PW=69,662=36,000(P/F, i*%,32)+(0.06) (36,000) (P/A, i*%,32)=36,000(P/F, i*%,32)+2160(P/A, i*%,32)If [(1+i*)2-1]L(1+0.04/4)4-1, the bond should be purchased.8
21)AmeriTextile Co. is considering opening a production and shipping facility in Dallas tokeep up with demand for its pillows. The 105,000-square-foot facility will require aninitial investment of$280,000, and an annual operating cost of$26,000. It will have a$74,500salvage value after9years. Calculate the net present worth of this investment ifthe company’s minimum attractive rate of return is5% per year.21)Answer:-$416,780.10Explanation:PW=-280,000-26,000(P/A,5%,9)+74,500(P/F,5%,9)=-280,000-26,000(7.1078)+74,500(0.6446)=-416,780.1022)A 24-hour music network plans to add satellite technology to allow its expansion intoother major southern markets. The network expects the monthly revenue to increase by$380,000from new cable subscription fees. The satellite will require an initial cost of$2million with monthly operating and maintenance costs of$340,000. It will have a$122,000salvage value after6years. Calculate the net present worth of this investment at aninterest rate of4% per year, compounded continuously.22)Answer:$655,389.00Explanation:The nominal interest per month is0.33%.PW=-2,000,000+40,000(P/A,0.33%,72)+122,000(P/F,0.33%,72)=-2,000,000+40,000(63.9798)+122,000(0.7885)=655,389.0023)Miner’s Mexican Grill Inc. plans to open its 100th restaurant by the end of next year. Thenew restaurant will require an initial investment of$300,000and an annual operating costof$31,000. It will have a$62,000salvage value after6years. The company also estimatesthat the new restaurant will bring in revenue of$43,400each year. Determine theacceptability of the investment if the company’s minimum attractive rate of return is13%per year using annual worth analysis.23)Answer:The annual worth of-$55,207.60is less than zero; therefore, the investment shouldbe rejected.Explanation:AW=-300,000(A/P,13%,6)-31,000+43,400+62,000(A/F,13%,6)=-300,000(0.2502)-31,000+43,400+62,000(0.1202)=-55,207.60The annual worth is less than zero; therefore, the investment should be rejected.9
24)Smoothy Smoothies, a Florida-based chain that sells shakes, juices, salads, wraps, andsoups, plans to develop franchises in central Tennessee. Each new store will require aninitial investment of$270,000and a monthly operating cost of$25,000. Each will have a$78,500salvage value after5years. The company also estimates that a new store will bringin revenue of$40,000each month. Determine the acceptability of the investment if thecompany’s minimum attractive rate of return is8% per year, compounded monthly, usingthe annual worth analysis.24)Answer:AW(0.67%)=$10,586.60Since AW(0.67%)L0, the investment should be accepted.Explanation:Effective interest rate=0.08/12=0.0067or0.67% per monthAW=-270,000(A/P,0.67%,60)-25,000+40,000+78,500(A/F,0.67%,60)=-270,000(0.0203)-25,000+40,000+78,500(0.0136)=10,586.60Since AW (0.67%)L0, the investment should be accepted.25)Quinn purchases a bond for$29,000when the market interest rate is13% per year,compoundedsemiannually. The bond has an interest rate of10% per year payablesemiannuallyand a maturity date of24years. What is the face value of this bond?25)Answer:$37,155.91Explanation:FromVN=C(P/F,i%,N)+rZ(P/A,i%,N), we need to find C ( Z=C).Wherei=(1+r/M)M-1=0.13/2=0.065or6.50%r=(10%)/2=(0.05%)N=48Thus,29,000=C (P/F,6.5%,48)+0.05C (P/A,6.5%,48)C=(29,000)/ [(P/F,6.5%,48)+0.05(P/A,6.5%,48)]=29,000/ [0.0487+0.05(14.6359)]=37,155.9126)Dean bought a$26,000bond that has interest rate of8% per year payablesemiannually,3years ago. The bond has a maturity date of12years from the date it was issued. Howmuch should he be able to sell the bond for today, if the current market interest rate is9%per year, compoundedsemiannually?26)Answer:$24,419.20Explanation:FromVN=C(P/F,i%,N)+rZ(P/A,i%,N)Wherei=(1+r/M)M-1=0.09/2=0.045or4.50%r=(8%)/2=(4%)N=18periods remaining in the life of the bond.Thus, present worth of the bond=26,000(P/F,4.5%,18)+1040(P/A,4.5%,18)=11,772.80+12,646.40=24,419.2010
27)Lane College in Jackson, Tennessee, is considering the conversion of an abandoned churchpew manufacturing plant adjacent to the school’s campus into a34,000-square-footbuilding to house the campus bookstore, a conference center, a small business incubator,and a community computer lab. The project requires$30million for renovation costs,additional annual fixed operating and maintenance expenses of$100,000, and variableexpenses of190per square-foot over a10-year period. The college expects to generate anannual revenue of$7,810,000over a10-year period. The college uses a MARR of7percentper year in its economic evaluations of the new project. The market value of the buildingwill be$2million at the end of10years. Write the correct equation to determine if thisbuilding should be renovated using the IRR method.27)Answer:PW=0=-30,000,000+1,250,000.00(P/A, i*%,10)+2,000,000(P/F, i*%,10)Explanation:PW=0=-30,000,000+[-100,000-(190) (34,000)+7,810,000] (P/A, i*%,10)+2,000,000(P/F, i*%,10)=-30,000,000+1,250,000.00(P/A, i*%,10)+2,000,000(P/F, i*%,10)If i*%L7%, the building should be renovated.28)HighJump Inc. is considering partnering with FieldFeet to open “Athlete Heaven” stores inthe United States as it seeks to expand its own retail network to better control how itsproducts are displayed and sold. One particular store will require an initial investment of$220,000and an annual operating cost of$59,000. The buildings and equipment will have a$62,500resale value after10years. HighJump expects the store to generate annual revenueof$69,000. Calculate the future worth of the investment in this particular store at the endof year10, and determine the acceptability of the investment if the company’s minimumattractive rate of return is8% per year.28)Answer:The future worth is-$267,592.00, which is less than zero; therefore, the investmentshould be rejected.Explanation:FW=-220,000(F/P,8%,10)-59,000(F/A,8%,10)+69,000(F/A,8%,10)+62,500=-220,000(2.1589)+10,000 (14.4866)+62,500=-267,592.00The future worth is less than zero; therefore, the investment should be rejected.29)As part of a broad effort to invigorate its pipeline and move more aggressively intobiotechnology, GoodDrugs Inc. plans to set up a new division dedicated to developingbiotherapeutic drugs and research technologies. The company expects to pay$240millionfor set up costs of its new division now and$12million in operating costs each year for thenext13years. The company estimates that the new division will be able to generate annualrevenue of$84million8years from now. What is the net present worth of this investmentif the company’s minimum attractive rate of return is7% per year and the study period is13years? Assume there is no salvage value.29)Answer:-$90,972,037.80Explanation:PW=-240,000,000-12,000,000(P/A,7%,13)+84,000,000(P/A,7%, 6)(P/F,7%,7)=-240,000,000-100,292,400.00+249,320,362.20=-90,972,037.8011
30)Husker Co., a major drug store chain, plans to spend$35million in capital investments forits new inventory loss reduction initiative. By upgrading the current inventory trackingsystem using advanced RFID technology, the company estimates the annual maintenancecost of$210,000. The salvage value of the system at the end of year13is expected to be0.4% of the original investment. What is the minimum annual inventory loss preventionrequired to make this investment economically acceptable if the company’s minimumattractive rate of return is8% per year.30)Answer:$4,630,990.00Explanation:To make this investment economically acceptable, the annual inventory lossprevention (A) must be as great as the annual equivalent of the costs.A=35,000,000(A/P,8%,13)+210,000-140,000(A/F,8%,13)=35,000,000(0.1265)+210,000-140,000(0.0465)=$4,630,990.0012
Answer KeyTestname: C51)-$267,542.252)The present worth is-$227,887,000.00, which is less than zero; therefore, the investment should be rejected.3)CR=$67,512.96EUAC=$208,512.964)-$245,550,020.005)-$12,072,976.256)$47,912,000.007)FW for each store is-$367,349.00.8)$2343.4per month9)-$16,509,278.0010)$36,305.7611)-$3656.8112)ƍi=14.77%13)PW=0=-44.5+(-2.7+5.7)(P/A, i*%,22)+4.45(P/F, i*%,22)14)-$2,379,852.9515)-$9,488,397.5016)2.34%17)$31,508.3618)1year(s)19)5.41%20)PW=69,662=36,000(P/F, i*%,32)+2160(P/A, i*%,32)21)-$416,780.1022)$655,389.0023)The annual worth of-$55,207.60is less than zero; therefore, the investment should be rejected.24)AW(0.67%)=$10,586.60Since AW(0.67%)L0, the investment should be accepted.25)$37,155.9126)$24,419.2027)PW=0=-30,000,000+1,250,000.00(P/A, i*%,10)+2,000,000(P/F, i*%,10)28)The future worth is-$267,592.00, which is less than zero; therefore, the investment should be rejected.29)-$90,972,037.8030)$4,630,990.0013

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