AIN SHAMS UNIVERSITY

FACULTY OF ENGINEERING
CREDIT HOURS ENGINEERING PROGRAMS
All ENGINEERING PROGRAMs

Sheet - 02
MDP231 Engineering Economy
Instructor Name: Dr. Ghada E. Shedid 1/2
Comparison between alternatives using:
Present Worth, Capitalized cost, Future Worth, and Annual Worth Evaluation

1. An Investor is trying to decide whether he should invest the L.E.30 000 he received from the sale
of his car in the stock market or in a small fast food restaurant with three other partners. If he buys
the stock, he will receive 3500 shares which pay dividends of L.E. 1 per share each quarter. He
expects the shares value will be L.E.40 000 six years from now. If he invests in the restaurant, he
will have to put up another L.E.10 000 one year from now, but starting 2 years from now, his share of
the profit will be L.E.9 000 per year for 5 years, after which he will receive L.E.35 000 from the sale
of the business. Using a PW analysis and an interest rate 12% per year compounded quarterly,
which investment should he make?

2. Two methods can be used for producing a certain part. Method 1 costs L.E.20 000 initially and
will have L.E.5 000 salvage value after 3 years. The operating cost with this method is L.E. 8500 per
year. Method 2 has an initial cost of L.E. 15 000, but it will last only 2 years. Its salvage value is
L.E.3000. The operating cost for method 2 is L.E. 7 000 per year. If the minimum attractive rate of
return is 12% per year, which method should be used on the basis of present worth analysis?

3. Compare the two plans below using the PW method at i = 15% per year:
Plan B
Plan A
Machine 1 Machine 2
First cost, L.E. 10 000 30 000 5 000
Annual operating cost, L.E. 500 100 200
Annual increase in the
100 50 75
operating cost, L.E.
Salvage value, L.E. 1 000 5 000 -200
Life, years 14 14 7

4. Compare the alternatives shown below on the basis of present-worth comparison. The interest
rate is 16% per year:
Alternative R1 Alternative R2
First cost, L.E. 147 000 56 000
Annual operating cost, L.E. 11 000 in year 1: 30 000 in year 1:
increasing by L.E.500 per increasing by L.E.1000
year per year
Salvage value, L.E. 5 000 2 000
Life, years 6 3
Then solve the problem using a study period of 4 years, assuming the salvage value of R1 after 4
years is L.E.18 000 and that R2 will have residual (salvage) value of L.E.14 000 when it is only 1
year old.

5. Two machines are considered for purchase by the L-Tech Company. The manual model will cost
L.E. 25 000 to buy with 8 years life and L.E. 5 000 salvage value. Its annual operating cost will be
L.E. 15 000 for labor and L.E. 1000 for maintenance in the first year and increasing by L.E 200
each year. A computer controlled model will cost L.E. 95 000 to buy, and it will have a 12 years life if
 AIN SHAMS UNIVERSITY, FACULTY OF ENGINEERING
CREDIT HOURS ENGINEERING PROGRAMS, All ENGINEERING PROGRAM
Sheet - 02
Engineering Economy
Instructor Name: Dr. Ghada E. Shedid 2/2

upgraded at the beginning of 5th and the 9th years; the upgrade cost is L.E. 15 000 at the first time
and L.E. 25 000 at the second time. Its terminal salvage value is L.E. 23 000 and the annual
operating and maintenance cost is L.E. 10 000. If the company’s MARR is 20% which machine
would be preferred.

6. Machines that have the following costs are under consideration for a continuous production
process. Using an interest rate 12% per year, determine which alternative should be selected on the
basis of an annual worth analysis:
Machine G Machine H
First cost, L.E. 62 000 77 000
Annual operating cost, L.E. 15 000 21 000
Salvage value, L.E. 8 000 10 000
Life, years 4 6

7. A Company is considering purchasing a machine which costs L.E.30 000 and is expected to last
11 years, with a L.E.3 000 salvage value. The annual operating expenses are expected to be L.E.8
000 for the first 3 years, but owing to increased use, the operating costs will increase by L.E.200 per
year for the next 8 years. Alternatively, the company can purchase a highly automated machine at a
cost of L.E.58 000. This machine will last only 6 years because of its higher technology and delicate
design, and its salvage value will be L.E.15 000. Because it is so automated, its operating cost will
be L.E.4 000 per year. If the company’s MARR is 18% per year, which machine should be selected
on the basis of an annual worth analysis?

8. A company is concerned to produce a new product. There are three possible methods to
produce the new product which are:
Method A: Use the current facilities which will result in annual operating cost of L.E.30000, with an
annual production of 10000 units.
Method B: Buy a new production line at L.E. 300000 to produce the new product. The annual
operating cost is estimated to be L.E.65 000 and the annual production 25 000 unit. The expected
life of the new line is 5 years with a salvage value of L.E. 40000.
Method C: Produce the new product at external facility. The external facility will charge L.E. 5 per
product increasing every year by L.E.0.5. The external facility can produce any number of products.
Knowing that the maximum number of products that can be sold is 50000 units per year and the
selling price is L.E.11 per unit, what will be the company decision if the dominant MARR is 12% per
year and the study period is set to 10 years. Use AW analysis.

9. The city council decided to build a new power plant to ensure the supply of electricity to the
city expansion. The city engineers recommended two types of station to select one of them. The
first one is based on building a new nuclear reactor which will cost € 50 000 000 and its annual
operating cost is expected to be € 750 000. Alternatively the city can use natural gas operated
station which will initially cost € 2 500 000 and the annual operating cost will be € 1 250 000. The
nuclear power plant will need an overhaul each 10 years which will cost € 400 000 and it is
expected to last indefinitely. The natural gas operated plant is expected to last for 25 years and
its salvage value will be € 50 000. If the MARR is 5% which plant should be built?