economics calculations

CENE286 ECON HW 2

You must handwrite this assignment on engineering paper. Re-write each question and provide your solutions,

you must show all of your work.

1. You have a credit card with a monthly periodic rate of 1.60%. What is the APR (r)? What is the APY?

2. You have a CD and an APY (i) of 11% is desired. What APR (r) should be used if compounding is quarterly?

What is the periodic rate (over just one quarter)?

3. The CD thing didn't work out, and you want to retire 40 years from now. You want your retirement account

to hold $2.75 million dollars in 40 years. How much must you invest annually each year to achieve this goal?

Use an interest rate of 7.3%. How much would you have to invest annually if you could get 11.2% interest?

Sketch the cash flow diagram.

4. Compare the following 2 options for a nuclear power plant using a PW Analysis. Sketch the cash flow

diagrams for each. Use i=6% for both options.

Option 1:

 capital outlay: $370million, year 0; $220million, year 1; startup at beginning of year 2

 annual operating cost after startup (includes waste handling): $28million

 value of electricity sold: $95 million per year (after startup)

 lifetime of plant: 50 years

 salvage value at end of life: $30 million

 demolition cost: $75 million

Option 2:

 capital outlay: $210 million, year 0; $200 million, year 1; startup at beginning of year 2

 annual operating cost after startup (includes waste handling): $28 million

 additional capital outlay at year 20: $70 million

 value of electricity sold: $110 million per year (after startup)

 lifetime of plant: 50 years

 salvage value at end of life: $45 million

 demolition cost: $20 million

5. A company has 2 options for improvement of its current production system. The data are:

Machine A Machine B

Initial installation cost $30,000 $60,000

Annual operating cost $21,000 $17,000

Service life 3 yr 6 yr

Salvage value $1500 $6000

The firm's MARR is 13%. Answer the following questions:

a) For a PW analysis, what n should you use?

b) Sketch both cash flow diagrams.

c) Determine which machine should be purchased using the PW method.

d) Determine which machine should be purchased using the AE method.

e) Determine which machine should be purchased using the incremental ROR method (use

increment B-A); be sure to sketch incremental cash flow diagram.

6. Describe in your own words the following terms

 Engineering Economics

 Cash flow

 Equivalence

 Single Payment

 Uniform Series Payment

 Simple Interest

 Compounding Interest

 Continuously Compounding Interest

 Present Worth

 Future Worth

 Annual Cost

 Rate of Return

 Benefit Cost Analysis

 Break Even Analysis

 Life Cycle Costs