Engineering Economic Analysis

Problems 173

the ties then in place have a remaining useful life of

4 years or more, they will be used by the railroad

elsewhere and have an estimated salvage value of $3

each. Any ties that are removed at the end of their

service life, or too close to the end of their service life

to be used elsewhere, can be sold for $0.50 each.

Determine the most economical plan for the

initial railroad ties and their replacement for the 15-

year period. Make a present worth analysis assuming

8% interest.

5-62 ConsiderA-E, five mutually exclusive alternatives:

A

$600

100

B

$600

100

C

$600

100

E

$600

150

D

$600

150

Initial cost
Uniform annual
benefits for first
) years
F, .ist 5 years 50 100 110 0 50

The interest rate is 10%. If all the alternatives have

a lO-year useful life, and no salvage value, which

alternative should be selected?

5-63 An investor has carefully studied a number of com-

panies and their common stock. From his analysis, he

has decided that the stocks of six firms are the best of

the many he has examined. They represent about the

same amount of risk and so he would like to determine

one single stock in which to invest. He plans to keep

the stock for 4 years and requires a 10% minimum

attractive rate of return.

Which stock from Table P5-63, if any, should

the investor consider purchasing? (Answer:Spartan

Products)

5-64 Six mutually exclusive alternatives, A-F (see

Table P5-64), are being examined. For an 8% interest

rate, which alternative should be selected? Each

alternative has a six-year useful life.

The management of an electronics manufacturing

firm believes it is desirable to automate its produc-

tion facility. The automated equipment would have

a lO-year life with no salvage value at the end of

10 years. The plant engineering department has sur-

veyed the plant and suggested there are eight mutually

exclusive alternatives available.

5-65

Plan

1 2 3 4 5 6 7 8

Initial Cost

(thousands)

$265

220

180

100

305

130

245

165

Net Annual Benefit

(thousands)

$51

39

26

15

57

23

47

33

If the firm expects a 10% rate of return, which plan,

if any, should it adopt? (Answer:Plan 1)

A local symphony association offers memberships as

follows:

5-66

Continuing membership, per year

Patron lifetime membership

$ 15

375

The patron membership has been based on the sym-

phony association's belief that it can obtain a 4% rate

of return on its investment. If you believed 4% to be

an appropriate rate of return, would you be willing

to purchase the patron membership? Explain why or

why not.

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TABLEP5-63

Price Annual End-of- Year Estimated Price

Common Stock per Share Dividend per Share at End of 4 Years

Western House $233/4 $1.25 $32

Fine Foods 45 4.50 45

Mobile Motors 305/8 0 42

Spartan Products^12020 III.

U.S. Tire 333/8 2.00 40 i

Wine Products 521/2 3.00 60 I

TABLEP5-64

A B C D E F

Initial cost $20.00 $35.00 $55.00 $60.00 $80.00 $100.00

Uniform annual benefit 6.00 9.25 13.38 13.78 24.32 24.32