Engineering Economic Analysis

Problems

7-25 Upon graduation, every engineer must decide whether

to go on to graduate school. Estimate the costs of

going full time to the university to obtain a master

of science degree. Then estimate the resulting costs

and benefits. Combine the various consequences into

a cash flow table and compute the rate of return.

Nonfinancial benefits are probably relevant here too.

7-26 A table saw costs $175 at a local store. You may either

pay cash for it or pay $35 now and $12.64 a month

for 12 months beginning 30 days hence. If you choose

the time payment plan, what nominal annual interest

rate will you be charged? (Answer:15%)

7-27 An investment of $5000 in Biotech common stock

proved to be very profitable. At the end of 3 years

the stock was sold for $25,000. What was the rate of

return on the investment?

7 -, The Southern Guru Copper Company operates a large

J!!!mine in a South American country. A legislator in theNational Assembly said in a speech that most of the

capital for the mining operation was provided by loans

from the Word Bank; in fact, Southern Guru has only

$500,000 of its own money actually invested in the

property. The cash flow for the mine is:

Year

o 1 2 3 4 5 6 7

Cash Flow

$0.5 million investment

3.5 million profit

0.9 million profit

3.9 million profit

8.6 million profit

4.3 million profit

3.1 million profit

6.1 million profit

The legislator divided the $30.4 million total profit by

the $0.5 million investment. This produced, he said,

a 6080% rate of return on the investment. Southern

Guru claims the actual rate of return is much lower.

They ask you to compute their rate of return.

7-29 An insurance company is offering to sell an annuity
for $20,000 cash. In return the firm will guarantee to
pay the purchaser 20 annual end-of-year payments,
with the first payment amounting to $1100. Subse-
quent payments will increase at a uniform 10% rate
each year (second payment is $1210; third payment
is $1331, etc.). What rate of return will the purchaser
receive if he buys the annuity?

7-30 A bank proudly announces that it has changed its in-
terest computation method to continuous compound-

ing. Now $2000 left in the bank for 9 years will double

to $4000.

(a) What nominal interest rate, compounded contin-

uously, is the bank paying?

(b) What effective interest rate is it paying?

7-31 Fifteen families live in Willow Canyon. Although

several water wells have been drilled, none has pro-

duced water. The residents take turns driving a water

truck to a fire hydrant in a nearby town. They fill the

truck with water and then haul it to a storage tank in

Willow Canyon. Last year truck fuel and maintenance

cost $3180. This year the residents are seriously con-

sidering spending $100,000 to install a pipeline from

the nearby town to their storage tank. What rate of

return would the Willow Canyon residents receive on

their new water supply pipeline if the pipeline is con-

sidered to last

(a) Forever?

(b) 100 years?

(c) 50 years?

(d) Would you recommend that the pipeline be

installed? Explain.

7-32 Ian purchased 100 shares of Peach Computer stock

for $18 per share, plus a $45 brokerage commission.

Every 6 months she received a dividend from Peach

of 50 cents per share. At the end of 2 years, just after

receiving the fourth dividend, she sold the stock for

$23 per share and paid a $58 brokerage commission

from the proceeds. What annual rate of return did she

receive on her investment?

7-33 The Diagonal Stamp Company, which sells used

postage stamps to collectors, advertises that its

average price has increased from $1 to $5 in the

last 5 years. Thus, management states, investors who

had purchased stamps from. Diagonal 5 years ago

would have received a 100% rate of return each

year.

(a)To check their calculations, compute the annual

rate of return.

(b)Why is your computed rate of return less than

100%?

7-34 An investor purchased 100 shares of Omega common

stock for $9000. He held the stock for 9 years. For

the first 4 years he received annual end-of-year di-vi-

dends of $800. For the next 4 years he received annual

dividends of $400. He received no dividend for the

ninth year. At the end of the ninth year he sold his

stock for $6000. What rate of return did he receive on

his investment?