Engineering Economic Analysis

168 PRESENTWORTH ANALYSIS

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months. The company treasurer has indicated that he

could pay for the equipment as follows:

Date

April 1

June 1

Aug. 1

Oct. 1

Dec. 1

Payment

$150

300

450

600

750

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A local office supply firm will agree to sell the equip-

ment to the firm now and accept payment according

to the treasurer's schedule. If interest will be charged

at 3% every 2 months, with compounding once every

2 months, how much office equipment can the Miro

Company buy now? (Answer: $2020)

By installing some elaborate inspection equipment

on its assembly line, the Robot Corp. can avoid hir-

ing an extra worker who would have earned $26,000

a year in wages and an additional $7500 a year in

employee benefits. The inspection equipment has a

6-year useful life and no salvage value. Use a nomi-

nall8% interest rate in your calculations. How much

can Robot afford to pay for the equipment if the wages

and worker benefits would have been paid

(a) At the end of each year

(b) Monthly

(c) Continuously

(d) Explain why the answers in(b)and(c)are larger

than in(a).

Assume the compounding matches the way the wages

and benefits would have been paid (i.e., annually,

monthly, and continuously, respectively).

Annual maintenance costs for a particular section of

highway pavement are $2000. The placement of a new

surface would reduce the almual maintenance cost to

$500 per year for the first 5 years and to $1000 per

year for the next 5 years. After 10 years the annual

maintenance would again be $2000. If maintenance

costs are the only saving, what investment can be

justified for the new surface. Assume interest at 4%.

An investor is considering buying a 20-year corpo-

rate bond. The bond has a face value of $1000 and

pays 6% interest per year in two semiannual pay-

ments. Thus the purchaser of the bond will receive $30

every 6 months in addition to $1000 at the end of

20 years, along with the last $30 interest payment.

If the investor wants to receive 8% interest, com-

pounded semiannually, how much would he or she

be willing to pay for the bond?

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5-23 A road building contractor has received a major high-

way construction contract that will require 50,000 m3

of crushed stone each year for 5 years. The needed

stone can be obtained from a quarry for$5.80/m3.

As an alternative, the contractor has decided to try

and purchase the quarry. He believes that if he owned

the quarry, the stone would only cost him $4.301m3.

He thinks he could resell the quarry at-the end of

5 years for $40,000. If the contractor uses a 10% inter-

est rate, how much would he be willing to pay for the

quarry?

5-24 A new office building was constructed 5 years ago by

a consulting engineering firm. At that time the firm

obtained a bank loan for $100,000 with a 12% annual

interest rate, compounded quarterly. The terms of the

loan call for equal quarterly payments to repay the

loan in 10 years. The loan also allows for its prepay-

ment at any time without penalty.

As a result of internal changes in the firm, it is

now proposed to refinance the loan through an insur-

ance company. The new loan would be for a 20-year

term with an interest rate of 8% per year, compounded

quarterly. The new equal quarterly payments would

repay the loan in the 20-year period~ The insurance

company requires the payment of a 5% loan initia-

tion charge (often described as a "5-point loan fee"),

• which will be added to the new loan..
  (a) What is the balance due on the original mortgage
  if 20 payments have been made in the last five
  years?
  (b) What is the difference between the equal quar-.
  terly payments on the present bank loan and the
  proposed insurance company loan?
  5-25 ffiP Inc. is considering establishing a new machine to
  automate a meat packing process. The machine will
  save $50,000 in labor annually. The machine can be
  purchased for $200,000 today and will be used for a
  period of 10 years. It is has a salvage value of $10,000
  at the end of its useful life. The new machine will
  require an annual maintenance cost of $9000. The
  corporationhas a minimumrate of return of 10%.Do
  you recommend automatingthe process?
  5-26 Argentinais consideringconstructinga bridge across
  the Rio de la Plata to connect its northern coast
  to the southern coast of Uruguay. If this bridge
  is constructed, it will reduce the travel time from
  Buenos Aires, Argentina, to Sao Paulo, Brazil, by
  over 10 hours and has the potential to significantly
  improvethe flow of manufacturedgoods betweenthe