Engineering Economic Analysis

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198 ANNUALCASH FLOW ANALYSIS

6-30 Your company must make a $500,000 balloon pay-

ment on a lease 2 years and 9 months from today.

You have been directed to deposit an amount of

money quarterly, beginning today, to provide for the

$500,000 payment. The account pays 4% per year,

compounded quarterly. What is the required quarterly

deposit?Note:Lease payments are due at beginning

of the quarter.

A manufacturer is considering replacing a produc-

tion machine tool. The new machine, costing $3700,

would have a life of 4 years and no salvage value,

but would save the firm $500 per year in direct la-

bor costs and $200 per year indirect labor costs. The

existing machine tool was purchased 4 years ago at a

cost of $4000. It will last 4 more years and will have

no salvage value at the end of that time. It could be

sold now for $1000 cash. Assume that money is worth

8% and that the difference in taxes, insurance, and so

forth, for the two alternatives is negligible. Use an

annual cash flow analysis to determine whether the

new machine should be purchased.

1\vo possible routes for a power line are under study.

Data on the routes are as follows:

6-31

6-32

Length

First cost

Maintenance

Useful life, in years

Salvage value

Yearly power loss

Annual property taxes

Around

the Lake

15km

$5000/km

$200/km/yr

15

$3000/km

$500/km

2% of first cost

Under

the Lake

5km

$25,OOO/km

$400/km/yr

15

$5000/km

$500/km

2% of first cost

6-33

If 7 % interest is used, should the power line be routed

around the lake or under the lake? (Answer:Around

the lake.)

An oil refinery finds that it is now necessary to subject

its waste liquids to a costly treating process before dis-

charging them into a nearby stream. The engineering

department estimates that the waste liquid processing

will have cost $30,000 by the end of the first year. By

making process and plant alterations, it is estimated

that the waste treatment cost will decline $3000 each

year. As an alternate, a specialized firm, Hydro-Clean,

has offered a contract to process the waste liquids for

10 years for a fixed price of$15,000 per year, payable

at the end of each year. Either way, there should be

no need for waste treatment after 10 years. The re-

finery manager considers 8% to be a suitable interest

rate. Use an annual cash flow analysis to determine

whether he should accept the Hydro-Clean offer.

6-34 Bill Anderson buys an automobile every 2 years a!

follows: initially he makes a down payment of $600C

on a $15,000 car. The balance is paid in 24 equa:

monthly payments with annual interest at 12%. Wher

he has made the last payment on the lo~n, he trade!

in the 2-year-old car for $6000 on a new $15,000 car

and the cycle begins over again.

Doug Jones decided on a different purchase plan

He thought he would be better off if he paid $15,OOC

cash for a new car. Then he would make a monthly de.

posit in a savings account so that, at the end of2 years

he would have $9000 in the account. The $9000 plm

the $6000 trade-in value of the car will allow Dou~

to replace his 2-year-old car by paying $9000 for,

new one. The bank pays 6% interest, compoundec

quarterly. '..

(a) What is Bill Anderson's monthly payment to pa)

off the loan on the car?

(b) After he purchased the new car for cash, ho"

much per month should Doug Jones deposit ii

his savings account to have sufficient money fo]

the next car two years hence?

(c) Why is Doug's monthly savings account deposi

smaller than Bill's payment?

6-35 Alice White has arranged to buy some home record.

ing equipment. She estimates that it will have a 5-ye3.J

useful life and no salvage value. The dealer, who is ,

friend, has offered Alice two alternative ways to pa~

for the equipment:

(a) Pay $2000 immediately and $500 at the end 0:

one year.

(b) Pay nothing until the end of 4 years, when a singh

payment of $3000 must be made.

Alice believes 12% is a suitable interest rate

Use an annual cash flow analysis to determine whicl

method of payment she should select.

(Answer:Select(b»

6-36 Two mutually exclusive alternatives are being con

sidered.

Year

o I 2 3 4 5

A

-$3000

+845

+845

+845

+845

+845

B

-'$5000

+1400

+ 1400

+ 1400

+1400

+1400 ;'

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