Engineering Economic Analysis

;'

meters, in which case the monthly rent would be

$1000 a mont;h. Further, Tyre could cease renting

warehouse space entirely. Tom Clay, the Tyre Corp.

plant engineer, is considering three alternatives:

1. Buy the new warehouse and lease the Johnson
   Company half the space. In turn, the Tyre-rented
   space would be reduced to 2000 square meters.


2. Buy the new warehouse and cease renting any
   warehouse space.


3. Continue as is, with 7000 square meters of rented
   warehouse space.
   Based on a 20% minimum attractive rate of return,
   which alternative should be selected?
   8-19 Consider the following alternatives:

8-21 Three mutually exclusive alternatives are being stud-

ied. If the MARR is 12%, which alternative should

be selected?

Year

o

1

2

3

4

A

-$20,000

+10,000

+5,000

+10,000

+6,000

B

-$20,000

+10,000

+10,000

+10,000

o

c

• $20,000
  +5,000
  +5,000
  +5,000
  +15,000

Use present worth analysis, an 8% interest rate, and

an infinite analysis period. Which alternative should

be selected in each of the two following situations?

1. Alternatives Band C are replaced at the end of
   their useful lives with identical replacements.


2. Alternatives Band C are replaced at the end of
   their useful lives with alternatives that provide an
   8% rate of return.

8-20 A problem often discussed in the engineering econ-

omy literature is the "oil-well pump problem."}

Pump 1 is a small pump; Pump 2 is a larger pump that

costs more, will produce slightly more oil, and will

produce it more rapidly. If the MARR is 20%, which

pump should be selected? Assume that any temporary

external investment of money earns 10% per year and

that any temporary financing is done at 6%.

}One of the more interesting exchanges of opinion

about this problem is in Prof. Martin Wohl's "Com-

mon Misunderstandings About the Internal Rate of

Return and Net Present Value Economic Analysis

Methods;" and the associated discussion by Profes-

sors Winfrey, Leavenworth, Steiner, and Bergmann,

published inEvaluating Transportation Proposals,

Transportation Research Record 731, Transporta-

tion Research Board, Washington, D.C. See also

Appendix 7A in Chapter 7.

The South End bookstore has an annual profit of

$170,000. The owner is considering opening a sec-

ond bookstore on the north side of the campus. He

can lease an existing building for 5 years with an

option to continue the lease for a second 5-year

period. If he opens the second bookstore, he expects

the existing store will lose some business that will he

gained by "The North End," the new bookstore.. It will

take $500,000 of store fixtures and inventory to open

The North End. He believes that the two stores will

have a combined profit of $260,000 a year after all the

expenses of both stores have been paid.

The owner's economic analysis is based on a

5-yearperiod. He will be able to recover this $500,000

investment at the end of 5 years by selling the store

fixtures and inventory. The owner will not open The

North End unless he can expect a 15% rate of return.

What should he do? Show computations to justify

your decision..

8-23 A paper mill is considering two types of pollution

control equipment.

Neutralization Precipitation

Initial cost $700,000 $500,000

Annual chemical 40,000 110,000

cost

Salvage value 175,000 125,000

U sefullife, 5 5

III years

The firm wants a 12% rate ofreturn on any avoidable

increments of investment. Which equipment should

be purchased?

8-24 A stockbroker has proposed two investments in low-

rated corporate bonds paying high interest rates and

..~ L

T

Problems 267

Pump 1 Pump 2

Year ($OOOs) ($OOOs)

(^0) -$100 -$110
(^1) +70 +115
(^2) +70 +30
A B C 8-22
Initial cost $100.00 $150.00 $200.00
Uniform annual 10.00 17.62 55.48
benefit
Useful life, Infinite^205
in years