Engineering Economics

Benha University 2nd Term 2018/2019

Faculty of Engineering at Shoubra
Mechanical Engg. Dept.(3rd power) Assignment No. 2

Subject: The Time-Value of Money

[1] A manufacturing firm is considering borrowing $5,000,000 with a simple interest
rate of 6 percent with total principal and interest due in four years. How much interest
will accrue at the end of each year and what is the total amount of interest due in four
years?

[2] A construction firm is planning to purchase equipment in eight years costing

$14,000,000. It invested a lump sum of money in a certificate of deposit that pays 5
percent simple interest per year for eight years. How much did construction firm invest
in this certificate of deposit if the certificate is worth $14,000,000 at the end of eight
years?

[3] MyJet borrowed $100 million at 7 percent compound interest for four years to
expand its operations. Calculate the interest per year and total interest paid by the
company in four years.

[4] DirectJet Engineering has invested $100 million in a money market account that
pays 8 percent interest per year. It is planning to use the accumulated amount at the end
of six years to purchase equipment that supports the institution’s growth. How much
will be accumulated in this money market account in six years?

[5] FunJet is planning to expand its operation to Asia Pacific by ordering five Boeing
787 Dreamliners with delivery in five years. The B787’s lower fuel consumption and
superior long-haul capability is expected to improve the company’s profitability as
well. They have deposited one billion dollars in an investment account today and will
receive $1.34 billion in five years to pay for the five B787-10 airplanes. What annual
compounded interest rate is FunJet earning in this investment?

[6] DirectJet Engineering needs $7,320,500 to replace equipment and machinery to

increase its operational efficiency. It has deposited $5,000,000 in an investment
account that pays 10 percent per year compounded annually. How many years would it
take for DirectJet Engineering to accumulate at least $7,320,500 in this investment
account?

[7] Jet Services Avionics (JSA) is planning to purchase a new warehouse at the airport
in Phoenix five years from now at an estimated cost of $2,000,000. How much should
JSA set aside today earning 8 percent interest to accumulate $2,000,000 in five years?

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[8] In a consulting agreement, you will be receiving consulting fees of $50,000,
$65,000, $80,000, and $100,000 at the end of each year for the next four years
respectively. If you deposit these consulting fees into an investment account that pays
10 percent interest per year over the next four years, how much money will you have in
that account at the end of year 4?

[9] DirectJet is signing a lease agreement for a property to service aircraft. The lease
payments are $2.5 million per year for 10 years. If DirectJet can earn 6 percent on its
investment, what is the present value of these payments today?

[10] AvJets is considering purchasing a property in six years to expand its operations
and is planning to deposit $2 million in an investment account at the end of each year
for six years. If AvJets earns 5 percent return on its investment, how much will AvJets
accumulate in this account to purchase the property in six years?

[11] An employee of AvParts, a newly hired engineer, has determined that she will
need $2,400,000 when she retires in 40 years to live comfortably during the retirement
years. Assuming she earns 10 percent on her investment, how much will she need to
invest at the end of each year in equal amount for 40 years to accumulate $2,400,000?

[12] You are leasing a warehouse with annual lease payments of $100,000, $120,000,
$135,000, $155,000, and $180,000 at the beginning of each year for the next five years
respectively. If you earn 8 percent on your investment, how much in lump sum do you
have to deposit today to be able to make all lease payments for the next five years?

[13] A leasing company is considering investing $500,000 at the end of each year for
five years to purchase equipment that increases its efficiency. The investment account
pays 6 percent interest compounded annually. How much will the company accumulate
in this account to purchase the equipment in five years?

[14] Travelers flying in and out of an international airport should soon get free
wireless speeds that would be four times faster than the current service in the terminals
(5 megabits per second). The airport has recently awarded a $5.9 million contract to
Bingo Wireless Inc. to upgrade, manage, and operate the Wi-Fi network at the airport
for 10 years. What would be the annual cost of offering free Wi-Fi to airport travelers?
Assume a MARR of 8 percent for the airport.

[15] An airport in Japan is planning to purchase a parcel of land for building

additional executive hangars in five years. The price of land currently is $2,000,000.
The average inflation rate is 5 percent in the next five years. How much should the
airport invest in a uniform amount per year for five years in an account that pays 8
percent interest annually to be able to purchase the land in five years?

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[16] A newly graduated electrical engineer is signing a five-year consulting
agreement with Dubai International Airport to improve the efficiency of the airport
energy consumption. The length of the contract is five years and consulting fees are
$100,000 at the end of year 1 increasing by $20,000 per year starting at the end of the
second year through the end of the contract. Assuming the engineer earns 10 percent
return on his investment, what is the present value of his consulting contract?

[17] A new airline in Mexico has started a new non-stop flight from Mexico City to
Boston in the United States. The airline requires an average sales revenue of at least
$10,000,000 per year for four years to break even. If sales are $5,000,000 in year 1,
how much should the sales increase by a constant amount per year in order for the
airline to reach its break-even target in four years? The airline uses a MARR of 8
percent.

[18] An aerospace engineer is signing up a consulting agreement with an airport in

Dubai. The length of the contract is seven years and consulting fees are $200,000 at the
end of year 1 increasing by $25,000 per year starting at the end of the second year
through the end of the contract. Assuming the engineer earns 8 percent return on his
investment, what is the present value of his consulting contract?

[19] A company is estimating a total payroll expense of $1,000,000 at the end of the
first year. Starting from the second year, the payroll expenses will increase by a
constant 6 percent per year through the end of the 10-year study period. How much
should company deposit in a lump sum today in an investment account that pays 8
percent interest to be able to pay the payroll expenses every year for the next 10 years?

[20] Star Technology offers retirement benefits to its employees and matches up to 4
percent of the employee’s contribution. An engineer who was just hired by Star
Technology started with a salary of $120,000 in the first year with increase of 3
percent per year for the next 30 years. The employee, who wants to take advantage of
matching by employer, will contribute 4 percent of his salary every year. If the
employee can earn 10 percent return on his retirement investment, how much will he
accumulate in his retirement account at the end of 30 years?

[21] Misr Aircraft is leasing a property for an aircraft hangar for 10 years. The first
lease payment is $20,000 and it is due at the end of the first year. Starting from the
second year, the lease payments will increase by a constant 5 percent per year through
the end of 10 years of the lease contract. If Misr can earn 10 percent return on its
investment, how much should Misr deposit as a lump sum today in that investment
account to be able to pay the lease payments every year for the next 10 years?

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[22] Rockwell Machine is considering building a manufacturing plant that takes three
years to complete. The plant is expected to generate a revenue of $500,000 per year at
the end of each year of operation for 10 years (year 4 through 13). If Rockwell earns 8
percent on its investment, what is the maximum price that Rockwell is willing to pay
for this investment opportunity?

[23] Precision Machine is signing a 10-year lease contract with a lease payment
schedule of $40,000 at the end of each year for the first five years, $60,000 at the end
of year 6, and increases of $20,000 at the end of each year through year 10. If Precision
could earn 8 percent on its investment, how much does Precision need to deposit today
to make all scheduled lease payments in the next 10 years?

[24] An airport manager is planning to pay $40,000 per year for 10 years for weather
monitoring and reporting services. The cost of buying weather monitoring equipment
is $200,000 with $3,000 maintenance cost per year. Assuming the life of the equipment
is 10 years and the airport can borrow at 8 percent, should the airport manager buy the
equipment?

[25] Golden Aerospace Company has budgeted $500,000 per year for an expansion
over the next 10 years. Golden earns 8 percent return on its investment and spent
$200,000 at the end of the first year for this expansion. What should be the constant
annual increase in spending so that Golden uses its total budgeted amount by the end of
10 years?

[26] Precision Machine maintenance payment schedule division B for the next 10
years is given in the following table. If Precision could earn 6 percent on its
investment, how much does it need to deposit today to make all scheduled payments
for the next 10 years?

Precision's Payments Schedule

End Of the Year (EOY) Payments, $
1 50,000
2 50,000
3 50,000
4 50,000
5 50,000
6 100,000
7 120,000
8 140,000
9 160,000
10 180,000

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