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Engineering Economics Questions

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Question 2

Yakima is retiring this year with his savings in an investment fund worth $750,000. The fund has an average annual return of 9.00% (EAR).

a How much can Yakima withdraw at the end of each month (12 months per year) to have the fund last 30 years and still have $100,000 in the fund at the end of the 30 years (just to be safe)?

b How much can Yakima withdraw up front to invest in his home and still be able to withdraw $5,000 monthly for 30 years, with a zero balance at the end?

Initial Investment $750,000
EAR 9%

Month Interest Withdraw Balance
0 0 0 $750,000
1 $67,500

Question 3 Score 0

The Smothers are looking at retiring and would like to be debt free when this starts. They presently owe $225,000 on their home mortgage that has a rate of 4.25% APR with monthly compounding.

a If they make payments of $3,000 monthly, how many years until they can retire (when the house loan is paid off).

b If in the upcoming 5 years, they make $2,000 monthly payments, and then sell their house for $500,000, how much will they have to buy a home in a retirement development? (All taxes and fees should be ignored)

Payments 3000
Rate 4.25%
Period 12
PV $35,184.77

Monthly Rate 0.3542%

Presently Owe $225,000
Rate 0.3542%
Payments $2,000
Period 60
Amount Paid $120,000

Question 4

Save-Your-Day loans advertises no-interest loans of $100 on which only a $1 fee per week is charged. Collateral is usually a car title. The borrower will not pay anything until the loan is paid off. Then the amount to be paid back is $1.00 for each week per $100 of loan value. For a loan of $200 (two loans of $100) for 3 weeks, the pay back amount would be $200 + $1.00 * 2 loans * 3 weeks = $200 + $6= only $206.
Louie borrows $500 and pays it back in 4 weeks. What effective annual rate will Save-Your-Day earn on the loan to Louie?

Question 5

Joan Dale inherited $500,000 that she invested at 12% APR compounded monthly and will not make any further payments. In 15 years when she retires, she will reinvest it in a more conservative fund that earns 5% APR with monthly compounding.

If she wants the retirement funds to last 25 years, how much will she receive monthly in her retirement years.

Question 6

Veronica borrowed $5,000 from her Uncle and the agreed upon interest rate is 4% annually (EAR)?

a What would be the result at the end of five years If she pays her uncle $100 a month?

b If each month she pays the interest (only) on the loan, how much would this be?

Question 7
Your client is considering two investments and has asked you to evaluate these alternatives. Provide financial and risk advice for your client regarding which to purchase.

a 500 shares of a stock that can be purchased for $80 a share. Forecasts are that it can be sold in 5 years for $135 a share. It also is forecasted to pay quarterly dividends of $2.00 per share in the upcoming 5 years.

b A bond with a face value of $50,000 that matures in 5 years. It can be purchased for $40,000 today, and it has a coupon rate of 5.00% that is paid semi-annually.

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Engineering Economics Problems

2. A machine is under consideration for a new manufacturing process. The interest rate is 10% computed semiannually. Compute the future worth of this alternative:

First cost = $70,000
Semiannual cost = $6,000
Semiannual income = $18,000
Salvage value = $9,000
Life in years = 5

4. You deposit $5,000 in a savings certificate. The bank pays compound interest at an annual rate of 12%, compounded quarterly. At the end of 4 years, how much money have you earned in the savings certificate?

7. Consider the following sets of investments projects in Table 1. All projects have a 5 year investment life, with and interest rate of 10%.

Table 1 Project Cash Flow ($)
0 -$17,000 -$18,000
1 4100 3300
2 4200 3500
3 4300 3700
4 4400 3900
5 4500 4100
5 (Salvage Value) 5000 5500

Compute the present worth of project A, in Table 1.

8. How much do you have to pay for a bond rate that pays 6% dividend compounded semiannually, with a face value of $5,000 that is going to be paid (maturity) in 5 years. The buyer wants to have an interest rate profit of 8% compounded semiannually.

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