CHAPTER 10 Solutions Manual

For

Basics of Engineering Economy, 1e

Leland Blank, PhD, PE
Texas A&M University
and
American University of Sharjah, UAE

Anthony Tarquin, PhD, PE

University of Texas at El Paso

PROPRIETARY MATERIAL.
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Chapter 10
10.1 The two ways to account for inflation in economic calculations are (1) convert all
cash flow amounts into constant-value (CV) dollars, and (2) change the interest rate
to include the changing currency values.
10.2 There is no difference between inflated dollars and then-current future dollars.
10.3 CV dollars = 100,000/(1 + 0.06)15 = $41,727
10.4 Inflated dollars = 10,000(1 + 0.05)10 = $16,289
10.5

1.29 = 0.14(1 + f)57

(1 + f)57 = 9.214
57[log (1 + f)] = log 9.214
log(1 + f) = 0.01692
f = 3.97%

10.6 Salary in 2015 = 74,400(1 + 0.025)9 = $92,915

10.7 Assume C1 is the cost today.
2*C1 = C1(1 + 0.07)n
(1 + 0.07)n = 2.000
n log 1.07 = log 2.000
n = 10.2 years
10.8 Number of future dollars required = 1,500,000(1 + 0.04)30
= $4,865,096
10.9 Number of future dollars = present dollars(1 + f)n
9745.51 = 1000(1 + f)85
log 9.74551 = 85*log(1 + f)
0.9888 = 85*log(1 + f)
log(1 + f) = 0.011633
1 + f = 100.011633
1 + f = 1.0271
f = 2.71%
10.10 (a) Cost in year 10 = 1000(1.10)(1.10)(1.10)(1.10)(1.10)
= $1610.51
(b) Cost in year 10 at 5% per year = 1000(1 + 0.05)10 = $1628.89
The cost is not the same because there are different compound rates on
different amounts of money.

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10.11 CV dollars = 1,000,000/(1.04)40

= $208,289
10.12 The $1.5 is then-current dollars. Use if to find PW.
if = 0.15 + 0.03 + (0.15)(0.03)
= 18.45%
PW = 1,500,000(P/F,18.45%,3)
= 1,500,000[(1/(1 + 0.1845)]3
= $902,580
10.13

if = 0.10 + 0.06 + (0.10)(0.06)

= 16.6%
PW = 130,000(P/F,16.6%,5)
= 130,000[(1/(1 + 0.166)]5
= $60,319
The company should buy later.

10.14 if = 0.10 + 0.04 + (0.10)(0.04)

= 14.4%
PW = 50,000(P/F,14.4%,2)
= 50,000[(1/(1 + 0.144)]2
= $38,205
10.15 Convert all cash flows into CV dollars and then use i.
PW = 3000(P/F,8%,1) + [6000/(1 + 0.06)2](P/F,8%,2)
+ [8000/(1 + 0.06)3](P/F,8%,3) + 4000(P/F,8%,4)
+ 5000(P/F,8%,5)
= 3000(0.9259) + 5340(0.8573) + 6717(0.7938)
+ 4000(0.7350) + 5000(0.6806)
= $19,031
10.16 if = 0.12 + 0.04 + (0.12)(0.04)
= 16.48%
PWA = 2,100,000[(1/(1 + 0.1648)]2
= 2,100,000(0.73705)
= $1,547,806
PWB = $1,700,000
The offer from vendor A is better.

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10.17 if = 0.12 + 0.03 + (0.12)(0.03)

= 15.36%
PW = 75,000(P/F,15.36%,4)
= 75,000[(1/(1 + 0.1536)]4
= 75,000(0.56465)
= $42,349
10.18 if per month = 0.01 + 0.004 + (0.01)(0.004) = 1.4%
PWS = 2,300,000(P/F,1.4%,120)
= 2,300,000[(1/(1 + 0.014)120]
= $433,684
PWL = 2,500,000(P/F,1.4%,120)
= 2,500,000[(1/(1 + 0.014)120]
= $471,395
10.19 F = 150,000(F/P,10%,5)
= 150,000(1.6105)
= $241,575
10.20 F = 5000(F/A,10%,10)
= 5000(15.9374)
= $79,687
10.21 F = 0.005(15,200,000)(F/A,9%,7)
= 76,000(9.2004)
= $699,230
10.22 Market rate = real rate + inflation rate + (real rate)(inflation rate)
0.10 = i + 0.06 + (i)(0.06)
1.06i = 0.04
i = 3.77%
10.23 0.09 = 0.03 + f + (0.03)(f)
1.03f = 0.06
f = 5.83%
10.24 Purchasing power = 10,000(F/P,8%,10)/(1 + 0.03)10
= 10,000(2.1589)/1.3439
= $16,064

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10.25 Buying power of $6000 = 6000/(1 + 0.04)2 = $5547.33

Buying power of $9000 = 9000/(1 + 0.04)3 = $8000.97
Buying power of $5000 = 5000/(1 + 0.04)6 = $3951.57
10.26 Buying power = 60,000(F/A,10%,5)/(1 + 0.04)5
= 60,000(6.1051)/1.21665
= $301,078
10.27 Buying power = 100,000(F/P,10%,15)/(1 - 0.01)15
= 100,000(4.1772)/0.86006
= $485,687
10.28 8,000,000(1 + f)4 = 7,000,000(F/P,7%,4)
8,000,000(1 + f)4 = 7,000,000(1.3108)
8,000,000(1 + f)4 = 9,175,600
(1 + f)4 = 1.14695
4[log (1+f)] = log 1.14695
4[log (1+f)] = 0.05954
log1 + f = 0.01489
1 + f = 100.01489
1 + f = 1.03487
f = 3.48% per year
10.29 Cost = 40,000/(1 + 0.06)10
= 40,000/1.79085
= $22,336
10.30 Cost = (3)32,350(1 + 0.035)2
= $103,962
10.31

if = 0.15 + 0.028 + (0.15)(0.028)

= 18.22%
FW = 2,400,000(F/P,18.22%,3)
= 2,400,000(1 + 0.1822)3
= $3,965,374

10.32 (a) Cost, year 20, machine A = 10,000(1.10)(1.10)(1.02)(1.02)(1.02)

= $31,617.58
Cost, year 20, machine B = 10,000(1.02)(1.02)(1.10)(1.10)(1.10)
= $31,617.58
The cost is the same.

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(b) 10,000(1 + f)20 = 31,617.58

(1 + f)20 = 3.1618
20[log(1 + f)] = log 3.1628
log(1 + f) = 0.0250
1 + f = 100.025
1 + f = 1.05925
f = 5.925%
(c) Year 1: Machine A cost = 10,000(1.10) = $11,000
Machine B cost = 10,000(1.02) = $10,200
Year 2: Machine A cost = 11,000(1.10) = $12,100
Machine B cost = 10,200(1.02) = $10,404
Year 3: Machine A cost = 12,100(1.02) = $12,342
Machine B cost = 10,404(1.10) = $11,444.40
Year 4: Machine A cost = 12,342(1.02) = $12,588.84
Machine B cost = 11,444.40(1.10) = $12,588.84
Machine A will cost more than machine B in all years except years
4, 8, 12, 16, and 20.
10.33 if = 0.10 + 0.06 + (0.10)(0.06)
= 16.6% per year
F = 10,000(F/P,16.6%,10)
= 10,000(1 + 0.166)10
= $46,500
10.34 if = 0.10 + 0.03 + (0.10)(0.03)
= 13.3%
A = 3,100,000(A/P,13.3%,5)
= 3,100,000(0.2864)
= $887,840 per year
10.35 if = 0.10 + 0.04 + (0.10)(0.04)
= 14.4% per year
A = 40,000(A/P,14.4%,3) + 24,000 6000(A/F,14.4%,3)
= 40,000(0.43363) + 24,000 6000(0.2896)
= $39,597 per year

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10.36 if = 0.20 + 0.05 + (0.20)(0.05)

= 26% per year
A = 2,500,000(A/P,26%,5)
= 2,500,000(0.3795)
= $948,750 per year
10.37 if = 0.12 + 0.04 + (0.12)(0.04)
= 16.48% per year
A = 80,000(A/P,16.48%,5) + 90,000(P/F,16.48%,3)(A/P,16.48%,5)
= 80,000(0.30884) + 90,000(0.6328)(0.30884)
= $42,296 per year
10.38 if = 0.10 + 0.028 + (0.10)(0.028)
= 13.08% per year
A = 12,000(F/A,13.08%,20)(A/P,13.08%,10)
= 12,000(81.7076)(0.18488)
= $181,273 per year
Problems for Test Review and FE Exam Practice
10.39

0.12 = i + 0.07 + (i)(0.07)

1.07i = 0.05
i = 4.64%
Answer is (a)

10.40 Answer is (b)

10.41 Answer is (a)
10.42 Answer is (a)
10.43 if = 0.09 + 0.04 + (0.09)(0.04)
= 13.36%
F = 20,000(F/P, 13.36%,10) = 20,000(1 + 0.1336)10
= $70,085.53
Answer is (d)
10.44 if per month = 0.01 + 0.01 + (0.01)(0.01)
= 2.01%
Nominal per year = 2.01(12) = 24.12%
Answer is (d)

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10.45 Cost = 40,000(1 + 0.12)4 = $62,940.77

Answer is (a)
10.46 Answer is (c)
10.47 Answer is (a)
10.48 if = 0.10 + 0.06 + (0.10)(0.06) = 16.6%
F = 5000(F/P,16.6%,10) = 5000(1 + 0.166)10 = $23,225
Answer is (d)

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