Engineering economics

 

  1. Carla’s Classy Counterfeits Company is considering the purchase of a $200,000 machine to make fake Sandhill Cranes. It will cost $20,000 per year to operate and require a $80,000 overhaul at the end of year 3. At the end of year 7, Carla can take the machine to an illegal “chop-shop” and sell it for parts, earning $15,000. Draw the cash flow diagram.

 

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  1. What is the total present worth of Carla’s crane machine if the interest rate is 7%? Note: there is more than one way to come up with this answer, but only one correct value.

 

  1. An investment in the (real) Sandhill Crane Production Company pays a nominal annual interest rate of 7%. If interest is compounded monthly, what amount has accumulated for your retirement (at age 75) if you invest $25,000 when you are 25? How much less is the future value of this investment if you wait until you’re 45 to invest?

 

  1. Alex is trying to decide whether to realize his lifelong dream of owning an alligator farm in Apopka, FL. He finds a property that satisfices for sale for $150K, but it will require $50K in repairs in years 1 and 2 and recurring maintenance of $10K per year in year 3 and beyond. Alex expects revenues of $25K per year beginning when he opens for business in year 4, which will increase by $40k per year as word of Alex’s Awesome Alligator Attraction spreads. Assume all cash flows (except first costs) are end-of-period cash flows, and i = 7%.
  2. Draw Alex’s cash flow through year 10.
  3. What is the present worth of Alex’s expenses through year 10? Is it positive or negative?
  4. What is the present worth of Alex’s revenues through year 10? Is it positive or negative?
  5. Is this a good investment? Why or why not?

 

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