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Homework 10

The document outlines four engineering economy problems related to cash value calculations, inflation rates, and investment strategies. It includes scenarios involving life insurance payouts, equipment offers with warranties, construction costs, and reserve fund planning. Each problem requires analysis based on given financial parameters such as inflation rates and return requirements.

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2 views1 page

Homework 10

The document outlines four engineering economy problems related to cash value calculations, inflation rates, and investment strategies. It includes scenarios involving life insurance payouts, equipment offers with warranties, construction costs, and reserve fund planning. Each problem requires analysis based on given financial parameters such as inflation rates and return requirements.

Uploaded by

meliscmen
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

IE223 - ENGINEERING ECONOMY

ASSIGNMENT 10
1. A UK-based life insurance company will pay a cash-value sum of £500,000 when the
insured
reaches the age of 65. The insured will be 65 years old 27 years from today. Determine the
cash value of the £500,000 in CV purchasing power, assuming inflation remains constant at
3% per year.

2. A salesman from Industrial Water Services (IWS), who is trying to get his foot in the door
of Westco Refining, offered electro-dialysis equipment for $2.5 million. This is $800,000
more than the price offered by a competing saleswoman from AG Enterprises. However, IWS
said Westco won’t have to pay for the equipment until the 2-year warranty runs out. IWS will
also offer an extended 2-year warranty for $100,000, payable 2 years from now. If Westco
does want the extended warranty, determine which offer is better using Westco’s real return
requirement of 15% per year and an assumed inflation rate of 3.5% per year.

3. The cost of constructing a roundabout (R/A) in a low-traffic residential neighborhood 5


years ago was $625,000. A civil engineer designing another R/A that is almost the same
design estimates the cost today will be $740,000. If the cost had increased only by the
inflation rate over the 5 years, determine the inflation rate per year.

4. A recently graduated mechanical engineer wants to build a reserve fund as a safety net to
pay his expenses in the unlikely event that an unexpected emergency arises. His aim is to have
$45,000 developed over the next 3 years, with the proviso that the amount must have the same
purchasing power as $45,000 today. If the expected market rate on investments is 8% per year
and inflation is averaging 2% per year, find the annual amount necessary to meet his goal.

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