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Engineering Economy, 5/e

Leland Blank, Texas A&M University
Anthony Tarquin, University of Texas - El Paso

Annual Worth Analysis

Sample FE Exam Problems

How to use this section: This section includes questions and problems like those on a typical FE exam. For organization purposes only, they are presented in chapter order of the text Engineering Economy, 5^th edition, by Blank and Tarquin.

It is recommended that you read through each question carefully.


1	In comparing different-life alternatives by the annual worth method, an assumption inherent in using annual worth values for one life cycle is:
		A)	All of the costs associated with each asset remain the same in succeeding life cycles.
		B)	The alternatives will be needed for an indefinite period of time.
		C)	The alternatives will be needed only through the life of the shorter-life alternative.
		D)	The costs of the alternatives will change only by the inflation or deflation rate.


2	In calculating the annual worth of an alternative over one life cycle, the value obtained is:
		A)	The same value that would be obtained if two or more life cycles were used to calculate the annual worth.
		B)	The same value that would be obtained in calculating the annual worth of infinite service for the alternative.
		C)	The same value that would be obtained if the present worth of one life cycle were annualized over the alternative's life cycle.
		D)	All of the above.


3	A certain machine has a first cost of $10,000, a life of 10 years, an operating cost of $5,000 per year, and a salvage value of $2,000. At an interest rate of 10% per year, the annual worth of the alternative is nearest to:
		A)	$6,329
		B)	$6,502
		C)	$6,627
		D)	$7,635


4	The first cost of a dam that is expected to have an infinite life is $30 million. The maintenance cost of the dam will be $200,000 per year. At an interest rate of 10% per year, the annual worth of the dam is nearest to:
		A)	$200,000
		B)	$3,000,000
		C)	$3,200,000
		D)	$4,500,000


5	A permanent historic monument has a first cost of $20,000 with a maintenance cost of $2,000 every three years. At an interest rate of 10% per year, the annual worth of the monument is nearest to:
		A)	$2,604
		B)	$4,000
		C)	$4,604
		D)	$6,710


6	At an interest rate of 6% per year, the annual worth of an expenditure of $10,000 now, and $10,000 every 5 years forever, is nearest to:
		A)	$600
		B)	$1,774
		C)	$2,374
		D)	$2,974


7	A wealthy alumna of a small university wanted to establish a permanent endowment in her name that would provide scholarships of $10,000 per year starting 20 years from now. If the university can invest money at an interest rate of 8% per year, the amount of money that must be donated now is nearest to:
		A)	$22,195
		B)	$26,813
		C)	$28,963
		D)	$125,000


8	An alumnus of a famous university left his entire estate valued at $3 million to his alma mater. He stipulated that the endowment was to last forever, with the first withdrawal for medical research to be made 10 years after he dies. If the endowment fund earns interest at 10% per year, the amount that can be withdrawn forever is nearest to:
		A)	$300,000
		B)	$707,370
		C)	$826,250
		D)	$966,700


9	The equivalent annual worth of $100,000 now, $30,000 per year for years one through ten, and $5,000 per year thereafter, at an interest rate of 10% per year is nearest to:
		A)	$30,361
		B)	$34,650
		C)	$284,340
		D)	$303,600


10	A permanent scholarship fund has been established through a donation of $500,000 at time zero, $100,000 in year one, $150,000 in year two, and amounts increasing by $50,000 per year through year ten. At an interest rate of 10% per year, the amount that could be withdrawn forever beginning in year 11 is nearest:
		A)	$225,903
		B)	$385,923
		C)	$585,923
		D)	$2,259,000

Problems 11 and 12 are based on the following statement:


11	Two stamping machines are under consideration for purchase by a metal recycling company. The manual model will cost $25,000 to buy with an eight-year life and a $5,000 salvage value. Its annual operating costs will be $16,000. A computer-controlled model will cost $95,000 to buy and it will have a twelve-year life if upgraded at the end of year six for $15,000. Its terminal salvage value will be $23,000, with annual operating costs of $7,500 for labor and $2,500 for maintenance. The company's minimum attractive rate of return is 18%. The annual worth of the computer-controlled machine is nearest to:
		A)	$29,318
		B)	$30,318
		C)	$30,990
		D)	$39,620


12	The perpetual equivalent annual worth of the manual model is nearest to:
		A)	$2,180
		B)	$2,213
		C)	$21,804
		D)	$22,130

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