Ing Economica

Solutions to Chapter 8 Problems
8-1 With no inflation in the U.S. economy, the GDP will grow at 3% per year. Inflation will add to the real rate of growth, so the actual GDP will exceed 3% per year by about the value of the inflation rate.

539
Engineering Economy, Fourteenth Edition, by Sullivan, Wicks, and Koelling. ISBN 0-13-614297-4. © 2009 Pearson Education, Inc., Upper Saddle River, NJ.All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, PearsonEducation, Inc., Upper Saddle River, NJ 07458.

8-2

A = $1,000; N = 10 (a) f = 6% per year; ir = 4% per year In Part (a), the $1,000 is an A$ uniform cash flow (annuity) im = 0.04 + 0.06 + (0.04)(0.06) = 0.1024, or 10.24% per year PW(im) = $1,000 (P/A,10.24%,10) = $1,000(6.0817) = $6,082 (b) In Part (b), the $1,000 is a R$ uniform cash flow (annuity) because the A$ cash flow is $1,000 (1.06)k where1  k  10; i.e.,

 1  (R$)k = (A$)k   1 f 

k-b

1  = $1,000 (1.06)    1  0.06 

k

k-0

= $1,000; 1  k  10

PW(ir) = $1,000 (P/A,4%,10) = $8,111

540
Engineering Economy, Fourteenth Edition, by Sullivan, Wicks, and Koelling. ISBN 0-13-614297-4. © 2009 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyrightand written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

8-3

f = 4% peryear; N = ? (when does $1 equal $0.50 in today's purchasing power) From Equation 8-1, with k = 0, we have

 1  (R$)N = $0.50 = ($1)   (1.04) N    
(1.04)N = 2 N (ln (1.04)) = ln (2) N=

ln( 2)  18 years ln(1.04)

In 18 years, the dollar's purchasing power will be one−half of what it is now if the general price inflation rate is 4% per year.

541
Engineering Economy, FourteenthEdition, by Sullivan, Wicks, and Koelling. ISBN 0-13-614297-4. © 2009 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording,or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

8-4

In ten years a service/commodity that increases at the 4% general inflation rate will cost (F/P, 4%, 10) = 1.4802 times its current cost. But health care costs will increase to (F/P, 12%, 10) = 3.1058 times their current value. Theratio of 3.1058 to 1.4802 is 2.10, which means that health care will cost 210% more than an inflation-indexed service/commodity in ten years.

542
Engineering Economy, Fourteenth Edition, by Sullivan, Wicks, and Koelling. ISBN 0-13-614297-4. © 2009 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should beobtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

8-5

Situation a: FW5 (A$) = $2,500 (F/P, 8%, 5) =...