56:054 Engineering Economy

1. A slot machine in the not-too-popular U-Lose Casino accepts quarters and has 4 wheels and 40 symbols on each wheel, with 1 jackpot symbol on each wheel. What is the probability of randomly obtaining the 4 jackpot symbols, and hence winning the jackpot?

(1/40)^4 = 0.00000039

2. Three estimates of the cost of a project are obtained. The optimistic cost estimate is $200,000, the most likely cost estimate is $300,000 and the pessimistic cost estimate is $500,000. Assuming a beta distribution, what is the mean cost estimate?

(P523)

Mean value = [200,000 + 4(300,000) + 500,000]/6 = $316,667

3. A three horse race has the following data

Horse Probability of Winning Outcome of $10 bet

1 0.25 $30

2 0.4 $20

3 0.35 $22

If someone decides to bet $10 on each horse, what is the total expected value of the three $10 tickets?

Ticket #1: Bet on Horse 1: EV = 0.25 x 30 = 7.5

Ticket #2: Bet on Horse 2: EV = 0.4 x 20 = 8

Ticket #3: Bet on Horse 3: EV = 0.35 x 22 = 7.7

All your three tickets (cost $30 total): EV = 7.5+8+7.7=$23.2 (You spend $30 and only expect $23.2 average in return!? That doesn't sound very attractive.

4. What are the CPI and PPI? Why are they important indicators?

CPI: Consumer Price Index, an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Published monthly.

PPI: Producer Price Index, an inflationary indicator published by the U.S. Bureau of Labor Statistics to evaluate wholesale price levels in the economy.

Both indexes are used to track "inflation" by measuring price changes.

5. Car prices are expected to increase by 3% for three years and then by 5% for two years. What will be the expected price of a car that costs $20,000 today in five years time?

  [ Professor O'Grady ]