Question

Boeing has purchased composite wing fixture for the assembly of its new Dreamliner Commercial airliner. Assume this system cost $3 million to install at year 0 and an estimated quarterly operation cost of $200,000 for quarter 1 of year 1 . The operation cost is expected to decrease by $2,000 every quarter throughout the expected life of 10 years. An engineer wants to estimate the total revenue requirement for each year that is necessary to recover the installation/operation cost and interest. Construct a cash flow diagram and find this annual revenue if the interest rate is effective 12% per year compounded quarterly.

Answer 1

The question requires an engineering economic analysis to compute the annual revenue that Boeing must generate to recover the costs of installing and operating a composite wing fixture for the Dreamliner, considering a 12% annual interest rate compounded quarterly.

Step-by-step explanation:

The question involves creating a cash flow diagram and calculating the annual revenue required to recover installation and operation costs, with an interest rate of 12% per year compounded quarterly for a composite wing fixture in a Boeing Dreamliner assembly. To solve this, one must understand the principles of engineering economics including the present value, the concept of cash flows, and the annuity formula.

The installation cost is $3 million at year 0, and the operation cost starts at $200,000 for the first quarter of the first year, decreasing by $2,000 every subsequent quarter over 10 years. Calculating the annual equivalent cost and the future value of these cash flows allows for determining the required revenue per year. Given the compounding interest rate, we must apply financial mathematics techniques to discount the operation costs to present value, add the initial installation cost, and then convert back to an equivalent annual cost over 10 years.