Homework 4 SOLUTION Chapters 5 and 6 v1 FA 2023 (2)
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Q1 Problem 5.7
Alternative
X
First cost, $
($45,000)
Maintenance cost, $/year ($8,000)
Salvage value, $ 2,000
Life, years
5
i
12%
PV
($72,703.36)
Year
Cash Flow
0
($45,000)
1
($8,000)
2
($8,000)
3
($8,000)
4
($8,000)
5
($6,000)
NPV
($72,703.36)
You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for manufacturing parts. The parameters associated with each alternative have been estimated. Which one should be selected on the basis of a present worth comparison at an interest rate of 12% per year? Why is yours the correct choice?
Y
($58,000)
($4,000)
12,000
5
12%
($65,609.98)
*
Cash Flow
($58,000)
($4,000)
($4,000)
($4,000)
($4,000)
$8,000 ($65,609.98)
Select Y
Q2 Problem 5.11
Option 1
Option 2
Year
Cash Flows
Cash Flows
0
($900,000)
($280,000)
1
($79,000)
($280,000)
2
($639,000)
($280,000)
3
($79,000)
($280,000)
4
($79,000)
($280,000)
5
($79,000)
($280,000)
6
($79,000)
($280,000)
7
($79,000)
($280,000)
8
($79,000)
($280,000)
9
($79,000)
($280,000)
10
($79,000)
($280,000)
i
20%
20%
NPV
($1,620,094.18)
($1,453,892.18)
Select 2
NPV
($1,620,094.18)
($1,453,892.18)
FV
($10,031,196.16)
($9,002,117.19)
($9,002,117.19)
Leonard, a company that manufactures explosion-proof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $900,000 now and $560,000 two years from now, with annual M&O costs of $79,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company’s MARR of 20% per year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered recently.)
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Q3 Problem 5.15
Method A
0
($80,000)
1
($30,000)
2
($34,000)
3
($23,000)
i
12%
NPV
($150,261)
($150,261.25)
Two methods can be used to produce expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The op erating cost with this method will be $30,000 in year 1, increasing by $4000 each year. Method B will have a first cost of $120,000, an operating cost of $8000 in year 1, increasing by $6500 each year, and a $40,000 salvage value after its 3-year life. At an interest rate of 12% per year, which method should be used on the basis of a present worth analysis?
Method B
($120,000)
($8,000)
($14,500)
$19,000 12%
($125,178)
Select B
($125,178.34)
Problem 5.17
Method
DDM
LS
First cost, $
−164,000
M&O cost, $/year
−55,000
Salvage value, $
0
Life, years
2
i
20%
20%
Year
DDDM
LS
0
$ (164,000)
$ (370,000)
1 $ (55,000) $ (21,000)
2
$ (219,000)
$ (21,000)
3
$ (55,000)
$ (21,000)
4 $ (55,000) $ 9,000 NPV
$ (420,269)
$ (409,896)
Select LS
Dexcon Technologies, Inc. is evaluating two alternatives to produce its new plastic filament with tribological (i.e., low friction) properties for creating custom bearings for 3-
D printers. The estimates associated with each alternative are shown below. Using a MARR of 20% per year, which alternative has the lower present worth?
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−370,000
−21,000
30,000
4
Initial investment
Annual operating cost
Belt replacement per year
Sludge hauling
Salvage value
Initial investment
a) LCM for n
b) Study period
Year
0
1
2
3
4
5
6
7
8
9
10
a) NPV
Year
0
1
2
3
4
5
6
Problem 5.21 An engineer is trying to decide which process to use to reduce sludge volume prior to disposal. Belt filter presses (BFP) will cost $203,000 to buy and $85,000 per year to operate. Belts will be replaced one time per year at a cost of $5500. Centrifuges (Cent) will cost $396,000 to buy and $119,000 per year to operate, but because the centrifuge will produce a thicker “cake”, the sludge hauling cost to the monofill will be $37,000 per year less than for the belt presses. The useful lives are 5 and 10 years for alternatives BFP and Cent, respectively, and the salvage values are assumed to be 10% of the first cost of each process whenever they are closed down or replaced. Use PW evaluation to select the more economical process at an interest rate of 6% per year over (
a
) the LCM of lives, and (
b
) a study period of 8 years. Are the decisions the same?
7
8
b) NPV
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BFP
Cent
($203,000)
($396,000)
($85,000)
($119,000)
($5,500)
$0 $0 $37,000 $20,300 $39,600 6%
6%
5 10 8 8 BFP
Cent
($203,000)
($396,000)
($90,500)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($273,200)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($70,200)
($42,400)
($994,277)
($977,415)
Select Cent
BFP
Cent
($203,000)
($396,000)
($90,500)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($273,200)
($82,000)
($90,500)
($82,000)
($90,500)
($82,000)
($70,200)
($42,400)
($888,774)
($880,358)
Select Cent
Q 5, 6, 7: Problem 5.28
Option
D
First cost, $
−62,000
AOC, $ per year
−15,000
Expected market value, $
8,000
Expected use, years
3
D
Year
Cash Flows
0
($62,000)
1
($15,000)
2
($15,000)
3
($69,000)
4
($15,000)
5
($15,000)
6
($7,000)
i
15%
NPV
($150,814)
FV
($348,843)
NPV
($150,814)
FV
($348,843)
Select D
Parker Hannifin of Cleveland, Ohio manufactures CNG fuel dispensers. It needs replacement equipment to streamline one of its production lines for a new contract, but plans to sell the equipment at or before its expected life is reached at an estimated market value for used equipment. Select between the two options using the corporate MARR of 15% per year and a future worth analysis for the expected use period. Also, write the FV spreadsheet functions that will display the correct future worth values.
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E
−77,000
−21,000
10,000
6
E
Cash Flows
($77,000)
($21,000)
($21,000)
($21,000)
($21,000)
($21,000)
($11,000)
15%
($152,151)
($351,934)
Select E
($152,151)
($351,934)
Problem 5.33
i
8%
Average painters wage
$120,000 38 $ 4,560,000 Average ironworkers wage
$150,000 17 $ 2,550,000 PV
$ 7,110,000 $ (88,875,000)
The Golden Gate bridge is maintained by 38 painters and 17 ironworkers (who replace corroding steel and rivets). If the painters get an average wage of $120,000 per year (with benefits) and the ironworkers get $150,000 per year, what is the capitalized cost today of all the future wages for bridge maintenance at an interest rate of 8% per year?
Capitalize
d cost
Q9 Problem 5.45
Vendor
Ferguson
Halgrove
−203,000
−396,000
M&O, $ per year
−90,000
−82,000
Salvage value, SV
Maximum life, years
5
10
i
6%
6%
Ferguson
Halgrove
Years
Cash Flows
Cash Flows
0
($203,000)
($396,000)
1
($90,000)
($82,000)
2
($90,000)
($82,000)
3
($90,000)
($82,000)
4
($90,000)
($82,000)
5
($69,700)
($42,400)
NPV
($566,943)
($711,822)
Select Ferguson
Charlie’s Truck Repair and Service has a new contract that requires him to purchase and maintain new equipment for work on 18-wheeler trucks and heavy road equipment. Two separate vendors have made quotes and estimates for Charlie. Use the es timates and a 6% per year return requirement to find the better economic option. One problem is that Charlie does not currently know if the contract will last for 5, 8, or 10 years. He needs a recommendation for all three time periods.
First cost P
, $
10% of P
10% of P
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6%
6%
Ferguson
Halgrove
Years
Cash Flows
Cash Flows
Years
0
($203,000)
($396,000)
0
1
($90,000)
($82,000)
1
2
($90,000)
($82,000)
2
3
($90,000)
($82,000)
3
4
($90,000)
($82,000)
4
5
($272,700)
($82,000)
5
6
($90,000)
($82,000)
6
7
($90,000)
($82,000)
7
8
($69,700)
($42,400)
8
9
NPV
($885,669)
($880,358)
10
Select Halgrove
NPV
6%
6%
Ferguson
Halgrove
Cash Flows
Cash Flows
($203,000)
($396,000)
($90,000)
($82,000)
($90,000)
($82,000)
($90,000)
($82,000)
($90,000)
($82,000)
($272,700)
($82,000)
($90,000)
($82,000)
($90,000)
($82,000)
($90,000)
($82,000)
($90,000)
($82,000)
($69,700)
($42,400)
($990,596)
($977,415)
Select Halgrove
Q11 Problem 6.8
P
($638,000)
Annual operating cost
($240,000)
Salvage value
$184,000 i
25%
n 9 PMT
($417,095)
Problem 6.8
White Oaks Properties builds strip shopping cen¬ters and small malls. The company plans to replace its refrigeration, cooking, and HVAC equipment with newer models in one entire center built 9 years ago. The original purchase price of the equipment was $638,000 nine years ago and the operating cost has averaged $240,000 per year. Determine the equivalent annual cost of the equip¬ment if the company can now sell it for $184,000. The company’s MARR is 25% per year.
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ann amt:
init cost (prec inj mold mach) (1)
-1,100,000
($290,177.23)
init cost (3 smaller mach) (2)
-275000
($72,544.31)
ann cost
-1,300,000
-1,300,000
5
10%
sal val 1
275000
$45,044.31 sal val 2
68750
$11,261.08 ($1,606,416.15)
Problem 6.11
The Toro Company is expanding its El Paso, Texas plastic molding plant as it continues to transfer The plant bought a $1.1 million precision injection molding machine to make plastic parts for Toro
blowers. The plant also spent $275,000 for three smaller plastic injection molding machines to ma
systems. The plant expects to hire 13 people, including some engineers for the ex¬pansion. If the benefits) of each employee is $100,000 per year, determine the annual worth of the new systems
period. Use an investment return rate of 10% per year, and assume a 25% salvage value for the n
Year
cf
0
-1,375,000
1
-1,300,000
2
-1,300,000
3
-1,300,000
4
-1,300,000
5
-956,250
NPV
-6,089,581.0954294
pmt
($1,606,416.15)
work from Juarez, Mexico contractors. o lawn mow¬ers, trimmers, and snow ake plastic parts for a new line of sprinkler average loaded cost (i.e., including s and employees over a 5-year study new equipment.
round knife
straight knife
year
First cost
-250,000
-170,000
0
ann cost
-31,000
-35,000
1
overhaul cost in year 2
-
-26,000
2
sal val
40,000
10,000
3
life
6
4
4
5
6
npv
aew
Problem 6.18
An international textile company’s North America Division must decide which type of fabric cutti
straight knife or round knife. The estimates are summarized below. Compare them on the basis
10% per year.
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round
year
straight
-250,000
0
-170,000
-31,000
1
-35,000
-31,000
2
-61,000
-31,000
3
-35,000
-31,000
4
-25,000
-31,000
9,000
-362,434.124481178
-295,602.759374360
($83,217.55)
($93,254.04)
tting machines it will use—
s of annual worth values at i =
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Q13 Problem 6.20
Machine
C
D
First cost, $
($40,000)
($65,000)
Annual cost, $/year
($10,000)
($12,000)
Salvage value, $
$ 12,000 $ 25,000 Life, years
3
6
i
15%
15%
PMT
($24,063)
($26,319)
Select C
($24,063.35)
($26,319.48)
Goal seek for N
You have two machines under consideration for an improved automated wrapping process for Snickers Fun Size candy bars as detailed below. (
a
) Using an AW analysis, determine which should be selected at i = 15% per year.
(
b
) Assume you want machine D to be selected and are willing to extend its estimated life, if necessary. Perform this analysis to ensure D’s selection using factors or a spreadsheet.
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D
($65,000)
($12,000)
$ 25,000 15%
($24,063)
Set cell
($24,063)
To value
9.153 By changing cell
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Annual amount
first cost
-300,000
(30,000)
update
-100,000
($16,379.75)
(46,380)
Year
0
-300,000
1
0
2
0
3
0
4
0
5
-100,000
Problem 6.28
The State of Chiapas, Mexico, decided to fund a program for improving reading skills in elemen¬
school students. The first cost is $300,000 now, and an update amount of $100,000 every 5 year
Determine the perpetual equiva¬lent annual cost at an interest rate of 10% per year.
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PV = A / i
A = PV * i
¬tary rs forever.
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Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Problem 6.34
An international aerospace contractor has been asked by a municipal police department to es
the life cycle costs for a proposed drone surveillance system to monitor traffic patterns and co
central thoroughfares of the city. The list of items include the following general categories: R&
nonrecurring invest¬ment costs (NRI), recurring investment costs (RI), scheduled and unsched
costs (Maint), equipment usage costs (Equip), and dis¬posal costs (Disp). The costs (in $ millio
year life cycle have been estimated. Calculate the annual LCC at an interest rate of 7% per yea
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NPV
$151.71 6.6
AW
$14.32 3.5
2.5
9.1
18.6
21.6
17
17
17
17
17
14.2
14.2
14.2
14.2
14.2
14.2
14.2
16.9
16.9
16.9
stimate and analyze ongestion within the &D costs (R&D), duled maintenance on units) for the 20-
ar.
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Problem 05.040 Capitalized Cost
Compare three alternatives on the basis of their capitalized costs at i= 9% per year and select the best alternative.
Alternative
First Cost
AOC, per Year
Salvage Value
Life, Years
E
G
$-75,000
$-80,000
$28,000
$-385,000
$-22,000
$78,000
$-885,000
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4.
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The capitalized cost of alternative E is $
alternative F is $
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Year
0
2
Project A
-$50,000
$24,200
$16,800
$46,500
Project B
-$45,000
$39,000
$18,000
$18,000
Assume these projects are mutually exclusive and the cost of capital is 12.6%. Which of the following statements are
true?
A. The payback period of project A is 2.19 years.
B. You'll accept project A since its NPV is about $872.85 greater than that of project B.
C. You'll accept project B since its payback period is shorter than project A.
D. Both (A) and (B) are true.
E. Both (A) and (C) are true.
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Costs and expenses Project
5
7
initial investment cost 528.000
years
additional major
maintenance in year 3
additional major
annual operation and
maintenance expense
annual labor costs 21.000
maintenance in year
Salvage value
Annual income ($)
A
Economic life
Cost
of capital
75.000
130.000
$20.000
250.000
375.000
235.000
of D
9.500
11.000
27.000
B
85.000
90.000
180.000
320.000
380.000
270.000
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160.000
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785.000
7.850
18.000
8.000
40.000
8
15.
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Annual Equivalent Net Income
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implementation determine the
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t
46
Merrill Corporation has the following information available about a potential capital investment
Initial investment
Annual net income
Expected life
Salvage value
Merrill's cost of capital
$2,500,000
$ 160,000
8 years
$170,000
7
Assume straight line depreciation method is used.
Required:
1. Calculate the project's net present value. (Future Value of $1,Present Value of $1, Future Value Annuity of $1. Present Value
Annuity of $1.)
Note: Use appropriate factor(s) from the tables provided.
2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 7 percent.
3. Calculate the net present value using a 9 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1,
Present Value Annuity of $1.)
Note: Use appropriate factor(s) from the tables provided.
4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 9 percent.
ences.
Complete this question by…
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Sh56
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8-9 Given the following information for projects X and Y, which one should be chosen and why?
Project X
Project Y
Net present value
$2,00,000
$3,000,000
Project life
5 years
8 years
Required return
10%
10%
Select one:
a. Choose Project X, as it has a lower equivalent annual cost than Project Y.
b. Choose Project Y, as it has a lower equivalent annual cost than Project X.
c. Choose Project Y, as it has a higher equivalent annual benefit than Project X.
d. Choose Project X, as it has a higher equivalent annual benefit than Project Y.
e. Choose Project Y, as it has a higher net present value than Project X.
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01:06:10
Item 8
Time Remaining 1 hour 6 minutes 10 seconds
01:06:10
Living Colour Company has a project available with the following cash flows:
Year
Cash Flow
0
−$ 32,190
1
8,510
2
10,290
3
14,820
4
16,330
5
11,420
If the required return for the project is 9.7 percent, what is the project's NPV?
Multiple Choice
$29,180.00
$13,808.85
$14,959.58
$15,781.54
$6,620.43
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- Problem 15 & 16arrow_forwardDogarrow_forwardProblem 05.040 Capitalized Cost Compare three alternatives on the basis of their capitalized costs at i= 9% per year and select the best alternative. Alternative First Cost AOC, per Year Salvage Value Life, Years E G $-75,000 $-80,000 $28,000 $-385,000 $-22,000 $78,000 $-885,000 $-8,000 $400,000 4. 00 The capitalized cost of alternative E is $ alternative F is $ and alternative G is $ The best alternative is (Click to select)arrow_forward
- Solve questions 15 & 16arrow_forwardYear 0 2 Project A -$50,000 $24,200 $16,800 $46,500 Project B -$45,000 $39,000 $18,000 $18,000 Assume these projects are mutually exclusive and the cost of capital is 12.6%. Which of the following statements are true? A. The payback period of project A is 2.19 years. B. You'll accept project A since its NPV is about $872.85 greater than that of project B. C. You'll accept project B since its payback period is shorter than project A. D. Both (A) and (B) are true. E. Both (A) and (C) are true.arrow_forward11arrow_forward
- 2 Costs and expenses Project 5 7 initial investment cost 528.000 years additional major maintenance in year 3 additional major annual operation and maintenance expense annual labor costs 21.000 maintenance in year Salvage value Annual income ($) A Economic life Cost of capital 75.000 130.000 $20.000 250.000 375.000 235.000 of D 9.500 11.000 27.000 B 85.000 90.000 180.000 320.000 380.000 270.000 125.000 160.000 6 15%. Project B 785.000 7.850 18.000 8.000 40.000 8 15. TOMOS Annual Equivalent Net Income which on using method implementation determine the need.arrow_forwardt 46 Merrill Corporation has the following information available about a potential capital investment Initial investment Annual net income Expected life Salvage value Merrill's cost of capital $2,500,000 $ 160,000 8 years $170,000 7 Assume straight line depreciation method is used. Required: 1. Calculate the project's net present value. (Future Value of $1,Present Value of $1, Future Value Annuity of $1. Present Value Annuity of $1.) Note: Use appropriate factor(s) from the tables provided. 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 7 percent. 3. Calculate the net present value using a 9 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) Note: Use appropriate factor(s) from the tables provided. 4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 9 percent. ences. Complete this question by…arrow_forwardSubject: acountingarrow_forward
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