1. A dam is proposed on a stretch of wild river, a river that is currently used for recre- ation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are characteristics of the dam: Initial Cost: $100,000,000 odb Electricity produced: 100,000 MWh per year, @ $100/Mwh. Cost of decommissioning dam: $10,000,000. Value of recreation lost: $5,000,000 per year a. If the social discount rate is 3% per year, is the dam a good idea? b. If the social discount rate is 10% per year, is the dam a good idea? 192 C. Calculate the "cutoff" discount rate, c, such that the dam is a good idea for dis- count rates c. 2. You are the mayor of the small town of Wasilla and a landowner has offered to sell you 1,000 hectares of woodland for $2,000,000. You are very tempted because of the

1. A dam is proposed on a stretch of wild river, a river that is currently used for recre- ation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are characteristics of the dam: Initial Cost: $100,000,000 odb Electricity produced: 100,000 MWh per year, @ $100/Mwh. Cost of decommissioning dam: $10,000,000. Value of recreation lost: $5,000,000 per year a. If the social discount rate is 3% per year, is the dam a good idea? b. If the social discount rate is 10% per year, is the dam a good idea? 192 C. Calculate the "cutoff" discount rate, c, such that the dam is a good idea for dis- count rates c. 2. You are the mayor of the small town of Wasilla and a landowner has offered to sell you 1,000 hectares of woodland for $2,000,000. You are very tempted because of the

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 10E

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The California Forest Service is considering two locations for a new state park. Location Ewould require an investment of $3 million and $50,000 per year in maintenance. Location Wwould cost $7 million to construct, but the Forest Service would receive an additional $25,000per year in park use fees. The operating cost of location W will be $65,000 per year. The revenueto park concessionaires will be $500,000 per year at location E and $700,000 per year at locationW. The disbenefits associated with each location are $30,000 per year for location E and $40,000per year for location W. Use(a) The B/C method, and(b) The modified B/C method to determine which location, if either, should be selected, using aninterest rate of 12% per year. Assume that the park will be maintained indefinitely.
Problem #2 (2/10): A new packaging machine will save Greene Cheese Ltd. $3000 per year in reduced spoilage, save $5000 per year in labour, and save $4000 per year in packaging material. The new machine will have additional expenses of $1500 per year in maintenance and $500 per year in energy. If it costs $68,000 to purchase, what is its payback period? Assume that the savings are earned throughout the year, not just at year end
A municipal power plant uses natural gas from an existing pipeline at an annual cost of $40,000 per year. A new pipeline would initially cost $100,000, but it would reduce the annual cost to $10,000 per year. (a) Assume an analysis period of 25 years and no salvage value for either pipeline. The interest rate is 6%. Using the equivalent uniform annual cost (EUAC), should the new pipeline be built? (b) The power plant uses natural gas. What are some of the noneconomic benefits to the municipality of this energy source over others? Develop three primary advantages and disadvantages.
What rent PSF would be needed to incentivize this development? Suppose new Class A Office developments cost $200 per square foot (psf), all in (i.e. land cost, construction, dev costs, reasonable dev profits) If the new building can be sold for $200 psf, development is feasible. Suppose investors are willing to pay $12.50 per dollar of (net operating) income on the building
A manufacturing company leases a building for $100,000 per year for its manufacturing facilities. In addition, the machinery in this building is being paid for in installments of $20,000 per year. Each unit of the product produced costs $15 in labor and $10 in materials. The product can be sold for $40. Use this information to solve, How many units per year must be sold for the company to breakeven? (a) 4,800 (b) 3,000 (c) 8,000 (d) 6,667 (e) 4,000. Select the closest answer.
4. A government is planning to implement a new traffic control and surveillance system. The maintenance cost of the system is $1,200,000 per year. It is believed that the new system can help 3,000 driver saving 8 hours per year. The average wage of the people in this country is $150 per hour. It is expected that the system can be used for 5 years, i.e., the first benefit and cost are B1 and C1 respectively, while the last are B5 and C5. (a) What is the value of time saved by the new system per year? (b) Suppose the market interest rate is 5%. Calculate the net present value of this system. Should the system be launched? (c) Suggest two reasons to explain why the market interest rate in part (b) may be too high to evaluate the project. Should the system be launched if the interest rate is adjusted according to your suggestions?
You need to determine whether a project is profitable or not in a long run. Based on the data given, which of theseprojects will be profitable according to engineering economy methods?a. θ = 3 yrs., Net Value: 0b. Accumulated (without interest) net values of the revenues, expenses and investments after 5 years is +300.c. Accumulated (without interest) net values of the revenues, expenses and investments after 4 years is +100.d. θ = 6 yrs., Net Value: +400
Construct a cash flow timeline with n=10 years. Include a Year 0 cost of P0, at least two future costs in two different years (F1 and F2), a series of 5 annual costs (A) that start in a year that you select, and a single income in year 10 from salvage (S). Now you have a timeline and economic model but no dollar cost estimates. Using your cash flows above, build two different ‘factor’ equations that can be used to compute the overall Present Value (P) using the timeline cash flows from your timeline. Let the interest rate be a variable named i%. Use the cost variable’s name to represent the cash flow dollars and write each equation to produce an overall model for Present Value at time 0.
Problem Solving. Solve the following problems completely. 4. Atty. Gacayan invested P280, 000 which will be used in a project that will produce auniform annual revenue of P180,000 for 5 years and then have a salvage value of 16% ofthe investment. Out-of-pocket costs for operation and maintenance will be P80,000 peryear. Taxes and insurance will be 3% of the first cost per year. Atty Gacayan expectscapital to earn not less than 30% before income taxes. Determine if the investment is goodand Calculate the following:a. Calculate using Rate of Return Method.b. Payback period of the investment.
A firm is considering the “make vs. buy” question for a subcomponent. If the part is made in-house, the production data would be: first cost = $350, 000; annual costs for operation = $45, 000; salvage value = $15, 000; project life = 5 years; interest = 10%; and material cost per unit = $8.50. If annual production is 10,000 units, the maximum amount that the firm should be willing to pay to an outside vendor for the subcomponent is nearest? (a) $10 per unit (b) $16 per unit (c) $22 per unit (d) $28 per unit?
The ore of a gold mine in the province contains, on average, 0.5 ounce of gold per ton. Method A ofprocessing costs 150Php/ton and recovers 93% of the gold, while Method B costs only 120Php/tonand recovers 81% of the gold. If gold can be sold at 1,200/ounce, which method is better and by howmuch?a. Method A, by 43Phpb. Method A, by 42Phpc. Method B, by 42Phpd. Method B, by 43Php
3. A construction company is considering purchasing a water pump to be used in dewatering a deep foundation cut. The Specific Electric Company sells two pumps in the 100-HP range. Model A-38 costs $2,400 and has a full load efficiency of 91%. Model A-40 costs $2,000 and has a full load efficiency of 89.5%. The construction company's excavation operation requires one 100-HP pump to operate a full load for 1,800 hours per year. Energy costs 2 cents a kilowatt-hour. (0.746 KW = 1 HP, and kilowatt-hours equals the number of kilowatts input times the number of hours of operation). These pumps are expected to serve 12 years and have 25% salvage value. If they are equal mechanically in all respects except efficiency, what selection should be made based on a rate-of-return analysis? Take MARR=12%.