Problem 3 Two options are being analyzed using a break even analysis based on net present worth with a MARR of 6%. Option A: Initial Cost: $150,000 Annual 0&M: $14,000 per year Additional maintenance cost at year 11: $26,000 Annual Revenue: $32,000 per year Salvage Value: $21,000 Life Span = 20 years %3D
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- Determine which alternative is the most viable by incremental B / C (values in thousands),considering an interest rate of 3%A B C D E FInitial cost 500 550 300 550 500 600Total annual costs $ 360 480 180 600 300 660Annual income $ 550 620 325 900 550 800Against annual profits 300 300 400 300 300 200 ---Methods of economic evaluation of alternatives----A project is being planned that has an initial investment at time 0, annual revenuesand expenses, and a salvage value at the end of the project lifespan (20 years). The financialvalues are summarized below:Initial investment amount at time 0 $150,000Estimated annual revenue $34,500 per yearEstimated annual expenses $8,700 per yearEstimated salvage value at end of lifespan $10,000Minimum attractive rate of return (MARR) 15%a. Calculate the capital recovery amount CR(i%).b. Using the annual worth (AW) method, determine whether purchasing the equipmentis economically justified.c. Repeat part (a) using the internal rate of return (IRR) method based on annual worth(AW).d. Using the present worth (PW) method, determine the break-even time period afterwhich purchase of the equipment generates a profit. (Find N when PW = 0) year period.A project is being considered that has a first cost of $12,500, creates $5000 in annual cost savings, requires $3000 in annual operating costs, and has a salvage value of $2000 after a project life of 3 years. If interest is 10% per year, which formula calculates the project’s present worth? (a) PW = 12,500(P/F, 10%, 1) + (− 5000 + 3000) (P/A, 10%, 3) − 2000(F/P, 10%, 3) (b) PW = − 12,500 + (5000 − 3000) (P/A, 10%, 3 ) − 2000(P/F, 10%, 3) (c) PW = 12,500(F/P, 10%, 3) + (5000 − 3000) (F/A, 10%, 3) + 2000 (d) PW = − 12, 500 + 5000(P/A, 10%, 3) − 3000 (P/A, 10%, 3) + 2000(P/F, 10%, 3)
- 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 0.1. The Present Worth Method A project your firm is considering for implementation has these estimated costs and revenues: an investment cost of $50,000; maintenance costs that start at $5,000 at the end of year (EOY) 1 and increase by $1,000 for each of the next 4 years, and then remain constant for the following 5 years; savings of $20,000 per year (EOY 1–10); and finally a resale value of $35,000 at the EOY 10. If the project has a 10-year life and the firm’s MARR is 10% per year, what is the present worth of the project? Is it a sound investment opportunity?Alternative 3 is incorrect EUAC=( Equivalent Annaul COst of Initial Investment)+ (Expected Moderate annaual flood damage cost )+ (expected severe annaual flood cost )
- Ronald McDonald decides to install a fuel storage system for his farm that will save him anestimated 6.5 cents/gallon on his fuel cost. He uses an estimated 20,000 gallons/year on his farm.Initial cost of the system is $10,000 and the annual maintenance the first year is $25 and increasesby $25 each year thereafter. After a period of 10 years the estimated salvage is $3,000. If moneyis worth 12%, is it a wise investment?1.b You are faced with a decision on an investment proposal. Specifically, the estimated additional income from the investment is $125,000 per year; the investment cost is $400,000; and the first year estimated expense of $20,000 and will increase a rate of 5% per year. Assume an 8-year analysis period, no salvage value, and MARR = 15% per year. What is the ERR ( Ԑ=MARR) of this proposal? show whole solution, not in excel pleaseSolve with complete solution and draw the cash flow diagram A project your firm is considering for implementation has these estimated costs and revenues: an investment cost of $50,000; maintenance costs that start at $5,000 at the end of year (EOY) 1 and increase by $500 each year until year 10 ; savings of $20,000 per year (EOY 1–10); and finally a resale value of $35,000 at the EOY 10. If the project has a 10-year life and the firm’s MARR is 10% per year a) what is the present worth of the project? PW = $___ b) What is the Future Worth of this project? FW = $___ c) What is IRR ? IRR = ___ % d) Is it a sound investment opportunity? YES or NO e) Determine the Discounted Payback? ____ 5 years Note: For equivalent worth, round off the final answer to whole number. For Rate of Return, round off to two decimal places (in percentage)
- ΔRoR for the first increment (Alt. C-Alt. A) is ___________________. Alt. A Alt. B Alt. C Initial cost $5,000 9,000 7,500 Annual benefits $1,457 2,518 2,133 RoR 14% 12.4% 13% Life in years 5 Group of answer choices 10.12% 11.00 11.85% 9.38%4. Using the incremental B / C analysis (∆B/C). Determine the best alternative.5. Using the incremental rate of return (∆RoR) analysis. Determine the best alternative. MARR =10%. A B C DFirst cost 45,000 $25,000 $35,000 $15,000O &M Cost/year $4,000 $1,500 $3,000 $2,000Benefit/year $15,000 $9,500 $14,000 $8,000Salvage value $9,000 $5,000 $7,000 $3,000Life in years 10Methods of Economy Studies An investment of P 250,000 can be made in a project that will produce a uniform annual revenue of P 192,800 for 5 years and then have a salvage value of 10% of the first cost. Operation and maintenance will be P 72,000 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn 20% before income taxes. Show whether or not the investment is justified economically using1. Present Worth (PW) method2. Future Worth (FW) method3. Annual Worth (AW) method4. Rate of Return (ROR) method5. Payback (Payout) method