Project: The streets and roads maintained by the government have not had an adequate maintenance program. The Public Works Department’s Civil Engineers have recommended the establishment of a dedicated team for the rapid and efficient accomplishment of the repair of potholes and other paving failures. The accomplishment of this recommendation is expected to require the services of a full-time, dedicated crew of four (4) field personnel: one (1) Crew Foreman and three (3) Maintenance Workers. The efforts of this group will be the constant execution of a job-order report from the Public Works Department’s current Road Inventory computer software’s Repair Report List. They will accomplish their scheduled work using an automated asphalt patching system for the repair of potholes in major roadways that will be purchased for this purpose. Purchase price estimated @ $175,000. The purchase price includes training of three (3) individuals in the operation and maintenance of the equipment. The cost of the crew’s year 1 annual salaries and benefits are expected to conform to the following schedule:
Position Individual Cost Total Cost
Supervisor 1 (1) $51,000 $51,000
Maintenance Worker II (3) $38,500 115,500
Note that salary & benefit costs can be expected to increase approximately 2.5% per year.
Presently, the annual budget for maintaining and refurbishing failing roadways is $750,000. This amount has historically (over the most recent 10 years) increased by an average 8% annually. The Public Works Engineers estimate that the proposed maintenance program will reduce that budgetary item’s cost annually by the following proportions:
The Public Works Engineers also estimate program operating costs for materials, equipment maintenance, repairs, and fuel as follows:
Yr Materials Maint. Fuel
1 100,000 10,000 500
2 110,000 10,000 500
3 115,000 10,000 500
4 120,000 10,000 525
5 125,000 10,000 525
6 125,000 12,000 525
7 120,000 12,000 525
8 120,000 12,000 550
9 110,000 14,000 550
10 100,000 14,000 550
Analyze the project using both the Net Present Value (NPV) method and the Internal Rate of Return (IRR) method.
The initial investment for the project is $175000 as patching system has to be purchased so that work can be completed on time and efficiency of project can be increased.
First, we need to find out annual cost saving. Annual budget for maintenance and refurbishing is $750,000 which increases with an annual growth rate of 8%.
The following table shows the estimate for annual budget for 10 years:
The formula for calculating budgets for respective years is:
Estimated Budget before program launch = Annual Budget Amount*(1+ Growth Rate)^N
Annual Budget Amount = $750,000
Growth Rate = 8%
N= years (1,2,3,4…respectively)
Estimated Budget after New program launch = Annual Budget*(1 – Cost reduction)
For Annual Saving, we have to subtract the budget after launching program from budget before launching the program.
Now we calculate the Operating Cost in the following manner:
Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour*See Solution
Q: Block, S., Hirt, G., & Danielsen, B. (2017). Foundations of Financial Management. New York, NY: ...
A: Sale Price per bag, SP = $ 20 / bag; Variable cost per bag, VC = variable cost per pound x no. of p...
Q: Bank M offers the following terms for a $10 million loan: interest rate: 8 percent for one year on...
A: If the firm intends to borrow the $10 million for the entire year.For Bank M:Interest rate is 8 %. S...
Q: Moerdyk Corporation's bonds have a 9-year maturity, a 7.75% semiannual coupon, and a par value of $1...
A: The price of a bond can be calculated using the PV function in excel. We have to select the inputs o...
Q: The four different bond ratings below have a yeild to maturity for 10 year bonds. Baa 9.40% Ba1 9.60...
A: The bonds of Parrot Corp. were rated as Baa and issued at par a few weeks ago. The yiled correspond...
Q: On Thursday, May 18, the board of directors of ABC declares a 30-cent-per-share dividend to sharehol...
A: On Thursday, May 18, the board of directors of ABC declares a 30-cent-per-share dividend to sharehol...
Q: A $2,000 furniture can be financed by paying $50 per month for 4 years. What is the annual nominal c...
A: Nominal Interest Rate:It is the rate of interest which calculates before taking inflation. It exclud...
Q: if A firm's current balance sheet is as follows: Assets $100 ...
A: Click to see the answer
Q: Tip Top Hats (TTH) is expected to grow at a 4 percent rate for as long as it is in business. Current...
A: a)Calculation of Cost of Retained Earnings:Here “D1” denotes the dividends for the next year, “P0”de...
Q: MV Corporation has debt with market value of $96 million, common equity with a book value of $104 mi...
A: We have : Market Value of debt : $96 millionBook Value of Equity : $104 millionPreferred Stock : $2...