Engineering Economy (17th Edition)
17th Edition
ISBN: 9780134870069
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 13, Problem 12P
To determine
Formulation of capital allocation problem as a linear integer programming model.
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You have been asked to evaluate whether a project to preserve an area of forest should
go ahead or whether the land should be converted to agriculture. The net benefits of
ecosystem goods and services have been valued over the next four years at R6000, R10
000, R14 000 and R22 000 respectively. The immediate cost of preserving the forest is
R23 500. Assume that MWTP = 90 - 3Q and MC = 10 + 2Q. The discount rate is 7%.
Smith and Co. has to choose between two mutually exclusive projects. If it chooses project A, Smith and Co. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%?
Cash Flow
Project A
Project B
Year 0:
–$17,500
Year 0:
–$40,000
Year 1:
10,000
Year 1:
8,000
Year 2:
16,000
Year 2:
16,000
Year 3:
15,000
Year 3:
15,000
Year 4:
12,000
Year 5:
11,000
Year 6:
10,000
$15,731
$11,012
$12,585
$9,439
$14,158
Smith and Co. is considering a three-year project that has a weighted average cost of capital…
You are faced with making a decision on a large capital investment proposal. The capital investment amount is $640,000. Estimated annual revenue at the end of each year in the eight year study period is $180,000. The estimated annual year-end expenses are $42,000 starting in year one. These expenses begin decreasing by $4,000 per year at the end of year four and continue decreasing through the end of year eight. Assuming a $20,000 market value at the end of year eight and a MARR = ε =12% per year, answer the following questions.
Using AW, determine whether this proposal is acceptable.
What is the ERR of this proposal? Is it acceptable?
What is the IRR of this proposal? Is it acceptable?
What is the simple and discounted payback period for this proposal?
Chapter 13 Solutions
Engineering Economy (17th Edition)
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