EBK BASICS OF ENGINEERING ECONOMY
2nd Edition
ISBN: 8220100255052
Author: Blank
Publisher: MCG
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Question
Chapter 4, Problem 4P
a:
To determine
Dependent project.
b:
To determine
Available options.
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A pharmaceutical company has spent $500 million to date working on a blood pressure treatment. It has to decide whether to spend another $500 million today to get final approval from the FDA in two years. Once approved, expected profits will be $50 million per year for the foreseeable future. The firm’s cost of capital is 5%.
Should the firm proceed? (Hint: use the perpetuity formula used to value projects found in the readings to find the value of the profit stream that starts in two years, and then discount that.)
2. Suppose some doctors do not see any advantage of using the drug over what they currently prescribe for patients and the profit stream is only $25 million per year. Should the firm proceed?
3. Going back to the original information, suppose there is a delay of a year in getting FDA approval. Should the firm proceed?
4. Going back to the original information, suppose the firm’s’ cost of capital is 10%. Should the firm proceed?
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A firm has a capital budget of $30,000 and is considering three possible independent projects. Project A has a present outlay of $12,000 and yields $4, 281 per annum for 5 years. Project B has a present outlay of $10,000 and yields $4,184 per annum for 5 years. Project C has a present outlay of $17,000 and yields $5,802 per annum for 10 years. Funds which are not allocated to one of the projects can be placed in a bank deposit where they will earn 15%. (a) Identify six combinations of project investments and a bank deposit which exhaust the budget. (b) Which of the above combinations should the firm choose: when the reinvestment rate is 15%? (ii) when the reinvestment rate is 20%?
Given a project with three paths and their corresponding path lengths: AB-C: 25 days, A-D-E: 15 days, and B-C-E: 20 days; which of the followingstatements is TRUE?
A. Activity B has the most slackB. The critical activities are A, B and CC. The earliest project completion time is 15 daysD. The expected duration of the project is 60 days
Chapter 4 Solutions
EBK BASICS OF ENGINEERING ECONOMY
Ch. 4 - State two conditions under which the do-nothing...Ch. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7PCh. 4 - Prob. 8PCh. 4 - Prob. 9PCh. 4 - The costs associated with manufacturing a...
Ch. 4 - Prob. 11PCh. 4 - Prob. 12PCh. 4 - Prob. 13PCh. 4 - Prob. 14PCh. 4 - Prob. 15PCh. 4 - Prob. 16PCh. 4 - Prob. 17PCh. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Prob. 21PCh. 4 - Prob. 22PCh. 4 - Prob. 23PCh. 4 - Prob. 24PCh. 4 - Prob. 25PCh. 4 - Prob. 26PCh. 4 - Prob. 27PCh. 4 - Prob. 28PCh. 4 - Prob. 29PCh. 4 - Prob. 30PCh. 4 - Prob. 31PCh. 4 - Two mutually exclusive projects have the estimated...Ch. 4 - Prob. 33PCh. 4 - Prob. 34PCh. 4 - Prob. 35PCh. 4 - Prob. 36PCh. 4 - Prob. 37PCh. 4 - The manager of engineering at the 900-megawatt...Ch. 4 - Prob. 39PCh. 4 - Prob. 40PCh. 4 - Prob. 41PCh. 4 - Three different plans were presented to the GAO by...Ch. 4 - The U.S. Army received two proposals for a turnkey...Ch. 4 - Prob. 44PCh. 4 - Prob. 45PCh. 4 - Prob. 46PCh. 4 - Prob. 47PCh. 4 - Prob. 48PCh. 4 - Prob. 49PCh. 4 - Prob. 50PCh. 4 - Prob. 51PCh. 4 - Prob. 52PCh. 4 - Prob. 53PCh. 4 - Prob. 54PCh. 4 - Prob. 55PCh. 4 - Prob. 56PCh. 4 - Prob. 57PCh. 4 - Prob. 58PCh. 4 - Prob. 59PCh. 4 - Prob. 60PCh. 4 - Prob. 61PCh. 4 - Prob. 62PCh. 4 - Prob. 63APQCh. 4 - Prob. 64APQCh. 4 - Prob. 65APQCh. 4 - Prob. 66APQCh. 4 - Prob. 67APQCh. 4 - Prob. 68APQCh. 4 - Prob. 69APQCh. 4 - Prob. 70APQCh. 4 - Prob. 71APQ
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Similar questions
- A pharmaceutical company has spent $500 million to date working on a blood pressure treatment. It has to decide whether to spend another $500 million today to get final approval from the FDA in two years. Once approved, expected profits will be $50 million per year for the foreseeable future. The firm’s cost of capital is 5%. -Should the firm proceed? (Hint: use the perpetuity formula used to value projects found in the readings to find the value of the profit stream that starts in two years, and then discount that.)arrow_forwardFor mutually exclusive projects, the internal rate of return and the net present value give consistent accept/reject decisions if: A.the investment projects have identical cash flows in the final year. B.the required rate of return is less than the discount rate, which causes the net present value profiles of the two projects to intersect. C.the net present value profiles for both projects do not intersect. D.the investment projects have equal lives.arrow_forwardComplete Solution needed. A plant produces 300 units of equipment a month of Php 3,600 each. A unit sells for Php 4,800. The company has 10,000 shares of stock at Php 200 par value whose annual dividend is 20%. The fixed cost of production is Php 120,000 a month. a) What is the break-even point? b) What is the unhealthy point? c) What is the profit if production is 60% of capacity? (Specify if it is a gain or loss)arrow_forward
- Question 6. You are asked to evaluate a mining project with costs in the developmental stage followed by benefits in the production stage and ending with significant costs at the end of the study period for reclamation of the land to its original state. You have determined that the project has two positive IRRs. a. Summarize a strategy for modifying the CB C cash flow pattern into a simpler CB cash flow pattern with just one IRR solution and a straightforward decision rule. b. Ilustrate your strategy with the following example: Capital cost at t-0 is $70 million; Constant benefits of $40 million in years 1-5; Year 6 reclamation cost of S140 million; Appropriate MARR = 20%. Set up the cash flow diagram, but do not solve for IRR.arrow_forwardA seasonal bus tour firm has 5 buses with a capacity of 60 people each. Each customer pays $25 for a one-day tour. Records show $360,000 in fixed costs per season, incremental costs of $5 per customer, and an average daily occupancy of 80%. The number of days of operation necessary each season to break even is closest to which value? (a) 50 days (b) 75 days (c) 100 days (d) 120 days?arrow_forward2. A company is analyzing a make-versus-purchase situation for a component used in several products and the engineering department has developed these data: Option A: Purchase 10,000 items per year at a fixed cost of Php 340 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials= Php 200 per item and direct labor = Php 60 per item. Manufacturing overhead is allocated at 200% of direct labor. Based on these data, should the item be purchased or manufacture? (please include the solution for the overhead cost)arrow_forward
- 1)what is the best project based on simple payback 2) What is the best project based on discounted payback 3)What is beta B/C ratio 4) What is gammas B/C ratioarrow_forwardCorrect or Incorrect: The “discounting” in a discounted cash flow approach requires the use of which of the following? a. An interest rate b.The economic value added c. The gross margin d. The incremental cost.arrow_forwardWhat process does the net present value method use to help management determine whether a project is acceptable to a company? Options : A. It discounts net cash flows to their present value and then compares that value to the capital outlay required by the project.B. It determines the interest rate that will cause the present value of the capital expenditure to equal the present value of the expected net cash flows.C. It divides the present value of net cash flows by the initial investment to determine the profitability index of the project.D. It identifies the time period required to recover the cost of the capital investment from the net annual cash flow produced by the project.arrow_forward
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