Chapter 10 Developing Project Cash Flows

Generating Net Cash Flows

10.1 The cash flow chart are as below:

Annual unit rental rate = $3,034,510 / 50 = $60,690

Income Statement
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Debt interest

$3,034,510

$3,034,510

$3,034,510

$3,034,510

$3,034,510

330,000
306,713
0

380,000
320,513
0

430,000
320,513
0

480,000
320,513
0

530,000
306,713
0

Taxable Income
Income Taxes

$2,397,797
$839,229

$2,333,997
$816,899

$2,283,997
$799,399

$2,233,997
$781,899

$2,197,797
$769,229

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Loan repayment

$1,558,568

$1,517,098

$1,484,598

$1,452,098

$1,428,568

Net Cash Flow (actual)

$ 1,558,568 $ 1,517,098 $ 1,484,598 $ 1,452,098 $ 1,428,568

$ 306,713 $ 320,513 $ 320,513 $ 320,513 $
306,713
$ (12,500,000)
$ 14,000,000
$ (1,076,238)
$
$
$
$
$
$
($12,500,000)

$1,865,281

PW (15%) =
IRR =

$3
15.00%

$1,837,611

$1,805,111

$1,772,611

$14,659,043

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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2
10.2 Investment in industrial robot:
0
Income Statement
Revenues (savings)
Expenses:
Depreciation

$120,000

$120,000

$120,000

$120,000

$120,000

$120,000

$37,000

$59,200

$35,520

$21,312

$21,312

$10,656

Taxable Income
Income Taxes(35%)

$83,000
$29,050

$60,800
$21,280

$84,480
$29,568

$98,688
$34,541

$98,688
$34,541

$109,344
$38,270

$120,000
$42,000

Net Income

$53,950

$39,520

$54,912

$64,147

$64,147

$71,074

$78,000

$53,950
$37,000

$39,520
$59,200

$54,912
$35,520

$64,147
$21,312

$64,147
$21,312

$71,074
$10,656

$78,000
$0

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

$120,000

($185,000)
$40,000
($14,000)
($185,000)

$90,950

$98,720

$90,432

$85,459

$85,459

$81,730

$104,000

10.3 Cash flow diagram

0
Income Statement
Revenues (savings)
Expenses:
O&M
Depreciation

$25,000

$25,000

$25,000

$25,000

$25,000

$25,000

$7,000
11000

$7,000
17600

$7,000
10560

$7,000
6336

$7,000
6336

$7,000
3168

Taxable Income
Income Taxes(40%)

$7,000
2,800

$400
160

$7,440
2,976

$11,664
4,666

$11,664
4,666

$14,832
5,933

Net Income

$4,200

$240

$4,464

$6,998

$6,998

$8,899

$4,200
$11,000

$240
$17,600

$4,464
$10,560

$6,998
$6,336

$6,998
$6,336

$8,899
$3,168

$15,200

$17,840

$15,024

$13,334

$13,334

$12,067

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow
PW(15%)

($55,000)

($55,000)
$1,056

Since the PW of the project is positive, buy the machine.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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3
10.4 Investment in an answering device:

Depreciation: It is assured that the building will be placed in service in

January during the first project year. Then, it will be depreciated based on 39year MACRS.

Gains and losses:

Property
(asset)
Land
Building
Equipment

Cost Salvage
Book
Gains
Gains
base
value
value
(losses)
taxes
$100,000 $115,000 $100,000 $115,000
$6,000
$500,000 $575,000 $436,965 $138,035 $55,214
$500,000 $50,000 $133,873 ($83,873) ($33,549)

Project cash flows

0

Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation :
Building
Equipment
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Land
Building
Machines
Gains Tax
Land
Building
Equipment
Net Cash Flow

$2,500,000

$2,500,000

$2,500,000

$2,500,000

$2,500,000

1,280,000

1,280,000

1,280,000

1,280,000

1,280,000

12,287
71,450
1,136,264
454,505

12,821
122,450
1,084,730
433,892

12,821
87,450
1,119,730
447,892

12,821
62,450
1,144,730
457,892

12,821
22,325
1,184,855
473,942

$681,758

$650,838

$671,838

$686,838

$710,913

$681,758
$83,737

$650,838
$135,271

$671,838
$100,271

$686,838
$75,271

$710,913
$35,146

($100,000)
($500,000)
($500,000)

115000
575000
50000
($6,000)
($55,214)
$33,549

($1,100,000)

$765,495

$786,108

$772,108

$762,108

$1,458,393

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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4
10.5 Investment in a new trench excavator:
0

Income Statement
Revenues (savings)
Expenses:
Required annual digging (ft)
Number of hours to operate
Operating cost (@$15/hr)
Depreciation

6,400
400
$6,000
$40,000

6,400
400
$6,000
$64,000

6,400
400
$6,000
$38,400

6,400
467
$7,005
$23,040

6,400
533
$7,995
$11,520

Taxable Income
Income Taxes (34%)

($46,000)
($15,640)

($70,000)
($23,800)

($44,400)
($15,096)

($30,045)
($10,215)

($19,515)
($6,635)

Net Income

($30,360)

($46,200)

($29,304)

($19,830)

($12,880)

($30,360)
$40,000

($46,200)
$64,000

($29,304)
$38,400

($19,830)
$23,040

($12,880)
$11,520

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

($200,000)
$40,000
$5,766
($200,000)

$9,640

$17,800

$9,096

$3,210

$44,407

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.6
Revenues (savings)
Expenses:
Software development
Operating expenses
Depreciation

$52,000

$52,000

$52,000

$52,000

$52,000

$20,000
$12,000
20,800

$12,000
33,280

$12,000
19,968

$12,000
11,981

$12,000
5,990

Taxable Income
Income Taxes (35%)

($800)
(280)

$6,720
2,352

$20,032
7,011

$28,019
9,807

$34,010
11,903

Net Income

($520)

$4,368

$13,021

$18,212

$22,106

(520)
20,800

4,368
33,280

13,021
19,968

18,212
11,981

22,106
5,990

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Gains Tax (35%)
Net Cash Flow

(104,000)
($104,000)

0
4,194
$20,280

$37,648

$32,989

$30,193

$32,290

10.7
Input
Tax Rate(%)=
MARR(%)=
0
Income Statement
Revenues (savings)
Expenses:
Operating expenses
Depreciation

Output
PW(i)=
IRR(%)=

40
12
1

$9,465
31.17%
4

$20,160

$20,160

$20,160

$20,160

$20,160

$10,000
3,700

$10,000
5,920

$10,000
3,552

$10,000
2,131

$10,000
1,066

Taxable Income
Income Taxes(40%)

$6,460
2,584

$4,240
1,696

$6,608
2,643

$8,029
3,212

$9,094
3,638

Net Income

$3,876

$2,544

$3,965

$4,817

$5,457

3,876
3,700

2,544
5,920

3,965
3,552

4,817
2,131

5,457
1,066

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

(18,500)
1,850
112
($18,500)

$7,576

$8,464

$7,517

$6,948

$8,260

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.8 (a) & (b) a good investment to undertake.

Input
Tax Rate(%)=
MARR(%)=
0

Income Statement
Revenues (savings)
Expenses:
Labor
Materials
Depreciation
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

Output
PW(i)=
IRR(%)=

40
12
2

$334,792
92%

$300,000

$300,000

$300,000

$300,000

$300,000

$300,000

$80,000
50,000
24,000

$80,000
50,000
38,400

$80,000
50,000
23,040

$80,000
50,000
13,824

$80,000
50,000
13,824

$80,000
50,000
6,912

$146,000
58,400

$131,600
52,640

$146,960
58,784

$156,176
62,470

$156,176
62,470

$163,088
65,235

$87,600

$78,960

$88,176

$93,706

$93,706

$97,853

87,600
24,000

78,960
38,400

88,176
23,040

93,706
13,824

93,706
13,824

97,853
6,912

(120,000)
0
0
($120,000)

$111,600

$117,360

$111,216

$107,530

$107,530

$104,765

10.9
0
Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

$
$
$

$250,000

$250,000

$250,000

$250,000

$250,000

$50,000
40,000
$160,000
64,000
$96,000

$50,000
64,000
$136,000
54,400
$81,600

$50,000
38,400
$161,600
64,640
$96,960

$50,000
23,040
$176,960
70,784
$106,176

$50,000
11,520
$188,480
75,392
$113,088

96,000 $
40,000 $

81,600 $
64,000 $

96,960 $
38,400 $

106,176 $
23,040 $

113,088
11,520

$
$

5,000
7,216
$136,824

(200,000)

($200,000)

$136,000

$145,600

$135,360

$129,216

Return on invest = 62.88%.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.10 Investment in energy management system: N = 9 years

Input
Tax Rate(%) =
MARR(%) =

Output
PW(i) =
IRR(%) =

35
10

$1,998
11.19%

5-8

Income Statement
Energy Savings
Expenses:
Depreciation

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

16,665

22,225

7,405

3,705

Taxable Income
Income Taxes

($6,665)
(2,333)

($12,225)
(4,279)

$2,595
908

$6,295
2,203

$10,000
3,500

$10,000
3,500

Net Income

($4,332)

($7,946)

$1,687

$4,092

$6,500

$6,500

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

$
$
$

(4,332) $
16,665 $

(7,946) $
22,225 $

1,687
7,405

$
$

4,092
3,705

$
$

6,500
-

$
$

6,500
-

(50,000)
0
(0)
($50,000)

$12,333

$14,279

$9,092

$7,797

$6,500

$6,500

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.11 Investment decision based on after-tax IRR:

Input
Tax Rate(%) =
MARR(%) =

Output
PW(i) =
IRR(% )=

40
12

($0)
12.00%

Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation

$130,000

$130,000

$130,000

$130,000

$130,000

$20,000
116,920

$20,000
155,928

$20,000
51,953

$20,000
25,994

$20,000
0

Taxable Income
Income Taxes (40%)

($6,920)
(2,768)

($45,928)
(18,371)

$58,047
23,219

$84,006
33,602

$110,000
44,000

Net Income

($4,152)

($27,557)

$34,828

$50,404

$66,000

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

$
$
$

(4,152) $
116,920 $

(27,557) $
155,928 $

34,828
51,953

$
$

50,404
25,994

$
$

66,000
-

(350,794)
0
0
($350,794)

$112,768

$128,371

$86,781

$76,398

$66,000

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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Investment in Working Capital

10.12
0
Income Statement
Revenues (savings)
Expenses:
Production cost
Depreciation :
Building
Equipment
Taxable Income
Income Taxes
Net Income

10

$675,000

$675,000

$675,000

$675,000

$675,000

$675,000

$675,000

$675,000

$675,000

$675,000

$425,000

$425,000

$425,000

$425,000

$425,000

$425,000

$425,000

$425,000

$425,000

$425,000

$36,860
$71,450
$141,691
$56,676

$38,462
$122,450
$89,089
$35,635

$38,462
$87,450
$124,089
$49,635

$38,462
$62,450
$149,089
$59,635

$38,462
$44,650
$166,889
$66,755

$38,462
$44,600
$166,939
$66,775

$38,462
$44,650
$166,889
$66,755

$38,462
$22,300
$189,239
$75,695

$38,462

$36,860

$211,539
$84,615

$213,141
$85,256

$85,014

$53,453

$74,453

$89,453

$100,133

$100,163

$100,133

$113,543

$126,923

$127,884

$85,014
$108,310

$53,453
$160,912

$74,453
$125,912

$89,453
$100,912

$100,133
$83,112

$100,163
$83,062

$100,133
$83,112

$113,543
$60,762

$126,923
$38,462

$127,884
$36,860

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Land
Building
Machines
Gains Tax
Land
Building
Equipment
Working capital

($250,000)
($1,500,000)
($500,000)

$500,000
$700,000
$50,000

($150,000)

($87,500)
$182,179
($20,000)
$150,000

Net Cash Flow

($2,400,000)

$193,324

$214,365

$200,365

$190,365

$183,245

$183,225

$183,245

$174,305

$165,385

$1,639,423

(a) PW (15%) with working capital = $1, 083,867 , do not accept the project.
(b) PW (15%) without working capital = $970, 945 , still do not accept the project.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.13
Input
Tax Rate(%)=
MARR(%)=
0
Income Statement
Revenues (savings)
Expenses:
Operating cost
Depreciation

Output
PW(i)=
IRR(%)=

35
18
1

$52,163
42%
4

$55,800

$55,800

$55,800

$55,800

$55,800

$55,800

$8,120
13,100

$8,120
20,960

$8,120
12,576

$8,120
7,546

$8,120
7,546

$8,120
1,886

Taxable Income
Income Taxes (35%)

$34,580
$12,103

$26,720
$9,352

$35,104
$12,286

$40,134
$14,047

$40,134
$14,047

$45,794
$16,028

Net Income

$22,477

$17,368

$22,818

$26,087

$26,087

$29,766

$22,477
$13,100

$17,368
$20,960

$22,818
$12,576

$26,087
$7,546

$26,087
$7,546

$29,766
$1,886

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Worikng capital

($10,000)

Net Cash Flow

($75,500)

($65,500)
$3,000
($390)
$10,000
$35,577

$38,328

$35,394

$33,633

$33,633

$44,262

Comments: The operating cost represents the annual expenses related to operate the scanning
equipment.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.14 Delaware Chemical Corporation: (a), (b), and (c)

Calendar year
Base period
Income Statement
Revenues (savings)
Expenses:
R&D expenses
Production cost
Depreciation :
Building
Equipment
Taxable Income
Income Taxes

0
-3

($500)
($200)

($2,500)
($1,000)

Net Income

($300)

($300)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Building
Machines
Gains Tax
Building
Equipment
Working capital
Net Cash Flow
(b) IRR =

$500

($300)

1
-2

2
-1

3
0

4
1

5
2

6
3

7
4

8
5

(All units in $000)

9
10
6
7

11
8

12
9

13
10

$50,000

$55,000

$60,500

$66,550

$73,205

$80,526

$72,473

$65,226

$58,703

$52,833

$40,000

$44,000

$48,400

$53,240

$58,564

$64,420

$57,978

$52,181

$46,962

$42,266

$51
$735
$10,214
$4,086

$51
$525
$11,524
$4,610

$51
$375
$12,884
$5,154

$51
$268
$14,322
$5,729

$51
$268
$15,786
$6,314

$51
$268
$14,175
$5,670

$51
$134
$12,860
$5,144

$51

$49

($2,000)
($800)

$49
$429
$9,522
$3,809

$11,689
$4,676

$10,517
$4,207

($1,500)

($1,200)

$5,713

$6,128

$6,914

$7,730

$8,593

$9,472

$8,505

$7,716

$7,014

$6,310

($1,500)

($1,200)

$5,713
$478

$6,128
$786

$6,914
$576

$7,730
$426

$8,593
$319

$9,472
$319

$8,505
$319

$7,716
$185

$7,014
$51

$6,310
$49

$2,500

($1,500)

$2,000

($1,200)

($2,000)
($3,000)

$1,000
$300

($5,000)

($500)

($550)

($605)

($666)

($732)

$805

$725

$652

$587

$197
($120)
$5,283

($10,000)

$5,691

$6,364

$6,885

$7,491

$8,180

$10,596

$9,549

$8,553

$7,652

$13,019

43.28%

(c) PW(20%) =

$10,253

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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Effects of Borrowing
10.15
Income Statement
0

Income Statement
Revenue
Expenses:
O&M
Depreciation
Debt interest
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Loan repayment
Net Cash Flow

$
$

$3,034,510

$3,034,510

$3,034,510

$3,034,510

$3,034,510

330,000
306,713
1,250,000

380,000
320,513
1,045,253

430,000
320,513
820,032

480,000
320,513
572,288

530,000
306,713
299,770

$1,147,797
$401,729

$1,288,744
$451,060

$1,463,965
$512,388

$1,661,709
$581,598

$1,898,027
$664,309

$746,068

$837,684

$951,577

$1,080,111

$1,233,718

746,068 $
306,713 $

951,577 $ 1,080,111 $ 1,233,718

320,513 $
320,513 $
306,713
$ (12,500,000)
$ 14,000,000
$ (1,076,238)
$ 12,500,000 $ (2,047,469) $ (2,252,216) $ (2,477,437) $ (2,725,181) $ (2,997,699)
$0

($994,688)

PW (15%) =
IRR =

$2,458,837
41.91%

837,684 $
320,513 $

($1,094,019)

($1,205,347)

($1,324,557)

$11,466,494

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.16

0
Income Statement
Revenues (savings)
Expenses:
Depreciation
Deit interest
Taxable Income
Income Taxes(35%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$120,000

$120,000

$120,000

$120,000

$120,000

$120,000

$120,000

$37,000
$18,500
$64,500
$22,575

$59,200
$14,800
$46,000
$16,100

$35,520
$11,100
$73,380
$25,683

$21,312
$7,400
$91,288
$31,951

$21,312
$3,700
$94,988
$33,246

$10,656
$109,344
$38,270

$120,000
$42,000

$41,925

$29,900

$47,697

$59,337

$61,742

$71,074

$78,000

$41,925
$37,000

$29,900
$59,200

$47,697
$35,520

$59,337
$21,312

$61,742
$21,312

$71,074
$10,656

$78,000
$0

($185,000)
$40,000
($14,000)
$185,000
$0

($37,000)

($37,000)

($37,000)

($37,000)

($37,000)

$41,925

$52,100

$46,217

$43,649

$46,054

$81,730

$104,000

Note: This situation calls for a constant rate of reduction on principal payment.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.17
Annual payment = $100, 000( A / P,11%,5) = $27, 060
New after tax cash flow
0

Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
Debt interest
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$
$
$

$250,000

$250,000

$250,000

$250,000

$250,000

$50,000
40,000
11,000
$149,000
59,600
$89,400

$50,000
64,000
9,233
$126,767
50,707
$76,060

$50,000
38,400
7,272
$154,328
61,731
$92,597

$50,000
23,040
5,096
$171,864
68,746
$103,118

$50,000
11,520
2,680
$185,800
74,320
$111,480

89,400 $
40,000 $

76,060 $
64,000 $

92,597 $
38,400 $

103,118 $
23,040 $

111,480
11,520

$
$

5,000
7,216

(21,964) $
104,194 $

(24,380)
110,836

(200,000)

100,000

$ (16,060) $ (17,827) $ (19,788) $

(100,000) $ 113,340 $ 122,233 $ 111,209 $

10.18
Cash flow statement
Operating activities:
Net income
Depreciation
Investment activities:
Investment
Salvage
Gains Tax (40%)
Financial activities:
Borrowed funds
Principal repayment
Net cash flow

1
$10,400
$6,666

2
$12,019
$4,445

($20,000)
$8,000
$356
$10,000
($10,000)

($4,762)
$12,304

($5,238)
$19,581

NPW(15%) = $15,505.48

Note: Annual installments for the loan = $10,000( A / P,10%, 2) = $5, 762
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.19 Income statement approach:

Input
Tax Rate(% )=
MARR(%) =

40
18

Output
PW(i) =
IRR(%) =

$80,000
$ 55,000

$80,000
$ 55,000

$80,000
$ 55,000

$
$
$
$

28,580
13,500
92,920
37,168
$55,752

$ 48,980
$ 9,000
$ 77,020
$ 30,808
$46,212

$ 55,752
$ 28,580

$ 46,212
$ 48,980

$241,601
91.54%

(a)
Income Statement
Revenues:
Additional revenue
Labor & materials savings
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

5-7

10

$80,000
$ 55,000

$80,000
$ 55,000

$80,000
55,000

$80,000
$ 55,000

$80,000
$ 55,000

$ 34,980
$ 4,500
$ 95,520
$ 38,208
$57,312

24,980

$ 17,860

$ 110,020
$ 44,008
$66,012

$ 117,140
$ 46,856
$70,284

$ 126,080
$ 50,432
$75,648

$ 135,000
$ 54,000
$81,000

$ 135,000
$ 54,000
$81,000

$ 57,312
$ 34,980

$
$

$ 70,284
$ 17,860

$ 75,648
$ 8,920

$ 81,000
$
-

$ 81,000
$
-

66,012
24,980

8,920

(200,000)
$ 20,000
$ (8,000)

150,000
$ (50,000) $ (50,000) $ (50,000)
($50,000) $34,332
$45,192
$42,292

$90,992

$88,144

$84,568

$81,000

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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$93,000

10.20 (a) and (b)

Input
Tax Rate(%) =
MARR(%) =

Output
35
18

PW(i) =
IRR(%) =
2

($1,318,770)

Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes (35%)

285,800
80,000
($365,800)
(128,030)

489,800
66,896
($556,696)
(194,844)

349,800
52,482
($402,282)
(140,799)

249,800
36,626
($286,426)
(100,249)

89,300
19,185
($108,485)
(37,970)

Net Income

($237,770)

($361,853)

($261,483)

($186,177)

($70,515)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$
$
$

(237,770) $
285,800 $

(361,853) $
489,800 $

(261,483) $
349,800 $

(186,177) $
249,800 $

(70,515)
89,300

$
$

200,000
117,425

(2,000,000)

800,000
$

(131,038) $

(144,142) $

(158,556) $

(174,412) $

(191,853)

($1,200,000) $

(83,008) $

(16,194) $

(70,239) $

(110,789) $

144,357

(b) This is a service project. The equivalent annual cost is

AEC (18%) = $1,318, 770( A / P,18%,5)
= $421, 743

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.21
(a) After tax cash flow
Input
Tax Rate(%) =
MARR(%) =
0
Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes (36%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

Output
36
15

PW(i) =
IRR(%) =

$10,000

$10,000

$5,002
$4,200
$799
$287

$3,593

$10,000

$10,000

$10,000

$10,000

$8,572
$3,683
($2,254)
($811)

$6,122
$3,103
$775
$279

$4,372
$2,454
$3,175
$1,143

$3,126
$1,727
$5,148
$1,853

$1,563
$913
$7,524
$2,709

$511

($1,443)

$496

$2,032

$3,294

$4,816

$511
$5,002

($1,443)
$8,572

$496
$6,122

$2,032
$4,372

$3,294
$3,126

$4,816
$1,563

($35,000)
$3,000
$1,168
$35,000
$0

($4,312)

($4,829)

($5,409)

($6,058)

($6,785)

($7,599)

$1,201

$2,299

$1,209

$345

($365)

$2,948

(b) No meaningful IRR exists. We need to use the present worth analysis. Since
PW(15%) > 0, the project is acceptable.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.22 (a) and (b)

Input
Tax Rate(%) =
MARR(%) =
0

Output
PW(i) =
IRR(%) =

40
14
1

$35,723
31.02%
4

Income Statement
Revenues (savings)
Expenses:
O&M cost
Depreciation
Debt interest

$40,000

$40,000

$40,000

$40,000

$40,000

$40,000

$40,000

$40,000

5,000
14,290
4,000

5,000
24,490
3,650

5,000
17,490
3,265

5,000
12,490
2,842

5,000
8,930
2,377

5,000
8,920
1,865

5,000
8,930
1,301

5,000
4,460
682

Taxable Income
Income Taxes (40%)

$16,710
6,684

$6,860
2,744

$14,245
5,698

$19,668
7,867

$23,693
9,477

$24,215
9,686

$24,769
9,907

$29,858
11,943

Net Income

$10,026

$4,116

$8,547

$11,801

$14,216

$14,529

$14,861

$17,915

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$ 10,026 $ 4,116 $ 8,547 $ 11,801 $ 14,216 $ 14,529 $ 14,861 $ 17,915

$ 14,290 $ 24,490 $ 17,490 $ 12,490 $ 8,930 $ 8,920 $ 8,930 $ 4,460
$ (100,000)
$ 10,000
$ (4,000)
$

40,000
$ (3,498) $ (3,848) $ (4,232) $ (4,656) $ (5,121) $ (5,633) $ (6,196) $ (6,816)
($60,000)

$20,818

$24,758

$21,804

$19,635

$18,025

$17,816

$17,595

$21,559

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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Generalized Cash Flow Method

10.23 (a) with no borrowed funds:
Input Data
Tax Rate(%) =
MARR(%) =

Output
PW(9%) =

35
9

$416

Financial Data
year
Depreciation
Book value
Salvage value
Gains tax
Loan payment schedule
Interest
Principal
Revenues
O & M costs

0
$

1
2
3
$ 2,000 $ 2,667 $ 889 $
6,000 $ 4,000 $ 1,333 $ 445 $

4
5
445
$
$ 2,000
$ (700)

$ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500

Cash Flow Statement

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.35) (Revenue)
-(1 - 0.35) (Expenses)
-(1 - 0.35) (Debt interest)
+ (0.35) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

0
($6,000)

5
$1,300

$975
$975
$975
700 $ 933 $ 311 $

$975
156

$975
-

($6,000)

$1,675

$1,908

$1,286

$1,131

$2,275

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(b) With borrowed funds:

Input Data
Tax Rate(%)=
MARR(%)=
year
Depreciation
Book value
Salvage value
Gains tax
Loan payment schedule
Interest
Principal
Revenues
O&M costs

0
$6,000

Output
PW(9%)= $10,104

35
9
1
$2,000
4,000

2
$2,667
1,333

3
$889
445

4
$445
0

5
$0
0
$2,000
-700

$
540 $
450 $
351 $
244 $
127
6,000 $ 1,003 $ 1,093 $ 1,191 $ 1,298 $ 1,415
$ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500

Cash Flow Statement

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.35) (Revenue)
-(1 - 0.35) (Expenses)
-(1 - 0.35) (Debt interest)
+ (0.35) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

0
($6,000)

5
$1,300

$975
-351
700

$975
-292
933

$975
-228
311

$975
-159
156

$975
-83
-

$6,000
$ 1,003 $ 1,093 $ 1,191 $ 1,298 $ 1,415
$0

$2,327

$2,709

$2,249

$2,270

$3,607

(c) The debt financing option is more attractive. Note that the debt financing option
results in a higher net present value ($10,104 versus $416) due to the fact that the interest
payments are tax deductible and the loan interest rate is the same as the MARR.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.24 Net cash flow

Input Data
Tax Rate(%) =
MARR(%) =

Output
PW(12%) = $75,393

40
12

Financial Data
year
Depreciation
Book value
Salvage value
Gains tax
Loan payment schedule
Interest
Principal
Revenues
O&M costs

0
$

125,000

125,000

1
2
$ 17,863 $ 30,613
$107,138 $ 76,525

3
4
5
$ 21,863 $ 15,613 $ 5,581
$ 54,663 $ 39,050 $ 33,469
$ 50,000
$ (6,613)

$ 12,500 $ 10,453 $ 8,200 $ 5,723 $ 2,998

$ 20,475 $ 22,522 $ 24,774 $ 27,252 $ 29,977
$ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000

Cash Flow Statement

0
($125,000)

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.40) (Revenue)
-(1 - 0.40) (Expenses)
-(1 - 0.40) (Debt interest)
+ (0.40) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

5
$43,388

$36,000
$36,000
$36,000
$36,000
$36,000
$ (7,500) $ (6,272) $ (4,920) $ (3,434) $ (1,799)
$ 7,145 $ 12,245 $ 8,745 $ 6,245 $ 2,233
$

125,000
$ (20,475) $ (22,522) $ (24,774) $ (27,252) $ (29,977)
$0

$15,170

$19,451

$15,050

$11,559

$49,844

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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10.25 Air South Airline

0

Cash Flow Statement

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital

$ 21,700
$ (12,400)
$ (4,018)
$ 3,257

$ 21,700
$ (12,400)
$ (4,018)
$ 5,584

$ 21,700
$ (12,400)
$ (4,018)
$ 3,988

$ 21,700
$ (12,400)
$ (4,018)
$ 2,849

$ 21,700
$ (12,400)
$ (4,018)
$ 2,035

$ 21,700
$ (12,400)
$ (4,018)
$ 2,035

$ 21,700
$ (12,400)
$ (4,018)
$ 2,035

8,539

$ 10,866

10

(60,000)

(1 - 0.38)(Revenue)
-(1 - 0.38)(Expenses)
-(1 - 0.38) (Debt interest)
+(0.38)(Depreciation)
Borrowed funds
Principal repayment

54,000

Net cash flow

(6,000) $

Cash Flow Statement

9,270
11

8,131
12

7,317
13

7,317
14

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.38)(Revenue)
-(1 - 0.38)(Expenses)
-(1 - 0.38) (Debt interest)
+(0.38)(Depreciation)

5,580

21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700

(12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400)
(4,018) $ (4,018) $ (4,018)
1,017

Borrowed funds
Principal repayment
Net cash flow

15

$
$
$
$

7,317

$ (54,000)
$

6,299

PW(18%) =

5,282

$ (48,718) $

9,300

9,300

9,300

9,300

$ 14,880

$ 26,663 > 0, Accept the investment.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Comparing Mutually Exclusive Alternatives

10.26
(a) The net after-tax cash flows for each financing option:

Option 1: Retained earnings

Input
Tax Rate(%) =
MARR(%) =
Option 1: Financing with retained earnings
0
Income Statement

Output
PW(i) = $161,321
IRR(%) =
42.46%

39
18
1

Revenues (savings)
Expenses:
O&M costs
Depreciation
Debt interest

$174,000

$174,000

$174,000

$174,000

$174,000

$174,000

$22,000
28,580

$22,000
48,980

$22,000
34,980

$22,000
24,980

$22,000
17,860

$22,000
8,930

Taxable Income
Income Taxes

$123,420
48,134

$103,020
40,178

$117,020
45,638

$127,020
49,538

$134,140
52,315

$143,070
55,797

$75,286

$62,842

$71,382

$77,482

$81,825

$87,273

Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$ 75,286 $ 62,842 $ 71,382 $ 77,482 $ 81,825 $ 87,273

$ 28,580 $ 48,980 $ 34,980 $ 24,980 $ 17,860 $ 8,930
$

(200,000)
$ 30,000
$ 2,219
$ 25,000

(25,000)

($225,000) $103,866

$111,822

$106,362

$102,462

$99,685

$153,422

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Option 2:Use a 12% term loan

Input
Tax Rate(%) =
MARR(%) =

Output
PW(i) =
IRR(%) =

39
18

$214,470
263.36%

Option 2: Debt Financing

0

Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
Debt interest

$174,000

$174,000

$174,000

$174,000

$174,000

$174,000

$22,000
28,580
24,000

$22,000
48,980
21,043

$22,000
34,980
17,730

$22,000
24,980
14,021

$22,000
17,860
9,866

$22,000
8,930
5,212

Taxable Income
Income Taxes

$99,420
38,774

$81,977
31,971

$99,290
38,723

$112,999
44,070

$124,274
48,467

$137,858
53,765

Net Income

$60,646

$50,006

$60,567

$68,929

$75,807

$84,093

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$
$
$

60,646 $
28,580 $

50,006 $
48,980 $

60,567 $
34,980 $

68,929 $ 75,807 $
24,980 $ 17,860 $

84,093
8,930

$
$
$

30,000
2,219
25,000

(200,000)

(25,000)
200,000
$
($25,000)

(24,645) $

(27,602) $ (30,915) $ (34,624) $ (38,780) $ (43,433)

$64,581

$71,384

$64,632

$59,285

$54,887

$106,809

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Option 3: Leasing

Input
Tax Rate(%) =
MARR(%) =

Output
PW(i) =
IRR(%) =

39
18

$170,092
101.06%

Option 3: Lease Financing

0

Income Statement
Revenues (savings)
Expenses:
O&M costs
Financial lease

$174,000

$174,000

$174,000

$174,000

$174,000

$174,000

$22,000
$55,000

$22,000
$55,000

$22,000
$55,000

$22,000
$55,000

$22,000
$55,000

$22,000

$55,000

Taxable Income
Income Taxes

($55,000)
($21,450)

$97,000
37,830

$97,000
37,830

$97,000
37,830

$97,000
37,830

$97,000
37,830

$152,000
59,280

Net Income

($33,550)

$59,170

$59,170

$59,170

$59,170

$59,170

$92,720

Cash Flow Statement

Operating Activities:
Net Income
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

(33,550) $

(25,000)

($58,550)

59,170 $

$59,170

59,170 $

$59,170

59,170 $

$59,170

59,170 $

$59,170

59,170 $

92,720

25,000

$59,170

$117,720

Note: With the financial lease, the lessee must assume responsibility for paying
most of the operating costs of the equipment, including the maintenance expenses.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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(b) Vermonts PW cost of owning the equipment by borrowing:

PW of after-tax O&M
P1 = $22, 000(1 0.39)( P / A,18%, 6)
= $46,938

PW of after-tax loan repayment:

P2 = $48, 645( P / A,18%, 6)
= $170,141

PW of tax credit (shield) on depreciation and interest:

n
1
2
3
4
5
6

Dn
$28,571
$48,980
$34,985
$24,990
$17,850
$8,925

In
$24,000
$21,043
$17,730
$14,021
$9,866
$5,212

Combined Tax Savings

$52,571(0.39) = $20,503
$70,023(0.39) = $27,309
$52,715(0.39) = $20,559
$39,011(0.39) = $15,214
$27,716(0.39) = $10,809
$14,137(0.39) = $5,513

P3 = $20,503( P / F ,18%,1) + "

+$5,513( P / F ,18%, 6)
= $64,115

PW of net proceeds from sale:

total depreciation amount = $164,301

book value = $35,699
taxable gain = $30,000 - $35,699
= ($5,699)
loss credit = (0.39)($5,699) = $2,223
net proceeds from sale = $30,000 + $2,223
= $32,223
P4 = $32,223(P / F ,18%, 6)
= $11,936
PW (15%) buy = P1 + P2 P3 + P4 = $141, 028
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
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(c) Vermonts PW cost of leasing the equipment:

PW of after-tax operating cost:

P1 = $22, 000(1 0.39)( P / A,18%, 6)
= $46,938

PW of after-tax leasing expenses:

P2 = $55, 000(1 0.39) + $55, 000(1 0.39)( P / A,18%,5)
= $138, 467
P = P1 + P2
= $185, 405

(d) Buy the tipping machine.

10.27

Option 1: Lease
PW (12%)lease = $144, 000(1 0.40)( P / A,12%,30)
= $695,968

Option 2: Purchase
-

Note 1: Net proceeds from sale of building:

total depreciation amount = $498,611

book value = $151,389
taxable gain (loss) = $65,000 - $151,389
= $86,389
loss credit = (0.40)($86,389) = $34,556
net proceeds from sale = $65,000 + $34,556
= $99,556
-

Note 2: It is assumed that the property is placed in service during

the month of January and is disposed of during the month of
December:
D1 & D30 = (11.5 /12)(1/ 39)($650, 000) = $15,972

D2 to D29 = $650, 000 / 39 = $16, 667

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Note 3: Property tax calculation:

($800,000)(0.05) = $40,000
Cash Flow
Elements
Investment
Net Proceeds:
Building
Land
-(0.60)(property tax)
+(0.40)Dn
Net Cash Flow

0
-$800,000

End of Period
1
2 - 29

30

$99,556
$150,000
($24,000) ($24,000) -$24,000
$6,389
$6,667
$6,389
-$800000 -$17,611 ($17,333) $231,945

PW (12%)purchase = $800, 000 + $17, 611( P / F ,12%,1)

+$17,333( P / A,12%, 28)( P / F ,12%,1)
$231,945( P / F ,12%,30)
= $931,548

Option 3: Remodel
- Note 1: Cost basis for property tax:
Land + building + remodeling cost = $660,000
- Note 2: Depreciation base: Remodeling cost = $300,000
- Note 3: Net proceeds from sale of building:
total depreciation amount = $230,128
book value = $300,000 - $230,128
= $69,872
taxable gain (loss) = $30,000 - $69,872
=$39,872
gains tax = (0.40)($39,872) = $15,949
= $45,949
Cash Flow
Elements
Investment
Net Proceeds:
Building
Land
-(0.60)(property tax)
+(0.40)Dn
Net Cash Flow

0
-$300,000

End of Period
1

2 - 29

30

$45,949
-$5,400 '-$5,100 - 300n ($14,100)
-$19,800
-$19,800
($19,800)
$2,949
$3,077
$2,949
-$300000 -$22,251

$14,698

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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PW (12%)purchase = $300, 000 + $22, 251( P / F ,12%,1)

+$22, 423( P / A,12%, 28)( P / F ,12%,1)
+$300( P / G,12%, 28)( P / F ,12%,1)
$14, 698( P / F ,12%,30)
= $494, 434
Option 3 is the least cost alternative.

10.28 Comparison by the annual equivalent cost (all units in thousand dollars):
Book Value (n = 20)
Salvage Value
Taxable gains
Gains tax (39%)

$380.61 $423.80

$470.56

$853.00 $949.80 $1,054.60

$469.39 $526.00 $584.04
$183.06 $205.14

$227.78

Net Proceeds from sale $669.94 $744.66

$826.82

Plant A

Capital recovery cost with return:

A1 = ($8,530) $669.94)( A / P,12%, 20) + $669.94(0.12) = $1,132.69

After-tax O&M cost:

A2 = (1 0.39)($1,964) = $1,198.04

Depreciation tax shield:

A3 = 0.39($8,530) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $172.22

Total equivalent annual cost:

A = $1,132.69 + $1,198.04 $172.22 = $2,158.51

Unit cost:

$2,158,510
= $0.04317 / kWh
50, 000, 000kWh
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Plant B

Capital recovery cost with return:

A1 = ($9, 498 $744.66)( A / P,12%, 20) + $744.66(0.12) = $1, 261.25

After-tax O&M cost:

A2 = (1 0.39)($1, 744) + $1, 063.84

Depreciation tax shield:

A3 = 0.39($9, 498) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $191.76

Total equivalent annual cost:

A = $1, 261.25 + $1, 063.84 $191.76 = $2,133.33

Unit cost:

$2,133,330
= $0.04267 / kWh
50, 000, 000kWh
Plant C

Capital recovery cost with return:

A1 = ($10,546 $826.82)( A / P,12%, 20) + $826.82(0.12) = $1, 400.41

After-tax O&M cost:

A2 = (1 0.39)($1, 632) = $995.52

Depreciation tax shield:

A3 = 0.39($10,546) [0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $212.92

Total equivalent annual cost:

A = $1, 400.41 + $1,995.52 $212.92 = $3,183.01

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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Unit cost:
$3,183, 010
= $0.06366 / kWh
50, 000, 000kWh
Plant B is the most economical.

Lease -Versus - Buy Decisions

10.29
(a) Jacobs cost of leasing in present worth:
after-tax lease expense = (1 - 0.40)($11,000)
= $6,600
PW (15%)lease = $6, 600 + $6, 600( P / A,15%,3)
= $21, 670

(b) Jacobs cost of owning in present worth:

PW of after-tax maintenance expenses:

P1 = $1, 200(1 0.40)( P / A,15%, 4)
= $2, 055

PW of after-tax loan repayment:

P2 = $13,169( P / A,15%, 4)
= $37,597

PW of tax credit (shield) on depreciation and interest:

n
1

Dn

In

Combined Tax Savings

$8, 000 $4,800 $12,800(0.40) = $5,120

2 $12,800 $3, 796 $16,596(0.40) = $6, 638

3

$7, 680

$2, 671 $10,351(0.40) = $4,140

$2,304

$1, 411

$3, 715(0.40) = $1, 486

P3 = $5,120( P / F ,15%,1) + $6, 638( P / F ,15%, 2)

+$4,140( P / F ,15%,3) + $1, 486( P / F ,15%, 4)
= $13, 043
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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PW of net proceeds from sale:

total depreciation amount = $30,784
book value = $9,216
taxable gain = $10,000 - $9,216
= $784
gains tax = (0.40)($784) = $314
net proceeds from sale = $10,000 - $314
= $9,686
P4 = $9,686(P / F ,15%, 4)
= $5,538
PW (15%) buy = P1 + P2 P3 P4 = $21, 071

(c) Should the truck be leased or purchased? The borrowbuy option is a

better choice.

10.30
(a) PW (incremental) cost of owing the equipment:

PW of after-tax O&M:
P1 = $50, 000(1 0.40)( P / A,15%, 4)
= $85, 649

PW of after-tax loan repayment:

P2 = $37,857( P / A,15%, 4)
= $108, 080

PW of tax credit (shield) on depreciation and interest:

n

Dn

In

Combined Tax Savings

1 $24,000 $12,000

$36,000(0.40) = $14,400

2 $38,400

$9,414

$47,817(0.40) = $19,126

3 $23,040

$6,570

$29,610(0.40) = $11,814

$3,441

$10,353(0.40) = $4,141

$6,912

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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P3 = $14, 400( P / F ,15%,1) + $19,126( P / F ,15%, 2)

+$11,814( P / F ,15%,3) + $4,141( P / F ,15%, 4)
= $37,139

PW of net proceeds from sale:

total depreciation amount = $92,352
book value = $27,648
taxable gain = $20,000 - $27,648 = ($7,648)
loss credit = (0.40)($7,648) = $3,059
net proceeds from sale = $20,000 + $3,059
= $23,059
P4 = $23,059(P / F ,15%, 4)
= $13,184
PW (15%) buy = P1 + P2 P3 P4 = $143, 406

(b) PW (incremental) cost of leasing the equipment:

PW of after-tax operating cost:

P1 = $40, 000(1 0.40)( P / A,15%, 4)
= $68,519

PW of after-tax leasing:
P2 = $44, 000(1 0.40) + $44, 000(1 0.40)( P / A,15%,3)
= $86, 67
P = P1 + P2
= $155,196

(c) Should ICI buy or lease the equipment? The buying option is a better choice.

10.31
(a) PW of after-tax cash flow of leasing:

PW (15%)lea s e = $70, 000(1 0.4)( P / A,15%, 4)

= $119,909
(Note: The lease payments are made at the end of each year.)
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(b) PW of after-tax cash flow of owing:

PW (15%)own = 0 + $34, 430( P / F ,15%,1) + " + $48,872( P / F ,15%, 4)

= $113, 259

10.32
(a) Determine the annual cash flows for each option.

Buy option:
Cash flow elements
Investment
Net proceeds

3
$5,943

(0.65) I n

($1,151)

($740)

($275)

+0.35Dn

$1,132

$1,811

$543

($4,730)
($4,749)

($5,362)
($4,291)

($6,078)
$134

Loan repayment
Net cash flow

End of period
1
2

0
($16,170)

$16,170
$0

Lease option:
Cash flow elements
Security deposit
Refund

0
($500)

End of period
2

3
$500

(0.65) Ln
Net cash flow

($500)

($3,315)

($3,315)

($3,315)

($3,315)

($3,315)

($2,815)

(b) PW cost of owing versus leasing:

PW (13%)buy = $7, 470

PW (13%)lease = $7,981
The buy option is a better choice.

10.33
(a) Boggs PW cost of leasing: after-tax annual lease expense = $15,000(1
0.40) = $9,000.

PW (15%)leasing = $9, 000 + $9, 000( P / A,15%,3)

=$20,549
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(b) Boggs PW cost of owning:

PW of after-tax maintenance expenses:

P1 = $5, 000(1 0.40)( P / A,15%,3)
= $6,849

PW cost of after-tax loan repayment:

P2 = $41, 635( P / A,15%,3)
= $95, 062

PW of tax credit (shield) on depreciation and interest:

n
Dn
In
Combined Tax Savings
1 $20, 000 $12, 000 $32, 000(0.40) = $12,800
2 $32, 000 $8, 444 $40, 444(0.40) = $16,178
3

$9, 600

$4, 461

$14, 061(0.40) = $5, 624

P3 = $12,800( P / F ,15%,1) + $16,178( P / F ,15%, 2)

+$5,511( P / F ,15%,3)
= $27, 061

PW of net proceeds from sale:

total depreciation amount = $61,600
book value = $38,400
taxable gain = $50,000 - $38,400 = $11,600
loss credit = (0.40)($11,600) = $4,640
net proceeds from sale = $50,000 - $4,640
= $45,360
P4 = $45,360(P / F ,15%,3)
= $29,825

PW (15%)buy = P1 + P2 P3 P4 = $45, 043

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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10.34
(a) Purchase with debt:

PW of after-tax revenue:

P1 = $10, 000(1 0.30)( P / A,10%,5) = $26,536

PW of after-tax expenses:

P2 = $2,500(1 0.3)( P / A,10%,5) = $6, 634

PW of after-tax loan repayment:

A = $25,000( A / P,12%,5) = $6,935.24

P3 = $6,935.24( P / A,10%,5) = $26, 290

PW of tax credit (shield) on depreciation and interest:

n
Dn
In
Combined Tax Savings
1 $3,571 $3, 000 $6,571(0.30) = $1,971
2 $6,122 $2,528
3 $4,373 $1,999

$8, 650(0.30) = $2,595

$6,372(0.30) = $1,912

4 $3,123 $1, 407

5 $1,116
$743

$4,530(0.30) = $1,359
$1,859(0.30) = $558

P4 = $1,971( P / F ,10%,1) + $2,595( P / F ,10%, 2) + " = $6, 647

PW of net proceeds from sale:

total depreciation amount = $18,305
book value = $6,695
taxable gain = $5,000 - $6,695=($1,695)
loss credit = (0.30)($1,695) = $509
net proceeds from sale = $5,000 + $509
= $5,509
P5 = $5,509(P / F ,10%,5)
= $3,421
PW (10%) purchase = P1 P2 P3 + P4 + P5 = $3, 680

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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(Note: This is a net after-tax savings in present worth.)

(b) Financial lease:

PW (10%)lea s e = [(0.7)($10, 000 $2,500 $3,500)]( P / A,10%,5)

= $2,800( P / A,10%,5)
= $10, 614
(c) The financial lease is a better choice.
10.35 Setting the lease payment schedule: Let X denote the annual lease receipt
from the tractor lease. We will assume that these lease payments are received
at year end.

Cash Flow
Elements
Investment
Net Proceeds:
Security Deposit
+(0.65)(Rn )
+(0.35)Dn
Net Cash Flow

0
-$53,000

End of Period
1

0.65X
$5,936
0.65X
$5,936

$21,423*
-$1,500
0.65X
$1,781
0.65X
$21,704

$1,500

-$51,500

0.65X
$3,710
0.65X
$3,710

Note:
total depreciation amount = $32,648
book value = $53,000 - $32,648 = $20,352
taxable gain = $22,000 - $20,352 = $1,648
gains tax = (0.35)($1,648) = $577
net proceeds from sale = $22,000 - $577
= $21,423

Now to expect an after-tax rate of return of 10%, we solve the following

equation:
$51,500 = 0.65 X ( P / A,10%,3)
+$3, 710( P / F ,10%,1) + $5,936( P / F ,10%, 2)

+$21, 704( P / F ,10%,3)

X = $16, 655 per year

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Short Case Studies

ST 10.1

(a), (b), and (c)

0

5-7

10-11

12

$ 51,000

$ 51,000

$ 51,000

$ 51,000

$ 85,000

$ 136,000

$ 136,000

$ 136,000

$ 136,000

$ 36,000

$ 36,000

$ 36,000

$ 36,000

$ 60,000

$ 96,000

$ 96,000

$ 96,000

$ 96,000

$ 1,106
$ 14,290

$ 1,154
$ 24,490

$ 1,154
$ 17,490

$ 1,154
$ 12,490

$
$

$
$

Income Statement
Revenue
Expenses:
Production costs
Depreciation :
Building
Machines
Taxable Income
Income Taxes (40%)

$
$

(396) $ (10,644) $ (3,644) $

(158) $ (4,258) $ (1,458) $

1,356
542

Net Income

(237) $ (6,386) $ (2,186) $

814

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Land
$
Building
$
Machines
$
Gains Tax:
Land (35%)
Building
Equipment
Net Cash Flow

$
(237) $ (6,386) $ (2,186) $
814
$ 15,396 $ 25,644 $ 18,644 $ 13,644

1,154
8,930

1,154
4,460

1,154

1,154

1,106

$ 14,916
$ 5,966

$ 34,386
$ 13,754

$ 38,846
$ 15,538

$ 38,846
$ 15,538

$ 38,894
$ 15,558

8,950

$ 20,632

$ 23,308

$ 23,308

$ 23,337

$ 8,950
$ 10,084

$ 20,632
$ 5,614

$ 23,308
$ 1,154

$ 23,308
$ 1,154

$ 23,337
$ 1,106

(5,000)
(45,000)
(100,000)

$ 8,000
$ 30,000
$ 10,000
$ (1,050)
$
500
$ (4,004)

($150,000)
PW(15%) =

$15,158

$19,258

$16,458

$14,458

$19,034

IRR =

9.60%

($38,794)

$26,246

$24,462

$24,462

$67,888

Note: A true sense of capital gains is realized only for the sale of land.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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ST 10.2 Morgantown Mining Company

(a) Unit-production method
(Units are thousand dollars)
0

10

Income Statement

Revenues (savings)
Expenses:
O&M
Depreciation
Taxable Income
Income Taxes (40%)
Net Income

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
($19,300)
Salvage
Gains Tax
Working capital
($2,500)
Net Cash Flow
($21,800)

$500

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$2,500
$8,012

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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(b) 7 year MACRS

(Units are thousand dollars)
0

10

Income Statement

Revenues (savings)
Expenses:
O&M

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

Depreciation
Taxable Income
Income Taxes (40%)

$2,400
$2,758
$4,342
$1,737

$2,400
$4,727
$2,373
$949

$2,400
$3,376
$3,724
$1,490

$2,400
$2,411
$4,689
$1,876

$2,400
$1,723
$5,377
$2,151

$2,400
$1,722
$5,378
$2,151

$2,400
$1,723
$5,377
$2,151

$2,400
$861
$6,239
$2,496

$2,400
$0
$7,100
$2,840

$2,400
$0
$7,100
$2,840

Net Income

$2,605

$1,424

$2,235

$2,814

$3,226

$3,227

$3,226

$3,744

$4,260

$4,260

$2,605
$2,758

$1,424
$4,727

$2,235
$3,376

$2,814
$2,411

$3,226
$1,723

$3,227
$1,722

$3,226
$1,723

$3,744
$861

$4,260
$0

$4,260
$0

$4,260

$500
($200)
$2,500
$7,060

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Net Cash Flow

($19,300)

($2,500)
($21,800)

$5,363

$6,151

$5,610

$5,224

$4,949

$4,949

$4,949

$4,604

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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ST 10.3 Note to Instructors: In order to make the problem more realistic, the savings due to reduction in development time is
changed from $114,000 to $314,000. This correction is already made for the 2nd printing.
Savings = $314,000 + $35,000 = $349,000 per year
Materials (resin) = $350(400) = $140,000 per year
Cost base = $187,000 + $10,000 + $15,000 = $212,000
Taxable gain = $30,000
(a) Equity financing (retained earnings):
Input
Tax Rate(%)=
MARR(%)=
0

40
20

Output
PW(i)=
IRR(%)=

$181,889
50.80%

Revenues (savings)
Expenses:
O&M costs
Resin
Software development
Depreciation

$349,000

$349,000

$349,000

$349,000

$349,000

$349,000

$36,000
$140,000
$20,000
42,400

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

67,840

40,704

24,422

24,422

12,211

Taxable Income
Income Taxes (40%)

$110,600
44,240

$105,160
42,064

$132,296
52,918

$148,578
59,431

$148,578
59,431

$160,789
64,316

$66,360

$63,096

$79,378

$89,147

$89,147

$96,473

66,360
42,400

63,096
67,840

79,378
40,704

89,147
24,422

89,147
24,422

96,473
12,211

Income Statement

Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

(212,000)
30,000
(12,000)
($212,000)

$108,760

$130,936

$120,082

$113,569

$113,569

$126,684

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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(b) Debt financing (term loan): annual installment = $212,000(A/P, 13%, 6) = $53,032
Tax Rate(%)=
MARR(%)=
0

40
20

PW(i)= $244,004
IRR(%)= #NUM!

$349,000

$349,000

$349,000

$349,000

$349,000 $349,000

$36,000
$140,000
$20,000
42,400
27,560

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000 $36,000
$140,000 $140,000

67,840
24,249

40,704
20,507

24,422
16,278

Taxable Income
Income Taxes (40%)

$83,040
33,216

$80,911
32,365

$111,789
44,716

$132,299
52,920

Net Income

$49,824

$48,547

$67,074

$79,380

$82,246

$92,813

49,824
42,400

48,547
67,840

67,074
40,704

79,380
24,422

82,246
24,422

92,813
12,211

Income Statement
Revenues (savings)
Expenses:
O&M costs
Resin
Software development
Depreciation
Debt Interest

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed Funds
Principal repayment
Net Cash Flow

24,422
11,500

12,211
6,101

$137,077 $154,688
54,831
61,875

(212,000)
30,000
(12,000)
212,000

$0

(25,472)

(28,784)

(32,526)

(36,754)

(41,532)

(46,931)

$66,752

$87,603

$75,252

$67,048

$65,137

$76,092

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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(c) Lease financing (financial lease):

Tax Rate(%)=
MARR(%)=
0

40
20

PW(i)= $185,396
IRR(%)= 156.94%

$349,000

$349,000

$349,000

$349,000

$349,000 $349,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000 $36,000
$140,000 $140,000

$62,560

$36,000
$140,000
$20,000
$62,560

$62,560

$62,560

$62,560

Taxable Income
Income Taxes

($62,560)
($25,024)

$90,440
36,176

$110,440
44,176

$110,440
44,176

$110,440
44,176

$110,440 $173,000
44,176
69,200

Net Income

($37,536)

$54,264

$66,264

$66,264

$66,264

$66,264 $103,800

(37,536)

54,264

66,264

66,264

66,264

($37,536)

$54,264

$66,264

$66,264

$66,264

Income Statement
Revenues (savings)
Expenses:
O&M costs
Resin
Software development
Lease Payment

Cash Flow Statement

Operating Activities:
Net Income
Net Cash Flow

$62,560

66,264

$0

103,800

$66,264 $103,800

(d) The best financing method is the term loan option.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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ST 10.4

(a) The net cash flows for each alternative over 10 years:
Installing AGVS:
Input Data
Tax Rate(%)=
MARR(%)=

Output
PW(9%)= ($167,864)

35
15

Financial Data
year
Depreciation
Book value
Interest payment
Principal payment
O&M costs
Cash Flow Statement

Investment
Net proceeds from sale
-(1 - 0.35) (Expenses)
-(1 - 0.35) (Debt interest)
+ (0.35) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

0
$159,000
159,000
$20,000

1
2
3
$22,721 $38,939 $27,809
136,279
97,340
69,531
15,900
13,296
10,431
(26,044) (28,648) (31,513)
$20,000 $20,000 $20,000

4
5
6
$19,859 $14,199 $14,183
49,672
35,473
21,290
7,280
3,813
(34,664) (38,131)
$20,000 $20,000 $20,000

7
$14,199
7,091

8
$7,091
(0)

10
$0
(0)

$0
(0)

$20,000

$20,000

$20,000

$20,000

10

(all units in thousands of dollars)

0
($159,000)

($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000)
(10,335)
(8,642)
(6,780)
(4,732)
(2,478)
7,952
13,629
9,733
6,951
4,970
4,964
4,970
2,482
0
$159,000
(26,044) (28,648) (31,513) (34,664) (38,131)

$0

($13,000) ($41,426) ($36,662) ($41,560) ($45,445) ($48,640)

$0

($8,036)

($8,030) ($10,518) ($13,000)

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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Leasing gas-powered lift trucks (payable at the end of each year):

total annual expenses = $5,465 + $6,317

+ $1,660 + $58,653 + $10,000
= $82,095
after-tax annual expenses = (1 - 0.35)($82,095)
= $53,362 per year
(b) & (c) The incremental cash flows (AGVS option Gas truck option)
PW (i )agvs - gas = $13, 000 + $11,933( P / F , i,1)
+$16, 700( P / F , i, 2) + $11,803( P / F , i,3) + $7,919( P / F , i, 4) + $4, 719( P / F , i,5)
+$45,329( P / F , i, 6) + $45,329( P / F , i, 7) + $42,845( P / F , i,8) + $40,362( P / F , i,9)
+$53,362( P / F , i,10)
=0
IRR = 104.24% > 15%

Select the AGVS option.

(d) Repeat (c) based on the present worth criterion.

PW (15%)gas = $267,810
PW (15%)agvs = $167,865
Select the AGVS option.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.

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