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6.1
PW (12%) A $800 $1,500( P / F ,12%,1)
L $660( P / F ,12%,10)
$988.91
PW (12%) B $2, 635 $565( P / F ,12%,1)
L $840( P / F ,12%,10)
$1, 696.01
Select Project B.
6.2
(a)
Select Project B.
(b)
NFW (15%) D $1,500( F / P,15%,4) $450( F / A,15%, 4)
$376.49
NFW (15%) E $1,800( F / P,15%, 4) $600( F / A,15%, 4)
$152.18
Select Project D.
(c)
PW (15%)C $3, 000 $1, 000( P / F ,15%,1)
X ( P / F ,15%, 2)
$1,500( P / F ,15%,3) X ( P / F ,15%, 4)
1.3279 X $1,144.16
PW (15%)C 0
1.3279 X $1,144.16 0
X $861.63
(d)
PW (18%) D $1,500 $450( P / A,18%, 4)
$289.47 0
Yes, Project D is acceptable.
6.3
(a)
PW (12%) A $14,500 $12,610( P / F ,12%,1) $12,930( P / F ,12%,2)
$12,300( P / F ,15%,3) $15,821.54
PW (12%) B $12,900 $11,210( P / F ,12%,1) $11,720( P / F ,12%,2)
$11,500( P / F ,12%,3) $14,637.51
Select Project A.
(b)
FW (12%) A $15,821.54( F / P,12%,3) $22,228.13
FW (12%) B $14,637.51( F / P,12%,3) $20,564.65
Select Project A.
6.4
(a)
PW (15%) A $6,000 $800( P / F ,15%,1) $14,000( P / F ,15%,2)
$5,281.66
PW (15%) B $8,000 $11,500( P / F ,15%,1) $400( P / F ,15%,2)
$2,302.46
Select Project A.
(b) PW(i) function for each alterative on the same chart between 0% and 50%:
6.5
Method A:
Method B:
6.6
Select the standard lease option as you will save $52.72 in present worth.
6.7
Machine A:
Machine B:
*
6.8
(a)
Required HP to produce 10 HP:
Present Worth:
*
An asterisk next to a problem number indicates that the solution is available to students
on the Companion Website.
Motor B is preferred.
6.9 Given: Required service period = infinite, analysis period = least common
multiple service periods (six years)
Project A:
Project B:
6.10
(a) Without knowing the future replacement opportunities, we may assume that
both alternatives will be available in the future with the identical investments
and expenses. We further assume that the required service period will be
indefinite.
Project A1:
(1.10)3 1 33.10%
Project A2:
(c)
PW (10%) A1 $1,744.48
PW (10%) A 2 $1,800 $300( P / A,10%,3) S ( P / F ,10%,3)
$2,546.06 0.7513S
S $1, 067
6.11
Project B1:
Project B2:
(b)
Project B1 with two replacement cycles:
Project B2 with four replacement cycles where the fourth replacement ends
at the end of the first operating year:
6.12 Since only Model A is repeated in the future, we may have the following
sequence of replacement cycles:
S $2, 072.50
6.13
Since either tower will have zero salvage value after 20 years, we may select
the analysis period of 35 years:
If you assume an infinite analysis period, the present worth of each bid will
be:
[$137, 000 $2, 000( P / A,11%, 40)]( A / P,11%, 40)
PW (11%) Bid A
0.11
$157, 296
[$128, 000 $3,300( P / A,11%,35)]( A / P,11%,35)
PW (11%) Bid B
0.11
$161,367
6.14
(a)
PW (15%) A1 $15, 000 $9,500( P / F ,15%,1)
$12,500( P / F ,15%, 2) $7,500( P / F ,15%,3)
$7, 644.04
(b)
PW (15%) A 2 $25, 000 X ( P / F ,15%, 2)( P / F ,15%,1)
$9,300
X $24, 263
(c) Note that the net future worth of the project is equivalent to its terminal
project balance.
6.15
(a) Project balances as a function of time are as follows:
Project Balances
n A D
0 $2,500 $5,000
1 2,100 6,000
2 1,660 7,100
3 1,176 3,810
4 694 1,191
5 163 1,690
6 421 3,859
7 763 7,245
8 1,139
FW (10%) A $1,139
FW (10%) D $7, 245
6.16
*
6.17
Select Alternative B.
6.18
*
6.19
Let T denote the total operating hours in full load.
Motor I (Expensive)
6.20
Option 1: Purchase units from John Holland
6.21
(a) Determine the unit profit of air sample test by the TEM (in-house).
Subcontract Option:
(b) Let X denote the break-even number of air samples per year.
Note: If SECs goal is simply to minimize per unit cost of sampling, then the
break-even point would be calculated without including the revenue:
(a)
($199 / yr)
($0.034) / kWh
58,188 kWh/yr
(b)
6.24
New Lighting System Cost:
AEC (12%) $50, 000( A / P,12%, 20) ($8, 000 $3, 000)
$17, 694
6.26
Equivalent Annual Cost:
6.27
(a)
AE (15%) A [$2,500 $1, 000( P / F ,15%,1)
$400( P / F ,15%, 4)]( A / P,15%, 4)
$216.06
AE (15%) B [$4, 000 $100( P / F ,15%,1)]( A / P,15%, 4) $1,500
$129.40
Project A is a better choice.
(b)
AE (15%) B $129.40
6.29 Since the required service period is 12 years and the future replacement cost
for each truck remains unchanged, we can easily determine the equivalent
annual cost over a 12-year period by simply finding the annual equivalent cost
of the first replacement cycle for each truck.
6.30
Alternative Description
(b) With lease, the O&M costs will be paid by the leasing company:
For A1:
For A2:
For A3:
A2 is a better choice.
*
6.31
Option 1:
Option 2:
Capital Investment :
Supporting Equipment:
(1 0.1)15 1 3.1772
Operating Cost:
Capital Investment:
Supporting Equipment:
$150, 000
AEC (10%) 2 ( A / P,10%, )
16.4494
$912
(1 0.1)30 1 16.4494
Operating Cost:
Design Economics
*
6.33
(a)
Energy Loss:
Material Weight:
(60)(8894) A 533640 A
3.03813
AEC (11%) $814175 A
A
AEC (11%)
2 3.03813 $3,145.52
0.00193172
(c) Graphs of the capital cost, energy-loss cost, and the total cost as a function of
the cross-sectional area A:
Mixed Investments
6.34
i* B A 0% or 30%
Since this is a mixed incremental investment, we need to find the RIC using an
external interest rate of 15%.
Project B is preferred.
i*1 2 10% 9%
i* B A 28.11% 15%
Select Project B.
6.38
i* A 2 A1 29.92%
6.39
(b) We can verify the same result by applying the NPW criterion.
n AB
0 $2,376
1 0
2 0
3 0
4 2,500
IRR A B 1.28%
*
6.41
6.42
(a) The least common multiple project lives = six years analysis period six
years
Since the incremental cash flow series indicates a nonsimple investment, but it
is a pure incremental investment.
n A0 A1 A1 A0
0 0 -$2,500,000 -$2,500,000
1-8 -5,000,000 -2,900,000 2,100,000
A1 is a better choice.
n A2 A1 A2 A1
0 -$5,000,000 -$2,500,000 -$2,500,000
1-8 -1,400,000 -2,900,000 1,500,000
6.44
(a)
Project A vs. Project B
(b)
$1, 000 $300( P / A, i, 4)
i 7.71%
(c) Since borrowing rate of return (BRR) is less than MARR, Project D is
acceptable.
(d)
6.45
(a)
i1* 85.08%, i2* 48.11%, and i3* 44.31%
(b)
Project 1 vs. Project 2:
n Project 1 Project 2 21
0 $1,000 $5,000 $4,000
1 500 7,500 7,000
2 2,500 600 1,900
n Project 2 Project 3 23
0 -$5,000 -$2,000 -$3,000
1 7,500 1,500 6,000
2 600 2,000 -1,400
6.46
6.47 Select Model C. Note that all three projects would be acceptable individually,
as each projects IRR exceeds the MARR. The incremental IRR of Model (C
B) is 40%, indicating that Model C is preferred over Model B at MARR = 12%.
Similarly, the incremental IRR of Model (C A) is 15%, which exceeds the
MARR. Therefore, Model C is again preferred.
6.48 All projects would be acceptable because individual ROR exceed the MARR.
Based on the incremental analysis, we observe the following relationships:
6.49 From the incremental rate of return table, we can deduce the following
relationships:
It is necessary to determine the preference relationship among A1, A3, and A6.
6.50 For each power saw model, we need to determine the incremental cash flows
over the by-hand operation that will result over a 20-year service life.
Power Saw
Category Model A Model B Model C
Investment cost $4,000 $6,000 $7,000
Salvage value $400 $600 $700
Annual labour savings $1,296 $1,725 $1,944
Annual power cost $400 $420 $480
Net annual savings $896 $1,305 $1,464
Select Model B.
Select Model C.
Comments: Even though the incremental flow is a nonsimple, it has a unique rate
of return. As shown in Problem 7.39, this incremental cash flow series will pass the
net investment test, indicating that the incremental cash flow is a pure investment.
6.52
(a) Since there is not much information given regarding the future replacement
options and the required service period, we may assume that the required
service period is indefinite and both projects can be repeated at the same cost
in the future.
(b) The analysis period may be chosen as the least common multiple of project
lives, which is three years.
n A2 A1
0 -$5,000
1 0
2 0
3 15,000
IRR A 2 A1 44.195%
The MARR must be less than 44.195% for Project A1 to be preferred.
ST6.1
Option 1: Process device A lasts only four years. You have a required
service period of six years. If you take this option, you must consider how you
will satisfy the rest of the required service period at the end of the project life.
One option would subcontract the remaining work for the duration of the
remaining required service period. If you select this subcontracting option
along with Device A, the equivalent net present worth would be
Option 2: This option creates no problem because its service life coincides
with the required service period.
If the required service period is changed from six years to five years, what would
be the best course of action?
If there are price differentials in the subcontracting option (say, $55,000 a year for
a six-year contract, $60,000 for a five-year contract, $70,000 a year for a four-
year contract, and $75,000 a year for any contract lasting less than four years),
what would be the best option?
If both Processes A and B would be available in the subsequent years, but the
required investment and salvage value would be increasing at the annual rate of
10%, what would be the best course of action?
If both Device A and B will be available in the subsequent years, but the required
investment and salvage value (as well as the O & M costs) would be decreasing at
the annual rate of 10%, what would be the best course of action?
ST6.2
Note to Instructors: This case problem requires several pieces of information. (1)
No minimum attractive rate return figure is given for Northern Electric. (2) What
would be a typical number of accidents in line construction work? (3) How does a
typical electric utility handle the nesting problems? If there is some cleaning cost,
how much and how often?
First, we may calculate the equivalent present value (cost) for each option
without considering the accident costs and nesting problems.
Design Options
Factors Option 1 Option 2 Option 3 Option 4
Cross Arm Triangular Horizontal Stand Off
Line
Investment:
Construction cost $495,243 $396,813 $402,016 $398,000
Accident cost
Annual cost:
Flashover repair $6,000 $3,000 $3,000 $3,000
Cleaning nest
Annual savings:
Inventory 0 $4,521 $4,521 $4,521
Assume that Northern Electrics required rate of return would be 12%. The
equivalent present value cost for each option is as follows:
If we consider the potential accident costs ($65,000 per accident) during line
construction work, it is likely to change the outcome. If we expect only a
couple of accidents, Option 2 still appears to be the best. However, if you
expect more than three accidents, the conventional cross-arm design appears
to be more economical. If the nest cleaning cost were factored into the
analysis, the accident cost would be reduced to the extent of the annual
cleaning cost, indicating the preference of the triangular design.
ST6.3
Conventional method:
Blanking Method
Description Conventional Laser
Steel cost/part $14.98 $8.19
Transportation cost/part $0.67 $0.42
Blanking cost/part $0.50 $0.40
Capital cost/part $7.34 $5.72
Total unit cost $23.49 $14.73
ST6.4
Alternative 1:
153,12 TJ
Weight of dry coal
(0.75)(33.24 MJ/kg)
6,142 tonnes
Alternative 2:
153.12 TJ(0.94)
Natural Gas cost 40 / m3 3
(0.78)(39 MJ/m )
= $1,892,608
153.12 TJ(0.06)
Heating Oil cost $864 / L
(0.81)(38.6 MJ/L)
= $252,702
$10, 71,970
Unit cost $1.62 /kg
66106 kg
Alternative 2:
AEC (10%) ($889, 200 $1, 000)( A / P,10%, 20)
$2,145,310
$2, 249, 638
ST6.5
There is no information regarding the analysis period; we will assume that the
firm will be in business for an indefinite period.
There is no information regarding the future plastics technology options; we
will assume that the best one available will be the technology introduced n
months from now.
We will assume that the annual revenue/costs are spread evenly throughout
the year.
Present Worth Analysis: First we will determine the equivalent present worth for
each option, and its value at MARR = 15%
Option 1:
Option 2:
Although Option 1 (switching now) bestows a great present worth ($36.53 M), it
can be seen that the best time to retrofit would be to wait the full 96 months,
which would yield a PW of $48.22 M. The worst time to retrofit would be after
41 months ($186.43 M).
n PW n PW n PW n PW n PW n PW
1 $24.64 17 -$116.43 33 -$179.01 49 -$180.47 65 -$134.77 81 -$53.08
2 $13.14 18 -$122.44 34 -$180.73 50 -$178.86 66 -$130.61 82 -$47.00
3 $2.02 19 -$128.16 35 -$182.22 51 -$177.08 67 -$126.32 83 -$40.81
4 -$8.72 20 -$133.57 36 -$183.48 52 -$175.12 68 -$121.90 84 -$34.52
5 -$19.09 21 -$138.69 37 -$184.51 53 -$172.98 69 -$117.34 85 -$28.13
6 -$29.09 22 -$143.53 38 -$185.31 54 -$170.68 70 -$112.65 86 -$21.64
7 -$38.73 23 -$148.08 39 -$185.90 55 -$168.20 71 -$107.83 87 -$15.06
8 -$48.01 24 -$152.36 40 -$186.27 56 -$165.56 72 -$102.89 88 -$8.38
9 -$56.95 25 -$156.36 41 -$186.43 57 -$162.75 73 -$97.82 89 -$1.61
10 -$65.54 26 -$160.09 42 -$186.39 58 -$159.79 74 -$92.63 90 $5.25
11 -$73.79 27 -$163.56 43 -$186.13 59 -$156.67 75 -$87.32 91 $12.20
12 -$81.70 28 -$166.76 44 -$185.67 60 -$153.39 76 -$81.90 92 $19.24
13 -$89.29 29 -$169.71 45 -$185.02 61 -$149.96 77 -$76.36 93 $26.36
14 -$96.55 30 -$172.41 46 -$184.17 62 -$146.38 78 -$70.70 94 $33.57
15 -$103.49 31 -$174.85 47 -$183.12 63 -$142.65 79 -$64.94 95 $40.85
16 -$110.12 32 -$177.05 48 -$181.89 64 -$138.78 80 -$59.06 96 $48.22
ST6.6
There is no information regarding the expected cash flows from the current
operation if Chiller Cooling decides to defer the introduction of the
absorption technology for three years. Therefore, we need to make an
explicit assumption of the expected cash flows for the first three years if
Chiller Cooling decides to defer the decision. Assume that the annual cash
flow during this period would be X.
Another assumption we have to make is about the analysis period.
Assuming that the firm will be in business for an indefinite period, we also
need to make an explicit assumption regarding the future cooling technology.
Since there is no information about the future cooling technology options,
we may assume that the best cooling technology will be the absorption
technology that will be introduced three years from now. Therefore, if
Chiller Cooling decides to select Option 1, we could assume that, at the end
of eight years, Option 2 (the best cooling technology at that time) will be
adopted for an indefinite period.
Now we can determine the value X that makes the two options economically
equivalent at an interest rate of 15%. In other words, if we evaluate the two
present worth functions at i 15% , we have
PW (15%)1 $41.31
PW (15%)2 2.2832 X $13.28
X $12.28
Rate of return analysis: The present worth analysis above indicates that, if
X $12.28 , the break-even rate of return on incremental investment is
i*1 2 15%
Therefore, the ultimate choice will depend on the level of annual revenues
generated during the first three years when the advanced cooling technology is
deferred. Clearly, if
ST6.7
IRR = 25%
400%
The incremental cash flows result in multiple rates of return (25% and 400%), so
we may abandon the rate of return analysis. Using the PW analysis,
PB (i, 20%) 2 (8, 400, 000 1, 600, 000i)(1 0.20) $10, 000, 000
80, 000 1,920, 000i
0
i 4.17% 20%
If i 525%, then PB(i, 20%)1 0 , no RIC exists. So the RIC on the incremental
cash flows should be 4.17%, which indicates Select a smaller pump.
ST6.8
(a) Whenever you need to compare a set of mutually exclusive projects based
on the rate of return criterion, you should perform an incremental analysis.
In our example, the incremental cash flows would look like the following:
n B-A
0 -$10,000
1 +23,000
2 -13,200
i* B A 10% or 20%
We could abandon the IRR analysis and use the PW analysis to rank the
projects.
(b) If we plot the present worth as a function of interest rate, we will observe
the following:
Return on Invested Capital: The true rate of return can be found as a function of
MARR.
(Note that, if, i 1.3, there will be no feasible solution.) Rearranging the terms
in PB(i, MARR) 2 gives an expression of IRR as a function of MARR.
1.32
IRR 1.3
1 MARR