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Dinah Fe T.

Olitan Activity 5

1. A dam will have a first cost of $5,000,000, an annual maintenance cost of $25,000 and minor reconstruction cost
of $100,000 every 5 years. At an interest of 8% per year, the capitalized cost of the dam is nearest to:
Pcap = 5,000,000 + 25,000/0.08 + 100,000(A/F, 8%, 5)/0.08 = $5,525,625 ans.

2. A member of congress wants to know the capitalized cost of maintaining a proposed national park. The annual
maintenance cost is expected to be $25,000. At an interest rate of 6% per year, the capitalized cost of the
maintenance would be closest to:
P = A/i = 25,000/0.06 = $416,667 ans.

3. A purchasing agent is considering the purchase of some new equipment for the mailroom. Two different
manufacturers have provided quotation. An analysis of the quotations indicates the following:

Manufacturer Cost Useful life in years End-of- Useful Life Salvage Value
Speedy $1,500 5 $200
Allied $1,600 5 $325

Solution : For fixed output, the criterion is to minimize the present worth of cost.
Speedy: PW = 1500 – 200(P/F,7%,5)
= $1,357 Choose this equipment

Allied : PW = 1,600 -325(P/F, 7%,5)


= $1,368

4. Alternative X has a first cost of $20,000, an operating cost of $9,000 per year, and a $5,000 salvage value after
5 years. Alternative Y will cost $35,000 with an operating cost of $4,000 per year and a salvage value of $7,000
after 5 years. At an MARR of 12% per year, which should be selected?

Solution:
PWX = -20,000 - 9000(P/A,12%,5) + 5000(P/F,12%,5)
=-$49,606
PWY = -35,000 - 4000(P/A,12%,5) + 7000(P/F,12%,5)
= -$45,447 Choose this equipment

National Home builders Inc. plans to purchase new cut-and-finish equipment. Two manufacturers offered the
estimates below.

Solution : Determine which vendor should be selected on the basis of a present worth comparison, if the MARR
is 15% per year.

PWa = -15,000-15,000(P/F,15%,6) + 1,000(P/F,15%,6) -15,000(P/F,15%,12) + 1,000(P/F,15%,12)


+ 1,000(P/F,15%,18) – 3,500(P/A,15%,18)
= $ -45,036
PWb = -18,000-18,000(P/F,15%,9) + 2,000(P/F,15%,9) -2,000(P/F,15%,18) + 3,100(P/A,15%,18)
= $ -41,384 Choose this equipment
Dinah Fe T. Olitan Activity 6

1. On April 1 a man borrows $100. The loan is to be repaid in three equal semi-annual (every 6 months) payments.
If the annual interest rate is 7% compounded semi-annually, how much is each payment?

𝐴[(1+𝑖)𝑛 −1)] 𝐴[(1+0.0.35)3 −1)]


Solution : Pw = ; 100 = ; A = $ 35.69
𝑖(1+𝑖)𝑛 𝑖(1+0.035)3

2. An electronics firm invested $60,000 in a precision inspection device. It cost $4000 to operate and maintain in
the first year and $3000 in each of the subsequent years. At the end of 4 years, the firm changed their inspection
procedure, eliminating the need for the device. The purchasing agent was very fortunate in being able to sell the
inspection device for $60,000, the original price. The plant manager asks you to compute the equivalent uniform
annual cost of the device during the 4 years it was used. Assume interest at 10% per year.

Solution : 60k F
4k 3k 3k 3k 3k

0 1 2 3 4 5
60k
F = P (1+I)n
F =60k(1+0.1)4 + 4k(1+0.1)3 + 3k(1+0.13-1)/0.1 - 60k = $43.1k
𝐴[(1+𝑖)𝑛 −1)] 𝐴[(1+0.1)4 −1)]
F= ; 43.1k = ; A =$ 9,287
𝑖 0.1

3. The average age of engineering students at graduation is a little over 23 years. This means that the working
career of most engineers is almost exactly 500 months. How much would an engineer need to save each month
to become a millionaire by the end of his working career? Assume a 15% interest rate, compounded monthly.

Solution: F
A A A A A A
𝐴[(1+𝑖)𝑛 −1)] 𝐴 [(1+0.0125)500 −1]
F= = ; A= $25.13
𝑖 0.0125
1 2 3 498 499 500

4. Two possible routes for a power line are under study. Data on the routes are as follows:

Around the Lake Under the Lake


Length 15km 5km
First Cost $5,000/km $25,000/km
Maintenance $200/km/yr $400/km/yr
Useful life, in years 15 15
Salvage Value $3,000/km $5,000/km
Yearly power loss $500/km $500/km
Annual Prop. Tax 2% of first cost 2% of first cost

If 7% interest is used, should the power line be routed around the lake or under the lake?
Solution: “Around the lake”.
First Cost , P = 5,000(15) = 75,000
Salvage Value , F =3,000(15) = 45,000
Annual Maintenance Cost = 200(15) = 3,000
Annual power loss = 500(15) =7,500
Annual Prop. Tax = 2% (75,000) =1,500
Total Annual Cost , A1 = 3,000+ 7,500+ 1,500 ; A1 = 12,000
75,000
1 2 14 15

12,000 12,000 12,000 12,000


75,000

𝐴2 [(1+𝑖)𝑛 −1)] 𝐴2 [(1+0.07)15 −1)]


P= ; 75k = ; A2= 8,234.60
𝑖(1+𝑖)𝑛 0.07(1+0.07)15

𝐴3 [(1+𝑖)𝑛 −1)] 𝐴3 [(1+0.07)15 −1)]


F= ; 45k = ; A3= 1,790.76
𝑖 0.07

Equivalent Annual Cost = A1+ A2 – A3 = 12,000 + 8,234.60 – 1,790.76


= $ 18,443.84

“Under the lake”.

First Cost , P = 25,000(5) = 125,000


Salvage Value , F =5,000(5) = 25,000
Annual Maintenance Cost = 400(5) = 2,000
Annual power loss = 500(5) =2,500
Annual Prop. Tax = 2% (125,000) =2,500
Total Annual Cost , A1 = 2,000+ 2,500 + 2,500 ; A1 = 7,000

25,000
1 2 14 15

7,000 7,000 7,000 7,000


125,000

𝐴2 [(1+𝑖)𝑛 −1)] 𝐴2 [(1+0.07)15 −1)]


P= ; 125k = ; A2= 13,724.33
𝑖(1+𝑖)𝑛 0.07(1+0.07)15

𝐴3 [(1+𝑖)𝑛 −1)] 𝐴3 [(1+0.07)15 −1)]


F= ; 25k = ; A3= 994.87
𝑖 0.07

Equivalent Annual Cost = A1+ A2 – A3 = 7,000 + 13,724.33 – 994.87


= $ 19,729.46

Around the lake ($ 18,443.84) < Under the lake ($ 19,729.46)

Therefore : Choose “AROUND THE LAKE” option for it has a lower annual cost equivalent.
Dinah Fe T. Olitan Activity 7

1. Consider the following cash flow

Year Cash Flow


0 -$400
1 0
2 +200
3 +150
4 +150
5 +50

Write one equation, with i as the only unknown, for the cash flow. In the equation you are not to use
more than two single payment compound interest factors. (You may use as many other factors as you
wish.) Then solve your equation for i.

Solution :
0 2k 1.5k 1k 0.5k

0 1 2 3 4 5

4k

𝐴[(1+𝑖)𝑛 −1)] 𝐺[(1+𝑖)𝑛 −4𝑖−1] 1


P = ( 𝑛 - 2 𝑖 )( )
𝑖(1+𝑖) 𝑖 (1+𝑖) (1+𝑖)1
2,000[(1+𝑖)4 −1] 500[(1+𝑖)4 −4𝑖−1] 1
4,000 = ( 4 − 2 4 )( )
𝑖(1+𝑖) 𝑖 (1+𝑖) (1+𝑖)1
i= 0.07822 = 7.822 %
2. Compute the rate of return for the following cash flow to within 1/2%.

Year Cash Flow


0 -$100
1-10 +27

Solution:
27 27 27 27
𝐴[(1+𝑖)𝑛 −1)] 27[(1+𝑖)10 −1)]
1 2 9 10 P= ; 100= ; i= 23.81%
𝑖(1+𝑖)𝑛 𝑖(1+𝑖)10
$100

3. Solve the following cash flow for the rate of return to within an 1/2%.

Year Cash Flow


0 -$500
1 -100
2 +300
3 +300
4 +400
5 +500
300 300 400 500

1 2 3 4 5

100
$500

𝐹
F = P(1+i)n ; P=
(1+𝑖)𝑛
300 300 400 500 100
500 = + + + -
(1+𝑖)2 (1+𝑖)3 (1+𝑖)4 (1+𝑖)5 (1+𝑖)1
i = 30.81%

4. Solve the following cash flow for the rate of return to within an 1/2%.

Year Cash Flow


1-5 -$233
6-10 +1000
Solution: 1000 1000 1000 1000 1000

0 1 2 3 4 5 6 7 8 9 10

233 233 233 233 233

P233 = P1000
𝐴[(1+𝑖)𝑛 −1)] 233[(1+𝑖)5 −1)]
P233 = =
𝑖(1+𝑖)𝑛 𝑖(1+𝑖)5
𝐴[(1+𝑖)𝑛 −1)] 1 1000[(1+𝑖)5 −1)] 1
P1000= ( )((1+𝑖)𝑛 ) = ( ) ((1+𝑖)5 )
𝑖(1+𝑖)𝑛 𝑖(1+𝑖)5

Equate P233 and P1000


233[(1+𝑖)5 −1)] 1000[(1+𝑖)5 −1)] 1
= ( ) ((1+𝑖)5 ) ; i= 33.82 %
𝑖(1+𝑖)5 𝑖(1+𝑖)5

5. Compute the rate of return for the following cash flow to within 0.5%.

Year Cash Flow


0 -$640
1 0
2 100
3 200
4 300
5 300
Solution :
100 200 300 300

1 2 3 4 5

$640

𝐹
P = (1+𝑖)𝑛
100 200 300 300
640 = (1+𝑖)2 + (1+𝑖)3 +(1+𝑖)4 + (1+𝑖)5
i = 9.27%
Dinah Fe T. Olitan Activity 8

1. A firm is considering moving its manufacturing plant from Chicago to a new location. The industrial engineering department was
asked to identify the various alternatives together with the costs to relocate the plant, and the benefits. The engineers examined six
likely sites, together with the do-nothing alternative of keeping the plant at its present location. Their findings are summarized as
follows:

Plant Location First Cost ($000s) Uniform Annual Benefit ($000s)


Denver $300 $ 52
Dallas 550 137
San Antonio 450 117
Los Angeles 750 167
Cleveland 150 18
Atlanta 200 49
Chicago 0 0

The annual benefits are expected to be constant over the 8-year analysis period. IT the firm uses 10% annual interest in its
economic analysis, where should the manufacturing plant be located? (Answer: Dallas)

(1+𝑖)𝑛 −1
P = 𝐴[ ]
𝑖(1+𝑖)𝑛

(1+𝑖)8 −1 (1+𝑖)8 −1
PDenver $300 = $52 [ ] ; i=7.9%<10% PLA $750 = $167 [ ] ; i=14.97%>10% ok
𝑖(1+𝑖)8 𝑖(1+𝑖)8
(1+𝑖)8 −1 (1+𝑖)8 −1
PDallas $550 = $137 [ ] ; i=18.5% >10% ok PCleveland $150 = $18 [ ] ; i= -0.9%<10%
𝑖(1+𝑖)8 𝑖(1+𝑖)8
(1+𝑖)8 −1 (1+𝑖)8 −1
PSan Atonio $450 = $117 [ ] ; i=19.92%>10% ok PAtlanta $200 = $49 [ ] ; i=17.97%>10% ok
𝑖(1+𝑖)8 𝑖(1+𝑖)8

(1+𝑖)8 −1
Dallas-San Antonio: $550 − $450 = $137 − $117 [ ] ; i=11.815% Dallas is preferred
𝑖(1+𝑖)8
(1+𝑖)8 −1
La-Atlanta: $750 − $200 = $167 − $49 [ ]; i=13.86% LA is preferred
𝑖(1+𝑖)8
(1+𝑖)8 −1
LA-Dallas: $750 − $550 = $167 − $137 [ ]; i=4.24% Dallas is preferred (Answer)
𝑖(1+𝑖)8

2. Consider three mutually exclusive alternatives:

Year Buy X BuyY Do Nothing


0 -$100.0 -$50.0 0
1 +31.5 +16.5 0
2 +31.5 +16.5 0
3 +31.5 +16.5 0
4 +31.5 +16.5 0

Which alternative should be selected:


(a) If the minimum attractive rate of return equals 6%?
(b) If MARR =9%?
(c) If MARR = 10%?
(d) IfMARR = 14%? (Answers: (a) X; (b) Y; (c) Y; (d) Do nothing)

(1+𝑖)4 −1
PX $100 = $31.5 [ ] ;i=9.93%
𝑖(1+𝑖)4
(1+𝑖)4 −1
PY $50 = $16.5 [ ] ; i=12.11%
𝑖(1+𝑖)4
(1+𝑖)4 −1
a) X-Y: $100 − $50 = $31.5 − $16.5 [ ]; i=7.71%>6% X is preferred
𝑖(1+𝑖)4
(1+𝑖)4 −1
X-Do Nothing: $100 − 0 = $31.5 − 0 [ ] ; i=9.93%>6% X is preferred (Ans)
𝑖(1+𝑖)4

(1+𝑖)4 −1
b) X-Y: $100 − $50 = $31.5 − $16.5 [ ]; i=7.71%<9% Y is preferred
𝑖(1+𝑖)4
(1+𝑖)4 −1
Y-Do Nothing: $50 − 0 = $16.5 − 0 [ ] ; i=12.11%>9% Y is preferred (Ans)
𝑖(1+𝑖)4

(1+𝑖)4 −1
c) X-Y: $100 − $50 = $31.5 − $16.5 [ ]; i=7.71%<10% Y is preferred
𝑖(1+𝑖)4
(1+𝑖)4 −1
Y-Do Nothing: $50 − 0 = $16.5 − 0 [ ] ; i=12.11%>10% Y is preferred (Ans)
𝑖(1+𝑖)4

(1+𝑖)4 −1
d) X-Y: $100 − $50 = $31.5 − $16.5 [ ]; i=7.71%<14% Y is preferred
𝑖(1+𝑖)4
(1+𝑖)4 −1
Y-Do Nothing: $50 − 0 = $16.5 − 0 [ ] ; i=12.11%<14% Do Nothing is preferred (Ans)
𝑖(1+𝑖)4

3. Consider the following alternatives:


A B C
Initial Cost $300 $600 $200
Uniform Annual Benefits 41 98 35

Each alternative has a l0-year useful life and no salvage value. If the MARRis 8%, which alternative should be
selected?

(1+𝑖)10 −1
PA $300 = $41 [ ] ; i=6.12%<8%
𝑖(1+𝑖)10
(1+𝑖)10 −1
PB $600 = $98 [ ] ; i=10.08%>10% ok
𝑖(1+𝑖)10
(1+𝑖)10 −1
PC $200 = $35 [ ] ; i=11.73%>10% ok
𝑖(1+𝑖)10

(1+𝑖)10 −1
B-C: $600 − $200 = $98 − $35 [ ]; i=9.24%>8% B is preferred (Ans)
𝑖(1+𝑖)10