Problems of HW 8 (1)

9-3. The Ajax Corporation has an overhead crane that has an estimated remaining life of 8 years. The crane can be sold now for $8,000. If the crane is kept in service, it must be overhauled immediately at a cost of $5,000. Operating and maintenance costs will be $3,000 per year after the crane is overhauled. The overhauled crane will have zero MV at the end of the 8-year study period. A new crane will cost $20,000, will last for 8 years, and will have a $4,000 MV at that time. Operating and maintenance costs are $1,000 per year for the new crane. The company uses a before-tax interest rate of 10% per year in evaluating investment alternatives. Should the company replace the old crane? (9.410) 9-8. A city water and waste-water department has a four-year-old sludge pump that was initially purchased for $65,000. This pump can be kept in service for an additional four years, or it can be sold for $35,000 and replaced by a new pump. The purchase price of the replacement pump is $50,000. The projected MVs and operating and maintenance costs over the four-year planning horizon are shown in the table that follows. Assuming the MARR is 10%, (a) determine the economic life of the challenger and (b) determine when the defender should be replaced. (9.55, 9.610) $25,000 $18,500 $40,000 $13,000 21,000 21,000 32,000 15,500 17,000 23,500 24,000 18,000 13,000 26,000 16,000 20,500

9-16. Consider a piece of equipment that initially cost $8,000 and has these estimated annual expenses and MV: 1 $3,000 $4,700 2 3,000 3,200 3 3,500 2,200 4 4,000 1,450 5 4,500 1,950 6 5,250 1,600 7 6,250 1,300 8 7,750 1,110 If the after-tax MARR is 7% per year, determine the after-tax economic life of this equipment. MACRS (GDS) depreciation is being used (five-year property class). The effective income tax rate is 25%. (9.918)

10-9. Five independent projects consisting of reinforcing dams, levees, and embankments are available for funding by a certain public agency. The following tabulation shows the equivalent annual benefits and costs for each: (10.7)C - $1,800,000 $2,000,000 B 5,600,000 4,200,000 C 8,400,000 6,800,000 D 2,600,000 2,800,000 E 6,600,000 5,400,000 a. Assume that the projects are of the type for which the benefits can be determined with considerable certainty and that the agency is willing to invest money as long as the B-C ratio is at least one. Which alternatives should be selected for funding? b. What is the rank-ordering of projects from best to worst? c. If the projects involved intangible benefits that required considerable judgment in assigning their values, would your recommendation be affected?

10-17. Four mutually exclusive projects are being considered for a new 2-mile jogging track. The life of the track is expected to be 80 years, and the sponsoring agency’'s MARR is 12% per year. Annual benefits to the public have been estimated by an advisory committee and are shown below. Use the B-C method (incrementally) to select the best jogging track. (10.9)0 Initial cost $62,000 $52,000 $150,000 $55,000 Annual $10,000 $8,000 $20,000 $9,000 benefits B-C ratio 1.34 1.28 1.11 1.36