11-13-23, 10:17 AM Microsoft Lens(1)

Review: Chapter 5, 6 and 7 5. Annual Worth and Future Worth 6. Rate of Return 7. Replacement Analysis 5.1 Annual Worth 5.2 Future Worth 6.1 Internal Rate of Return Calculations 6.2 External Rate of Return Calculations 7.1: Cash Flow and Opportunity Cost Approaches to Replacement Analysis 7.2: Optimum Replacement Interval « Potential questions in exam: concept questions (T/F), short calculations, long calculations Example 1 A company is considering outsourcing its call center operations to a third-party contractor instead of operating its own, as it currently does. It would cost the third-party contractor $800,000 to set up the call center. It would cost $250,000 per year to operate the outsourced call center, but it would save the company $400,000 in labor costs per year. The call center will be operated for 8 years, and the company anticipates a salvage value of $25,000 when it sells the furniture and equipment used at the end of the outsourced call center's operations. Compute the annual worth of the outsourced call center, and state whether or not the company should outsource its call center operations to a third-party contractor assuming its MARR is 8%. - Given: P=-$800,000, A=$150,000, F=$25,000, MARR=8%, n=8 Find: AW Using factor notation, we know AW(8% ) = — $800,000(A|P 8 %, 8) + $150,000 + $25,000(A|F 8 % , 8) AW(8% ) = — $800,000(0.17401) + $150.000 + $25,000(0.09401) = $13,142.25 Since AW(8%) > O, the company should outsource its call center operations. Example 2 A hospital is considering purchasing a new medical dispensing cabinet that will cost $200,000. It believes that this cabinet will reduce the amount of labor required to track and administer medications and will also result in fewer expired medicines. It estimates ¥ ¥ T T end

Example 2 A hospital is considering purchasing a new medical dispensing cabinet that will cost $200,000. It believes that this cabinet will reduce the amount of labor required to track and administer medications and will also result in fewer expired medicines. It estimates the medical dispensing cabinet will result in a savings of $30,000 at the end of year one and that the savings will increase by $5,000 per year for each of the 7 years that the machine will be used. What is the IRR of this investment? If the hospital's MARR is 12%, should they invest in this cabinet? - Given: Composite series with, P=-$200,000, A=$30,000, G=$5,000, MARR=12%, n=7 Find: Using the factor tables, PW (i) = - $200,000 + $30,000(P|A i*,7) + $5000(P|G i*,7) = 0 ‘We can therefore infer that 11% < i* < 12%. We will need to try various values of i to determine the value of i so PW(i) =0. We could use linear interpolation to Ifi = 11%, we obtain approximate the value of i*, or if we had PW (1% ) = — 5200000 + $30,000(4.71220) + $5000(12.18716) = $2.301.50 ~ additional tables (e.g., i = 11.1%, 11.2%, etc.) If i = 12%, we obtain we could more closely estimate the value of o i*. When we interpolate, we obtain a value of PW (12% ) = — $200,000 + $30,000(4.56376) + $5.000(11.64427) = — $4,865.85 |94 306 A company is trying to decide whether it should upgrade a machine it has or purchase a newer version of the machine. It will need to use the machine for the next 6 years. If it upgrades the machine, it already owns, this would cost $40,000; the machine it owns would cost $10,000 per year to operate and maintain. At the end of 6 years, the machine would have a salvage value of $2,000. Alternatively, it could trade in the machine it owns for $20,000 and purchase a new machine for $90,000. The new machine would cost $2,000 per year to operate and maintain. At the end of 6 years, the machine would have a salvage value of $15,000. Assuming the company has a MARR of 10%, compute the EUAC of both the upgraded and new machine using the insider perspective. Which alternative would you recommend? EQY CF(rebuild) CF(new) Given: Cash flows shown in the table below, n=6, MARR=10% : . -$90,000 + Find: EUAC for each alternative 0 -$40,000 $20,000 If the company upgrades its machine, the EUAC would be: EUAC(rebuild) = $40,000(A|P 10 % , 6) + $10,000 — $2,000(A|F 10 % . 6) 15 -$10,000 -$2,000 EUAC(rebuild) = $40,000(0.22961) + $10,000 — $2,000(0.12961) = $18,925 $10,000+ -$2.000+ ” X { If the company buys a new machine, the EUAC would be: $2,000 $15,000 EUAC(new) = $70.000(A|P 10 % . 6) + $2,000 — $15,000(A|F 10 % , 6) EUAC(new) = $70,000(0.22961) + $2,000 — $15,000(0.12961) = $16,129 Since EUAC(new) < EUAC(rebuild), the company should purchase a new machine.