A city is planning a new pipeline to supply water from distant mountains. The planning horizon chosen is 50 years, and the city uses an interest rate of 7%. For $250 million, the city can build a pipeline now that would supply its needs for 50 years, or it could build the project in two stages: $150 million now and $200 million in Year 25. Annual operation and maintenance for the first stage of the two-stage project are $3.0 million through Year 25 followed by $6.0 million for the combined first and second stage project after Year 25 and through Year 50. a) Form the cash flow table for the two alternatives and the incremental investment, showing the correct signs for all entries. b) Using present worth analysis, determine the best project. c) Using annual cash flow analysis, determine the best project.
A city is planning a new pipeline to supply water from distant mountains. The planning horizon chosen is 50 years, and the city uses an interest rate of 7%. For $250 million, the city can build a pipeline now that would supply its needs for 50 years, or it could build the project in two stages: $150 million now and $200 million in Year 25. Annual operation and maintenance for the first stage of the two-stage project are $3.0 million through Year 25 followed by $6.0 million for the combined first and second stage project after Year 25 and through Year 50. a) Form the cash flow table for the two alternatives and the incremental investment, showing the correct signs for all entries. b) Using present worth analysis, determine the best project. c) Using annual cash flow analysis, determine the best project.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A city is planning a new pipeline to supply water from distant mountains. The planning
horizon chosen is 50 years, and the city uses an interest rate of 7%. For $250 million, the
city can build a pipeline now that would supply its needs for 50 years, or it could build the
project in two stages: $150 million now and $200 million in Year 25. Annual operation
and maintenance for the first stage of the two-stage project are $3.0 million through Year
25 followed by $6.0 million for the combined first and second stage project after Year 25
and through Year 50.
a) Form the cash flow table for the two alternatives and the incremental investment,
showing the correct signs for all entries.
b) Using present worth analysis, determine the best project.
c) Using annual cash flow analysis, determine the best project.
d) Using the incremental rate of return analysis, determine the best project. Check at the
MARR only; do not try to find the incremental ROR itself.
e) Using incremental benefit-cost ratio analysis, determine the best project.
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