A.9. The cost of heavy construction dredging equipment is rising at the rate of 6 percent com- pounded every year. A sum of $400,000 is now on hand. Two alternatives are available: (a) One $400,000 unit if purchased now should serve the needs of a growing contractor for the next 10 years. (b) One $250,000 unit may be purchased now and another identical unit purchased in five years at the price increase defined above. At what interest rate must the extra $150,000 left on hand be invested in order to provide the needed cash in five years? Ne- glect obsolescence costs and comparative operating costs.

A.9. The cost of heavy construction dredging equipment is rising at the rate of 6 percent com- pounded every year. A sum of $400,000 is now on hand. Two alternatives are available: (a) One $400,000 unit if purchased now should serve the needs of a growing contractor for the next 10 years. (b) One $250,000 unit may be purchased now and another identical unit purchased in five years at the price increase defined above. At what interest rate must the extra $150,000 left on hand be invested in order to provide the needed cash in five years? Ne- glect obsolescence costs and comparative operating costs.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EA: Gardner Denver Company is considering the purchase of a new piece of factory equipment that will...

See similar textbooks

Similar questions

Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
4. Your company is considering the introduction of a new product line. The initial investment required for this project is $500,000, and annual maintenance costs are anticipated to be $35,000. Annual operating costs will be directly proportional to the level of production at $7.50 per unit, and each unit of product can be sold for $50. If the MARR is 15% and the project has a life of 5 years, what is the minimum annual production level for which the project is economically viable?
The cost of a special purpose equipment will increase at the rate of 10% per year. If the cost for the first year is $10,000, what is the present worth of the costs for a 3-year time period at a MARR of 12% per year compounded annually? Your Answer:
A new machine for your company has a first cost of $80,000 and an estimated net salvage value of $15,000 at the end of 20 years. It is expected to have operating and maintenance costs of $3,000 per year, and it is expected to reduce costs by $5,000 per year. Assume an interest rate of 8%. What is the annual equivalent cost of the investment if the planning horizon is 20 years?
3. A delivery company is expanding its fleet of work vans at an initial cost of $100,000. Operation and maintenance costs for the new vehicles are expected to be $20,000/year for the next 10 years. After 10 years, the vans will be sold for a total of $10,000. The annual revenue increase associated with this fleet upgrade is expected to be $50,000. What is the company's rate of return on this investment?
The Geo-Star Manufacturing Company is considering a new investment in a punch-press machinethat will cost $100,000 and has an annual maintenance cost of $10,000. There is also an additionaloverhauling cost of $20,000 for the equipment onceevery four years. Assuming that this equipment willlast infinitely under these conditions, what is thecapitalized equivalent cost of this investment at aninterest rate of 10%?
b) Your company has asked you to analyze the purchase of a new machine. The machine will cost $1000,000 and have an operating and maintenance cost that starts at $40,000 the first year and increases by $10,000 each year. Assume the salvage value at the end of 10 years is $20,000 and the interest rate is 18% per year. What is the required annual revenue for this project to break even?
One oil company is considering 5 pipe sizes for a new pipeline. The costs for each of them are given below. Assuming that all the pipelines will last 15 years and that the company's minimum acceptable rate of return (MAAR) is 18% per year, determine which pipe size can be used based on A) present value method and B) incremental rate of return method. Tube size in mm 140 160 200 240 300 Initial inversion $9180 $10510 $13180 $15850 $30530 Installation Cost $600 $800 $1400 $1500 $2000 Annual Cost Opperation $6000 $5800 $5200 $4900 $4800
A truck can be purchased for $55,000. Annual O&M costs are expected to increase by $1,800 every year, with a 1st-year O&M cost of $4,000. (MARR = 26% and the planning horizon is 10 years) • The compressor salvage value for a given period t is calculated based on the following equation: Salvage value (t) = $30,000– $3,000 * t a) Find the Optimum Replacement Interval for this Equipment b) Find the Optimum Replacement Interval for this Equipment if the O&M costs are decreased to $1,700/yr. What is your conclusion? c) Find the Optimum Replacement Interval for this Equipment if the initial cost is reduced to $52,000. What is your conclusion? (independent of part b)
Your company is considering the purchase of a new piece of manufacturing equipment. The new machine will cost $500,000. The expected benefit of the equipment will be increased productivity of $150,000 at the end of each year for five years. Calculate the net present value (NPV) for the machine assuming a cost of capital of 12% compounded annually. Your Answer: Answer
#1: An investment will cost $10,000 today for equipment plus expenses for labor and materials at a continuous annual rate of $2,000 per year for the next four years. The project will begin earning back money at a continuous rate of $3,000 per year beginning four years from now and continuing forever. Assuming an annual effective rate i = 2%, calculate the discounted payback period.
Consider a 200,000 SF office building complex, with NOI of $25/SF/year with rents and operating expenses paid in arrears (at the end of the year) annually, and no capital expenditures. The rent will increase by 3% per year. The discount rate is 10%/year. a. What is the value of this office building, assuming that the building is sold at the end of year 10 and the cap rate at that time is expected to be 10%? What is the cap rate at time 0? b. What is the value of this office building, assuming that the building will be held and rented indefinitely (perpetually)? What is the implied cap rate at time 0? c. What is the value if the rents are paid in advance (at the beginning of the year) and the building is rented perpetually?