An engineer has designed 2 alternative systems to cater for customer's plant operation. System 1 will need initial investment of $150,000 and will have an annual operating cost of $20,000 with salvage price of $5,000 after 4 years. System 2 will need an investment of $180,000 and the annual operating cost will be $15,000. System can be salvaged for $8,000 after 6 years. At an interest rate of 10% per year, which system should be proposed by the engineer on the basis of a present worth analysis? Use equations to solve this problem.

An engineer has designed 2 alternative systems to cater for customer's plant operation. System 1 will need initial investment of $150,000 and will have an annual operating cost of $20,000 with salvage price of $5,000 after 4 years. System 2 will need an investment of $180,000 and the annual operating cost will be $15,000. System can be salvaged for $8,000 after 6 years. At an interest rate of 10% per year, which system should be proposed by the engineer on the basis of a present worth analysis? Use equations to solve this problem.

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

See similar textbooks

Related questions

Q: Capital Investment Analysis; Jones Excavation Company is planning an investment of $190,800 for a…

A: Net Present Value=(Present Value of Cash Inflows-Present Value of Cash Outflows)

Q: 5a. An elective project is currently under review. It requires an initial investment of $116,000 for…

A: The rate of return: The rate of return or the internal rate of return (IRR) is the rate at which the…

Q: Consider a new machine at a bottling plant that has a first cost of $100000, operating and…

A: All values shouldbe converted to Present value first before summing up all costs. FC and OM are…

Q: Tamarisk Inc. is contemplating a capital project with a cost of $143000. The project will generate…

A: Utilizing a capital budget enables firms to allocate resources wisely in order to maximize profits…

Q: A project will produce an operating cash flow of $14,000 a year for 5 years. The initial fixed asset…

A: Net present value (NPV) is an important capital budgeting metric. It is the sum of present values of…

Q: Mini Inc. is contemplating a capital project costing $49,631. The project will provide annual cost…

A: Net Present Value (NPV) is a vital financial metric employed to gauge the profitability of an…

Q: 5b. An elective project is currently under review. It requires an initial investment of $116,000 for…

A: The rate which makes the total discounted worth of cash flows equal to zero is called IRR or…

Q: Project A requires a $405,000 initial investment for new machinery. Project A is expected to yield…

A: Step 1: Identify the formula for Payback Period and the given valuesPayback Period = Cost of…

Q: Street lighting fixtures and their sodium vapor bulbs for a two-block area of a large city need to…

A: Present worth The present value method refers to calculating the present value of future cash. The…

Q: Replacing old equipment at an immediate cost of $70,000 and an additional outlay of $10,000 three…

A: Net present value is an important capital budgeting tool. A project is regarded as feasible if its…

Q: Consider the retrofitted space-heating system with given the investment of $110,000 and market value…

A: The question is based on the calculation of economic worth of machine.

Q: Advise the Manson Mothers, if should make this investment or not?

A: In this case the net present value of investment will have to be calculated to determine if…

Q: A regional infrastructure building and maintenance contra must decide to buy a new compact…

A: Inflation is the gradual loss of a currency's purchasing value over time. The increase of a mean…

Q: Replacing old equipment at an immediate cost of $80,000 and an additional outlay of $25,000 three…

A: Net Present Value: NPV is a profitability measure and is measured in absolute dollar amounts. Thus,…

Q: Use the following information to answer the next three questions: You are evaluating a project for…

A: Total cash flow from the project is that amount which is received by the investor from the project.…

Q: Westly Clinic is reviewing a new project that costs $482,500 and has expected net cash inflows of…

A: Concept. Pay back period. It can be defined as the time period required to recover original…

Q: You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for…

A: Present Value is the current price of future value which will be received in near future at some…

Q: Kingbird Corporation is considering investing in a new facility. The estimated cost of the facility…

A: The IRR is the investment discount rate that corresponds to the difference between the original…

Q: Hadden Corporation is evaluating a capital investment opportunity. This project would require an…

A: Net present value method :- It is defined as the difference between the present value of cash…

Q: Pablo Company is considering buying a machine that will yield income of $2,200 and net cash flow of…

A: Net Present value is present value of cash flow minus initial investment.

Q: Courtney Limited has capital project opportunities each of which would require an initial investment…

A: Net Present Value (NPV) is a financial measure used to analyze the profitability of an investment by…

Q: The Callway Cattle Company is considering the construction of a feed-handling system. The new system…

A: Discounted pay back period is a Capital budgeting techniques which help in decision making on the…

Q: 6. An elective project is currently under review. One alternative requires an initial investment of…

A: We will first calculate the IRR of the project and we will select the alternative which provides…

Q: An investor is given the opportunity to invest in one of the two projects: Project A costs $10000…

A: Net Present Value The method of capital budgeting helps the investor to calculate the profitability…

Concept explainers

Management by Exception

A manager’s job is a very tough one. A manager needs to look at the various areas of work and as a manager he has to look after two or more important jobs or activities at the same time for the growth of the business. In order to do all these things in an effective manner, a manager must adopt or practice different management styles and tactics.

Question

An engineer has designed 2 alternative
systems to cater for customer's plant
operation. System 1 will need initial
investment of $150,000 and will have an
annual operating cost of $20,000 with
salvage price of $5,000 after 4 years. System
2 will need an investment of $180,000 and
the annual operating cost will be $15,000.
System can be salvaged for $8,000 after 6
years. At an interest rate of 10% per year,
which system should be proposed by the
engineer on the basis of a present worth
analysis? Use equations to solve this problem.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Net Present Worth:

VIEW

Calculate present worth of System 1:

VIEW

Calculate present worth of System 2:

VIEW

Conclusion:

VIEW

Step by step

Solved in 4 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Project A requires an initial investment of $20,500, a cash inflow of $15,500 in the first year, and inflows of $10,000 each year for the next 2 years. What is the payback period for this project?
An engineer developed a fee proposal that requests the owner pay $20,000 after 6 months of work and $40,000 after 12 months. The engineer spent $8.000 developing the proposal and will spend $4,000 each month working on the project. The engineer can borrow funds at enn- 12% per year, invest at eny 6% per year, and desires an MARR of 9%. Using MIRR analysis, determine the attractiveness of this project. O Attractive O Not Attrative O No answer text provided. O No answer text provided.
Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $360,000. The cash flow patterns for each project are given below. Storage facility: Even cash flows of $120,000 per year Car wash: $112,500, $142,500, $60,000, $120,000, and $90,000 REQUIRED: 1. Calculate the payback period for the storage facility (even cash flows). 2. Calculate the payback period for the car wash facility (uneven cash flows). Which project should be accepted based on payback analysis? Explain. 3. What if a third mutually exclusive project, a laundry facility, became available with the same investment and annual cash flows of $150,000? Now which project would be chosen?
over the next four years. The client is also considering purchasing a different CNC systeme Teplace its currently leased system (rather than renewing /entering a new lease contract). The new system will cost $450,000 to purchase and install (and for training of employees in use). salvage value of $30,000. The interest rate is projected to be 6% per year during the life o1 the project. a. Draw a cash flow diagram for the next four vears for the existing system (leased system) and a separate cash flow diagram for the system that is being considered for purchase. b. For each option (leasing and buying), calculate the value of all cash receipts and disbursements at the end of the third year. C. Compare the value of each option at the end of the third vear. What should the client do?
Carla Vista Unlimited is considering purchasing an additional delivery truck that will have a seven-year useful life. The new truck will cost $44,900. Cost savings with this truck are expected to be $13,700 for the first two years, $9,500 for the following two years, and $5,400 for the last three years of the truck's useful life. What is the payback period for this project? (Round answer to 2 decimal places, e.g. 52.75.) Payback period years What is the discounted payback period for this project with a discount rate of 10 percent? (Round answer to 2 decimal places, e.g. 52.75.) Discounted payback period years
A contractor is saving money for a lucrative project. The initial cost is $175,000, annual outlays for maintenance is $1,500 and $4,000 every 3 years. There will be an additional one- time cost of $15,000 in 2 years for miscellaneous fixtures. At an interest rate of 8% per annum, how much money must he save now (in $) for the project?
An investment that costs $20,000 will produce annual cash flow's of $5000 for a period of six years further, the investment has an expected salvage value of $3000. Given a desired rate of return of 12%, what will the investment generate
A company is developing a special vehicle for Arctic exploration. The development requires an initial investment of $65,000 and investments of $52,000 and $42,000 for the next two years, respectively. Net returns beginning in Year 4 are expected to be $31,000 per year for 14 years. If the company requires a rate of return of 12%, compute the net present value of the project and determine whether the company should undertake the project. The net present value of the project is $ (Round the final answer to the nearest dollar as needed. Round all intermediate values to six decimal places as needed.)
Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,501 for 3 years and have a salvage value of $3,000. The company's required rate of return is 10%. The company uses straight-line depreciation. Present Value of an Annuity of 1 Period Present Value of 1 at 10% Present Value of an Annuity of 1 at 10% 1 .909 .909 .826 1.736 3 .751 2.487 Calculate the Net Present Value. Round your answer to 2 decimal places.
You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for manufacturing high-pressure hydraulic hoses. The parameters associated with each alternative have been estimated. Which one should be selected on the basis of a present worth comparison at an interest rate of 13% per year? Why is yours the correct choice? Alternative First Cost X $-45,000 Maintenance cost, per $-9000 Year Salvage Value $1,000 Life 5 years Y $-55,000 $-4000 $6,500 5 years The present worth of alternative X is $ 13888 and that of alternative Y is $ 44459.4 Alternative X is selected by the company.
A proposed investment has an initial equipment cost of $250. It will have a life of 4 years. The equipment will be depreciated straight-line to zero and be worth $50 after 4 years (i.e., before-tax salvage value is $50). Cash sales will be $230 per year and cash costs will be $120 per year. The firm will also need to invest $70 in net working capital at year 0 and it will be fully recovered after the life of the project. The firm has no debt and its beta is 1.20. The market risk premium is measured at 5%, the risk-free interest rate is known to be 3%, and the corporate tax rate is 20%. The risk level of the proposed investment is known to be same as that of the firm’s existing assets. Should the investment be undertaken?
Projects A and B have first costs of $5,000 and $9,000 respectively. Project A has net annual benefits of $2,500 during each year of its 5-year useful life, after which it can be replaced identically. • Project B has net annual benefits of $3,300 during each year of its 10-year life. Use present worth analysis, an interest rate of 30% per year, and a 10-year analysis period to determine which project to select. Project A Project B

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS