The estimated capital investment and the annual expenses) for four alternative designs of a diesel-powered air compressor are shown below, as well as the estimated market value for each design at the end of the common five-year useful life. The study period is five years, and the MARR is 10% per year. One of the designs must be selected for the compressor, and each design provides the same level of service. On the basis of this information, (a) Determine the preferred design alternative, using the IRR method (b) Show that the FW method (į = MARR), using the incremental analysis procedure, results in the same decision. %3D Design Alternative D1 D2 D3 D4 Capital investment $100,000 $140,600 $148,200 $122,000 Annual expenses Useful life (years) Market value 14,800 29,000 5 16,900 22,100 5 5 5 10,000 14,000 25,600 14,000

The estimated capital investment and the annual expenses) for four alternative designs of a diesel-powered air compressor are shown below, as well as the estimated market value for each design at the end of the common five-year useful life. The study period is five years, and the MARR is 10% per year. One of the designs must be selected for the compressor, and each design provides the same level of service. On the basis of this information, (a) Determine the preferred design alternative, using the IRR method (b) Show that the FW method (į = MARR), using the incremental analysis procedure, results in the same decision. %3D Design Alternative D1 D2 D3 D4 Capital investment $100,000 $140,600 $148,200 $122,000 Annual expenses Useful life (years) Market value 14,800 29,000 5 16,900 22,100 5 5 5 10,000 14,000 25,600 14,000

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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(4) Evaluate the ROI.
A developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time the building will cost $1,340,000 to construct. During the first year after construction would take place, there is a 60 percent chance that NOI will be $175,500 and a 40 percent chance that the NOI will be $88,600. In either case, NOI would be expected to increase at 2 percent per year after the first year. Required: How much should the developer be willing to pay for the land if he wants a 12 percent rate of return? (Round your answer to the nearest whole dollar amount.) Amount payable by developer $ 1,334,444
The manager of an electronics manufacturing plant was asked to approve the purchase of a surface mount placement (SMP) machine having an initial cost of $500,000 in order to reduce annual operating and maintenance costs by $92,500 per year. At the end of the 10-year planning horizon, it was estimated that the SMP machine would be worth $50,000. Using a 10% MARR and internal rate of return analysis, should the investment be made?
Determine the average rate of return for a project that is estimated to yield total income of $46,500 over 3 years, has a cost of $95,000, and has a $5,000 residual value.
You are evaluating a project for your company. You estimate the sales price to be $520 per unit and sales volume to be 2,200 units in year 1; 3,200 units in year 2; and 1,700 units in year 3. The project has a three-year life. Variable costs amount to $320 per unit and fixed costs are $210,000 per year. The project requires an initial investment of $335,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $52,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1? $104,000 $139,672 $82,160 $176,800
Information for two alternative projects involving machinery investments follows. Project 1 requires an initial investment of $130,900. Project 2 requires an initial investment of $97,200. Assume the company requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income Project 1 Years 1-7 Initial investment Net present value Compute the net present value of each potential investment. Use 7 years for Project 1 and 5 years for Project 2. (Negative net present values should be indicated with a minus sign. Round your present value factor to 4 decimals. Round your answers to the nearest whole dollar.) Net Cash Flows X Answer is complete but not entirely correct. Present Value of Annuity at 10% 26,460 X Project 1 $ 105,300 X 70,200…
A firm is considering investing in a new piece of equipment. The equipment would cost $500,000 and would have shipping and installation cost of $125,000. If purchased, the machine would have an estimated useful life of 5 years and would be depreciated via a 5-year MACRS schedule (e, 20.0%, 32.0%, 19.2 %, 11.5%, 11.5%, and 5.8%). Adoption of the project would also require an increase in working capital of $50,000. If the new equipment is purchased, an old piece of equipment (which is still useable for 5 more years) could be sold for $30,000. The old machine had been depreciated on a straight line basis and currently has a book value of zero. The machine would generate annual incremental revenues of $250,000 and annual incremental expenses of $50,000. It is estimated that the machine can be sold as scrap at the end of its 5 year useful life for $80,000. The required return on projects of this nature is 14% and the firm's marginal tax rate is 40%. What is cash flow from the project for…
Using a required rate of return equal to 10 percent, compute the modified internal rate of return (MIRR) for a project that costs $80,000 and is expected to generate $33,000, $66,000, and -$10,950, respectively, during the next three years. Should the project be purchased? Do not round intermediate calculations. Round your answer to two decimal places. The project -Select- (should, should not) be purchase because the MIRR, that is %, is -Select- (greater than, lower than, equal to) the required rate of return.
An interest rate of 15% is used to evaluate a new system that has a first cost of $212,400, annual operating and maintenance costs of $41,200, annual savings of $94,600, a life of 6 years, and a salvage value of $32,500. After initial evaluation, the firm receives word from the vendor that the first cost is 5% higher than originally quoted. The percentage error in the system' s present worth from this is closest to what value? (a) 5% (b) 15% (c) 100% (d) 300%
The senior management of Netherworld Ltd is evaluating four project proposals and will select one project to invest in. The following summary information is available: Project Code Initial Investment Required Net Present Value Project life (years) A 172,000 48,000 7 B 155,000 48,000 12 C 115,000 39,100 7 D 141,000 38,500 3 Required: Calculate the profitability index for each project. In order of preference, rank the four projects in terms of net present value and the profitability index. Which project do you think should be chosen?

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