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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GeoWorld Systems uses a subset of the following questions during the interview process for new engineers. For each of the following cases, determine if “the project” or “do nothing” is preferred. The value of MARR in each case is 14%.
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%
An engineer proposes to spend $95,000 on a capital project to upgrade a package delivery system. The project is expected to have labor savings of $20,000 a year plus reduce scrap costs by $5000 a year. There is expected to be no salvage value at the end of the equipment life, which is anticipated to be 7 years. MARR is 12%. This question is in five parts. The engineer next performs a sensitivity analysis for a best case and worst case scenario: Best Case Worst Case Initial Cost $95,000 $110,000 Labor Savings $25,000 $15,000 Scrap Cost Reduction $6,000 $4,00O Part 4: What is the present worth (PW) in the worst case scenario? (your answer should be a positive or negative number and do not use commas or $ signs)
The Reiph Transportation Company is planning to buy a new fleet of trucks requiring an initial investment of $1,000,000, and $2,500,000 annually to maintain and operate. The expected life of the new fleet is 10 years. The revenue is estimated to be $5,000,000 per year and the salvage value is expected to be $250,000. The MARR is 18%. Conduct a sensitivity analysis based on the given information. a. Calculate the PW of the Base case based on above given data. (Do not use AW or FW) b. Calculate the PW for the range of -10% to +15% for initial cost. (Do not use AW or FW)
Street lighting fixtures and their sodium vapor bulbs for a two-block area of a large city need to be installed at a first cost (investment cost) of $100,000. Annual maintenance expenses are expected to be $6,650 for the first 9 years and $9,500 each year thereafter upto 30 years. With an interest rate of 8% per year, what is the present worth cost of this project? Choose the closest answer below OA. The present worth cost of the project is $236,701. OB. The present worth cost of the project is $248,491. OC. The present worth cost of the project is $189,145 OD. The present worth cost of the project is $281,813 27
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?
Your company is planning to add a piece of equipment with 7 years of expected life for its production line. There will be no salvage value at the end of its life. The company has set its MARR to 11%. Your manager asks you to use incremental analysis to evaluate the alternatives and let him know which one of them should be chosen. Below is the data provided to you with the investment cost, annual income and IRR for each of the five alternatives. A B C D E Capital investment $14,000 $16,000 $16,500 $17,200 $20,000 Net annual income $3,000 $3,500 $3,700 $3,750 $4,300 IRR 11.30% 11.95% 12.73% 11.84% 11.41%
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…
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $120,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.32 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $440,000. Finally, the project requires an immediate investment in working capital of $370,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $4.60 million, and thereafter, sales are forecasted…
As an energy engineer at an industrial facility. A cogeneration units project is suggested with an initial investment is ($ 350,000) with a (6) year life cycle. The operational cost at first year is ($ 10,000) and increased by ($ 2,500) thereafter. A major maintenance should be made at third year with a cost of ($ 25,000). The salvage value for this units is ($ 35,000). Taking an interest rate is equal to 18 %, What is the minimum annual revenue that make project profitable?
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%

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