Oil from a specific type of marine microalgae can be converted into biodiesel that may serve as an alternate transportable fuel forautomobiles and trucks. If lined ponds are used to grow the algae, the construction cost is $11 million and the M&O cost is estimated at$2.3 million per year. Alternatively, if long plastic tubes are used for growing the algae, the initial cost will be higher at $20 million, butless contamination will render the M&O cost lower at $0.5 million per year. At an interest rate of 12% per year and a 5-year projectperiod, which system is better-ponds or tubes? Use a present worth analysis.The present worth of lined ponds is $million and that of plastic tubes is $imillion.Lined pondsv are used to grow algae.

Lined ponds Construction costs =$11 million MO cost=$2.3 million per year interest rate =12%…

tion will render the M&O cost lower at $0.5 million per year. At an interest rate of 12% per year and a 5-year project system is better-ponds or tubes? Use a present worth analysis. orth of lined ponds is $| | million and that of plastic tubes is $[ Emillion.

tion will render the M&O cost lower at $0.5 million per year. At an interest rate of 12% per year and a 5-year project system is better-ponds or tubes? Use a present worth analysis. orth of lined ponds is $| | million and that of plastic tubes is $[ Emillion.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 20P: The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting,...

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Oil from a specific type of marine microalgae can be converted into biodiesel that may serve as an alternate transportable fuel for automobiles and trucks. If lined ponds are used to grow the algae, the construction cost is $12 million and the M&O cost is estimated at $1.6 million per year. Alternatively, if long plastic tubes are used for growing the algae, the initial cost will be higher at $16 million, but less contamination will render the M&O cost lower at $0.4 million per year. At an interest rate of 10% per year and a 5-year project period, which system is better—ponds or tubes? Use a present worth analysis. The present worth of lined ponds is $ ____million and that of plastic tubes is $ ____million. ____ (Lined ponds or plastic tubes) are used to grow algae.
Oil from a specific type of marine microalgae can be converted into biodiesel that may serve as an al- ternate transportable fuel for automobiles and trucks. If lined ponds are used to grow the algae, the construction cost is $13 million and the M&O cost is estimated at $2.1 million per year. Alterna- tively, if long plastic tubes are used for growing the algae, the initial cost will be higher at $18 million, but less contamination will render the M&O cost lower at $0.41 million per year. At an interest rate of 10% per year and a 5-year project period, which system is better—ponds or tubes? Use a present worth analysis.
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8%, and the projects’ expected net costs are listed in the following table: What is the IRR of each alternative? What is the present value of the costs of each alternative? Which method should be chosen?
Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).
Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
The Philippines’ Bench clothing has just completed a feasibility study of what to do with the 16,000 kg of overruns, rejects, and remnants it produces every year. The company’s CEO launched the feasibility study by asking, why pay someone to dig coal out of the ground and then pay someone else to put our waste into a landfill? Why not just burn our own waste? The company is proposing to build a P10 million power plant to burn its waste as fuel, thereby saving P2.8 million a year in coal purchases. Company engineers have determined that the waste burning plant will be environmentally sound, and after its four-year study period the plant can be sold to a local electric utility for $5 million. What is the IRR of this proposed power plant? If the firm’s MARR is 15% per year, should this project be undertaken?
Environmentally conscious companies are looking for ways to be less damaging to the environment while saving money with innovative investments in capital equipment. DuPont is sponsoring a project to recover much of the energy presently being lost in the primary stage of one of their chemical reactor vessels. Three mutually exclusive designs are being considered for implementation. The estimated capital requirements and annual savings in operating expenses are given below. Assume aMARR = 15% per year, and the study period is 6 years. Salvage values of the three designs are negligible. Which design should be selected?
A logistic company is considering using automated guided vehicles (AGVS) system to speed up the process and cut some costs. To implement the system, the company need to anticipates the purchasing price of the AGVS system. The system will save $1,500,000 per year in labor and operational cost. However, it will incur a maintenance cost of $400,000 per year. The system is expected to have a 15-year service life and a salvage value of about $100,000. If the company's MARR is 10%, determine the maximum price that the company should pay to purchase the AGVS system so that project is profitable.
Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $360,000 and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of…
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An engineer is considering two different liners for an evaporation pond that will receive salty concentrate from a brackish water desalting plant. A plastic liner will cost $0.90 per square foot and will have to be replaced in 20 years when precipitated solids have to be removed from the pond using heavy equipment. A rubberized elastomeric liner is tougher and, therefore, is expected to last 30 years, but it will cost $2.20 per square foot. The pond covers 110 acres (1 acre = 43,560 square feet). Which liner is more cost effective on the basis of an annual worth analysis at an interest rate of 8% per year? Solve using (a) tabulated factors, and (b) a calculator.