Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 48P
(a):
To determine
Calculate the
(b):
To determine
Calculate the BRR.
(c):
To determine
Acceptability of the project.
(d):
To determine
Calculate the new internal rate of return.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Write it on a paper with clear solutions. Thanks
Consider the cashflow (n = 10 years, MARR = e = 14%)
Cash Flow A
Investment
Revenues
P 180,000 P 350,000 per year
Expenses
P 400,000 per year
for the first 3 years,
decreasing by P
50,000 per year
thereafter
a. Calculate the Internal Rate of Return (IRR) of each project.
b. Calculate the External Rate of Return (ERR) of each project.
Salvage
Value
P 40,000
Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method. In this method the annual cash flows
under the alternative investments are converted into a constant cash flow stream whose NPV is equivalent to the NPV of the comparative project's
Initial stream.
Consider the case of Three Waters Boatbuilders:
Three Waters Boatbuilders is considering a three-year project that has a weighted average cost of capital of 10% and a net present
value (NPV) of $85,647. Three Waters Boatbuilders can replicate this project indefinitely.
The equivalent annual annuity (EAA) for this project is
The EAA approach to evaluating projects with unequal lives does not
do a good job of taking inflation into account.
Chapter 7 Solutions
Contemporary Engineering Economics (6th Edition)
Ch. 7 - Prob. 1PCh. 7 - Prob. 2PCh. 7 - Prob. 3PCh. 7 - Prob. 4PCh. 7 - Prob. 5PCh. 7 - Prob. 6PCh. 7 - Prob. 7PCh. 7 - Prob. 8PCh. 7 - Prob. 9PCh. 7 - Prob. 10P
Ch. 7 - Prob. 11PCh. 7 - Prob. 12PCh. 7 - Prob. 13PCh. 7 - Prob. 14PCh. 7 - Consider an investment project with the cash flows...Ch. 7 - Consider the investment projects given in Table...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Consider the investment projects given in Table...Ch. 7 - Consider the investment projects given in Table...Ch. 7 - Prob. 21PCh. 7 - Prob. 22PCh. 7 - Consider the investment projects given in Table...Ch. 7 - Prob. 24PCh. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Prob. 34PCh. 7 - Prob. 35PCh. 7 - Prob. 36PCh. 7 - Prob. 37PCh. 7 - Prob. 38PCh. 7 - Prob. 39PCh. 7 - Prob. 40PCh. 7 - Prob. 41PCh. 7 - Prob. 42PCh. 7 - Consider the two mutually exclusive investment...Ch. 7 - You are considering two types of automobiles....Ch. 7 - Prob. 45PCh. 7 - Prob. 46PCh. 7 - Fulton National Hospital is reviewing ways of...Ch. 7 - Prob. 48PCh. 7 - Consider the investment projects given in Table...Ch. 7 - Prob. 50PCh. 7 - Prob. 51PCh. 7 - Prob. 52PCh. 7 - Prob. 53PCh. 7 - Prob. 54PCh. 7 - Prob. 55PCh. 7 - Prob. 56PCh. 7 - Prob. 57PCh. 7 - Prob. 1STCh. 7 - Prob. 2STCh. 7 - Prob. 3STCh. 7 - Prob. 4STCh. 7 - Prob. 5ST
Knowledge Booster
Similar questions
- Sunbelt Corporation, an investment company, is considering building a 50 unit student apartment complex in a growing area near BIUST, in Palapye. Since the long-term growth potential of the town is excellent, it is believed that the company could average 85% full occupancy for the complex each year. If the following financial data are reasonably accurate estimates, determine the minimum monthly rent that should be charged if a 15% rate of return is desired: Land investment cost = P1 000 000 Building investment cost = P15 000 000 Annual upkeep cost = P150 000 Property taxes and insurance = 5% of total initial investment Study period = 25 years Salvage value = only land cost can be recovered in full Insert your answer to 2 decimal places with no units. . . .arrow_forwardIf mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods always agree. Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project Y Project Z 0 -$1,500 -$1,500 1 $200 $900 2 $400 $600 3 $600 $300 4 $1,000 $200 NPV (Dollars) 800 600 Project Y 400 Project Z 200 -200 0246 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? O The methods agree. O The methods conflict.arrow_forwardSuppose Omni Consumer Products's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $400,000 Year 3 $475,000 Year 4 $475,00 If the project's weighted average cost of capital (WACC) is 9%, what is its NPV? $373,562 $336,206 $317,528 $429,596arrow_forward
- Q2arrow_forwardBuhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars): Free Cash Flow ($000,000s) Revenues - Manufacturing expenses (other than depreciation) - Marketing expenses - CCA = EBIT - Taxes (35%) = Unlevered net income + CCA Increases in net working capital - Capital expenditures + Continuation value = Free cash flow Year 0 Years 1-9 Year 10 103.00 - 32.00 - 9.00 ? ? ? ? ? - 5.00 - 144.00 103.00 - 32.00 - 9.00 ? ? ? ? ? - 5.00 ? 10.00 ? - 144.00 The relevant CCA rate for the capital expenditures is 15%. Assume assets are never sold. a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler is…arrow_forwardYou are considering getting a Little Nero Caesar Salad Franchise, because your boss (the owner of a Down Under Sandwich Shoppe) seems to be making it big. The Down Under Shoppe grosses an average of $380,000 sales annually. You estimate that your business will gross an average of 95% of Down Under’s sales. You must borrow $320,000 from the bank. The bank will charge you 12% per annum interest on this loan. You also will invest $50,000 of your savings in the business (thus you will no longer receive the 4% per annum interest from this). NOTE: neither the bank loan principal nor the $50,000 of your savings you invest is an explicit or implicit cost. However, the interest paid on the bank loan is explicit and the interest foregone on your savings is implicit. Other estimated explicit expenses are: labor $130,000 per year; rent $12,000 a year; utilities $4,000 a year; and salad ingredients $140,000 a year. An explicit expense you will have to pay Little Nero, Inc., is a franchise…arrow_forward
- Plz complete solution all part a and barrow_forwardSaved 235 XYZ Gadget Company is currently considering which investment projects it should undertake. The following list of projects along with the estimated rate of return of each project is presented to the executive management team: Project A (8.5%) Project B (7%) Project C (6%) Project D (11%) Project E (5.5%) The current interest rate in the loanable funds market is 5%. However, if an increase in government borrowing pushes the interest rate to 7.5%, we would expect the company to discontinue investment plans for all but, of its planned projects.arrow_forwardThe following cash flows result from a potential construction project for your company: 1. Receipts of $505,000 at the start of the contract and $1,200,000 at the end of the fourth year 2. Expenditures at the end of the first year of $400,000 and at the end of the second year of $900,000 3. A net cash flow of $0 at the end of the third year. Using an appropriate rate of return method (Approximate ERR), for a MARR of 20%, should your company accept this project (Perform all calculations using 5 significant figures and round your answer to one decimal place. Also remember that text answers are case-sensitive):? Answers entered using text are case sensitive! What is the approximate ERR for this project? Number Should your company undertake this project? (Enter either 'Yes' or 'No'): %arrow_forward
- A firm has a capital budget of $30,000 and is considering three possible independent projects. Project A has a present outlay of $12,000 and yields $4,231 per annum for 5 years. Project B has a present outlay of $10,000 and yields $4,184 per annum for 5 years. Project C has a present outlay of $17,000 and yields $5,802 per annum for 10 years. Funds which are not allocated to one of the projects can be placed in a bank deposit. Identify seven combinations of project investments and a bank deposits which exhaust the budget. Which of the above combinations should the firm choose when the bank deposit rate is (i) 15% or (ii) 20%? Explain your answer and show your work. Suppose there is no option to deposit in the bank, but the projects are "divisible" (e.g. you may have 25% of project A). Which combination should the firm choose? Explain your answer and show your work. Use 15% as the deposit rate (discount rate).arrow_forwardYou are considering the following project: It pays you $2,500 at the end of the first year, costs $8,500 by the end of the second year and brings $6,800 a year after. What is the project's internal rate of return(s), exact external rate of return and the approximate external rate of return it current MARR is 14%?arrow_forwardJohn wants to invest $1 000 000. He has two options. The first option is to buy government bonds that earn 4% annually. The second option is to buy an apartment building that brings him $100 000 per year in revenues. Compare the two options in terms of their internal rates of return. (Your answer in the answer box should be either 1 or 2). Calculations should be provided.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education