1. A firm must decide between two silicon layer chip 2.
A start-up biotech company is considering making an
designs from Intel. Their effective income tax rate is investment of $100,000 in a new filtration system. The
40%, and Straight-Line depreciation method is used. If associated estimates are summarized below:
the desired after-tax return on investment is 10% per
year, which design should be chosen? State your Annual receipts $75,000
assumptions. Annual expenses $45,000
Design A Design B Useful life 8 years
Capital Investment $1,000,000 $2,000,000 Salvage value $20,000
Salvage Value at end of life $1,000,000 $1,100,000 Straight line depreciation will be used, and the effective
Annual revenue less expenses $200,000 $400,000 income tax rate is 20%. The After-tax
Useful Life 7years 6 years MARR is 15% per year. Determine whether this
investment is an attractive option for the company.
3. Two alternatives, A and B, are under consideration.
Both have a life of five years. Alternative A needs an
initial investment of $17,000 and provides a net
revenue of $4,000 per year for five years. Alternative B
requires an investment of $19,000 and has an annual
net revenue of $5,000. All estimates are in actual
dollars. Inflation is expected to be 2% per year for the
next five years, and the inflation-free (real) MARR is
9.8% per year. Which alternative should be chosen?
1. One year ago a machine was purchased at a cost of 2. A steel pedestrian overpass must either be reinforced
$2,000, to be useful for 6 years. However, the machine or replaced. Reinforcement would cost $25,000 and
has failed to perform properly and has a cost of $500 would make the overpass adequate for an additional 6
per year per year for repairs, adjustments, and years of service. If the overpass is torn down now, the
shutdowns. A new machine is available to accomplish scrap value of the steel would exceed the removal cost
the functions desired and has an initial cost of $3,500. by $15,000. If it is reinforced, it is estimated that its net
Its maintenance costs are expected to be $50 per year salvage (market) value would be $18,000 at the time it
during its service life of 5 years. The approximate is retired from service. A new pre- stressed concrete
market value of the present machine has been roughly overpass would cost $140,000 and would meet the
$1,200. If the operating costs (other than maintenance) foreseeable requirements of the next 40 years. Such a
for both machines are equal, show whether it is design would have no scrap value or market value. It is
economical to purchase the new machine. Perform a estimated that the annual expenses of the reinforce
before-tax study using an interest rate of 12%, and overpass would exceed those of the concrete overpass
assume that the salvage values will be negligible. by $3,200. Assume that money costs 8% per year, what
would you recommend?
1. Determine the B/C ratio for the following project. 2. Data for two alternatives are as follows:
Using an interest rate of 20%, which alternative should
be chosen?
1. A new water treatment plant proposed for Anytown, 2. There is five alternatives for improvement of a road.
has an initial cost of P56 million. The new plant will Determine which alternative should be chosen if the
service the 7,500 residential customers for the next 30 highway department is willing to invest money as long
years. It is expected to save each customer P125 per as there is a B/C ratio of at least 1.00.
year. The plant will require a major overhaul every 5
years, costing P1million. Determine the benefit/cost
ratio at the city’s interest rate of 6%. Use PW and EUAC.
1. Data for two 50-h motors are follows: 2. A local company assembling stereo radio cassette
produces 300 units per month at a cost of 800 per unit.
Each stereo radio cassette sells for 1,200. If the firm
makes a profit of 10% on its 10,000 shares with a par
value of P 200 per share, and the fixed costs are 20,000
per month.
(a) What is the break-even point? Draw Breakeven
Chart
Power cost is 2.00 per kWh. If money is worth 20%, how (b) How much is the loss or profit if only 100 units are
many hours per year would the motors have to be produced in a given month?
operated at full load for them to be equally economical?
If the expected number of hours of operation per year Property of and for the exclusive use of SLU.
exceeds the break-even point, which motor is more Reproduction, storing in a retrieval system, distributing,
economical? (Use ROR and AC and draw the breakeven uploading or posting online, or transmitting in any form
chart) or by any means, electronic, mechanical, photocopying,
recording, or otherwise of any part of this document,
without the prior written permission of SLU, is strictly
prohibited. 12
3. A large city in the mid-West needs to acquire a street-
cleaning machine to keep its roads looking nice year-
round. A used cleaning vehicle will cost $85,000 and
have a $20,000 salvage value at the end of its five-year
life. A new system with advanced features will cost
$150,000 and have $40,000 market value at the end of
its five-year life. The new system is expected to reduce
labor hours compared with the used system. Current
street-cleaning activity requires the used system to
operate 8 hours per day for 20 days per month. Labor
costs $50 per hour (including fringe benefits), and
MARR is 12% per year.
a. Find the breakeven percent reduction in labor hours
for the new system.
b. If the new system is expected to be able to reduce
labor hours by 17% compared with the used system,
which machine should the city purchase?
c. Investigate how sensitive the decision is to 1) changes
in the market value of the new system and 2) the
productivity improvement of the new system. Graph
your
results.
