1. A company is considering two alternatives formanufacturing a certain part. Method R will have a first cost of$40,000, an annual operating cost of $25,000, and a $10,000 salvagevalue after its five year life. Method S will have an initial costof $100,000, an annual operating cost of $15,000, and a $12,000salvage value after its 10 year life. At an interest rate of 12%per year, which alternative should be chosen?
2. Compare the alternatives shown below on the basisof a present-worth comparison. The interest rate is 16% peryear:
Alternative I Alternative II
First Cost 147,000 56,000
AnnualCost 11,000 year 1: 30000 year 1
Inc $500 P/Y Inc $1,000 P/Y
Salvage Value 5,000 2,000
Life, Years 6 3
3. An alternative for manufacturing a certain part hasa first cost of $50,000, an annual cost of $10,000, and a salvagevalue of $5,000 after its 10 year life. At an interest rate of 10%per year, what is the capitalized cost of the alternative?
4. A member of congress wants to know the capitalizedcost of maintaining a proposed national park. The annualmaintenance cost is expected to be $25,000. At an interest rate of6% per year, what is the capitalized cost of the maintenance?
5. A dam will have a first cost of $5,000,000, anannual maintenance cost of $25,000 and minor reconstruction costsof $100,000 every five years. At an interest of 8% per year, whatis the capitalized cost of the dam?
6. Compare the alternatives shown below on the basisof their capitalized costs, using an interest rate of 15% peryear.
Alternative I Alternative II
First Cost 160,000 25,000
Annual Operating Cost 15,000 3,000
Salvage Value 1,000,000 4,000
Life, Years infinite 7
1. A company is considering two alternatives formanufacturing a certain part. Method R will have a first cost of$40,000, an annual operating cost of $25,000, and a $10,000 salvagevalue after its five year life. Method S will have an initial costof $100,000, an annual operating cost of $15,000, and a $12,000salvage value after its 10 year life. At an interest rate of 12%per year, which alternative should be chosen?
2. Compare the alternatives shown below on the basisof a present-worth comparison. The interest rate is 16% peryear:
Alternative I Alternative II
First Cost 147,000 56,000
AnnualCost 11,000 year 1: 30000 year 1
Inc $500 P/Y Inc $1,000 P/Y
Salvage Value 5,000 2,000
Life, Years 6 3
3. An alternative for manufacturing a certain part hasa first cost of $50,000, an annual cost of $10,000, and a salvagevalue of $5,000 after its 10 year life. At an interest rate of 10%per year, what is the capitalized cost of the alternative?
4. A member of congress wants to know the capitalizedcost of maintaining a proposed national park. The annualmaintenance cost is expected to be $25,000. At an interest rate of6% per year, what is the capitalized cost of the maintenance?
5. A dam will have a first cost of $5,000,000, anannual maintenance cost of $25,000 and minor reconstruction costsof $100,000 every five years. At an interest of 8% per year, whatis the capitalized cost of the dam?
6. Compare the alternatives shown below on the basisof their capitalized costs, using an interest rate of 15% peryear.
Alternative I Alternative II
First Cost 160,000 25,000
Annual Operating Cost 15,000 3,000
Salvage Value 1,000,000 4,000
Life, Years infinite 7
Related questions
Blinko Products wants an airplane for use by its corporatestaff. The airplane that the company wishes to acquire, a ZephyrII, can be either purchased or leased from the manufacturer. Thecompany has made the following evaluation of the twoalternatives: |
Purchase alternative. If the Zephyr II is purchased,then the costs incurred by the company would be as follows: |
| Purchase cost of theplane | $ | 800,000 |
| Annual cost ofservicing, licenses, and taxes | $ | 5,000 |
| Repairs: | ||
| Firstthree years, per year | $ | 3,000 |
| Fourthyear | $ | 5,000 |
| Fifthyear | $ | 10,000 |
The plane would be sold after five years. Based on currentresale values, the company would be able to sell it for aboutone-half of its original cost at the end of the five-yearperiod. |
Lease alternative. If the Zephyr II is leased, then thecompany would have to make an immediate deposit of $46,000 to coverany damage during use. The lease would run for five years, at theend of which time the deposit would be refunded. The lease wouldrequire an annual rental payment of $120,000 (the first payment isdue at the end of Year 1). As part of this lease cost, themanufacturer would provide all servicing and repairs, license theplane, and pay all taxes. At the end of the five-year period, theplane would revert to the manufacturer, as owner. |
| Blinko Productsâ required rateof return is 10%. (Ignore income taxes.) |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. |
| Required: | |
| 1a. | Use the total-cost approach to determine the present value ofthe cash flows associated with purchase alternative.(Negative amount should be indicated by a minus sign. Rounddiscount factor(s) to 3 decimal places, intermediate and finalanswers to the nearest dollar amount. Omit the "$" sign in yourresponse.) |
| Present value ofcash outflows with purchase alternative | $ |
| 1b. | Use the total-cost approach to determine the present value ofthe cash flows associated with lease alternative. (Negativeamount should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places, intermediate and final answers tothe nearest dollar amount. Omit the "$" sign in yourresponse.) |
| Present value ofcash outflows with lease alternative | $ |
| 2. | Which alternative should thecompany accept? | ||||
|
