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8 May 2019

The owner of a business is considering investing $55,000 in new equipment. She estimates that the net cash flow will be $5,000 during the first year and will increase by $2,500 per year each year thereafter. The equipment is estimated to have a 10 â year service life and a net salvage value at the end of this time of $6,000. The firmâs interest rate is 12% compounded annually.

(a) Determine the annual capital recovery cost (ownership cost) for the equipment.

(b) Determine the equivalent annual savings (revenue).

(c) Determine whether this investment is wise.

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Casey DurganLv2

8 May 2019

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Petroleum Drilling, Inc., is considering installation of a new automated drilling equipment. The new equipment can be installed for $12,850,000 today and will have a life of 4 years until technological obsolescence due to rapid advances in drilling control technology. At the end of its 4 year life, its components will have a salvage value of $2,500,000, and it will cost $712,500 to have the equipment removed. The equipment will be depreciated under MACRS. The equipment will produce $8,975,000 additional sales capacity per year due to productivity gains. Additional technical labor cost will be $2,305,000 per year and operating and maintenance costs will be $885,000 per year. The company is in a western state with no corporate income taxes and is in the 35% federal tax bracket. Estimate both the annual net income and annual cash flow. The companyâs MARR for this project is 20.0%. Based on net present value estimate, do you recommend installing the automated refining line? What is the equivalent uniform annual worth, and IRR of the project?

magentarat681

1. What is the capitalized value of an infinite series of $1,000 biennial (every two years) payments? MARR = 10%

		$4,950
		$4,025
	.	$4,350
		$4,762

2. Frank West Enterpises would like to choose one of the following plans for expansion. Using present worth analysis, find the best alternative among the three alternatives and the Do-Nothing.

	Alt. A	Alt. B	Alt. C
Initial Cost	$10,000	$21,000	$8,000
EUAB	$6,000	$7,000	$4,000
EUAC	$1,500	$1,000	$2,000
Salvage Value	$2,000	$8,000	$3,000
Life	2 Years	3 Years	2 Years

Use a MARR of 10%.

	.	Do-Nothing
	.	Alt. C
	.	Alt. B
	.	Alt. A

U. S. Engineering is investigating the possibility of acquiring new automated packaging equipment at a cost of $12,000. It is expected that the equipment will have a salvage value of $1,000 at the end of its useful life of 10 years. It is determined by the plant engineering department at the company that the operation and maintenance cost will be $500 in the first year and will gradually increase every year starting year 2 at the rate of $50 until the equipment is retired. Determine the equivalent uniform annual cost (EUAC) if MARR for the company is 10%.

		$2,575.95
		$2,150.50
	.	$2,176.60
	.	$2,184.40

The cash flows given in table below are for two different alternatives. MARR =10%

Data	C	D
Initial Cost	$20,000	$80,000
Uniform Annual Benefits	$6,000	$10,000
Salvage Value	$5,000	$20,000
Useful Life in years	5	infinity

The equivalent uniform annual worth (EUAW) of alternative N is ______________.

Hint: Assume the Salvage Value is never realized since N is infinite.

		$2,000
		$1,920
		$1,762
		$2,476

Compare the following plans using a MARR of 6%.

Data	Plan X	Plan Y
Equipment First Cost	$50,000	$75,000
Annual Operation & Maintenance Cost	$3,000	$2,500
Salvage Value	$10,000	$0
Service Life, Years)	25	50

		$6,728; $7,255
		$7,255; $9,000
	.	$6,728; $7,728
	.	$6,728; $8,200

LAEP, Inc. wants to evaluate two methods of shipping their products. The following cash flows are associated with each alternative:

Data	Method
	A	B
Life (Years)	10	10
First Cost	$700,000	$1,512,000
M&O Cost	$18,000	$9,000
M&O Cost Gradient	$900	$775
Annual Benefit	$154,000	$303,000
Salvage Value	$142,000	$210,000

Annual profits are based on amount of products which can ordinarily be shipped each year as a function of the amount of vehicles or service purchased with the first cost and the M&O costs.

Using a MARR of 15%, calculate the equivalent uniform annual cash flow (EUAB - EUAC) for each alternative.

Determine the most desirable alternative based on the results.

		$389.57, $445.90; Method A
		$445.90, $389.57; Method A
	.	$445.90, $389.57; Method B
	.	$389.57, $445.90; Method B

For the cash flow diagram shown, which of the following equations properly calculates the uniform equivalent (A)?

n	0	3	6	9	12	15
Dollars	$100	$100	$100	$100	$100	$100

		A=100(A/P,i,15)+ 100(A/F,i,3)
		A=100(A/P,i,15)
		A=100(A/F,i,3) + 100(A/F,i,15)
		A=100(A/P,i,3) + 100(A/F,i,3)

Three different alternatives shown in table below are being considered by U. S. Engineering systems.

Assume that alternatives X and Z are replaced at the end of their lives.

Data	Alternative X	Alternative Y	Alternative Z
Initial Cost	$6,000	$1,000	$1,500
Uniform Annual Benefits	$810	$125	$ 230
Useful Life in Years	20	infinite	10
MARR	12%

The NPW for alternative

A. Mary Graham has worked as a real estate agent for Piedmont Properties for 15 years. Her annual income is approximately $100,000 per year. Mary is considering establishing her own real estate agency. She expects to generate revenues during the first year of $2 million. Salaries paid to her employees are expected to total $1.5 million. Operating expenses (i.e. rent, supplies, and utility services) are expected to total $250,000. To begin the business, Mary must borrow $500,000 from her bank at an interest rate of 15%. Capital equipment will cost Mary $50,000. At the end of one year, the value of this equipment will be $30,000, even though the depreciation for tax purposes is only $5,000 during the first year.

(a) Determine the accounting profit for this venture. Show your calculations.

(b) Determine the economic profit for this venture. Show your calculations.

(c) Which of the costs of this firm are explicit, and which are implicit costs.

B. A local restaurant owner recently purchased a liquor license issued by the state for $90,000. This license can be transferred or sold to another party. If the owner returns the license to the state only $75,000 is refundable. After selling alcoholic beverages for about one year, the restaurant owner realized that she was losing dinner customers and that her profitable restaurant business was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements, in various newspapers and restaurant magazines, across the state offering to sell the license for $80,000. After a long wait, she finally received one offer to purchase her license for $77,000. Carefully identifying the sunk costs, would you recommend that she accept the $77,000 offer?