1. A company decides to buy the excavating equipment for $25,000. 80% of this amount would be on loan from ABC bank that would be repaid in 20 equal payment made semiannually (i.e., 10 years) from now. Each payment is $1500. If the MARR is 12% per year compounded monthly, should the company get the loan from the bank? Why?
2. If you are borrower, you want the compounding period as short as possible given the interest rate is kept same. T/F?
3. There are two mutually exclusive project, where the basic information is provided below. Assume a DN alternative does not exist.
|
|
A
|
B
|
|
Initial Cost
|
$25,000
|
$35,000
|
|
Annual net profit
|
$6,000
|
$7,111.11
|
|
Useful Life
|
Infinity
|
Infinity
|
a) Using the incremental cost analysis, calculate the incremental rate of return for switching from project A to B?
b) Assuming MARR Is 10% per year, what would be your final decision?
c) If the DN exist, do your decision change? Why?
4. The costs of fuel for a smelting operation are expected to be $50,000 in year 3 and decreasing by 5% per year thereafter through year ten. At an interest rate of 8% per year, find the equivalent annual cost between years 3 through 10.
5. You are considering two options. First option is an electric engine powered car, and it would take $30,000 to purchase the car. Besides, you need to change battery every 6 years. The cost of new battery is $3,000. The interest rate is 12% per year. The second option is a gasoline engine car, which cost $20,000 initially. The annual maintenance cost for gasoline engine car is $3,000, and the fuel cost per mile is $0.16. On the other hand, it cost $0.04/mile for electric powered car, and annual maintenance cost is $5000. At the end of 12 years, the electric powered car can be sold for $8,000, and the gasoline powered car can be sold for $3,000. Under the assumption that you do not need to change the battery before selling the electric car at the end of year 12, and each car is driven for 15,000 miles/year.
a. Calculate the annual total cost of ownership
b. Which car do you prefer to buy if DN alternative does not exist?
c. Find the value of x (x being the miles driven for each car per year), so that the total ownership costs are the same.
Problem 6 is based on the following statement:
6. The data for new and used machines are shown below:
|
Initial cost($)
Annual operating cost ($/year)
Salvage value ($)
Life (years)
|
Used machine
15,000
8,000
5,000
4
|
New machine
40,000
2,000
10,000
6
|
Use an interest rate of 10% per year compounded monthly. Compare the machines on the basis of a present worth analysis. Which machine you will pick? Why?
7. A perpetual public park requires $1,000,000 upfront cost, and 100,000 for the major renovation every 10 years. On the other hand, annual maintenance cost is $10,000 and the project requires a major overhaul for $500,000 cost at the end of year 5. Assuming interest rate of 10%, calculate
a. Capitalized cost.
b. Annual equivalent cost.