1. The expansion of the Wideplace Mall is delayed over the issue of parking. There is not enough now to support the new facility and more must be added. Let's suppose that there are 3 options: buying more land, filling wetlands at the rear of the site, or building a multilevel garage on the present lot. Assume a forty-year planning horizon and an interest rate of 9% per year. Use present worth analysis and the data below to determine which option should be selected.
|
|
PurchaseLand
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Fill Wetlands
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Garage
|
|
Initial Cost, $
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$12,000,000
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$19,000,000
|
$44,000,000
|
|
Annual Benefit, $ per year
|
0
|
0
|
4,000,000 (parking fees)
|
|
Annual Cost, $ per year
|
200,000
|
160,000
|
2,900,000
|
2. Your company needs a small front-end loader for handling bulk materials at the Wideplace plant. It can be leased from the dealer for three years for $4050 per year including all maintenance. It can also be purchased for $14,000. You expect the loader to last for six years and to have a salvage value of $3000. You predict that maintenance will cost $400 the first year and increase by $200 per year in each year after the first. Your MARR is 15% per year. Use AW analysis to determine whether to lease or buy the loader.
3. For the cash flow series below, calculate the composite rate of return, using a reinvestment rate of 14% per year.
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Year
|
Cash Flow, $
|
|
0
|
3000
|
|
1
|
-2000
|
|
2
|
1000
|
|
3
|
-6000
|
|
4
|
3800
|
4. The State Department of Excessive Spending (DES) is planning to build a new office building for the Bureau of Eternal Taxation (BET) near Wideplace. Four proposed sites are to be evaluated. Any of these sites will save the state $750,000 per year because the space for BET will no longer need to be rented from the private sector. As required, the DES uses benefit/cost ratio analysis with a 6% per year interest rate and assumes that the building and its benefits will last for 40 years. Which, if any, site should DES choose?
|
Site
|
Here
|
Near
|
Far
|
Farther
|
|
Initial Cost
|
$8,600,000
|
$8,100,000
|
$7,500,000
|
$6,800,000
|
|
Annual Operating Cost
|
$160,000
|
$ 200,000
|
$240,000
|
$300,000
|
5. The following two alternatives are mutually exclusive. Which one will you select if your MARR is 15% per year? Use rate of return analysis.
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Alternative
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Initial Cost
|
Annual Benefit
|
Life, years
|
|
Ordinary (O)
|
$30,000
|
$9,000
|
5
|
|
Above average (AA)
|
33,000
|
9,000
|
6
|