1. Which of the four projects listed blow would you choose if you only want to invest in one project if the criteria is a) Present Worth, b) Future Worth or c) Annual Worth? All projects are for five years and the risk-free interest rate is 10%.
X1. Invest $14,000 today and receive $25,000 in five years.
X2. Invest $10,000 today, receive annual payments of $3,000.
X3. Invest $15,000 today, receive annual payments of $4,000, and also receive a final payment of $2,000.
X4. Invest $9,000 today, receive annual payments of $1,000, $2,000, $3,000, $4,000 and $5,000
2. The following projects are being considered by the Corporate Investment Committee who has an investment budget of $1,000,000.
A. Which ones should be funded based on NPV assuming a 6% interest rate? Your Budget is Only $1,000,000.
B. Which ones should be funded using a 3 year or less payback period criterion?
|
Project
|
Years
|
Up Front (Y 0)
|
Cost each year after first
|
Benefits each year after first
|
|
V
|
6
|
$ 500,000
|
0
|
$110,000
|
|
W
|
6
|
$ 250,000
|
$40,000
|
$100,000
|
|
X
|
5
|
$400,000
|
$100,000
|
$200,000
|
|
Y
|
3
|
$300,000
|
$25,000
|
$150,000
|
|
Z
|
4
|
$150,000
|
$200,000
|
$250,000
|
|
|
|
|
|
|
3. A portable generator is needed at a remote construction site. Two altarnatives are being considered. Their annual fixed costs and operating and maintenance costs per hour are shown in the table below. The generator runs three 8 hhours shifts/day for 250 working days per year.
|
Generator
|
Fixed Cost($/yr)
|
O&M Cost ($/hour)
|
|
1
|
$4000
|
$7.00
|
|
2
|
$8000
|
$5.50
|
A) How many hours per shift is a generator needed if the contractor is indifferent between the two generators?
B) If the site requires a generator for 2.5 hours/ shift, which generator is preferred, and what is its estimated annual cost?
c) If the site requires a generator for 5.5 hours/ shift, which generator is preferred, and what is its estimated annual cost?
4. The Signal Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Signal Company expects cash inflows from this project as detailed below.
|
Year
One
|
Year
Two
|
Year
Three
|
Year
Four
|
|
$200,000
|
$225,000
|
$275,000
|
$200,000
|
The appropriate discount rate for this project is 16%. Show calculations.
a) What is the payback period for this project?
b) What is the NPV for this project?
c) What is the profitability index for this project?
d) What is the IRR for this project?
5. A bond is purchased for $9,855.57. It is kept for 5 years and interest is received at the end of each year. Immediately following the owner's receipt of the fifth interest payment, the owner sells the bond for $500 less than its par value. The bond rate of interest is 8% and the owner's money yields a 10% interest rate.
A. Draw a clear completely labeled cash flow diagram of the entire bond transcation using dollar accounts where they are are known and $X to represent the bond's face value.
B. Determine the bond's Face Value.
6. Strong Tool Company has been considering purchasing a new lathe as a replacement for a fully depreciated lathe that can last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,000 in year 1; $3,200 in year 2; $1,900 in year 3; $1,200 in both year 4 and year 5; and $500 in year 6. The firm estimates the revenues and expenses (excluding depreciation and interest) for the new and the old lathes to be as shown in the following table. The firm is subject to a 40% tax rate. Should the new lathe be purchased? The price of the new lathe is $ 10,000 and the cost of capital is 10%, annually.
|
Year
|
New lathe
|
Old lathe
|
|
|
|
Revenue
|
Expenses (excl. depr. and int.)
|
Revenue
|
Expenses (excl. depr. and int.)
|
|
|
1
|
$40,000
|
$30,000
|
$35,000
|
$25,000
|
|
|
2
|
$41,000
|
$30,000
|
$35,000
|
$25,000
|
|
|
3
|
$42,000
|
$30,000
|
$35,000
|
$25,000
|
|
|
4
|
$43,000
|
$30,000
|
$35,000
|
$25,000
|
|
|
5
|
$44,000
|
$30,000
|
$35,000
|
$25,000
|
|
7. Fabco Inc. is considering purchasing flow valves that will reduce annual operating costs by $ 10,000 per year for the next 12 years. Fabco's MARR is 12%/year. Using a PW approach determine the maximum amount Fabco should be willing to pay for the valves.
8. A pipeline contractor can purchase a needed truck for $40000. Its estimated life is 6 years, and it has no salvage value. Maintenance is estimated to be $2400/year. Operating expenses is $60/day.The constructor can hire a similar unit for $150/day. MARR is 7%
A. How many days/year must the truck's services be needed such that the two alternatives are equally costly?
B. If the truck is needed for 180 days per year, should the contractor buy the truck or hire the similar one? Why?