Problem Statement

Joe's Hardware is planning to expand its retail capacity. Two alternatives are under consideration by management. Details of the alternatives are:

• Alternatives have essentially infinite lives (Nè∞).
• Alternative 1 (New building)
  • First cost = $2 million
  • $0 salvage value
  • Annual maintenance cost = $10,000
  • Painting to occur every 15 years (starting in 15 years) = $15,000

• Alternative 2 (New building now with an addition in 10 years from today)

§  First cost of new building now = $1.25 million

§  Annual maintenance of new building for the first 10 years = $5,000

§  First cost of addition in 10 years = $1 million

§  Total annual maintenance cost of new building and addition (11 years from today) = $11,000

§  $0 salvage value (new building and addition)

§  Painting cost (starting 15 years after the addition is built) = $15,000 every 15 years

§  CCA rate = 5%; Corporate tax rate = 45%

§  After-tax MARR = 15%

C1. The CTF (capitalized Tax Factor) for the buildings (rounded 4 decimals) is

a) 0.6756; b) 0.8948; c) 0.7684; d) 0.8978; e) None of these answers.

C2. Using the CTF, the after-tax annual cost of the $2 million building in alternative 1 (nearest $50) is

a) $248,000; b) $557,850; c) $604,000; d) $268,450; e) None of these answers.

C3. The after-tax annual maintenance cost of alternative 1 (nearest $100) is

a) $10,000; b) $4,500; c) $5,500; d) None of these answers.

C4. The after-tax annual painting cost of alternative 1 (nearest $10) is

a) $110; b) $170; c) $120; d) None of these answers.

C5. The total after-tax annual cost of alternative 1 (to the nearest $100) is

a) $274,100; b) $348,600; c) $358,500; d) None of these answers.

C6. Using the CTF, the after-tax annual cost of the $1.25 million building (to the nearest $50) in alternative 2 is

a) $168,900; b) $189,650; c) $198,800; d) $167,800; e) None of these answers.

C7. Using the CTF, the after-tax annual cost of the $1 million addition which is planned for 10 years from today (nearest $50) in alternative 2 is

a) $33,200; b) $55,800; c) $60,400; d) $68,450; e) None of these answers.

C8. Using the CTF, the after-tax annual cost of the $1.25 million new building and the $1 million addition (nearest $50) in alternative 2 is

a) $138,400; b) $178,450; c) $189,990; d) $201,000; e) None of these answers.

C9. The after-tax Present Worth of the annual maintenance cost of $5,000 of the $1.25 million new building during the first 10 years (nearest $10) is

a) $13,800; b) $17,850; c) $18,910; d) $20,000; e) None of these answers.

C10. The after-tax annual equivalent maintenance cost of $5,000 during the first 10 years of the $1.25 million new building [answer C.9] spread over an infinite period of time (nearest $10) is

a) $1,800; b) $1,780; c) $2,070; d) $2,000; e) None of these answers.

C11. After 10 years, annual maintenance costs are $11,000 forever (from $10,000 during the first 10 years).  The after-tax present worth of the annual maintenance cost of $11,000 at the end of the tenth year (nearest $50) is

a) $39,800; b) $40,350; c) $29,100; d) $42,200; e) None of these answers.

C12. The after-tax present worth TODAY of the annual maintenance cost of [using answer to C11] (nearest $50) is

a) $11,800; b) $11,750; c) $11,100; d) $10,000; e) None of these answers.

C13. The after-tax annual maintenance cost spread over an infinite period of time is [your answer to C12. spread over Nà∞] (nearest $20) is

a) $1,500; b) $1,780; c) $2,060; d) $2,000; e) None of these answers.

C14. The first paint job costing $15,000 is to occur in 25 years from today and is scheduled every 15 years thereafter. The after-tax present worth of all the paint jobs at   the end of the tenth year (nearest $20) is

a) $1,160; b) $1,200; c) $1,250; d) $1,400; e) None of these   answers.

C15. The after-tax present worth TODAY of all the paint jobs (nearest $10) is

a) $300; b) $250; c) $270; d) $290; e) None of these    answers.

C16. The after-tax annual painting cost spread over an infinite period of time is [your answer to C15 spread over Nà∞] (nearest $10) is

a) $50; b) $40; c) $60; d) $70; e) None of these answers.

C17. The after-tax TOTAL annual cost of alternative 2 spread over an infinite period of time (nearest $20) is

a) $204,600; b) $214,740; c) $274,100; d) $70; e) None of these answers.

C18. The less costly alternative is

a) Alternative 1; b) Alternative 2; c) Neither alternative 1 nor alternative 2;   d) Both alternatives 1 and 2.