- Three projects are considered, as follows:
|
Project 1
|
|
|
Optimistic
|
Expected
|
Pessimistic
|
|
Initial investment
|
$250,000
|
$270,000
|
$290,000
|
|
Annual O&M costs
|
$70,000
|
$74,000
|
$77,000
|
|
Annual revenue
|
$120,000
|
$110,000
|
$100,000
|
|
End of life salvage value
|
$25,000
|
$5,000
|
-$5,000
|
|
Project life
|
8 years
|
8 years
|
8 years
|
|
Interest rate
|
5%
|
6%
|
8%
|
|
Project 2
|
|
|
Optimistic
|
Expected
|
Pessimistic
|
|
Initial investment
|
$210,000
|
$250,000
|
$290,000
|
|
Annual O&M costs
|
$60,000
|
$70,000
|
$80,000
|
|
Annual revenue
|
$200,000
|
$160,000
|
$130,000
|
|
End of life salvage value
|
$45,000
|
$15,000
|
-$2,000
|
|
Project life
|
8 years
|
8 years
|
8 years
|
|
Interest rate
|
5%
|
6%
|
8%
|
|
Project 3
|
|
|
Optimistic
|
Expected
|
Pessimistic
|
|
Initial investment
|
$350,000
|
$400,000
|
$450,000
|
|
Annual O&M costs
|
$100,000
|
$130,000
|
$160,000
|
|
Annual revenue
|
$280,000
|
$250,000
|
$200,000
|
|
End of life salvage value
|
$50,000
|
$25,000
|
$0
|
|
Project life
|
8 years
|
8 years
|
8 years
|
|
Interest rate
|
5%
|
6%
|
8%
|
Find the NPV for each estimate for each project in the table above.
- For the same set of project data (question 1) determine the IRR for each outcome for each project.
- For the same set of three potential projects (question 1), develop a table of alternative combinations of projects based on the expected values of each project.
a. Identify the combinations of projects which are permissible if the initial investment budget limit is: $550,000.
b. For the alternatives which satisfy the budget limit criterion, perform a Present Value of incremental investment analysis to determine the preferred alternative. Interest rate is 6%.
Duration is 8 years.
- For the same set of three projects (question 1) determine the project which would be selected usingthe following project slection criteria. The probablity of the outcomes are as described in the table below.
|
Criterion
|
Optimistic
|
Expected
|
Pessimistic
|
|
Probability
|
0.2
|
0.6
|
0.2
|
a. Expected value criterion.
b. Maximax criterion.
c. Laplace criterion.
- In 1984 a particular machine of capacity x cost $35,000. Estimate the cost of a similar machine with capacity 1.25x in 1990, using the Producer Price Index, table 3.5. Use a power law parametric estimation relationship with m = 0.65.
- Consider the project described by the parameters described below.
|
Initial investment
|
$250,000
|
|
Annual O&M costs
|
$70,000
|
|
Annual revenue
|
$120,000
|
|
End of life salvage value
|
$25,000
|
|
Project life
|
8 years
|
|
Interest rate
|
5%
|
Find the sensitivity of the NPV of this project to variations of BOTH end of life salvage value (salvage values of $5,000, $10,000, $15,000, $20,000, $25,000) and interest rate (calculate for interest rates of 4%, 8%, 12%, 16%, 20%). Both sets of variations operate simultaneously; i.e. a matrix of results is expected.
- A tool costs $15,000 to buy and in five years is estimated to have a salvage value of $500. Annual fixed costs are $1,700. The cost of consumables per hour of operation is $83.50 and the operator costs $62.00 per hour. Interest is 7.5%. The cycle time per unit of production is 0.01 hours. Determine the cost contribution of the machine in the manufacture of units if annual production is:
a. 20,000 units.
b. 60,000 units.
c. 150,000 units.
d. 200,000 units.
e. Determine the total cost per unit of production for each of the above production quantities.
You are considering a design with two alternatives. Interest is 10%.
Alternative A has parameters: Initial cost $48,000; Cost of maintenance in the first year $950; Annual increase in the cost of maintenance $1,050; Annual operating costs $3,100; Salvage value at the end of each year is 75% of the salvage value at the end of the previous year.
Alternative B has parameters: Initial cost $45,000; Cost of maintenance in the first year $1,300; Annual increase in the cost of maintenance $1,250; Annual operating costs $3,700; Salvage value at the end of each year is 70% of the salvage value at the end of the previous year.
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