Posted: September 16th, 2017
A city government is planning to install a sewage line at a cost $10M with an estimated life of 50 years and an estimated salvage value of $2M
• A city government is planning to install a sewage line at a cost $10M with an estimated life of 50 years and an estimated salvage value of $2M. Assume that the line may be replaced at the same cost every 50 in perpetuity. Determine the capitalized cost if the interest rate is 9%
• Determine how much the owner of a building would be justified to pay (Initial cost = P) for a new fire protection system which would reduce insurance premiums by $900 each year if the system will need to be replaced each 15 years and will have a salvage value equal to 20% of its initial cost. Use a MARR of 8% and useful life equal to replacement period.
• A new automated packaging equipment costs $12,000. It is expected that the equipment will have a salvage value of $1,000 at the end of its useful life of 10 years. Operation and maintenance cost will be $500 in the first year and will gradually increase every year starting year 2 at the rate of $50 until the equipment is retired. Determine the equivalent uniform annual cost (EUAC) if MARR for the company is 10%.
• The accounting department has chosen Alternative B as the best EUAB – EUAC given the following data. Calculate the EUAB – EUAC of each alternative using a MARR of 12%. State whether or not you agree with the accounting department.
Data Alt. A Alt. B Useful Life, Years 9 10 First Cost (FC) $121,000 $137,000 Annual Benefit (AB) $63,000 $83,000 M&O Gradient (M&OG) $2,900 $4,000 M&O (M&O) $23,000 $32,000
Select the most appropriate answer from the choices below.
A. Agree with the accounting department, choose Alternative B B. Disagree with the accounting department, choose Alternative A C. Agree with the accounting department, choose Alternative B, and disagree with their calculations. You find EUAB – EUAC =$7,659 for alternative A and $10,560 for alternative B. D. There is insufficient information to make an informed decision
• . A company is considering two different makes of blow-molding machine for one of its automotive products. The cost data for the two alternatives are provided in table below. MARR =12%
Machine X Machine Y Initial cost $160K $285K Annual operating cost 45K 45K Benefits /Year 90K 105K Salvage value 20K 40K Life 10 Years
Choose the most attractive machine (X or Y) using Incremental Rate of Return (∆RoR) analysis. Hint: First check the ROR of each alternative. IF both the rate of returns exceed the MARR, an incremental analysis is required.
Select the most appropriate answer from the choices below.
A. ΔROR is > 12%, Machine X is attractive B. ΔROR is < 12%, Machine X is attractive C. ΔROR is < 12%, Machine Y is attractive D. Neither Machine X nor Machine Y, they are equivalent
• . Chuck purchased a corporate bond was purchased for $8,950. The face value of the bond is $10,000 and matures after 10 years. The bond pays a 13% interest with quarterly dividends. Determine the effective interest rate that Chuck would receive when the bond matures, if it has paid dividends as scheduled.
Select the most appropriate answer from the choices below.
A. Effective interest rate, ie =3.77% B. Effective interest rate, ie =15.08% C. Effective interest rate, ie =15.95% D. None of the above
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