ASSIGNMENT #4 SKKK 4173 (Chapter 7 &8) CO1, PO1

QUESTION 1

Consider two investment projects with the following cash-flow transactions:

Year Project 1 Project 2

0 -$3,000 -$2,000
1 $0 $1,300
2 $0 $1,500
3 $0
4 $4,500

Compute the rate of return for each project.

QUESTION 2

ACME Corporation distributes agricultural equipment. The board of directors is considering a proposal
to establish a facility to manufacture an electronically controlled “intelligent” crop sprayer invented by
a professor at a local university. This crop-sprayer project would require an investment of $10 million
in assets and would produce an annual before-tax net benefit of $2 million over a service life of eight
years. When the project terminates, the net proceeds from the sale of the assets would be $1 million.
What is the rate of return of this project?

QUESTION 3

Consider the following two mutually exclusive investment projects that require the same amount of
investment:

Year C1 C2
0 -$9,000 -$9,000
1 $480 $5,800
2 $3,700 $3,250
3 $6,550 $2,000
4 $3,780 $1,561
ROR (%) 18 20

Which project would you select on the basis of rate of return on incremental investment, assuming
that MARR=12%?
QUESTION 4

Missionaries of Charity Hospital is reviewing ways of cutting the costs of stocking medical supplies.
Two new stockless systems are being considered to lower the hospital’s holding and handling costs.
The hospital’s industrial engineer has compiled the relevant financial data for each system, as follows,
where dollar values are in millions:

Item Current Practice Just-in-Time System Stockless Supply

Start-up cost $0 $2.5 $5
Annual stock-holding $4 $2.5 $0.5
cost
Annual operating cost $3 $2 $2
System life 10 years 10 years 10 years
If the hospital’s MARR is 15%, which system is more economical?

QUESTION 5

Consider the following two mutually exclusive investment projects.

Year Project A1 Project A2

0 -$10,000 -$15,000
1 $5,000 $20,000
2 $5,000
3 $5,000

Determine the range of MARR that will indicate the selection of Project A1.

QUESTION 6

Two electric motors are being considered to drive a centrifugal pump. One of the motors must be
selected. Each motor is capable of delivering 60 horsepower (output) to the pumping operation. It is
expected that the motors will be in use 800 hours per year. The following data are available.

Motor A Motor B
Capital investment $1,200 $1,000
Electrical efficiency 0.90 0.80
Annual maintenance $160 $100
Useful life (years) 3 5

If electricity costs $0.07 per kilowatt-hour, which motor should be selected if MARR is 8% per year?
Recall that 1 hp = 0.746 kW. Assume repeatability.
QUESTION 7

Three mutually exclusive alternatives are being evaluated, and their costs and revenues are listed in
the following Table.

Alternative 1 Alternative 2 Alternative 3

Capital investment $300,000 $450,000 $600,000
Annual revenues $200,000 $100,000 $200,000
Annual expenses $50,000 $50,000 $100,000
Market value $50,000 $50,000 $100,000
Useful life (years) 10 10 10
a. If the MARR is 20% per year, which alternative is should be selected?
b. If the total capital investment budget available is $500,000, which selected should be selected?

QUESTION 8

A manufacturing firm is evaluating three automated machines. The estimated production rate and cost
data for each machine are given below. The MARR is 15% per year.

A B C
Investment cost $50,000 $75,000 $60,000
Production rate per 20,000 30,000 25,000
year
Selling price ($/unit) $4 $5 $4.5
Variable cost ($/unit) $2 $3 $1.5
Annual expenses $20,000 $30,000 $40,000
Market value $25,000 $25,000 $25,000
Useful life (years) 8 8 8
Annual revenues are based on the number of units sold and the selling price. Annual expenses are
based on fixed and variable costs. Determine which selection is preferable based on AW.

QUESTION 9

A steam generator is needed in the design of a new power plant. This generator can be fired by three
different fuels, A, B, and C, with the following cost implications.

A B C
Installed investment $30,000 $55,000 $180,000
cost
Annual fuel expense X + $7,500 X X - $1,500
Residual value None None None

If the study period is 20 years and MARR is 8% per year, which types of fuel is most economical?
QUESTION 10

Four mutually exclusive projects are being considered for a community gym. The life of equipment in
the gym is expected to be 50 years, and the sponsoring agency’s MARR is 15% per year. Annual income
from the gym has been estimated by a committee and is shown below. Use the incremental ROR to
select the best project.

Alternatives
A B C D
Initial investment $3,000 $2,500 $7,000 $2,700
Annual income $500 $400 $1,000 $450
ROR 16% 17.5 10.5% 16%