TIME CONTROL ASSIGNMENT 2
1. A company that manufactures magnetic membrane switches is investigating two
production options that have the estimated cash flows shown ($1 million units).
Which one should be selected on the basis of a present worth analysis at 10% per
year?
2. The supervisor of a community swimming pool has developed two methods for
chlorinating the pool. If gaseous chlorine is added, a chlorinator will be required
that has an initial cost of $8000 and a useful life of 5 years. The chlorine will cost
$650 per year, and the labor cost will be $800 per year. Alternatively, dry chlorine
can be added manually at a cost of $1000 per year for chlorine and $1900 per year
for labor. Which method should be used on the basis of a present worth analysis if
the interest rate is 10% per year?
3. A wealthy businessman wants to start a permanent fund for supporting research
directed toward sustainability. The donor plans to give equal amounts of money for
each of the next 5 years, plus one now (i.e., six donations) so that $100,000 per year
can be withdrawn each year forever, beginning in year 6. If the fund earns interest
at a rate of 8% per year, how much money must be donated each time?
4. An electric switch manufacturing company has to choose one of three different
assembly methods. Method A will have a fi rst cost of $40,000, an annual operating
cost of $9000, and a service life of 2 years. Method B will cost $80,000 to buy and
will have an annual operating cost of $6000 over its 4 year service life. Method C
will cost $130,000 initially with an annual operating cost of $4000 over its 8-year
life. Methods A and B will have no salvage value, but method C will have some
equipment worth an estimated $12,000. Which method should be selected? Use
present worth analysis at an interest rate of 10% per year.
5. An assistant to Stacy gave her the PW values for four alternatives they are
comparing for the development of a remote control vibration control system for
offshore platform application. The results in the table use a MARR of 14% per year.
Determine which alternative(s) should be selected (a)if the alternatives are
exclusive, and (b) if the projects are independent.
6. Two processes can be used for producing a polymer that reduces friction loss in
engines. Process T will have a first cost of $750,000, an operating cost of $60,000
per year, and a salvage value of $80,000 after its 2-year life. Process W will have a
first cost of $1,350,000, an operating cost of $25,000 per year, and a $120,000
salvage value after its 4-year life. Process W will also require updating at the end of
year 2 at a cost of $90,000. Which process should be selected on the basis of a
future worth analysis at an interest rate of 12% per year?
7. Two manufacturers supply MRI systems for medical imaging. Muhimbili’s
Hospital wishes to replace its current MRI equipment that was purchased 8 years
ago with the newer technology and clarity of a stateof-the-art system. System K will
have a first cost of $1,600,000, an operating cost of $70,000 per year, and a salvage
value of $400,000 after its 4-year life. System L will have a first cost of $2,100,000,
an operating cost of $50,000 the first year with an expected increase of $3000 per
year thereafter, and no salvage value after its 8-year life. Which system should be
selected on the basis of a future worth analysis at an interest rate of 12% per year?
8. Wakalinga has received a $500,000 inheritance from her favorite, recently deceased
aunt in Dodoma. Wakalinga is planning to purchase a condo in Dodoma in the same
area where her aunt lived all her life and to rent it to vacationers. She hopes to make
8% per year on this purchase over an ownership period of 20 years. The condo’s
total first cost is $500,000, and she conservatively expects to sell it for 90% of the
purchase price. No annual M&O costs are considered in the analysis. ( a ) What is
the capital recovery amount? ( b ) If there is a real boom in rental real estate 10
years in the future, what sales price (as a percentage of original purchase price) is
necessary at that time (year 10) to realize the same amount as the 8% return
expected over the 20-year ownership period?
9. Wasiengo developed the two cash fl ow diagrams shown at the bottom of this page.
The cash flows for alternative B represent two life cycles of A. Calculate the annual
worth value of each over the respective life cycles to demonstrate that they are the
same. Use an interest rate of 10% per year.
10. A new Electrical design software package is available for analyzing and designing
three-storey towers and three- and four-sided self-supporting towers. A single-user
license will cost $6000 per year. A site license has a one-time cost of $22,000. An
electrical engineering consulting company is trying to decide between two
alternatives: buy a single-user license now and one each year for the next 3 years
(which will provide 4 years of service), or buy a site license now. Determine which
strategy should be adopted at an interest rate of 10% per year for a 4-year planning
period using the annual worth method of evaluation.
11. A remotely located air sampling station can be powered by solar cells or by
running an above ground electric line to the site and using conventional power.
Solar cells will cost $16,600 to install and will have a useful life of 5 years with no
salvage value. Annual costs for inspection, cleaning, etc., are expected to be $2400.
A new power line will cost $31,000 to install, with power costs expected to be
$1000 per year. Since the air sampling project will end in 5 years, the salvage value
of the line is considered to be zero. At an interest rate of 10% per year, ( a ) which
alternative should be selected on the basis of an annual worth analysis and ( b )
what must be the first cost of the above ground line to make the two alternatives
equally attractive economically?
12. Water damage from a major flood in Hanang town resulted in damages estimated
at $108 million. As a result of the claimant payouts, insurance companies raised
homeowners' insurance rates by an average of $59 per year for each of the 160,000
households in the affected city. If a 20-year study period is considered, what was
the rate of return on the $108 million paid by the insurance companies?
13. A company that makes clutch disks for race cars has the cash flows shown for one
department.
(a) Determine the number of positive roots to the rate of return relation.
(b) Calculate the internal rate of return.
(c) Calculate the external rate of return using the return on invested capital (ROIC)
approach with an investment rate of 15% per year
14. Compute the following:
(a) An equipment trust bond with a face value of $10,000 has a bond coupon rate of
8% per year, payable quarterly. What are the amount and frequency of the dividend
payments?
(b) The face value of a municipal bond that matures in 20 years and has a bond
coupon rate of 6% per year with semiannual payments of $900?
(c) The present worth of a $50,000 debenture bond that has a bond coupon rate of 8%
per year, payable quarterly? The bond matures in 15 years. The interest rate in the
marketplace is 6% per year, compounded quarterly.
15. Two options are available for setting up a wireless meter scanner and controller. A
simple setup is good for 2 years and has an initial cost of $12,000, no salvage value,
and an operating cost of $27,000 per year. A more permanent system has a higher
first cost of $73,000, but it has an estimated life of 6 years and a salvage value of
$15,000. It costs only $14,000 per year to operate and maintain. If the two options
are compared using an incremental rate of return, what are the incremental cash
flows in ( a ) year 0 and ( b ) year 2?
16. Johnson Company which manufactures rigid shaft couplings, has $600,000 to
invest. The company is considering three different projects that will yield the
following rates of return.
The initial investment required for each project is $100,000, $300,000, and $200,000,
respectively. If Johnson’s MARR is 15% per year and it invests in all three projects,
what rate of return will the company make?
17. As groundwater wells age, they sometimes begin to pump sand (and they become
known as “sanders”), and this can cause damage to downstream desalting
equipment. This situation can be dealt with by drilling a new well at a cost of
$1,000,000 or by installing a tank and self-cleaning screen ahead of the desalting
equipment. The tank and screen will cost $230,000 to install and $61,000 per year
to operate and maintain. A new well will have a pump that is more efficient than the
old one, and it will require almost no maintenance, so its operating cost will be only
$18,000 per year. If the salvage values are estimated at 10% of the first cost, use a
present worth relation to ( a ) calculate the incremental rate of return and ( b )
determine which alternative is better at a MARR of 6% per year over a 20-year
study period.
18. CPE Foods Company. has determined that any one of five machines can be used
in one phase of its chili canning operation. The costs of the machines are estimated
below, and all machines are estimated to have a 4-year useful life. If the minimum
attractive rate of return is 20% per year, determine which machine should be
selected on the basis of a rate of return analysis.
19. The plant manager at Automaton Robotics is looking at the summarized
incremental rate of return information shown below for five mutually exclusive
alternatives, one of which must be chosen. The table includes the overall ROR and
the incremental comparison of alternatives. Which alternative is best if the
minimum attractive rate of return is ( a ) 15% per year and ( b ) 12% per year?
20. The five alternatives shown here are being evaluated by the rate of return method.
(a) If the alternatives are mutually exclusive and the MARR is 26% per year, which
alternative should be selected?
(b) If the alternatives are mutually exclusive and the MARR is 15% per year, which
alternative should be selected?
(c) If the alternatives are independent and the MARR is 15% per year, which
alternative(s) should be selected?