Exam2 Solution

Exam2 Solution - University of Alabama at Birmingham CE 395...

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Unformatted text preview: University of Alabama at Birmingham CE 395 Engineering Economies — Exam 2 Summer 2005 Name a) o ('1 ' Date Solved Problems: 1. Given the investment project cash flow shown below: Year End I Net Cash Flow (36) 0 0 1 2,000 I 2 2,000 3 -15,000 4 6,000 5 6,000 6 6,000 a. (3 pts) If you wanted to use Internal Rate of Return Analysis to determine the internal rate of return of this project, how many possible positive IRR percentages exist? 2 POSSUDIC (bob b. (6 pts) You decide to use the External Rate of Return Method, and your firm uses an external rate of return of 8% for the investment cash flow. What is the rate of return for this investment using the ERR method? mm: 49,909 (We, 32,, 3): 4550667932): W—M 9‘07 Fwe: am (PM. 97., 230%; 8116) + em CF/A'. ‘87», 3) 2' 2,550 ((-7953)(/.5"949> 4— 6,500 (3.2464) = 1525,13? 6 (3 maps; aim PM; (Hi) =-Fw3 I (MEL-— M 5,2,”); [1,997 Hi :mazra ,L‘ -.—_ (3.24.2, 2. Your company has asked you to determine which replacement machine alternative is the best financial investment for the company. The company uses an MARR of 10% for equipment investments. The three alternatives are shown below. Machine Machine B Machine C A Purchase Price $10,000 I $145000 $20,000 Annual Maintenance Cost $700 I $500 $400 | Salvage Value 0 0 $2,000 | Useful Life 3 4 6 | 3. Suppose you want to solve this problem using the Present Worth Method. 1. (2 pts) What is the criterion for selecting the equipment? mmmrae pram-l worth O‘F 1595+?» \. 2. (2 pts) What assumptions would you have to make to use the Present Worth Method? mach-"8.5 A,E’,+c CM 53- Ulkt Idea-lace] Cos-f; mm-l-emnce. MA Golda-32.. 3. (3 pts) Construct a table showing the cash flows you would use in a Present Worth Analysis. End of Year Machine A Machine B Machine (2 1 0 40,000 #I4rooo #20 owe) J "700 #500 «#400 ‘L #70:; «Marco #40 0 _§___ w-Igjae ~50 0 ~44) o ‘I‘ -“700 44,5190 | ~49 o . ‘5 4 o 0 die— “4:: o h “@700 —500 ulgIMO 7 a“? or) —-56 D —400 ‘3 #700 «+1 60 0 who “I 40.7w «goo —-_4.o_o 10 #200 Waggon -4 Do It :20 o ~50 o — 4.0 o [1’ #70 O — 5‘0 0 +1 600 b. You have decided to use the Annual Worth Method to solve the problem. 1. (2 pts) What is your criterion for selection? Minamrhe I ‘E-UAC. 2. (3 pts)Whi_ch machine is the best choice? _ _ __ , 5’ EUP‘CA: _/0r0006&/P1M%333;7a5 :-/ofaoo(.4,02t) 700* - 4/72!” \/ _ a a 44.0900/3407943 -5ao:—!4/aw(~3155>- 5%» e' 4.1% EURCB: o m' \ 2 (’44? res/a s;"‘~_.4ao . Alp- 20/0 {9}+ “can , , f, f ‘ n :(-2Qv;>oo{.224é)+2;a00515496)-—400: 4’753 chaise. A Clea-9+ EUMB 2 Ease C : 40m 3. ( 12 pts) The Invest Right Group (Invest Right) is trying to decide between three alternative projects for a particular site development. There is a substantial difference in the potential capital investment between the alternatives. Since Invest Right has many other alternative investments to consider, the management team wants to be sure that it selects the best choice for this project. The cost of the land is $150,000. Use the benefit-cost ratio method to determine the most attractive inVestment. The MARK for investing is 10%. In your analysis, consider the resale of the land and buildings at the end of their 15- yr analysis life to be a reduction in cost. This analysis is to be a conventional B/C ratio analysis and therefore include the annual operating expenses as a cost. Investment Options I Pro osal A Proposal B I Proposal C Cost oflm rovements $3,000,000 $1,200,000 I $2,000,000 Annual Reveniles $450,000 $225,000 | $400,000 Annual Operating Exp $100,000 $75,000 $85,000 Estimated Resale $2,500,000 $1,000,000 $2,000,000 praews We: 450,000 (mumps): 3,4121%? fitéosl .. -250 J P): ra,1S '1 33i2ii0 PbUL:i50/MO+ sawtooo‘rfoeoao(0&702337 r 00900 023%) I J I Bic: 51422.74: 2 tag or 3,302,110 fibwsa‘, E, 'PNB: 123,000 (PM, Nib-,6) : ’i'7t‘5,é:?_?:. w \ {ii-dc: ljfl'owshzoo'ooo .5. 731mm fP/Afio‘lwrsBs- 1,000, 000 ("P/Effie 101’5' , :: l13$0,aoo+57Q‘t5é—239,4oo= “6.550526 B iQ: 0K Pics: " 40cm“; (P/0,w%, :5\: 3942040” . PUJC: 150,000+ 2.6300 ,Lec ‘5‘ 55/60" (Pmr “"095: 1‘33 — 230°°r000(P/L_r Maj"! ’5 3 2,30"),qu BIC : r. s: at Order "mi east T5, C , A " m a A ((430 (last : gowooo A RCUQflUE-T WES—190W?” A"E’LP: “W‘W 3995ak= 110002009 news: Ias,ooo<?m,m%,153 :: 0531,06? APWC: 800,009 immoo PM D1, ;5\-lauc>,ouo (05107.; :5) = (ass/001 C " ’ ’ ’ A010, : 2.001 choose C AG'C) ACflS‘l': 0000mm) Afieuenue: 555005 53‘?” 5300“ A035an 'F gnaw" news: 30,00» CP/A/{o‘fi/r'SBI 330,305“ a k) APNC: 0009mm: + 13,000 CP/A,ro°70,i53_5mowCP/h (“0%, 1‘3 : 904,912: ABIQ; 399,503 $3329 <2 :9 (,bpdsa C 000,391 :— 3 4. Given the four mutually exclusive alternatives below. End of Year Option A Option B Option C _Option D -200 -270 -230 —300 1 +60 +80 0 +20 2 +60 +80 +40 +20 I 3 +60 +80 +80 +20 4 +60 +80 +120 +20 5 ‘ +60 0 +160 I +320 —l a. (4 pts) Which alternative is preferred if i = 4% ? NPWA- 60(Pr‘e,4%15)*2ao: 67.1 HASH? NONE :_ SoCP/o. {9‘2}, ‘fl -2?o: 20:4— 369140, NPWC: 4.0(PlC-gl 4'70, 5\"230 :- NPWW 20mm .4°o,r>5+~ b. (4 pts) Which alternative is preferred ifi z 20%? NPWA : Q; 0 (PM! 20629) S) #200 : —201 MM: 40(Pmlfg‘gfifi-Zao: ~33.8’ NPvJ b: 2009», 20°20, 55+ 300 (9/ 8. 5547 acme b 4— NPWET %0(P)A}zo‘?or4.> #270: b 2%) H12. \/ Choose; C, -« 821‘? 940%; 500(PIFI4WQISXE300: 55. (a a 1/ (LLwDSGA c. (3 pts) If MARK is 8%, what is the Benefit Cost Ratio of Option C? PWB: 7, 372% 400/4” as): zqm F! 2072/ 9‘)-*?200 : - Na 9 5. (4 pts) You are evaluating an investment in a rent house. Your research suggests that you can expect annual rental revenue of $15,000. You estimate annual maintenance to be 332,5 00. You can purchase the house now for $150,000. You plan to sell the house after 10 years of ovmership. What would be the required market value of the house in 10 years for you to realize a 10% rate of return on your investment? 5) r- : PW C. C, lab/o @000 (PM: ‘01: “JV *7 (We? We “=33: Scoot: + 2500(me’2w) 13?55_ 64qu 91.15% Jr .5855 F": I65! Eats— F: 731‘?” : 53/893,364 .5855 6. (12 pts) You are considering the three mutually exclusive investment options Show below. all options have an 8-year useful life and no salvage value. For this analysis your are using an MARR 7%. You decide to use the Internal Rate of Return method to identify the best option. Which option is best? Show all your work Option A Option B Option C. _| Initial Cost $700 $450 $800 Annual Benefit $13l.62 ' $81.30 $150 0 iwwb A Peg-E»:- 9o.) C. taint-DZ (Pal/Afli 9).:7'00 . a E P (were) ram? .4 :- 115.00 Option 3 ng: PWC, r51,‘30(\0)a,,e,g):4§o (Pm/{35:55:33— A OPl-‘ita‘lfl C, If] 83.: 900 ' (to/A7 A} 8)::ST333 /{ .7 xo‘fé Home; itva Cast 13> Al L / A@'3\l Acoéi‘fZfi’o AB: 55.31 rm 8: We, S'D-BzCPII-Akglg):2_go In 4 d7 (Plan‘s): 4.963” ,4, L: 17— o 3/ Age, A) Ace-8t : gig/00 A E: lag? WA- ?>: #30 ?Wg: i%*3%( r J mam-r3: 544— 1:9462) >709; - 5 3. Choose 7. (3 pts) Your are preparing to perform an after tax rate of return analysis. Your company uses a 15% MARR before tax. The incremented tax bracket for your analysis is 40%. Without any other guidance, what would you use for an after tax MARR? (I... ,4a\(is‘if\,t cm 8. (3, pts) Your small company recently ordered a new part stamping machine. The purchase price is $100,000. Sales tax is 10% of the purchase price and shipping and installation will cost $8,000. What is the tax basis for this piece of equipment? 46-1 , . . l001009 + I I (100.0(905’? 55,000 : 1/8, coo 9. (10 pts) You have purchased a piece of equipment with a projected useful life of 5 years. The equipment costs $605000 and has an estimated salvage value of $10,000 at the end of the useful life. Complete the following depreciation table using the following methods, Straight Line Depreciation (SL), Sum—of-the-Years Digits Depreciation (SOYD), and Double Declining Balance Depreciation (200% DB). \. SoHDeH-ZT'BwLAr-l 5:15 N:g_h’4_ 5 F _ SL Book SOYD SOYD Book DDB Deprec DDB Book Value Deprec Value Value éogouo D ‘ 60,000 0 50.000 lame? 45,332 244000 . 35.000 amino 431553 30,002. 14,:ron1 Zhboo 3b as 0 ~ ea, aw T act? {3,33% 2,350 (spy;- @- foyer/‘0 10. Your company has just purchased a new heavy general purpose truck with a class life of 6 years. The purchase price of the truck, including all transportation and service fees. is $70000. The estimated market value ofthe truck at the end of 6 years ofservice is $15,000. a. What would the depreciation of the truck be during the first year if: 1. (3 pts) The GDS (MACRS) method is used? 5. We a 20 (70/000) 1 gig/$600 2. (3 pts) he Altcrnate Depreciation System (ADS) is used? g2 19;? : 4; fig (70,000 '} : 5, 833. "$3 c. What would be the depreciation of the truck during the 3rd year if: 1. (3 pts) The GDS (MACRS) method is used? 5! _ , 920 (70,600} :15, 44° 2. (3 pts) The ADS Method is used? ’ I a t(70p00017$/H,65b' .U 11. You have invested in equipment with a total tax basis of $100,000 at the time of purchase. You expect the equipment to last for 5 years. The salvage value (market value) at the end of 5 years is expected to be $20,000. The annual revenue benefits from the purchase are expected to be $35,000 per year. The after tax MARR is 8%. You are going to depreciate the equipment using Straight Line Depreciation and your incremental tax rate is 40%. The annual Operating and maintenance expense is expected to be a constant $4,000/yr over the 5-year analysis period. a. (9 pts) Complete the following tabie. Taxable Income Tax Net Income ATCF Income After Tax 0 Stem lSFOOB @000 ES} 500 [51000 erogo b. (3 pts) Is the investment acceptable based on the after tax cash flow? NPN 615% = ZS-faoocplfil @020, §>+2me ‘8" ’5) —jool 300 ~— 25,ooo(5.9a273+2o,mo (03355400, 0&0 fit . :— +13qu7,§ Agdep‘l'athlfl Bonus Question (8 pts): T I: is is an all or nothing question. No genial credit. Given the investment in problem 11. What is the maximum the operating and maintenance expense can be for the investment to be attractive on an after tax basis? ' 1U “ DE'PEIEL TMeLE wme ATCV E D l gTCl‘ Name Tax 0 u 03/000 0 c: to “$00,000 I .. | (33,030 1:0) lbwoo [(saaco ext-tth a lilébjsuo-o-taaob] o sagas .94 94w VI I-l u. it it u h It t( '-l ’2 3 Ll! H h 'l w q 5- n jam“) it n H 5 20,000 0 0 D 22000 E (7(351000’x31‘é140fi(P/Qfgz’fiS) 1— 20,009 Pit; as) .— Macao : o 5.96: 27 .geas 85,347 #239“ +Z§£SB4 13,610 400,000 :0 ~Z.3%»§ +232g0f0:0 )(z: I ...
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Exam2 Solution - University of Alabama at Birmingham CE 395...

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