2009_Midterm

2009_Midterm - NAME HAAS SCHOOL OF BUSINESS UNIVERSITY OF...

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N AME : H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 T AKE -H OME M ID - TERM E XAMINATION J ULY 23, 2009 TO J ULY 27, 2009 D UE IN THE B OX O UTSIDE F494 AT 9 AM ON J ULY 27, 2009 S HOW WORK FOR PARTIAL CREDIT . E ACH Q UESTION HAS 12.5 POINTS . 1. Suppose you have to decide between two machines that have the following cash flows in millions of dollars: Machine Life (in years) C 0 C 1 C 2 C 3 C 4 C 5 A 3 –15 9 8 9 B 5 –15 6 6 6 6 6 Given a discount rate of 12% per year, work out the NPV (Net Present Value) of each machine, and state which machine is more attractive financially (a) without future replacement, and (b) with future replacement.

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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 A VINASH V ERMA Name: 2. Suppose you are given that an equipment costs \$150,000 to buy at t=0, and the operating and maintenance (O&M) costs at t =1,2,…8 are \$25,000, \$30,000, \$45,000, \$45,000, \$60,000, \$60,000, \$90,000, and \$100,000 respectively. The equipment is needed on an ongoing basis, and you are asked to decide how often we should replace one unit with another in order to minimize the total costs (sum of replacement and O&M costs). In other words, you are asked to work out the economic life of the equipment. Assume that the discount rate is 16% per year. Summer 2009 Take-Home Mid-term Examination 2
AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 A VINASH V ERMA Name: 3. ABC Fitness Club has a set of treadmills and other exercise equipment that costs \$225,000. They replace the entire set every 72 months with an identical set, and sell the old set for \$45,000. The technology and the prices are expected to remain unchanged in perpetuity. Therefore, as a going concern, ABC Fitness Club can be reasonably expected to follow this replacement policy forever. They bought the current equipment 15 months ago. Therefore, given the replacement policy and normal use, it will be replaced in exactly 57 months from now. XYZ Health Club, a sister facility in the neighborhood, closed down temporarily, and asked ABC Fitness Club to let its members use ABC’s facilities until it reopens. Taking into account the membership of the two clubs, it is estimated that ABC Club will have to replace their current equipment in 54 months if they still want to sell the old unit for \$45,000. In other words, the life of the current set of equipment that ABC has will be shortened by 3 months on account of its use by members of XYZ Health Club. Assuming the discount rate to be 0.9% per month, what payment from XYZ Health Club would compensate ABC Fitness Club for the fact that their current equipment will need replacement 3 months earlier? Summer 2009

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This note was uploaded on 04/30/2010 for the course L&S 101 taught by Professor Chow during the Spring '10 term at Berkeley.

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2009_Midterm - NAME HAAS SCHOOL OF BUSINESS UNIVERSITY OF...

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