Ch4Solutions

Ch4Solutions - Chapter 4 4.1 Do-nothing (DN) represents the...

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Chapter 4  4.1 Do-nothing (DN) represents the status quo and is understood to always be an option. If one of the projects absolutely must be selected, the DN alternative is present, it simply will not be selected when the final selection is made. 4.2 (a) Do-nothing, which is to leave in place the existing equipment. Annual costs for equipment used now, its estimated remaining life, and an interest rate at which the evaluation will be performed. (b) Cost series, since all estimates are cost cash flows. (c) Conversion to a revenue series requires annual revenue or savings estimates so that net cash flows can be calculated. 4.3 Independent projects are compared against the MARR, not each other; mutually exclusive alternatives compete with each other for selection. Additionally, each independent project usually accomplishes a different objective, whereas mutually exclusive alternatives are different ways to accomplish the same objective. 4.4 (a) A, B and C are mutually exclusive; D and E are independent. (b) X is in all bundles as the mutually exclusive selection. The two independent projects have 2 2 = 4 bundles. The 4 viable options are: X only XD XE XDE 4.5 Of the 2 4 = 16 bundles possible, there are 12 acceptable bundles. DN 1 2 3 4 12 13 14 23 24 123 124 4.6 PW = -200,000 + (40,000 – 5000)(P/A,10%,5) + 10,000(P/G,10%,5) = -200,000 +35,000(3.7908) + (10,000(6.8618) = $+1296 Excel: enter cash flows for years 0 through 5 and use the NPV function. 4.7 12% per year compounded monthly is 1% per month. Since PW > 0, the service is financially justified. PW = -600 + 30(P/A,1%,24) = -600 + 30(21.2434) = $+37.30 4- 1
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4.8 Determine if the deposit’s F value in year 10 equals the $20 million target amount. First use Equation [2.7] to find P with g = 0.1 and i = 0.0525. all monetary terms are in $ million. P = 1{[1- (1.1/1.0525) 10 ]/-0.0475} = 1{-0.5549/-0.0475} = 11.68236 F = 11.68236(F/P,5.25%,10) = 11,68236(1.66810) = $19.4873 million The deposits fall short of the target by $512,700. A spreadsheet solution follows. 4.9 Subscripts are C for contract service and B for Burling Coop installed. PW C = -75,000(P/A,6%,3) – 100,000(P/A,6%,2)(P/F,6%,3) = -75,000(2.6730) – 100,000(1.8334)(0.8396) = $- 354,407 PW B = -150,000 – 60,000(P/A,6%,5) = $-402,744 The contract service is a better deal with a smaller PW of costs. 4.10 Semiannual bond dividend is 1000(0.05)/2 = $25 per 6 months. Semiannual interest rate is 5%/2 = 2.5%. PW = -825 + 25(P/A,2.5%,16) + 800(P/F,2.5%,16) = -825 + 25(13.0550) + 800(0.6736) = $+40.26 Yes, the bond investment does make over the target rate since PW > 0. A spreadsheet solution follows. 4- 2
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4.11 Semiannual bond dividend is 10,000(0.05)/2 = $250 per 6 months. Semiannual interest rate expected is 6%/2 = 3%. PW = -9000 + 250(P/A,3%,40) + 10,000(P/F,3%,40)
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This note was uploaded on 03/24/2011 for the course ISEN 302 taught by Professor Ko during the Spring '08 term at Texas A&M.

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Ch4Solutions - Chapter 4 4.1 Do-nothing (DN) represents the...

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