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Ch5Solutions

# Ch5Solutions - Chapter 5 5.1(a Jim forgot the impact of...

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Unformatted text preview: Chapter 5 5.1 (a) Jim forgot the impact of interest, that is, the time value of money, which will increase the annual recovery amount. (b) Use Equation [5.3] to find the capital recovery amount with S = 0. CR = AW = -20,000(A/P,15%,5) = -20,000(0.29832) = \$-5966 per year 5.2 (a) Use Equation [5.3] for CR per year. CR = -3,800,000(A/P,12%,12) + 250,000(A/F,12%,12) = -3,800,000(0.16144) + 250,000(0.04144) = \$-603,112 (b) Use Equation [5.2]. AW = CR + A of AOC = -603,112 – 350,000 – 25,000(A/G,12%,12) = -603,112 – 350,000 - 25,000(4.1897) = \$-1,057,855 One way to use a spreadsheet follows: CR: single cell entry = -PMT(12%,12,-3800000,250000) AW: Enter increasing gradient into B3:B14 and combine the PMT functions. = -PMT(12%,12,-3800000,250000) - PMT(12%,12,NPV(12%,B3:B14)) 5.3 The CR is lower than the \$500,000 estimated 5 years ago. CR = -3,150,000(A/P,10%,13) + 300,000(A/F,10%,13) = -3,150,000(0.14078) + 300,000(0.04078) = \$-431,223 5.4 (a) AW = CR + (A of AOC and overhaul) = -115,000(A/P,7%,7) + 45,000(A/F,7%,7) - 9500 - 3200(P/F,7%,4)(A/P,7%,7) = -115,000(0.18555) + 45,000(0.11555) – 9500 – 3200(0.7629)(0.18555) = \$-26,091 per year (b) No since \$26,091 > \$20,000, and \$20,000 was an optimistic estimate. 5.5 Alternative A: At least, you need estimates of cost to provide same service for years 4 and 5, for example, repurchase of A for 2 years, plus any salvage (or other amounts) during these 2 years. 5- 1 Alternative B: You need market value estimate after 5 years. 5.6 (a) Monetary terms in \$ million. From AW, project clearly makes 10% per year. AW = -170(A/P,10%,20) + 85(1-0.22.5) = -170(0.11746) + 65.875 = \$+45.90 (\$+45.9 million) (b) AW goes negative between 35% and 40% per year. @ 20%: AW = -170(A/P,20%,20) + 65.875 = \$+30.96 million @ 30%: AW = -170(A/P,30%,20) + 65.875 = \$+14.60 million @ 40%: AW = -170(A/P,40%,20) + 65.875 = \$-2.21 million A spreadsheet solution with x-y scatter graph follows. 5.7 (a) AW = -175,000(A/P,i%,5) + 35,000 + 10,000(A/G,i%,5) indicates the turn to unjustified just above 15% per year. @12%: AW = -175,000(0.27741) + 35,000 + 10,000(1.7746) = \$+4199 @14%: AW = -175,000(0.29128) + 35,000 + 10,000(1.7399) = \$+1425 @15%: AW = -175,000(0.29832) + 35,000 + 10,000(1.7228) = \$+22 @16%: AW = -175,000(0.30541) + 35,000 + 10,000(1.7060) = \$-1387 (b) Spreadsheet indicates just above 155 at the point where AW = 0....
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Ch5Solutions - Chapter 5 5.1(a Jim forgot the impact of...

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