ECE 472 Tutorial Review Questions for Chapter 9
Question 1 Accounting Statements - Basic
9-1 This is an excellent warm-up accounting question before attempting Problem Set #1 and
Question 2.
Question 2 Accounting Statements More Complex
i. A new "Pizza Pi
Determining After-Tax Cash Flows
Capital Budgeting - After-Tax Treatment
Taxes
Interest
Income Statement
Gross Income
After-Tax
Cash Flow
What are the effects of the benefits and costs of a project
on the after-tax cash flows?
consider the income statemen
Nonlinear Breakeven Analysis
Nonlinear Breakeven Analysis
Manufacturing Example
Cost and revenue functions do not generally follow
convenient linear patterns
Manufacturing Example Cost Schedule
n
FC
0
$3000
$
TVC
0
TC
$3000
$ 700
3,700
Marginal Cost
$1,30
Income Tax Considerations
Faculty of Applied Science and Engineering
tax dollars are real cash flows
maximize the value of the firm on an after-tax basis
taxes and depreciation affect the magnitude and timing of
cash flows
therefore, they must be conside
Free Enterprise System
Free Enterprise System
Private Property
factors of production - scarce resources - owned by
individuals and private institutions
freedom to negotiate legally binding contracts
institution of private property sustained over time b
Hydro Utility
A small hydro utility has two hydro-electric power
plants. The fixed cost of Plant 1 is $4,000,000 per year
and at Plant 2, it is $2,500,000 per year. The variable
cost of producing electricity at Plant 2 is
14
TC1
12
TC2
10
VC(x) = $(31x +
MACRS - Modified Accelerated Cost
Recovery System
MACRS is the U.S. equivalent of CCA
ACRS was introduced in 1982 and phased in by 1985
simplified system that permitted faster write-off of
business assets
U.S. Economic Recovery Tax Act of 1981
designed to
IRR vs. NPV: Mutually Exclusive Projects
B
A
IRR vs. NPV : Mutually Exclusive Projects
$200
$1 500
Which Project Is Really Better?
Look at the rate of return (IRR) on the incremental
investment
$1 300
0
1
0
1
BA
(1 500 200)
0
$100
$1 000
BA
(1 000 100)
1
Income Tax Considerations
in Engineering Projects
Income Tax Considerations
in Engineering Projects
tax dollars are real cash flows
maximize the value of the firm on an after-tax basis
taxes and depreciation affect the magnitude and timing of
cash flows
Automobile Purchase for Business Purposes
First cost = $25 000
Tax rate = 40%
MARR =10%
CCA Class 10 d = 30%
What is the present value of the tax savings in the first 3
years?
Book
Tax
Year
Value
Dt
Savings (P|F10%,t) PV(TS)
0
25 000
1
21 250 3 750
1 500
Breakeven, Sensitivity and Risk Analysis
Investment Decisions Under Risk
Breakeven Analysis
Performed when we are completely uncertain of the
possible values a parameter can take on
This method identifies the set of values for which an
investment decisi
Public Sector Projects
Benefit-to-Cost Comparisons
Benefit-cost analysis is often used to evaluate projects
undertaken by the government
Benefits and costs are evaluated on a monetary basis
The choice of an appropriate interest rate is subject to much
deb
ECE 472 Tutorial Review Questions for Chapter 5
Question 1 Capital Cost Tax Factor
The Six Points Construction Company is a profitable construction company. It has purchased a
bulldozer for $50,000. Assume that Six Points Construction acquired this power-
ECE 472 Tutorial Review Questions for Chapter 4
Question 1 Present Value Project Analysis
4-7
Question 2 Internal Rate of Return Project Analysis
In order to improve air quality, the Ministry of the Environment has tightened the regulations on the
accepta
ECE 472 Tutorial Review Questions for Chapter 3
For the Chapter 3 questions, be sure to draw the cash flow diagrams to help understand the problem.
Question 1 Annuity Valuation Methods
3-16 - Consider the various approaches to the problem as there is more
IRR Reinvestment Rate
IRR Reinvestment Rate
What interest rate for the reinvestment of cash flows
is implicitly assumed by the Internal Rate of
Return methodology?
At-1
At
Bt
Et
At-1
At
t-1
t-1
Interest earned on unrecovered balance:
t
It = Bt i
Bt
t
Bt i
Capital Budgeting
Capital Budgeting
Assume no taxes, perfect certainty
Process of planning expenditures whose returns are
expected to extend beyond one year
Significance of capital budgeting
long-term effects
loss of flexibility
over-investment - unnec
Equivalence
Equivalence
Two cash-flow profiles are equivalent at some specified
interest rate, i %, if their present values are equal using that
interest rate of i.
$300
Cash Flow Profile A:
Purchase Price of server system
Estimated economic life of the s
Replacement Analysis
Replacement due to Obsolescence
frequently occurring problem
reasons for replacing existing assets
replacement due to obsolescence
replacement due to deterioration
replacement due to inadequacy
- asset currently in service
- curren
Compensation For Lending
Time Value Of Money Operations
The value of a given sum of money depends on when the
money is received
Interest - rental amount charged for the use of money
Fn = P + In
where
P = present value of a single sum of money
Fn = future
Telecommunications Design Economic
Analysis
Telephone dial-in access to multiple computer systems
TA
MA
PA
A
TB
MB
PB
B
TC
MC
PC
C
978-AAAA
978-BBBB
978-CCCC
Telephone
Lines (ISALs)
Modem
Pools
Computer
Systems
TA - number of telephone lines for Computer
Track Team Endowment
Perpetuities
A
A
A
$20 000
$20 000
$5 000
A
A
$5 000
$1 000
$1 000
0
0
.
1
2
3
1
4
2
3
4
5
6
i=5%
P?
How much does the alumnus have to donate so that the
resulting endowment income will continue to fund the track
team competition inde
IBM Financial Statistics by Value Line (1993)
Financial Statement Interpretation
International Business Machines
1990
Stock Prices ($US)
95123
Working Capital ($million) 13 644
Current Ratio
1.54
Acid Test Ratio
1.08
Equity Ratio
48.9%
Debt-Equity Ratio
2
Using Mandated Speed Limits to Measure the Value of a Statistical Life*
Orley Ashenfelter
Princeton University
Michael Greenstone
University of Chicago
April 2002
* We thank Gary Becker, Glenn Blomquist, David Card, Mark Duggan, David Lee, Helen Levy,
Ala
Compensation For Lending
Time Value Of Money Operations
The value of a given sum of money depends on when that
money is received
Interest rental amount charged for the use of money
F n = P + In
where
P = present value of a single sum of money
Fn = future
Sale & Lease-Back of Robarts Library
1
2
3
4
5
6
UofT sells Robarts Library to a Leasing Company (LC) for
$25,000,000.
Lease period is 25 years.
UofT agrees to pay an annual lease payment.
LC agrees to sell Robarts Library back to UofT at the end of
25 ye
Capital Budgeting
Capital Budgeting
Initially assume no taxes and perfect certainty
Process of planning expenditures whose returns are
expected to extend beyond one year
Significance of capital budgeting
long-term effects
loss of flexibility
over-inves
January 2015
FACULTY OF APPLIED SCIENCE AND ENGINEERING
DEPARTMENT OF ELECTRICAL AND COMPUTER ENGINEERING
ECE 472S ENGINEERING ECONOMIC ANALYSIS & ENTREPRENEURSHIP
2014-2015
Textbook:
Szonyi, A. J., Fenton, R.G., et al., Principles of Engineering Economic