Eng Mgt 1210 (MOD 7-9)

The discounted payback period is the amount of time for the

Cumulative present worth to become positive using i = MARR.

When comparing multiple projects, the project with the highest DPBP is always the project with the greatest economic worth.

False

Given a single alternative for a proposed government project, if the alternative's benefit-cost ratio is 1.4, then the project

Should be accepted the benefit-cost ratio method determines the ratio of the present worth of benefits to the negative of the present worth of the investment. With a 1.4 benefit-cost ratio, the benefits outweigh the costs.

A small manufacturer has net annual cash flows as follows over the first four years of business. The applicable interest rate varies from year to year.End of Year01234Cash Flow-$80,000$60,000-$10,000$70,000$100,000Interest Rate During Year 5%7%7%4%Determine the present worth of the series.

$106,457

The owner of a cemetery plans to offer a perpetual care service for grave sites. The owner estimates that it will cost $125 per year to maintain a grave site. If the interest rate is 8.00%, what one-time fee should the owner charge for the perpetual care service?

$1563 (highest)

A flood control project at Pleasant Valley dam is projected to cost $1,980,000 today, have annual maintenance costs of $44,000, and have major inspection and upkeep after each 9-year interval costing $210,000. If the interest rate is 11%/year.

$2,514,785

A virtual reality mask and associated software and firmware are needed by HazMat, a company that deals with hazardous waste. The mask will be used in their safety training. A mask can be rented for one year for $24,000 paid in equal installments at the end of each month at a rate of 9% annual interest compounded monthly. Determine the equal monthly payments that will be due.

$2099

On your child's 1st birthday, you open an account to fund his college education. You deposit $4,600 to open the account. Each year, on his birthday, you make another deposit. Each subsequent deposit is 6.5% larger than the previous. The account pays interest at 5%/year compounded annually. How much money is in the account immediately after the deposit on his 18th birthday?

$214,677

A flood control project at Pleasant Valley dam is projected to cost $2,260,000 today, have annual maintenance costs of $41,000, and have major inspection and upkeep after each 9-year interval costing $300,000. If the interest rate is 7%/year. Determine the total capitalized cost.

$3,203,513

The gaming commission is introducing a new lottery game called Infinite Progresso. The winner of the Infinite Progresso jackpot will receive $600 at the end of January, $1,900 at the end of February, $3,200 at the end of March, and so on up to $14,900 at the end of December. At the beginning of the next year, the sequence repeats starting at $600 in January and ending at $14,900 in December. This annual sequence of payments repeats indefinitely. If the gaming commission expects to sell a minimum of 850,000 tickets, what is the minimum price they can charge for the tickets to break even, assuming the commission earns 3.00 %/year/month on its investments and there is exactly one winning ticket?

$3.66

You win the lottery and are promised to receive $100,000 per month, every month, for 20 years. You plan to invest all of your winnings, and will earn 0.2% per month compounded monthly. How much will you have accumulated immediately after you receive your final $100,000?

$30,764,995

New equipment will require an initial $500,000 investment today, with expected positive annual returns of $92,500 each year over the following 10 years. The MARR is 1%. Determine the present worth of this investment.

$376,096

Quantum Logistics, Inc., a wholesale distributor, is considering the construction of a new warehouse to serve the southeastern geographic region near the Alabama-Georgia border. There are three cities being considered. After site visits and a budget analysis, the expected income and costs associated with locating in each of the cities has been determined. The life of the warehouse is expected to be 12 years, and MARR is 15%/year. City Initial Cost Net Annual Income Lagrange $560,000 $185,000 Auburn $530,000 $270,000 Anniston $730,000 $500,000 a. What is the annual worth of each site?

$81,691 $172,225 $365,329

Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $110,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $1,700 using the gang punch, but annual raw material costs would decrease $10,500. MARR is 7%/year.

-$82358

When using the present worth method to evaluate the attractiveness of a single project, what value is the calculated PW compared to?

0

When using the benefit-cost ratio measure of worth (B/C), what benchmark is the calculated ratio compared to in determining if an individual investment is attractive?

1.0

You decide to open an individual retirement account (IRA) at your local bank that pays 8 %/year compounded annually. At the end of each of the next 40 years, you will deposit $4,000 into the account. Three years after your last deposit, you will begin making annual withdrawals. What annual amount will you be able to withdraw if you want the withdrawals to last:

20 yrs = $123104 30 yrs = $107361 Forever = $96692

Financial planners (and engineering economists) unanimously encourage people to start early in planning for retirement. To illustrate this point, they frequently produce a table similar to the one below. Assume that your goal is to have $1,440,000 on your 65th birthday and that deposits start on the birthday shown and continue annually in the same amount on each birthday up to and including your 65th birthday. Assume that interest is compounded annually at 13.5%/year.

25 $1,087.15 30 $2,057.87 35 $3,912.72 40 $7,503.28 45 $14,631.85 50 $29,523.35 55 $64,227.34 60 $170,850.05 65 $1,440,000.00 bday dep goal

What is the effective annual interest rate if the nominal annual rate is 27% per year compounded weekly?

30.9%

Advanced personalized learning, tailoring instruction to a student's particular needs and learning preferences, is a challenging opportunity. One start-up with four engineers has produced an adaptive hardware / software package that is projected to sell for $3,600. Rather than pay cash, potential buyers will be able to buy the package over two years with annual payments and interest at 6% per year compounded monthly. What is the interest rate required to calculate the payment amount?

6.168%

You borrow $400,000 at a rate of 5% per year compounded monthly and make monthly payments for 2 years to repay the loan. What Excel function can be used to calculate the loan payment amount?

=PMT((5/12)%, 24, -400000)

The annual worth (AW) of an alternative for a given interest rate (i) is calculated by

AW=[Σt=0nAt(1+i)n-t](A|F⁢ i%,n).

The formula for capitalized worth is

CW = A/i

The _____ worth DCF method is only applicable if the series of cash flows will extend indefinitely into the future.

Capitalized

The future worth (FW) of an alternative for a given interest rate (i) is calculated by

FW=[Σt=0nAt(1+i)n-t].

The capitalized worth of an investment must be positive; otherwise, the investment alternative should not be considered.

False

Quantum Logistics, Inc., a wholesale distributor, is considering the construction of a new warehouse to serve the southeastern geographic region near the Alabama-Georgia border. There are three cities being considered. After site visits and a budget analysis, the expected income and costs associated with locating in each of the cities have been determined. The life of the warehouse is expected to be 12 years and MARR is 15%/year. City Initial Cost Net Annual Income Lagrange $1,260,000, $480,000 Auburn $1,000,000, $410,000 Anniston $1,620,000, $520,000 a. What is the future worth of each site?

Lagrange $7,179,485 Auburn $6,540,434 Anniston $6,413,462

When comparing several mutually exclusive alternatives using the future worth (FW) method, the alternative with the

Largest FW over the planning horizon is chosen.

Which of the following is an appropriate example of the future worth (FW) method?

Lump sum retirement portfolio value.

DelRay Foods must purchase a new gumdrop machine. Two machines are available. Machine 7745 has a first cost of $5,600, an estimated life of 10 years, a salvage value of $1,000, and annual operating costs estimated at $0.01 per 1,000 gumdrops. Machine A37Y has a first cost of $8,000, a life of 10 years, and no salvage value. Its annual operating costs will be $180 regardless of the number of gumdrops produced. MARR is 6%/year, and 30 million gumdrops ware produced each year. a. What is the annual worth of each alternative?

M7745 = -$985 MA37Y = -$1267 FW Table

Which of the following describes the future worth (FW)?

The value of all cash flows converted to a single sum equivalent at the end of the planning horizon.

Which of the following describes the annual worth (AW)?

The value of all cash flows converted to an equivalent uniform series of cash flows over the planning horizon.

Given a single alternative and doing nothing is acceptable; if the annual worth (AW) of the alternative is negative, then we reject the alternative.

True

The discounted payback period (DPBP) can be an integer or a fractional number of time periods.

True

Public investment projects should provide benefits for the public's greater good that exceed the _____ of providing those benefits.

costs

Using DPBP as the sole basis for choosing among multiple alternatives is not recommended. DPBP is best used as a supplemental tool when comparing investment alternatives.

True

When comparing multiple alternatives using annual worth (AW), the alternative that has the greatest AW is selected.

True

When two or more public investment alternatives are being compared using benefit-cost ratio, then the incremental analysis procedure is required.

True

Xanadu Mining is considering three mutually exclusive alternatives, as shown in the table below. MARR is 10%/year. EOY 0, 1, 2, 3, 4 [A001] -$210, $80, $90, $100, $110 [B002] -$110, $60, $60, $60, $70 [C003] -$160, $80, $80, $80, $80 a. What is the future worth of each alternative? b. Which alternative should be recommended?

a. [A001] = $128 =FV(10%,4,,-NPV(10%,[sum of yr 1-4])-[yr 0]) [B002] = $127 =FV(10%,4,-60,110)+10 [C003] = $137 =FV(10%,4,-80,160) b. [C003] {FW Table}

Two incinerators are being considered by a waste management company. Design A has an initial cost of $2,500,000, has annual operating and maintenance costs of $800,000, and requires overhauls every 5 years at a cost of $1,325,000. Design B is more sophisticated, including computer controls; it has an initial cost of $5,375,000, has annual operating and maintenance costs of $400,000, and requires overhauls every 10 years at a cost of $3,000,000. a. Using a 7.0 %/year interest rate, determine the capitalized cost for each design. b. Recommend which design should be chosen:

a. $17,220,074 $14,191,179 b. Design B

The management of Brawn Engineering is considering three alternatives to satisfy an OSHA requirement for safety gates in the machine shop. Each gate will completely satisfy the requirement, so no combinations need to be considered. The first costs, operating costs, and salvage values over a 5-year planning horizon are shown below. End of Year Gate 1 Gate 2 Gate 3 0 -$15,000, -$19,000, -$24,000 1 -$6,500, -$5,600, -$4,000 2 -$6,500, -$5,600, -$4,000 3 -$6,500, -$5,600, -$4,000 4 -$6,500, -$5,600, -$4,000 5 -$6,500+$0, -$5,600+$2,000, -$4,000+$5,000 a. What is the future worth of each alternative? b. Using a future worth analysis with a MARR of 20%/year, determine the preferred gate.

a. G1 = -85695 G2 = -86951 G3 = -84486 b. G3

Your manager is proposing a new investment. If the company pursues the investment, it will cost $300,000 today. It has an expected life of 10 years and no salvage value. An environmental impact fee of $25,000 must be paid to the government every five years, once at the end of year five and again to safely dispose of the investment at the end of year 10. As a result of the investment, annual revenue increases are estimated to be $70,000 per year. Your company must borrow 1/2 of the initial investment cost. The bank has agreed to four equal annual payments, with the first payment due at the end of year 1. The company's MARR is 12% compounded annually. The loan interest rate is 10% compounded annually. a) How much is the loan payment? b) What is the present worth of this investment opportunity? c) Based on the present worth analysis, should the company make the investment? Why or why not?

a. $49385.96 b. $104960.40 c. Since the Present worth of investment opportunity is positive, therefore the project seems to be profitable. Also the interest amount on loan is lower than the present worth,therefore, it is a profit making project even after borrowing half of the investment amount.

Carlisle Company has been cited and must invest in equipment to reduce stack emissions or face EPA fines of $18,500 per year. An emission reduction filter will cost $75,000 and have an expected life of 5 years. Carlisle's MARR is 10 %/year. a. What is the annual worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on annual worth? c. Is the filter economically justified?

a. -$1285 b. If AW >0, Accept; otherwise Reject. c. no

Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $230,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $8,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $18,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow 1/2 of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to 3 equal annual payments, with the 1st payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics' MARR is 10% compounded annually. a. What is the annual worth of this investment?

a. -$35,211

Carlisle Company has been cited and must invest in equipment to reduce stack emissions or face EPA fines of $19,500 per year. An emission reduction filter will cost $100,000 and have an expected life of 5 years. Carlisle's MARR is 10%/year. a. What is the future worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on future worth? c. Is the filter economically justified?

a. -$42,002 b. If FW >0, Accept; otherwise Reject. c. no

Galvanized Products is considering the purchase of a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow 1/4th of the purchase price from a bank at 15% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $5,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $25,000 per year to maintain the system but will save $55,000 per year through increased efficiencies. Galvanized Products uses a MARR of 18%/year to evaluate investments. a. What is the annual worth of this investment?

a. -$897

Final Finishing is considering 3 mutually exclusive alternatives for a new polisher. Each alternative has an expected life of 8 years and no salvage value. Polisher 1 requires an initial investment of $25,000 and provides annual benefits of $4,300. Polisher 2 requires an initial investment of $13,400 and provides annual benefits of $1,910. Polisher 3 requires an initial investment of $17,400 and provides annual benefits of $3,780. MARR is 12%/year. a. What is the future worth of Polisher 1? b. What is the future worth of Polisher 2? c. What is the future worth of Polisher 3? d. Which polisher should be recommended?

a. -$9010.40 b. -$9685.49 c. $3411.08 d. Polisher 3

Imagineering, Inc., is considering an investment in CAD-CAM compatible design software with the cash flow profile shown in the table below. Imagineering's MARR is 18 %/year. EOY Cash Flow 0-$12,000,000 1-$1,000,000 2$5,000,000 3$2,000,000 4$5,000,000 5$5,000,000 6$2,000,000 7$5,000,000 a. What is the annual worth of this investment? b. What is the future worth of this investment?

a. -252,994 b. -3.07

Ten cavemen with a remaining average life expectancy of 10 years use a path from their cave to a spring some distance away. The path is not easily traveled due to 100 large stones that could be removed. The annual benefit to each individual if the stones were removed is $8.75. Each stone can be removed at a cost of $1.25. The interest rate is 2 %. a. Compute the benefit/cost ratio for the individual if he alone removed the 100 stones. b. Compute the benefit/cost ratio for the individual if the task was undertaken collectively, with each individual removing 10 stones. c. What maximum amount may be charged by a manager who organizes the group effort if the minimum acceptable benefit/cost ratio is 2?

a. 0.63 b. 6.29 c. 268

The Oklahoma City Zoo has proposed adding to their Web site a major segment providing a virtual tour of the grounds and animals, suitable for both routine enjoyment and educational purposes in classrooms. Survey data indicate that this will have either a neutral or positive effect upon actual zoo attendance. The Web site will be professionally done and have an initial cost of $325,000. Upkeep, refreshing the videos, and developing videos for scientific research and entertainment will cost another $76,000 per year. The zoo is expected to be in operation for an indefinite period; however, a study period of only 10 years for the Web site is to be assumed, with only a residual (salvage) value of $60,000 for the archival value being anticipated. Interest is 10%. An estimated 110,000 persons will visit the e-zoo in the first year, increasing by 32,000 each year, and they will receive, on the average, an additional $0.90 of benefit per visit when the new area is complete.

a. 1.649 $498,428 b. yes

Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,000 per year using the gang punch, but raw material costs would decrease $12,000 per year. MARR is 5 %/year. a. What is the discounted payback period for this investment? b. If the maximum attractive DPBP is 3 years, what is the decision rule for judging the worth of this investment? c. Should Bailey buy the gang punch based on DPBP? select an option

a. 14 yrs b. IF DPBP less (<) then or equal to 3, Accept; otherwise, Reject. c. no

Home Innovations is evaluating a new product design. The estimated receipts and disbursements associated with the new product are shown below. MARR is 10 %/year. End of Year 0, 1, 2, 3, 4, 5 Receipts $0, $600, $600, $700, $700, $700 Disbursements $1,000, $300, $300, $300, $300, $300 a. What is the discounted payback period for this investment? b. If the maximum attractive DPBP is 3 years, what is the decision rule for judging the worth of this investment? c. Should Home Innovations buy the gang punch based on DPBP? (the maximum attractive DPBP is 3 years)

a. 3 yrs b. IF DPBP less (<) then or equal to 3, Accept; otherwise, Reject. c. no

In an amazing stroke of luck, you won the lottery and plan to buy your parents the coastal home they've always wanted. You pick out a $500,000 villa on the water, and make a $6,000 down-payment in cash. You take out a 30 year mortgage of $440,000 at 7% per year, and begin making the monthly mortgage payments. After two years, your parents decide the house is too big and want to move. a) What is the unpaid balance on the mortgage after making two years of payments? (In other words, how much do you still owe on the house?) b) How much total interest did you pay over two years?

a. 430322.85 b. 60993.71

The city of Columbus has identified three options for a public recreation area suitable for informal family activities and major organized events. As with most alternatives today, there are benefits, disbenefits, costs, and some savings. These have been estimated with the help of an external planning consultant and are identified in the table below. In each case, these are annualized over a 10-year planning horizon. Option 1 Option 2 Option 3 Benefits $400,000, $550,000, $575,000 Disbenefits $78,000, $125,000, $180,000 Costs $235,000, $390,000, $480,000 Savings $25,000, $65,000, $90,000 a. Determine the B/C ratio for: b. Determine which option should be selected using the incremental B/C ratio. c. Determine which option should be selected using the B-C for each option. d. At what value of Option 2 costs are you indifferent between Option 1 and Option 2?

a. Op1 = 1.53 Op2 = 1.31 Op3 = 1.01 no b. Op1 c. Op1 d. $378000

The engineering team at Manuel's Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software and installation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel's uses a 4-year planning horizon and a 10% per year MARR. a. What is the annual worth of each investment? b. What is the decision rule for determining the preferred investment based on annual worth ranking? c. Which ERP system should Manuel purchase?

a. [A] $5121 [B] $6668 b. Select the project with the highest annual worth. c. Vendor B

The engineering team at Manuel's Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software and installation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel's uses a 4-year planning horizon and a 10% per year MARR. a. What is the discounted payback period of each investment? b. Which ERP system should Manuel purchase if his decision rule is to select the system with the shortest DPBP? c. Does this decision agree or disagree with the results of the present worth analysis?

a. [A] 3.8 [B] 3.7 b. [B] c. Agree