Investment Analysis: Annual Equivalent Worth

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Questions and Answers

What interest rate is anticipated for the first 12 years for the foundation's gift investment?

12%

15%

8.4% (correct)

If Mr. Garcia buys the storage tank now, what is the present price of kerosene per gallon?

$3.80

$4.30 (correct)

$5.00

$4.73

What is the estimated net cash flow in the first year for the new equipment investment?

$18,000 (correct)

$22,000

$15,000

$20,500

If the net cash flow increases by $2,500 each subsequent year, what is the cash flow at the end of year 3?

$23,000 Signup and view all the answers

Which interest rate is applicable for evaluating the investment in the new equipment?

9% Signup and view all the answers

What is the salvage value of the equipment after its 10-year service life?

$5,000 Signup and view all the answers

What capital cost should be determined to assess the ownership cost of the equipment?

Annual capital cost including depreciation Signup and view all the answers

What is the acceptable interest rate for computing the equivalent annual worth of a project described in Table P6.10?

12% Signup and view all the answers

What are the two transactions associated with capital costs?

Initial cost and salvage value Signup and view all the answers

What is the service life of each workstation mentioned in the construction firm's plan?

5 years Signup and view all the answers

At a MARR of 15%, which factor must be considered when determining the equivalent annual cost of the engineering center?

Initial cost of the workstations and operating costs Signup and view all the answers

How much is the expected salvage value of each workstation?

$2,000 Signup and view all the answers

For Jennifer to break even, which of the following rates is essential to establish?

Reimbursement rate per mile Signup and view all the answers

What is the distance flown each way for the corporate executive jet's round trips?

3,280 miles Signup and view all the answers

What type of aircraft is Washington Air Company considering purchasing?

Helicopter Signup and view all the answers

What is the first-class round-trip fare for the corporate executive jet?

$3,400 Signup and view all the answers

What is the expected life of machine A available for the manufacturing firm?

4 years Signup and view all the answers

What is the annual leasing cost for the machine considered by the firm?

$3,000 Signup and view all the answers

If the interest rate is 10%, what is the best decision based on the new machines available?

Lease the machine Signup and view all the answers

What is the salvage value of machine B after four years of use?

$1,000 Signup and view all the answers

How many decision alternatives does the small manufacturing firm have?

Three options Signup and view all the answers

If the MARR is 13%, what type of analysis should be performed to determine the cost per ton for each incinerator?

Lifecycle cost analysis Signup and view all the answers

What is the primary factor that affects power loss in the conductor?

Cross-sectional area Signup and view all the answers

What is the cost of energy per kilowatt-hour in the given scenario?

$0.0825 Signup and view all the answers

What is the yield from an investment of $74,000 after selling half of the business for $165,000, considering a $36,000 loss later?

$29,000 Signup and view all the answers

How should the investments in Problem-16 be classified based on cash flows?

Some projects are simple and others nonsimple. Signup and view all the answers

Which project in Problem-18 does not have a computable rate of return?

Project C Signup and view all the answers

What is the required Minimum Acceptable Rate of Return (MARR) used for computations in Problem-19?

15% Signup and view all the answers

In Problem-21, why does the project fail the net-investment test?

The IRR is less than the MARR. Signup and view all the answers

When computing the Internal Rate of Return (IRR) in Problem-19, which outcome signifies an acceptability of investment?

IRR exceeds MARR. Signup and view all the answers

What is the significance of using the quadratic equation in investment project evaluations like in Problem-20?

To find multiple interest rates. Signup and view all the answers

Which statement about Project 1 from Problem-22 is incorrect?

It is guaranteed to fail the IRR criterion. Signup and view all the answers

Study Notes

Annual Equivalent-Worth

The equivalent annual worth (AEW) method is used to compare investments with different lifespans by determining the annual cost or benefit of each project.
The AEW is calculated by converting all cash flows to an equivalent annual amount over the project’s life, using a specific interest rate.
Projects are considered acceptable if their AEW is positive or greater than the minimum acceptable rate of return (MARR).

Capital (Recovery) Cost/Annual Equivalent Cost

Capital costs are associated with owning equipment and include the initial cost and salvage value.
The annual equivalent cost (AEC) is used to compare different ownership options by calculating the annual expense of owning an asset, considering its initial cost, salvage value, and operating expenses.

Comparing Mutually Exclusive Alternatives by the AE Method

The AEW method is used to compare mutually exclusive alternatives, meaning only one project can be chosen.
The project with the highest AEW is generally considered the most favorable option.

Lifecycle Cost Analysis

Lifecycle cost analysis (LCCA) considers the total costs associated with an asset over its entire life, including initial cost, operating expenses, and maintenance costs.
LCCA helps in making long-term decisions about investments, considering the overall cost impact rather than just the initial cost.

Minimum-Cost Analysis

Minimum-cost analysis involves selecting the alternative with the lowest total cost, considering all relevant factors like initial purchase, operating expenses, salvage value, and maintenance costs.
This approach ensures that the chosen option minimizes overall costs over the asset's lifespan.

Concept of Rate of Return

The rate of return (ROR) is the percentage profit or loss generated by an investment over a specific period.
ROR is calculated by dividing the total return by the initial investment and expressing it as a percentage.

Investment Classification and Calculation of i*

Investments can be classified as simple or nonsimple based on the pattern and timing of their cash flows.
Simple investments have a single change in the sign of cash flows and are easier to analyze, while nonsimple investments have multiple sign changes and require more complex calculations.
The internal rate of return (IRR) or i* is the discount rate that makes the present worth (PW) of all cash flows equal to zero.
i* represents the effective rate of return generated by an investment.

Mixed Investments, RIC and MIRR

Mixed investments have both positive and negative cash flows within the project life.
The IRR (true) for mixed investments is still found by making the present worth of all cash flows equal to zero, but it may not be a unique solution.
The modified internal rate of return (MIRR) uses a specific discount rate (MARR) to reinvest all positive cash flows at that rate, providing a more realistic representation of the return on investment.
The MIRR can help in decision-making by considering the reinvestment opportunity of the project's positive cash flows.

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Description

Explore the concepts of Annual Equivalent Worth (AEW) and Annual Equivalent Cost (AEC) in project investment analysis. Learn how to evaluate different investment options and compare mutually exclusive alternatives using AE methods. This quiz covers essential calculations and principles to assess the viability of projects based on their annualized benefits and costs.