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Annual Equivalent-Worth Calculation Chapter-6  Problem-1 Consider the cash flows in Figure and compute the equivalent annual worth at i = 12%.  Problem-2 Consider the sets of investment projects from Table P6.9. Compute the equivalent annual worth of each pr...

Annual Equivalent-Worth Calculation Chapter-6  Problem-1 Consider the cash flows in Figure and compute the equivalent annual worth at i = 12%.  Problem-2 Consider the sets of investment projects from Table P6.9. Compute the equivalent annual worth of each project at i =15%, and determine the acceptability of each project.  Problem-3 Beginning next year, a foundation will support an annual event on campus with the earnings of a $420,000 gift it received this year. It is felt that 8.4% interest will be realized for the first 12 years, but that plans should be made to anticipate an interest rate of 6% after that time. What amount should be added to the foundation now to fund the event at the $45,000 level into infinity?  Problem-4 The repeating cash flows for a certain project are as given in Table P6.10. Find the equivalent annual worth for this project at I = 12%, and determine the acceptability of the project. Since the project has the same cash flow cycle during the project life, you can just consider the first cycle.  Problem-5 The present price (year 0) of kerosene is $4.30 per gallon, and its cost is expected to increase by 10% per year. (At the end of year 1, kerosene will cost $4.73 per gallon.) Mr. Garcia uses about 800 gallons of kerosene for space heating during a winter season. He has an opportunity to buy a storage tank for $600, and at the end of four years, he can sell the storage tank for $100. The tank has a capacity to supply four years of Mr. Garcia’s heating needs. So, he can buy four years’ worth of kerosene at its present price ($4.30), or he can invest his money elsewhere at 6% interest. Should he purchase the storage tank? Assume that kerosene purchased on a pay-as-you-go basis is paid for at the end of the year. (However, kerosene purchased for the storage tank is purchased now.) Capital (Recovery) Cost/Annual Equivalent Cost  Problem-6 You are considering investing $65,000 in new equipment. You estimate that the net cash flows will be $18,000 during the first year, but will increase by $2,500 per year the next year and each year thereafter. The equipment is estimated to have a 10- year service life and a net salvage value of $5,000 at that time. Assume an interest rate of 9%. (a) Determine the annual capital cost (ownership cost) for the equipment. (b) Determine the equivalent annual savings (revenues). (c) Determine whether this is a wise investment.  Capital (Ownership) Cost Def: Owning equipment associated with two transactions—(1) its initial cost (I), and (2) its salvage value (S). Capital costs: Taking these items into consideration, we calculate the capital costs as: Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd. Park All Rights Reserved  Problem-7 A construction firm is considering establishing an engineering computing center. The center will be equipped with three engineering workstations that cost $45,000 each, and each has a service life of five years. The expected salvage value of each workstation is $2,000. The annual operating and maintenance cost would be $25,000 for each workstation. At a MARR of 15%, determine the equivalent annual cost for operating the engineering center. Unit-Cost Profit Calculation  Problem-8 Jennifer Ozman is a sales engineer at Montana Chemical Engineering Company. Jennifer owns two vehicles, and one of them is entirely dedicated to business use. Her business car is a small, used pickup truck, which she purchased with $11,000 of personal savings. On the basis of her own records and with data compiled by the U.S. Department of Transportation, Jennifer has estimated the costs of owning and operating her business vehicle for the first three years as given in Table P6.27. If her interest rate is 7%, what should be Jennifer’s reimbursement rate per mile so that she can break even?  Problem-9 A corporate executive jet with a seating capacity of 20 has the cost factors given in Table P6.38. The company flies three round trips from Boston to London per week, which is a distance of 3,280 miles one way. How many passengers must be carried on an average trip in order to justify the use of the jet if the first-class round-trip fare is $3,400? The firm’s MARR is 15%. (Ignore income-tax consequences.) Comparing Mutually Exclusive Alternatives by the AE Method  Problem-10 Washington Air Company is considering the purchase of a helicopter for connecting services between the company’s base airport and the new intercounty airport being built about 30 miles away. It is believed that the chopper will be needed only for six years until the Rapid Transit Connection is phased in. The estimates on two types of helicopters under consideration, the Whirl 2B and the ROT 8, are given in Table P6.40. Assuming that the Whirl 2B will be available in the future with identical costs, what is the annual cost advantage of selecting the ROT8? (Use an interest rate of 10%.)  Problem-11 A chemical company is considering two types of incinerators to burn solid waste generated by a chemical operation. Both incinerators have a burning capacity of 20 tons per day. The data in Table P6.45 have been compiled for comparison. If the firm’s MARR is known to be 13%, determine the processing cost per ton of solid waste incurred by each incinerator. Assume that incinerator B will be available in the future at the same cost. Lifecycle Cost Analysis  Problem-12 A small manufacturing firm is considering purchasing a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of machine A and machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the expected receipts and disbursements given in Table P6.50. The firm also has another option: leasing a machine at $3,000 per year, which is fully maintained by the leasing company. After four years of use, the salvage value for machine B will remain at $1,000. (a) How many decision alternatives are there? (b) Which decision appears to be the best at i = 10%? Minimum-Cost Analysis  Problem-13 A continuous electric current of 2,000 amps is to be transmitted from a generator to a transformer located 200 feet away. A copper conductor can be installed for $6 per pound, will have an estimated life of 25 years, and can be salvaged for $1 per pound. Power loss from the conductor will be inversely proportional to the cross-sectional area of the conductor and may be expressed as 6.516/A kilowatt, where A is in square inches. The cost of energy is $0.0825 per kilowatt-hour, the interest rate is 11%, and the density of copper is 555 pounds per cubic foot. (a) Calculate the optimum cross-sectional area of the conductor. (b) Calculate the annual equivalent total cost for the value you obtained in part (a) (c) Graph the two individual cost factors (capital cost and power-loss cost) and the total cost as a function of the cross-sectional area A, and discuss the impact of increasing energy cost on the optimum obtained in part (a). Concept of Rate of Return Chapter-7  Problem-14 Suppose that you invest $3,000 in stock. Five years later, your investment yields $8,568. What is the rate of return of your investment?  Problem-15 Suppose that you invest $74,000 in a restaurant business. Two years later, you sell half of this business to a partner for $165,000. Then a year later, the business is in the red, and you have to pay $36,000 to close the business. What is the rate of return on your investment from this restaurant business? Investment Classification and Calculation of i*  Problem-16 Consider four investments with the sequences of cash flows given in Table P7.8. (a) Identify all the simple investments. (b) Identify all the nonsimple investments. (c) Compute i* for each investment. (d) Which project has no rate of return?  Problem-17 Consider the investment projects given in Table P7.10. (a) Classify each project as either simple or nonsimple. (b) Use the quadratic equation to compute i* for project C. (c) Obtain the rate(s) of return for each project by plotting the NPW as a function of the interest rate.  Problem-18 Consider two investments, A and B, with the sequences of cash flows given in Table P7.13. (a) Compute i* for each investment. (b) Plot the present-worth curve for each project on the same chart, and find the interest rate that makes the two projects equivalent. Mixed Investments, RIC and MIRR  Problem-19 Consider the investment projects given in Table P7.16. Assume that MARR = 15% in the following questions. (a) Compute i* for each investment. If the problem has more than one i*, identify all of them. (b) Compute IRR(true) for each project. (c) Compute the MIRR at MARR = 15%. (d) Determine the acceptability of each investment.  Problem-20 Consider the investment projects given in Table P7.22. (a) Compute i* for project C. If there is more than one i*, identify all of them. (b) Identify the mixed investment(s). (c) Assuming that MARR = 15%, determine the acceptability of each project on the basis of the IRR criterion.  Problem-21 Consider the cash flows of a certain project given in Table P7.25. The project’s i*s are computed as 5.36% and 106%, respectively. The firm’s MARR is 15%. (a) Show why this investment project fails the net− investment test. (b) Compute the IRR, and determine the acceptability of this project. (c) Compute the MIRR at MARR = 15%. and determine the acceptability of the project.  Problem-22 Consider the investment projects given in Table P7.26. Which of the following statements is not correct? (a) Project 1 will have two real rates of return. (b) Project 2 should have a unique real rate of return. (c) Project 3 is a nonsimple investment. (d) None of the above IRR analysis  Problem-23 You are considering an investment that costs $4,500. It is expected to have a useful life of three years. You are very confident about the revenues during the first two years but you are unsure about the revenue in year 3. If you hope to make at least a 15% rate of return on your investment ($4,500), what should be the minimum revenue in year 3?  Problem-24 Consider the cash flow of a certain project given in Table P7.30. If the project’s IRR is 12%: (a) Find the value of X. (b) Is this project acceptable at MARR = 14%?