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Chapter 10 Solution

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Chapter 10 Making Choices: the Method, MARR, and Multiple Attributes

Solutions to Problems

10.1 The circumstances are when the lives for all alternatives are: (1) finite and equal, or (2) considered infinite. It is also correct when (3) the evaluation will take place over a specified study period. 10.2 Incremental cash flow analysis is mandatory for the ROR method and B/C method. (It is noteworthy that if unequal-life cash flows are evaluated by ROR using an AW-based relation that reflects the differences in cash flows between two alternatives, the breakeven i* will be the same as the incremental i*. (See Table 10.2 and Section 10.1 for comments.) 10.3 Numerically largest means the alternative with the largest PW, AW or FW identifies the selected alternative. For both revenue and service alternatives, the largest number is chosen. For example, $-5000 is selected over $-10,000, and $+100 is selected over $-50. 10.4 (a) Hand solution: After consulting Table 10.1, choose the AW or PW method at 8% for equal lives of 8 years.

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equal lives of 8 years.

Chapter 10 Solution

Computer solution: either the PMT function or the PV function can give single-cell solutions for each alternative. In either case, select the alternative with the numerically largest value of AW or PW. (b) (1) Hand solution: Find the PW for each cash flow series. PW8 = -10,000 + 2000(P/F,18%,8) + (6500 4000) (P/A,18%,8) = -10,000 + 2000(0.2660) + 2500(4.0776) = $726 PW10 = -14,000 + 2500(P/F,18%,8) + (10,000 5500) (P/A,18%,8) = $5014 PW15 = -18,000 + 3000(P/F,18%,8) + (14,000 7000) (P/A,18%,8) = $11,341
Chapter 10 1
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed, reproduced

or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student using this Manual, you are using it without permission.

PW20 = -24,000 + 3500(P/F,18%,8) + (20,500 11,000) (P/A,18%,8) = $15,668 PW25 = -33,000 + 6000(P/F,18%,8) + (26,500 16,000) (P/A,18%,8) = $11,411 Select the 20 cubic meter size. Computer solution: Use the PV function to find the PW in a separate spreadsheet cell for each alternative. Select the 20 cubic meter alternative.

(b) (2) Buy another 20 cubic meter truck, not a smaller size, because it is always correct to spend the largest amount that is economically justified. 10.5 (a) Hand solution: Choose the AW or PW method at 0.5% for equal lives over 60 months. Computer solution: Either the PMT function or the PV function can give single-cell solutions for each alternative. (b) The B/C method was the evaluation method in chapter 9, so rework it using AW. Hand solution: Find the AW for each cash flow series on a per household per month basis.

Chapter 10

PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed, reproduced

or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student using this Manual, you are using it without permission.

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Chapter 10 Solution

AW1 = 1.25 60(A/P,0.5%,60) = 1.25 60(0.01933) = 1.25 - 1.16 = $0.09 AW2 = 8.00 - 500(A/P,0.5%,60) = 8.00 9.67 = $-1.67 Select program 1. Computer solution: Develop the AW value using the PMT function in a separate cell for each program. Select program 1.

10.6

Long to infinite life alternatives. Examples are usually public sector projects such as dams, highways, buildings, railroads, etc. (a) The expected return is 12 - 8 = 4% per year. (b) Retain MARR = 12% and then estimate the project i*. Take the risk-related return expectation into account before deciding on the project. If 12% < i* < 17%, John must decide if the risk is worth less than 5% over MARR = 12%. (a) (b) (c) (d) Bonds are debt financing Stocks are always equity Equity Equity loans are debt financing, like house mortgage loan
3

10.7

10.8

Chapter 10

PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed, reproduced

or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student using this Manual, you are using it without permission.

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Chapter 10 Solution

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