WILMAR RIOS

Assignment 3

Chapter 5

Question #1

Suppose that your firm needs either machine for only 2 years. The net proceeds from the sale of
machine B are estimated to be $200. What should be the required net proceeds from the sale of
machine A so that both machines could be considered economically indifferent at an interest rate of
10%? Answer: $750

End of Machine
Machine B
year A

0 ($1,000) ($2,000)

1 $900 $2,500

2 $800 $800 + $200

3 $700

Question # 2

You are considering buying an old house that you will convert into an office building for rental. Assuming
that you will own the property for 10 years, how much would you be willing to pay for the old house
now given the following financial data? Answer: $218,420

Remodeling cost = $20,000

Annual rental income = $25,000

Annual upkeep costs = $5,000

Estimated net property value (after taxes) at the end of 10 years = $225,000

Interest rate = 8%
Question # 3

A manufacturing company is considering two mutually exclusive machines E1 and E2 with the following
cash flow information:

End of Cash Salvage cash salvage

year flow value flow value

0 ($400) ($600)

1 ($300) $200 ($250) $400

2 ($300) $175 ($250) $360

3 ($300) $150 ($250) $320

4 ($250) $280

5 ($250) $240

Which machine would you recommend if the company needs either machine for only 3 years? Assume a
MARR of 12%.

Chapter 6

Question # 1
An engineer must choose between two technically equivalent alternatives, A and B. Based upon the data
in the table below and an interest rate of 9%, which alternative should be selected?

A B

First Cost $3,000 $6,000

Annual
$500 $300
Maintenance

End of
Useful Life
$700 $1,000
Salvage
Value

Useful Life 5 years 15 years

Year 1 $150
Year 2 $300
Year 3 $450
Year 4 $600
Year 5 $750
Year 6 $900
EUAC = 150 + 150(A/G, 8%, 6) = 150 + 150(2.276) = $491.40

Question # 2

A piece of construction equipment has an initial cost of $80,000, a salvage value of $10,000, and annual
operating costs of $13,000. Assuming a 15-year useful life and a 10% interest rate, the equivalent
uniform annual cost of the equipment is approximately

Solution: EUAC = 80,000(A/P, 10% 15) B 10,000(A/F, 10%, 15) + 13,000

= 80,000(0.1315) B 10,000(0.0315) + 13,000
=$23,205

Question # 3

Maintenance costs for a backhoe were $1,200 in year 1, $1500 in year 2, $1650 in year 3, and $1700 in
year 4. If the interest rate is 7%, the equivalent uniform annual maintenance cost for the 4 years is
approximately

Question 4

The maintenance expense on a piece of machinery is estimated to be $150 in the first year and is to
increase by $150 every year thereafter until year 6. If the interest rate is 8%, the approximate equivalent
uniform annual maintenance cost for 6 years is
 Solution:
EUAC = [1,200(P/F, 7%, 1) + 1,500(P/F, 7%, 2) + 1,650(P/F, 7%, 3) + 1,700(P/F, 7%, 4)](A/P, 7%, 4) =
[(1,200)(0.9346) + (1,500)(0.8734) + (1,650)(0.8163) + (1,700)(0.7629)](0.2952) = (5,075.45)(0.2952) =
$1,498.27

Chapter 7

Question #1

You are given the option of investing $5,000 now and receiving a payments of $5300 at the end of year 4
and a payment of $5,500 at the end of year 10. The rate of return on your investment would be
approximately

Solution: PW of cost = PW of benefits

5,000 = 5,300(P/F, i, 4) + 5500(P/F, i, 10)
Solving by trial and error and noting that if the PW of benefits exceeds the PW of cost, it indicates that
our interest rate is too low so try a higher one.

Try 12%: 5,300(0.6355) + 5,500(0.3220) = $5,139.15. This exceeds the $5,000 cost.
Try 15%: 5,300(0.5718) + 5,500(0.2472) = $4,390.14. This is below the $5,000 cost.
Thus, our rate of return is between 12% and 15%

Question # 2

Two alternatives for a construction project are being considered. Both projects have a 5-year life.
Alternative A"s initial cost is $2,260 and yields $355 annually for 5 years. Alternative B initially costs
$5500 and yields $1,250 annually for 5 years. The rate of return on the difference between the
alternatives is approximately

Solution: Incremental initial present worth cost = 5500 − 2260 = 3240

Incremental annual benefit = 1250 − 355 =895
PW of Costs = PW of Benefits
3240 = 895(P/A, i, 5)
(P/A, i, 5) = 3240/895 = 3.620
From the interest tables, i is approximately 12%

Question # 3

The rate of return for a $1,000,000 investment that will yield $100,000 per year for 30 years is
approximately?

Solution NPW = 100,000(P/A, i, 30) − 1,000,000

(P/A, i, 30) = 1,000,000/100,000 = 10
From the interest tables i is between 9% and 10%.