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1-1

A survey of students answering this question indicated that they thought about 40% of their

decisions were conscious decisions.

1-2

(a)

Yes.

**The choice of an engine has important money consequences so would be
**

suitable for engineering economic analysis.

(b)

Yes.

**Important economic- and social- consequences. Some might argue the
**

social consequences are more important than the economics.

(c)

?

**Probably there are a variety of considerations much more important than
**

the economics.

(d)

No.

Picking a career on an economic basis sounds terrible.

(e)

No.

Picking a wife on an economic basis sounds even worse.

1-3

Of the three alternatives, the $150,000 investment problem is u suitable for economic

analysis. There is not enough data to figure out how to proceed, but if the µdesirable interest

rate¶ were 9%, then foregoing it for one week would mean a loss of:

1

/52 (0.09) = 0.0017 = 0.17%

**immediately. It would take over a year at 0.15% more to equal the 0.17% foregone now.
**

The chocolate bar problem is suitable for economic analysis. Compared to the investment

problem it is, of course, trivial.

Joe¶s problem is a real problem with serious economic consequences. The difficulty may be in

figuring out what one gains if he pays for the fender damage, instead of having the insurance

company pay for it.

1-4

èambling, the stock market, drilling for oil, hunting for buried treasure²there are sure to be a lot

of interesting answers. Note that if you could double your money every day, then:

2- ($300) = $1,000,000

and - is less than 12 days.

1-5

Maybe their stock market µsystems¶ don¶t work!

1-6

It may look simple to the owner because Ê is not the one losing a job. For the three

machinists it represents a major event with major consequences.

1-7

For most high school seniors there probably are only a limited number of colleges and

universities that are feasible alternatives. Nevertheless, it is still a complex problem.

1-8

It really is not an economic problem solely ² it is a complex problem.

1-9

Since it takes time and effort to go to the bookstore, the minimum number of pads might be

related to the smallest saving worth bothering about. The maximum number of pads might

be the quantity needed over a reasonable period of time, like the rest of the academic year.

1-10

While there might be a lot of disagreement on the µcorrect¶ answer, only automobile

insurance represents a u

u and a situation where money might be

the u basis for choosing between alternatives.

1-11

The overall problems are all complex. The student will have a hard time coming up with

examples that are truly u or u until he/she breaks them into smaller and

smaller sub-problems.

1-12

These questions will create disagreement. None of the situations represents rational

decision-making.

Choosing the same career as a friend might be OK, but it doesn¶t seem too rational.

Jill didn¶t consider all the alternatives.

Don thought he was minimizing cost, but it didn¶t work. Maybe rational decision-making

says one should buy better tools that will last.

1-13

Possible objectives for NASA can be stated in general terms of space exploration or the

generation of knowledge or they can be stated in very concrete terms. President Kennedy

used the latter approach with a year for landing a man on the moon to inspire employees.

Thus the following objectives as examples are concrete. No year is specified here, because

unlike President Kennedy we do not know what dates may be achievable.

Land a man safely on Mars and return him to earth by ______.

Establish a colony on the moon by ______.

Establish a permanent space station by ______.

Support private sector tourism in space by ______.

Maximize fundamental knowledge about science through - probes per year or for

per year.

Maximize applied knowledge about supporting man¶s activities in space through probes per year or for per year.

Choosing among these objectives involves technical decisions (some objectives may be

prerequisites for others), political decisions (balance between science and applied

knowledge for man¶s activities), and economic decisions (how many dollars per year can be

allocated to NASA).

However, our favorite is a colony on the moon, because a colony is intended to be

permanent and it would represent a new frontier for human ingenuity and opportunity.

Evaluation of alternatives would focus on costs, uncertainties, and schedules. Estimates of

these would rely on NASA¶s historical experience, expert judgment, and some of the

estimating tools discussed in Chapter 2.

1-14

This is a challenging question. One approach might be:

(a) Find out what percentage of the population is left-handed.

(b) What is the population of the selected hometown?

(c) Next, market research might be required. With some specific scissors (quality and price)

in mind, ask a random sample of people if they would purchase the scissors. Study the

responses of both left-handed and right-handed people.

(d) With only two hours available, this is probably all the information one could collect. From

the data, make an estimate.

A different approach might be to assume that the people interested in left handed scissors in

the future will be about the same as the number who bought them in the past.

(a) Telephone several sewing and department stores in the area. Ask two questions:

(i) How many pairs of scissors have you sold in one year (or six months or?).

(ii) What is the ratio of sales of left-handed scissors to regular scissor?

(b) From the data in (a), estimate the future demand for left-handed scissors.

**Two items might be worth noting.
**

1. Lots of scissors are universal, and equally useful for left- and right-handed

people.

2. Many left-handed people probably never have heard of left-handed scissors.

1-15

Possible alternatives might include:

1. Live at home.

2. A room in a private home in return for work in the garden, etc.

3. Become a Resident Assistant in a University dormitory.

4. Live in a camper-or tent- in a nearby rural area.

5. Live in a trailer on a construction site in return for µkeeping an eye on the place.¶

1-16

A common situation is looking for a car where the car is purchased from either the first

dealer or the most promising alternative from the newspaper¶s classified section. This may

lead to an acceptable or even a good choice, but it is highly unlikely to lead to the best

choice. A better search would begin with u or some other source that

summarizes many models of vehicles. While reading about models, the car buyer can be

identifying alternatives and clarifying which features are important. With this in mind, several

car lots can be visited to see many of the choices. Then either a dealer or the classifieds

can be used to select the best alternative.

1-17

Choose the better of the undesirable alternatives.

1-18

(a)

(b)

(c)

(d)

**Maximize the difference between output and input.
**

Minimize input.

Maximize the difference between output and input.

Minimize input.

1-19

(a)

(b)

(c)

(d)

**Maximize the difference between output and input.
**

Maximize the difference between output and input.

Minimize input.

Minimize input.

1-20

Some possible answers:

1.

There are benefits to those who gain from the decision, but no one is harmed.

(Pareto Optimum)

2.

Benefits flow to those who need them most. (Welfware criterion)

3.

4.

5.

6.

7.

8.

**Minimize air pollution or other specific item.
**

Maximize total employment on the project.

Maximize pay and benefits for some group (e.g., union members)

Most aesthetically pleasing result.

Fit into normal workweek to avoid overtime.

Maximize the use of the people already within the company.

1-21

Surely planners would like to use criterion (a). Unfortunately, people who are relocated

often feel harmed, no matter how much money, etc., they are given. Thus planners

consider criterion (a) unworkable and use criterion (b) instead.

1-22

In this kind of highway project, the benefits typically focus on better serving future demand

for travel measured in vehicles per day, lower accident rates, and time lost due to

congestion. In some cases, these projects are also used for urban renewal of decayed

residential or industrial areas, which introduces other benefits.

The costs of these projects include the money spent on the project, the time lost by travelers

due to construction caused congestion, and the lost residences and businesses of those

displaced. In some cases, the loss may be intangible as a road separates a neighborhood

into two pieces. In other cases, the loss may be due to living next to a source of air, noise,

and visual pollution.

1-23

The remaining costs for the year are:

Alternatives:

1.

To stay in the residence the rest of the year

Food: 8 months at $120/month

Total

2.

3.

**To stay in the residence the balance of the first
**

semester; apartment for second semester

Housing: 4 ½ months x $80 apartment - $190 residence

Food: 3 ½ months x $120 + 4 ½ x $100

Total

Move into an apartment now

Housing: 8 mo x $80 apartment ± 8 x $30 residence

Food: 8 mo x $100

Total

= $960

= $170

= $870

= $1,040

= $400

= $800

= $1,200

**Ironically, Jay had sufficient money to live in an apartment all year. He originally had $1,770
**

($1,050 + 1 mo residence food of $120 plus $600 residence contract cost). His cost for an

apartment for the year would have been 9 mo x ($80 + $100) = $1,620. Alternative 3 is not

possible because the cost exceeds Jay¶s $1,050. Jay appears to prefer Alternative 2, and

he has sufficient money to adopt it.

1-24

µIn decision-making the model is mathematical.¶

1-25

The situation is an example of the failure of a low-cost item that may have major

consequences in a production situation. While there are alternatives available, one appears

so obvious that that foreman discarded the rest and asks to proceed with the replacement.

One could argue that the foreman, or the plant manager, or both are making decisions.

There is no single µright¶ answer to this problem.

1-26

While everyone might not agree, the key decision seems to be in providing Bill¶s dad an

opportunity to judge between purposely-limited alternatives. Although suggested by the

clerk, it was Bill¶s decision.

(One of my students observed that his father would not fall for such a simple deception, and

surely would insist on the weird shirt as a subtle form of punishment.)

1-27

Plan A

Plan B

Plan C

Plan D

Profit

Profit

Profit

Profit

= Income ± Cost

= Income ± Cost

= Income ± Cost

= Income ± Cost

= $800 - $600

= $1,900 - $1,500

= $2,250 - $1,800

= $2,500 - $2,100

= $200/acre

= $400/acre

= $450/acre

= $400/acre

**To maximize profit, choose Plan C.
**

1-28

Each student¶s answer will be unique, but there are likely to be common threads.

Alternatives to their current university program are likely to focus on other fields of

engineering and science, but answers are likely to be distributed over most fields offered by

the university. Outcomes include degree switches, courses taken, changing dates for

expected graduation, and probable future job opportunities.

At best criteria will focus on joy in the subject matter and a good match for the working

environment that pleases that particular student. Often economic criteria will be mentioned,

but these are more telling when comparing engineering with the liberal arts than when

comparing engineering fields. Other criteria may revolve around an inspirational teacher or

an influential friend or family member. In some cases, simple availability is a driver. What

degree programs are available at a campus or which programs will admit a student with a

2.xx èPA in first year engineering.

**At best the process will follow the steps outlined in this chapter. At the other extreme, a
**

student¶s major may have been selected by the parent and may be completely mismatched

to the student¶s interests and abilities.

Students shouldn¶t lightly abandon a major, as changing majors represents real costs in

time, money, and effort and real risks that the new choice will be no better a fit.

Nevertheless, it is a large mistake to not change majors when a student now realizes the

major is not for them.

1-29

The most common large problem faced by undergraduate engineering students is where to

look for a job and which offer to accept. This problem seems ideal for listing student ideas

on the board or overhead transparencies. It is also a good opportunity for the instructor to

add more experienced comments.

1-30

Test marketing and pilot plant operation are situations where it is hoped that solving the subproblems gives a solution to the large overall problem. On the other hand, Example 3-1

(shipping department buying printing) is a situation where the sub-problem does not lead to

a proper complex problem solution.

1-31

(a)

**The suitable criterion is to maximize the difference between output and input. Or
**

simply, maximize net profit. The data from the graphs may be tabulated as follows:

Output

Units/Hour

50

100

150

200

250

Total Cost

Total Income

Net Profit

$300

$500

$700

$1,400

$2,000

$800

$1,000

$1,350

$1,600

$1,750

$500

$500

$650 U

$200

-$250

$2,000

Loss

$1,800

$1,600

$1,400

Cost

$1,200

$1,000

$800

Profit

Cost

$600

$400

$200

0

50

100

150

200

Output (units/hour)

250

**(b) uu is, of course, zero, and u-uu is 250 units/hr (based on the
**

graph). Since one cannot achieve maximum output with minimum input, the statement

makes no sense.

1-32

Itemized expenses: $0.14 x 29,000 km + $2,000

Based on Standard distance Rate: $0.20 x $29,000

= $6,060

= $5,800

**Itemizing produces a larger reimbursement.
**

Breakeven: Let x = distance (km) at which both methods yield the same amount.

x

= $2,000/($0.20 - $0.14)

= 33,333 km

1-33

The fundamental concept here is that we will trade an hour of study in one subject for an

hour of study in another subject so long as we are improving the total results. The stated

criterion is to µget as high an average grade as possible in the combined classes.¶ (This is

the same as saying µget the highest combined total score.¶)

Since the data in the problem indicate that additional study always increases the grade, the

question is how to apportion the available 15 hours of study among the courses. One might

begin, for example, assuming five hours of study on each course. The combined total score

would be 190.

000 Area B Difference in Haul 0.2 km average additional haul Cost of additonal haul/load = 4.6 km = 0 km = 4.Decreasing the study of mathematics one hour reduces the math grade by 8 points (from 52 to 44).000 litre capacity = 12 m3 capacity Let: L = tank length in m d = tank diameter in m The volume of a cylindrical tank equals the end area x length: Volume = (Ȇ/4) d2L = 12 m3 L = (12 x 4)/( Ȇ d2) .60 x 8 km 0. The result would be: Math Physics Engr. Econ.375/km)] = $595.00/week 1-35 Area A Preparation Cost = 2 x 106 x $2.2 km/25 km/hr x $35/hr = $5. Total 4 hours 7 hours 4 hours 15 hours 44 77 71 192 1-34 Saving = 2 [$185.700.116. Total 4 hours 6 hours 5 hours 15 hours 44 68 79 191 Further study would show that the best use of the time is: Math Physics Engr.20 x 0 Total = 4.88/20 m3 = $0.000 Area B with its lower total cost is preferred. 1-36 12.8 km = -0. Econ.294 = $4.00 + (2 x 150 km) ($0.88 Since truck capacity is 20 m3: Additional cost/cubic yard = $5.294/m3 For 14 million cubic meters: Total Cost = 14 x 106 x $0.35 = $4. This hour could be used to increase the physics grade by 9 points (from 59 to 68).20 x -3 km 0.

60 $0.200 1.26 $598 $75 $60 $144 $136 $161 U $138 $104 $210 $336 $425* $400** $460 * buy 1.2100 2100.20 each.33 each.700 Selling Price Income Cost Profit $0.0800 0800.33 $180 $270 $480 $561 2.48)2) = 2.000 packages at $0.1800 1800.45 $0.20 each Conclusion: Buy 2.25 each ** buy 2.48 m Subsitute back to find L: L = (12 x 4)/(Ȇd2) Tank diameter Tank length = 48/(Ȇ(2.The total surface area is the two end areas + the cylinder surface area: S = 2 (Ȇ/4) d2 + Ȇ dL Substitute in the equation for L: S = (Ȇ/2) d2 + Ȇd [(12 x 4)/(Ȇd2)] = (Ȇ/2)d2 + 48d-1 Take the first derivative and set it equal to zero: dS/dd = Ȇd ± 48d-2 = 0 Ȇd = 48/d2 d3 = 48/Ȇ = 15.700 packages at $0.40 $0. Sell at $0.0900 0900-1200 1200.000 packages at $0. 1-38 Time period 0600.0700 0700.1500 1500.500 $0.5 m) = 2.28 d = 2.48 m (ð2.2200 2200.48 m = 2.48 m (ð2.5 m) 1-37 Ruantity Sold per week 300 packages 600 1.2300 Daily sales in time period $20 $40 $60 $200 $180 $300 $400 $100 $30 Cost of groceries Hourly Cost Hourly Profit $14 $28 $42 $140 $126 $210 $280 $70 $21 $10 $10 $10 $30 $30 $30 $30 $10 $10 -$4 +$2 +$8 +$30 +$24 +$60 +$90 +$20 -$1 .

2400 2400.6 hours x 1.000 d(Profit)/dR = 31 ± 0.04 = 775 units/year d2 (Profit)/dR2 = -0.C where PR C = 35R ± 0.02R2 = 4R + 8. close at 2400. Jim should not advertise and charge $62 per night.000= $52.260 $1.000 pieces Individual Assembly: Team Assembly: $22.0 hrs x 1.04 The negative sign indicates that profit is maximum at R equals 775 units/year.20/unit 4 x $13.00 x 1.200 $57. . Room Net Income 100% 94% 80% 66% 70% 68% 66% 56% 50 47 40 33 35 34 33 28 $1.568 To maximize net income. Conclusion: Open at 0700.0100 $60 $20 $42 $14 $10 $10 +$8 -$4 The first profitable operation is in 0700.440 $1.Cost = PR.2300.428 $1. but next hour¶s profit more than makes up for it.00 x 2. In the evening the 2200.150 $1.00 $52.000 = $57. 1-40 Profit = Income.2300 time period is unprofitable.650 $1.410 $1. 1-39 Alternative Price 1 2 3 4 5 6 7 8 $35 $42 $48 $54 $48 $54 $62 $68 Net Income per Room $23 $30 $36 $42 $36 $42 $50 $56 Outcome Rate No.04R = 0 Solve for R R = 31/0. Answer: R = 775 units/year 1-41 Basis: 1.0800 time period.00/unit Team Assembly is less expensive.386 $1.

$15t2 This is a minima-maxima problem.00 .15t Total Cash Return (TCR) = (1.000 + 120t ± 20t) Price at any time = $3.000 + $150t .$30t = 0 = $150/$30 = 5 wekes d2TCR/dt2 = -10 (The negative sign indicates the function is a maximum for the critical value.$15 (25) = $3.375 .00 . dTCR/dt t = $150 .) At t = 5 weeks: Total Cash Return (TCR) = $3.000 + 120t ± 20t) ($3.1-42 Let t = time from the present (in weeks) Volume of apples at any time = (1. Set the first derivative equal to zero and solve for t.$0.$0.15t) = $3.000 + $150 (5) .

($0.000)]/46.20 1.800 kWh = $214.$214.000 kWh at $0.40 Incremental cost of energy = $231.066 = $59.60 Incremental unit cost = $16.200 kWh/month: 200 kWh x $0.800 = $129.20 (c) New equipment: Assuming the basic conditions are 30 HP and 2.00 900 kWh at $0.00 1.000.000 is a past cost and should not be allowed to alter a subsequent decision unless there is some real or perceived effect.066 because the 2.60/100 = $0.40 .066 = $13. the cost.40 2. Since either home is really an individual plan selected by the homeowner.000 = $483/unit (b) Two Shifts = [($2.¶ The $4.040 = $40.801st kWh is in the 2nd bracket of the cost structure. each should be judged in terms of value to the homeowner vs.80 Average Cost = $214.Chapter 2: Engineering Costs and Cost Estimating 2-1 This is an example of a µsunk cost.086 = $172. 2-3 (a) Monthly Bill: 50 x 30 Total = 1.200 kWh $53.066 for 1.800 kWh/month Monthly bill with new equipment installed: 50 x 40 = 2.80 = $16.066 = $85.000)/23.000 kWh) (b) Incremental cost of an additional 1.000 = $497.00 Marginal Cost (cost for the next kWh) = $0.00 = 1.400.501-to-3. 2-2 Unit Manufacturing Cost (a) Daytime Shift = ($2.80/2.086 = $129.1660/kWh .900 kWh $231.000 kWh x $0.109.109.80 = 2.000 + $9.25) ($9.300 kWh @ $0. On this basis the stock plan house appears to be the preferred alternative.000 + (1 + 1.72/unit Second shift increases unit cost.500 kWh @ $0.

This indicates that production below 120 units per year is most undesirable.77 per map Marginal Cost is the variable cost for each alternative.000 . The student can visually verify this from the figure. ensuring that R = 120 is the point of a minimum.23 per map TC(II) = (0.800 Variable Costs (II) = 0.7/3.000 + 0.10 x thus x = 5.2-4 x = no.0) + 5.0 = 3.000 maps: TC(I) = (0.000 (120) + $75 (120)2]/120 = $16.0 = $1.000.000 .000 (h) Average Cost @ 3.000 .90 per map Marginal Cost (II) = $0.0) + 1.000 + 0.000 (g) System II is recommended if the annual need for maps is >5. of maps dispensed per year (a) (b) (c) (d) (e) Fixed Cost (I) = $1.000 maps dispensed per year.000R + $75R2 Where C = Total cost per year R = Number of units produced per year Set the first derivative equal to zero and solve for R.0 = 5.160 Set Total Cost (I) = Total Cost (II) $1.000/$150 = 120 Therefore total cost is a minimum at R equal to 120.$18. Average unit cost at R = 120/year: = [$3.0 = $1.90 x = $5.$18.9) (3.000.000 Variable Costs (I) = 0.000 + $150R = 0 R = $18.10 per map 2-5 C = $3. as it costs more to produce 110 units than to produce 120 units.000 Fixed Cost (II) = $5. Check the sign of the second derivative: d2C/dR2 = +$150 The + indicates the curve is concave upward.1) (3. thus: Marginal Cost (I) = $0. dC/dR = -$18. (f) System I is recommended if the annual need for maps is <5.3/3.

000 . of course.523 One must note.000 8.000 Y2 (Buzz) 4.$18.000 + $4.000 + $2. and Marginal Cost is increasing.000 .800 2-7 (a) x = number of visitors per year Break-even when: Total Costs (Tugger) = Total Costs (Buzzer) $10. and hence we cannot compute the optimum level of output.440 x $4.000 + $960 x = $1.00 x x = 400 visitors is the break-even quantity (b) See the figure below: X 0 4.000 (110) + $75 (120)2]/110 = $17.$201.5 x = $4.000.000 + $80 (12) x Total Revenue = $120 (12) x (b) Break-even when Total Cost = Total Revenue $48.000 + $80 (12) (160) = $201.400 Profit = Revenue ± Cost = $230. we cannot know Marginal Revenue.000 36. that 120 units per year is necessarily the optimal level of production.400 . We can say.000 20.Average unit cost at R = 110/year: = [$3.600 = $28.000 Y1 (Tug) 10. Since we do not know the Selling Price. then it will be much more profitable at levels greater than 120 units. Economists would remind us that the optimum point is where Marginal Cost = Marginal Revenue. 2-6 x = number of campers (a) Total Cost = Fixed Cost + Variable Cost = $48.000 30. however. that if the firm is profitable at the 110 units/year level.000 20.600 Total Revenue = $120 (12) (160) = $230.800 = $480 x x = 100 campers to break-even (c) capacity is 200 campers 80% of capacity is 160 campers @ 160 campers x = 160 Total Cost = $48.

000 6.000 [See graph below] .000 Profit = $300.000 + $100 x x = 1.000 .000 + 2.000 Tug Preferred 0 2.000 + ($100.000)x = $100. where the cost equations are: Total Cost (A) = $20 x + $100.5x $20.000 Total Cost = $100.000 + $100 (150 = $250.000/1.5 x + $150.000 Y1 = 10.000 Y2 = 4.000 Visitors per year 8.000 = $50.000 Buzz Preferred 4.000 2-9 x = annual production Let¶s look at the graphical solution first.$250.000/1.000 units per year The student can visually verify this from the figure.000 + $100 x (c) Set Total Cost = Total Revenue $200 x = $100.000 $10.000 Total Cost (C) = $7.000) x = $200 x (b) Total Cost = $100.Y1 (Tug) Y2 (Buzz) $40.000 2-8 x = annual production (a) Total Revenue = ($200. (d) Total Revenue = $200 (1.000 Total Cost (B) = $5 x + $200.000 + 4x $30.500) = $300.

000 units) 2-10 x = annual production rate (a) There are three break-even points for total costs for the three alternatives A & B: $20. B & C.000 = $8.000 Thus our recommendation is.000 choose Alternative B X 0 10 20 30 A 100 300 500 700 B 200 250 300 350 C 150 225 300 375 A B C $800 YA = 100. From the graph we see that there are three break-even points: A & B.000 = $8 x + $600.000 + 20x $600 YC = 150. Only A & C and B & C are necessary to determine the minimum cost alternative over x. Mathematically the break-even points are: A & C: $20 x + $100.000 x = 4.5x $400 YB = 200.000 = $7.000 choose Alternative C 20.5 x + $350.000 x = 100.000 + 7.000 B & C: $5 x + $200. if: 0 < x < 4.5 x + $150.000 = $10.5 x + $100.000 + 5x $200 A Best 0 5 B Preferred BE = 25.5 x + $150.000 B & C: $10.000 C Preferred BE = 100.000 choose Alternative A 4.Ruatro Hermanas wants to minimize costs over all ranges of x.000 x = 20.000 < x 30. and A & C.5 x + $350.000 < x < 20.000 .000 x = 25.000 10 15 20 25 30 Production Volume (1.

000 = $8 x + $600.000 50 100 150 Production Volume (1.000 choose A 25.400 1.$10.000 x = 40.25 D + $250) D and if D = x = -$0.175 B 350 875 1.5x $2.25 x2 + $250 x (b) Set Total Cost = Total Revenue $10.000 units) 2-11 x = annual production volume (demand) = D (a) Total Cost = $10.5x $2.000 + 20.500 $1.000 $500 A 0 B Preferred BE = 25.125 2. Sneaking a peak at the figure below we see that if: 0 < x < 25. thus the A & C break-even point is not of interest.000 C Preferred BE = 100.875 + $20 x Total Revenue = (price per unit) (number sold) = ($0.925 C 600 1.25 x2 + $250 x 2 -$0.150 3.875 + $20 x = -$0.000 < x < 100.000 + 10.000 choose C (b) See graph below for Solution: X 0 50 100 150 A 100 1.25 x + $230 x .000 YC = 600.875 = 0 This polynomial of degree 2 can be solved using the quadratic formula: .800 A B C YA = 100.500 YB = 350.000 We want to minimize costs over the range of x.000 choose B 80.000 + 8x $1.400 1.000 < x < 80.000 1.A & C: $20 x + $100.

25x2 $60.50 Thus x = 870 and x = 50.25 x2 + $230 x .875 + 20x $20.875 dTP/dx = -$0.875 $20. and solve for x: TR = -$0.25 x2 + $250 x dTR/dx = -$0.$10.500 $46.875 $0 Total Cost Total Revenue TR = 250 x ± 0.25 x2 + $250 x) ± ($10.875 Total Revenue $0 $46.000 $40.875 $15.000 .000 BE = 50 0 200 400 600 Annual Production 800 1. Total Profit = (-$0. There are two levels of x where TC = TR. X 0 250 500 750 1.875 + $20 x) = -$0.000 Max Profit Max Revenue BE = 870 TC = 10.875 $25. thus let¶s find the profit equation and do the same process as in part (c).50 x + $250 = 0 x = 500 is where we realize maximum revenue (d) Profit is revenue ± cost. (c) To maximize Total Revenue we will take the first derivative of the Total Revenue equation.50 x + $230 = 0 x = 460 is where we realize our maximum profit (e) See the figure below. set it equal to zero. Your answers to (a) ± (d) should make sense now.875 $62.000 Total Cost $10.875 $30.There will be two solutions: x = (-b + (b2 ± 4ac)1/2)/2a = (-$230 + $205)/-0.

500 $2.20 = $4.$1.000 Total Cost & Income TC = 1.000 .048 = 208.$10 S 40 60 Sales Volume (S) 80 100 = -S2 + $90 S .2-12 x = units/year By hand $1.000 + 10S $1.000 (b) For break-even.000 + $0.000/4 + $0.000))1/2)/-2 = 12.000 = $0 S = (-b + (b2 ± 4ac)1/2)/2a = (-$90 + ($902 ± (4) (-1) (-1.02 (c) For maximum profit dP/dS = -$2S + $90 = $0 S = 45 units .000 Breakeven Total Income $500 0 20 Profit = S ($100 ± S) .330 units 2-14 (a) $2.000 + $0.05 x x = $10.98.002 x = $5.20 = $5.500 $1.000/1.$1.$1.40 x x = Painting Machine = $15.167 units 2-13 x = annual production units Total Cost to Company A = Total Cost to Company B $15.000/$0. set Profit = 0 -S2 + $90S . 77.

000 $1.Drafting of rental contracts ` Internal/external paint costs .Initial construction costs ` Annual costs of permits . they are only represented on the accounting books of the firm. Maximum profit at 45 units.475 $2.100 -$200 $0 (Break-even) $400 $1. Book costs are not represented as beforetax cash flows.400 $1.771 $2. Engineering economic analyses can involve both cash and book costs. With today¶s electronic banking capabilities cash costs may or may not involve µcash.450 $1. Below is a list of possible recurring and non-recurring costs. annual costs. Recurring Costs Non-recurring costs ` Annual inspection costs . air-conditioner.600 $1.400 $1.¶ µBook costs¶ are costs that do not involve an exchange of µcash¶. costs ` Remodeling costs (bath.500 $1. Cash costs are the before-tax cash flows usually estimated for a project (such as initial costs.100 $2.800 $1. Students may develop others. and . rather.131 $900 Total Cost Profit $1. etc.600 $1.200 $1.) 2-16 A cash cost is a cost in which there is a cash flow exchange between or among parties. This term derives from µcash¶ being given from one entity to another (persons. divisions. etc. bedroom) ` Durable goods replacements (furnace.Answers: Break-even at 14 and 77 units. detectors. banks.770 $1.). etc.700 $1.Legal costs to establish rental ` Carpet replacement costs .Demolition costs ` Monthly trash removal costs ` Monthly utilities costs ` Annual costs for accounting/legal ` Appliance replacements ` Alarms.500 $2.025 $1.000 $400 $0 (Break-even) -$200 2-15 In this situation the owners would have both recurring costs (repeating costs per some time period) as well as non-recurring costs (one time costs).130 $1. @lternative Solution: Trial & Error Price Sales Volume $20 $23 $30 $50 $55 $60 $80 $87 $90 80 77 70 50 45 40 20 13 10 Total Income $1.

or the estimating process. The key point being that most costs are committed early in the life cycle. the time to make important design decisions (and to account for all life cycle effects) is early in the life cycle. bids and budgets could potentially vary greatly in such circumstances. designed. and Estimator Expertise. This is perhaps the most difficult of the factors to overcome. as can estimator expertise. or service from the time it is conceived. By life-cycle costs the authors are referring to any cost associated with a product. An integrated. cross-functional. firms benefit from spending time. Estimates. implemented. delivered. Effects resulting from early decisions impact the overall life cycle cost (and quality) of the product. Time and effort can be influenced. 2-18 Figure 2-4 illustrates the difference between µdollars spent¶ and µdollars committed¶ over the life cycle of a project. good. Cash costs are important in such cases. One-of-a-kind estimating is a particularly challenging aspect for firms with little corporate-knowledge or suitable experience in an industry. 2-20 Total Cost = Phone unit cost + Line cost + One Time Cost = ($100/2) 125 + $7.000 . One-of-a-kind estimates pose perhaps the greatest challenge. Figure 2-5 demonstrates µease of making design changes¶ and µcost of design changes¶ over a project¶s life cycle. Time and Effort Available. which is accounted for in after-tax analyses. although they are not realized until later in the project. In summary. in different scenarios in different firms.500 (100) + $10. Both figures represent important effects for firms. For the engineering economist the primary book cost that is of concern is equipment depreciation. 2-17 Here the student may develop several different thoughts as it relates to life-cycle costs. The point of this comparison is that the early stages of the design cycle are the easiest and least costly periods to make changes. The implication of this effect is that if the firm wants to maximize value-per-dollar spent. Firms should be aware of and account for all activities and liabilities associated with a product through its entire life-cycle. or service.retirement costs) as well as costs due to financing (payments on principal and interest debt) and taxes. the authors list the following three factors as creating difficulties in making cost estimates: One-of-a-Kind Estimates. money and effort early in the life cycle. These costs and liabilities represent real cash flows for the firm either at the time or some time in the future. Each of these factors could influence the estimate. enterprise-wide approach to product design serves the modern firm well. good. constructed. supported and retired. 2-19 In this chapter.

12) = $18.17) = $25.00 = (15 cans) $7.000 = 2.500 $39.000 $39.000) (0.000 (bii) For items that change proportionately to the size increase we multiply by: 4.500 2-23 (a) Unit Profit = $410 (0.75 Cost (total) = $412.3) .500 ($150.$410 = $123 .000 ($150.250 (1.000) (0.20) = $30.000 $51.581.50 + $1.000 $36.000 $36.034.000 ft2 House Cost Increase ($150.000 = $295.75/hr) = $1.500 ($150.000 ($150.50 Total = $412.35) = $1.000 ft2) = $300.000) (0.= $766.0 all the others stay the same.12) = $18.000/2. then: Total Cost = ($75/ft2) (4.25 2-22 (a) Unit Cost = $150.000 ft2 House Cost $12.13) = $19.000) (0.968.000 = $75/ft2 (bi) If all items change proportionately.13) = $19.000 ($150.$410 = $533 .250 Cost to State = $766.000) (0.000) (0.000) (0.438 2-21 Cost (total) = Cost (paint) + Cost (labour) + Cost (fixed) Number of Cans needed = (6.500 ($150.30) = $123 or = Unit Sales Price ± Unit Cost = $410 (1.000 ($150.000/2.000/300) (2) = 40 cans Cost (paint) = (10 cans) $15 = $150.50 Cost (labour) = (5 painters) (10 hrs/day) (4.08) = $12.75 + $200 = $2.968.000 $22.000) (0. [See table below] Cost item 1 2 3 4 5 6 7 8 2.000 $60.15) = $22.500 x1 x1 x2 x2 x2 x2 x2 x2 Total Cost 4.50 = $112.5 days/job) ($8.00 = (15 cans) $10 = $150.

6 (3.5/0.$3.000) (0.000 batch: (10.100.500) = $4.316 $250 (0.500 (0.15) = $4.50) + $85 + $213 = $354 Batch Cost with Contract = 10.000 ± 100) (0.22 (250) = $291 (12/3)0.80 (3.007 2-25 ITODAY = (72/12) (100) = 600 CLAST YEAR = (525/600) (72) = $63 2-26 Equipment Varnish Bath Power Scraper Paint Booth Cost of New Equipment minus (75/50)0.000) = $6.012 Trade-In Value = Net Cost $3.553 (d) Unit Cost = 112 ($0.000 for the contract.442 Total $11.000) the 10.15) = $4.841 (1.375 .540. = 297 of finished product go unsold = 192 of sold product are not returned = 589 of original batch are not sold for profit = (10. 2-24 CA/CB = IA/IB C50 YEARS AèO/CTODAY = AFCI50 YEARS AèO/AFCITODAY CTODAY = ($2.000 SungSam can afford to pay up to $560. 3.(b) Overall Batch Cost (c) Of 1.500 (0.000 = $560. = $410 (10.540.850 2-27 Equipment Varnish Bath Cost of New Equipment minus 4.000 = 100 are scrapped in mfg.15) = $254 $3.000 ($354) = $3.000 .02) Total Overall Batch Profit = $4.050/112) (55) = $1.100.BC with contract = $4.01) (10.000 (0.75)0.892 Trade-In Value = Net Cost $3. 2.841 (171/154) = $5.900 ± 297) (0.03) (9.15) = $6.000 ± 589) $123 = $1.000 Difference in Batch Cost: = BC without contract.157.

000/2) = 12.180 (300/120) = $227.62 b is defined as log (learning curve rate)/ log 20 b = [log (learning curve rate)/lob 2.950 2-29 Cost of VMIC ± 50 today = 45.75/litre) = $66 Wear and Tear: (800 km) ($0.500 model = $91.500/1.50) x = 0.000 hrs (c) Miles around equator = 2 Ȇ (4.63775) = x log (0.775 Using Power Sizing Model: (63.187) 2-32 Time for the first pillar is: T(10) = T(1) x 10log (0.566 mi 2-31 T(7) = T(1) x 7b 60 = (200) x 7b 0.30)/log (7) = -0.500 g/hr centrifuge = (4.Power Scraper Paint Booth 291 (900/780) = $336 6892 (76/49) = $10.000 (214/151) = $63.180 Updating the cost: Cost of 4.15) = $10.240 Total $15.775/100.05/km) = $40 Total Cost = $66 + $40 = $104 (b) (75 years) (365 days/year) (24 hours/day) = 657.62 log (learning curve rate) = -0.000) = (50/100)x log (0.0] = -0.500)0.000 (0.75)/log (2.200 = 7b log 0.65 2-30 (a) èas Cost: (800 km) (11 litre/100 km) ($0.75 (40.338 2-28 Scaling up cost: Cost of 4.187 learning curve rate = 10(-0.000)= $91.650 = 65% .15) = $298 $3.690 $250 (0.30 = b log (7) b = log (0.0) T(1) = 676 person hours Time for the 20th pillar is: = .

and difficulties associated with µcost estimating¶ described in this chapter all have a direct (or near direct) translation for µestimating benefits.16 hr/unit) = $3.000 -$7.55/unit Profit = (0.75/25 units) = $1.45)/x] times 100% = 55% 2-34 T (25) = 0.20/units) = $1.000 -$2. Cost = $6. whereas benefits tend to accumulate later in the project life comparatively.000 -$8.0)) = 0.60/unit Total Mfg. effects.000 $0 Maintenance $0 -$1. models.20/unit Material Cost = ($43.000 -$6. and (2) most costs tend to occur during the beginning stages of the project.000 -$6.10/unit 2-35 The concepts.000 -$2.75)/log (2.0) = 0. 2-36 Time 0 1 2 3 4 Purchase Price -$5.60 (25log (0.5 -2.5 Overhaul 0 0 0 Total -$5.00 2.75)/log (2.00 1.T(20) = 676 (20log (0.00 Capital Costs -20 0 0 O&M 0 -2.55/unit Unit Selling Price = $8.000 +$5.000 -$8.000 Market Value $0 $0 $0 $0 $7.45 x Thus costs have been reduced: [(x ± 0.50) ($3.75/unit) = $1.000 .000 2-37 Year 0.20) ($7.75/unit Overhead Cost = (0.¶ Differences between cost and benefit estimation include: (1) benefits tend to be over-estimated.000 -$2.80)/log (2. whereas costs tend to be under-estimated.0)) = 195 person hours 2-33 80% learning curve in use of SPC will reduce costs after 12 months to: Cost in 12 months = (x) 12log (0.16 hours/unit Labor Cost = ($20/hr) (0.000 -$6.

5 -2.5 0 -5 0 0 0 Cash Flow ($1.00 5.5 -2. 00 5.00 6.5 -2.000) 10 5 0 Overhaul -5 O&M Capital Costs -10 -15 0.00 7.00 0 0 0 0 2 -2. 00 6. 00 7.5 -2. 00 3. 00 -20 Year 2-38 Year 0 1 2 3 4 5 6 7 8 9 10 CapitalCosts -225 100 O&M -85 -85 -85 -85 -85 -85 -85 -85 -85 -85 Overhaul -75 Benefits 190 190 190 190 190 190 190 190 190 190 . 00 2.3. 00 1. 00 4.00 4.

As an example: å : tuition costs. board (if paid ahead) . supplies. books. fees.400 300 200 Benefits 100 Overhaul O&M 0 Capital Costs 0 1 2 3 4 5 6 7 8 9 10 -100 -200 -300 2-39 Each student¶s answers will be different depending on their university and life situation.

: monthly living expenses. . rent (if applicable) : selling books back to student union. etc. etc. : wages & tips.

. Ê: periodic (random or planned) mid-term expenses The cash flow diagram is left to the student.

could be indifferent because she has another investment option that earns exactly 26%. on the other hand could know that she does not have any investment options that would come close to earning 26% and thus would be happy to pass up on the $500 today to accept the $1000 three years from today. boats. Perhaps she simply needs $500 right now to make a purchase or pay off a debt. Understanding interest and its impact is important in many life circumstances. The reason this is possible (that there is not a RIèHT answer) is that Magdalen. Miriam. . Mary. i% = {(1000/500)^(1/3)}-1 = 26% In terms of an explanation. Thus. etc. i% = {(F/P) ^ (1/n)} ±1 Thus. college. Miriam. perhaps she is a pessimist and isn¶t convinced the $1000 will be there in three years (a bird in hand idea). cars.000 three years from today. However. the time value of money means that ownership of money is valuable.¶ Money has value. F = P(1+i%)^n and. because of what it can purchase. etc.) Etc. credit cards. the same rate the $500 would grow at if not accepted now. etc. Or. F=$1000. jewellery.) Using the best strategies for paying off personal loans. of course. and Mary all could be using a different (interest rate or investment rate) as they consider the choice of $500 today versus $1. i=unknown So. 3-2 It is entirely possible that different decision makers will make a different choice in this situation. n=3 years. weddings. Many aspects involved with businesses ownership (payroll. Magdalen wants the $500 today because she knows that she can invest it at a rate above 26% and thus have more than $1000 three years from today. debt Making investments for life goals (purchases. on the other hand. Examples could include some of the following: ! ! ! ! ! Selecting the best loans for homes. taxes. We find the interest rate at which the two cash flows are equivalent by: P=$500.Chapter 3: Interest and Equivalence 3-1 ëu u means µmoney has value over time. as a decision maker she would be indifferent. and it is valuable because of the interest dollars that can be earned/gained due to its ownership. Another aspect that may explain Magdalen¶s choice might have nothing to do with interest rates at all. retirement.

320 (P/F.080 (P/F 10%.05 3-7 =$750.$80 (P/è 10%.260) $1. =8%.5 months 3-5 $200 c ccccccccccccccccccccccccccccccccccccc 4 = $200 (P/F 10%.758. 10%.272.61 + $792.791) .000 + $2. 5) = $1.400 (P/A 10%.57 = $4. å =? F = P (1+ )n = $750 (1.08)3 = $750 (1.10 x 3) = $2.875 years= 10.000) = $350/$400 = 0.08 x $5.160 .000 (0.350 .090. 4) + $1.862) = $4. 5) . 1) + $1. 2) + $1.$80 (6. 5) = $1.758.683) = $136.85 + $931.240 (P/F 10%. =3 years.74 + $1.600 3-4 ($5.3-3 $2. 4) = $200 (0.44 Using single payment factors: = $1400 (P/F 10%.28 + $670. 3) + (P/F 10%.60 3-6 $1.000) /(0.$5.400 (3.

250 (0. =? P = F (1+i)-n = $7.04)-4 = $8.5%.10 = $8. = 4 semi-annual periods.102) = $3.250 (0.306 Out of Town Bank F = $3. 3-11 Lump Sum Payment = $350 (F/P. 4) = $7. =4%.052. 1.250. 5%.250 (1. 8) = $350 (1.000 (1.5 years.8548) Using interest tables: P = F (P/F 4%.25%.312 Additional Interest = $6 3-10 $1 = unknown number of semiannual periods F = P (1 + i) 2 = 1 (1.360) 3-8 å =$8. the money will double in 17. 3) = $945 = $750 (1. 8%.8548) 3-9 Local Bank F = $3.= $945 Using interest tables: F = $750 (F/P.000 (1. 1.02 n = log (2) / log (1.052.02) = 35 2% Therefore.104) = $3.000 (F/P. 8) = $3.02) 2 = 1.126) å=2 . 2) = $3.10 = $8.000 (F/P.

1) = $350 (1.74 .10 Alternate Payment = $350 (F/P.000 (1.00 Savings in interest = $7. 4 ½%.12)1 Savings in interest = $1.126. 30) = $1 billion (3.000 (1 + 0.127.= $394.00 = $6.120. solve Equation (2).00 Choose the alternate payment plan.00 12% per year F = $1.745) = $3. 4) = P (F/P.62 billion Repayment at 5 ¼% Saving to foreign country = $897 million 3-13 Calculator Solution 1% per month F 12% per year = $1. 10) (1) (2) Since P is between and R6 is not.120) = $1.127) = $1.000 (1 + 0. R10 = $60 (1. 3-12 Repayment at 4 ½% = $1 billion (F/P.629) = $97.745 billion = $1 billion (1 + 0.120.83 F = $1.00 3-14 R6 R10 i = 5% P = $60 Either: R10 R10 = R6 (F/P.000 (1. 10%.100) = $385.01)12 = $1.83 Compound interest table solution 1% per month F = $1. 5%.0525)30 = $4. 5%.

587 = $48.454 3-18 F = P (1 + i)n Solve for P: P = F/(1 + i)n P = F (1 + i)-n P = $150.152.000 (1.1% (ii) Interest rate for the next year = ($110 .587 = 0.10 or 10% (b) $90 (F/P.54% 3-17 n = 63 years i = 7.135 .$90)/$90 = $10/$90 = 0.124 = 12.1054 = 10.6209) = $93.3-15 P = $600 F = $29.000/$600 = (1 + i)92 (1 + i) i* = ($48.111 or 11. 2) = $110 (F/P. i%.222 So.152. 2) = $110/$90= 1. (1 + i)2 = 1.079)-63 = $1.000 P = F (1 + i)-n = $175.10)-5 = $150.1054 ± 1 = 0.222 i = 1.000 (1 + 0.000 (0.000 n = 92 years F = P (1 + i)n $29.$100)/$100 = 0.587)(1/92) = $45.4% 3-16 (a) Interest Rates (i) Interest rate for the past year = ($100 .9% F = $175. i%.

000 customers x $6.00 x 1% per month x 6 times/yr 3-20 Year 0 1 2 3 4 Cash Flow -$2.3-19 The garbage company sends out bills only six times a year.000 .625 -$3. 100. Each time they collect one month¶s bills one month early.000 -$4.875 = $36.250 -$2.000 -$3.

810) .378) (c) 90 30 T ë T 120 60 $90 T = 30 ( . 10%. 10%. 4) = $100(4. 10%. 4) = 218.641) = $464.30 T T = 30 (1.10 (b) $15 $50 $0 0 1 $10 0 $50 2 3 4 S = 50 ( . 5) = 54.90 = 50 (4.Chapter 4: More Interest Formulas 4-1 (a) 100 100 100 100 100100100 100 0 1 2 3 4 R R = $100(F/A.

5) .6209) = $228.7513 + 0. %. = 10%.17 From compound interest tables. i%. 4) = $634/$200 = 3. 1) + $100 ( å. 10%. 4) ( .$10 = $51.9091 + 0.$10 = $10 (6. 10%.105) . 3) + $100 ( å. (c) $10 $10 $10 $10 V = $10 (å . 10%. 5) = $100 (0.05 . 10%.4-2 (a) $100 $100 $100 $0 $0 B = $100 ( å.13 (b) $200 $200 $200 $200 i=? $63 4 $634 = $200 ( .

6) = $500/$140 = 3.(3.170 + 4. i%. 4) = .24 4-3 (a) $25 $50 $75 $0 $50 0 = $25 ( .548 = $66. %.( . 4) = $25 (4.( .378) - = $500/7.(d) 2x x 3x 4x $50 0 $500 $500 = . 10%. 10%.45 (b) A = $140 i=? $50 0 $500 = $140 ( .571 Performing linear interpolation: . 4) + . 10%.378) = $109. 6) ( .

5) (å .784 ± 3. 5) = $25 (6. %. 6) 3.487 ± 3.571)/(3.24% (c) $50 $0 $75 $10 0 $25 P F = $25 ( .15%) ((3. 1) ( .611) = $276. 10%. 10%. 10%.498) = 17.3155) = $60. 4) = $40 (4.498 18% = 15% + (18% .37 å (d) $0 $40 A P $12 $80 0 A A A = $40 ( .10) (0.( . 4) (å .784 15% 3.862) (1.78 4-4 (a) $50 $25 W $75 $10 0 . 10%. 10%.378) (1.

00 x (c) $30 0 $20 0 $10 0 Y = $300 ( .38 .487 ± 2.$50 (0.8264) = $207.20 (d) $10 0 $50 $10 0 Z = $100 ( .378) (0.9091) = $398. 4) ( å.378) = $188. 10%.487) . 10%. 10%. 10%. 10%. 2) = $100 (2.= $25 ( . 4) = $25 (3.$100 ( .70 (b) $15 $10 0 $0 $0 $50 - = $100 ( . 4) + $25 ( . 3) . 10%.$50 ( å.329) = $513. 10%.170 + 4. 10%. 3) = $300 (2. 1) = $100 (4. 3) .

3) + $50 ( .775) + $40 (2.8696) = $157. 10%.50 4-6 $30 0 $40 0 $50 0 $40 0 $30 0 - - = $300 ( .855) (0. 4)(P/F. 15%. 5) + $40 (P/A.50 4-7 $80 $50 $60 $70 $0 P P = $10 (P/è.6830) = $1. 10%. 5) + $100 ( .487) + $50 (2.06 .329) + $100 (0. 4) = $300 (3.438. 10%.329) = $589. 10%. 15%. 3) = $100 + $150 (2.791) + $100 (2. 1) = $10 (5. 15%. 10%.4-5 $15 0 $10 0 $25 0 $20 0 P = $100 + $150 ( . 3) + $100 ( å.

n) (P/A.95 = 1 (F/A. 3. 12%. 10%.757B B = $1.757 = $1. n) $35.093. 2) + 1.5%.921.4-8 B $800 $800 $800 O B B 1. = 2.921. n) (F/A. 10%.6 Expenditures (downward) at time O: PW = B (P/A.5B Receipts (upward) at time O: PW = B + $800 (P/A. n) = 35. 3) = B + $1. n) = 20 From the 3.6/2.5B (P/F.6 = 2.757B . 12%. n = 16.000 = A (P/A. 4-10 P $1. 10%.70 4-9 F = A (F/A. n) = $50 (P/A. 3. 12%.95 From the 10% interest table. n = 35.5%. 3) Equating: B + $1. 3.5% interest table.5%.921.

2) = $331 (1.60 . 10%. 4) = $100 (4.51 (0. 5) = $100 (1. 3) = $400. 10%.30 C = $705.80 (F/P.80 (1.51 (A/P. 3) = $705. 10%.51 J = $400.611) = $705.10 4-12 $10 0 $20 0 $30 0 P P¶ C C C P = $100 (P/è. 10%. 3) = $100 (3. or: Ñ = $100 (F/P.378)= $437. 10%. 10%.310)= $331 P¶ = $331 (F/P.4021) = $283.4-11 $100 $100 $100 F F J P¶ J J = $100 (F/A.80 P¶ = $437.210)= $400. 10%.611)= $161.05 Alternate Solution: One may observe that Ñ is equivalent to the future worth of $100 after five interest periods. 5) = $437.4021) = $161.30 (A/P.30 (0.

2) + $500 (P/F.2155) = $94.7972) + $500 (0. 10%.7. 12%.80 4-14 0 D D D $10 0 $20 0 $30 0 D P Present Worth of gradient series: P = $100 (P/è.4-13 è 3è 2è 4è 5è 6è 0 $500 $500 P Present Worth P of the two $500 amounts: P = $500 (P/F. 7) = è (11. 4) = $100 (4. 4) = $4.80 (A/F.50/11.644) è = $754.50 Also: P $754. 10%. 12%. 7) = è (P/è. 1) = $500 (0. 12%.80 D = $437.50 = è (P/è.644 = $64.7118) = $754.80 (0.378)= $437.35 . 12%.

3) + $300 (F/P.432.90 E = $1. 3) + $200 (F/P. 10%.170 + 4. 10%.432. 4) ± B (P/è.329) + $300 (1. 10%.90 (0. 10%. 10%.331) + $200 (1. 4) = $100 (3. 10%. 10%. 4) . 10%. 4) + $100 (P/è.90 (A/P. 10%.487) + $100 (2.4-15 $30 0 $20 0 $10 0 $20 0 $10 0 E $20 0 $30 0 E P P = $200 + $100 (P/A.378) = $754.64 4-16 $10 0 $20 0 $30 0 $40 0 P 4B 3B 2B B P = $100 (P/A. 1) = $200 + $100 (2.5762) = $825.210) + $100 (1. 2) = $1. 2) + $100 (F/P. 3) + $100 (P/è.100) = $1. 10%.432.80 Also: P = 4B (P/A.

10%.Thus.170) ± B (4. the problem must be split into workable components.605) + $150 (6. 5) Since P01 = P02.335) .80/8. 4B (3.029) + $3.75 + 959. On way would be: A = $20 n = 90 n = 90 F¶ F .00 = (å . 4) Cash flow number 2: P02 = $150 (P/A.80 B = $754.30 = $90.$250 (P/è.378) = $754. 8) . 10%. 8) = $1.50%. 8) + $3.250 (5.55)/3.000 . 12%. A (3. 5) + $150 (P/è. 0.50% /month = $20. 12%.94 4-17 P = $1.4665) = $5.250 (P/A.$250 (0.037 = $494 4-19 å ? å = 180 months 0.037) = $150 (3. 180) Since the ½% interest table does not contain n = 180. 12%.$250 (16.545 4-18 Cash flow number 1: P01 = A (P/A.$250 (P/F.397) A = (540.000 . 10%.

259 Note the inaccuracy of this solution. 9) = $30 (9.å = $20 (å . 1) = $275. 90) + $20 (å . 90)(å .817 Alternate Solution Perform linear interpolation between n = 120 and n = 240: å = $20 ((å . ½%. 1 March 1 A = $30 F¶ Amount on Nov 1: F¶ = $30 (F/A. ½%. 90) = $5. ½%.46 (1. ½%.005) = 276. 240))/2 = $6.46 Amount on Dec 1: F = $275. 120) ± (å . ½%. 1 Nov.84 4-21 B B B B B B F The solution may follow the general approach of the end-of-year derivation in the book. ½%.812) = $275. .46 (F/P. ½%. 4-20 F Dec.

80 (F/P.560 = $5.000 (14.80 F¶ = F (F/P. 8%.000 (F/A. 7%.025.377.129) = $5..61 = $200 (F/A.08)7 ± (1.487) (1.28 B = $200 n = 15 = 7% 4-22 ««««.08 [(1 + 0. + B (1 + )1 Divide equation (1) by (1 + ): (2) F (1 + )-1 = B (1 + )n-1 + B (1 + )n-2 + « + B Subtract equation (2) from equation (1): (1) ± (2) F ± F (1 + )-1 = B [(1 + )n ± 1] Multiply both sides by (1 + ): F (1 + ) ± F = B [(1 + )n+1 ± (1 + )] So the equation is: = B[(1 + )n+1 ± (1 + )]/ F Applied to the numerical values: F = 100/0.469) = $42. 1) 4-23 F = $2. 7%. %. ) = $5. 10) (F/P.025.025. %. 15) = $200 (25.(1) F = B (1 + )n + «.08)] = $792.80 (1. 5) = $2. F F¶ F = $200 (F/A.07) . ) = $5. 8%.

6. 6. i%.5%.000 (F/P. 10%. 12%.024) + 7. 10) = ½ (7.000 = $0. 12%.38 per vehicle 4-27 From compound interest tables.25% ? 10 years P = A (P/A.189 Why do the values differ? Since the compound interest factor is non-linear.024 7% (P/A. 10) i 7.000 (1.31) X å $25.024 = 7. 10) = 7. using linear interpolation: (P/A.0525 (1.000 = 12% å $30.000 X (3.779) A = $2. linear interpolation will not produce an exact solution.4-24 $300 = 5.000.000.000 X (F/A.62884) = $2.000 4-26 Let X = toll per vehicle. 5. Then: 20. .000 4 $10.574) + A (4.000.0525)10 ± 1]/[0.000 $10. 4) = $30.0525)10] = $300 (7.000.360 6% 7.000 3 = $25.5%.000 X = 10% 20.000 = $25.000.984 = $30.192 Exact computed value: (P/A. 10) = A [(1 + )n ± 1]/[(1 + )n] = $300 [(1. 4) + A (F/A. 3) 20.289 4-25 $10.360 ± 7.25%.000.

971.41 The series of ten deposits must be: A = $9.629) = $4. 10) = $792.4-28 A = $4.184 must be accumulated by the two series of deposits.184 This $14. 4) (F/P. .5%.546) = $14. n = 50 months. the annual deposits between 8 and 17 must accumulate a future sum: = $14.310) (1.184 .5%. 1. 10) = $600 (4.0745) 4-29 P = A (P/A. 1. The four $600 deposits will accumulate by x (17th birthday): F = $600 (F/A. 5%. n) $525 = $15 (P/A.212.971.11 (A/F.000 (P/A.11 (0. n) (P/A.5%. 1.$4.000 A = $600 A=? x To have sufficient money to pay the four $4. 5%.5% interest table.971.73 = $9.000 (3. 4) = $4.59 = $9.000 disbursements.59 Thus. 5%. x = $4.212. n) = 35 From the 1. 5%.

1%. $156 $156 $156 = ? 1.5% = $10 = $10 (P/A.312)/0.(0. 8%. 4) + .6806) - = ($5. 1%.$3.312 + .95 4-33 This problem may be solved in several ways. 8%.6806 . 1. ) =2 From the 1%. n) (P/A. Therefore. Below are two of them: Alternative 1: $5000 = $1. table: = 70 months 4-31 A = $10 ««««.(0.5%.000 .0679) = $33. 4-32 = $500 ( . it takes 18 months to repay the loan.(P/F. is between 17 and 18. ) (F/P.6 From the 1.312) + . 5) = $1.5% interest table. 1. n) = $156/$10 = 15.5%.000 (3.4-30 1 å = 2 1% =? $2 = $1 (F/P.6806) = $3. 1%.000 (P/A. 16) = $500 (0.

7%. 3) = $1.672. A = $648.28 = $1.16 Alternative 2: P = $1. 8%.672.90 P= $3.90.= $2. 8%.22 (0.90 (P/A.577) Last three payments: A¶ = $1.$3. 3) = $637.312 ($5.480.479.000 (P/A.2163) = $648. 6) = $3. 5) = $2. 8%.22 (A/P. 4) = $1.000 (3.90 (2.90 each.672.3811) .000 (0.67 4-34 A = P (A/P.000 A¶ = ? P¶ = Balance Due after 3rd payment Balance due after 3rd payment equals the Present Worth of the originally planned last three payments of $648.90 The first three payments were $648. 8%.312) (F/P. P¶ = $648.000 .22 = $648.312) = $3.

5%.695.695.20 (P/A. Final Payment = $2.43 = $1. n=? $15 0 ($150 .2246) = $2.20 The final payment is the present worth of the three unpaid payments. 1.5 From the 1.778.20 + $2. n) (P/A. 15) = $10 (13.695.$133.695.343) = $133.20 (1. 4%. 2) = $2.$15 .886) = $7.000 A A Final Payment A = $12.5%. 16) = $1. 1.000 (A/P.$15) = $10 (P/A.5%.57 16th payment = $1.57 (F/P. 5) = $12. 1.000 (0.20 + $2. This indicates that there will be 15 payments of $10 plus a last payment of a sum less than $10.5% interest table we see that is between 15 and 16.35 . n) = $135/$10 = 13.43 Remaining unpaid portion of the purchase price: = $150 .99 4-36 A A A $12.4-35 $15 A = $10 ««.5%. 4%.695. Compute how much of the purchase price will be paid by the fifteen $10 payments: P = $10 (P/A. 1.

) = $120.000 A = A + A (P/A.000 (0.000 P = $150.368 = $263.853) = $2.4-37 A=? $3. %.544.000/11.90 + 263. 15) = $120.570. 5) = $1263.$30.747) = $80. 15 years .368) = 11. 1%.55 RY RY = Remaining Balance in any year. %.61 4-38 (a) ? = 8% $120. Y = A (P/A.000 = $120.368 A = $3.019.019. ) R7 = $14.000 Pay off loan Compute monthly payment: $3.000 . 8%.90 (4.55 (P/A.000 A = P (A/P.11683) = $14.90 + 263.90 Car will cost new buyer: = $1.35 (b) The quantities in Table 4-38 below are computed as follows: Column 1 shows the number of interest periods. 8%. 8) = $14.000 (A/P.000 + 263.55 (5.90 (P/A. 1%.019. 11) = A + A (10.

565.578.129.23 $72. the remaining balance as shown on Table 4-38 is approximately equal to the value calculated in (a) using a formula except for round off error.11 $5.04 $1.434.70 $9.55 gives the principal portion to be $4.304. The other row quantities are computed in the same fashion.019.600 SEP@ @TION OF INTE EST @ND P INCIP@L ANNUAL PAYMENT INTEREST PORTION PRINCIPAL PORTION $14.55 $4.44 $36.478.839.96 $5.00 REMAININè BALANCE $120.834.55 $14.019.180.600 from the total payment of $14.45 $110.019.44 *NOTE: Interest is computed on the remaining balance at the end of the preceding year and not on the original principal of the loan amount.85 $4.55 is the total payment which includes the principal and interest portions for each of the 15 years.019.78 $7.981.90 $64.038.79 $11.55 $14.019.019.00 $115.19 $8.541.006.75 $6. The rest of the calculations proceed as before.019.77 $7.28 $6.019.154.37 $2. This completes the year 1 row.580.246.019.419.55 $14.45.019.07 $3.493.55 $14.92 $46.807.48 $4.33 $8.38 $100. The amount $14.019. and subtracting it from the principal balance of the loan at the end of the previous year (y) results in the remaining balance after the first payment is made in year 1 (y1).36 $6.45) = $9.55 $14.072.000.810.55 $14.28 $8.55.47 $12.55 $14.55 $14.51 $12.27 $87.600 $9.59 $8.000) = $9.981.129.55 $14. To compute the interest portion for year one.55 $14.085.80 $7. The interest portion for row two. of $115.890.62 $55.76 $2. .019.000.990.000.55 $14.27 $5.019.02 $94.08) ($120.246.55 $14.48 $10.08) ($115.013.22 $5.574.012.00 0 Subtracting the interest portion of $9.184.019. we must first multiply the interest rate in decimal by the remaining balance: Interest Portion T@BLE 4-38: YEAR 0 1 2 3 4 5 6 7* 8 9 10 11 12 13 14 15 = (0.525.006.55 $9.27 $7.773.714.019.18 $12.864.55 $14. Also.Column 2 shows the equal annual amount as computed in part (a) above.975.445.567.34 $105.55 $14.50 $80.019. note that in year 7.019. year 2 is: (0.65 $25.580.452.580.419.44 $8.019.652.

0575(1. Owed BOP 4.70 2.93 2. 5.60 Monthly Pmt.44 199.483 (A/F.68 4.94 177.575)/[(1.624. 2000.44 199.425.504.140.26 2.344.41 3.32 183.500 loan at 6% Paid monthly for 24 months P = $4.52 3.950.516. It is now necessary to determine what yearly deposits should have been over the period 1981±1997 to build a fund of $29.45 12.79 2.24 3.96 1.64 Int.000 = 5.0575)18 ± 1] = $29.483.560.79 189.000 + $8.805.28 1.889.875.61 180.83 18. 1999.323.00 4.91 3.99 186.75%.375.35 3.44 199. Owed (this pmt.568. and 2001.08 1.51 181.69 191. ? = 5. ) å $29.0575)3 ± 1]/[0.44 199.44 199.074.44 199.48 Principal (This pmt) 176.50 4.258.72 1.75% A = F (A/F.4-39 Determine the required present worth of the escrow account on January 1.483 (0.000 (P/A.84 Total Owed (EOP) 4.44 199.73 19.52 11.82 178.69 2.242.44 199.32 2.) 22.35 2.69 3.21 15.606.44 199.85 188.000 at the end of 1998.522. 18) = $29. 199.328.38 13. 3) = $8.75%.44 199.44 3.483.442.97 3.500.14 185.14 1.00 It is necessary to have $29.759.483 ()/[(1 + )n ± 1] = $29.145.70 8.44 199.64 192.00 3.690.483 at the end of 1997 in order to provide $8.62 20.70 1.44 199.750.76 2.74 190.483 (0.65 9.03 17.03313) = $977 4-40 Amortization schedule for a $4.59 10.786.000 + $8. # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 i = 6%/12 mo = 1/2% per month Amt.93 18.13 3.000 [(1.06 4.06 185.44 199.500 Pmt. ) = $8.165. %.44 .23 184.129.80 6. %.44 199.317.75 7.44 199.49 1.940.40 1.46 2.41 182.25 2.000 + $8.986.703.44 199.50 21.71 179. 5.368.000 [(1 + )n ± 1]/[(1 + )n] = $8.84 3.0575)3] = $29. 1998: $8.059.44 199.483 18 years = $29.92 187.13 16.30 14.75% 3 years PW = A (P/A.966.90 3.

90 1.35 3. # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 i = 6%/12 mo = 1/2% per month Amt.52 TOTALS 5.71 780.13 16.00 199.94 2.323.Column C (payment .48 970.90 595.79 185.44 199.50 4.79 190.46 395.44 199.40 791.91 3.96 592.98 198.10 187.44 199.88 4.13 3.51 286.93 Total Owed (EOP) 4.79 12.97 3.357.62 20.70 7.15 583.65 2.44 199.90 2.19 20 21 22 23 24 1.27 580.44 199.66 Monthly Pmt.573.88 2.25 2.586.624.01 1.27 1.E12 (amount owed BOP.170.118.44 199.92 0.86 776.805.128.56 194.44 199.44 199.44 199.82 178.44 199.99 1.) 22.13 187.12 2.44 199. Owed BOP 4.48 787.74 191.65 267.500.145.52 3.interest owed) Column F = Uniform Monthly Payment (from formula for A/P) 4-41 Amortization schedule for a $4.87 11.44 199.739.79 5.principal in this payment) Column C = amount owed BOP * 0.45 199.258.57 1.90 2.005 Column D = Column B + Column C (principal + interest) Column E = Column F .425.164.18 186.48 197.44 199.92 987.32 483.85 3.21 13.83 1.500 Pmt.986.50 196.56 196.80 1.500 loan at 6% Paid monthly for 24 months P = $4.59 195.44 280.363.00 (principal amount) B13 = B12 .44 199.41 182.06 4.00 199.00 4.70 192.176.65 8.85 189.344.242.500.548.50 21.758.522.748.53 10.00 3.65 193.59 9.929.74 6.181.786.66 Int.73 19.606.93 18.51 181.03 17.44 500.36 1.61 386.772.69 2.82 4.98 0.69 2.44 199.04 982.96 1. 199.96 199.30 975.24 3.52 186.44 199.966.442.165.41 3.53 195.59 .92 1.44 199.94 177.59 Principal (This pmt) 176. Owed (this pmt.63 193.44 199.21 1.44 199.61 180.44 4499.62 194.13 1.91 3.12 2.91 188.44 187.68 4.306.84 3.83 18.44 199.317.46 198.556.93 B12 = $4.54 197.57 1.44 3.71 179.42 397.939.44 199.71 384.

46 = $25.00 0.59 4-42 Interest Rate per Month = 0.442.000 (0.03 ± 506.00 TOTALS 0.00 256.055/4)16 = $12.37 Interest for 33 days = P = $79.00 0.442.00 (principal amount) B13 = B12 .319.46 .00 0.000 [0.24/$10.00 0.319.24 = (1 + )10 ($10.934.00583)12]/[(1.00583/month Interest Rate per Day = 0.11 (1 + 0.8319 10 ln (1 + ) = ln (1.319.E12 (amount owed BOP.00583 (1.00583) = $65.07/365 Payment = P[(1 + )n]/[(1 + )n ± 1] = $80.57 4-43 (a) F16 F10 = $10.8319) = $506.000192/day = 0.934 (33) (0.005 Column D = Column B + Column C (principal + interest) Column E = Column F .00583)12 ± 1] = $532.$65.500.000 .07/12 = 0.03 Principal in 1st payment = $532.065/4)24 = $18.00 0.95 0.03 ± $80. Payment amount = $187.63 Loan Principal at beginning of month 2 = $80.interest owed) Column F = Uniform Monthly Payment (from formula for A/P) Payment 22 is the final payment.000 (1 + 0.00 0.00 0.23 24 0.24 (b) $18.00 4500.Column C (payment .000) (1 + )10 = $18.000 = 1.11 = $12.00 B12 = $4.principal in this payment) Column C = amount owed BOP * 0.000192) Principal in 2nd payment = $532.63 = $79.

967 i 6% 7% = 6% + [(1.8319))/10 = 0.832 Performing interpolation: (F/P. i%. 10) = 1. i%.24 = $10. .832 ± 1.000 (F/P.0624 = 6.319.24% @lternative Solution $18. 5) + $10 (P/è. 5) + $50 (P/è.0605 (1 + ) = 1. $50 (P/A.ln (1 + ) = (ln (1.967 ± 1. i%.791 1. 10) (F/P.0624 0. 5) 100 =1 . 10) 1.24% 4-44 Correct equation is (2).791)] = 6.791)/(1. i%.

5) (P/F. 5%.4-45 $1. 8%.000 (P/A.44 + $162. Therefore. 8%. 8) .232) = $231. 5%. $70 0 $55 0 $1. $150 (P/è.76 4-47 20th Birthday 59th Birthday i = 15% Number of yearly investments F $1 x 10·cc · c . Equation 1 is correct.000 $40 0 $850 $25 0 $700 $550 $10 0 -$50 $15 0 $30 0 $450 } $400 $400 $400 $400 The above single cash flow diagram is equivalent to the original two diagrams.32 = $393. 8%.786) + $10 (16. 7) = $40 (5.000 $85 0 $1. 8%.$150 (P/è. 4) 4-46 = $40 ( . 7) + $10 ( .

000. 15%.000. 1) = $869.600 = $1. Thus.000 (0.000 one year hence: F = $1.000.8696) .c = (59 ± 20 + 1) = 40 The diagram indicates that the problem is not in the form of the uniform series compound amount factor.000 (P/F. find F that is equivalent to $1.

4%.693. 1) + $25 (P/è.00056) This result is very sensitive to the sinking fund factor. 9) (P/F.000 $300 $5. 5) . 6%.577) (0. P = $85. 6%. 6%.000 (8.78.9434) + $25 (24. 15%.05 .000 + $500 (P/F.A = $869.9434) = $11. 5) = $85.600 (A/F.$10.98 = $869.452) .000 (P/è. 9) (P/F.000 (P/A. 1) + $100 (P/A.$10.870 4-49 $10. 4%.000 + $500 (0. 4-48 This problem has a declining gradient. 1) = $10.9434) + $100 (6.600 (0.555) = $292. 40) = $486.00056208 which makes A = $488.000 (4.000 $20 0 $10 0 P P = $10. 6%.802) (0. (A/F. 15%. 40) is actually 0. 6%.

019 (1.000 is: $5.019 (F/P.9529) = $136. 5) = $1. 8%. 8%.51 $80 .4-50 $2. 8%. 4) = $500 (3.019 Thus: x = $1.650) = $3.$3.000 $50 0 $1.372) (0. 1) = $20 (7. 8%.469) = $1. 8%.000 .981 The unpaid portion of the $5.496.500 x i = 8% per year $5.000 $1. 4) + $500 (P/è.000 The first four payments will repay a present sum: P = $500 (P/A.312) + $500 (4. 5) (P/F.91 4-51 $20 $40 $60 P P = $20 (P/è.981 = $1.

4-52

P

F

$1,500

**(a) Since the book only gives a geometric gradient to present worth factor, we
**

must first solve for P and then F.

?

P

= 6

10%

= 8%

= A1 (P/A, g%, i%, n)

(P/A, g%, i%, n)

= [(1 ± (1 + g)n (1 + i)-n)/(i ± g)]

= [(1 ± (1.08)6 ( 1.10)-6)/(0.10 ± 0.08)]

= 5.212

P

= $1,500 (5.212)

= $7,818

F

= P (F/P, i%, n)

= $7,818 (F/P, 10%, 6)

= $13,853

**As a check, solve with single payment factors:
**

$1,500.00 (F/P, 10%, 5)

$1,620.00 (F/P, 10%, 4)

$1,749.60 (F/P, 10%, 3)

$1,889.57 (F/P, 10%, 2)

$2,040.73 (F/P, 10%, 1)

$2,203.99 (F/P, 10%, 0)

= $1500.00 (1.611)

= $1,620.00 (1.464)

= $1,749.60 (1.331)

= $1,898.57(1.210)

= $2,040.73 (1.100)

= $2,203.99 (1.000)

= $2,413.50

= $2,371.68

= $2,328.72

= $2,286.38

= $2,244.80

= $2,203.99

**Total Amount =$13,852.07
**

(b) Here, i% = g%, hence the geometric gradient to present worth equation is:

P

= A1 n (1 + )-1

= $1,500 (6) (1.08)-1 = $8,333

F

= P (F/P, 8%, 6)

= $8,333 (1.587)

= $13,224

4-53

Ac

F

P

5% ($52,000)

= $2,600

P = A1 n (1 + )-1

= $2,600 (20) (1 + 0.08)-1

= $48,148

F

= P (F/P, i%, n)

= $48,148 (1 + 0.08)20

= $224,416

= 20

8%

å ?

4-54

Ac

P

** 2nd year salary
**

= 1.08 ($225,000)

= $243,000

12%

?

= 8%

P = A1 [(1- (1 + g)n (1 + i)-n)/(i ± g)]

= $243,000[(1 ± (1.08)4 (1.12)-4)/0.04]

= $243,000 [0.135385/0.04]

= $822,462

4-55

2000 cars/day

= 2

5%

å = ? cars/day

?

= $47.50

F2 = P ein = 2000 e(0.05)(2) = 2,210 cars/day

4-56

$1,000

P

$1,000

= 24 months

= A (P/A, i%, )

= $47.50 (P/A, i%, n)

(P/A, i%, 24)

= $1,000/$47.50

= 21.053

Performing linear interpolation using interest tables:

(P/A, i%, 24)

21.243

20.624

i

i

1%

1.25%

**= 1% + 0.25% ((21.243 ± 21.053)/(21.243 ± 20.624))
**

= 1.077%/mo

Nominal Interest Rate

**= 12 months/year (1.077%/month)
**

= 12.92%/year

4-57

$2,000

$51.00

= 50 months

?

= $51.00

= ( , i%, n)

= $2,000 ( , %, 50)

( , i%, 50)

= $51.00/$2,000

= 0.0255

From interest tables:

= 1% / month

Nominal Interest Rate

**= 12 months/ year (1% / month)
**

= 12% / year

Effective Interest Rate

= (1 + )m ± 1 = (1.01)12 ± 1

= 12.7% / year

4-58

$1,000

**Interest Payment = $10.87 /
**

month

Nominal Interest Rate

?

= 12 ($10.87)/$1,000

= 0.13 = 13%

4-59

i

= 1% / month

Effective Interest Rate

= (1 + i)m ± 1 = (1.01)12 ± 1

= 0.127

= 12.7%

4-60

Nominal Interest Rate

Effective Interest Rate

= 12 (1.5%)

= 18%

12

= (1 + 0.015) = 0.1956

= 19.56%

u Ê

4-61

(a) Effective Interest Rate

= (1 + )m ± 1 = (1 + 0.025)4 ± 1

= 10.38%

= 0.1038

**(b) Since the effective interest rate is 10.38%, we can look backwards to
**

compute an equivalent for 1/252 of a year.

(1 + )252 ± 1

= 0.1038

(1 + )252

= 1.1038

(1 + )

= 1.10381/252

Equivalent

= 0.0392% per 1/252 of a year

= 1.000392

**(c) Subscriber¶s Cost per Copy:
**

= P [( (1 + )n)/((1 + )n ± 1)]

A

= P (A/P, i%, n)

A

**= $206 [ (0.000392 (1 + 0.000392)504)/(1 + 0.000392)504 ± 1)]
**

= $206 (0.002187)

= $0.45 = 45 cents per copy

To check:

Ignoring interest, the cost per copy = $206/(2(252)) = 40.8 cents per copy

Therefore, the answer of 45 cents per copy looks reasonable.

4-62

(a)

=xu

= (1.25%) (12)

= 15%

(b)

= (1 + 0.0125)12 ± 1

= 16.08%

(c)

**= $10,000 (A/P, 1.25%, 48)
**

= $10,000 (0.0278)

= $278

4-63

(a)

$1,000

= $90.30

$1,000 = $90.30 (P/A, %, 12)

?

u 12 months

(P/A, %, 12) = $1,000/$90.30

= 11.074

= 1.25%

(b)

= (1.25%) (12)

= 15%

(c)

= (1 + 0.0125)12 ± 1

= 16.08%

4-64

Effective interest rate

1.61

(1 + )

= (1 + )m ± 1 =

= (1 + )12

= 1.610.0833

= 1.0125

= .0125

= 1.25%

4-65

Effective interest rate

(1 + u )

u

= (1 + u )m ± 1= 0.18

= (1 + 0.18)1/12 = 1.01389

= 0.01388

= 1.388%

4-66

Effective Interest Rate

= (1 + )m ± 1 = (1 + (0.07/365))365 ± 1

= 0.0725

= 7.25%

4-67

P = A (P/A, i%, n)

$1,000

= $91.70 (P/A, i%, 12)

(P/A, i%, 12)

= $1,000/$91.70

= 10.91

**From compound interest tables, = 1.5%
**

Nominal Interest Rate

= 1.5% (12)

4-68

F

= P (1 + )n

$85

= $75 (1 + )1

(1 + )

= $85/$75

= 0.133

= 1.133

= 13.3%

= 18%

Nominal Interest Rate

= 13.3% (2)

= 26.6%

Effective Interest Rate

= (1 + 0.133)2 ± 1

= 0.284

= 28.4%

= (1 + 0.0175)12 ± 1

= 0.2314

= 23.14%

= 0.1268

= 12.7%

4-69

Effective Interest Rate

4-70

Nominal Interest Rate

= 1% (12)

= 12%

Effective Interest Rate

= (1 + 0.01)12 ± 1

4-71

Effective Interest Rate

= (1 + )m ± 1

0.0931 = (1 + )4 ± 1

1.0931 = (1 + )4

1.09310.25

= (1 + )

1.0225 = (1 + )

= 0.0225

= 2.25% per quarter

= 9% per year

4-72

Effective Interest Rate

= (1 + )m ± 1 = (1.03)4 ± 1

= 0.1255

= 12.55%

4-73

$10,000 $10,000 $10,000 $10,000

$10,000

«««

=?

= 40

= 4%

F

**Compute F equivalent to the five $10,000 withdrawals:
**

F

= $10,000 [(F/P, 4%, 8) + (F/P, 4%, 6) + (F/P, 4%, 4) + (F/P, 4%, 2) + 1]

= $10,000 [1.369 + 1.265 + 1.170 + 1.082 + 1]

= $58,850

**Required series of 40 deposits:
**

A = F (A/F, 4%, 40)

= $58,850 (0.0105)

= $618

4-74

P

n = 19 years

P¶

n = 30 years

A = $1,000

**Note: There are 19 interest periods between P(40th birthday) and P¶ (6 months prior to 50th
**

birthday)

P¶ = $1,000 (P/A, 2%, 30)

= $22,396

= $1,000 (22.396)

P = P¶ (P/F, 2%, 19)

= $22,396 (0.6864)

= $15,373 [Cost of Annuity]

4-75

The series of deposits are beginning-of-period deposits rather than end-of-period. The

simplest solution is to draw a diagram of the situation and then proceed to solve the problem

presented by the diagram.

309) = $839.00 .70 = $1.$12 0 $10 0 $80 $14 0 $60 $50 $50 P F The diagram illustrates a problem that can be solved directly. P = $50 + $50 (P/A. 10) = $50 + $50 (8. 7%.59 (F/P. 3%.200. 3%.70 (F/P. 3%.41 4-76 è = 20 «««««.530) + $10 (36.128. 80) F = $5. 10) = $839.59 (1.383. $100 P n = 80 quarters i = 7% per quarter F P = $100 (P/A.207. 10) + $10 (P/è.59 F = P (F/P. 80) + $20 (P/è. 3%. 7%. 7%. 10) = $839.344) = $1. 80) Alternate Solution: = $5.383.

F = [$100 + $20 (A/è.0700)] = A1 (29.000.000. Let¶s use the quarterly with = 27.04 Now.071225)19 ± 1]/0. P = F (1 + )-n = $37. P = F (P/F.0824)-40 = $42.035)2 ± 1 = 0.24%.414 4-78 = 14% = 19 semiannual periods u = 0.0824-0.78 = $1.927)] (3189.24% Since F = $1.852.207. the quarterly or the semiannual. Effective interest rate = (1 + )m ± 1 = (1.071225 Can either solve for P or F first.000 [(1 + 0.1) = $1.14 / 4 = (1 + 0.78) The first RRSP deposit. we have the Future Worth at January 1. 80) = [$100 + $20 (13. 2005.120 Now we can insert these values in the geometric gradient to present worth equation: P = A1 [(1 ± (1 + g)n (1 + i)-n)/(i ± g)] $42.035 = 0.200. A1 = $42.071225 = $37.07)40 (1.952 .035)-27 = $14. we must first compute the effective interest rate per year. 80)] (F/A.000 (1 + 0. We can use either interest rate.852. Let¶s solve for F first: F1/05 = A (F/A. 7%. 40) = $1.00 4-77 Since there are annual deposits.0824)-40)/(0.24% and n = 40. but quarterly compounding.02)4 ± 1 = 0.000 we can find the equivalent P for = 8. 7%. 1998. We need the Present Worth at April 1.120/29.0824 = 8.04 (1. %.120 = A1 [(1 ± (1. ) = $1. 8.

273) = $7.000 Tisha¶s Account: 18 deposits of $18.742.0025] = $2.880.880.40 .0758) = $2.000 (0. There was no simple formula.000 (A/F.49) = $7.000 each.40 (2691.742. or even a complicated formula.This particular example illustrates the concept of these problems being similar to putting a puzzle together.13/52 = 0.752.000 (A/F. 0.40 (F/A.25%.40 [((1.570 (P/F.570 at 4/1/2012 Amount at 1/1/ 2007 = $7. ) = $38.000 (0. 4-79 = interest rate/interest period = 0.25% Paco¶s Account: 63 deposits of $38.921.25%.25%.880.0373) = $671.0025 = 0. While the actual calculations were not difficult. %. 0. 0.50578) = $3.880.25%. 0. there were several steps required to arrive at the correct solution.000 A = F (A/F. 26) = $18.40 For 63 deposits: F = $2. to arrive at the solution.570 (0.0025)819 ± 1)/0.000 each Equivalent weekly deposit: A = $18. 63x13) = $2. equivalent weekly deposit «««« n = 13 i = ¼% A=? $38. 13) = $38.

1%. 1%.000 + $211.116) = $57.000 (F/A.084 (1.67] = $185.084 (F.084 Amount at 1/1/2007 = $185. 1%. 18x26) = $671.716) = $51. =? = 23 ««««««.152) = $5. 0. 1%.432 (1.Present Worth P1/1/2006= $671.40 (P/A.01518) Equivalent semiannual payments required from 7/1/2001 through 1/1/2010: Asemiann= $871.000 Sum of both accounts at 1/1/2007 = $3.432 (F/P.432 F2/1/2001 = $51.0025)468 ± 1)/275.000 4-80 4/1/98 A = $2.132.360 .40 [((1. 11) = $51.30 (6. 108) = $871.398 Equivalent A from 2/1/2001 through 1/1/2010 where = 108 and = 1% Aequiv = $57. 0.000 (25.139) = $211.P.398 (A/P.25%.000 «««.921. = 11 7/1/2001 u Ê 18 payments 1/1/2001 Monthly cash flows: F2/1/2000 = $2. 23) = $2.30 (F/A.25%.000 = $4. 6) = $871.30 = $57.398 (0. 52) = $185.

1%.0303 = $5. 80) = $255.03% . 3.100 ««««««« 1/1/05 = 80 = 1% monthly deposits Fdeposits Fdeposits = $2.03%.509 .$193.000 (F/A. 2005: = $255.000 1/1/2005 = 26 quarterly withdrawals Fwithdrawal Equivalent quarterly interest Fwithdrawals = (1.000 [((1.4-81 Deposits 6/1/98 A = $2.561 Amount remaining in the account on January 1.01)3 ± 1 = 0.561 = $61. 26) = $5.509 Withdrawals: 10/1/98 A = $5.0303)26 ± 1)/0.948 = 3.100 (F/A.0303] = $193.

491) + (10.52% Compute the present worth of the 32 quarterly payments: P = A (P/A. 6%. 1.363 4-84 7/1/97 = 12% A = $128.0252 = 2.7878) = $65.041) = $300 (F/A. 9) + $128. 4-83 Compute the effective interest rate per quarterly payment period: = (1 + 0. as her monthly deposits do not earn any interest until the subsequent quarter.000 A=? 1% /month 30 months .000 (P/A.904 4-85 $3.5% per quarter year å (F/A. 6%.52%. 17) = $128.912. 12) Note that this is no different from Ann¶s depositing $300 at the end of each quarter. 32) = $3.000 «««.30 å ? 12 quarterly periods (in 3 years) = $300 (13.10/12)3 ± 1 = 0.0252(1.477)] = $2.811.000 (F/A.0252)12] = $3. =9 = 17 7/1/2001 u Amount7/1/2001 = $128. n) = $3.0252)12 ± 1]/[0.000 (21. 2.000 [(1.5%.000 [(11.4-82 3($100) = $300 = 1. i%.

19252 = 19.04 (P/A.00 x 12 .75%. 4) = $278.000 ( .0387) = $116.54 Exact Method Additional Sum equals present worth of the nine future payments that would have been made: . i%.0875) = $875.000 (A/P.10 4-86 (a) Bill¶s monthly payment (b) = 2/3 ($4. Balance = $89. = ( .75%.5%.54 Additional Sum (in addition to the 3rd $875.360) = $2.000 (0.00) = $7.000 + $211.00 payment) Additional Sum = $10. 27) = $89.75%.$10.000 (A/P.04 Bill owed the October 1 payment plus the present worth of the 27 additional payments. 0.000 (0.04 + $89.3% 4-88 Monthly Payment = $10.00 Total Interest Per Year = $875.258.04 (1 + 24.0318) = $89.200) (A/P. 0. 1%.000 = $500. 12) = $10. 36) = $2.045)4 ± 1 = 0.00 Rule of 78s With early repayment: Interest Charge = ((12 + 11 + 10) / 78) ($500) = $211.05 4-87 Amount of each payment = $1.54 interest ± 3 ($875.2787) = (1 + i)m ± 1 = (1.70 Effective interest rate = $1. 30) = $3. n) = $3.800 (0.586. 4. 0.000 (0.

00 (8.50% 1.00 (P/A.672) = $7. 1.00 4-89 $25.99 + $4.99 .5825% per month = (1 + 0. %. 1.5%.75%.5827)/(39.500/$635 = 38.000 (0.580)= $425.588.5% per month = $635 (P/A.99 (P/A.75% % = 0. 24) = $100 (0.000 (A/P.380 ± 38.99 (10.2073 = 20. 9) = $875.964)] = 0. i%. 0. 0.500 18% per year = 1.071) = $55. 60) = $24.98) = $24.80 = $4.015825)12 ± 1 = 0.380 36.500 $24.0025) [(39.380 ± 36.5%.72% 4-90 = 18%/12 = 1.015825 = 1.5%. 60) 39.000 = 60 months (a) A = $25.015 + (0.964 i 1.0499) (b) P13 = $4. 48) = $10 (42. 60) = $635 (b) P = $25. 1. 11) = (13th payment) + (PW of future 11 payments) = $4. 60) (P/A.000825 = 0.Additional Sum = $875. %.015 + 0.5% /month (a) A = $100 (A/P.24 4-91 = 6%/12 (a) P = ½% per month = $10 (P/A.5%.99 + $4.5827 Performing interpolation using interest tables: (P/A.

0421 = 0.0106)4 ± 1 (c) ern ± 1 = e0.005)/(5.000 (e0.$100.000 + $280 (44.75%. 1%.63 (c) P = $10 [(e(0.005)(48) ± 1)/(e(0. 240) = $357.05)(0.220 = $400.005 ± 1))] = $10 (42.809 = $5.000 (0.1618) 4-95 Compute effective interest rate for each alternative (a) 4. 60) = $15.09/12 = 0.887 = $3.790 5% compounded continuously F = Pern = $5.06/12)(360) ± 1)] = $400.955) 4-94 5% compounded annually F = $5.04125 ± 1 = 0.005)(48)(e0.000 [(e(0.158) = $5. 0. 5%. 0.000 A r/m = 0.000 + $280 (P/A.000 (F/P.05 (3)) = $5.000 (1. = 4.587 = $3.(b) P24 = $10 (P/A.05)] = $2.06/12)(360))(e(0. 360) = $3.5%.00805) (b) P = A (P/A.000 (A/P.568) = $425.145) (c) A = $400.75%.220 (111.396 4-93 P = $3. 24) = $10 (22.21% The 4 3/8% interest (a) has the highest effective interest rate.000 .0425/4)4 ± 1 = (1.68 4-92 (a) $500.0431 = 4.31% =? .06/12) ± 1)/(e(0.000 = $400.375% (b) (1 + 0.563)= $225.75% = $400.000 (1.000 [(6. 0. 3) = $5.

0816 (b) For continuous compounding: F = Pern $520.0400 Effective Interest Rate per yr.0392 = 3.000 = 0.0986/0.92% per 6 months Nominal Interest Rate (per year) = 0.000 [(e0.97 years 5% = 1.04)2 ± 1 = 8.000 er(1) r = ln ($520.000/$10.53 4-98 (a) Interest Rate per 6 months = $20.14 4-97 1 2 3 4 P P = F [(er ± 1)/(r ern)] = $40.05 = 21.000 F $30.000 å = $30.000 (0.092619) = $31.314.000 = P ern = $10.0986 ? .072508/0.05 n = ln ($30.05)n 0.000/$500.84% per year 4-99 $10.000 e(0.07)(4))] = $40.000 = $500.000) n = 1.000/$500.07 ± 1)/(0.07 e(0.04 (5) = $100 (1.4-96 F = Pern = $100 e.000) = 3.0.2214) = $122. = (1 + 0.92% (2) = 7.16% = 4% = 0.

1201/12)12x4 = $16.12/365)365x4 = $16.44% 4-102 (1) 11.000 (1 + 0.5) = $5.52% 4-101 (a) P = Fe-rn = $8.41 (b) F F/P ln(F/P) = = Pern = ern = (1/) ln (F/P) = (1/4.000 (1 + 0.98% compounded continuously F = $10.752.581.147.1198)(4) = $16.000/$5000) = 10.03% compounded yearly F = $10.025)4 ± 1 = 0.10/365))365 ± 1 (c) Effective Interest Rate = er ± 1 = 10.52% = (1 + )m ± 1 = (1 + (0.06 Decision: Choose Alternative (2) = e0.128.47 (3) 12.10516 = 10.01% compounded monthly F = $10.82 (2) 12% compounded daily F = $10.000 e(0.5) ln($8.10 ± 1 = 0.000 (1 + 0.10517 .53 (5) 12.159.38% (b) Effective Interest Rate = 0.65 (4) 12.1038 = 10.4-100 (a) Effective Interest Rate = (1 + )m ± 1 = (1.1202/4)4x4 = $16.000 (1 + 0.000 e-(0.1203)4 = $15.02% compounded quarterly F = $10.08)(4.059.

13/4) ± 1 = 3.03303)53)] = $25.03303)53 ± 1))/(0. 3.000 + $1.303%.03303) = $25.4-103 A = $1.866 Solution Two P10/1/97 = $1.03303 (1.303%.000 ««««« = 54 P P 10/1/97 Continuous compounding Effective interest rate/ quarter year = e(0.0609 = 6.303%.09% Continuous Effective Interest Rate = er ± 1 0.18% (b) The future value of the loan.000 (P/A. 54) (F/P.03303)54 ± 1)/(0. one period (6 months) before the first repayment: . 1) = $1.000 [((1.000 (P/A. 53) = $1.000 [((1.06 =e ±1 = 0.03303(1. 3.03303 Solution One P10/1/97 = $1.000 + $1.0618 = 6. 3.03303)54)] (1.866 4-104 (a) Effective Interest Rate = (1 + u)m ± 1 = (1 + 0.303% = 0.06/2)2 ± 1 = 0.

54 every 6 months (c) Total interest paid: = 4 ($623.2690) = $623.0526)2 ± 1 = 0.= $2.000 (F/P.000/$4. 3%.000 (0.444.7408) = $4.000 e-(0.318 (A/P.37% 4-107 $4.52% Effective Interest Rate = (1 + . 5) = $2.16 4-105 P = Fe-rn = $6.26% Nominal Interest Rate = 5.159) = $2318 The uniform payment: = $2.5) = $6.000 (1.80 4-106 Nominal Interest Rate = (1.2337 = 23. 3%.0526 = 5.26% (2) = 10.000 (1 + (0.065/365))365 = $10. 4) = $2.500 å ? 1 six month interest period = (1 + ) (1 + ) å = $10.$2.21x1) ± 1 = 0.0526 = 1.318 (0.53 .12)(2.75%) 12 = 21% Effective Interest Rate = ern ± 1 = e(0.000 = F/P = $10.80% 4-108 West Bank F = P (1 + )n = $10.000 = $494.10797 = 10.500 = .54) .671.

000 [0.000 e-0.5) = $9608 = $10.005)] = $1 x 109 [(e0.00125) ± 1)] = $250.005)(1))/(0.879.00125 = 0.000.125% F = A [(ern ± 1)/(er ± 1)] = $250.879.671.00125)(4) ± 1)/(e(0.08)(6))] = $15.002.504.000 Thus.504.9608) 4-110 (a) Continuous cash flow ± continuous compounding (one period) F = P^ [(er ± 1) (ern)/rer] = $1 x 109 [(e0.59 Difference = $0.000.000 Here.000 e-(0.005 ± 1)/0.001.005) = $1.04 = $10.000 a month to move quickly! 4-111 P = F^ [(er ± 1)/rern] = $15.005] = $1 x 109 (0.000 (0.065x1) = $10.000 [(e(0.083287/0. So it pays $625.005 e0.005 ± 1) (e(0. the interest is $1.129286] = $9.06 4-109 P = F e-rn = $10. (b) Deposits of A = $250 x 106 occur four times a month Continuous compounding r = nominal interest rate per ¼ month = 0.East Bank F = P ern = $10.00125078] = $1.08 ± 1)/((0.000. the interest is $2.000 [0.000 [(e0.000 e(.663 .00501252/0.08)(0.08)(e(0.00501252/0.000.005/4 = 0.

603% = e0.000 (1.01167 ± 1)] = $1. 4-113 $1.Continous Compounding Effective interest rate = er ± 1 = 4. Barry should have selected the Second Bank.13 = P (1 + )n = $29.698% No. i%.1275 = P ern = $29.499 From the compound interest tables we see that the interest rate per month is exactly 1. the future amount is greater because of the increased compounding periods (an infinite number of compounding periods).045 ± 1 = 0.000 (1.Monthly Compounding Effective interest rate = (1 + r/m)m ± 1 = 0.13)3 = $41. .000 = 3 years å=? (a) F = 0.200 [(e(0.14/12 = A [(ern ± 1)/(er ± 1)] = $1.66520/0. the correct choice for the company is to choose the 13% interest rate and discrete compounding.046/12)12 ± 1 = 4.000 e(0.200 F 7 x 12 = 84 compounding periods 0.01167)(84) ± 1)/(e0. i%.200 [1.5%.1275)(3) = $29.4-112 $29.511 We can see that although the interest rate was less with the continuous compounding.000 = 0.4659) = $42. 24) (A/P. 24) = A/P = 499/10.04603 Second Bank. 4-115 A = P (A/P. Thus.011738] = $170.844 (b) F = 0.237 4-114 First Bank.04698 = (1 + 0.

282 1.347 ± 1.307 (F/P.307 .282)) = 1.00/0.98å (1 + i)1 = (1.000 = 1.04% eff = (1 + )m -1 = 0.347 i i 1.35% Nominal Interest Rate = 4 quarters / year (1.05 ««««.4-116 Common Stock Investment $1.10% = 1. 20) = $1. = 40 quarters å = $1. 20) 1.25% + 0.40% / year Effective Interest Rate = (1 + i)m ± 1 = (1. i%.51% / year 4-117 å = (1 + )n = 0.0204 = 2. i%.0135)4 ± 1 = 5.307 Performing linear interpolation using interest tables: (P/A.25% ((1.6% 4-118 = 0. i%.4456 = (1.000 F $1.282)/(1.25% 1.0204)365/20 ± 1 = 44.307/$1.000 (F/P.35% / quarter) = 5. n) = $1. 20) = 20 quarters ? = P (F/P.307 ± 1.98) ± 1 = 0. i%.25% + 0.50% = 1.

unpaid balance is $2775.41 «««««.$375)/$93.1% per year * Note that no interpolation is required as ( . 40) 21.25%.793 3.5% ((21.355 ± 19. %.0125)12 ± 1 = 0. 45) = 1/34.03 Effective interest rate = (1 + i)12 ± 1 = (1. 1. = 1.5% + 0.0292) = $81. %.5% 4. 45) = 1/( .67% per year 4-119 $37 5 = $93.05 ( . 40) ( .562) = 3.05 = 20 From interest tables: ( . = 0. %.258 = 0. $2.161 = 16.0% Performing linear interpolation: = 3.5% + 0.575 = $375 + $93. 40) = 1/0. 45) ( .775 (0. $3575 = 45 months = ? $3. 45) = ($3. %.355 19. %.355/1.575 .25%.775 (A/P.775 = 45 months 1. 1.25% per month For an $800 down payment.258 From compound interest tables.5% (1.0393)4 ± 1 = 0. %.93% per quarter year Effective rate of interest = (1 + i)m ± 1 = (1.0292 .41 ( .355 ± 20)/(21.793)) = 3. 45)* = $2.1667 = 16.25% =? = $2.41 = 34.

223. The real rate of return is closer to 6. %. i%. %.034.0378 + = 13.622)/($35.7 1.4-120 (a) Future Worth $71 million = $165.5% (Shown on page 78) .14% 4-122 Since (A/P.000 (17.5 10% 12% Performing linear interpolation: = 10% + (2%) ((430.5 ± 341.304) (1.3 From interest tables: ( .000 = 430.000 (20.3% (b) In 1929.000 in 1990 dollars.000.749) = $27. the Consumer Price Index was 17 compared to about 126 in 1990. 10) (F/P. i%.512 .9%. 61) (F/P.000 ± $27. 61) = $71. 61) 341.000 in 1929 dollars is roughly equivalent to $165. ) = (A/F.000 (F/P.622 = $35.000/$165.1728 = 0.7)/(1034. 4) = $28. %.549) (1.7)) = 10. %.622)) = 12.000 By trial and error: Try 12% = 15% $1. ) + 0.000 (126/17) = $1.574) $1.512 too low too high Using Interpolation: = 12% + 3% (($28.3 ± 341. So $165.$27. %. 4-121 FW = FW $1000 (F/A.

4-123

$40

0

$27

0

$100

0

11

1

2

3

4

5

$20

0

$180

6

7

8

9

10

12

F

= NIR/u

F12

= 9%/12

= 0.75%/mo

**= $400 (F/P, 0.75%, 12) + $270 (F/P, 0.75%, 10) + $100 (F/P, 0.75%, 6) + $180
**

(F/P, 0.75%, 5) + $200 (F/P, 0.75%, 3)

= $400 (1.094) + $270 (1.078) + $100 (1.046) + $180 (1.038) +

$200 (1.023)

= $1,224.70

(same as above)

4-124

PW = $6.297m

Year

1

2

3

4

5

6

Cash Flows ($K) ±

15%

$2,000

$1,700

$1,445

$1,228

$1,044

$887

PW Factor 10%

PW ($K)

0.9091

0.9264

0.7513

0.6830

0.6209

0.5645

Total PW

$1,818

$1,405

$1,086

$839

$648

$501

= $6,297

Cash Flows ($K) ±

8%

$10,000

$10,800

$11,664

$12,597

PW Factor 6%

PW ($K)

0.9434

0.8900

0.8396

0.7921

Total PW

$9,434

$9,612

$9,793

$9,978

= $38,817

4-125

Year

1

2

3

4

4-126

Year

1

2

3

4

5

6

Cash Flows ($K) ±

15%

$30,000

$25,500

$21,675

$18,424

$15,660

$13,311

PW Factor 10%

PW ($K)

0.9091

0.9264

0.7513

0.6830

0.6209

0.5645

Total PW

$27,273

$21,074

$16,285

$12,584

$9,724

$7,514

= $94,453

4-127

Payment = 11K (A/P, 1%, 36)

= 11K (0.0332)

($365.357 for exact calculations)

Month

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

1% Interest

$365.36 Principal

$110.00

107.45

104.87

102.26

99.63

96.97

64.29

91.58

88.84

86.08

83.28

80.46

77.61

74.74

71.83

68.90

65.93

62.94

59.91

56.86

53.77

50.66

47.51

44.33

41.12

37.88

34.60

31.30

27.96

24.58

21.17

17.73

$255.36

257.91

260.49

263.09

265.73

268.38

271.07

273.78

276.52

279.28

282.07

284.89

287.74

290.62

293.53

296.46

299.43

302.42

305.45

308.50

311.58

314.70

317.85

321.03

324.24

327.48

330.75

334.06

337.40

340.78

344.18

347.63

= $365.2

Balance Due

$11,000.00

10,744.64

10,486.73

10,226.24

9,963.15

9697.41

9429.04

9157.97

8884.19

8607.68

8328.40

8046.32

7761.43

7473.69

7183.07

6889.54

6593.08

6293.65

5991.23

5685.74

5377.28

5065.70

4751.00

4433.15

4113.13

3787.89

3460.41

3129.66

3795.60

3458.20

2117.42

1773.24

1425.61

33

34

35

36

14.26

10.75

7.20

3.62

351.10

354.61

358.16

361.74

1074.51

719.90

361.74

0.00

4-128

Payment = 17K (A/P, 0.75%, 60) = 17K (0.0208)

($352.892 for exact calculations)

Month

0

1

2

3

4

5

6

7

8

6

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

0.75%

Interest

$352.89

Principal

$127.50

125.81

124.11

122.39

120.66

118.92

117.17

115.40

113.62

111.82

110.01

108.19

106.36

104.51

102.64

100.77

98.88

96.97

95.05

93.12

91.17

89.21

87.23

85.24

83.23

81.21

79.17

77.12

75.05

72.96

$225.39

227.08

228.79

230.50

232.23

233.97

235.73

237.49

239.28

241.07

242.88

244.70

246.54

278.38

250.25

252.12

254.02

255.92

257.84

259.77

261.72

263.68

265.66

237.65

269.66

271.68

273.72

275.78

277.84

279.93

Balance

Due

$17,000.00

$16,774.61

16,547.53

16,318.74

16,088.24

15,856.01

15,622.04

15,386.31

15,148.81

14,909.54

14,668.48

14,425.59

14,180.89

13,934.35

13,685.97

13,435.72

13,183.60

12,929.58

12,673.66

12,415.82

12,156.05

11,894.33

11,630.64

11,364.98

11,097.33

10,827.67

10,555.98

10,282.26

10,006.48

9,728.64

9,448.71

= $353.60

Month

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

0.75%

Interst

$358.89

Principal

$70.87

68.75

66.62

64.47

62.31

60.13

57.93

55.72

53.49

51.25

48.98

46.71

44.41

42.10

39.76

37.42

35.05

32.67

30.26

27.84

25.41

22.95

20.48

17.98

15.47

12.94

10.39

7.82

5.23

2.63

$282.03

284.14

286.27

288.42

290.58

292.76

294.96

297.17

299.40

301.64

303.91

306.19

308.48

310.80

313.13

315.48

317.84

320.23

322.63

325.05

327.48

329.94

332.45

334.91

337.42

339.95

342.50

345.07

347.66

350.27

Balance

Due

$9,448.71

9,166.68

8,882.54

8,596.27

8,307.85

8,017.27

7,724.51

7,429.55

7,132.38

6,832.98

6,531.33

6,227.43

5,921.24

5,612.76

5,301.96

4,988.83

4,673.36

4,355.52

4,035.29

3,712.66

3,387.62

6,030.13

2,730.19

2,397.77

2,062.86

1,725.44

1,385.49

1,042.99

697.92

350.27

0.00

4-129

See Excel output below:

4-130

See Excel output below:

4-131

Year

1

5%

Salary

$50,000.00

6%

Interest

10%

Deposit

$5,000.00

Total

$5,000.00

2

52,500.00

$300.00

5,250.00

10,550.00

3

55,125.00

633.00

5,512.50

16,695.50

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

57,881.25

60,775.31

63,814.08

67,004.78

70,355.02

73,872.77

77,566.41

81,444.73

85,516.97

89,792.82

94,282.46

98,996.58

103,946.41

109,143.73

114,600.92

120,330.96

126,347.51

132,664.89

139,298.13

146,263.04

153,576.19

161,255.00

169,317.75

177,783.63

186,672.82

196,006.46

205,806.78

216,097.12

226,901.97

238,247.07

250,159.43

262,667.40

275,800.77

289,590.81

304,070.35

319,273.86

1,001.73

1,409.12

1,858.32

2,352.70

2,895.90

3,491.78

4,144.52

4,858.59

5,638.78

6,490.20

7,418.37

8,429.17

9,528.90

6,434.59

7,475.53

8,611.66

9,850.35

11,199.45

12,667.41

14,263.24

15,996.62

17,877.87

19,918.07

22,129.06

24,523.51

27,114.96

29,917.89

32,947.81

36,221.26

39,755.95

43,570.79

47,685.99

52,123.15

56,905.35

62,057.21

67,605.07

5,788.13

6,077.53

6,381.41

6,700.48

7,035.50

7,387.28

7,756.64

8,144.47

8,551.70

8,979.28

9,428.25

9,899.66

10,394.64

10,914.37

11,460.09

12,033.10

12,634.75

13,266.49

13,929.81

14,626.30

15,357.62

16,125.50

16,931.77

17,778.36

18,667.28

19,600.65

20,580.68

21,609.71

22,690.20

23,824.71

25,015.94

26,266.74

27,580.08

28,959.08

30,407.03

31,927.39

23,485.36

30,972.01

39,211.74

48,264.92

58,196.32

69,075.37

80,976.53

93,979.60

108,170.07

123,639.56

140,486.18

158,815.01

107,243.13

124,592.09

143,527.71

164,172.47

186,657.57

211,123.51

237,720.73

266,610.28

297,964.51

331,967.88

368,817.73

408,725.16

451,915.95

498,631.55

549,130.13

603,687.64

662,599.10

726,179.75

794,766.48

868,719.21

948,422.44

1,034,286.87

1,126,751.11

1,226,283.57

40

335,237.56

73,577.01

33,523.76

1,333,384.34

4-132

Year $200,000

15%

1

$200,000

2

230,000

3

264,500

4

304,175

5

349,801

6

402,271

7

462,612

8

532,004

9

611,805,

10

703,575

**Potential Lost Profit -3% Incremental Cash
**

Flow (B (1 ± C)

1.00

$0.00

0.9700

6,900.00

0.9409

15,631.95

0.9127

26,562.69

0.8853

40,124.72

0.8587

56,827.27

0.8330

77,269.18

0.8080

102,153.89

0.7837

132,333.42

0.7602

168,695.49

PW 5

PW 10

PW (10%)

$0.00

5,702.48

11,744.52

18,142.67

24,914.29

32,077.51

39,651.31

47,655.54

56,111.00

65,039.42

= $60,503.96

= $301,038.74

4-133

Payment = 120K ð (/,10/12%,360) = 120K ð .00877572 = $1053.08

Month

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

0.83%

Interest

$1,000.00

999.56

999.11

998.66

998.21

997.75

997.29

996.82

996.36

995.88

995.41

994.93

994.44

993.95

993.46

992.96

992.46

991.96

991.45

990.93

990.42

989.89

989.37

988.84

988.30

987.76

987.22

986.67

986.11

985.56

984.99

984.43

983.85

983.28

982.69

982.11

981.52

980.92

$1,053.09

Principal

$53.09

53.53

53.97

54.42

54.88

55.33

55.80

56.26

56.73

57.20

57.68

58.16

58.64

59.13

59.63

60.12

60.62

61.13

61.64

62.15

62.67

63.19

63.72

64.25

64.79

65.33

65.87

66.42

66.97

67.53

68.09

68.66

69.23

69.81

70.39

70.98

71.57

72.17

Balance Due

$120,000.00

Month

50

119,946.91

119,893.399373

119,839.411424

119,784.99

119,730.11

119,674.77

119,618.98

119,562.72

119,505.99

119,448.79

119,391.11

119,332.95

119,274.30

119,215.17

119,155.54

119,095.42

119,034.79

118,973.67

118,912.03

118,849.87

118,787.20

118,724.01

118,660.29

118,596.04

118,531.26

118,465.93

118,400.06

118,333.64

118,266.67

118,199.14

118,131.05

118,062.39

117,993.15

117,923.34

117,852.95

117,781.98

117,710.41

117,638.24

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

0.83%

Interest

$1,053.09

Principal

Balance Due

$116,723.88

$972.70

972.03

971.35

970.67

969.99

969.29

968.60

967.89

967.18

966.47

965.74

965.02

964.28

963.54

962.80

962.04

961.28

960.52

959.75

958.97

958.19

957.39

956.60

955.79

954.98

954.16

953.34

952.51

951.67

950.83

949.97

949.11

948.25

947.37

946.49

945.61

944.71

943.81

$80.39

81.06

81.73

82.41

83.10

83.79

84.49

85.20

85.91

86.62

87.34

88.07

88.80

89.54

90.29

91.04

91.80

92.57

93.34

94.12

94.90

95.69

96.49

97.29

98.10

98.92

99.75

100.58

101.41

102.26

103.11

103.97

104.84

105.71

106.59

107.48

108.38

109.28

116,643.49

116,562.43

116,480.70

116,398.29

116,315.19

116,231.40

116,146.91

116,061.71

115,975.81

115,889.18

115,801.84

115,713.77

115,624.97

115,535.42

115,445.13

115,354.09

115,262.29

115,169.72

115,076.38

114,982.27

114,887.37

114,791.67

114,695.19

114,597.89

114,499.79

114,400.87

114,301.12

114,200.55

114,099.13

113,996.87

113,893.76

113,789.79

113,684.95

113,579.24

113,472.65

113,365.17

113,256.79

113,147.51

39

40

41

42

43

44

45

46

47

48

49

50

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

200

201

202

203

204

205

206

980.32

979.71

979.10

978.48

977.86

977.24

976.60

975.97

975.32

974.68

974.02

973.36

72.77

73.37

73.99

74.60

75.22

75.85

76.48

77.12

77.76

78.41

79.06

79.72

$931.36

930.34

929.32

928.29

927.25

926.20

925.14

924.08

923.00

921.92

920.82

919.72

918.61

917.49

916.36

915.22

914.07

912.91

911.75

$121.73

122.74

123.77

124.80

125.84

126.89

127.94

129.01

130.08

131.17

132.26

133.36

134.47

135.60

136.73

137.86

139.01

140.17

141.34

910.57

909.38

908.18

906.98

905.76

904.53

903.29

902.04

900.78

899.52

898.24

896.95

895.64

894.33

893.01

891.68

890.33

888.97

887.61

886.23

884.84

883.43

882.02

880.60

879.16

877.71

876.25

874.77

873.29

871.79

870.28

142.52

143.71

144.90

146.11

147.33

148.56

149.79

151.04

152.30

153.57

154.85

156.14

157.44

158.75

160.08

161.41

162.76

164.11

165.48

166.86

168.25

169.65

171.06

172.49

173.93

175.38

176.84

178.31

179.80

181.30

182.81

$773.96

771.63

769.29

766.92

764.54

762.13

$279.13

281.45

283.80

286.16

288.55

290.95

117,565.47

117,492.10

117,418.11

117,343.51

117,268.29

117,192.44

117,115.96

117,038.84

116,961.07

116,882.66

116,803.60

116,723.88

$111,762.91

111,641.18

111,518.44

111,394.68

111,269.88

111,144.04

111,017.16

110,889.21

110,760.20

110,630.12

110,498.95

110,366.69

110,233.33

110,098.85

109,963.26

109,826.53

109,688.67

109,549.65

109,409.48

109,268.14

89

90

91

92

93

94

95

96

97

98

99

100

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

109,125.62

108,981.92

108,837.01

108,690.90

108,543.58

108,395.02

108,245.23

108,094.18

107,941.88

107,788.31

107,633.46

107,477.32

107,319.88

107,161.13

107,001.05

106,839.64

106,676.88

106,512.77

106,347.29

106,180.43

106,012.18

105,842.53

105,671.47

105,498.98

105,325.05

105,149.67

104,972.84

104,794.52

104,614.72

104,433.43

104,250.62

$92,874.91

92,595.78

92,314.32

92,030.52

91,744.36

91,455.81

91,164.86

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

250

251

252

253

254

255

256

942.90

941.98

941.05

940.12

939.18

938.23

937.27

936.31

935.33

934.35

933.36

932.36

110.19

111.11

112.03

112.97

113.91

114.86

115.82

116.78

117.75

118.74

119.72

120.72

$868.76

867.22

865.67

864.11

862.53

860.95

859.34

857.73

856.10

854.46

852.81

851.14

849.45

847.76

846.05

844.32

842.58

840.83

839.06

$184.33

185.87

187.42

188.98

190.55

192.14

193.74

195.36

196.98

198.63

200.28

201.95

203.63

205.33

207.04

208.77

210.51

212.26

214.03

837.27

835.48

833.66

831.83

829.99

828.13

826.26

824.37

822.46

820.54

818.60

816.65

814.68

812.69

810.69

808.67

806.63

804.57

802.50

800.42

798.31

796.19

794.05

791.89

789.71

787.52

785.30

783.07

780.82

778.55

776.26

215.81

217.61

219.42

221.25

223.10

224.96

226.83

228.72

230.63

232.55

234.49

236.44

238.41

240.40

242.40

244.42

246.46

248.51

250.58

252.67

254.78

256.90

259.04

261.20

263.38

265.57

267.78

270.01

272.26

274.53

276.82

$630.41

626.89

623.33

619.75

616.14

612.50

$422.68

426.20

429.75

433.33

436.94

440.59

113,037.32

112,926.21

112,814.18

112,701.21

112,587.30

112,472.44

112,356.63

112,239.85

112,122.09

112,003.36

111,883.63

111,762.91

$104,250.62

104,066.29

103,880.42

103,693.01

103,504.03

103,313.48

103,121.34

102,927.60

102,732.24

102,535.26

102,336.63

102,136.35

101,934.40

101,730.77

101,525.44

101,318.40

101,109.63

100,899.13

100,686.87

100,472.84

100,257.03

100,039.42

99,819.99

99,598.74

99,375.64

99,150.69

98,923.86

98,695.14

98,464.51

98,231.96

97,997.48

97,761.04

97,522.62

97,282.23

97,039.83

96,795.41

96,548.95

96,300.44

96,049.85

95,797.18

95,542.41

95,285.51

95,026.47

94,765.27

94,501.90

94,236.33

93,968.54

93,698.53

93,426.26

93,151.73

92,874.91

$75,648.89

75,226.21

74,800.01

74,370.26

73,936.92

73,499.98

73,059.39

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

759.71

757.26

754.80

752.31

749.80

747.28

744.73

742.16

739.57

736.96

734.32

731.67

728.99

726.29

723.56

720.82

718.05

715.26

712.44

709.60

706.74

703.85

700.94

698.01

695.05

692.07

689.06

686.02

682.96

679.88

676.77

673.63

293.38

295.82

298.29

300.77

303.28

305.81

308.36

310.93

313.52

316.13

318.76

321.42

324.10

326.80

329.52

332.27

335.04

337.83

340.65

343.48

346.35

349.23

352.14

355.08

358.04

361.02

364.03

367.06

370.12

373.21

376.32

379.45

90,871.48

90,575.65

90,277.37

89,976.59

89,673.31

89,367.50

89,059.14

88,748.22

88,434.70

88,118.57

87,799.81

87,478.39

87,154.29

86,827.49

86,497.96

86,165.69

85,830.65

85,492.82

85,152.18

84,808.69

84,462.35

84,113.11

83,760.97

83,405.89

83,047.86

82,686.84

82,322.81

81,955.74

81,585.62

81,212.42

80,836.10

80,456.65

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

608.83

605.13

601.39

597.63

593.83

590.01

586.15

582.26

578.33

574.38

570.39

566.36

562.31

558.22

554.10

549.94

545.74

541.52

537.25

532.95

528.62

524.25

519.84

515.40

510.92

506.40

501.84

497.25

492.62

487.95

483.24

478.49

444.26

447.96

451.69

455.46

459.25

463.08

466.94

470.83

474.75

478.71

482.70

486.72

490.78

494.87

498.99

503.15

507.34

511.57

515.83

520.13

524.47

528.84

533.24

537.69

542.17

546.69

551.24

555.84

560.47

565.14

569.85

574.60

72,615.14

72,167.18

71,715.48

71,260.03

70,800.77

70,337.70

69,870.76

69,399.93

68,925.17

68,446.46

67,963.77

67,477.04

66,986.27

66,491.40

65,992.41

65,489.26

64,981.92

64,470.35

63,954.52

63,434.38

62,909.92

62,381.08

61,847.84

61,310.15

60,767.98

60,221.30

59,670.06

59,114.22

58,553.75

57,988.61

57,418.77

56,844.17

239

240

670.47

667.28

382.61

385.80

80,074.04

79,688.23

289

290

473.70

468.87

579.38

584.21

56,264.79

55,680.57

241

242

243

244

245

246

247

248

249

250

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

323

324

664.07

660.83

657.56

654.26

650.94

647.59

644.21

640.80

637.37

633.90

389.02

392.26

395.53

398.82

402.15

405.50

408.88

412.29

415.72

419.19

589.08

593.99

598.94

603.93

608.96

614.04

619.16

624.32

629.52

634.76

$640.05

645.39

650.77

656.19

661.66

667.17

672.73

678.34

683.99

689.69

695.44

701.23

707.08

712.97

718.91

724.90

730.94

737.03

743.17

749.37

755.61

761.91

768.26

774.66

291

292

293

294

295

296

297

298

299

300

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

352

353

354

464.00

459.10

454.15

449.15

444.12

439.05

433.93

428.77

423.57

418.32

$413.03

407.70

402.32

396.90

391.43

385.92

380.36

374.75

369.10

363.40

357.65

351.85

346.01

340.12

334.18

328.19

322.14

316.05

309.91

303.72

297.47

291.18

284.83

278.43

79,299.22

78,906.96

78,511.43

78,112.61

77,710.46

77,304.96

76,896.08

76,483.80

76,068.08

75,648.89

$49,563.88

48,923.82

48,278.43

47,627.67

46,971.48

46,309.82

45,642.65

44,969.92

44,291.59

43,607.60

42,917.91

42,222.47

41,521.24

40,814.16

40,101.20

39,382.29

38,657.39

37,926.45

37,189.41

36,446.24

35,696.87

34,941.26

34,179.35

33,411.09

32,636.43

$232.09

225.25

218.35

211.40

204.38

197.31

190.18

182.99

175.74

168.42

161.05

153.62

146.12

138.56

130.94

123.26

115.51

107.70

99.82

91.88

83.87

75.79

67.64

59.43

$820.99

827.84

834.73

841.69

848.70

855.78

862.91

870.10

877.35

884.66

892.03

899.47

906.96

914.52

922.14

929.83

937.58

945.39

953.27

961.21

969.22

977.30

985.44

993.65

55,091.49

54,497.50

53,898.56

53,294.63

52,685.67

52,071.63

51,452.47

50,828.16

50,198.64

49,563.88

$27,851.01

27,030.01

26,202.18

25,367.44

24,525.75

23,677.05

22,821.27

21,958.36

21,088.26

20,210.91

19,326.25

18,434.22

17,534.75

16,627.79

15,713.27

14,791.12

13,861.30

12,923.72

11,978.33

11,025.07

10,063.86

9,094.64

8,117.34

7,131.90

6,138.25

0 to 3.69 30.89 17.00 PW 9% -$2.38 5.851.020.020.70 1027.020. the furnace is paid off sooner.500 $935.15 42.080.70 1001. since the savings occur throughout the year rather than at the end of the year.21 31.92 .273.28 1018.22 27.12 787.71 $81.31 4.90 252.28 245.107.32 31.500 $1.33 2.97 265.78 $858.13 1.51 $787.81 807. etc. This is the cumulative PW in the last column below. but one of the easiest is to simply calculate the PW for years 0 to 1.38 0.126.19 1035.00 $1.067.136.00 4-134 There are several ways to solve this. The period with monthly figures is 34 months rather than the 35 months indicated below.500 -$1.46 258.48 814.22 -$705.00 $1.325 326 327 328 329 330 271.33 8.03 3.88 781.61 238.19 800.564. Note that if the average monthly cash flow savings of $85 are used.63 4-135 (a) See Excel output below: Cumulative PW -$2.50 29.70 28.93 1010.044.75 1044.38 25.665.80 34. Year 0 1 2 3 Cash Flow -$2. 0 to 2.01 355 356 357 358 359 360 51.855.62 794.472.

(b) See Excel output below: 4-136 See Excel output below: .

.

Chapter 5: Present Worth @nalysis 5-1 $10 $50 0 $15 0 $200 P P = $50 (P/A.50 .221) = $498. 3) . 10%. 15%. 12%.$100 (2.25 5-3 $30 0 $20 0 $10 0 P P = $300 (P/A.6575) = $82. 3) = $300 (2. 12%.626) + $30 (0. 2) + $30 (P/F.402) . 3) = $30 + $20 (1. 4) + $50 (P/è.40 5-2 $30 $30 $20 $20 P P = $30 + $20 (P/A. 4) = $50 (3.378) = $377.170) + $50 (4. 15%.$100 (P/è. 10%.

4241) = $272.8264 + 0.66 . 10%.6209 + 0. 9) = $50 (4. 10%. 3) = [$50 (4. 6)](P/F. 10%. 10%. 3) + $70 (P/F. 10%. 7) + $70 (P/F.355) (0.5132 + 0.67 @lternative Solution P = [$50 (P/A. 10%.76 5-5` $120 $120 $50 $50 $120 $50 P P = $50 (P/A. 5) + $70 (P/F.254) = $257. 2) = $50 (4.7513) + $70 (0. 6) (F/P.7513) = $272. 6) + $70(P/F. 10%. 6) (P/F. 2) + $70 (P/F. 4) + $70 (P/F. 10%. 12%. 10%.5-4 $50 $50 $50 $50 $50 $50 R R = $50 (P/A.355) + $70 (0. 10%.111) (1.6830 + 0. 12%.5645)] (0.

5) = $60 + $60 (3. i.170) + $120 (0.. n) = A1 [(1 ± (1. 10%. P P^ P^ = B/0.5-6 $120 $60 $60 $60 $60 $60 P P = $60 + $60 (P/A.. 10%. 3) = 10 B (0.15 ± 0.. q.10)4 (1.51 B .71 5-7 P = A1 (P/A..10)] = $200 (3. 10%. 4) + $120 (P/F..60 5-8 B B B «««.258) = $651.15)-4)/(0.6209) = $324.10 = 10 B P = P^ (P/F. «««.7513) = 7..

058092] = $475.951229) + $500 [0. 1) 5-10 $50 0 1 $500 2 3 P P = F e-rn + F* [(er ± 1)/(rern)] = $500 (0. %. %. 6) P = P* (F/P. %.5-9 Carved Equation è 2è 3è 4è Carved Diagram 5è è P* P* P* = è (P/è.29 = $916. 6) (F/P. 1) Thus: P = è (P/è.90 5-11 The cycle repeats with a cash flow as below: P 2è 3è 4è 5è . %.051271/0.61 + 441.

000 cash flow is a repeating annuity from time 13 to infinity (rather than indicating the repeating decreasing gradient series cycles).000 (P/F. 6%. 9) + $1.000} {0.$1.000 (4. 4) + $500 (P/F. 8%. 8%.$100 (A/è. 6) = $100 (4. 8%.000 P P = $9.000} {P/F. 8%. 10) + $145.637. 10) = $9. 8%. 18%. 8%.000 (P/A.404) + $900 (0. 18%. 6%.073 5-12 $145.155. In this case P is calculated as: P = [$500 . 4) + $900 (A/F.50 5-13 P = $100 (P/A. 8%.$100 (A/è. 4)](P/A.917) + $100 (11.2219)]/0.08 + $1.6806} = $4. 8%.000 (0.000 $40 0 $300 $20 0 P = {[$400 . 8)(P/F. 6) + $100 (P/è.000 (P/A.60 . 8%. ) (P/F. 12) = $7.$100 (1.1911) = $68. 4)]/0. 8%.494) + $145. 5) + $500 (P/F.459) = $1. 5} = {[$400 .000 A = $9.588 Alternative Solution: An alternate solution may be appropriate if one assumes that the $1.08 + $1.

540 (P/F.540 (0. 20) = $750 (10. 6%. P PW of Cost = PW of Benefits P = $750 (P/A.980 (0.400 $220 $1.8396) + $1.540 = PW of Benefits ± PW of Cost = $220 (P/F. 1) + $1.320 $1.400 = -$135.8900) + $1. Do not purchase equipment.41 NPW is negative. 3) + $1.320 (P/F. 20) + 0. 6%.$4.1P A = $750 n = 20 «««««.320 (0.5-14 0. 7%.97416 = $8156 5-15 Determine the cash flow: Year 0 1 2 3 4 NPW Cash Flow -$4.594) + 0.980 (P/F.$4.02584P P = $7945/(1-0. 2) + $1.1P (P/F.980 $1. 7%.02584) = $7945/0.2584) = $7945 + 0. 6%. . 6%..7921) .400 = $220 (0. 4) .1P (0.9434) + $1.

Dec. 31.1999 Jan. NPW 12 years = $420 + $420 (P/F.70 . 10) + ($0.977) = $18. 2) = -$140 (0.5-16 For end-of-year disbursements. 10%. 2000 NPW c c NPW 12/31/00 = -$140 NPW 12/31/97 = -$140 (P/F.710) + $500 (25.356 is the increased justifiable cost of the equipment. 1. 31. 1.356 This $18. 10) = $800 (6.25 x 8 hrs x 250 days) (P/è.8264) = -$115.40 x 8 hrs x 250 days) (P/A. 8%. NPW Dec.1998 Jan. 1997 Jan.09 5-18 Dec. 31. 10%. 8%. 6) = +$657. 5-17 6 years 6 years NPW +$420 +$420 NPW For the analysis period. PW of wage increases = ($0. the NPW of the new equipment = +$420 as the original equipment. 1.

35 5-20 (a) PW of Cost (b) PW of Cost (c) PW of Cost = ($26.000 + $7.3698) + (0.1972/0.5300)] = $33.020. 5) + $150 (P/è.000 + $7. hence their PW of Cost is greater.6686) = $122. 6) = $117.897 (d) Part (a) assumes end-of-year payments. 3%..1972/0.18e(0. 18%.183 = [($26.5%.500 [((e0.1972/0.2580) + (0.1972/0.2155) + (0.1972/0.400 = F Ȉ (n= 1 to 6) [(er ± 1)/(rern)] = $35. 3%. 1.580) + $150 (8. 5) = $150 (4.18)(2)) + .5-19 $15 0 $30 0 $45 0 $60 0 $75 0 P P = $150 (P/A.500)/12] (P/A.889) = $2.18)(1))) + ((e0.18 ± 1)/(0.18e(0.500 (3.3089) + (0. 72) = $122.] = $35.500) (P/A. Parts (b) and (c) assume earlier payments.000 [ (0.18 ± 1)/(0. .4427) + (0..1972/0.

4%.200 . 40) = $30 (19.6209) = $309.452) = $10.30) ($50. 10) + $500 (P/A. 10%.80 . 4%.000 (0.000 (8. 10%.50) ($50.000 (0. 40) + $1.791) + $40. 5) + $40.5-21 A= $500 A= $1. 5) = $1.000 P Maximum investment = Present Worth of Benefits = $1.000) (P/A.000 (P/A. 5) = ($1.000 (P/F. 337 5-22 $1.000) (3. 4%.000(P/F.111) + $500 (4.000 «««« A = $30 = 4% / period n = 40 P P = $30 (P/A.$4. 4%.793) + $1.2083) = $802 5-23 The maximum that the contractor would pay equals the PW of Benefits: = ($5.

000 (0.5-24 (a) A= quarterly payments «. 80) = $67.000 (P/A. the process should be automated.105 PW of Costs = $200.05 P Amount of new loan = 1.000 + $10.800 Since NPW is positive. 40) = $100. 10) = $200.417) = $67.145) + $10. 2%.000.417 .638 Ruarterly payment on new loan = $67.000 + $9. 9%.330 (14.05 ($64.330 (P/A. ««.626 5-25 The objective is to determine if the Net Present Worth is non-negative.145) = $255.000 (P/A. 10) = $50.000 (P/A.000 (0.$255. 20) = $4.704 = $2.$1. 10%.00 0 = 3% n = 20 P A = $100.000 = $64.638 (0.330 ..000 (P/F. NPW of Benefits = $50.000 (6.305 = $55.. 3%. 10%. 80) = $811.000 (6.3855) = $311.000. 10%.638 (A/P.000.0433) = $4.330 P = $4.877) (b) Service Charge = 0. 5-26 (a) PW Costs = $700.0252) = $1.000 (A/P.105 . 305 NPW = $311.704 Difference in quarterly payments = $4.000 + $9. 3%. 10) + $10. = 3% n = 20 $100.

000 = 60 months A = $12. 9%.50% /month = $250 (27.000.000 = $38.000 (0. 10) + ($1.003705 P = A[((1 + )n ± 1)/((1 + )n)] = $199 [((1.000) (90) (P/è. 10) + ($50. 60) 1. 60) = A/P = $250/$12. 36) 1. (b) Other considerations: Engineering feasibility Ability to finance the project Effect on trade with Brazil Military/national security considerations 5-27 ? = 36 months P = $250 (P/A.PW Receipts = ($550. 10) = $849.000) (90) (P/A.0% /month = $12. 9%.000.915 5-28 $12.003705 (1.000 NPW = $849. .003705)60)] = $10. 70) (P/F.0208 = 9% per year 5-30 month = (1 + (0.000 (A/P. 5-29 Find : (A/P.000.000.000 From tables. = ¾% per month = 0.000 This project meets the 9% minimum rate of return as NPW is positive.000) (90) (P/A.688 =? .661) = $250 = $6. 1%.0222) = $266 $266 > $250 and therefore she cannot afford the new car.5%.000 . 1.$811.003705)60 ± 1)/(0.000.045/365))30 ± 1 = 0. 9%. 9%.

3%. 40) + $5. purchase the machine.231.045/2) = $112.60 + $306. 40) + $1. 12%. 13) = -$980.70 (27. 2%.4529) = $3.2292) = $309.000 (0. 2%. 40) = $55.000 (P/F.50 per 6 months Probably the simplest approach is to resolve the $112.788 .000 AB = the annual benefit = $200.50 (0.4951) = $55. NPW = . as NPW is positive. 13) + F (P/F.60 = $1. 3%.000 (0. A P = $1.20 5-33 The interest the investor would receive is: = $5.50 (A/F.000 + $200.70 = $55.50 payments every 6 months into equivalent payments every 3 months: $112.000 (P/F.70 (P/A. 12%.P + AB (P/A.000 (0.384 Therefore.355) + $5.000 (6.424) + $20. 2%.5-31 P = the first cost = $980. 2) PW of Bond = $112.08%)/(2 payments/year) = $40 = $40 (P/A. Also.000 Remember our convention of the costs being negative and the benefits being positive.000 F = the salvage value = $20. remember the occurs at time = 0. 40) = $924.50 A = $112. 5-32 The market value of the bond is the present worth of the future interest payments and the face value on the current 6% yield on bonds.000 (0.

5-34 $360. 4%.000) (A/F. P¶ = present worth of an inifinite series = A/i A = 6 ($60.0839)/0.000 P = ($216.000 + $360. 25) = $360.05 = $1.000/0.000 $360.800 .000 5-37 Capitalized Cost = PW of an infinite analysis period When n PW = or P = A/ = $5. 8%.08 = $62.000/0.000) (P/F.000 A ««.000 (0.000 (A/P.08 = $837. 4%. A « «««««.04 = $216.000 (0..000 (0. 10) = $576.500 + $150.08 + $150.00/0.. 40)/0.00 / year 2) A ³conservative´ interest rate²say 5% P = A/ = $50.6756) = $389.150 5-35 P = A/ = $67. A A « A ««.000 A $360.0240) = $8640 P¶ = A/i = $8640/0.500 5-36 Two assumptions are needed: 1) Value of an urn of cherry blossoms (plus the cost to have the bank administer the trust) ± say $50.08 = $219.

662 5-41 Capitalized Cost = $2.05062) = $1.000/0.000 (0. 50) = $125.08 = $125. P = A/ = $7.0213) = $2.000 + $15.005 = $200.000 (0.000 The amount of money that would need to have been deposited 50 years ago at 8% interest is: P = $125.000 (P/F.00 0 ««.000/0.000 5-40 The amount of money needed now to begin the perpetual payments is: P¶ = A/ = $10.265.60 ..0625% Annual Withdrawal = P A = $25.000 (A/F.000. A = $100. 5%. 10) = $100.3 million 5-42 Effective annual interest rate = (1.000 a month she must deposit: P = A/ = $1.0795) = $7.050625 = 5. P Compute an A that is equivalent to $100.5-38 A $100.000 (0.05 = $2.950/0.00 0 $100.05 = $159. 8%.025)2 ± 1 = 0.000/0.000 5-39 To provide $1.000 at the end of 10 years.950 For an infinite series.

5)]/0.06 = $2.000 = $100.2286) P = A/ = $381.000 .08 = $50/0.08 = $5.461) + $300 (0.000 + $2.08 = $8. 6%.000 = $22.000 (0.1705) (12.000 + $200/0.000 + $200 (P/A. 5%.881 million 5-44 = 5% P = $50/0.461) = $8.5 million (3) $100. 8%.860 = $100.08 = $2. 4)/0.000.000/0.130 5-46 ? P = A/ = = $100. 75) = $5.5-43 The trust fund has three components: (1) P = $1 million (2) For n = P= A/ = $150. 8%.000 + $200 (12. 75) + $300 (A/F. Solving one portion of the perpetual series for A: A = $100. 5) (P/A.000 every 4 years: First compute equivalent A.500 + $300 (0.000 = $3.06 Required money in trust fund = $1 million + $2.139 (b) P = $5.05 + [$500 (0.10 10% = $1.08 + $300 (A/F.860/0.000 (A/F. 4) = $22.1705)/0.1810)]/0.810 5-45 (a) P = $5. 8%.5 million + $381.05 + [$500 (A/F. 8%.000/0.

600.000 (P/A. 2) = $50 (0.000 (0. 4%. P = $50 (P/F.000 per year after 25 years. 25) + $12.72 Since the lifetime muffler costs an additional $15. 25) = $14.000 + $100.400. Thus after 25 years all costs are identical.5-47 2 year Lifetime $50 $50 $65 By buying the ³lifetime´ muffler the car owner will avoid paying $50 two years hence.000 (15.000 Choose two stage construction.200. 5-48 Compute the PW of Cost for a 25-year analysis period.000 (P/A.622) + $12.200.6944)= $34. Single Stage Construction PW of Cost = $22. Compute how much he is willing to pay now to avoid the future $50 disbursement. it appears to be the desirable alternative.600.000 + $75.000 (P/F.622) = $23. 20%.000 + $100. 25) = $22.400. Note that in both cases the annual maintenance is $100.000 Two Stage Construction PW Cost =$14.000 (15. 4%.098.3751) = $20.962. 4%.000 + $75. 5-49 or $58 $58 $58 $116 .

800 (P/A.300 .000 + $15.$10.335) .300 .$5. 10%. 8) . the objective is to minimize cost. (a) Present Worth of Cost for Option 1: PW of Cost = $200.000 (P/F. 6%. 20) (P/F.6944) = $146. .100 (5. 5-52 The revenues are common.50 Select Alternate A.800 (5. 8) .000 (P/A. 5) + $100 (P/è. 10%.934) = $1. 5-50 NPW = PW of Benefits ± PW of Cost NPW of 8 years of alternate A = $1.300 (0.700 = $2. 10%.300 (P/F.300 = $100 (P/A.$5.212 + 7.Three One-Year Subscriptions PW of Cost = $58 + $58 (P/F.8333 + 0. 5) = $100 (4.000 + $150. 30) = $341.$5. choose B. 30) + $10.335) . 4) = $1. 20%. 10%. 1) + $58 (P/F. 10) .100 (P/A. 20%.10 NPW of 8 years of alternate B = $2.000 (P/A. 10%. 10%. 5-51 PW of CostA PW of CostB = $1. 10%.215 To minimize PW of Cost.$10. 400 Present Worth of Cost for Option 2: PW of Cost = $150. 10%. 6%.61 One Three-Year Subscription PW of Cost = $116 Choose the three-year subscription.700 = $503.2) = $58 (1 + 0.$5.6830) = $683. 10) + $10.000 (P/A.

000 + $150. 10%. 10%. 5-53 PW of Costwheel = $50.000 (8.270 (a) Buy Model B because it has a positive NPW. 10) + $30. 5) = $394.= $150.000 .000 (P/F.000 (P/A. 8%. 5) = $73.000 (0.$2. 10) = -$50.3855) = $334.418) + $9.$10. 9%.$1. 10) + $12. (b) The cost for option 1 will not change.418) + $30.190 The wheel mounted backhoe.000 (6.000 (P/A.000 (P/A.605) . 30) + $10. 10) + $10.000 .3855) + $10. 25) (P/F.00O (0.514) (0.300 Therefore. 9%. 10) = -$80. 8%.000 (P/F.000 (9. 9%. with its smaller PW of Cost.000 .000 (P/F.418) + $10. it is better to do nothing or look for more alternatives.936 . 5) + Salvage Value (P/F.$2.000 (P/A.$2.900 Select option 2 because it has a smaller Present Worth of Cost.605) + $15.000 (3. 12%.000 (0. 12%.000 (6.First Cost + Annual Benefit (P/A.427) + $10. 5) ± Maintenance & Operating Costs (P/A. 10%. 10) + $9.4224) = -$850 NPW B = -$80.000 (P/F. 5) = -$250.640 PW of Costtrack = $80.000 (3.5674) = $64. The cost for option 2 will now be higher.000 (0. 5-55 Machine @ NPW = . 12%.$1.418) + $12. therefore. 9%.000 + $150.4224) = +$3. 5) = $48.000 .000 (P/F.000 . 5) + $10.000 (P/A. PW of Cost = $150. 9%. the answer will change to option 1.000 (6.000 (6. 9%.000 (P/A.000 + $89. 10%. is preferred. 5-54 NPW A = -$50. (b) The NPW of Model A is negative.$4.000 .

6%. 12%.605) + $15. 5) + Salvage Value (P/F.890 (11.$10.000 + $4.$3.000 + $86.$4.851 = $100.594) = $90.$10.000 .000 (P/F.$10.5584) = $3.470) .000 .000) (P/A.000 = $2.549 Alt. 20) = $100. 20) .530 (11.$20.055 Alt.000 . 20) .000 = $1.2584) = $93. Foxhill PW of Cost Quicksilver PW of Cost @lmeden PW of Cost = $35.500) (P/A. 7%.000 (0. 12%. 10) = $1.$10.040 Choose Machine B because it has a greater NPW. 20) .890 (P/A.$15.800 (10.594) . B NPW = $1.$2. C NPW = $1.530 (P/A. 6%.000 (3. 7%.First Cost + Annual Benefit (P/A.200) (P/A.500 (10. 6%.000 (0.470) . A NPW = $1.Machine B NPW = . 12%.000 (P/F.5674) = $98.$2.300 (3. 20) = $35.000 (10.000 .´ choose the alternative with the least Present Worth of Cost.000 = $1. 20) .605) .$20.000 = $1.000 .000 + ($7.000 . 20) = $40.109 Select the Almaden bid. 5-57 Use a 20-year analysis period: Alt.470) . 7%. 5) = -$205.594) = $84.625 (P/A. 5-56 Since the necessary waste treatment and mercury recovery is classed as ³Fixed Output.$20.625 (11.678 . 6%. 7%.396 = $40.000 + ($2.$1.$15.000 (0. 5) ± Maintenance & Operating Costs (P/A.$20.000 + ($8.000 + $6.

400 (2. 15%.000 + ($8. 20) + PW of Fuel Oil Cost = $180.500 (0.000 + $7.000 $55. 5-60 The least common multiple life is 12 years.$400) (P/A.404 Company C NPW = -$20.000 > Fuel Oil For fixed output.000 .987 Company B NPW = -$25. 4) + $4. 15%. 8%.818) + PW of Fuel Oil Cost = $32.855) + $4.855) + $6.500 (P/A.000 + ($11.855) + $3. so this will be used as the analysis period.600 (2.100 (2.000 (0.500 (P/F.$15.000 $180.000 + $6.600)(P/A. 20) + PW of Fuel Oil Cost = $30.5718) = $4.$15. minimize PW of Cost: Natural Gas PW of Cost Fuel Oil PW of Cost Coal PW of Cost = $30. 15%. 4) + $6. 8%.818) + PW of Fuel Oil Cost = $103. 4) = -$20.500 > Fuel Oil $15.000 (0.$900) (P/A. 5-59 Company @ NPW = -$15. 15%. .000 .000 (P/F.000 . 5-58 Fuel Natural èas Fuel Oil Coal Installed Cost $30.500 (9.5718) = $14.409 To maximize NPW select Company B¶s office equipment.Choose Alternative A.000 + $12.730 + PW of Fuel Oil Cost Install the coal-fired steam boiler.000 + $10.5718) = $11.000 .000 (P/F. 15%.000 + PW of Fuel Oil Cost = $180.000 + $7.000 (P/A.635 + PW of Fuel Oil Cost = $55. 4) = -$25.000 .000 Annual Fuel Cost $7. 4) + $3.$1.000 (9. 4) = -$15.000 + ($13. 15%.

12)-8] = $53.$3 (P/F.000 . 12%.000(P/F. 12%.000 + $69. 12%.000(P/F.000)(P/A.$3 (0.850 + $5. 12%.846 Machine C NPW 12 =-$67.625 = $37.000 .$15. 12%. 4) + (P/F. 12)+$22.067 NPW 12 = NPW 6 [1 + (P/F. 12%. 4) = -$52.$9.000 + $90. 15) = $6 + $5.000 .067 [1 + (1.113 NPW 12= NPW 4 [1 + (P/F. 8%. 12) = -$67. 8%.50 0 $6 PW of Cost 10 15 20 $6 = $6 + $5.851 + $8. 4) + $13.000(P/F.000)(P/A.Machine @ NPW 4 = -$52.12)-4 + (1. 6)] = $37.497 Machine C is the correct choice. 12%.000 + $154.12)-6] = $55. 12%. 6) = -$63.$12.50 (P/F. 5-61 It appears that there are four alternative plans for the ties: 1) Use treated ties initially and as the replacement $3 $0.000)(P/A.60 .50 (0.000+($37.000 + ($38.4632) . 8)] = $26.000 + ($31. 6) + $19.255 Machine B NPW 6 = -$63. 10) .442 + $9.3152) = $7. 12%.262 = $26.647 = $93.113 [1 + (1.

6) .$0.50 0 $0.50 (0.$0. 15) = $4.50 + $4 (0.3152) = $7.50 12 15 $4.3971) .50 $0.50 (P/F.3152) = $7.6302) + $4 (0.50 15 $6 PW of Cost = $4.$0.50 (0. Replace with treated ties.50 + $4 (P/F.70 3) Use untreated ties initially.50 (P/F. Replace with untreated ties. then two replacements with untreated ties.$0. 12) .50 (0. $0.50 $6 PW of Cost = $6 + $4 (P/F.2) Use treated ties initially. 8%.50 (0. 8%.50 + $5. 10) ± $0.45 .50 $0.$0. 8%. 8%. 8%. 8%.50 10 15 16 $4.50 (P/F.50 $0.4632) . 15) = $6 + $4 (0.50 (P/F.3152) = $8. $0.50 PW of Cost = $4.50 6 16 0 $4.50 6 18 0 $4.81 4) Use untreated ties initially.50 + $5. 15) = $4.50 $4.6302) . $0. 8%. 6) + $4 (P/F.

From the 10% interest table: (P/A. 5) (P/F.66 $33.66 + 0 = 27.683 $40 x 0.6209) = $638 = $150 (P/A. 10%.82 $45.01 PW of Benefit = $25.00 $33. 5) = $100 (3.49 NPW per $1 invested +0.66 = $33.170 (P/F.37 $52.75 $45.S. 10%. 5-62 This is a situation of Fixed Input.40 Choose Alternative E.170 + 3.09 0 -0. with its greater benefits.62 $12. maximize PW of benefits.170 + 4.6209) = $686. 4) = 3.791) (0.98 + 9.26 = 28.00 = $28. 10%.683 Western House Fine Foods PW of Future Price $32 x 0.04 In this problem.93 +1.50 x 3.82 = $45.00 $30.69 + 0 = 13.683 PW of Dividends + 1. 10%. 4) = 0. 5) (P/F.34 = 40. Tire Wine Products $42 x 0.791) + $50 (3.66 $50.06 +0.86 + 3.50 = 21. Tire Wine Products PW of Benefit PW of Cost $25. 10%.29 .2.07 0 -1. . E is preferred over D. Therefore.66 +0.683 $45 x 0. 5) + $50 (P/A. The problem is reduced to choosing between C and E.25 x 3.49 $23. By inspection. one can see that C.170 + 2.683 + 0 x 3.96 = 30. 5) + $110 (P/A. choosing to Maximize NPW per share leads to Western House.32 + 6.51 NPW per share +2.170 Western House Find Foods Mobile Motors Spartan Products U. 10%.14 +0.S.683 $60 x 0.01 -0.170 Mobile Motors Spartan Products U. 5) = $150 (3. @lternative C PW of Benefits @lternative E PW of Benefits = $100 (P/A.74 + 14.791) (0.00 x 3.69 $13. 5-63 Compute the Present Worth of Benefit for each share.00 x 3.69 = $13.791) + $110 (3.170 + 0 x 3. 10%.Choose Alternative 1 to minimize cost.66 = $50.00 $28. Similarly. 10%.683 $20 x 0. is preferred over A and B. But the student should recognize that this is a faulty criterion.

32 (P/A. .An investment of some lump sum of money (like $1. 5-64 NPW A NPW B NPW C NPW D NPW E NPW F = $6.80 $37. Buy Spartan Products.32 (P/A. 6) .74 = +$7. It would buy 83 shares of Spartan Products. 8%. A = P = $375 (0.70 $159. 8%.20 $350.30 $141.76 = +$6.$35 = $13.30 $43.80 $202. is to maximize NPW for the amount invested.40 $19. 6) . The criterion.40 $239.43 Choose E. This could be stated as Maximize NPW per $1 invested. 5-65 Eight mutually exclusive alternatives: Plan 1 2 3 4 5 6 7 8 Initial Cost $265 $220 $180 $100 $305 $130 $245 $165 Net Annual Benefit x (P/A.30 $11.000) will purchase different numbers of shares of the various shares.$100 = +$7.70 = +$32.78 (P/A.80 $45.43 = +$12.$60 = $24.70 -$20. but only 42 shares of Western House.00 (P/A.$80 = $24.145 $51 $39 $26 $15 $57 $23 $47 $33 PW of Benefit $313. therefore. 6) .80 To maximize NPW. 8%.38 (P/A. 8%.04) = $15 But this is not quite the situation here. 6) . 5-66 $375 invested at 4% interest produces a perpetual annual income of $15. choose Plan 1. 8%. 10) 6.86 = +$3.20 -$7.80 $92. 6) .$20 = $9.25 (P/A.80 NPW = PW of Benefit minus Cost $48.$55 = $13. 10%. 6) .30 $288. 8%.

920 Cap.07 = $556.000/0.000/0.000 + $25. 10)]/0. (But that¶s probably not why people buy patron memberships or avoid buying them. 4%.12 = $500.000 + ($40. P = A (P/A. 5-68 Full Capacity Tunnel Capitalized Cost = $556.000 + $35. 4%.0724))/0.12 = $700.07 = $597.12 + [$350.A = $15 «««««.400 .12 + [$450. 10))/0. 12%. 7%.008. ) (P/A. Lifetime (patron) membership is not economically sound unless one expects to be active for 82 + 1 = 83 years. Compute . ) $360 = $15 (P/A.12 + [$450.000(A/F.000/0. CostA = $500. = 82. CostB = $700.000 + $25.12 = $957.000 + $35.000/0. Continuing Membership Lifetime Membership $375 An additional $360 now instead of annual payments of $15 each.) 5-67 Cap. ) = $360/$15 = 24 From the 4% interest table. 15)]/0.0268)]/0.830 Type A with its smaller capitalized cost is preferred. 12%.000 (0. 4%.000 + ($40.000 (0.000 (A/F.12 + [$350.000 (A/F.000 (0.12 = $1.0570)]/.

0573) = $92. Capitalized Cost = $463. 10%.000 n = 10 A= $45.700 (P/F.07] = $463.000 (P/F.07] + [$2.700 (A/P.000 (0. 20) . 5-69 $3.700 + $119.000 + [($32.000 + $2. 10%.000/0.000 (0.700 n = 10 A = $2.000 $2.713 . 30) + $42.427) + $42.700 (0. 10%.000 + $2.800 Capitalized Cost for two half-capacity tunnels = $463.700 $45. 7%.000 $3. 20) = $463.000 $3.700 Second Half-Capacity Tunnel 20 years hence the capitalized cost of the second half-capacity tunnel equals the present capitalized cost of the first half.$3. 10%.700 n = 10 A = $2.1486) ± $3.0724))/0.000 PW of Cost of 30 years of Westinghome = $45.000 $45.800 = $583.000 (0.000 (P/F.500 Build the full capacity tunnel.3855) + $42.000 (0. 30) = $45.First Half Capacity Tunnel Capitalized Cost = $402.2584) = $119.700 (9. 10) + $42.000 ( P/F.

500 (0. 15) .850 (P/A.500 $4. Thus we use 12 years and assume repeatability of the cash flows.9420) = $80. 1%. 6) = $21. 10%. 10%.850 A = $2.346 Award the job to Faultless Paving. 6) + $21.8874) = $81. 1%. minimize the Present Worth of Cost.9420) + $21.459 The Itis bid has a slightly lower cost.000 $2.$4. 30) = $54.375 Tartan Paving PW of Cost = $82.$4.000 + $63.500 n = 15 $3. Quick Paving PW of Cost = $42. 10%.850 $54.500 (P/F.000 Faultless Paving PW of Cost = $21. 30) + $49.000 (0.2394) .250 (P/F.000 n = 15 A= $54.427) + $49.000 + $2.500 + $21.000 + $63.500 (P/F. 1%.250 (0.500 (0. .000 + $2.250 (P/F.850 (9.500 + $21.$4. 12) = $42. 5-70 For fixed output. 5-71 Using the PW Method the study period is a common multiple of the lives of the alternatives.000 PW of Cost of 30 years of Itis = $54.250 (0.0573) = $92.000 (P/F.

000 + $2.000 .$2. 10%.$29.$15.000 0 12 2 4 6 8 10 $10.872 @lternative B $10. 3) + (P/F. 10%. 10%. 8) + (P/F.000 $15.000 (P/A.$15.$637 .140 .000 . 10%.000 ± ($10. 2) + (P/F.$1.000 ± ($15.884 + $319 . 10)] = $40.000 .578 = $22. 10%. 10%.$10. 6) + (P/F.000 (P/è.000)[(P/F.000 $6. 12) .000) [(P/F. 12) . 10%. 12) . 10%.000 NPW = $6.000 (P/F.000 NPW = $10. 4) + (P/F. 10%. 10%.$10. 9)] = $68. 10%.925 .@lternative @ $1.$26.000 (P/A.331 = $4. 12) + $1. 6) + (P/F.000 0 12 3 6 9 $2. 10%.000 $2.

10) .$350 (P/F. 12) + $3.55 NPW 2 = ($100 + $250) (P/A.5 (6. 9%.13 Select alternative A with NPW = 0. 5) .$50 = -$4.$12. 5-72 NPW = PW of Benefits ± PW of Cost NPW A NPW B NPW C NPW D =0 = $12 (P/A. 10) . 10) .51 = $4. (a) 8% interest NPW 1 = $135 (P/A.000 NPW = $5. 10) = +$54.$40 = $12 (3. 10%. 12) .000 ± ($12.38 NPW 4 = $0 Choose Alternative 1.145) .000 $12. 10%. 5-73 Choose the alternative to maximize NPW.$50 = $4. 4) + (P/F.681 Choose Alternative B.$40 = -$3.000 (P/F.5(P/A.000 . .000 0 4 8 12 $2.145) . 8%. 8%. 8)] = $34. 10%.$600 .$500 (P/F.35 = $6 (6. 8%.000 .070 + $956 . 5) = -$51. 10) .791) . 10%.000 (P/A. 10%.$12. 10%.$30 = $6 (P/A.$500 . 10%.41 NPW 3 = $100 (P/A.000 $5.$30 = -$2.345 = $12. 5) = +$65.$700 + $180 (P/F.@lternative C $3. 8%.000) [(P/F. 10) .$10.$3. 8%.

B2.09 NPW 3 = $100 (P/A.$350 (P/F.$500 . 10) .B1) for Present Worth obtain: 1 2 3 4 @ Payment N Interest rate PW B $6. 5-74 Using the Excel function = -PV (B3.711 . 12%.04 NPW 4 = $0 Choose Alternative 4.50% $21. 12%.(b) 12% interest NPW 1 = $135 (P/A.B1) for Present Worth obtain: 1 2 3 4 @ Payment N Interest rate PW B $500 48 0.$500 (P/F. 5) = -$153. 10) .B2. 12%. 12%.791 5-76 Using the Excel function = -PV (B3.000 4 6.B1) for Present Worth obtain: 1 2 3 4 @ Payment N Interest rate PW B $6.95 NPW 2 = ($100 + $250) (P/A.000 4 6% $20. 12%.$700 + $180 (P/F. 10) = -$77.$600 .290 5-75 Using the Excel function = -PV (B3. 5) = -$20.B2.168% $20. 10) . 12%.

Problem 5-80 has the same effective interest rate as 5-77. but the rate on 5-75 is lower.5-77 Problem 5-74 will repay the largest loan because the payments start at the end of the month.B1) for Present Worth obtain: 1 2 3 4 @ B Payment 1000 N 360 Interest rate 0. but the rate on 5-79 is lower.B2.168% PW $162. rather than waiting until the end of the year. . 5-78 Using the Excel function = -PV (B3.792 5-79 Using the Excel function = -PV (B3.50% PW $166.B1) for Present Worth obtain: 1 2 3 4 @ B Payment 12000 N 30 Interest rate 6. rather than waiting until the end of the year.B2.B1) for Present Worth obtain: 1 2 3 4 @ B Payment 12000 N 30 Interest rate 6% PW $165.B2.251 5-81 Problem 5-78 will repay the largest loan because the payments start at the end of the first month.178 5-80 Using the Excel function = -PV (B3. Problem 5-76 has the same effective interest rate as 5-74.

00 5.25 6. A3.4972 0.0000 0.75 5.5645 total -42000 11364 12397 16905 17075 9935 1693 27368 So do.7513 0.8696 2 3 4 5 6 7 -60000 20000 40000 80000 100000 60000 0.25 4.00 -42000 12500 15000 22500 25000 16000 3000 1..25 3.75 2. E4:E9) + E3 Notice that NPV function starts with year 1.50 3.368 = NPV(A1.8264 0..6209 0. 5-83 Using a 10% interest rate.-1) 1 2 3 4 5 6 7 8 9 @ year 0 1 2 3 4 5 6 B annual sales 0 5000 6000 9000 10000 8000 4000 C Cost/unit D Price/unit E Net revenue F (P/F. and year 0 is added in separately. use the excel function = PV ($A$1.n) G PW 3.50 3.0000 0. A3.00 2.i. and year 0 is added in separately.7561 0.6575 0.50 5.50 2.9091 0.133 = NPV (A1. solve for PW using the function = PV ($A$1. B4:B10) + B3 Notice that NPV function starts with year 1. .6830 0.5718 0.i.5-82 At a 15% rate of interest.3759 total D PW 0 104348 -45369 13150 22870 39774 43233 22556 -8133 So don¶t do.-1) for Present Worth.4323 0. Can also solve without P/F column by using NPV function: PW = $27. 1 2 3 4 5 6 7 8 9 10 @ Year 0 1 B Net Cash 0 -120000 C (P/F.n) 1. This problem can also be solved by using NPV function: PW = -$8.

3759 total PW -8000000 608696 952741 867921 571753 357967 276690 157894 -4206338 So do. A3. solve for PW using the function = PV ($A$1. Can also solve without P/F column by using NPV function: PW = -$4.0000 0. ..-1) @ 1 2 3 4 5 6 7 8 9 10 year 0 1 2 3 4 5 6 7 B annual prod.5718 0.i. E4:E10) + E3 Notice that NPV function starts with year 1.338 = NPV(A1.8696 0.n) 1.5-84 Using interest=15%.6575 0.4323 0. and year 0 is added in separately.206.4972 0. 0 70000 90000 120000 100000 80000 60000 40000 C D Cost/unit Price/unit 25 20 22 24 26 28 30 35 34 33 34 35 36 37 E Net revenue -8000000 700000 1260000 1320000 1000000 720000 640000 420000 F G (P/F.7561 0.

0 4)] (A/F. 15%.$15 (1. 5) = [$100 + $100 (1.$15 (A/è.72 6-2 B B B B B B $10 $10 0 = [$100 + $100 (F/P. 4) = $15 + $15 (1.359) = $39.77 6-3 $60 E E $45 E $30 $15 E E = $60 . 10%. 12%.381) = $35. 4) = $60 . 15%.749)] (0.62 .1483) = $40.Chapter 6: @nnual Cash Flow @nalysis 6-1 $15 $45 $30 $60 C C C C C = $15 + $15 (A/è.

124) + $200 (1. 1) + $10 (P/F.1434) = $52. 6%. 4)] (A/F. 10%.5 + 1.564 = $89.6-4 $200 $100 D D D D D D D = [$100 (F/P. 6%.690) D = $500/5. 2) + $200 (F/P.374 + 0. 6%.86 6-6 $40 $30 C $20 C $10 $10 C C x x = $40 + $10 (P/A.262)] (0. 2) .5D + D (P/A. 10%. 12%.5D D D D $50 $500 0 = D (F/A. 2) = D (3. 12%. 10%. 3) + 0. 6) = [$100 (1.31 6-5 D 1. 4) + $20 (P/F.

6830) = $132. 10%. 4) . 10%. 10%. 4) + [$20 (P/A.9091) + $10 (0. n= Pattern repeats infinitely A There is a repeating series:.90 A = $132.3155) = $30.487) + $10 (2. 7) = $132.90 (A/P. 4) = $98. A = $100 + [$100 (P/F.15 (A/P. 10%.170) .97 6-7 $40 $30 $20 $10 $20 $30 $40 P P = $40 (P/A.15 (0.378) + [$20 (2. 3)] (P/F.90 (0. 100 ± 200 ± 300 ± 200.$10 (4. 3) + $10 (P/è.170) + $20 (0.30 6-8 $300 $10 0 $20 0 $20 0 $10 0 $20 0 $30 0 $200 ««««. 3) . 4 = $40 (3.2054) = $27.8264) = $98.= $40 + $10 (3. 2) + $200 (P/F. 10%. Solving this series for A gives us the A for the infinite series.15 C = $98. 10%. 10%.$10 (P/è.329)] (0. 10%. 10%.

3) = $100 (0. 10%.10) + $3. 1) (A/P.5%.$60.8254) + $200 (0. 10%.000 (A/F. 8) = A + $35.000.69 6-10 EUAC = $60.20] (0. they should compute: $60.9091) (0.000 + $3.000 + $1.000 (0. In this situation the annual capital recovery cost equals interest on the investment.7513) + $100 (0. 4) = $6. This equals P*i = $60.+ $100 (P/F. If anyone doubts this.03 6-9 A A A $100 A = $100 (A/P. 10%. 10%.000 (A/P.3155) = $100 + [$301. 10%.000 (0.287 This is the relatively unusual situation where Cost = Salvage Value. 8) .3155) = $195. 4)] (A/P. 4) = $100 + [$100 (0.000 (A/P.000 (P/F. 2).3569) = $35. 3. 6-11 Prospective Cash Flow: Year Cash Flow 0 -$30.000 + $1.000 1-8 +A 8 +$35. 4) . 15%. 15%.10) = $6.3155) = $9.000 (0.000 (A/F.000 EUAC = EUAB $30. 10%.6830)] (0.

10)} = {$600 (3.$40. 8%.000 (0.000 (A/P.$1. 8) = $30.000 . 5)]}{(A/P.000 .6806]}{0. 5) + $100 (P/è. 8%.50 A = $4.$30.993) . 8%.000 (0.0729) $6.$40.000 (0. 8%. 8%. 8%.687 = A + $2. 8) .372) + [$900 (3. 8%.0940) = $460 The equipment has an annual cost that is $460 greater than the benefits.1490} = $756.1740) .$1. .50 6-12 $60 0 $70 0 $80 0 $90 0 $1. 5) ± $100 (P/è.372)][0.2229) = A + $35.$100 (7.000 $90 0 $80 0 $70 0 $60 0 $50 0 A=? This problem is much harder than it looks! EUAC = {$600 (P/A.135. 8%.000 (0. 5)][(P/F. 5) + [$900 (P/A.49 6-13 EUAC = $30.993) + $100 (7.000 (A/F.551. The equipment purchase did not turn out to be desirable.

.276) = $1.709) + A (42.6-14 «««. 36) + A (F/A.000.000 = PW of all future scholarships . «««. F = A (F/A. 84.000 A = $6.5%. 1.579) = 84.92 monthly investment 6-15 A A ««««« i = 7% n = 10 i = 5% n= P¶ = PW of the infinite series of scholarships after year 10 P¶ = A/I = A/0.5%. The problem must be segmented to use the 1.579 A (1.05 $30.5% table.000.000. n = (65±22)12 = 516 i = 1... n = 480 i = 1.5%. 480) = A (84.000 84.00 0 The 1.5% per month A=? F Compute the future value F of a series of A¶s for 480 interest periods.5% per month A=? $1. 36) = $1..579 A for the first 480 interest periods and solve for A. 1.5% interest table does not contain n = 516.579 A (F/P.579 A Then substitute 84. 1.

05) A = $30. n) = $2. 4%.91 6-17 A A «.$4.190 = $1.282) + 22.000 F = A (F/A. 1. 20) + A (F/A. 1. compute A: A = ($20. 2) = $2.25%..786 = $25.13 .000 A $20. 10) + $4.350.132. 10) = A (7. 1. 480) (F/P.25%.80 (2.000/39.000 A A A A A A A A A n = 10 semiannual periods i = 4% per period First.6] = A (39.000. i%.000) (A/P..1233) + $160 = $2.80 per semiannual period Now.024) + A(0.017) (1.25%. compute the equivalent uniform annual cost: EUAC = A (F/A.000.5083/0.000 (0. 20) = A [(31.132. 10) + P¶(P/F. 7%.80 (F/A.. 7%.000/17.745.= A (P/A.000 . «.040) = $4.04) = $16. 4%.132.000 (0.20 6-16 $4.786) A = $1. n = 480 n = 20 F = $1.

30/bale) ± 12 ($200/mo trucker) = $182. 6%.500 (P/A. 8%.6274) = $4.000 (0.7921) + $1. (b) The need to recycle materials is an important intangible consideration. 6%.011 6-21 (a) EUAC = $2.500 (P/F.196 = $13.212) (0.500 $1.000 (4. 6%.609.500 + $5. 6%. 6%. bailer is not economical.212 + $2.42879] = $2.500 (0.889 . 8%. 6%. 5) (P/F. 4) = $2.000 (A/P.50 (b) P = A/ = $1.161834/402.15)(40) ± 1)] = $5 x 106 [0.000 / yr 1 2 3 4 5 6 7 8 9 10 P P = $1.500 (P/F.000 (labor) + $200 (material) . 30) + $3. While the project does not meet the 8% interest rate criterion.500 / yr $1.212) + $3.6-18 (a) EUAC = $6.901 Equivalent Uniform Annual Amount = $13.7473) + $3. 5) + $3. 10) 6-20 A = F[(er ± 1)/(ern ± 1)] = $5 x 106 [(e0.500 $3.15 ± 1)/(e(0.901 (A/P.80 Therefore.721 + $2.000 (A/F.500 bales ($2.500 + $5. 5) + $3. 4) + $1. it would be economically justified at a 4% interest rate.000 (P/A.772 + $4. The bailer probably should be installed. 6-19 $3.500 (0.2219) = $3. 8) = $1.500 (4.

000 (0. 5%.000 EUAC = $150.000 F5 = -$45.500 + $2.000 A = -$2.425 + $2.000 annual cost of the existing pipeline. 8) (A/P.08 = $45.0872) = $8.113 6-24 imonth = (1 + (0. 5%.= $3.$2. 5%.008295 (1.609.000 (A/F.000 (A/P.121 + $4.000 + $35. 5%.1075/52))4 ± 1 P = 0.000(A/P. 5)(A/P.500 F4 = -$20. 6%.000 + $35. 10) + $45.000(P/F. 5%.50/0. 10) + $10. 10) = $19.008295)300)/((1.55 .000 F10 = +$30.000(P/F. it should be constructed.450. 5%.000) = 0.119 6-22 (a) EUAC = $5. 5%.200 A = P [(i (1 + i)n)/((1 + i)n ± 1)] = $160.200 [(0.566 + $876 . 4)(A/P.000(P/F.052 (b) Since the EUAC of the new pipeline is less than the $5. 10) + $2. 5%.008295 = $160. 10) . 20) = $5.385 = $27.008295)300 ± 1)] = $1.9 ($178.500 + $20. 6-23 èiven: P = -$150.$30.000 F8 = -$10.

¾%. Amount to deposit September 1: = Future worth of 5 months deposits (May ± Sep) = $69. ¾%. 1 just before making the payment (about $560.6-25 $425 $425 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 1 Dec 1 Jan 1 Feb 1 Mar 1 Apr 1 Equivalent total taxes if all were paid on April 1st: = $425 + $425 (F/P. 4) = $425 + $425 (1.75 Equivalent uniform monthly payment: = $862.02 Therefore the monthly deposit is $69.075) = $350. 3.030) = $862.0800) = $69. ¾%. but they do not in this problem.02.75 (A/P. 2. The solution may be verified by computing the amount in the savings account on Dec. does not affect the computations. (a) Purchase for cash .28 Notes: 1.02 (F/A. July 1 Through June 30.75 (0.03) and the amount on April 1 after making that payment ($0). 6-26 Compute equivalent uniform monthly cost for each alternative. 5) = $69.02 (5. The fact that the tax payments are for the fiscal year. 12) = $862. Ruarterly interest payments to the savings account could have an impact on the solution.

600 and the four $44 payments at F.000 . F = $2. 15) = $67. 1%. Thus 36 payments of $84 will be required. 10) = $54.527. 1%. n) = $2. 1%.830 .816 Balance = $8. 10%. 4) .600 (F/P.170 = $25.000 .40 Alternative (a) has the least equivalent monthly cost.527.041) . 1%.96 = $84 (P/A.$44 (4.$54.96 This is the amount of money still owed at the end of the four months. 10%.170 making the unpaid loan at Year 0: = $80.060) = $2. but non-monetary considerations might affect the decision. 1%.Equivalent Uniform Monthly Cost (b) Lease at a monthly cost = ($13.000 (A/P.00 (c) Lease with repurchase option= $360. 10%. 1%.$4.000 (0.572.01) = $338. $2. 36) + $4.00 .96/$84 = 30. 4) = $2.$500 (A/F.054 The payments would repay: = $8.000) (A/P.600 (1.600 F n=? i = 1% Compute the equivalent future sum for the $2.80 = $350.816 (P/A.09 From the 1% interest table n is almost exactly 36.816 (P/A. n) (P/A. 25) Balance due at end of 10 years: Method 1: Method 2: = $8. 6-28 Original Loan Annual Payment = $80. Now solve for the unknown n. 6-27 A =$ 84 A = $44 «« « $2. 36) = $348.$44 (F/A.

000 = $600/yr + 0.3155) + $700 + $600 = $4.000(0.035.000 = $69.At year 10 this becomes: = $25.605 New payment < Old payment.075 x 0. 10%. .000) (0.$7.770 / 0. 4) + $7. The exact answer is $67.000) + $1.340 (A/P. 10) = $67. therefore refinancing is desirable.000 .1241) = $8.000 å = $7.075/km = 4 years Pay Salesmen 0. 6-29 Provide @utos = $18.00 0 These are beginning of period deposits.80 New Loan (Using $67.770 Kilometres Driven (x) = 4.1125 x = ($11.1875 x = ($18.000 Note: The difference is due to four place accuracy in the compound interest tables.340 (0.000 + 2% ($67.400 6-30 A diagram is essential to properly see the timing of the 11 deposits: -1 0 1 2 3 4 5 6 7 8 9 10 11 P $500. so the compound interest factors must be adjusted for this situation.000)(A/P.340 New Pmt.830 (F/P. 15) = $69. 10%. 9%.000 as the existing loan) Amount = $67.1125 = 42. = $69.1875 x where x = km driven 0.10) + $600 + $0.

Pnow-1 = $500.8874) A = Pnow-1 (A/P.000/yr $7.000 15 years @round the Lake EUAC = $75.000 (A/F.196 = $42. 4) .000 (0.000 .000 15 years Under the Lake $125.0398) = $18.000 (A/P. 8%.000 $2. 7%.03 Existing Machine EUAC = $1.0951) Ruarterly beginning of period deposit = $443.000 (0.$25.700 (0. 6-32 First Cost Maintenance Annual Power Loss Property Taxes Salvage Value Useful Life @round the Lake $75.1098) + $7.000/yr $2. 7%.90 The new machine should not be purchased.000 (0. 12) = $500. 1%. 15) = $75.500/yr $2.$500 . 1%.000 (P/F.500/yr $45.3019) .700 (A/P.700 = $42.000 .$25.000 .000 (A/P.500/yr $1.3019) = $301. 15) = $125.$45.196 6-31 New Machine EUAC = $3.700 (0. 8%. 15) + $7.000 (A/P.730 èo around the lake.000 .000 $3.$700 = $417.444 Under the Lake EUAC = $125. 11) = $443. 7%.500/yr $25. .000 (0.000 (A/F.000 (0.$200 = $3. 7%.$45.000 (0.1098) + $12.0398) = $19. 15) + $12. 4) = $1.

000 A = $9. 8%.000 (A/P.000 Note that interest is compounded quarterly . 24) = $9.387 Hyro-clean¶s offer of $15. 1%.90/month (b) A¶ A¶ A¶ A¶ A¶ A¶ A¶ A¶ n = 8 quarterly periods i = 1 ½% per quarter $9. 6-34 (a) ««.000 (0.000 (A/è.000 . 10) = $30. n = 24 i = 1% A=? $9.$3.871) = $18.000 .000 (3.0471) = $423.6-33 Engineering Department Estimate $30 EUAC $27 $24 $21 Amounts x 10c $18 $15 $12 $9 $6 $3 = $30.000/yr is less costly.$3.

40 Monthly Deposit = ½ of A¶ = ($1.000.A¶ = $9. 12%. 1. 8) = $9. 12%. 12%. 1)] (A/P.80/mo (c) In part (a) Bill Anderson¶s monthly payment includes an interest payment on the loan.000 + $500 (0. 1) (A/F.65 @lternative B A A A A A $3.000 (0.000.000 EUAC =A = $3. The sum of Doug¶s 24 monthly deposits will be less than $9.120) (0. 12%. 6-35 @lternative @ A A A A A $50 0 $2.40)/3 = $355.000 EUAC =A = [$2. 5) = [$2.067.067. select B.5%.000 (F/P. .1574) = $528.000 (A/F.1186) = $1.000 In part (b) Doug James¶ savings account monthly deposit earns interest for him that helps to accumulate the $9.8929)] (0.86 To minimize EUAC. The sum of his 24 monthly payments will exceed $9.000 + $500 (P/F.2774) = $678.000 (1. 5) = $3.

000) (A/P. 8%. 3) + $3.60 = -$75.000 .30672 @lternative @ EUAB ± EUAC = $845 .61 The diesel taxi is more economical.485.30672) @lternative B EUAB ± EUAC = $1.000 .106 Select Machine Y. 5) = $5.000) (A/P.51/l = $910.157.15 and n = 5.15)(5) (e0.000km/(35 km/l)] x $0.08) + $150 = $1.000 .$5.16 To maximize (EUAB ± EUAC) choose alternative A. 4) + $2.000 (0.000 (0. 6%.30672) = -$133.15 ± 1))/(e(0. maximize (EUAB ± EUAC) Continuous compounding capital recovery: A = P [(ern (er ± 1))/(ern ± 1)] For r = 0.$2. 6-38 Annual Cost of Diesel Fuel = [$50. .000 (0.000) (A/P.000 (0.2886) + $120 + $1.06) + $685.71 = $4. (less negative value).48/l = $685.6-36 With neither input nor output fixed. 6%.71 fuel + $200 repairs + $500 insurance = $5.06) + $910. [(ern (er ± 1))/(ern ± 1)] = [(e(0. 6-37 Machine X EUAC = $5.400 .000 (0.71 Annual Cost of èasoline = [$50.000 (0.$3.$2.31 EUACgasoline = ($12.71 EUACdiesel = ($13.000 (0.15)(5) ± 1)] = 0.252 Machine Y EUAC = ($8.71 fuel + $300 repairs + $500 insurance = $11.2505) = $1. 8%.000km/(28 km/l)] x $0. 12) + $2.780.000 (A/P.$3.

28 @lternative B NPW = $60 (P/A. 15%.$150 (0. 10) = +$5. we may compare 20 years of B with an infinite life for A by EUAB ± EUAC. 10%.000 + Pi = $1.$100 (A/P.627 + $1.$180 (A/P.$50 (0. 4) .$180 = +$21.000 = $2.$50 = +$25.$50 (A/P.10) = +$6. 15%. ) = $16 . 5) .12 6-41 Because we may assume identical replacement. @lternative @ EUAB ± EUAC @lternative B EUAB ± EUAC = $15 .000) (A/P.10) = $1. 6-40 It is important to note that the customary ³identical replacement´ assumption is not applicable here.6-39 Machine @ EUAC = $1. 10%.000 . 10%.000 (A/P.38 Choose Alternative B.$10. 10) . 10) . period) = $24 . @lternative @ EUAB ± EUAC (for an inf. 5) (A/P.000 Machine B EUAC = ($20. 15%.00 @lternative B EUAB ± EUAC (for 20 yr.627 Choose Machine A.04 = $15 .000 = $2. period) = $16 .000 + $10. 10%. 4) = $1. 10%. 15%. 15%.000 (0.1175) = +$6. 10) = +$4. Check solution using NPW: @lternative @ NPW = $15 (P/A.21 Choose A.000 (A/F.$10.000 + $1.1993) = $60 (P/A.$150 (A/P. . 15%. 20) = $24 . 10) + $10.$100 (0.

6)] (A/P.1023) Annual Operation and maintenance Annual Cost Pumping Plan Initial Investment: = $1.739 Select the electric motor.400 = $10.1627) + $60 + $800 = $1.084 EUACelectr = ($6.8 million (A/P. 10%.6-42 Seven-year analysis period: @lternative @ EUAB ± EUAC = $55 ± [$100 + $100 (P/F.000 = $296.1023) = $286.$300 ) (A/P.500 = $2. %. 10%. 10%.5645)] (0.000 .$600) (A/P. four years of B.3855) (0.1023) Additional investment in 10th year: = $200. 10%. 5) + $300 (0.43 @lternative B EUAB ± EUAC = $61 ± [$150 + $150 (P/F.200 + $300 = $2.2054) = +$7.400 (0.15 Choose B. 10) (A/P. n) + SL + Annual Costs = ($2.400 . 10%.7513) + $100 (0. 40) = $200.2638) + $30 + $1.100 (0.200 = $7. 40) = $2. 20) = $1. 7) = $61 ± [$150 + $150 (0.000 for 40 years . 10%. the problem is constructed so he will get the wrong answer. 6-43 EUACgas = (P ± S) (A/P.10) + $1. 6-44 EUAC Comparison Gravity Plan Initial Investment: = $2.000 Power Cost: = $50.683)] (0.4 million (A/P. 4)] (A/P.000 (P/F. 3) + $100 (P/F.8 million (0. If one does.4 million (0.10) + $750 + $50 = $5. Note: The analysis period is seven years.000 (0.890 Annual Operation and maintenance = $25.000 = $50. 10%.400 = $143. 10) + $600 (0. 10%. 10%. 10%. hence one cannot compare three years of A vs.2054) = +$9. 7) = $55 ± [$100 + $100 (0. 10%.

000 (0. 40) = $50.000 (0. 6%.2191) .Additional Power Cost in last 30 years: = $50. 12%.$100 (A/F. 10) . 8) + (P/F. 7) = -$15.2286) = $90 EUACBRK = $10 + $1.000 (0.00226) = $18.0991) = $3.$10 (A/F.$1. Equivalent Uniform @nnual Cost @pproach EUACMas. 10) = -$25.000 + $3. 6%.000 (164.872) .000 (0. 4) + (P/F.000 (0. 20) + $100 (P/F. 20) = -$1.$10 (0.$10) [(P/F.$400 + $13. 6%. 6%. 12) + (P/F.3936) + $10 (0. 20) = -$250 ± $240 [0.2886) .517 Choose Machine B to maximize (EUAB ± EUAC). 20) .$20 (P/A. 6-46 Machine @ EUAB ± EUAC Machine B EUAB ± EUAC = .000 .031 NPW BRK = -$1.6274 + 0.470) = -$1.680 Select the Pumping Plan. 16)] + $10 (P/F.000 (F/A.$10 (P/A. . 12%.411 = .083 Choose Masonite to save $52 on Present Worth of Cost.590 Annual Cost = $244.000 + $6. 6%. 6-45 Use 20 year analysis period.$20 (11.600 + $8.Maintenance & Operating Costs + Annual Benefit + Salvage Value (A/F. Net Present Worth @pproach NPW Mas.$100 (0. = -$250 ± ($250 .First Cost (A/P.$10 (11. 6%. 6%. 4) = $20 + $250 (0.First Cost (A/P. 12%.000 (A/P. 20) .470) + $100 (0. 30) (A/F. 10%. 6%.0272) = $94 Choose Masonate to save $4 per year.7921 + 0.000 .3118) .0570) = $8. = $20 + $250 (A/P.4970 + 0. 7) . 6%. 6%. 6%.Maintenance & Operating Costs + Annual Benefit + Salvage Value (A/F. 20) = $10 + $1.3118) = -$1.1770) .494) (0. 4) . 10%. 12%. 6%.

.024 + $2. -298.000 . 8%.95 = $34. ) = +$2. 20) = -$271. 20) .38) = $12.38 Owed = PV (0. the choice is Machine A but note that there is very little difference between the alternatives.6-47 Machine @ EUAB ± EUAC = -$700. 60. -15000) = $311. (a) 12 month tire EUAC = $39.$100 (A/P.050 = $466 Machine B EUAB ± EUAC = -$1.2505) = +$5. 10%. 48.75%. 6-49 @lternative @ EUAB ± EUAC = $10 .$4.010. 10) . 4) = $43.000 (A/P. 20) + $210.75%.00 (A/P.62 Owed = PV (0.000 + $154.95 (A/P.512.000 + $303. -12000) = $298. 20) = -$271.62) = $5.74 She will have to pay $513 more than she receives for the car.$18.000 (A/F.08) = $17. 6-48 Choose alternative with minimum EUAC.48 .34 = $55.$29. 3) (d) 48 month tire EUAC = $90. 15%. 48.60 6-51 Payment = PMT (0. 20) = $17.$200 (0. 5) = $55. 10%.48 .024 + $2.$29.$150 (0.62 . 15%. 15%. 20) + $210.000 (A/P.000 .700. 8%. 2) (c) 36 month tire EUAC = $69.54 = $28.660 . 15%. 1) (b) 24 month tire EUAC = $59. 10%.660 .95 (A/P. 10%.75%.000 (A/F. 18.1019) = +$2.$4.$29. 15%.38 Select C.62 .$200 (A/P.$900 (A/è. 6-50 Payment = PMT (0.00 @lternative B EUAB ± EUAC @lternative C EUAB ± EUAC = $10 .13 = $28.000 + $303. 15%.75%.000 + $303.$15 (A/P. -311.000 . 8%.$100 (0.000 .95 (A/P.050 = $366 Thus.40 Buy the 36-month tire.$750 (A/F.

07 46.00 573.000.01 (c) $570.638.09 $ 77.85 Ending Balance $ 78.00% 0.684.911.09 44.34 573.91 $ 77.41 Month 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment Interest Principal Payment $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 574.50 48.07 45.00 571.27 44.352.14 48.000.66 571.50 $ 77.50 $ 77.80 $ 77.01 $ 77.449.821.91 569.44 47.34 572.400.866.77 $ 77.27 569.449.41 46.70 $ 77.37 $ 77.591.79 48.40 45.730.955.544.52 =((1+$A$2/2)^(1/6))-1 =$A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) .34 $ 77.74 45.57 $ 77.41 44.73 46.776.6-52 D@T@ 9.00 360 $ 618.30 $ 77.496.97 570.56 (a) 618.09 47.32 574.67 573.75 47.7363% $ 78.24 $ 77.00 $ 77.01 572.31 570.68 572.303.41 (b) $77.87 $ 77.62 570.

41 =((1+$A$2/2)^(1/6))-1 =$A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) Ending Balance $ 92.00 $ 91.85 $ 90.92 $ 82.030.01 6-54 D@T@ 9.56 62.85 667.02 (a) $729.38 52.000.47 121.000.17 $ 82.94 607.50 $ 82.640.43 $ 90.43 $ 81.895.19 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment (a) $753.42 $ 90.154.00% 0.64 667.62 $ 91.49 125.02 676.6-53 D@T@ 9.401.41 Month 0 1 2 3 24 25 26 117 118 119 120 121 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment Interest Principal Payment $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 677.01 62.7363% $ 92.948.578.78 122.515.63 606.92 604.40 666.7363% $ 95.83 604.41 (b) (c) $82.00 $ 91.000.77 61.278.41 677.00 360 $ 753.842.40 / $62.43 (d) $667.68 123.58 124.00 52.030.905.73 605.00 52.00 360 $ 729.19 =((1+$A$2/2)^(1/6))-1 =$A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) .95 $ 82.00% 0.

7363% $ 95.65 3.50 302.00% 0.52 =((1+$A$2/2)^(1/6))-1 =$A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) Ending Balance 95.561.396.4939% $ 145.06 692.31 $ 1.483.51 (113.00 360 $ 753.94 307.506.699.89 $ 812.48 Principal Payment $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 300.07 Principal Payment $ 806.05 986.71 2.79 971.83 $ 818.11 93.95 13.07 1.736.000.00% 0.00% 0.505.00 360 $ 862.00 94.25 993.50 693.82 1.00 12.19 1000 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment Accelerated Payment Month 0 1 2 3 4 160 161 162 163 164 Interest $ $ $ $ $ $ $ $ $ 699.84 93.D@T@ 9.19 $ 1.78 94.866.091.845.57 681.72 304.50 94.31 $ $ $ $ $ $ $ $ =((1+$A$2/2)^(1/6))-1 =$A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) Ending Balance 95.62 (1.56 687.49 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment =((1+$A$2/2)^(1/6))-1 =$A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) .38 $ 1.380.77 880.69) (c) The mortgage would be paid off after the 86th payment 6-55 D@T@ 6.81 35.89 979.639.48 91.21 28.359.38 Month 0 1 2 3 4 84 85 86 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment Double Payments Interest $ $ $ $ $ $ $ 699.75 6.193.64 1.54 23.50 697.000.784.28 695.00 360 $ 753.817.000.000.00) (b) The mortgage would be paid off after the 164th payment D@T@ 9.00 94.29 92.19 964.93 145.494.7363% $ 95.11 20.84 $ 1.81 $ 824.000.49 (a) $862.

85 $ 1.000 $200 $500 $3.00 Month 0 1 2 3 253 254 255 256 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period @ccelerated Payment Interest $ $ $ $ $ $ $ 716.024.80 $ 144.78 2.76 $ (27.000.53 712.01 25.94 1.47 322.004.59 $ 5.22 997.94 1.00% 5 $25.10 $ 144.00 360 $ 1.000 Under the Lake 7.94 30.000.034.716.04 =((1+$A$2/2)^(1/6))-1 =120% * $A$4*(($A$3*(1+$A$3)^$A$5)/((1+$A$3)^$A$5-1)) Ending Balance $ 145.34 992.30 286.00 $ 144.009.D@T@ 6.00 $ 144.93 1.05 10.562.98 1.4939% $ 145.99 Month 0 1 2 3 234 235 236 237 238 239 Canadian conventional mortgage rate effectively monthly interest Principal Months in amortization period Monthly Payment x 120% Principal Payment Interest $ $ $ $ $ $ $ $ $ 716.019.000 .06 15.000.89 320.030.00% 0.00 360 $ 1.144.12 =((1+$A$2/2)^(1/6))-1 Ending Balance $ 145.038.002.072.64 $ 144.000.00% 0.71 982.4939% $ 145.01 4.74 $ 1.09 $ 2.575.11 $ 144.49 987. km First Cost/km Maintenance/km/yr Yearly power loss/km Salvage Value/km Around the Lake MARR 16 $5.98 1.29 $ (413.70 713.68 $ 2.05 1.95 $ $ $ $ $ $ $ $ $ 318.10 714.10 714.047.61 $ 3.360.28) (c) The mortgage would be paid off after the 239 payment 6-56 2ALTEUAW (modified) Length.29 17.05 20.90 285.55 $ 4.430.51 12.83) (b) The mortgage would be paid off after the 256 payment D@T@ 6.000.51 $ 583.014.027.000 $400 $500 $5.88 Principal Payment $ $ $ $ $ $ $ 283.681.062.66 7.

780 -$4.00% 50.000 $200 $500 $3.444 Diesel MARR 50.444 $0 $19.000 $12.000 $0 $18.000 èasoline 6.000 $1.000 15 $125.02*first cost/yr USEFUL LIFE INITIAL COST ANNUAL COSTS ANNUAL REVENUE SALVAèE VALUE EUAB EUAC (CR) + EUAC (O&M) EUAW $1.486 $0 $2.444 -$18.444 $0 $18.000 $0.500 Under the Lake 7.000 $0 $25.729 -$19. km/liter Annual Repairs Annual Insurance Premium USEFUL LIFE INITIAL COST ANNUAL COSTS ANNUAL REVENUE SALVAèE VALUE EUAB EUAC (CR) + EUAC (O&M) EUAW .000 $12.Property tax/0.780 $0 $5.095 $6.000 15 $115.500 $2.02*first cost/yr USEFUL LIFE INITIAL COST ANNUAL COSTS ANNUAL REVENUE SALVAèE VALUE EUAB EUAC (CR) + EUAC (O&M) EUAW Around the Lake MARR 15 $5.302 15 $75.000 $2.611 $0 $3.000 $7.000 $0 $45.019 $400 $500 $5.444 -$18.000 $1.000 $13.51 28 $200 $500 3 $12.000 $0 $4.000 $12.000 $0.444 -$18. km First Cost/km Maintenance/km/yr Yearly power loss/km Salvage Value/km Property tax/0.48 35 $300 $500 4 $13.000 $1.500 15 $75.000 $0 $18.000 $0 $45.00% 5 $23.802 $0 $25.279 Breakeven @nalysis º Ê 2ALTEUAW (modified) Length.158 -$5.158 6-57 º Ê 2ALTEUAW (modified) Km per year First Cost Fuel Cost per liter Mileage.

00% Pumping Drive to zero using solver .00 $0.896.000.765.00 $0. 10th Year Additional Power Cost.000 40.733 -$183 6-59 º Ê USEFUL LIFE COMMON MULTIPLE INITIAL COST ANNUAL COSTS Additional Cost.00 -$75.00 $0.000 20.00 $0.000.00 $3.704 6-58 º Ê MARR Current Trucking Cost Per Month Labor Cost per year Strapping material cost per bale Revenue per bale Bales per year produced USEFUL LIFE Initial Cost for Bailer ANNUAL COSTS Annual Benefits SALVAèE VALUE Salvage value as a reduced Cost EUAB EUAC (CR) + EUAC (O%M) EUAW 8.00 Breakeven Pumping 40 40 $1.30 500 30 $6.00 $2.917 $5.550 $0 3.643 $4.232 $4.000 $4.00 $75.40 $2.00 $0.000.000.00 -$75.000.550 $3.400.369 $4.429 $4.000 $3.379.798.000 60.00 $0.000.000 $0.800.340 $5.000.00 40 40 $1.Mileage (km) 10.400.000 80.00 $50.976 $5.000.200 $3.000.000.000. yr 1140 ANNUAL REVENUE SALVAèE VALUE NET ANNUAL CASH FLOW MARR èravity Plan 40 40 $2.00 $0.192 $4.00% $200.00 Difference $0.444.00 $50.00 $0.00 $0.00 $200.00 Ê å å Ê PWB PWC 10.00 $2.00 -$10.000.541.00 $10.611 $4.00 $75.00 $1.

00 $296.00 $2.222.321.444.00 A NPW -2896765 -2810000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 B NPW -2379444 -1475000 -140000 -75000 -75000 -75000 -75000 -75000 -75000 -75000 -75000 -75000 -275000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 C NPW -2896765 -1475000 -1400000 -75000 -75000 -75000 -75000 -75000 -75000 -75000 -75000 -75000 -1616798 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 -125000 .00 $243.896.00 $296.896.379.222.765.765.NPW = PWB ± PWC EUAC Repeating Cash Flow Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 $2.00 $2.

937) = $117.4 ± 125).930) = $130.Chapter 7: ate of eturn @nalysis 7-1 $12 5 $10 $20 $30 $40 $50 $60 $125 = $10 (P/A. i%. i%. 6) + $10 (P/è. 6) at 12%.2)) = 13.2 i* = 12% + (3%) ((130.784) + $10 (7. $10 (3. 1) $120 = $80 (1 + i) $12 0 .4-117.111) + $10 (8. $10 (4.23% 7-2 $80 $80 $80 $200 $200 $80 $80 $80 $200 The easiest solution is to solve one cycle of the repeating diagram: $80 $80 $80 = $20 0 $120 = $80 (F/P. i%.4 at 15%.(130.

4762) = $381 $3.49 < $42.810 (i) = $250 + $250 (F/P. i%. i%.810 (i) = $250 + $250 (P/F. 1) (A/F.64 .99 .$39.1975) + $200 (0.10) (0.906) = $39.64 > $42.50 = 50% @lternative Solution: EUAB = EUAC $80 = [$200 (P/F. i%.775) = $45. 6)] (A/P. 5) Try i = 15%.64 .55 Rate of Return = 15% + (5%) [($45. i%. i%.55)/($45.$42. i%.55 = $5 (P/A.50 i* = 0.10) = $381 i = 10% *Alternate Equations: $3. 5) + $5 (P/è.0878)] (0.4444) + $200 (0. i%. $5 (3. 2) + $200 (P/F. i%.(1 + i) = $120/$80 = 1.352) + $5 (5. 2)* Try i = 10% $250 + $250 (1. i%.55 $42. i%.51% Exact Answer: 17. 1) (A/P. 6) Try i = 50% $80 = [$200 (0. $5 (2.810 (0.991) + $5 (4.55 Try i = 20%. 4) + $200 (P/F.38% 7-4 For infinite series: A = Pi EUAC= EUAB $3.5481) Therefore i* = 50%. 7-3 $5 $10 $15 $20 $25 $42.49)] = 17. 2) = $79.

000)/($1.000 =(?) Try i = 6% $1.4% .$3. Therefore.465) (0.$250 (A/è.16 $300 (3. 10) Try i = 15% $412 + $5. 7-7 A = $300 $1. 10) = ($1000/i) (P/F.66)) = 5.66 Performing Linear Interpolation: i* = 5% + (1%) (($1.013.000 (0.000 At Year 0.9434) =(?) $980.810 (j) = $500 .2472) $1.013.648 ROR = 15% 7-6 The algebraic sum of the cash flows equals zero. 2) 7-5 P¶ A = $1. Yr 0 n = 10 $41 2 n= $5.000/0.6 .000 Try i = 5% $1.546) (0.013.$1. the rate of return is 0%.6 .9524) =(?) $1. i%.$980.2472) = $1.15) (0. i%. i%. PW of Cost = PW of Benefits $412 + $5.000 (P/F.000 ««««.648 = ($1.000 =(?) $300 (3.

75 ¨ = 11.7407) + $400 (0.571)] = 23. 1) + $400 (P/F.92 $300 (1.9% 7-10 Year 0 1 2 3 4 5 Cash Flow -$500 -$100 +$300 +$300 +$400 +$500 $500 + $100 (P/F.361) (0.$398.2693) = $588.82% 7-9 $100 (P/A. 1)= $300 (P/A.08 i* = 7% + (1%) [($409.192 ± 3. i%.650)] (0.$50 (P/è.7692) = $576. i%.$400)/($409. 4) + $500 (P/F. 4)] (P/F. i%.03 . %. 4) . 10) = 3.37 .387) .83 Try i = 35% $500 + $100 (0. i%.03 .192 20% 3. i%.04)] = 7. i%. i%. 10) = $27 (P/A. 10) 4.07 $300 (1.$50 (4.6501) + $500 (0.2230) = $518.704)/(4.03 Try i = 8% [$200 (3.912 ± 3. 1) Try i = 7% [$200 (3.$50 (4.571 25% Rate of Return = 20% + (5%) [(4.7692) + $400 (0.289) (0.704 Performing Linear Interpolation: ( .7-8 $400 = [$200 (P/A. 5) Try i = 30% $500 + $100 (0.7407) = $574.3011) + $500 (0. i%. i%. i%. 2) (P/F.9346) = 409.795)] (0.9259) = $398.312) .

000 = 0.70) = 31.511) + $300 (0.06% Exact Answer: 30.83/55. 5) Try i = 9% $100 (4. 4) + $300 (P/F.000 +$1.000 +$1. i%.70 Rate of Return = 30% + (5%) [11.07)] .000 The rate of return may be computed by any conventional means.07 < $640 Rate of Return = 9% + (1%) [(%646.000 in five years.000 +$1.81% 7-11 Year 0 1 2 3 4 5 6 7 8 9 10 Cash Flow -$223 -$223 -$223 -$223 -$223 -$223 +$1.$624.07 . On closer inspection one observes that each $223 increases to $1.378) + $300 (0.¨ = 55.6499) = $646. i%. $223 = $1. Rate of Return = 35% 7-12 Year 0 1 2 3 4 5 Cash Flow -$640 40 +$100 +$200 +$300 +$300 $640 = $100 (P/è.07 > $640 Try i = 10% $100 (4.2230 From interest tables.6209) = $624. 5) (P/F.000 (P/F.$640)/($646. i%.000 +$1. i%. 5) = $223/$1.07 .

201 x 12 = 14.41% (b) Effective Interest Rate = (1 + 0.500 = $500 (1 + i)4 (1 + i)4 = $4.= 9.67 (P/A. i%.08% .000 A = $325 ««««. 30) = $3.4% 7-15 $3.25%)((25.069)/(25. %. n = 36 $12.808-24. 36) (P/A.2% 7-14 $3. F = P (1 + i)n $4.375 = $325 (P/A. i%. i = 1.25% Nominal Interest Rate Effective Interest Rate = 1.000 = $119.808-25.732 = 73.25 x 12 = 15% = (1 + 0.28% 7-13 Since the rate of return exceeds 60%.201% (a) Nominal Interest Rate = 1.01201)12 ± 1 = 0.000/$119.069 Performing Linear Interpolation: ( .846 From compound interest tables.25% = 1% + (0. 30) 25.808 24.732 i* = 0.0125)12 ± 1 = 16. the tables are useless.375 $9. 30) (P/A. i%.889 i 1% 1.375/$325 = 28.889)) = 1. i%.500/$500 =0 1/4 (1 + i) = 9 = 1. 36) = $9.154 = 15.67 = 25.

00 x 108 This may be immediately solved on most hand calculators: i* = 5.54) (108))] = 5% + 4.84) = 0. 65) Try i = 6% (F/P. 100) (F/P. 100) (F/P. 5%.00 x 108 = (F/P.64% Solution based on compound interest tables: (F/P. i%. i%. 10) + $1. i%. 365) = (131. i%.542 X 108 (i too low) Performing linear interpolation: i* = 5% + (1%) [((5 ± 0.7-16 1991 ± 1626 = 365 years = n F = P (1 + i)n 12 x 109 = 24 (1 + i)365 (1 + i)365 = 12 x 100/24 = 5. 365) = (339.46/16.14) = 17. i%. i%.70 = 5.5)3 (23.000 A = $40 n = 10 $92 5 PW of Cost = PW of Benefits $925 = $40 (P/A. 100) (F/P. 365) = 5. 7-17 $1.27% The linear interpolation is inaccurate. i%.24 X 108 (i too high) Try i = 5% (F/P.3)3 (44.24 ± 0. 6%. 10) .54) (108))/((17.000 (P/F.

355) + $1. i%.5% $20 (21.000 (0.3066) .90 i too low Try i = 3.$715 = 0 Try i = 3% $20 (23.000 n = 10 n = 10 $28.6139) = $922.000 $3.000 (P/F.000 A = $40 ««.000 (0.97% 7-18 $1.000 $12.Try i = 5% $925 = $40 (7.30 i too high Performing linear interpolation: i* = 3% + (0.913) + $1.42 (i too low) i* § 4.722) + $1.2526) .5%) [53.30% Nominal i* = 6.90 ± (-35.5% $925 = $40 (7.115) + $1.000 PW of Cost = PW of Benefits n = 20 .$715 = $53.30))] = 3. 40) .$715 = -$35.6439) = $960.000 (0. n = 40 semiannual periods $715 PW of Benefits ± PW of Costs = 0 $20 (P/A. i%.000 (0.90/(53.60% 7-19 $6. 40) + $1.78 (i too high) Try i = 4.

000 Performing Linear Interpolation: i* = 15% . .000 (5. i%. 4) = $0 Try i = 12% $15. i%.000 (5.73% 7-20 $15.000 (6.$9.$9.000 (0.160 > $28.090)/($37.$80 (2.855) = -$651. i%.000 (P/A.54 Try i = 15% $15.650) (0.000 (5.000 (0.3220) + $12.0611) = $27.259) (0.(3%) [($28. Seventy or seventyfive years might be the range of reasonable estimates. i%.019) + $6.000 (5.1037) = $37.6355) .000 .5718) .000 . 10) + $6.$9.$28.650) + $6.000 PW of Benefits ± PW of Cost = $0 $15.2472) + $12.$27.000 (7.019) (0.000 (P/F.54/(289.037) = +$289. 20) (P/F.92% 7-21 The problem requires an estimate for n.$80 (3. Based on 71 beginning-of-year payments.$80 (P/A.40)] = 12.070) = 14.000 (P/A.090 < $28.000 = $3.000 A = $80 $9.000 (P/A. i%.90.090)] = 15% . i%. Here we will use 71 years.40 Performing Linear Interpolation: i* = 12% + (3%) [289. 20) Try i = 12% $3. i%.(3%) (910/10. 10) (P/F.000 Try i = 15% $3.000 . 10) + $12. 4) .the expected life of the infant.$27.54 + 651.160 .000 . The purchase of a $200 life subscription avoids the series of ! ! payments of $12.469) (0.

75%) = 7.285) + $1.$12.90 (P/A. = $12.83% 7-22 $1.000 (P/F. n = 2(2001 ± 1998) + 1 = 27 $875 PW of Benefits ± PW of Cost = $0 $30 (P/A.90 ««««.90 = 14.000 (0. i%.000 (0.3468) . 70) 6% < i* < 8%.50 By Calculator: i* = 6.5% .A = $12.55 >$0 Try i = 4% $30 (16.90 (P/A. 27) + $1. n = 70 $200 $200 .3950) .75% Nominal rate of return = 2 (3.10/$12. i%. 27) .000 A = $30 «««. i%.330) + $1.$875 = $38.$875 = -$38. i%.30 < $0 i* = 3. 70) = $187.$875 = $0 Try i = 3 ½% $30 (17.

71% Nominal Interest Rate = 12 (0.871 ½% 21.300 $2.500 .13% per month Effective interest rate = (1 + 0. 24) = $2.447 ¾% i* = (1/2%) + (1/4%) [(32.168/$100 = 31.300 = $110 (P/A.71%) = 8.300/$110 = 20. %.4% 7-24 A = $100 «««.87 ± 31. 24) (P/A. i%. n = 36 $3. 36) = $3.5% .168 (P/A.25% On Financial Calculator: i = 1. n = 24 $3.200 = $2. i%. i%.45)] = 0.68 Performing Linear Interpolation: ( .144 = 14. 36) = $3.87 ± 31. 36) º 32.168 PW of Cost = PW of Benefits $100 (P/A.7-23 A = $110 «««. i%.91 From tables: 1% < i < 1.$1.68)/(32.0113)12 ± 1 = 0.

500 Computation as of award of MS degree: $1. i%.$35) = $12.000 (P/A.000 per year for 10 years MS Degree A = $3. The cost of the degree might be $24.3% 7-26 $35 A = $12. i%.7-25 This is a thought-provoking problem for which there is no single answer. Assuming the MS degree is obtained by one of year of full-time study Cost: Difference between working & going to school. i%. 10) i* = 4. i%. A.64 «««.64 = 11.000 per year for 10 years $24.500 (F/A.000 Benefit: $3. 2) = $3. Assuming the MS degree is obtained by attending graduate school at night while continuing with a full-time job: Cost: $1.08 i = 1 ¼% Nominal interest rate = 12 (1 ¼%) = 15% .000 n = 10 $1. n = 12 $175 ($175 . 12) = $140/$12.64 (P/A. 12) (P/A. 10) i* > 60 B.000 = $3. i%.500 per year for 2 years Benefit: $3.000 (P/A. Whether working or at school there are living expenses. Two possible solutions are provided below.500 $1.

502 i* § 642% (Calculator Solution: i = 642. F $25.9/(1 + 6.71 = 0.9/(1 + 6.000 (1 + i) i* = P (1 + i)n = $5.009 + 0.9 (1 + i)-3 + $8.4)3 + $8.473 + 0.5)4 + «.4) + $0.4)2 + $3.9/(1 + 6.7-27 The rate of return exceeds 60% so the interest tables are not useful.5 (1 + i)-1 + $0.000)1/3 = 1.4)4 + «.495 Try i = 640% PW of Benefits = $3.6 (1 + i)-4 + « For high interest rates only the first few terms of the series are significant: Try i = 650% PW of Benefits = $3. = 0.000/$5.9%) .003 = 0. Available interest tables obviously are useless.5)3 + $8.016 + 0.010 + 0.467 + 0.9 (1 + i)-2 + $3. = 0.5/(1 + 6.016 + 0.5 = $3.003 = 0. One may write: PW of Cost = PW of Benefits $0.71 Rate of Return = 71% 7-28 This is an unusual problem with an extremely high rate of return.5/(1 + 6.000 (1 + i)3 = ($25.5)2 + $3.5) + $0.6/(1 + 6.6/(1 + 6.9/(1 + 6.

10 $20.000 = $2. improved quality of life. i* = 3% = 0.318 (d) The saving in water truck expense is just a small part of the benefits of the pipeline. 50) = $3. all are benefits.693 r = 7.077 ± 1 = 0.10)-1 = $20.. i* = 2% = 0. 100) = $3180/$100. the pipeline appears justified.100 (20) (1.000 = $1.000 From interest tables.000 = 3.00% 7-31 (a) When n = .000 Rate of Return i* = g = 10% 7-30 (a) Using Equation (4-39): F = Pern $4.100 n = 20 i=? P = $20.000 The payment schedule represents a geometric gradient.318 (c) (A/P.000er(9) 2 = er(9) 9r = ln 2 = 0.7-29 g = 10% A1 = $1.0800 = 8. increased value of the dwellings.18% (b) (A/P. Convenience. i%. i%. . etc.000 From interest tables. There are two possibilities: i g and i = g Try the easier i = g computation first: P = A1n (1 + i)-1 where g = i = 0. i = A/P = $3. Thus.180/$100.180/$100.70% (b) Equation (4-34) ieff = er ± 1 = e0.

387) + $2.879 .813 < $1.879 > $1. 4) Try i = 7% 450 (3.879 .845 Set PW of Cost = PW of Benefits $1. i%.7-32 F = $2.242 (0. not $5! Note that the prices Diagonal charges do not necessarily reflect what anyone will pay a collector for his/her stamps. i%. 4) + $2.$1.242 A = $50 n=4 P = $1.845)/($1. .312) + $2.52%) = 15.38 i* = 38% (b) For a 100% annual rate of return F = $1 (1 + 1.845 Try i = 8% 450 (3.845 Rate of Return = 7% + (1%) [($1.242 (P/F.6% 7-33 (a) å $5 = $1 = 5 F = P (1 + i)n $5 = $1 (1 + i)5 (1 + i) = 50.813)] = 7.0)5 = $32.52% for 6 months Nominal annual rate of return = 2 (7.0752)2 ± 1 = 15.242 (0.7350) = $1.0% Equivalent annual rate of return = (1 + 0.20 = 1.845 = $50 (P/A.$1.7629) = $1.

170) + $400 (3. i%.094 [(P/F.000 Rate of Return = 20% . 6) + (P/F.000 Rate of Return = 2 ½% + (1/2%) [($9.177 > $9.020) + $400 (3. 9)] Try i = 20% $1.7664) = $8.000 (0.094. 8) + $400 (P/A.3349)] = $1.7-34 $800 $400 $6.717) + $6.81% 7-35 Year 0 3 6 Cash Flow -$1.60 +$1. i%.8007) = $9. 9) Try i = 3% $400 (7.000 (P/F.000 Year 0 1.000 +$1.000 = $400 (P/A.094.4 5.177 .893)] = 2. i%.000 (0.60 $1.000 PW of Cost = PW of Benefits $9.$8.000 $9.094 [(0.$9.177 . i%.000 +$800 +$400 +$6.000 Try i = 2 ½% $400 (7.762) + $6. 4) + $6.5787) + (0.893 < $9. i%.000)/($9.000 = $1.8 9 Cash Flow -$9.

%.220 .000 Try i = 18% $65.00316 per month Nominal Annual Rate = 12 (0. 120) (P/A.000 (P/è. 120) 103.000 $240.563 100 90.583) -$5.$224.074 i* º ¼% i* ½% = 0.765)] = 15.00316) = 0. 13) .7-36 $65.562 ± 100)/(103.000 (18.000 (23.220 > $240.96% 7-37 3.910) -$5.$240.0025 [(103.465 < $240.000 $5. i%.000 = $65.135) = $247. 13) Try i = 15% $65. i*.074)] = 0.877) = $224.000 $240.000)/($247.220 .79% .03792 = 3.000 (P/A. 120) = 3.000 Rate of Return = 15% + 3% [($247.000 = 30 (P/A. i%. i*.000/30 = 100 Performing Linear Interpolation: ( .562 ± 90.0025 + 0.000 (4.$5.000 (5.

) = $24.$140.019) .000 + $20.000 + $20.3855) + ($64.778 . Try i = 15% NPW = -$300.000 . i*.000 = $16.464 NPW = -$6.7% (b) At 13.816)] = 13.255 > $0 The interest rate is too low.979) = $9. 5) . 7-39 NPW = -$300. i*.130 > $0 Thus.$600 (16.000 (P/A. 10) Try i = 10% NPW= -$300.1911) + ($64.000 @t i = 12%.000 Annual Revenues ± Expenses = $24. 5) + $160. i*.145) . i*.891) = $87. Final payment = 132 x $2 = $264 Average Payment = ($264 + $2)/2 = $133 Total Amount = 132 payments x $133 average pmt = $17.7% the apartment building is more attractive than the other options. @t i = 15%.000) (5.130/($9.2472) + ($64.000) (6.000 (P/F.000) (P/A.7-38 (a) Total Annual Revenues = $500 (12 months) (4 apt.000 To find Internal Rate of Return the Net Present Worth must be $0.000 + $20.352) = -$17.000 (0.0% 7-40 (a) First payment = $2.000 (P/F.000 + $20. the rate of return (IRR) is between 15% and 18%.000 .173)] = 16.000 (0. i*.000) (4.$3.000 (0. NPW = $16.494) . IRR NPW = $8. 10) . By linear interpolation: i* = 15% + (3%) [$9. 10) + ($67.556 @lternate Solution: The payments are same as sum-of-years digits form SUM = (n/2) (n + 1) = (132/2) (133) = 8.130 .$600 (P/è.464 + $6.$600 (14.$8.$17.816 = 12% + (3%) [$8.$600 (22.464/($8.173 < $0 The interest rate is too high. Try i = 18% NPW = -$300.

00 +$599.00 +$599.334.00 +$599.46 . 133) = 3.1 = 132.00 +$599.6 ± 3. F = P (1 + i)n = $30.00 +$599.05)35 = $30.00 +$599.718. 1%.000 now.83% 7-42 = 5% = $30.1) = $7.00 = +$27. leave your fund in the system until retirement. so n = 133 By interpolation.000 (5.32% = 10. 1%.854.000 @lternative 2: Wait.1 Loan (P) = $2 (3.11 + (13/120) (6.00 +$599.Total Amount = $2 (8778) = $17.00 +$599.718.00 -$625.000 = 35 years @lternative 1: Withdraw $15. Deposit) -$39.00 +$599.1) = 3. Equivalency seeks to determine what future amount is equal to $15.00 IRR Nominal IRR Effective IRR = 0.264.516015) = $165.20 7-41 Year 0 1 2 3 4 5 6 7 8 9 10 11 12 « 33 34 35 36 Case 1 (incl.556 (b) The bank will lend the present worth of the gradient series Loan (P) = $2 (P/è.229.000 today and lose $15.00 +$599.00 +$599. (P/è.878.000 (1.00 +$599.00 +$27.00 +$599.00 +$599.00 +$599.86% = 10.436.480.00 +$599.334. 133) Note: n.

8% 7-44 $3.000 can be invested with a return higher than 7. 36) (P/A.000 = $165.661 ± 26.Therefore: $15. $15.1002% > 5% Unless $15.396 ± 20.05 = 21. i*.661 ± 26.930 2½ imo = 2% + (1/2%) [(22.000)]1/35 i = 1.699% per month Nominal Annual ROR = 12 (1.90 = 26.000 now is only equivalent to $165. %.90 (P/A.46 35 years from now if the interest rate now is 7.699%) = 20.46/$15.46 (1 + i) = [(165.930)] = 2.1%.480.480. n = 20 $2.46 (1 + i)-35 $15.000 . 30) = $2.966)/(22. 36) = $3.396 2 20.966 ( . i*.000 (1 + i)35 = $165.771 ( .771)/(27.15%) = 25. it is better to wait for 35 years for the retirement fund.000 = $118.071 ± 1 = 7. 30) (P/A. %.480.543 1 ¾% imo = 1 ½% + ¼% [(27.000/$118.4% 7-45 (a) $150 A = $100 «««. i*. 30) 22.000 = $91.480. i*. 36) 27. 7-43 $2.15% per month Nominal ROR received by finance company = 12 (2.05 (P/A.396 ± 21.1% instead of the quoted 5%.543)] = 1.661 1 ½% 26.000/$91.

Y is greater than 10%.000 7.A) exceeds the Minimum Attractive Rate of Return (MARR).the $2. the increment is desirable.5 = ¾% per month The alternatives are equivalent at a nominal 9% annual interest.($2.000 .5 +$16. 20) = $1.3 Computed ROR A -$2.000.000 4.5 17.A) -$40.and invest the money at a higher interest rate. 7-47 Year 0 1.Y -$50 +$18. Choose A.5 +$16.100 8.5 +$18. 20) i = $100 (P/A. 7-46 Year 0 1.63% (B. Select X.5 +$18.000 +$8.0% Y -$50 +$16.1% The rate of return on the increment (B.5 12. The additional $3 for Alternative B does not increase the benefits.A) is less than the desired 6%.7% B -$2.$150) (P/A.5 +$18. Therefore.A) -$800 +$300 6. 7-48 Year 0 1 2 3 4 Computed ROR X -$100 +$35 +$35 +$35 +$35 15.5 +$16. Therefore it is not a desirable increment of investment. .850/$100 = 18. In this situation the lower cost alternative (A) èas Station should be selected. 7-49 The fixed output of +$17 may be obtained at a cost of either $50 or $53. i%.8% The ¨ROR on X.000 6.000 +$3.75% (B) Ice Cream Stand -$120.000 +$800 9.20 Computed ROR (A) èas Station -$80.000 +$11.1% X.22% The rate of return in the incremental investment (B.7% (B. therefore the higher cost alternative B should be selected. (b) Take Alt 1.800 +$1. i%.

Y $0 -$5. 5) . 7-51 Year 0 1 2 3 4 Computed ROR X -$5.Maximize (EUAB.$6. (c) Rate of Return Analysis: Compute the rate of return on the B. (b) Annual Cash Flow Analysis.000 (A/P.500 = $918 (P/A. $918 (3.Y difference between alternatives is desirable.000 +$2.7% ¨ROR = 9.500 +$746 B -$6.000 21.00 +$19.$2.000 16.000 +$2. 5) Try i = 8%.993) = $3. 5) = $746 .993) ± $2. 8%.61% Y -$5. 5) = +$161 Select B.2505) = +$120 (EUAB ± EUAC)B = $1.$2.000 +$4.000 +$2. Select A.10 Computed ROR A -$100.00 +$11.500 = $746 (3.5 A -$2.000 +$2.000 -$3. 8%.000 +$2.A -$3.000 +$4.664 .$2.00 +$8.Maximize NPW NPW A = $746 (P/A.500 +$918 $3.666 > $3.664 (P/A.7-50 Year 0 1.000 +$2.A increment of investment and compare to 8% MARR. i%. 7-52 (a) Present Worth Analysis.500 (0. 8%. 5) . 8%.500 (A/P.00 9.000 = +$644 Select B. select Alternative X.93 15% B -$50.$6.93 20% (B.000 +$1.500 .000 9. Year 0 1.500 = +$479 NPW B = $1.000 +$2.000 +$4.A) -$50.EUAC) (EUAB.664 B.61% > MARR.9% Since X.EAUC)A = $746 .9% X.

$3.000 -$3.A +$12.840 ¨ROR > MARR (15%) . 8) = $0 Try i = 18% $12.000 (3. 7) .000 .200 (0.2472) = $108.200 Note: Internal Rate of Return (IRR) equals the interest rate that makes the PW of costs minus the PW of Benefits equal to zero. 10) + $70.000 -$3.000 -$3. 7-53 Using incremental analysis.000 $92.000 $158.480 < $3.62% > 15% MARR.2660) = -$553 < $0 Try i = 17% $12. 10) = $0 Try i = 15% -$315.$4.6% The contractor should choose Alternative B and lease because 17.791) = $3.$3.000 A $615.000 .000 -$3.019) + $70.000 NPW = -$315. i*.812) .000 (3. B.000 -$5.000 $66.000 $10.000 $70.000 + [$66.$3. i*. 7-54 First Cost Maintenace & Operating Costs Annual Benefit Salvage Value B $300.$4.B $315.000 (0.A increment is desirable.000 $25.000 -$3.000 ± (-$15.200 (0. $918 (3. i*.000 (P/A. i*.000)] (5.000 A.000)] (P/A.2848) = $962 > $0 i* = 17% + (1%) [$962/($962 + $553)] = 17.000 -$3.8% Since ¨ROR > MARR.000 + [$66.000 -$3.200 (P/F.000 ± (-$15.000 .000 (P/F.000 -$4. Year 0 1 2 3 4 5 6 7 8 B.000 $65. computed the internal rate of return for the difference between the two alternatives.500 ¨ Rate of Return = 9.Try i = 10%.922) .000 -$15. Select B. $12.$4.

B -$4.750 +$1.850 +$1.200 +$100 +$100 +$100 +$5.750 +$1.850 +$1.200 +$93 +$87 +$82 +$3.B -$4.850 B -$5.The higher cost alternative A is the more desirable alternative.850 +$1.850 +$1. 7-55 Year 0 1 2 3 4 A -$9.750 +$1.3% Choose Alternative A.750 +$1.850 +$1. incremental rate of return > 60% (¨ROR = 64.750 +$1.850 +$1.750 +$1.000 +$1.750 A. 7-57 Year 0 1 2 3 4 5 6 7 8 A -$9.613 +$100 +$100 +$100 +$100 Sum +$71 +$67 +$62 +$58 +$211 +$65 +$60 +$55 +$50 -$104 ¨ ROR § 8. 1) (P/F.750 +$1.850 +$1.850 Rates of Return B -$5.750 +$1.200 +$100 +$100 +$100 +$100 +$5.200 +$92 +$84 +$77 +$3.000 +$1.100 NPW at 7% -$4.850 +$1.750 +$1. i%.850 +$1.850 +$1. Buy Kicko.750 -$5.750 +$1. hence the increment of investment is desirable.850 +$1. 7-56 Year 0 1 2 Zappo -$56 -$56 $0 Kicko -$90 $0 $0 Kicko ± Zappo -$34 +$56 $0 Compute the incremental rate of return on (Kicko ± Zappo) PW of Cost = PW of Benefit $34 = $56 (P/F.000 +$1. i%.000 +$1.750 +$1.850 +$1.7%). 1) = $34/$56 = 0.750 -$5.850 5 6 7 8 +$1.850 +$1.750 A.200 +$1.200 +$1.6071 From interest tables.891 NPW at 9% -$4.750 +$1.000 +$100 +$100 +$100 +$100 Sum .

000 (P/F.850 (P/A.000 = $1. i%. 15) Rate of Return = 11. 8) + $5. .65 Select A.B): $50 = $2. i%.10 11.B: $9. i%.B -$50 +$2.75 +$25 +$20 11.A: B: A. i%. 4) ¨RORA-B = 8. 10) + $20 (P/F.25 $0 $0 18% A. 10) + $25 (P/A.3% Select A. i%.15 15 Computed ROR A -$150 +$25 +$25 +$20 14. i%.750 (P/A. 5) Rate of Return = 11. 4) Rate of Return = 15% $4.200 = $1. i%.6% Rate of Return (A.8% B -$100 +$22.200 = $100 (P/A. i%.75 (P/A. 5) (P/F.7% $5. 7-58 Year 0 1.

one is forced to conclude that Figure B is the general form of the NPW plot.000 +$4.000 0 Figure @ i NPW $5. or zero positive interest rates.000 Figure B 0 i After making a number of calculations.000 +$4.000 There are 2 sign changes in the cash flow indicating there may be 2. .@ppendix 7@: Difficulties Solving for @n Interest ate 7@-1 Year 0 1-9 10 11-19 Cash Flow +$4. and there is no positive interest rate for the cash flow. 1.000 -$71. At i = 0% At i = % NPW= +$5.000 This suggests that the NPW plot may look like one of the following: NPW $5.000 NPW =+$4.

972) = $59. 11) = $4.9% 7@-2 The problem statement may be translated into a cash flow table: Year 0 1 2 3 4 Cash Flow +$80. . their algebraic sum represents NPW at the stated interest rate.000 = -$15.1% 6% 22. 6%. i = 22. i%.112 The altered cash flow becomes: Year Cash Flow 0 0 1-9 0 10 -$15.000 -$70. 9) = $15.112 = $4. This is done on the next page by using single payment present worth factors to compute the PW for each item in the cash flow.000 There are two sign changes in the cash flow indicating there may be as many as two positive rates of return. The internal interest rate is sensitive to the selected external interest rate: For external Computed internal Interest rate Interest rate 0% 3.112/$4. we can proceed to solve for the interest rate i for the investment phase of the problem.1% 8% 45.1%.888 -$75.000 0 +$80.000 (F/A.78 By linear interpolation from interest tables.There is external investment until the end of the tenth year. Then.888 At year 10 we have +$59. 9) (P/A.000 At the beginning of year 10: PW of Cost = PW of Benefits $15. i%.000 -$85. If an external interest rate (we will call it e* in Chapter 18) is selected.000 a year for 10 years (11 payments) = $4.000 (P/A.112 11-19 +$4.000 = 3. To search for positive rates of return compute the NPW for the cash flow at several interest rates.000 (14. For external interest rate = 6% Future worth of $4.

380 -$41.000 (P/F.000 -$70.$200 (0.000 0 +$80.920 0 +$56.8900) = +$879 By interpolation.000 (1.000 -$68.000 (0.000 -$70. the Year 0 cash flow is invested and accumulates to +$80.000 (0.670 -$230 0% 10% PW at 25% +$80.980 -$58.8734) = -$293 Try i = 6% $80. i%.$200 (0.000 -$44.000 20% 30% i -$2.000 +$80.800 at the end of Year 1. .06) = $84.$70.7629) .000 0 +$80.000 The plow of NPW vs. PW of Benefit = PW of Cost.9346) .770 -$30 PW at 30% +$80.75%. 2) = 0 Try i = 7% 80.700 -$60. 1) .000 -$78.000 With only one sign change we know there no longer is more than one positive interest rate.420 0 +$28. i shows two positive interest rates: i § 8.Year Cash Flow PW at 0% PW at 8% PW at 9% 0 1 2 3 4 +$80.000 (P/F.210 +$5.000 -$77.000 -$85. i%.$70.000 +$80. i = 6.000 (0.000 +$5.000 -$85.000 (0.000 0 +$80.2% and i § 25% Using an external interest rate of 6%.7921) .9434) .010 0 +$58.000 -$65.$200 (P/F. or PW(Benefit) ± PW(Cost) = 0 $80.$70. i%. The revised cash flow becomes: Year 0 1 2 3 4 Cash Flow 0 -$200 -$70. 4) .800 +$90 +$80.800 0 +$32.010 +$1.

4 By interpolation.90 0 +$18.0 +$62.34))) = 36.3 +$42.54 Solve the Transformed Cash Flow for the rate of return: Ruarter 0 1 2 3 4 Sum Transformed Cash Flow -$75 +$26.46 0 +$50 +$125 Let X = amount required at end of quarter 1 to produce $50 at the end of 2 quarters: X (1.0 +$53.5 +$18.56 -$75.6% x 4 = 146% .5 -$34.6% per quarter Nominal annual rate of return = 36.56/(2.00 +$18. The nominal rate of return = 4 (43%) = 172% per year.2 +$32.0 +$51.8 +$16.5 +$3.56 ± (-5.6 -$25.7 +$28.64 +$2.7 -$23.22 +$32.32 +$37.03 = $48.7@-3 (a) Ruarter 0 1 2 3 4 Sum Ruarterly Cash Flow -$75 +$75 -$50 +$50 +$125 PW at 0% -$75 +$75 -$50 +$50 +$125 +$125 PW at 20% -$75.00 +$19.8 PW at 45% -$75.60 0 +$20.34 Rate of return = 35% + 5% (2.3 -$2. (b) Ruarter 0 1 2 3 4 Ruarterly Cash Flow -$75 +$75 -$50 +$50 +$125 Transformed Cash Flow -$75 +$26.46 0 +$50 +$125 PW at 35% PW at 40% -$75.9 +$60.54 -$5. i § 43% per quarter.03) = $50 X = $50/1.0 PW at 40% -$75.4 +$28.

for return in Ruarter 2. In part (a) the required external investment in Ruarter 1. . (described in Chapter 18) indicates there is only a single positive rate of return for the untransformed cash flow. is assumed to be at the internal rate of return (which we found is 43% per quarter). It is 43%. the accumulated cash flow sign test.ë: (c) Although there are three sign changes in the cash flow.

Looking for the other (possible) rate of return: Year Cash Flow 0 1 2 3 -$500 +$2.088 -$259 +$58 PW at 50% -$500 +$1. 6%.000 at Year 1 must be set aside in an external investment at 6% to provide for the Year 2 and Year 3 disbursements? Amount to set aside = $1. 1) + $300 (P/F.000 -$1. is not necessary here. Even though there is only one rate of return. and 0% is a rate of return for the cash flow.905 -$1. Since the algebraic sum of the cash flow = $0.In part (b) the required external investment is at 3% per quarter. we know that NPW at 0% = 0. there still exists the required external investment in Ruarter 1 for Ruarter 2.000 -$1. 7@-4 Year 0 1 2 3 Sum Cash Flow -$500 +$2. 6%. The ³correct´ answer is the one for the computation whose assumptions more closely fit the actual problem. 2) . of course. we will check for multiple rates of return. The required disbursement in Year 2 & 3 indicate that money must be accumulated in an external investment to provide the necessary Year 2 & 3 disbursements.200 (P/F.333 -$533 -$89 +$211 PW at 200% -$500 +$667 -$133 -$11 +$23 PW at 219% -$500 +$627 -$118 -$9 0 PW at 250% -$500 +$571 -$98 -$7 -$34 PW at % -$500 $0 $0 $0 -$500 +$500 -$500 0% 219% i Solution using an external interest rate e* = 6%. This. How much of the +$2. On this basis the Part (b) solution appears to have more realistic assumptions than Part (a).200 -$300 0 There are two sign changes in the cash flow indicating as many as two positive rates of return.200 -$300 NPW = PW at 5% -$500 +$1. Before proceeding.

1) (P/F. 1) = $500/$600. i%.08 The altered cash flow becomes: Year 0 1 2 3 Cash Flow -$500 +$2.94.000 -$1.6% 7@-6 Year Cash Flow 0 1 2 3 NPW= -$100 +$360 -$570 +$360 +$50 PW at 20% -$100 +$300 -$396 +$208 +$12 PW at 35% -$100 +$267 -$313 +$146 0 PW at 50% -$100 +$240 -$253 +$107 -$6 There is a single positive rate of return at 35%. Year Cash Flow 0 1 2 3 -$100 +$360 -$570 +$360 $360(1.08 = +$600.= $1.399. i%.200 +$412 PW at 18% PW at 20% +$23 -$6 PW at 12% -$100 0 -$150 +$256 +$6 PW at 15% -$100 0 -$142 +$237 -$5 The rate of return is 18% + (2%) (23/(23 + 6)) = 19.92 (P/F.2% 7@-5 Year Cash Flow 0 1 2 3 -$500 +$2.8900) = $1.200 (0.92 = 0.8321 From tables: 20.000 -$1.399.4) + $300 (0.06) = +$382 Altered Cash Flow -$100 0 -$188 +$360 +$72 .06) = +$212 Altered Cash Flow -$500 0 -$288 +$1.92 0 0 Solve the altered cash flow for the unknown i: $500 = $600.200 -$300 $200(1.

000 -$8.82 0 +$163.84 +$163.0 +$36. 7@-9 Year Cash Flow 0 1 2 3 4 -$15.1 From the computations we see that the rate of return on the internal investment is 15%.00 -$400 +$133.) 7@-8 Year Cash Flow 0 1 2 3 4 5 -$50.91(1.10) = +$22 Transformed Cash Flow -$50.12)2 = +$1.000 +$6.12 = +$6. (This is only slightly different from the 21.3 -$0.000 +$8. $90.000 +$10.0 0 -$18.6%.000 .00 -$416.2 +$21.Rate of return § 13.8 PW at 15% -$50.0 +$36.95 +$12.0 0 -$13.65 +$145.19 0 +$192.4% rate of return on the original cash flow because the external investment is small and of short duration.92 +$200.8 +$36. see the solution to Problem 18-4.0 +$20.000 X 1.8 +$36.09 0 +$400 +$500 NPW at 20% -$110.91 at Year 2 becomes the required $100 at Year 3.280 Transformed Cash Flow -$15.41 NPW at 25% -$110. Year Cash Flow 0 1 2 3 4 5 -$110 -$500 +$300 -$100 +$400 +$500 -$90.0 -$40.720 Y (1.980 0 0 +$4.10) = +$100 Transformed Cash Flow -$110 -$500 +$209.0 +$18.8 +$36.6 +$24.000 +$4.85 -$48.8 +$36. 7@-7 Some money flowing out of the cash flow in Year 2 will be required for the Year 3 investment of $100. At 10% external interest. For further computations.49 The rate of return on the transformed cash flow is 21%.8 $20(1.

732 +$2.000 +$4.463 = -146% 7@-11 Year Cash Flow 0 1 2 3 4 5 6 7 0 0 -$20 0 -$10 +$20 -$10 +$100 X (1.000 PW at 10% PW at 12% -$15. of course.000 +$8.000 +$4.000 +$4.15) = +$10 X = $10/1.7 Transformed Cash Flow 0 0 -$20 0 -$10 +$11.164 0 0 +$2.863 1 + i = 1/-2.137 = -13.000 Y = $1.980 0 0 +$4.270 +$2.542 +$2.50 = 0 x = .020 Transformed Cash Flow -$15.) PW of Cost = PW of Benefits $50 = $20 (1 + i)-1 + $20 (1 + i)-2 let x = (1+ i)-1 thus. -2.1 + (12 ± 4(-2.50))1/2 2 Solving for i: x = (1 + i)-1 = +1.7% i = -1.463 i = -0.158 2 1 + i = 1/1.1+ (11)1/2 = +1. (Tables could be produced.15 = $8.158 = -0.159.3 0 +$100 .000 +$8.018 0 0 +$2. for negative values.484 +$2.026 -$144 Rate of Return = 10% + (2%) (638/(638+144)) = 11. $50 = $20x + $20x2 or x2 + x ± 2.000 +$4.000 +$4.5 6 Year 0 1 2 3 4 5 6 Sum +$4.000 +$8.6% 7@-10 The compound interest tables are for positive interest rates and are not useful here.159 = 0.258 +$638 -$15.158 = .159 x = (1 + i)-1 = -2.

0 0 -$3.10 = $272.1 -0.6 +$2.6 From the Present Worth computation it is clear that the rate of return is very close to 25% (Calculator solution says 24.5 Rate of return = 35% + 5% (0.96%).7+1.2 0 -$2.0 +$2.00% root root .2 0 0 -$10.10) = +$300 X = $300/1.3 0 +$100 PW at 35% PW at 40% 0 0 -$11.00% 30.$B$3:$B$4) 10.2)) = 36.8% 7@-12 Year Cash Flow 0 1 2 3 4 5 -$800 +$500 +$500 -$300 +$400 +$275 X (1.7/(0.5 0 +$163. 7@-13 Year 0 1 2 Cash flow -100 240 -143 2 sign changes => 2 roots possible I 0% 10% 20% 30% 40% PW -3 0 1 0 -2 =$B$2+NPV(D2.27 0 +$400 +$275 PW at 25% -$800 +$400 +$145.8 +$90.Year 0 1 2 3 4 5 6 7 Transformed Cash Flow 0 0 -$20 0 -$10 +$11.73 Transformed Cash Flow -$800 +$500 +$227.1 0 +$9.5 0 +$12.

8% external financing rate external investing rate MIRR value is less than external investing rate => not attractive 7@-14 Cash flow Year 0 -610 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 200 10 -1300 2 sign changes => 2 roots possible I 0% 5% 10% 15% 17% 19% 20% 25% PW -110 13 41 23 10 -6 -14 -57 =$B$2+NPV(D2.6% 12% 8.07% 18.$B$3:$B$12) 4.29% root root .

6% 12% 9.5% external financing rate external investing rate MIRR value is less than external investing rate => not attractive 7@-15 Year 0 1 2 3 Cash flow -500 800 170 -550 i 0% 10% 20% 30% 40% 50% 60% PW -80 -45 -34 -34 -42 -54 -68 =$B$2+NPV(D2.5% external financing rate external investing rate MIRR value is less than external investing rate => not attractive .$B$3:$B$5) #NUM! root #NUM! root No roots exist 2 sign changes => 2 roots possible 6% 12% 7.

14 0.00% root All PW values = 0 given significant digits of cash flows external financing rate external investing rate MIRR value is less than external investing rate => not attractive 7@-17 Year 0 1 2 3 4 5 6 Cash flow -1200 358 358 358 358 358 -394 2 sign changes => 2 roots possible i -45% -40% -30% -20% -10% 0% 10% 20% PW -422 970 1358 970 541 196 -65 -261 =$B$2+NPV(D2.23 0.96% root root .00% root -1.$B$3:$B$5) -0.00 0.00 0.$B$3:$B$8) 7.22% -43.00 =$B$2+NPV(D2.7@-16 Year 0 1 2 3 Cash flow -100 360 -428 168 I 0% 10% 20% 30% 40% 50% 60% 3 sign changes => 3 roots possible 6% 12% 8.8% PW 0.44 20.00% root -0.17 40.

$B$3:$B$10) 10.00% IRR unique IRR .5% external financing rate external investing rate MIRR value is less than external investing rate => not attractive 7@-18 Cash flow Year 0 -3570 1 1000 2 1000 3 1000 4 -3170 5 1500 6 1500 7 1500 8 1500 3 sign changes => 3 roots possible i 0% 5% 10% 15% 20% PW 2260 921 -1 -651 -1120 =$B$2+NPV(D2.6% 12% 9.

1% i 0% 5% 10% 15% 17% 19% 20% 25% PW -450 -153 -29 7 8 3 -1 -31 =$B$2+NPV(D2.62% 1 sign change => 1 root possible IRR monthly =RATE(A3.A4) effective annual rate =(1+A6)^12-1 7@-20 Cash flow Year 0 -850 1 600 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 200 10 -1800 2 sign changes => 2 roots possible 6% 12% 9.7@-19 800 down payment 55 40 2500 monthly payment # payment final receipt -0.-A2.75% -8.99% 19.72% root root external financing rate external investing rate MIRR value is less than external investing rate => not attractive .$B$3:$B$12) 12.-A1.

$B$3:$B$10) 20.7@-21 Year 0 1 2 3 4 5 Cash flow -16000 -8000 11000 13000 -7000 8950 i 0% 5% 10% 15% 20% PW 1950 -1158 -3639 -5644 -7284 i PW =$B$2+NPV(D2.5 4 sign changes => 4 roots possible 0% 5% 10% 15% 20% 25% 176 111 63 27 0 -21 =$B$2+NPV(D2.00% IRR unique IRR 3 sign changes => 3 roots possible 7@-22 Cash flow Year 0 -200 1 100 2 100 3 100 4 -300 5 100 6 200 7 200 8 -124.00% IRR unique IRR .$B$3:$B$7) 3.

78% IRR unique IRR .$B$3:$B$9) 15.7@-23 Cash flow Year 0 -210000 1 88000 2 68000 3 62000 4 -31000 5 30000 6 55000 7 65000 3 sign changes => 3 roots possible i 0% 5% 10% 15% 20% PW 127000 74284 34635 4110 -19899 =$B$2+NPV(D2.

7@-24 Cash flow Year 0 -103000 1 102700 2 -87000 3 94500 4 -8300 5 38500 5 sign changes => 3 roots possible i 0% 10% 20% 30% 40% PW 37400 7699 -11676 -25003 -34594 =$B$2+NPV(D2.$B$3:$B$7) 13.51% IRR unique IRR .

7@-25 Year 0 1 2 Cash flow -200 400 -100 i 0% 20% 40% 60% 80% 100% PW 100 64 35 11 -9 -25 =$B$2+NPV(D2.71% IRR unique IRR 2 sign changes => 2 roots possible 6% 12% 24.$B$3:$B$4) 70.5% external financing rate external investing rate MIRR value is more than external investing rate => attractive .

2% 50% 60% 70% 1193 -3 -1086 60.0% 2 sign changes => 2 roots possible 6% 12% 5.648 6.0% 11.000 IRR 8.648 6.648 6.648 101.0% root external financing rate external investing rate MIRR for A-B value is less than external investing rate => not attractive .352 19.7@-26 5 6 7 8 9 6648 6648 6648 6648 6648 0 0 0 0 0 10 36648 138.648 6.1% 6.

7@-27 Cash flow Year 0 -1000 1 60 2 60 3 -340 4 0 5 1740 3 sign changes => 3 roots possible i 0% 5% 10% 15% 20% PW 520 181 -71 -261 -406 =$B$2+NPV(D2.44% IRR unique IRR .$B$3:$B$7) 8.

**Chapter 8: Incremental @nalysis
**

8-1

At 10%, select Edmonton.

NPW

70000%

60000%

50000%

Rate

40000%

Hfx

Edm

$$

30000%

To

20000%

Van

Cal

10000%

Reg

0%

-10000%

1

3

5

7

9

11

13

15

17

19

21

-20000%

rate

8-2

PW Chart

$1,400

$1,200

$1,000

$800

A

B

$400

$200

C

D

$(800)

Interest ate

19%

17%

15%

13%

9%

7%

11%

$(400)

$(600)

5%

$(200)

3%

$1%

NPV

$600

If

If

If

MARR >

>MARR>

>MARR>

18%

9%

18%

9%

0%

Choose

Choose

Choose

0

D

C

Choose

Choose

Choose

0

D

F

8-3

$4,000

$3,000

A

$2,000

B

C

$1,000

D

E

$-

19

%

16

%

13

%

10

%

7%

4%

1%

F

$(1,000)

$(2,000)

If

If

If

18%

10%

MARR >

>MARR>

>MARR>

18%

10%

0%

8-4

$2,000

Keep

1 story

2 story

3 story

4 story

5 story

$1,500

$1,000

$500

$(500)

19

%

17

%

15

%

13

%

11

%

9%

7%

5%

3%

1%

$-

If

If

If

15%

12%

MARR >

>MARR>

>MARR>

15%

12%

8%

Choose

Choose

Choose

0

1 story

3 story

If

8%

>MARR>

0%

Choose

5 story

8-5

Plan

Net Annual

Income

Salvage

Value

A

B

C

Cost of

Improvements

and Land

$145,000

$300,000

$100,000

$23,300

$44,300

$10,000

$70,000

$70,000

$70,000

Computed

Rate of

Return

15%

12.9%

9%

D

$200,000

$27,500

$70,000

12%

Decision

Accept

Accept

Reject - fails to meet

the 10% criterion

Accept

**Rank the three remaining projects in order of cost and examine each separable increment of
**

investment.

Plan D rather than Plan @

¨ Investment

$55,000

$55,000

¨ Annual Income

$4,200

¨ Salvage Value

$0

= $4,200 (P/A, %, 15)

**(P/A, i%, 15) = $55,000/$4,200 = 13.1
**

From interest tables: i = 1.75%

This is an unacceptable increment of investment. Reject D and retain A.

Plan B rather than Plan @

¨ Investment

$155,000

¨ Annual Income

$21,000

¨ Salvage Value

$0

**$155,000 = $21,000 (P/A, i%, 15)
**

(P/A, i%, 15) = $155,000/$21,000 = 7.38

From interest tables: i = 10.5%

This is a desirable increment of investment. Reject A and accept B.

Conclusion: Select Plan B.

8-6

Year

Plan A Cash

Plan B Cash

Plan B

Plan C Cash

Plan C

0

1-10

10

11-20

Rate of

Return

Flow

Flow

-$10,000

+$1,625

-$10,000

+$1,625

10%*

-$15,000

$1,625

$0

+$1,625

8.8%

Rather than

Plan A

-$5,000

$0

+$10,000

$0

7.2%**

flow

-$20,000

+$1,890

$0

+$1,890

7%

rather than

Plan B

-$5,0000

+$265

$0

+$265

0.6%***

***The computation may be made for a 10-year period:
**

$10,000 = $1,625 (P/A, i%, 10)

i = 10%

The second 10-year period has the same return.

**The computation is:

$5,000 = $10,000 (P/F, i%, 10)

(P/F, i%, 10) = $5,000/$10,000 = 0.5

i = 7.2%

***The computation is:

$5,000 = $265 (P/A, i%, 20) i = 0.6%

The table above shows two different sets of computations.

1. The rate of return for each Plan is computed.

Plan

A

B

C

Rate of Return

10%

8.8%

7%

**2. Two incremental analyses are performed.
**

Increment

Plan B ± Plan A

Rate of Return

7.2%

Plan C ± Plan B

0.6%

**A desirable increment. Reject
**

Plan A. Retain Plan B.

An undesirable increment.

Reject Plan C. Retain Plan B.

**Conclusion: Select Plan B.
**

8-7

Looking at Alternatives B & C it is apparent that B dominates C. Since at the same cost B

produces a greater annual benefit, it will always be preferred over C. C may, therefore, be

immediately discarded.

Alternative

Cost

B

A

$50

$75

Annual

Benefit

$12

$16

¨ Cost

¨ Annual

Benefit

¨ Rate of

Return

Conclusion

$25

$4

9.6%

This is

greater than

the 8%

MARR.

D

$85

$17

$10

$1

Retain A.

< 8%

MARR.

Retain A.

0%

**Conclusion: Select Alternative A.
**

8-8

Like all situations where neither input nor output is fixed, the key to the solution is

incremental rate of return analysis.

Alternative:

Cost

Annual Benefit

Useful Life

Rate of Return

A

$200

$59.7

5 yr

15%

¨ Cost

¨ Annual Benefit

¨ Rate of Return

B±A

$100

$17.4

< 0%

B

$300

$77.1

5 yr

9%

C

$600

$165.2

5 yr

11.7%

C±B

$300

$88.1

14.3%

C±A

$400

$105.5

10%

**Knowing the six rates of return above, we can determine the preferred alternative for the
**

various levels of MARR.

MARR

0% < MARR < 9%

**Test: Alternative Rate
**

of Return

Reject no

alternatives.

9% < MARR < 10%

Reject B.

10% < MARR <

11.7%

11.7% < MARR <

15%

Reject B.

Reject B & C

**Test: Examination of separable
**

increments

B ± A increment unsatisfactory

C- A increment satisfactory

Choose C.

C- A increment satisfactory.

Choose C.

C- A increment unsatisfactory.

Choose A.

Choose A.

**Therefore, Alternative C preferred when 0% < MARR < 10%.
**

8-9

Incremental ate of eturn Solution

Cost

Uniform

Annual

Benefit

Salvage

Value

A

$1,000

$122

B

$800

$120

C

$600

$97

D

$500

$122

C-D

$100

-$25

B±C

$200

$23

A- C

$400

$25

$750

$500

$500

$0

$500

$0

$250

Compute

Incremental

Rate of

Return

10%

< 0%

1.8%

**The C- D increment is desirable. Reject D and retain C.
**

The B- C increment is undesirable.

Reject B and retain C.

The A- C increment is undesirable.

Reject A and retain C.

Conclusion: Select alternative C.

Net Present Worth Solution

Net Present Worth = Uniform Annual Benefit (P/A, 8%, 8)

+ Salvage Value (P/F, 8%, 8) ± First Cost

NPW A = $122 (5.747) + $750 (0.5403) - $1,000

= +$106.36

NPW B = $120 (5.747) + $500 (0.5403) - $800

= +$159.79

NPW C = $97 (5.747) + $500 (0.5403) - $600 = +$227.61

NPW D = $122 (5.747) - $500

= +$201.13

8-10

Year

0

1

2

3

4

5

A

-$1,000

+$150

+$150

+$150

+$150

+$150

+$1,000

6

7

Computed

Incremental

Rate of

Return

B

-$2,000

+$150

+$150

+$150

+$150

+$150

B- A

-$1,000

$0

$0

$0

$0

-$1,000

C

-$3,000

$0

$0

$0

$0

$0

C-B

-$1,000

-$150

-$150

-$150

-$150

-$150

+$150

+$2,700

+$2,850

$0

-$2,850

$5,600

+$5,600

6.7%

9.8%

**The B ± A incremental rate of return of 9.8% indicates a desirable increment of investment.
**

Alternative B is preferred over Alternative A.

The C- B incremental rate of return of 6.7% is less than the desired 8% rate. Reject C.

Select Alternative B.

Check solution by NPW

NPW A

= $150 (P/A, 8%, 5) + $1,000 (P/F, 8%, 5) -$1,000 = +$279.55

NPW B

NPW C

**= $150 (P/A, 8%, 6) + $2,700 (P/F, 8%, 6) - $2,000 = +$397.99**
**

= $5,600 (P/F, 8%, 7) - $3,000

= +$267.60

8-11

Compute rates of return

Alternative X

$100 = $31.5 (P/A, i%, 4)

(P/A, i%, 4) = $100/$31.5 = 3.17

RORX = 9.9%

Alternative Y

$50

= $16.5 (P/A, i%, 4)

(P/A, i%, 4) = $50/$16.5 = 3.03

RORY = 12.1%

Incremental @nalysis

Year

0

1-4

X- Y

-$50

+$15

$50 = $15 (P/A, i%, 4)

¨RORX-Y = 7.7%

(a)

(b)

(c)

(d)

**At MARR = 6%, the X- Y increment is desirable. Select X.
**

At MARR = 9%, the X- Y increment is undesirable. Select Y.

At MARR = 10%, reject Alt. X as RORx < MARR. Select Y.

At MARR = 14%, both alternatives have ROR < MARR. Do nothing.

8-12

Compute

ates of eturn

Alternative A:

Alternative B:

Incremental @nalysis

Year

0

1-5

B- A

-$50

+$13

$50 = $13 (P/A, i%, 5)

¨RORB-A = 9.4%

$100 = $30 (P/A, i%, 5)

(P/A, i%, 5) = $100/$30

RORA = 15.2%

= 3.33

$150 = $43 (P/A, i%, 5)

(P/A, i%, 5) = $150/$43

RORA = 13.3%

= 3.49

**(a) At MARR = 6%, the B- A increment is desirable. Select B.
**

(b) At MARR = 8%, the B- A increment is desirable. Select B.

(c) At MARR = 10%, the B- A increment is undesirable. Select A.

8-13

Year

0

1-4

4

5-8

Computed

ROR

A

-$10,700

+$2,100

+$2,100

11.3%

B

-$5,500

$1,800

-$5,500

+$1,800

11.7%

A- B

-$5,200

+$300

+$5,500

+$300

10.8%

**Since ¨RORA-B > MARR, the increment is desirable. Select A.
**

8-14

Year

0

1- 10

Computed ROR

Decision

A

-$300

$41

6.1%

RORA <

MARR- reject.

B

-$600

$98

10.1%

Ok

C

-$200

$35

11.7%

Ok

B- C

-$400

$63

9.2%

ROR¨B- C >

MARR. Select

B.

8-15

Year

0

1

Computed

ROR

X

-$10

$15

50%

Y

-$20

$28

40%

Y- X

-$10

+$13

30%

**ROR¨Y- X = 30%, therefore Y is preferred for all values of MARR < 30%.
**

0 < MARR < 30%

8-16

Since B has a higher initial cost and higher rate of return, it dominates A with the result that

there is no interest rate at which A is the preferred alternative. Assuming this is not

recognized, one would first compute the rate of return on the increment B- A and then C- B.

The problem has been worked out to make the computations relatively easy.

Year

0

1

2

3

4

A

-$770

+$420

+$420

-$770

+$420

+$420

B

-$1,406.3

+$420

+$420

$0

+$420

+$420

B- A

-$636.30

$0

$0

+$770

$0

$0

157.5%. Transform.5% C-B 5% C 6.4% ǻROR = 9.157.A: Year 0 1.5% 5% .30 $0 = $1. 4) = 5% Summary of ates of eturn A B-A 6. Rate of Return on B. 2) ¨RORB-A = 10% B -$1.6% Two sign changes in C ± B cash flow.Cash flows repeat for the next four years. i%. B is preferred for values of MARR from 5% to 7.3 +$420 +$420 -$1.500 +$250 B -$1. .3 +$420 +$420 $0 +$420 $1.406.30 (P/F.406.B -$1.5% > 7.000 +$250 A-B -$500 $0 C -$2.3% 21. Keep B.3 4 5-8 $636.406.A: C -$2.563.5% Decision C is preferred B is preferred D is preferred Therefore. 8-17 Cost Annual Benefit.3 +$420 Rate of Return on B. next 5 years Computed rate of return Decision A -$1.035 +$650 C-B -$1.0% 10% B 7.035 +$400 +$450 +$250 +$200 +$145 -$105 16.3% 21.4% D 0% Value of M@ Value of MARR 0% . i%.406.30 = $770 (P/F. Reject A.0 $0 $0 +$1.00 ¨RORC-B C. first 5 years Annual Benefit.7.

330 +$2.000 Alt.500 Alt. 4) + $2 (P/F. 10%.700 1-3 -$100.1% Effective ROR = (1 + 0.000 ǻROR = 1. 1 -$100. 2 -$100.3% . 5) ǻRORC-B = 20% This is a desirable increment. this increment is desirable. Reject 2.300 $0 $0 +$600.000 (A/P.330 1-2 $0 +$1. Select C. 1. 3 $0 -$2.000 = $350.25%.035 P = $105 (P/A.500 -$1.60 60 Decision Alt. 8-18 Monthly payment on new warehouse loan Month 0 1.000 -$8.000 -$4. $0 +$600.C±B A1 = $400 A2 = $1-5 $1. Keep 1. 60) = $8.035 = $400 (P/A.000 -$8.000 +$600.035 +$400 +$2 -$1.130 $0 By inspection.0134)12 ± 1 = 17.34%/mo Nominal ROR = (1. 5) = $398 Transformed Cash Flow Year 0 1-4 5 C-B -$1. i%.34%)12 = 16. i%.

1 Increment 2. NPW A = (UAB/i) ± PW of Cost = ($10/0.29)/0. 8%.48 . .08 . 8%.3 increment does not yield the required 20% MARR.29 EUAB = $17.00 NPW B = PW of Benefits ± PW of Cost = $17. Infinite @nalysis Period The replacements have an 8% ROR. Reject 1 and select 3 (continue as is).62 (P/A.Identical eplacements.13 NPW C uses same method as Alternative B: EUAC = $200 (A/P. 8%.62 .25 Select C. Part Two. 8-19 Part One.$100 = +$25.00 NPW Bm EUAC = $150 (A/P.10)/0. 5) .10 NPW C = (EUAB ± EUAC)/i = ($55. The 1. 20) = $15.eplacements provide 8% O . 8%.1 -$10 +$8. 5) = $50. Select Pump 1.08 = +$67.$15.08 = +$29.48 (P/A.$150 + $0 = +$22. so their NPW at 8% is 0. 20) . so it is not desirable. Alternative 2 may be rejected.08) .53 Select A. 8-20 Year 0 1 2 Pump 1 -$100 +$70 $70 Transformation: Solve for x: Year 0 1 2 Pump 2 -$110 +$115 $30 x(1 + 0.10) x = $40/1.64 $0 This is obviously an undesirable increment as ǻROR < 0%.Being less desirable than Alternative 1. Infinite @nalysis Period NPW A = (UAB/i) ± PW of Cost = $10/0.1 -$10 +$45 -$40 = $40 = $36.$200 + $0 = +$21.62 (èiven) NPW B = (EUAB ± EUAC)/i = ($17.99 NPW C = $55.36 Transformed Increment 2 .$10 = +$25.$50.

B $0 -$5.000 (P/A. 5) Try i = 25%.000) is fully recovered.3277) = $204. Dev.0000/$500.0% A. i%.) for rate of return.000 -$40.000 -$5.000 $10. Computed rate of return = 26% Choose Neutralization.000 $6.000 +$70.18 = 18% Open The North End.000 (2.000 Solve (Neut.000 +$175.000 RJR -$630 +$140 +$1.000 $10. 8-23 Year 0 1. ROR > 25%. 8-24 Year 0 1. -$480 +$94 +$1.615 Therefore.000 Where the investment ($500.000 $0 $6.000 $5.000 $15.000 9.8-21 Year 0 1 2 3 4 Computed ROR Decision A -$20. $200.B $0 $0 -$5.000 21.5 5 Neutralization -$700.000 +$125.000 (P/F.000 RJR ± èen Dev.000 (0.000 -$5.3% B -$20.000 $5.000 = $70.000 Neut. 8-22 New Store Cost Annual Profit Salvage Value South End Both Stores $170. -$200.000 +$90.000 $5.5% C.000 $260.000 Precipitation -$500.000 $10.000 $10.000 = 0. $200.000 $5. ± Precip.000 0% Reject A Reject C Choose Alternative B.689) + $50.15 15 èen.000 $0 23.000 -$110.000 $15.000 = $70. -$150 +$46 $0 . as is the case here: Rate of Return = A/P = $90.000 $10.4% C -$20. i%.000 North End -$500. 5) + $50. ± Precip.000 15.000 +$500.000 +$50.

Computed ROR 21. i%. So Alternative 1 can be rejected.55 $200 = $52.000 $5. reject B. 5) (P/A. This leaves alternatives 2 and 4. Proceed with incremental analysis.450 (P/A. Initial Investment Annual Income C $15.0% Neither bond yields the desired 25% MARR.77 = 3. 4.0% 22. 5) = $200/$52. Note also that Alternative 2 dominates Alternative 1 since its ROR > ROR Alt.093 A.C = 2.78 4 $330.C $7.00 $38. Examine increments of investment. Initial Investment Uniform Annual Benefit 2 $130.000 $1.450 $35.so do nothing.000/$3. 20) (P/A.6% Since ǻRORA-C > 7%.000 $3.77 (P/A. 20) = $35. Initial Investment Annual Income C $15. i%. 8-25 The ROR of each alternative > MARR. 20) = $7. Select A. Examine (4-2) increment.79 ǻROR4-2 = 10% Since ǻROR4-2 > 8% MARR. Thus ǻROR2-1 > 15%. i%.643 A $50.000/$434 = 16.C $35. Alternative 3 may be immediately rejected as well as Alternative 5. i%.000 $434 $7. i%. i%.643 B $22.00 $52.1% Since ǻRORB-C < 7%. 1.13 ǻRORB.8% 30.077 B. select Alternative 4.000 = $3.00 $91. 8-26 Since there are alternatives with ROR > 8% MARR. Note that simply examining the (RJR ± èen Dev) increment might lead one to the wrong conclusion.000 $1.77 .000 = $434 (P/A.000 $2.450 = 10.14 ǻRORA-C = 7. reject C.2 $200. 20) (P/A.

500 (0.300 +$4. 7) .800 (P/F.864 ROR > MARR Alternative B NPW = $500 (P/A.400 (P/F.$3.917) + $1.000 = $500 (4.8-27 Check to see if all alternatives have a O > M@ .000 = $1.000 +$800 +$800 +$800 +$800 +$2.484 ROR < MARRReject B Alternative C NPW = $400 (P/A.465) + $3.A) is slightly greater than 40%.7921) . 6) + $1.800 D -$3.$2.$40 (A/P.$40 (0. Alternative A NPW = $800 (P/A.300 +$1. 6%.$3. 6%.300 D. 7) + $1.$4. 4) .000 = -$1.$20 (A/P. 6%. 5) + $2.000 = +$2.33 = -$2 . 6%.7050) . 4) + $3.000 = +$3. 3) + $858 (P/F.000 = $400 (5.$20 (0.000 +$1. 1) = +$858 Now compute the incremental ROR on (D.000 (P/A.A) NPW = -$1. 12%.2603) = +$18 So the ǻROR on (D.000 = $800 (4.300 (P/A.000 (0. 12%.000 + $500 (P/A.500 -$2. 6%.4163) = -$13. 6%. 3) = -$2 .500 (P/F.$2.$4. 8-28 Using Equivalent Uniform Annual CostEUACTh EUACSL = -$5 . 6) .000 + $500 (1.A -$1. 6%.10 . Move the Year 5 disbursement back to Year 4 at MARR = 6% Year 4 = +$3.500 . 5) . 6%.2774) = -$13. Year 0 1 2 3 4 5 A -$2.7473) . i%.800 So the increment (D.582) + $1. 4) Try i = 40% NPW = -$1.400 (0.$2.A) has a cash flow with two sign changes. 5) = -$5 .000 (P/F.$5.589) + $858 (0.881 ROR > MARR So only Alternatives A and D remain.000 +$500 +$500 +$500 +$3.6651) . i%. Choose Alternative D.000 (0.300 (3.300 +$1.000 = -$610 ROR < MARRReject C Alternative D NPW = $1. 6%.212) + $2.$5.

3) = $0 To solve for i*. i*. i%.500 (P/A. i%.$20 (A/P. $0 = -$2 .500 $3.172))] = 13.300 (P/A. 3)] = $3 .900 $3. construct a table as follows: i 12% i* 15% NPW +$16 $0 -$334 Use linear interpolation to determine ROR ROR = 12% + 3% ($16 . the cash flow table is: Year 0 1 2 3 Net Cash Flow (Atlas -$6.$40 (A/P. the ROR > MARR.$40 (0. 5) + $6. i*.700 +$2. 3) At i = 12% $3 . i*.500 NPW = -$6. i*.993) + $6.$40 (0.Fred should choose slate over thatch to save $0.500 (P/F.300 (3.23/(0.4163) = $0.300 $6.900 + $3.$40 (A/P.2774) + $20 (0. i*.800 NPW = -$16.700 $2. 2) + $3. 6) At MARR = 8% NPW = -$16.72% 8-29 (a) For the Atlas mower. 5) ± [-$5 .23 ± (-0.23/yr. To find incremental ROR.23 > $0 12% too low At i = 15% $3 . find such that EUACSL ± EUACTH = 0.900 + $3.800 (P/F.172 < $0 15% too high Using linear interpolation: ǻROR = 12 + 3[0.4380) = -$0.800 (0.500 $2.6302) = +$562 Since NPW is positive at 8%. i*. 5) + $20 (A/P. . the cash flow table is: Year 0 1-5 6 Net Cash Flow (Zippy) -$16.2983) + $20 (0.$0)/($16 + $334) = 12.1% (b) For the Zippy mower.

000 .800 Net Cash Flow (Atlas) -$6.8396) + $3.300 3 $3.$0)/($282 + $68) = 6.000 (0. 3) + $3. Company A Company C Company B First Cost $15.300 4 $3. At i = 15%: NPW A = -$15. so choose the lower cost alternative.$1.600)(P/A.8% The ǻROR < MARR.500 $2.500 Difference (Zippy ± Atlas) -$10.000 $25.300(P/F.7050) = +$282 NPW = -$10. (3) Consider the increment (Company C ± Company A) First Cost Maintenance & Operating Costs Annual Benefit Salvage Value C. i*.500 .$6.500 $3.5718) = $4.200 +$800(4.700 $2.000 $1.900 1 $3.000(P/F. 6) Compute the ǻROR Try i = 6% Try i = 7% NPW = -$10.300 5 $3. 8-30 (1) Arrange the alternatives in ascending order of investment.200 +$800(4.000 + $6. 15%. 4) = -$15.8163) + $3.300(0.000+($8.000 $20.700(0. i*.100) + $5.855) + $3. 4) + $3. 15%.700(P/F.300 2 $3.212) + $5.200 +$800 +$800 +$6.300(0.500 +$800 +$800 +$3.(c) The incremental cash flow is: Year Net Cash Flow (Zippy) 0 -$16.987 Since NPW A at i = 15% is positive. 5) + $5.300 NPW = -$10.700(0.6663) = -$68 Using linear interpolation: ǻROR = 6% + 1% ($282.000 -$700 $3.400 (2. i*.300 6 $6.500 $2.500 .A $5. RORA > 15%.500 $2. the Atlas.700 $2.000 (2) Compute the rate of return for the least cost alternative (Company A) or at least insure that the RORA > MARR.200 +$800(P/A.

000 $26.000 +[$4.C) is more or less than the 15% MARR.120 -$75.000 ± (-$700)](P/A.855) + $1. 4) + $1. it is desirable. 10) i* 0 0.900 .5718) = $6. Reject Company A. At i = 15%: NPW B-C = -$5.Determine whether the rate of return for the increment (C. 4) = -$5.000 (P/F.000)](P/A.5718) = $6. 15%. 15%.500(P/F.15 NPW $53. i*.000 + $4.egular) .$8.15 NPW $128.855) + $1. 8-31 MARR = 10% n = 10 RANKINè: 0 < Economy < Regular < Deluxe ǻ Economy ± 0 NPW = -$75.500(0.500 Determine whether the rate of return for the increment (B. At i = 15%: NPW C-A = -$5. i*.C $5. 4) + $1.A) is more or less than the 15% MARR.000 -$500 $4.421 Since NPW C-A is positive at MARR%.500(0. 15%. ǻ ( egular ± Economy) NPW = -($125.000 i* > MARR so Economy is better than doing nothing.000 $1.000) (P/F. i*. i*.000 + ($28.000 i* > MARR so Regular is better than Economy. 10) + $3. 15%.500(P/F.700 (2.$75.000 +[$3.000) + [($43.000 .900 $1.000 . 10) + ($6. 4) = -$5.000 + $3.$28.154 -$50.000 .$8. it is desirable.000 .500 (2.421 Since NPW C-A is positive at MARR%.000) (P/A. ǻ (Deluxe . Reject Company A.$3. (4) Consider the increment (Company B ± Company C) First Cost Maintenance & Operating Costs Annual Benefit Salvage Value B.000 ± (-$500)](P/A.000) ' ($13. 10) i* 0 0.

000 + ($68. 15%.000 i* < MARR so Deluxe is less desirable than Regular.000 + $69.000 + ($23.300 $9.300)(P/A.Reject Do Nothing Ship.383 = $68.000 + $232.000)](P/A. i*.100 0.540 -$95.373 ROR > MARR.000(P/F.000 . 10) i* NPW 0 $24.400(P/F. 15%.000 $23. i*.Reject U-Sort-M Sort-Of ± ShipFirst Cost Annual Benefit Maintenance & Operating Costs Salvage Value $51.± U-Sort-M First Cost Annual Benefit Maintenance & Operating Costs Salvage Value NPW 15% $4. 8-32 Put the four alternatives in order of increasing cost: Do nothing < U-Sort-M < Ship-R < Sort-Of U-Sort-M ± Do Nothing First Cost Annual Benefit Maintenance & Operating Costs Salvage Value NPW 15% $180.700 . 7) = -$180.$6.15 -$37.900 .$7.413 = $58. 15%.000 .000)(P/A.000 .000) + [($79.900) (P/F. 10) + ($16.000 .960 + $5.056 + $3. 7) + $14.400 = -$180. 7) + $9.000 $13.000 .000 $68.$13. 7) = -$4.NPW = -($220.700 $0 $5.000 $12.$43.000 = -$4.$12.$125. 15%. The correct choice is the Regular model.000) ' ($38.900 $7.000 $14.439 ROR > MARR.

000 is invested in A.000 $300.000 available for investment.A increment.000 $1. 15%. To maximize annual income. Select Sort-of 8-33 Since the firm requires a 20% profit on each increment of investment.A increment of $200.000 is available for other projects.000 elsewhere (yielding 20% or $40. The $200.000 C $25. (With only a 16% profit rate. Incremental @nalysis Investment A $10.000) plus $200. B. Alternative B with an overall 22% profit rate may be considered as made up of Alternative A plus the B. Select A. Looked at this way. Compute the amount of annual income for each alternative situation. 8-34 Assume there is $30.000. then $20.000 $200. has an 18% profit rate and is not acceptable. would be Alternative A (annual profit = $30.000 + ($13.000 $750 = $5. A B C Initial Cost $100.A.500 = $4.000 annually).000 + $56. there is Alternative D where the $30.) Alt.000 investment yields a $5.000 $500.000.000 ¨ Profit ¨ Profit Rate $36.800 C $25.000 $2. 7) = -$51.000 B $18.000. Investment Net Annual Income Sum A $10. which is better than Alternative B profit of $66.000 $3.000 18% Alternative A produces a 30% profit rate.000 annual income.NPW 15% = -$51. Thus the best investment of $300. 15%.000 increment of investment of B rather than A.000 B.000 Annual Profit ¨ Cost $30.800 Elsewhere $5. for example.000 Elsewhere $12.A $15. choose C.000 C.000 $3.000 Elsewhere $20.135 ROR > MARR. Since the B-A increment is not acceptable.992 + $2. that is.700(P/F.000 $66.000 profit.A $8. one should examine the B.143 = $8.700)(P/A.000 $4. Thus if $10. 7) + $5.000 .000 B $18.Reject Ship-R. C is unacceptable.000 A $10. An alternate solution may be obtained by examining each separable increment of investment.000 $80. This combination yields a $70. Alternative B should not be adopted.000 = $5. In addition to the three alternatives above.250 Elsewhere is the investment of money in other projects at a 15% return.

000 $3.000 $4.500 17% OK Reject A D.000 $2. 8-35 8-36 $1.Net Annual Income Return on Increment of Investment $2.C $18.000 10% undesirable Reject D .000 D $20.000 $2.000 $2.000 $3.500 13% undesirable Reject B C $10.000 Investment Net Annual Income Return on Increment of Investment Conclusion: Select Alternative C.000 $3.

574) . 10%. 12%.762) + $200 (1.$100 (F/P. 5) + $100 (F/P.80 9-3 $100 $300 $250 $200 $150 F P . 3) + $100 (F/P. 4) .$100 (F/P.611 + 1. 5) + $200 (F/P.00 9-2 $100 $100 $100 $100 F $100 F = $100 (F/P. 2) = $100(1.$100 (F/P.100 ± 1.$100 (1. 1) = $100 (1. 10%.210) = $136. 12%.Chapter 9: Other @nalysis Techniques 9-1 $200 $100 i = 10% $100 F F = $100 (F/P.120) = 379. 10%. 10%. 1) . 10%.464 ± 1. 12%. 4) .331 + 1.

35x @lternate Solution F = 4x (F/P.150) + x = 13.993) = 13. 15%. 5) = $100 (3.35 (F/P.198. 12%.199. 15%. 1) + x = 4x (1.78 @lternate Solution F = [$100 + $50 (A/è.326)] (4. 15%. 3) + 3x (F/P. 2) + 2x (F/P. 15%.323) + 2x (1. 12%.35 (1. 15%. 12%. 5) = $680.353) = 1.397) = $680.13 9-4 4x 3x 2x x i = 15% F F = [4x ± x(A/è.35x . 12%. 4) = [4x ± x(1.762) = $1. 4)] (F/A. 5) = [$100 + $50 (1.775)] (6. 5)] (F/A.P = $100 (P/A. 12%.521) + 3x (1.605) + $50 (6.35 F = $680. 5) + $50 (P/è.

12%.200 (20.055 = PTotal (F/P.305 = $109. 12) + $30 (F/A.138) + $30 (7.254) = $24. 12%. 10)= $109.725 9-7 ia = (1 + r/m)m ± 1 = (1 + 0.42 9-6 Psystem 1 Psystem 2 PTotal FTotal = A (P/A. 6) (F/P.650) = $84.716) = 383.130 .055 (3.17320)5 9-8 è = $100 $100 21 P ««. 12%.684) (3..9-5 $5 $10 $15 $20 A = $30 $25 i = 12% F P F = $5 (P/è.10/48)48 ± 1 = 0. 10%. 10) = $15.750 + $24. 10%.17320 F = P (1 + ia)5 = $50. 10) = $1.750 = è (P/è.106) = $338.000 (1 + 0.000 (5. 10%. 55 P = $111.305 = $84. 6) = $5 (6.

P .

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.430. 24) (F/P.177) + $600 (31.526 9-11 F = $100 (F/A. 9-9 $30.200 ««. 15) = $30. 60) = $100 (25. ½%.78 . 10%.000 (F/P.972) (7.373 9-10 è = $60 $3.. 15) + $600 (F/A.200 (F/A. 7%.200 (94. ½%.612) = $357. 30) = $3.772) = $144.432) (1. 10%.349) = $3. 30) (F/P.461) + $60 (120. 7%.000 A = $600 «««« « n = 15 F F = $30. 30) + $60 (P/è. 7%.000 (4. n = 30 F F = $3.

14) + $100 (F/A. 18%. 18%.00 F = $1.072) + $100 (14.10)800 = £1. 4) (F/P. ½%.08 9-13 F = £100 (1 + 0. 18%.094.108.352) = 1. 14) = $150 (4.3 x 1035 9-14 $150 $100 i = ½% F F = $150 (F/A. ½%.9-12 $550 g = +$50 $100 i = 18% P F P = $100 (P/A. 10) = $100 (4.167.167 (5.42 .464) = 2. 10) + $50 (P/è.167 (F/P. 10) = $1.234) = 6. ½%.030) (1.494) + $50 (14.

000 (0. 2)] = $1.x 21 years Age 55 x = years to continue working age to retire = 55 + x Age 76 .170 + 1.082] = $7.000 A F A A = $1.9-15 Using single payment compound amount factors F = $1.000 $1. 4) + (F/P. 8) + (F/P.026) = $7.369 + 1.20 (15.500 A = $5.000 [(F/P.967 @lternate Solution $1. 4%.20 (F/A. 4%.000 Retirement x «««. 10) + (F/P.20 F = $530. 6) + (F/P.265 + 1. 4%. 4%. 4%.480 + 1.966. 12) = $530.000 Adding to fund 21 .000 [1. 12) + (F/P.000 (A/P. $48.5302) = $530. 4%. 2) = $1. 4%. «««.601 + 1. 4%.80 9-16 A = $20.

9-17 èeometric èradient: n = 10 g = 100% A1 = $100 i = 10% P = A1 [(1 ± (1+g)n (1 + i)-n)/(i ± g)] = $100 [(1 ± (1 + 1.90)] = $43.743) (7. 10) = $43.974) = $139.500 (1. 6%. 12%.500 (F/P.000 (8. 6%.500 (1 + 0.755 (2. 35) * = $25.000 (6. 35) + $200 (P/è.974) + $5.147) + $1.007208)24 = $2. 12%. x) = $20.686) = $569.000 (F/P. Instead we can substitute: (P/è.386 = $118.x) Try x = 10 $48.811) = $136. 6%.755 (F/P.500 9-18 i n = 0.755 Future Worth = $43. 6%. x = 6.000 (8.000 (17. 10%.890 * The factor we want is (F/A. x) + $5.024) (0.220 Therefore.10 ± 1.Amount at Retirement = PW of needed retirement funds $48. 35) + $1.970. 21. 35) .0)] = $100 [(1 ± (1.000 (F/A.594) = $113. 35) but it is not tabulated in the back of the book.222 $20.106) + $5. 6%.000 (P/A.007208 F = P (1 + i)n = $2.760 so x can be < 10 Try x = 5 $48. 35) (F/P. 6%.762) + $5.000 (5.0)10 (1 + 0. 12%.000 (111.10)-10)/(0. The youngest age to retire is 55 + 6 = 61.500 (3.314 $20.30 9-19 F56 = $25.000 (6.549) $20. 6%.500 (1.000 (F/A.0865/12 = 24 = 0.938) = $238.115)= $136.480 so x > 5 Try x = 6 $48.353)= $117.000 (6.3855))/(-0.432) + $200 (165. 35) (F/P.

7) (F/P. 10%.000 (2.937) + $500 (12.594) + $1.500 (15.000 overhaul = 12 (10) = 120 months = 7. 7%.400 per year at the end of 7 years: F7 = $72.60% per month Find: F120 = ? .000 A1-120 = $1.000 (F/P. 7%.000) = $150.000 (F/A. 10) + $500 (P/è.309 9-21 F = $2. 10%.000 (F/P. 10) = $1.05) ($150. 10%.704 Alternative solutions using interest table values: F = $2. 41) = $2. 10%.524) (A/F. 10%. 7) = $626.949) . 7%.550 in 3 years i.$7.$767.000 (0. the expected end-of-year deposits are: A1 = $1.763) (1.200 A84-120 = $2.704 9-22 FW (Costs) = $150. 40) = $2. 10%.000 . 2) = $112.000.000 (A/F.000. 7) ± (0.259 + 442.400 (F/A. at the end of year 10: F10 = $626.550 Compute the future worth of $626.550 (F/P.940 9-23 èiven: n i P = $325.200 = $800 F60 = $55.2/12 = 0. 7%. 10%.000 (487.0724) = $72.000 (45.9-20 Assuming no disruption.000 .000 (F/A.852) = $975.e.524 Remaining two deposits = ($1. 3) = $767. 10) + $1.593) = $975.000.400 Compute the future worth of $72.$1.500 (F/A.500 = $417. 40) + $2.

248) (2.720 = $683.60%.932 9-25 isemiannual = (1 + 0.$226. 9%.006] ($1.194) = -$226.308 (1.250 + $210.006)36 ± 1)/0. 0. 0. 9%. n = 31): FA = $5.60%. 36) ($800) = [((1 + 0.750 = $666. 5) = $909.412 = $683.720 . 9%.120 FA84-120 F60 F120 = (F/P. 31) = -$150 (78.308 = $683.809 9-26 The monthly deposits to the savings account do not match the twice a month compounding period.000) = (1 + 0. 31) = $5. 9%. 11) = $150 (P/è.FP FA1. 10%. 120) ($1. 10%.933 @lternate Solution Remembering that è must equal zero at the end of period 1.100. 9%.200) = $210.000) = $666. 120) ($325. 10) + $150 (P/è.640) (19. 31) (F/P.000 = (F/A.944) Fè = -$150 (P/è.750 = $987.040 + $78.580) = $10.006] ($800) = $32. 10) (F/P. adjust the time scale where equation time zero = problem time ± 1.000) = $78.006)60 ($55.006)120 ± 1)/0.000) = (1 + 0. or .412 F1/1/12 F7/1/14 = $909. 0. F = $150 (F/A. 10%.250 = (F/A.10 = 10% F1/1/12 = FA + Fè From the compound interest tables (i = 10%.611) = $1.192/12)6 ± 1 = 0. 10) = $10.60%.000 (181.040 9-24 Find F. 9%. To use the standard formulas we must either (1) compute an equivalent twice a month savings account deposit. 11) = $150 (28. 0. 11) (F/P.040 = (F/P.308 (F/P.0060)120 ($325.000 (F/A.60%.000 + $32. 10%. Then: F = $150 (F/è.200) = [((1 + 0. 60) ($55.

001875] = $24.001875/((1 + 0.0037535] = $24. i%. Method (1) A A n=2 i = 0.001875 $75 Equivalent twice a month deposit (A) = $75 (A/F.(2) compute an equivalent monthly interest rate.0037535 Future Sum F1/1/15 = A (F/A.901 9-27 Bob¶s Plan A = $1.5%. imonth.001875)2 ± 1)] = $37. 3. 41) = $1.001875)432 ± 1)/0.500 «««««.4649 Future Sum F1/1/15 = A (F/A.901 Method 2 Effective i per month (imonth) = (1 + 0. i%. i = 3.437) = $129.045/24 = 0.5% n = 41 F7/1/2018 F = $1..650 . 18 x 12) = $75 [((1 + 0.045/24)2 ± 1 = 0.500 (F/A. n) = $75 [0. 18 x 24) = $37.4649 [((1 + 0.500 (86.0037535)216 ± 1)/0.

5%. 31) = $132.000 (3. He should deposit: $132. 3.000 (5. 5) + $500 shares ($60/share) = $257.200 Joe¶s deposit will be insufficient.000/yr salary P = $65.5% n = 31 F7/1/2018 F = $40.272 (1.764 (0. 9%.890) + $200 (7.070 + 600 shares of stock Set F !"#$% &# ' .3442) = $45.5%. 9%.905) = $116. 9%.000 (P/A.000 (F/A.000 (2.325 Generous Electric F = $62.111) + 500 shares of stock = $254.272 + 500 shares of stock F = $257. 31) = $40. 3.985) + 600 shares of stock = $371.272 (F/P.000 = $421.000 i = 3.Ñoe¶s Plan $40. 5) + 500 shares of stock = $65.539) + $30.764 (P/F. 5) + $200 (P/è. 5) + 600 shares of stock = $62.701 9-28 Fearless Bus $200 $400 $600 $800 dividends 100 shares/yr $65. 9%.000 (F/P.

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000 (8) (1 + 0.11 All alternatives have a B/C ratio > 1.45 9-30 Cost Uniform Annual Benefit B/COF A B/COF B B/COF C A $600 $158.10)-1]/$50.7/[$500 (A/P. 10%. Cost Uniform Annual Benefit B. 10%. 10%.05 = $58.02 Desirable increment. 5)] = 1.3/[$600 (A/P.6 B/COF B-C = $80.3 = $158. 5)] = 1. 10%. 9-29 A1 P = $50.7 C $200 $58.00.C $300 $8034 A. A1 = $10.4/[$300 (A/P.000 = 1.3 B $500 $138. 5)] = 1. 5)] = 1. Proceed with incremental analysis.3/[$200 (A/P. Reject C.B $100 $19.000 èeometric gradient at a 10% uniform rate. .00 = $138.000 i = 10% g = 1-% n = 8 yrs Where i = g: P = A1n (1 + i)-1 B/C = PW of Benefits/PW of Cost = [$10.

890 $2.818A B/C Ratio = PW of Benefit/PW of Cost $500.000 $70. Reject B.23 = ($33.000 $200.09 This is a desirable increment.260 $835. 20) = 0.350 $2.000 $400. 10%.000 $105. 10))/$150 = 1.5 (P/A.000 $85.200.23 1.030.900 $900.800 $457.200.2145F PW of Cost PW of Benefit = A (P/A.C Increment B. 10%. 9-31 B/CA B/CB B/CC = ($142 (P/A. 10))/$150 = 1.000 5 Stories $900.513.19 .B ¨ Cost $500 ¨ UAB $82 ¨B/¨C = ($82 (P/A.000 $64. 10%.01 This is a desirable increment. 5)] = 0.200 $2. A. 10))/$800 = 1. 10))/$500 = 1.114. 9-32 Cost (including land) Annual Income (A) Salvage Value (F) 2 Stories $500.09 = ($60 (P/A. 10))/$300 = 1. 10%.000 10 Stories $2. 8%.37 Incremental @nalysis B.6/[$100 (A/P. Conclusion: Select B.5 (P/A.B/COF A-B = $19. 20) = 9. 10%. Reject A.410 1.B Increment A.000 $300.C ¨ Cost $150 ¨ UAB $26.PW of Salvage Value = F(P/F.74 Undesirable increment. 8%.000 B/C atio @nalysis Cost .50 1.5 ¨B/¨C = ($26.000 $256.100 $687.650 $1. Reject C.000 $42. 10%. Conclusion: Select A.

With ǻB/ǻC = 0.550 $1.200 . C $120 $40 $0 1. 9-33 Note that the three alternatives have been rearranged below in order of increasing cost. 6)]/$340 = 1.100 = $1.657.657.260 = $1.$687. 10%.150 $1.$40 (P/F.650 . 6)] = [$140 (4. 10%.100 $2.550 = 0. Conclusion: Choose the 10-story alternative.C $220 $60 A.826. Reject 5 stories.410 . 10%.13 Incremental @nalysis ǻ First Cost ǻ Uniform Annual Benefit ǻ Salvage Value Compute ǻB/ǻC value B.$40 (0.88 Benefit.28 A $560 $140 $40 1.91.$457.10 > 1 Desirable increment.$687.826.91 <1 Undesirable increment.Incremental B/C atio @nalysis ǻ PW of Cost ǻPW of Benefit ǻB/ǻC = ǻPW of Benefits/ǻPW of Costs Decision 5 Stories Rather than 2 Stories $835.030.114.260 = $343.Cost atio Computations: Alternative A: B/C = [$140 (P/A.150/$1. 6)]/[$560 . The 10 stories rather than 2 stories is desirable.890 .100 = 1.100 = $378.630 $343.45 .28 Alternative C: B/C = [$40 (P/A. the increment of 5 stories rather than 2 stories is undesirable.B $220 $40 $0 1.19 $40 0. 10%.5645)] = 1.630/$378. 10 Stories Rather than 2 Stories $2.$457. 6)]/$120 = 1.45 First Cost Uniform Annual Benefit Salvage Value Compute B/C Ratio B $340 $100 $0 1.513.13 Alternative B: B/C = [$100 (P/A.355)]/($560 .

The solution may be checked by Net Present Worth or Rate of Return NPW Solution NPW . 6)]/$220 = 1. 10%.C ǻB/ǻC = [$60 (P/A. A. 10%.C is a desirable increment.B ǻB/ǻC = [$40 (P/A. 6)/[$220 . Conclusion: Choose B. 6)] = 0.B is an undesirable increment. 10%.$40 (P/F.Incremental @nalysis: B.88 A.19 B.

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$40 6.B $220 $40 $0 16. 8)) . 8%.2% > 10% Accept B. * ´ ´ ǻ Cost ǻ Uniform Annual Benefit ǻ Salvage Value Computed ǻ ROR Decision B. 8))/(Cost ± S (P/F. 8%. An incremental Uniform Annual Benefit becomes a cost rather than a benefit.6% < 10% Reject A. Reject C. * 9-34 This is an above-average difficulty problem. Compute B/C for each alternative Form of computation used: (PW of B)/(PW of C) = (UAB (P/A. . ' .C $220 $60 A.

206) = 1.5 = ($47.0 .747))/($100 .2 B/C ratio Cash Flow C.30 = ($9.5403)) = 1.747))/(Cost ± S (0. 8)/($10 + $2.D increment is desirable.747))/$50 = 1. 8%.5 (0.7 +$50 Cash Flow D -$50 +$12.$50 (0.747))/($80 . Incremental @nalysis C.5403)) = 1.C $40.$50 (0.= (UAB (5.747))/($60 .D Increment C.0 $2.2 (5.0 $2.5 +$47.5 (P/A.$75 (0. 8%.7 (5.C Increment ǻ Cost ǻ Uniform Annual Benefit ǻ Salvage Value B/C ratio B.40 B/CA B/CB B/Cc B/Cd All alternatives have B/C > 1.D $10 -$2.D -$10 -$2.5 (5.5 $25.7 8 Cash Flow C -$60 +$9.7 +$9.66 Reject B.5 (P/F. 7)) = ($47.5403)) = ($12.2 (5.3 (0.C Increment ǻ Cost ǻ Uniform Annual Benefit ǻ Salvage Value A.5 ǻ Cost ǻ Uniform Annual Benefit ǻ Salvage Value $50 The apparent confusion may be cleared up by a detailed examination of the cash flows: Year 0 1.3 $0 = ($2. Proceed with ¨ analysis.18 = ($12 (5.11 The C. Reject D.2 +$12.69 = ($12.5403)) = 1.C $20. B.5403)/$20 = 0. A.5403)/($10 + $2.

is preferred to F in all situations.93 1. D. On this basis C may be rejected.34 Reject D.2 D $400 $126 $422. 5) = $16 (3.3 C $300 $83 $278.16 0.1 0. 5) B/C Ratio ¨ Cost ¨ UAB PW of Benefits ¨B/¨C Decision A $100 $37 $124 B $200 $69 $231. D. E.8 1.0 and only C is less than 1. Hence B may be rejected.352) $10 (3.$25 (0.B $200 $57 $191. 15%. E.54 Reject A.96 Reject D.0.352) $16 (3. That leaves A.352)/$50 = 1.4 E $500 $150 $502.5 (0.A $100 $32 $107.B/C ratio = ($2.5403)) = 0. D. 15%. is preferred over B. Based on the B/C ratio for the remaining four alternatives. do A.01 B. Similarly.B $300 $81 $271.352)/$25 = 1. 9-36 By inspection one can see that A.D $25 $10 $10 (P/A.24 1. Conclusion: Select B.07 Reject E.06 1. hence F may be immediately rejected. ¨ Cost ¨ Benefits PW of Benefits ¨B/¨C Decision Therefore. . A. with its smaller cost and identical benefits.5 0.5403)/($40 .E $50 $16 $16 (P/A.3 1. 9-35 Cost UAB PW of Benefits = UAB (P/A.91 Reject E. Conclusion: Select C. with greater benefits and identical cost. and E for incremental B/C analysis. 5) = $10 (3. 15%. three exceed 1.07 Reject A.

i%.000) < Cost.000 Annual Benefit = $26. 12) + (P/F. i%. i%. 24) + (P/F. 36) + (P/F. 4) (P/F. i%.9-37 Investment= $67. i%.800= $400 (P/A. i%.000q= 2. 12) + $400 (P/A.6 years Do not buy because total benefits (2) ($26.800/(4*$400) = 2.800= $400 (P/A.000/$26. 4) (P/F. i%. 4) (P/F. 48) $3. i%. 4) (P/F. 24) + $400 (P/A.800 $3. 36) + $400 (P/A.4 years A = $400 «««« Pattern of monthly payments repeats for 2 more years n = 60 months $3. 48)] Try i = 3% P. i%. i%. 4) + $400 (P/A. 9-38 Payback Period = Cost/Annual Benefit = $3. i%. 4) [1 + (P/F. i%.000/yr for 2 years Payback period = $67. i%. i%.

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- - $ . /0 $ .

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- - $ $1 /0 $ .

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$ 2 3 45 (4$5 ! !#5 . - - .

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5 PaybackA = 5.500/yr + $500 at any time Payback = ($7.000 A = $3.Cost Ratio B/C = EUAB/EUAC = [$1.1296)]/[$7. 6)] = [$1.000 (0.500 + $500 (A/F.5 -$135 -$102. 9-40 Lease: A = $5.5 $32. 6)]/[$7.$500)/$1.000 Benefit = $1.0 years PaybackB = 7 years (based on end of year cash flows) Sum CF -$30 -$130 -$200 -$167.9-39 Costs = Benefits at end of year 8 Therefore.97 9-41 (a) Payback Periods Period -2 -1 0 1 2 3 4 5 6 7 Alternative A Cash Flow -$30 -$100 -$70 $40 $40 $40 $40 $40 $40 $40 Sum CF -$30 -$130 -$200 -$160 -$120 -$80 -$40 $0 $40 $80 Alternative B Cash Flow -$30 -$100 -$70 $32.5 $32.5 -$5 $27.2296)] = 0.5 $32.5 $32.500 = 4.500 (a) Payback Period Cost = $7.5 .5 $32.500 + $500 (0. payback period = 8 years.3 years (b) Benefit. 10%.000 (A/P. 10%.000 .5 -$70 -$37.5 $32.000/yr Purchase: S = $500 $7.

3 (A/P. which is virtually impossible for this problem. 20) + $230 = $253.3 (A/P. Alternative A may be considered if the investor is very short of cash and the short payback period is of importance to him. 10) = $4.A $300 $50 Incremental Payback = Cost/UAB (b) ¨B/¨C = [$50 (P/A. this alternative should be selected.210) + $100 (1.200 -$1.08 million Since the EUAW for the Alternative B is higher. 12%.50 . 8)]/$300 = $300/$50 = 6 years = 0.$216. 10%.$180 -$230/yr -$230/yr |-----------------Part (a) ----------------------| Solar ± Net Investment Conventional -$1.20 yrs = 9. 10%. The Present Worth method requires common analysis period.400 -$60/yr -$180 -$60/yr -$180 -$60/yr . The problem is easy to solve by Annual Cash Flow Analysis.200 +$170/yr -$520 -$180 -$700 +$170/yr -$20 -$180 -$200 +$170/yr +$480 U Payback -$180 +$300 (a) Payback = 8 yrs + $200/$170 (b) The key to solving this part of the problem is selecting a suitable analysis method.(b) Equivalent Investment Cost = $30 (F/P. 20) = $7. 10%.$216. EUACconventional.12 12 -$200 -$230/yr -$1.4 4 5. 10%.81 million EUAW B = $32. 1) + $70 = $30 (1.5 . 9-43 Year Conventional Solar 0 1.100) + $70 = $216.18 yrs = $200 (A/P. c 9-42 (a) ¨ Cost ¨UAB Increment B.8 8 9.83 Reject B and select A. 2) + $100 (F/P. 10%.3 million (c) Equivalent Uniform @nnual Worth = EUAB ± EUAC EUAW A = $40 .

10%. n) = [$253. 5) = $4.02 Reject C.55 0.0 $18.$60]/$1.8 = 4. 5) .8 (F/A.5 $3.05 Ok 0. 10%.0 $4. 10%. ¨ UAB ¨ UAC ¨B/¨C Decision (c) Payback Period = $75/$18.94 Reject D.B $9. 5) = $23.0 $13.1382 From the interest tables.3 U = 3.0 $23. n = 13.90 $10. Payback A PaybackB PaybackC PaybackD C $15.8 = $50/$13.400 (A/P.6 = 3.31 U = +$3.400 = 0. select C.8 $23 74 1.C $9. 5) .9 (F/A.$50 (F/P.40 $9. 10%.5 years.06 = +$4.5 = $90/$23.EUACsolar. 10%.78 1. 10%.50 . 5) = -$6. B $50.00 Ok .31 Select B.96 D $90. 9-44 (a) Net Future Worth NFW A NFW B NFW C NFW D = $18.9 = $15/$4. 10%. 10%.23 1.8 $19.95 Reject D.19 A $75.14 Ok 1. Conclusion: Select B.9 $13.$90 (F/P. 10%. 5) . 5) = $13.$75 (F/P. (b) Incremental @nalysis Cost UAB Computed Uniform Annual Cost (UAC) B/C Ratio Decision B. 10%.8 (F/A. 5) .8 To minimize Payback.n yrs = $1.0 = 3. n) + $60 For equal EUAC: (A/P.31 = +$0.5 (F/A.$15 (F/P.

12%.5917) (24.$50 (0.8 2 yr Cost Annual Benefit Useful Life (a) B $150 $39.8 (24.6 $150 $150 FW NFW * . 2) (P/A. @lternative @ A = $28. 12) .94 @lternative B A = $39.$50 (A/P.8 (F/A.8 $50 $50 $50 $50 $50 $50 FW NFW = $28. In this case 12 years hence is a practical future time.6 6 yr C $110 $39. 12) = $28. In future worth analysis there must be a common future time for all calculations. 12%.133) = -$18.6 4 yr Solve by Future Worth analysis. 12%.9-45 A $50 $28.133) .

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6 $110 $110 $110 FW NFW + . ' - @lternative C A = $39.

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896] = +$81.574 + 2.61 Choose Alternative C because it maximizes Future Worth.476 + 3. 7.133) .$110 [1.= $39.6 (24.

.8 70 *5$'+ $ 50$ )$ 5$ $53# 5 #3# $9% $545 50$ $ "#$% @ .

@ .

6 +$39.A -$60 +$10.6 3 4 +$39.6 +$39.8 +$10.8 +$28.8 -$50 +$28.@ Year 0 1 2 Alt.8 C.8 +$28.8 # 0 $ #$7 50$ 3$% 5$8 + 5% å @ ) + ) *5$ .8 +$10. A -$50 +$28.6 Alt. C -$110 +$39.8 +$60.

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12 Alt. C -$110 +$39. ǻB/ǻC = PW of Benefits/PW of Cost = $72.6 $0 +$39.8 0 $ #$7 50$ 3$% 5$8 * 5% + å :15$51 35$ %$$#$ $15% 70 $15 51 $5 *' + . Increment B.8 8 9.6 $0 +$39.6 Alt.6 $0 +$39.6 -$110 +$39.6 -$150 +$39.4 4 5-6 6 7.66/$60 > 1 The increment of investment is acceptable and therefore Alternative C is preferred over Alternative A.C -$40 $0 +$110 $0 -$150 $0 +$110 $0 /.6 B.6 -$110 +$39.m ) + . B -$150 +$39.C Year 0 1.

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06 (P/F.79 yr = $150/$39.C An examination of the B.6 6 7-8 8 B.06 (0.11 < 1 The increment is undesirable and therefore Alternative C is preferred to Alternative B.43 ǻB/ǻC = PW of Benefits/PW of Cost = $44.254) = $137.33/$115.43/$46. (c) Payback Period Alternative A: Payback Alternative B: Payback Alternative C: Payback = $50/$28.C cash flow: PW of Cost = $40 + $12.94 = -$12. 2) = $110 (1. @lternative @nalysis of the Increment B.8 = 1.C -$40 $0 -$150 +$137.6 = 2.78 yr To minimize the Payback Period. Using an external interest rate (say 12%) the +$110 at Year 4 becomes: +$110 (F/P. The altered cash flow becomes: Year 0 1. choose Alternative A. . 6) = $40 + $12.99 < 1 The increment is undesirable and therefore Alternative C is preferred over Alternative B. Solutions for part (b): Choose Alternative C. 6. 8) = $110 (0. ǻB/ǻC = PW of Benefits/PW of Cost = $114.74 yr = $150/$39.4039) = $44. 12%.06 $0 +$110 For the altered B.6 = 3.C cash flow suggests there is an external investment of money at the end of Year 4. 12%. 12%.5066) = $46.94 at the end of Yr.11 PW of Benefits = $110 (P/F.

5) . (b) Net Future Worth NFW A = $200 (F/A. 6) = $350 (6. 4)]/$100 (b) Payback Period x = $100/$25 y = $50/$16 z = $50/$21 = 0.1 yrs = 2. 12%. 12%.$600 (1.4%.974) = +$142. (c) No computations are needed. Thus each generates uniform annual benefits in excess of the cost.79 = 4 yrs = 3.$500 (F/P. 12%. 9-46 (a) B/C of Alt. Alternative z dominates Alternative y.4 Year 5. While Alternative A takes the shortest amount of time to recover its investment. 10%.$400] (1. Choose Alternative z.$300] (1. (Both cost $50.$300] (F/P. 12%. 12%. x = [$25 (P/A. 12%. 6) = $200 (6.$500 (1.762) .5%) and is obviously the best of the three mutually exclusive alternatives. 5) + [$50 (P/F.$600 (F/P. The problem may be solved by inspection.38 NFW B = $350 (F/A. Here we have three alternatives that have rates of return varying from 10% to 16. 12%.397) . 12%.(d) Payback period is the time required to recover the investment.$400] (F/P. but Alternative z yields more benefits).4 yrs To minimize payback. 5) + [-$50 (P/è. choose Alternative B. Alternative z has a positive rate of return (actually 24. 9-47 (a) Payback Period Payback A = 4 + $150/$350 PaybackB = Year 4 PaybackC = 5 + $100/$200 = Year 4. Alternative C is best for longterm economic efficiency. Alternative x has a 0% rate of return (Total benefits = cost). 5) . select z.5 For shortest payback. Thus we see that the shorter-lived asset automatically has an advantage over longer-lived alternatives in a situation like this. during the life of the alternative.762) . The alternative with a 4-year life has a payback period less than 4 years. From this is must follow that the alternative with a 2-year life has a payback period less than 2 years.397) .353) + [$50 (6. 5) .353) + [-$50 (6. 5) . and the alternative with a 6-year life has a payback period less than 6 years.974) .

12%. choose Alternative A. 10%.03 NFW C = $200 (F/A. 1)/$500 = 1.36 Incremental @nalysis B.$900 (1.00 To maximize NFW.$900 (F/P. 12%. 10%. 10%. 10%. 10%. 10%.B Increment Year 0 1 2 3 4 5 A. 10%. 1)/$400 = 1.05 B/CB = ($125 (P/A.B -$100 $0 -$25 -$25 -$25 +$100 . 1) + $125 (P/F. 9-48 (a) PaybackA PaybackB PaybackC = 4 years = 2.36 B/CC = ($100 (P/A. 4) + $100 (P/F.= -$53. choose C.34 This is a desirable increment. 6) = $200 (6. 10%. 6) + $100 (P/F.353) .6 years = 2 years To minimize payback.C -$100 $0 +$25 +$25 +$25 +$125 ¨B/¨CB-C = ($25 (P/A. A. 5))/$100 = 1.C Increment Year 0 1 2 3 4 5 B. 5) + $75 (P/F. 5) . 10%. 3)(P/F. 1)/$300 = 1. Reject C.974) = -$506. (b) B/C Ratios B/CA = ($100 (P/A.

$90 (F/P.02* NFW è = [$10 (P/è.56 * Note: Two different equations that might be used. 10%. select F.72 To maximize NFW. 15%. 6) = +$11. = 4. 6%. 6%.09 = -$23. 6) .$120 (F/P.$110 (F/P.$100] (F/P. = 3. 6) NFW F = [$35 (P/A.$100] (F/P. 6) = +$16. 6) = +$9. 15%. Conclusion: Select B. 4) . To maximize NFW. 2) . select è. 9-49 (a) Future Worth @nalysis at 6% NFW E = $20 (F/A. (d) B/Cè = PW of Benefits/PW of Cost = [$10 (P/è. 15%. 6))/($100 + $25 (P/A. 6)]/$100 9-50 EUAC .$120 (F/P. 6) .5 yr. 6) = -$33. (c) Payback Period PaybackE = $90/$20 PaybackF = $110/$35 Paybackè = 5 yr.70 U NFW H = $180 . 10%. 6) NFW è = [$10 (P/è.By inspection we see that ¨B/¨C < 1 ¨B/¨CA-B = ($100 (P/F.!:+ ( ' . 10%.33 Reject A. 15%. 6%.72 = -$97.79 NFW F = $35 (F/A.$110] (F/P. PaybackH = 6 yr. 1)) = 0. 6) . 15%.1 yr U To minimize payback period.30*U = -$47.$90 (F/P. 6%. 15%. 6%. 6) NFW H = $180 . 6) = +$20. 6%. 6%. 15%. 6) . 7%. 4) (F/P. (b) Future Worth @nalysis at 15% NFW E = $20 (F/A. 6%. select F. 4) (P/F.

.

.

+= 6 9. < +: .

.

9 .

6 9 9 .

!:+ ( < +: .+= 6 > . .$5$4#4 $ ! &# 9 . < + .

10 . = 1.

the useful life must be 5.000 (A/P.2219 = [$230 . x) = +$8.$800 (A/P.25 years. 6) + $200 (P/F. (EUAB ± EUAC)B = $230 . 5) Set (EUAB ± EUAC)B = +$8. n) (P/A.7% 9-52 (EUAB ± EUAC)A = $230 . 12%.$1. i%. (c) When n = .$8.4% 15. x) = 0.9-51 A = $12 n=? P = $45 $45 = $12 (P/A.08 (A/P.9 yrs.08 and solve for x.10 = 303.6% 10. 12%.10 Set NPW B = NPW A = $65 (P/A.$150 = +$65.6% 20. 12%. 6) + $100 (P/F.3% 18.08 = +$8. 12%.8% A/P = $12/$45 = 26. 6) .75 i% 2.44 . n) = $45/$12 n 4 5 6 7 8 = 3.54 ± x x = +$65.7% (b) For a 12% rate of return. 12%. i%. 9-53 NPW A = $40 (P/A. rate of return = 26.08]/$1. 12%. 6) ± x $368.10 = +$65. 12%. x = 6.000 From the 12% compound interest table.

000 @lternative 2: Buy just before trip trip $1.010 (P/F.10 .9-54 NPW Solution NPW A = $75/0. n) = $550/$75 = 7. x) x = 4 weeks = 0.010 Difference between alternatives $1. ¼%. ¼%.$500 = +$250 NPW B = $75 (P/A.9 yrs. x weeks) (P/F. n = 13. 10%. 10%.010 x weeks $1.000 = $1.$300 = +$250 (P/A.33 From the 10% table.000 i = ¼% per week $1. n) .9901 . 9-55 @lternative 1: Buy May 31st trip x weeks $1.

$6.000 (6. 12) . up to $2.$1. 10%.400 +$8.$1.71 .50 (0. 7%.000 F = $10.400 +$8.400 +$8. 10%. 12) + $80.400 . 10%. 5) = $10. x = ($14.400 +$8.51 So.400 +$8.105) = $10.000 $10.000 (1.38)/0.400 +$8.38 + 0. 9-57 F A = $1.400 +$8.000 (F/A.400 +$8.000 Where x = maximum purchase price.000 (P/F.1627) = $1. 10%.1315 (treatment) Treatment = ($1.000) (P/A.51 could be paid for post treatment.400 +$80. 10) = $10.71 EUAC = ($10. 5) .$1. 7%.71 = $1.400 +$8.38 + 0. 15) = $1.000 (F/P.50 + treatment) (A/P.1315 = $2.1315 (treatment) Set EUACUNTREATED = EUACUNTREATED $1.400 +$8.400 +$8.611) .9-56 Untreated: Treated: EUAC = $10.50 (A/P.000 9-58 Year 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flow -x +$8.

10%. must be used is: (12.07/hr (hrs) The minimum number of hours the graybar.943) + $80.122.50 + $12.07) hrs = $1.57 = 206 hours 9-60 The difference between the alternatives is that Plan A requires $20.400 (7.5 From the 8% interest table. 6) = $350 (0. Here.000 (A/P.07/hr (hrs) Blueball EUACB = $6.1175) + $300 + 12.07 hrs = $1.000 = $40.000 extra n years hence. n = 9 years.746 kw/hp) ($0.072/kwhr)]/0.36 = $500 (A/P.240 9-59 Since both motors have the same annual maintenance cost.4440) = $102. 10%.1607 So n = 10 yrs + (1) [(0.000 (A/P.122.072/kwhr)]/0.000 (0.$1. Graybar EUACè = $7. 8%.1627 ± 0.64 hrs = $1.000 (0.50 .1627 ± 0. it may be ignored in the computations. 10%.122. 8%.36 The annual cost of the treated part must be at least this low so: $80.85 eff] = $6. 10%.36/$500 = 0. n) (P/F.64 ± 12. we will include it. however.1540)] = 10.1607)/(0.1175) + $300 + 12.005 + 12.2296) = $80. 20) + $300 + [[(200 hp) (0.50/$0.000 (P/F. 20) + $300 + [[(200 hp) (0. n) = $80.000 (0. n) (A/P.89 eff] = $7.64 hrs Set EUACB = EUACè $1. with its smaller power cost.64 hrs = $1.2 years .005 hrs = $117. At breakeven: $20.50 + $12.000 extra now and Plan B requires $40.746 kw/hp) ($0. 9-61 The annual cost of the untreated part: $350 (A/P.= $8. n) = 0.005 + 12. 10%.

10n = 5.$55.´ Since the breakeven analysis takes all eight years of benefits into account. based on end-of-year benefits.240 A = $1. payback would appear to be $5. the machines are equivalent at 5 1/3 years. n = 8 years.000 + $16.10n ± 1)/(e0.9-62 (a) PW of CostA $55. 9-63 (a) Payback Period At first glance. (b) At 0% interest. .000 + $12.000 R = 0.$12.000 = 5.5511] e0. 0%.10n ± 1] e0. as well as the interest rate. as specified in the problem.000)/($16.335 so the machines are equivalent at 8 years. it is a better measure of long term economic efficiency.000 .10n)] [e0. 10%.10n [1.450) = 5.240 = $1.240/$1.1052 e0.000[(e0. (P/A.33 Since (P/A.33 From the 10% interest table. n) (P/A.5511) = 2. 8) = 5. 10%. 10%.10 n=? $5.24 [0. n) = ($75. For continuous compounding: P = A[(ern ± 1)/(ern (er ± 1)] P = $5. n) = 5. from (a): (P/A.200 .10n (e0.24 years However. the correct answer is: Payback = 6 years (b) Breakeven Point (in years) Here interest is used in the computations.10 ± 1)] = $1. (c) Both (a) and (b) are ´correct.000 [(e0.450 (P/A.1052 e. 0%. n) = n.10n ± 1)/(0.200 (P/A. n) = PW of CostB = $75.10n] =1 = 1/(1 ± 0. 10%.0.23 Solving.

5% of the original group of poles have been removed from the group.000 = 9.5 + 990 . This is the accepted practice.970 .713 Decreasing annual mileage to 8.5) = 9.000 = 5. no longer being needed.000x.8%.000 = 9.000x.000(/å.2505 + 1.051 . 3.5 + 1.980 ± 7.5) = 9. (b) Telephone poles face varying weather and soil conditions.000 km per year.1705 = 2.5x990 ± 3. The pole is where someone wants to construct a driveway.382 Increasing annual mileage to 24.05 = 2.5x990 ± 7.1705 = 2.000x. then fuel cost = oil/tires/repair = $990/year.000x.000x. Poles are destroyed by damage from fire.000 is a 50% decrease so it decreases operating costs by 50%.980 ± 5. to define optimistic life as the point where the last one from a large group of telephone poles is removed (for Pacific Telephone this would be 83.8%.000 is a 50% increase so it increases operating costs by 50%.5 years).000(/.000 EUAC8.000x.254.852.000x.5 = $4. but impractical.8%. The salvage value increases by 5x8. say.5x16.1705 = 2.5 + 2.000 . 4.Chapter 10: Uncertainty in Future Events 10-1 (a) Some reasons why a pole might be removed from useful service: 1. hence there may be large variations in their useful lives.5x1. The poles. the optimum life is where only a small percentage (often 5%) of the group remains in service.000 = 9. are removed.8%. The telephone lines are removed from the pole and put underground.254.980 .000 ± 4. The pole has deteriorated and can no longer perform its function of safely supporting the telephone lines 2.254.5) + 2x990 ± 5.980 .000(/.511.5 = $2. The street is widened and the pole no longer is in a suitable street location. The salvage value drops by 5x8.3000x.8%. 10-2 If 16.2505 + 1. pessimistic life is when.000 EUAC16.2505 + . 5.05 = 9.5x1.000(/å.000x. Instead.5) = 9.000(/.5) + 2x. etc.1193. Typical values for Pacific Telephone Co.5) + 2x1.5 = $3.05 = 2.8%. and salvage value = 9.000 EUAC24. in California are: Optimistic Life: 59 years Most Likely Life: 28 years Pessimistic Life: 2.000(/å.5 years Recognizing there is a mortality dispersion it would be possible. Similarly. automobiles.

3/10 = .10-3 Mean Life = (12 + 4 x 5 + 4)/6 = 6 years PW of Cost = PW of Benefits $80.1705 = 2.5% 10-8 State of Nature Sunny and Hot In Between Weather Cool and Damp Completion Time 250 Days 300 Days 350 Days (days) = . 6 & 1 There are two ways to roll an 11: 5 & 6 or 6 & 5 Probability of rolling a 7 or 11 = (6 + 2)/36 = 8/36 10-6 Since the s must sum to 1: (30K) = 1 .05 = 9. 4 & 3.8%. If 16.5x16.5 + 1.5 = $3.2 0.3 0.5(20%) = 16.3 .000(/å.2/10 .000 EUAC16..2 .3(350) = 305 days Probability 0. 5 & 2.000 (P/A.3 = .5(30K) + . i%.000.2 ± 0. then fuel cost = oil/tires/repair = $990/year.000 km per year.000x.000(/.000 = 5. 6) Rate of Return is between 12% and 15% Rate of Return § 13% 10-4 Since the pessimistic and optimistic answers are symmetric about the most likely value of 16. 2 & 5.000x.000 .3(20K) + .2(40K) = $29K 10-7 Since the s must sum to 1: (20%) = 1 .000 ± 4.254. and salvage value = 8.2(10%) + .5) + 2x990 ± 5.5) = 9.382 10-5 There are six ways to roll a 7: 1 & 6.5(300) + .2505 + 1980 ± 5.5 () = .20(250) + . the weighted average is 16.000 = 9.000 km.000x.5 (savings) = .980 .000 = $20.3(15%) + .8%. 3 & 4.5 = 1 ± 0.852..

36. with probability 0. it is assumed to occur near the end of the year so that it affects insurance rates for years 1-3.05.20 0. 10-11 Expected outcome= $2.83.000 (0. A violation in year 1 affects the rates in years 2 and 3 only if there was no additional violation in this year.500 (0. The student is expected to observe this difficulty.488.10) ($400.0 2. For year 3.10 + 0.45 0.15 + 0.20) ($250.1) = $1.95.16 or . This also equals either 1 .2) + $500 (0.3) + $0 (0.0 3.85 To minimize the Expected èrade Point.0 1.10 Probability of not playing = 0. This is not a faulty problem statement.100 10-12 The sum of probabilities for all possible outcomes is one.40 0. which is P(none in 0)P(occur in 1) = .05 + 0.000 (0.15 + 0.00 1. in year 2) = .0 0 Instructor A èrade Expected Distribution èrade Point 0.2 = .90 Instructor B èrade Expected Distribution èrade Point 0.2 + . the result can be found as P(higher in year 2) + P(not higher in year 2) P(viol.P(no violation in 0 to 2) = 1 .15 0.10 0.60 0.2 = .2 probability. has not been tabulated.000) ..90 0.8. ates for Year 0 1 2 3 ($600) 0 .64.15 0.16. This also equals 1 .15 0 1.000) + (0.15 0. which has a .10-9 If you have another accident or a violation this year.82.P(no violation in 0 or 1) = 1 .3) + $1. Similarly.15 + 0.90 Expected Net Income for the team = (0.00 1.488 10-10 èrade A B C D F Sum 4.30 0. So the total probability of higher rates for year 2 is .36 + .36 .1) + $1.20 0.2 . An inspection of the Regular Season situation reveals that the sum of the probabilities for the outcomes enumerated is 0..60 0. the complete probabilities concerning a post-season Bowl èame are: Probability of playing = 0. Thus one outcome (win less than three games). choose instructor A.15 0.20 0 1.45 0.15 0.45 0.

000) + 0.000 repair + 0.9259 + .000 replacement + 0.+ (0.000) + 0.50 ($20.10 ($100.000) + 0.000) + 0.000 epair the Valve Expected PW of Cost = $10.000) + 0.20 ($4) + 0.2600.30 ($20.10) ($100.50 ($250.8%.8%.8%.36600.20 The probability of losing is 0.7 10-15 Leave the Valve as it is Expected PW of Cost = 0.20.20 loss.000) = $26.2) +.60 ($10.000) = $30.10 ($30.40 ($10. 10-14 (PW extra costs) = .1) +.03) ($600. Die 1 2 3 4 5 6 Die 2 6 5 4 3 2 The five ways of throwing an 8 have equal probability of 0. repair the valve.40 ($400.00 10-13 Determine the different ways of throwing an 8 with a pair of dice.80 This means a $0.80 The outcome of a $1 bet = 0. .000 To minimize Expected PW of Cost.000) + (0.000) + 0.000) + 0.000) = 0.40 ($30.80 ($0) = $0.000) + 0.36600(/å.000 eplace the Valve Expected PW of Cost = $20.8573 + . The probability of winning is 0.488600.000) = $28.20 ($30.30 ($10.90 ($0) = $355.07 + 0.20 ($20.3) = .000) + 0.2600(/å.7938 = $528.488600(/å.10 ($600.000) + 0.

500 $12.000) = $4.000 = $37.5 m 3m 3. 15%. .000 $300.04 0.120 = $48.000 (A/P.160 = $66.10 ($25.1204 0.5 m 4m Annual Probability of Flood Damage 0.420 To minimize expected EUAC.000 = $6.000 Total Expected Annual Cost $112.5 m 4m Height above roadway 2m 2.000 = EUAC of Embankment = $12.000) + 0.000 Building @lteration Expected Annual Damage Annual Floodproofing Cost = 0.000 Expected Annual Damage $100.000 (A/P.69 Expected loss = $500.000 = $3.500 $15.20 ($10.565 EUAC = $3. 15) = $2.870 =$36.1204 0.5 m 3m 3. 10-18 Height above roadway 2m 2.160 $69.1204 0.01 Initial Cost $100.040 $53. 12%.125 0. 15) = $3.565 = $0 = $20.6313) = $473.370 $48.220 = Expected Annual Damage = $100.000 $300.000) = $1.69 = $26.000 $300. recommend $20.00 (2.1204 x Damage $300.10-16 Expected number of wins in 100 attempts = 100/38 = 2.000 $300.000 x (A/P.1204 0.10 ($10.$473.120 U $54.500 =$12.040 = $19.000 = $15.6316 Results of a win = 35 x $5 + $5 bet return = $180. 15%. 50) 0.000 $550.000 building alteration.333 0.00 .000 $6.31 10-17 Do Nothing EUAC = Expected Annual Damage = 0.000 $165.000 $400.220 Select the 3-metre embankment to minimize total Expected Annual Cost.000 $300.000 $37.02 0.420 EUAC = $3.000 $3.00 Expected winnings = $180.000 Building @lteration Expected Annual Damage Annual Floodproofing Cost $20.

000(.3.000(.01(553)/(553 + 2952) = 10. 100 yr.605 + 19..10(22K) = $19.800 = 4.2) + 400.000(.000(. The discounting by has much more impact in the 12 year life.18% Because (/.10-19 (first cost) = 300..9K.6) = 3.2(18K) + .0909 (/. 100 yr.4.000(.8K(1/6)(/.11 .6) (/.8K(1/6) 6.111 .102 + 19. (Remember.8K(2/3) 3. only the differences between alternatives are relevant.000 + 19..000 $2.8K(1/6) 3.111 . the use of 6 years for the expected value of is an approximation.000/19..000 $250.8K(2/3)(/. 0 = -81K + 19.01(4.8K(1/6)(/. so that we expect the true IRR to be less than 12. this $250.696 + 19.02 0.13%.5) + 19.000 can be included or ignored in the analysis. do the project 10-20 (savings) = .037 + 19.5) + 100. Here it is ignored. Probability of damage in any year = 1/yr flood 0.4) + 19.000 of dam repairs must be done in all alternatives.12 + ..3) + 90. Damage if spillway capacity exceed: $250.000.0909)/(4.3) = $440K (net revenue)= 70..01 Downstream Damage Spillway Damage $50.12%.000 .10) = $45.000 $1.998) = 12.492 = -553 = .800 (life) = (1/6)(4) + (2/3)(5) + (1/6)(12) = 6 years 0 = -81.6) = 81.000(.8K(2/3) 3.84% 10-21 Since $250.000 epair existing dam but make no other alterations u : Probability that spillway capacity equaled or exceeded in any year is 0.. 50 yr.04 0.18%.000.000 $200.800(/.6) = 4.) Flood For 10 yrs: Thereafter: @lternative I: 25 yr.111 & (/.7(20K) + .01 0.5) + 600.) is a non-linear function of .8K(1/6) 6.2) = $86K (PW) = -440K + 86K(/.12) PW 12% = -81K + 19.02.000 $250.8K(1/6) 3.998 = .194 = -2952 PW 11% = -81K + 19.12%.

Expected Annual Cost of Spillway Damage

= $250,000 (0.02)

= $5,000

u u - "

Flood

25 yr.

50 yr.

100 yr.

Probability

that flow*

will be

equaled or

exceeded

0.04

0.02

0.01

Damage

¨ Damage over

more frequent

flood

Annual Cost

of Flood Risk

$50,000

$200,000

$1,000,000

$50,000

$150,000

$800,000

$2,000

$3,000

$8,000

Next 10 year expected annual cost of downstream damage

= $13,000

u u

" Following the same logic as above,

Expected annual cost of downstream damage

= $2,000 + $3,000 + 0.1 ($2,000,000 - $200,000)

= $23,000

Ê

- u u

PW= $5,000 (P/A, 7%, 50) + $13,000 (P/A, 7%, 10)

+ $23,000 (P/A, 7%, 40) (P/F, 7%, 10)

= $5,000 (13.801) + $13,000 (7,024) + $23,000 (13.332) (0.5083)

= $316,180

#

u

Annual Cost = $316,180 (A/P, 7%, 50)

= $316,180 (0.0725)

= $22,920

* An N-year flood will be equaled or exceed at an average interval of N years.

@lternative II:

epair the dam and redesign the spillway

Additional cost to redesign/reconstruct the spillway

= $250,000

**PW to Reconstruct Spillway and Expected Downstream Damage
**

Downstream Damage- same as alternative 1

PW

= $250,000 + $13,000 (P/A, 7%, 10)

+ $23,000 (P/A, 7%, 40) (P/F, 7%, 10)

= $250,000 + $13,000 (7.024) + $23,000 (13.332) (0.5083)

= $497,180

EUAC = $497,180 (A/P, 7%, 50)

= $497,180 (0.0725)

= $36,050

@lternative III:

epair the dam and build flood control dam upstream

**Cost of flood control dam = $1,000,000
**

EUAC

= $1,000,000 (A/P, 7%, 50)

= $1,000,000 (0.7225)

= $72,500

**Note: One must be careful not to confuse the frequency of a flood and when it might be
**

expected to occur. The occurrence of a 100-year flood this year is no guarantee that it won¶t

happen again next year. In any 50-year period, for example, there are 4 chances in 10 that

a 100-year flood (or greater) will occur.

: Since we are dealing with conditions of risk, it is not possible to make an

absolute statement concerning which alternative will result in the least cost to the

community. Using a probabilistic approach, however, Alternative I is most likely to result in

the least equivalent uniform annual cost.

10-22

The $35K is a sunk cost and should be ignored.

a. E(PW) = $5951

b. P(PW<0) = .3 and ı = $65,686.

State

Probability

Net

Revenue

Life (yrs)

PW

PW^2 Prob

Bad

.3

$-15,000

OK

.5

$15,000

Great

.2

$20,000

5

-86,862

2,263,491,770

5

26,862

360,778,191

10

92,891

1,725,760,288

$5,951

$65,686

EPW

ıPW

10-23

a. The $35K is still a sunk cost and should be ignored. Note: P(PW<0) = .3 and = 1 used

for PW bad since termination allowed here. This improves the EPW by 18,918 - 5951 =

$12,967. This also equals the E(PW) of the avoided negative net revenue in years 2 ±

5, which equals .3 (1/1.1)x15,000(/,.1,4).

b. The P(loss) is unchanged at .3. However, the standard deviation improves by 65,686 47,957 = $17,709.

State

Probability

Net Revenue

Life (yrs)

PW

PW^2 Prob

Bad

.3

$-15,000

1

-43,636

571,239,669

OK

.5

$15,000

5

26,862

360,778,191

Great

.2

$20,000

10

92,891

1,725,760,288

$18,918

$47,957

EPW

ıPW

10-24

Since the expected life is not an integer, it is easier to use a spreadsheet table to calculate

each PW. For example, the first row's PW = -80K + 15K(/,9%,3).

Savings/

yr

15,000

15,000

30,000

30,000

45,000

45,000

Life

.3

.3

.5

.5

.2

.2

3

5

3

5

3

5

.6

.4

.6

.4

.6

.4

PW

0.18

-42,031

0.12

-21,655

0.30

-4,061

0.20

36,690

0.12

33,908

0.08

95,034

Expected Value

PW

-7,566

-2,599

-1,218

7,338

4,069

7,603

$7,627

10-25

If the savings were only $15K per year, spending $50K for 3 more years would not make

sense. For the two or three shift situations, the table from 10-24 can be modified for 3 extra

years, and to include the $50K at the end of 3 or 5 years. For example, the first and second

rows' PWs are unchanged. The third row's PW = -80K + 15K(/,9%,6) - 50K(/å,9%,3).

Savings/

yr

15,000

15,000

30,000

30,000

45,000

45,000

Life

PW

.3

.3

.5

.5

.2

.2

3

5

6

8

6

8

.6

.4

.6

.4

.6

.4

0.18

-42,031

0.12

-21,655

0.30

15,968

0.20

53,548

0.12

83,257

0.08

136,570

Expected

Values

PW

-7,566

-2,599

4,791

10,710

9,991

10,926

26,252

The option of extending the life is not used for single shift operations, but it increases the

expected PW by 26,252 - 7,627 = $18,625.

10-26

Al¶s Score was

Bill¶s Score was

x + (5/20) s

x + (2/4) s

= x + 0.25 s

= x + 0.50 x

Therefore, Bill ranked higher in his class.

10-27

.3

$6570

43,164,900

PW

PW 2

.5

$8590

73,788,100

.2

$9730

94,672,900

()

$8212

68,778,100

**ıPW = (68,778,100 - 82122)1/2 = $1158
**

10-28

PW 1 = -25,000 + 7000(/,12%,4) = -$3739

PW 2 = -25,000 + 8500(/,12%,4) = $817

PW 3 = -25,000 + 9500(/,12%,4) = $3855

From the table the E(PW) = $361.9

ıPW = (8,918,228 - 361.92)1/2 = $2964

P

Annual

Savings

PW

PW 2

.3

$7000

.4

$8500

.3

$9500

(-)

$8,350

-3739

13,976,79

0

817

668,256

3855

14,859,62

8

361.87

8,918,228

10-29

To calculate the risk, it is necessary to state the outcomes based on the year in which the

next accident or violation occurred.

year of 2nd

offence

extra $600 in years

PW

PW 2

0

1

2

ok

1-3

.2

$-1546

2,390,914

2-3

.16

$-991

981,492

3

.128

$-476

226,861

none

.512

$0

0

**ıPW = (664,260 - 5292)1/2 = $620.0
**

10-30

For example, the first row's PW = -300K + 70K(/,12%,10)

First

Cost

-300

-300

-300

-400

-400

-400

.2

.2

.2

.5

.5

.5

Net

Revenue

70

90

100

70

90

100

PW

PW

PW 2

.3

.5

.2

.3

.5

.2

0.06

0.10

0.04

0.15

0.25

0.10

95.5

208.5

265.0

-4.5

108.5

165.0

5.73

20.85

10.60

-0.68

27.13

16.50

547

4,347

2,809

3

2,943

2,723

(-)

$-529

664,260

-600

-600

-600

.3

.3

.3

70

90

100

.3

.5

.2

0.09

-204.5

0.15

-91.5

0.06

-35.0

Expected

Values

-18.41

-13.73

-2.10

45.90

3,764

1,256

74

18,468

**Risk can be measured using the P(loss), range, or the standard deviation of the PWs.
**

P(loss) = .15 + .09 + .15 + .06 = .45

The range is -204.5K to $265K.

The standard deviation is ıPW = z(18,468 - 45.902) = $127.9K

10-31

a.

**The probability of a negative PW is .18 + .12 + .3 = .6
**

Savings/

yr

15,000

15,000

30,000

30,000

45,000

45,000

Life

.3

.3

.5

.5

.2

.2

3

5

3

5

3

5

PW

.6

.4

.6

.4

.6

.4

0.18

-42,031

0.12

-21,655

0.30

-4,061

0.20

36,690

0.12

33,908

0.08

95,034

Expected

Values

PW

-7,566

-2,599

-1,218

7,338

4,069

7,603

7,627

PW 2

317,982,538

56,273,884

4,947,906

269,224,438

137,972,411

722,521,558

1,508,922,7

38

**Risk can also be measured using the standard deviation of the PWs. The standard
**

deviation is ıPW = z(1,508,922,738 - 76272) = $38,089.

b. Extending the life for 2 & 3 shift operations reduces the probability of a negative PW by

.3 to .3.

Savings/

yr

15,000

15,000

30,000

30,000

45,000

45,000

Life

PW

PW

PW 2

.3

.3

.5

.5

.2

.2

3

5

6

8

6

8

.6

.4

.6

.4

.6

.4

0.18

0.12

0.30

0.20

0.12

0.08

-42,031

-21,655

15,968

53,548

83,257

136,570

-7,566

-2,599

4,791

10,710

9,991

10,926

**317,982,538
**

56,273,884

76,496,783

573,477,749

831,810,614

1,492,115,5

47

3,348,157,1

18

Expected

Values

26,252

**Risk can also be measured using the standard deviation of the PWs. The standard
**

deviation is increased by $13,477. This illustrates why standard deviation alone is not

the best measure of risk. Extending the life makes the project more attractive, and

**increases the spread of the possible values. The standard deviation is higher, but the
**

P(loss) has dropped by half.

ıPW = z(3,348,157,118 - 26,2522) = $51,565

10-32

(a) Expected fire loss in any year= 0.010 ($10,000) + 0.003 ($40,000)

+ 0.001 ($200,000)

= $420.00

(b) The engineer buys the fire insurance because

1. a catastrophic loss is an unacceptable risk

or

2. he has a loan on the home and fire insurance is required by the lender.

10-33

Project

1

2

3

4

5

6

F

IRR

15.8%

12.3%

10.4%

12.1%

14.2%

18.5%

5.0%

Std.Dev.

6.5%

4.1%

6.3%

5.1%

8.0%

10.0%

0.0%

IRR

10.4%

9.8%

6.0%

12.1%

12.2%

13.8%

4.0%

Std.Dev.

3.2%

2.3%

1.6%

3.6%

8.0%

6.5%

0.0%

10-34

Project

1

2

3

4

5

6

F

Risk vs. Return èraph

Expected Value of IRR

20%

6

15%

1

5

2

10%

4

3

5%

F

0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Standard Deviation of IRR

Risk vs. Return èraph

Expected Value of IRR

15%

6

5

4

10%

2

5%

1

3

F

0%

0.0%

2.0%

4.0%

6.0%

Standard Deviation of IRR

8.0%

$75.000) = (2/21) ($1 mil . Depreciation.600 $1.238 = $176.555) (2/6) ($1. on the MARR%.$75.$802.222 $1.000.)/[(N/2)(N+1)]] (P ± S) 1st Year: 2nd Year: 3rd Year: 4th Year: 5rd Year: 6th Year: SOYD = (6/21) ($1 mil .000 .000 .$75.000) = $264.000) = (5/21) ($1 mil .400 $2.$75.000) = (3/21) ($1 mil .313 .190 = $132.000) = (4/21) ($1 mil .000 .$868.469) See below DDB Depreciation = $333.$75.095 = $ 44.$555.000. If switch DDB to SL for year 6: SL = ($1.000 .766 = $65.$703.400 *Computed $658 must be reduced to $375 to avoid depreciating the asset below its salvage value.000.$333.148 = $98.266 = $56.$802. i% used by the firm (individual) .000)/1 Do switch.000 .$75.400 DDB $3.687 If switch DDB to SL for year 5: SL = ($1.Chapter 11: Income.$75.000.222 = $148. = $61.$0) (2/6) ($1. useful life at begin.000.000.143 = $ 88.000 $1.000)/2 Do not switch.687 Sum-of-Years Digits Schedule is: SOYD in N = [(Remain.000.048 Ruestion: Which method is preferred? Answer: It depends.000 .844 = $56.000 .200 $800 $400 $8.333 = $222.333 $2.469 . and Cash Flow 11-1 Year 1 2 3 4 5 6 Sum SOYD $2. 11-2 DDB Schedule is: Year n 1 2 3 4 5 6 d(n)=(2/n)[P ± sum d(n)] (2/6) ($1.482 $988 $375* $0 $8.333) (2/6) ($1.$75.286 = $220.703) (2/6) ($1.000) = (1/21) ($1 mil . of yr.

801 $724.468 $537.728 $2.600 $5.631 PW of SOYD is= $925.211 $738.304 $1.As an example: If i% is= 0% 2% 10% 25% PW of DDB is= $925.728 $16. if MARR% is > 0%.000 SL = (Book ± Salvage)/Remaining Life $2.304 = $830 $14.400 $1.$0) (2/5) ($16.840 $2.331 $561. One can also see this by inspection of the depreciation schedules above.400) (2/5) ($16.000 .000 $881.000 .400 = $3.400 $3.$6.130 Preferred is Equal.926) DDB Depreciation = $6.$10.240) (2/5) ($16.840 = $2.456 $2.074 Decision Do not switch Do not switch Switch to SL .728 $1.920 $1. same DDB DDB DDB Thus.756 Converting to Straight Line Depreciation If Switch for Year 2 3 4 5 Beginning of Yr Book Value $9.000 .074 Remaining Life 4 yrs 3 yrs 2 yrs 1 yr esulting Depreciation Schedule: Year 1 2 3 4 5 Sum DDB with Conversion to Straight Line $6. DDB is best.000 $877.$13. 11-3 DDB Depreciation Year 1 2 3 4 Sum (2/5) ($16.760 $3.000 .

000 10.000 S=$3.140 4.500) / 4 (b) Sum-of-Years Digits Depreciation SOYD in yr.11-4 P=$12.$10.000 .$3.$3.000 .000 .$3.998 3.$6.200 7.142 1.800 3.000-$3.000 .499 .499 $ $ $ $ 10.500)= $2.550 3 Year: = (2/10) ($12.200 7.000 .$3.060 2.$0) = $6.500 4th Year: = (2/4) ($12.500) = $750 rd (d) CC@ Special handling equipment classifies as a Class 43 asset with a CCA rate of 30% Year 1 2 3 4 UCC at Start of Year $ $ $ $ 12.000 2nd Year: = (2/4) ($12.500)= $850 2nd Year: rd (c) Double Declining Balance Depreciation DDB in any year = 2/N(BookValue) DDB in any year 1st Year: = 2/N (Book Value) DDB = (2/4) ($12.500)= $3. of yr.500 N=4 (a) Straight Line Depreciation SL = -(P-S) / N $2.140 4.000) = $3. N = [(Remain.000 .400 = (3/10) ($12.000 .998 CCA Rate 15% 30% 30% 30% Depreciation Charge for year UCC at end of t = year t $ $ $ $ 1.000 .500)= $1.000) = $1.700 4th Year: = (1/10) ($12.$9. useful life at begin.)/[(N/2)(N+1)]] (P ± S) 1st Year: SOYD = (4/10) ($12.125 =($12.000 3 Year: = (2/4) ($12.

887.00 23.566 = $3.686.800.00 23.00 14.549.000.120 $4.00 36. Capital Cost at end of year 50.00 0.549.760.$59.944 = $6.277 $2.745.000.240 = $10.000 $5.887.000.00 $4.549.200 $10.00 4.000 $6.00 18.48 9.00 0.067 $76.000.000 .000 .745.200 $15.000.000.00 0.18 7.040.75 20 20 20 20 20 20 20 20 20 20 5.432.200 $15. This mistaken view is based on the fact that in the table above the Straight Line .437.$48.039. during the year 0 0 0 0 0 0 0 0 0 0 Undep.400 = $18.342 SOYD CC@ $9.000.00 $8.00 14.000. capital cost CCA rate % Capital cost allowance Undep.18 7.00 25.000.95 45.00 18.400 $5.75 25.800.133 $5.200 $15.640) (2/5) ($76.00 0 0 0 0 0 0 0 0 0 Proceeds of disp.267 $15.000 $8.359.48 9.12 2.549.000 $5.432.000 $5.40 $3.745.364 $5.18 7.940 $70.437.432.000 .00 0.686.273 $7.000 $5.432.00 0.584) (2/5) ($76.80 Summary of Methods Year 1 2 3 4 5 6 7 8 9 10 SL $5.30 $1.00 $7.150) DDB = $30.00 23.00 45.48 9.509.60 11.00 18.636 $2.096 $3.818 $1. Undep.000 DDB $10.000 $5.00 7.000 .800.437.95 11-6 (a) Year 1 2 3 4 5 Sum (b) SL $15.000.090 By looking at the data in Part (a).000.800.091 $5.455 $4.000 $5.796.040.200.000 $5.000 $5.949. (d) Furniture: Class 8 (CCA rate=20%) Year 1 2 3 4 5 6 7 8 9 10 Class No.333 $20.000.000 .000.75 6.40 2.$30.00 14.44 1.200 $76.040.00 $5.60 11.00 0.000.359.30 1.00 5.000.608.437.509.00 0.00 45.760.00 36.182 $9.44 $909 $1.00 28.000 (2/5) ($76.678 $1.48 9.200 $15.00 28.00 23.60 11.00 28. DB.796.60 11. during the year 8 8 8 8 8 8 8 8 8 8 0 45.12 $2.00 14. capital cost at beginning of year Cost of acq.727 $2.400) (2/5) ($76.200.00 3.00 28.000.$0) (2/5) ($76. SOYD) are similar to Problem 11-4.796.000 SOYD $25.00 9.040.621 $2.545 $3.00 $6.796.00 0.00 36.608.745.00 18.000 $5.949.097 $1.75 50.11-5 The computations for the first three methods (SL.00 0.00 36. some students may jump to the conclusion that one should switch from DDB to Straight Line depreciation at the beginning of Year 3.$66. capital cost 50% rule Reduced undep.18 7.

000. One would naturally choose to continue with DDB depreciation.00 43.000.720. This may be illustrated by computing the Straight Line depreciation for Year 3. SL depreciation for subsequent years = ($27. The resulting depreciation schedule is: Year 1 2 3 4 5 Sum (c) DDB with Conversion to Straight Line $30.850 When SL is compared to DDB in Part (a).776.944 or SL = $9.00 0.755.64 .00 38.776.680.80 28. it is apparent that the switch should take place at the beginning of Year 4.240 $10.00 0. if DDB depreciation had been used in the prior years. Capital Cost at end of year 20 20 20 20 20 7. during the year 43 43 43 43 43 0 68.00 35.000 .00 35.016.240 = $27.776.16 68.020.020.416 $9.720.020.944 $8.120.00 35.400.00 54.000.00 54.400 $18.720.depreciation for Year 3 is $15. capital cost at beginning of year Cost of acq. therefore loss on disposal=$28.944.00 43.360.400. the choice for Year 3 is to use DDB = $10. the book value at the beginning of Year 3 = $76.00 35.400.$0)/3 = $9.00 0.$30.208 $8. With DDB depreciation for the first two years.$18.000 CCA rate =30% Year 1 2 3 4 5 Class No.00 0.2000.00 68.00 54.720.208 $76.20 7. This is not a correct analysis of the situation. Undep.64 CCA rate % Capital cost allowance Undep.80 76.80 38.00 0 0 0 0 Proceeds of disp. Thus. during the year 0 0 0 0 0 Undep.208 $9.120.600.00 43.00 68.00 43. For subsequent years: If Switch for Year 4 5 Beginning of Yr Book Value $16.944.80 Salvage value=0.00 8.776.400 .400.00 13.016. capital cost 76.004.360 .00 54.850 Remaining Life SL = (Book ± Salvage)/Remaining Life 2 yrs 1 yr $8.020. while the DDB depreciation is only $10. capital cost 50% rule Reduced undep.00 10.000.

00 $12.000 $9.500.480 $3.800 = $6.00 $6.920.500.000 $28.501 SOYD CC@ $15.00 Salvage value=0.000 (c) DDB Year 1 2 3 4 5 (2/5) ($45.000 $4.20 40.00 32.00 40. Undep.280) (2/5) ($45.480 = $3.00 0.480.00 5. during the year 0 0 0 0 0 Undep.000 $6.$18.500.00 0.000 .$0) = $9.500.00 $3.480.100.588. capital cost at beginning of year Cost of acq.00 25.920.00 0.920.00 22.736.888 = $2.500.400.588.184.000 .00 $9.000 .000 .800 $6.00 6.00 25.888 $2.00 16. Capital Cost at end of year 20 20 20 20 20 4.20 CCA rate % Capital cost allowance Undep.000.$0) (2/5) ($45.000 $9.000) (2/5) ($45.11-7 (a) Straight Line SL depreciation in any year = ($45.168) DDB = $18.000 .147.80 .00 0.000 .00 40.333 (d) CCA Class 8 asset (CCA rate=20%) Year 1 2 3 4 5 Class No.$28.80 Summary of Depreciation Schedules Year 1 2 3 4 5 Sum SL $9. during the year 8 8 8 8 8 0 40.333 $41.00 20.20 $45.00 22.400.000 $10.500.800) (2/5) ($45.500.184.000 .736.411.147.000 = -$3.000 .000 DDB $18.$0)/5 (b) SOYD sum = (n/2) (n+1) = (5/2) (5) = 15 Depreciation in Year 1 = (5/15) ($45.00 20.400.000 = $15.$0) èradient = (1/15) ($45.000 $45.100.920.00 25.000 $9.000 $4.00 25.00 20.00 32.00 32.000.00 32.000 $5.$39.000 $8.00 4. capital cost 45.000 = $10.00 45.000 $9.$35.736.00 20.00 0 0 0 0 Proceeds of disp.00 8. capital cost 50% rule Reduced undep.400.500. therefore loss on disposal=$16.736.

300 DDB $2.52 Undep.200.38 738.312.657.45 Year 1 2 3 4 5 *UOP Depreciation is based on actual production.28 . 9 9 9 9 9 Undep. capital cost at beginning of year ($1.707.000) Undep.000) 0 1.707.767 $1.28 553.413 $1.00 0.500. capital cost ($1.00 0.250.00 1.18 568.525.178 CCA $975.000) 187.707.00 $1.50 984.060 $1.525.25 $812.000) 50% rule ($1.867.00 0.71 750.00 3.525.28 553.08 30 30 30 30 30 Capital cost allowance 975.71 415.00 0.52 $5.00 0.00 750.000) CCA rate % 1.25 1. capital cost ($1. capital cost 50% rule Reduced undep.00 0.50 2.300 SOYD $1.50 2.160.08 Cost of acq.00 0.160.50 328.895.00 5.895.08 3.50 2.500. capital cost at beginning of year 1 2 3 4 5 8 8 8 8 8 0 5.707. therefore loss on disposal=$126.312.00 0 0 0 0 Proceeds of disp.250.525.71 25 25 25 25 25 Capital cost allowance ($1.895. 11-9 Class 9 asset (CCA rate=25%) Year 1 2 3 4 5 Class No.500.50 $1.657.867.600 $1.060 $5.55 Year 1 2 3 4 5 Sum SL $1.312. Capital Cost at end of year ($1. during the year ($1.18 $568.25 1.25 812. capital cost CCA rate % 6.00 0 0 0 0 Proceeds of disp.09 184.57 138.000) 0 0 0 0 0 Undep.00 5.11-8 CCA rate=30% Year Class No.560 $936 $204 $0 $5.00 3.50 984.000) Cost of acq.38 738.00 1.00 1.13 246.312.000) Reduced undep.060 $1.867.00 3.060 $707 $353 $5.38 738.08 1.060 $1.00 3.00 3.28 553.50 984.895.38 738. Capital Cost at end of year 5.500. during the year ($1.060 $1.43 1.50 984. during the year 0 0 0 0 0 Undep.25 1.867.300 UOP* $707 $1.55 Salvage value=$1. Undep. during the year 6.28 553.326.00 0.174.71 1.25 1.50 2.50 1.

40 2.200.00 0.00 44.00 0.214.00 $36.95 20 20 20 20 20 20 20 20 20 20 1.000.00 0.95 1.00 7.25 15.95 10.00 13.207.98 $25.00 44.46 7.675.12 5.00 5.30 1.760.06 30 30 30 30 30 30 30 30 30 30 11.102.500. capital cost CCA rate % Capital cost allowance Undep.00 7.625.306.50 $30.00 5.00 7. during the year 43 43 43 43 43 43 43 43 43 43 0 63.500.00 5.387.50 21.00 3.00 5.00 3.359.50 21. capital cost at beginning of year Cost of acq.887.30 1.88 4.30 1.99 9.440.09 3. capital cost at beginning of year Cost of acq.00 0.09 3. during the year 8 8 8 8 8 8 8 8 8 8 0 9.00 0.38 10.40 2.34 2.00 0.12 2.44 1.887.75 $36.06 37.00 $ 27.00 44.00 31.00 0.00 0.760.00 $27.760.675.675.306.40 2.00 0.714.608.686.675.30 1.949.237.00 4.52 63.80 $20.000.750.000.00 $27.00 31.54 11-11 Class 43 asset (CCA rate=30%) Year 1 2 3 4 5 6 7 8 9 10 Class No.25 15.000.686.866.625.44 1. Capital Cost at end of year 10.500.237.00 3.88 $18.00 0.608.608.714.00 31.06 2.82 471. capital cost 50% rule Reduced undep.09 3.44 1.250.949.509.00 0.00 9.50 9.00 9.12 5.00 921.00 0.306.12 5.25 6.625.000.00 1.509.000.686.00 4.12 5.625.000.572.38 10.95 5.200.00 1.750.00 0.00 3.00 44. capital cost 50% rule Reduced undep.49 301.237.00 0 0 0 0 0 0 0 0 0 11-12 Initial Cost Useful Life Salvage Value CCA Rate Year 1 2 3 4 SL $27.46 7.00 4. during the year 0 0 0 0 0 0 0 0 0 0 Undep.250.00 1. Capital Cost at end of year 75.00 37.00 0.608.3 SOYD $45.12 2. capital cost CCA rate % Capital cost allowance Undep.866.250.00 31.750.00 $27.50 21.00 $34.25 15.714.12 2.46 7.00 0.09 3.866.359.359.591.00 150%DB $43.800.60 737.00 4.887.509.00 0.00 5.04 1.887.00 63. Undep.00 0.760.53 CC@ $21.00 0 0 0 0 0 0 0 0 0 Proceeds of disp.03 1.44 1.45 $21.38 10.00 145 5 10 0.25 15.000.250.12 .866.86 377.250. during the year 0 0 0 0 0 0 0 0 0 0 Undep.00 $18.12 2.575.32 $14.000.750.46 7.306.500.000.500.559.250.000.949.371.686.92 DDB $58.200.237.949.00 63.152.40 2. Undep.91 3.359.50 21.96 Proceeds of disp.00 19.200.06 75.125.11-10 CCA class 8 (CCA rate 20%) Year 1 2 3 4 5 6 7 8 9 10 Class No.714.88 $12.38 10.500.509.28 589.00 7.00 0.

00 $222.00 $194.85 DDB $424.233 $1.667 $1.11 $ 73.00 1060 5 90 40% SOYD $323.00 $135.233 $1.410 $1.298 CC@ $1.52 $122.500 $1.560 $1.27 $--$--$ 19.00 $194.233 $1.00 $194.233 $1.00 $120.35 $--$--$ 88.185 $ 790 $ 527 $ 351 $--$ 102 $7.72 $115.33 $258.125 $ 844 $ 633 $ 475 $--$ 824 $6.057 $ 705 $ 352 $--$--$7.60 $155.82 $109.00 $129.57 CC@ $212.63 $133.64 $ 91.15 $881.536 $ 922 $ 553 $ 332 $--$ (102) $7.90 $950.233 $1.58 $ 54.59 TOT@L $135.00 $--$--$--- $9.00 $194.762 $1.44 $--$--$14.52 $--$--$1.41 Column B is probably a unit of production.000 $1.233 $--$0 $7.40 $152.600 $2.400 .33 $ 64.37 $7.00 $254.68 $--$--$19.28 $12.114 $1.57) $977.00 $339.778 $1. 11-13 Initial Cost Useful Life Salvage Value CCA Rate Year 1 2 3 4 5 6 7 SV-UCC TOT@L SL $194.67 $--$--$--$970.20 $203.07 $ 76.5 6 7 SV-UCC $27.00 $--$--$--$970.000 6 $600 40% SOYD $2.400 $8.10 150%DB $2.67 $194. 11-14 Initial Cost Useful Life Salvage Value CCA Rate Year 1 2 3 4 5 6 7 SV-UCC TOT@L SL $1.502 Column E is probably a unit of production.00 $--$--$--- $10.95 $--$--$ (7.576 DDB $2.00 150%DB $318.

750 $21.000 $ 202.811 $ 74.333 $ 116.667 $ 200.325.892 38.957.332 .667 9 $16.750 $ 75.223 29.3 Book Values SL $ 233.333 $ 166.917 6 $16.167 3 $16.0 $ 97.417 12 $16.469.824 $140.574 $ 107.845 $ 7.223 $220.686 $ 8.986 $ 5.2 $ 0.571 68.667 187.750 $189.806 $16.473 $ 51.7 $ 115.332 $195.667 $25.623 $ 132.453 $ 6.762 $ 9.314 $15.375 $19.473 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ DDB 216.223 29.000 $ 133.11-15 Comparison Worksheet Initial Cost $ 250.667 $ 50.500 11 $16.360 $10.225 $16.2 depreciable amount= $250.583 $ 93.187 $ 4.250 2 $16.250 $18.333 $28.610 $ 9.833 7 $16.170 $ 78.223 29.500 $213.622 $11.042 122.778 162.798 44.077 $ 60.500 $23.024 $12.667 $ 6.473 $ 51.250 $ 164.456.281 $ 7.530 $ 67.484.201 $ 8.500 $114.236 $ 92.708 $ 6.957 $10.332 $ 54.795.403 $14.667 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 SOYD $218.583 10 $16.667 $14.138 $155.855 $ 87.195 $ 7.217 $113.583 $162.000 $250.236 105.000 i= NPW of deprec= NPW of balance Total NPW $ 0.807.083 4 $16.500 $20.607 $ 63.167 15 $16.667 $ 2.500 $137.667 $20.496 $--$--$--$--$--$29.250 $ 20.241 $126.333 $ 43.617 $ 96.7 $ $ - $ 127.667 $22.192 $ 51.667 $ 4.332 $ 54.969 $ 6.667 $ 100.719 $--$--$--$--$--$51.083 16 $--$--17 $--$--18 $--$--19 $--$--20 $--$--SV-UCC $0 $--TOT@L $250.667 $ 8.000 5 $16.000 $ 83.9 $ 3.473 $198.456.750 $ 31.667 $31.596 $102.000 $ 58.741 141.667 $ 150.473 $ 51.000 150%DB $25.286 $11.453 $ 70.667 $16.906 $ 5.375 $173.298 $14.906 33.224 $ 9.6 CC@ gives greater NPW than SL CCA $237.333 $ 16.061 $ 6.000 Useful Life 15 Salvage Value 0 CC@ ate 0.667 $12.355 $ 5.591.667 $29.223 29.750 $192.025 $ 147.242 $10.938 91.3 103.333 $ 66.369 $ 54.4 $ $ 6.333 $ 216.037 $--$--$--$--$--$ 54.473 $ 51.000 $22.699 $18.332 $ 54.9 $ 97.500 $ 182.0 $ 90.777 CCA $12.767 51.250 14 $16.962 59.083 $ (0) $ (0) $ (0) $ (0) $ (0) $ (0) 150%DB $ 225.547 $ 57.223 29.1 Year SL SOYD 1 $16.000 $ 183.667 $27.860 $ 119.473 $ 51.667 $18.125 $12.332 $ 54.119.037 $21.762 $13.500 $ 6.813 79.223 6.719 29.750 8 $16.2 $ 97.582 $14.833 $ 12.332 $ 54.333 13 $16.250 $ 2.677.717 $ 7.4 $ 119.668 $ 127.527 DDB $33.000 $ 33.548.667 $10.012 $ 82.2 $ 97.119.889 $25.238 $17.

600 i= NPW of deprec= NPW of balance Total NPW 10% $60.333 $16.000 $14.000 To maximize PW at Year 0.167 = $100.000 = $120.051 $11.000 Useful Life 5 Salvage Value $20.000 = $24.000 = $32.760 $5.000 $10.341 The DDB method gives the highest NPW 11-17 SOYD Depreciation Sum = (5/2) (5 + 1) = 15 Year 1 2 3 4 5 Sum (5/15) ($120.500 $17.230 $8.333 $--$80.000 $73.000 $62.000) ($120.000 $16.000/$40.400 $ 8.000) (3/15) ($120.000) (4/15) ($120.667 $ 5.000) (2/15) ($120.491 $--$64.087 $ 254 $62.000) ($4.000 $16.850 $12.000 = $33.000/$40.000 $25.000 = $8.000/$40.912 $80.000 $24.000 $16.000 = $18.653 $64.000) ($120.880 .000 $16.000/$40.000 CCA Rate 30% Year 1 2 3 4 5 SV-UCC TOT@L SL $16.000 = $12.11-16 Comparison Worksheet Initial Cost $100.000) (1/15) ($120. PW at Yr 0 at 8% $41.000 SOYD $26.640 $ 1.653 $--$60.667 $21.291 $9.000 PW at Yr 0 at 8% $37.726 Unit of Production Depreciation Year 1 2 3 4 5 Sum ($15.666 $28.000 DDB $40.000) ($120. choose UOP depreciation.000) ($120.445 = $100.000) ($4.000 $--$80.000 = $120.036 $27.000) UOP = $45.000/$40.434 $19.526 $13.000 = $16.000) ($120.491 $73.912 CC@ $15.000) ($11.495 $ 8.000) SOYD = $40.000) ($6.747 $ 409 $80.000 = $12.

39 = $2.$26.500 nd 2 year depreciation .78 (c) $130.000 11-19 See solution to 11-8.000 .000 .000) = $5. 11-21 (1) Use Table 11-1 to find the MACRS èDS Property Class for each asset: (a) CCA class 10 asset (b) CCA class 43 asset (c) CCA class 1 asset (2) Depreciation in year 3 (a) Dep3=$3.16 (3) Book Value = Cost Basis ± Sum of Depreciation Charges (a) $17.$25.285.22 = $4.000 (c) CCA ± Class 12 Assets are at 100% rate Because of ½ year rule.034.52 = $103.000 .$5.878.4)($10.$14.428.714.000) DDB = $5.50 (b) Dep3=$5.48 .500 (b) SOYD 2nd year SOYD = (3/10) = $3.571.000 .61 (b) $30.121. this is really 50% per year 2nd year CCA = 50% x ($10.$0) (2/4)($10.355.$2.000 = $2. 11-20 See solution to 11-15.000 .00 (c) Dep3=$4.11-18 (a) DDB Year 1 2 (2.892.

500 + $20.015 = $736. capital cost at beginning of year ($1.00 0.000) (A/P.99 30.380 To minimize EUAC.00 564.000) 50% rule ($1.00 799.48 541.32 31.42 Capital cost allowance ($1.58 21.000-100.050 EUACII = ($100.000 = $27. during the year ($1.000 (P/A.000 (0.000 (0. capital cost ($1.90 520.000) 0 833. capital cost ($1.000) Cost of acq.00 799. during the year ($1.00 0.000) 50% rule ($1.48 541.000 .68 767.69 CCA rate % 4 4 4 4 UCC at end of year 4=$850.584 11-23 Year Class No.00 0.68 767.00 564. 11-25 (a) EUACI = (P ± S) (A/P.00 0.11-22 Year Class No.00 799.22 300.00 0 0 0 0 Proceeds of disp.00 0. Capital Cost at end of year ($1.1102) + $2. during the year ($1.000) 0 588. 20) + $20.68 767.000) 0 0 0 0 0 Undep.68 20.584.00 588. capital cost ($1.00 588.000) Reduced undep.48 541.00 833.000 (0.000 = $60.00 0. 10%.00 300.000 (0. select Machine II.81 588.416 èain on disposal=$100. capital cost ($1.00 425.000) Undep.99 4 4 4 4 4 UCC at end of 5 years=$600.69 736.52 22.000) 17.48 541.000 .71 833.$5.00 0 0 0 Proceeds of disp.000 + $18.000 .22 600.$25. i%.000) Undep. 10%. 10%.000 (6. .000) Reduced undep.68 767.000-113.000) (A/P.000) Cost of acq.22 499.69 850.00 33.10) + $18. 25) = $75.000 . 1 2 3 4 5 1 1 1 1 1 Undep. Capital Cost at end of year ($1.00 833.00 564. 10) (A/P.22 CCA rate % Capital cost allowance ($1.1175) + $2.145) (0. 10%.000) 12.10) + $20.90 520.90 520.00 564.00 23.000) 850. n) + Si + Annual operating cost = ($80.1102) = $27.985 11-24 Same as above.90 520.00 0.000) 0 0 0 0 Undep.69 425.00 799. during the year ($1. capital cost at beginning of year ($1.000) 600.22=$499. 25) + $25.$5. 1 2 3 4 1 1 1 1 Undep.$20.

000 (0.4% (e) SOYD depreciation Book value of Machine I after two periods Dep.$20.1486) = $88.000 -$18.10 = $270.500 (c) Fund to replace Machine I Required future sum F Annual Deposit = $80. 20) Solve by trial and error: Try i = 10% ($10.000 +$28.000 (0.000 +$20. EUAC = $27.(b) Capitalized Cost of Machine I = PW of an infinite life = EUAC/i In part (a).857 (f) DDB Depreciation Book value of Machine II after three years Depreciation charge in any year = (2/n) (P ± Depreciation charge to date) = $5.0175) = $1.000 (P/F.000 (0.000 (A/P.$20.143 . 20) = $60.714 = $5.000) (8. i%.000) (7.514) + $20.000) 2nd Year depreciation = (19/210) ($80.050.1037) = $76.050 (d) Year 0 1.20 20 $80.$80.000)/($88. so: Capitalized Cost = $27.000) (P/A.000) Book value = Cost ± depreciation to date = $80.112 .764)] = 11. Charge in any year = (Remain.$76.000 A = $60.000 = $60.112 .000 .000 .143 = $68.000 = ($28.$20. i%.469) + $20.000 .000 Try i = 12% ($10.000 Rate of Return = 10% + (2%) [($88.000 .112 $80. 20) + $20.764 $80.000 .000 Cash Flow -$80. useful life at beginning of yr/SOYD for total useful life)(P ± S) Sum of years digits = (n/2) (n + 1) = 20/2 (20 + 1) = 210 1st Year depreciation = (20/210) ($80.050/0. 10%.$18.$11.429 Sum = $11.

00 10.00 Loss on disposal = 17.00 25.750 UCC at end of 3 rd year (before 3rd yr CCA taken) = $29. Capital Cost at end of year ($1. Undep.000.500) $(12.000.000 .500 $(22. capital cost at beginning of year Cost of acq.000.000 .00 17.000) 0 0 0 Undep.000) 0 85.000) Reduced undep.00 5.000 11-27 CC@ P= $50. capital cost CCA rate % Capital cost allowance Undep.771 Sum = $22. during the year ($1. capital cost 50% rule Reduced undep.000.000) Cost of acq.750) 60000 $20. during the year 1 2 0 17.1st Year Depreciation = (2/25) ($100.000) Undep.000-14.000) 15.000.00 0.$15.00 59.50 Capital cost allowance ($1.360 3rd Year Depreciation = (2/25) ($100.500 dep yr 2 $ 12.360) = $6.500 .50 17.$8.000 = $3.000 . capital cost at beginning of year ($1.500) $12.00 85.00 0. Capital Cost at end of year 20.00 0 Proceeds of disp. capital cost ($1.000 dep yr 1 $ 7.869 (g) CCA depreciation (class 43 asset) Year 1 2 3 Class No.000 $6.750) 25000 $(4.85 85.000) CCA rate % 100. during the year 0 0 Undep.00 59.$0) = $8.00 0 0 43 43 43 Proceeds of disp.000. capital cost ($1.00 50.131 = $77.000 .100.00 30 30 3.000.00 0.00 10.$22.00 59.00 85.00 17.000) 50% rule ($1.50 50.00 59.250 SL $50.000.50 41.000 2nd Year Depreciation = (2/25) ($100.65 30 30 30 11-26 Year Undep.900.250 $6.50 100.00 20.131 Book Value = Cost ± Depreciation to date = $100.000) = $7. during the year ($1.250 $37.00 17.000.00 11.750 selling price recapture (loss) 15000 $(14.

50.000 m4) = $29.000 $30.000 $90.$60.000 .$60.250 To engineering student .250) = $1.800.65/m3 (45.000Bbl) = $3.000 $45.000) = $1. 11-30 (a) SOYD Depreciation N=8 SUM = (N/2) (N+1) = 36 1st Year SOYD Depreciation = (8/36) ($600.00.000 (b) Unit of Production (UOP) Depreciation Depreciation/hour Year = $540.000 .000) = $120.000 $540.462. allowable depletion = $3.000 $60.750 Percentage depletion = 5% ($29.000 $15.000) = $15.000/21.000) = $4.50 Therefore.11-28 èross income from sand and gravel $0.000 (1. depletion = $26.462. allowable depletion is $1.000.600 hours = $25/hr Utilization hrs/yr UOP Depreciation .000 $75.000 $105. Salt¶s cost of depletion Percentage depletion = $45.000 Year 1 2 3 4 5 6 7 8 Sum SOYD Depreciation $120.000 . 11-29 Mr.$3.000 Subsequent years are a declining gradient: è = (1/36) ($600. but limited to 50% of taxable income before depletion or = 50% ($12.$2.000 Bbl/15.500 Therefore.500 Taxable Income inc.000 = 15% ($12.

000 1.200 11-31 11-32 11-33 See solution to problem 11.000 $55.600 800 800 2.000 $40.1 2 3 4 5 6 7 8 Sum 6.16 $150.000 $20.000 $20.000 4.000 4.000 $100.000 .200 2.000 $55.000 $540.000 $100.

857 $14.571 $ 4.575 $ 66.848 BV $74.000 $70.143 $12.000 $10.600 $46.024 $103.400 $11.714 $21.864 $29.491 .280 $129.286 $52.714 $22.000 $57.000 $72.000 $15.600 $161.000 BV $85.286 11-35 Year 1 2 3 4 5 6 7 8 9 10 CC@ $175.219 $ 82.080 $36.520 $ 9.000 $201.060 $ 52.373 UCC $90.000 $40.000 $14.000 $15.000 CC@ $10.000 $55.000 Sum Of Year $25.857 $ 8.000 $18.000 $15.000 $315.000 $15.857 $35.000 $252.216 $ 7.000 $25.286 $10.429 $17.000 $15.11-34 Comparison Worksheet Initial Cost 100000 Useful Life 6 Salvage Value 10000 CCA Rate 20% Year 1 2 3 4 5 6 SL $15.

300.380 $1.00 $3.280.804 26% $2.00 Federal taxes payable= $6.00 $14.500.340.260.00 From $70.000 to $70.74 $13.600.00 $5.940.000 Non-refundable tax credit=$6.700.800 $960.000 to $70.840.001 to $113.00 $10.079.000 On the first $35.000 On all income 10% Total taxes= $11.000R16%= Federal taxes payable= Increase in federal taxes= Federal taxes=$15.000 16% 22% Taxable income $62.000R16%= Federal taxes payable= $5.00 $2.000 16% $5.000 Non-refundable tax credit=$8.100.00 $11.00 .840.540.000 16% 22% Taxable income $62.Chapter 12: @fter-Tax Cash Flows 12-1 (a) Federal Taxes On the first $35.000 Non-refundable tax credit=$8.280.000 to $70.000 From $35.840 Provincial taxes: $4.600.000 22% $7.00 Federal taxes=$11.00 From $35.00 Provincial taxes: Taxable income=$45.800.600.540 $1.00 (b) Increase in federal taxes after increase of $16.00 (b) Ontario resident Federal taxes payable=$6.000R16%= $5.00 Taxable income $78.000 Non-refundable tax credit=$6.000 From $35.00 Federal taxes=$7.200.00 12-2 (a) @lberta resident Federal Taxes On the first $35.00 $7.

20 Net Income=$7.800+$2.90% $704.69 $3.752 Total taxes= 6.20 $850.60 Net Income=$7.000R16%= $960.On the first $33.000R16% $960.60 Total taxes= $1.15% $2.063.00 Federal taxes payable= Provincial taxes: On the first $30.2= Upon increase in income of $2.00 $1.00 Non-refundable tax credit=$6.3 Federal Taxes: On the first $35.19 $1.248.248.133.600=$10.082.837.00 Non-refundable tax credit=$6.544 10.562.800-$1.661.248.60 $8.922.544 10.800+$2.90% $288.00 Non-refundable tax credit=$6.40 Increase in net income=$8.019.248.664.88 12-3 Problem 12.00 $1.600-$1.000 16% $850.375 From $33.900.661.00 $1.664.80 $1.00 Total taxes= $1.375 to $66.837.400) $1.88 $9.562.40-$6.000R16% $960.133.138.00 .600 Federal Taxes: On the first $35.80 (gross income=$7.00 Federal taxes payable= Provincial taxes: On the first $30.05% 9.60 $1.000 16% $1.60 12-4 Federal Taxes: On the first $35.138.000 16% $1.20 $6.00 $1.

924.00 (gross income=$7.Federal taxes payable= Provincial taxes: On all income 10.040.800 ± $1.068.00 Net Income=$7.600 ± $1.00 .732.00% Total taxes= $1.00% $704.000 16% $288.732.00 Non-refundable tax credit=$6.00 $1.656.600 Federal Taxes: On the first $35.00 $780.656.837.00 $1.800+$2.800+$2.2= Upon increase in income of $2.00 Federal taxes payable= Provincial taxes: On all income 10.664.00 Net Income=$7.00 Increase in net income=$8.400) $1.068.744.00 $6.600=$10.00 ± $6.00 $1.000R16%= $960.00 $780.00 Total taxes= $1.040.664.60 $8.00 $1.

00 to surtax $ 33.78 Tax per Level $5.073.804.00 22.376.00 $ 66.00% 29.00 2004 Ontario Provincial Tax On the first from above $ 33.805.00 $ 8.00 $ 66.00 $ 70.00 $ 113.000.90 $ 2.00 $ 13.300.912.00 Taxable Income Nonrefundable tax credit $ 65.752.00% $11.00 $ 24.000.688.920.019.200.00 $ 113.00 Fed Marg Tax= 22.78 - .001.700.00 $ $ $12.00% $ 7.053.893.019.00 $ 8.15% 11.280.00 Fed Avg Tax= 16.000.388.00 Surtax on Prov Tax over 6.00 $ 6.00 to $ 35.600.00 2004 Federal Personal rates Amount On the first from $ 35.80% x 16% = $1.2% $ 3.00 16.019.12-5 P OBLEM 12-5 Taxable Income Non-refundable tax credit Province D@T@ $ 65.00% $ 5.19 $ 2.600.09 Tax Amdt.00 26.000.375.00 Fed tax = $12.19 $ 5.78 Total per Level $ 5.19 9.600. $ 2.60 $ $ 4.753.200.00 to from above $ 70.600.00% Total Taxes Payable = $10.05% $ 2.000.000.000.

90 $ $ 245.805.000.96% 24.00 Fed Avg Tax= 10.001.053.00 to from above $ 70.00% $ 7.520.00 $ 113.600.00% $11.00 $ 13.095.00 2004 Federal Personal rates Amount On the first from $ 35.56 $ 17.00 $ 6.00 $ 70.804.00 22.19 $ Tax Amdt.520.300.78 Tax per Level $3.00 On the first to $ 33.00 $ - .019.331.00 to $ 35.19 $ 3.00 2004 Ontario Provincial Tax from $ 33.019.0% 4864 36.00 Taxable Income Nonrefundable tax credit $ 22.05% 9.000.00 26.Taxable Income Non-refundable tax credit Province $3.00 Fed Marg Tax= 16.00 $ 24.376.00 Fed tax = $3.175. $ 1.240.600.520.388.00 $ 8.00% $ 5.0% Ontario tax = $5.280.000.00 $16.000.76% 8.78 Total per Level $ 5.00 $ - $ $ $3.90 $ 2.00 $ 113.000.90 Combined tax = $ 22.700.00 16.000.00% Total Taxes Payable = $2.56 Avg Ont Tax= Avg Combined Tax= 7.18% x 16% = $1.688.375.15% $ 2.685 20.000.00% 29.

09 11.331.569.66.6% = $7.00 $ 11.2% surtax $ $ 1.0% 4864 36.571.00 5.00 · .00 above $ 66.331.90 $ 7.998 Jane as an individual= Jane as corp = PaysPersonal Tax $ 16.00 $ $ Surtax on Prov Tax over $3.753.571.752.998.000) x 18.000 .095.$22.095.90 $ 3.073.00 Combined tax = $3.0% Ontario tax = $1.00 Avg Ont Tax= Avg Combined Tax= Corporate Tax ± ($65.685 20.00 Pays Corp Tax Total $ $ 16.

.

60% . 18.

05% 16.23% - - . 6.

000) Combined tax rate=16.200.25 ($25.00% $2.280.000 16% 22% $1.00 $11.550 ± 48.600.000) Federal Taxes: On the first $35.00 Taxes payable from personal income= $4.000 .440.00 Federal taxes payable= $10.000 to $70.000*16%= $1.00 $12.550 12-8 èenerally all depreciation methods allocated the cost of the equipment (less salvage value) over some assigned useful life.000) .00 10. This will affect .363.15 ($50.$30.000 = $41.000 From $35.00 Non-refundable tax credit=$8.420.00 Non-refundable tax credit=$8.280.000) + 0.00 Provincial taxes: On all income (ii-2) Corporate income (income=$43.240.000 16% $3.1% Taxes payable from corporate income= Total taxes= $6.923.520.34 ($25.00 10.00 12-7 Taxable Income Tax Bill = Adjustable èross Income ± Allowable Deductions = ($500.00 Federal taxes payable= $2.920.000) ± tax credits = $49.00% Provincial taxes payable= $6. the sum of the depreciation charges will be the same.00 $6.00 $17.00 $6.000) + 0.000 = $170. While the depreciation charges in any year may be different for different methods.000R16%= Provincial taxes: On all income Total taxes= $5.000 = 0.39 ($70.600.500.000) + 0.200.00 (ii) @s a corporation (ii-1) Personal income (income=$22.12-6 (i) @s a proprietorship Federal Taxes: On the first $35.$30.500.

151.80 $427.32 $3.50 $1. the after-tax interest rate is 10.80 $303.000 (0.50 $2.50 -$1.522.030928 = 3.000) = $33.000 (A/P.751.50 1 2 3 4 $750.0% ($150.50 $1.751.3503) = $1.32 $0 $1. 4) n=0 Loan Balance Interest Payment Principal Payment Loan Balance Sum of Payments Additional ³Point´ Interest BTCF Tax BenefitInterest Deduction Interest Tax Saving (Interest x 0.751.700 +$4.751.50 $1.700 Solving the After-Tax Cash Flow.4)9.35 $1.40) ATCF = $5.0928% for use of the money for: 45 ± 5 = 40 days.751.522.751.50 -$1.481.3%) ± 1 = 0.751. Number of 40-day periods in 1 year = 365/40 ia = [1 + (0. but with a stable income tax rate.00 -$1. XYZ.630.70 $1.00 $75.1% ($150.00 $75. is paying: (100%) (100% . the total taxes paid will be the same.27% = 9.50 $75.02 $228.30 -$1.00 $599. 12-11 Federal Tax = 22.125 = 0.50 $825.150 Provincial Tax =16.000) = $24.48 $1.00 +$330.50 $1.9%.846.550. (The difference is not the amount of the taxes.50 -$1.030928) (1 ± 0.90 $502.00 $674.60 -$1.80 +$269.000 +$4.50 -$1. but their timing. 15%.1827 12-10 A = $5.324.000 .the amount of taxes paid in any year.20 $5.35 +$121.751.001.751.421. Inc.00 $75.80 $1.998.125 ± 1 = 18.02 +$200.70 -$1.) 12-9 Let ia = annual effective after-tax cost of capital.

i%.000 1.000 After-Tax Rate of Return $25. but only up to the taxpayer¶s investment income.000 capital gain * taxed at 20%.000* capital gain -$2. Rate of Return = 7. i%.9% = $77.639 After-Tax Cash Flow -$75.5556.993) + $95. 5) (P/F. thus the Rate of Return = 12.5 5 Before-Tax Cash Flow -$75.150 Combined incremental state and federal income tax rate = 22.1%+16% = 38.000 +$100.000 = $45.000 $0 $0 -$5. i%.000 5 +$100. 5) Try i = 7%. (b) Bonds but no loan Year 0 1.47% Note: The Tax Reform Act of 1986 permits interest paid on loans to finance investments to continue to be deductible.7130) $2. Income Taxes After-Tax Cash Flow -$25.000 (0.500 (3. 5) = 0.1% 12-12 Combined incremental tax rate = federal tax rate + provincial tax rate = 26% + 13.000 = $2.6806) Using linear interpolation.000 * Taxed at 20% After-Tax Rate of Return $75.000 +$5. the capital gain rate.000 +$45.00 (P/F.7% =39.000 $0 -$5.500 (4.500 -$5.000 (0.000 . 5) + $95. i%. Try i = 8%.500 (P/A.000 $2.500 +$95.000 $25.7% 12-13 (a) Bonds plus Loan Year Before-Tax Cash Taxable Flow Income 0 -$75.000 (P/F.000 +$50.Combined federal and provincial tax = $57.985 = $74.000 Taxable Income Income Taxes $5.000* -$50. $2.000 $25.5 +$5.100) + $95.

00 evenue Yr 1 ann .000.12-14 (a) Purchase Price P Land Purchase P D@T@ $ 84. ev increase Expense yr 1 ann.000.600.00 $ 10% O .00 n 20 SL (yrs) 20 DDB (%) SOTD (yrs) 10% CC@ rate 10% $ 9.000.00 $ 9.00 $ 38% $ 9. Exp inc Tax ate Land Salvage Selling Price S M@ $ 600.

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.

32 X.80 disposal tax $ effect = 4.32 Net Salvage at $ Yr n = 4.779.096. $ UCC(n) = 10.096.

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564.15% .000.000.000.00 Capital èain (Loss) x Tax Rate/2 = $ Land Net Salvage at Yr n $ = 9. Land Purchase $ P 9.00 I = NPV= 5.78% ($21.22) 5.00 $ Land Salvage 9.

600 9.980 7.142 6.204 6.036 7.600 9.254 2.808 1.970 2.600 9.643 1.564 2. Land & WC Total @fterTax Cash Flow $ 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 9.000 9.357 7.000 9.908 6.309 8.198 4.131 .914 2.782 2.000 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 -84.800 1.000 9.629 1.600 9.802 1.000 9.000 9.791 7.086 6.182 6.000 9.204 6.174 7.755 6.000 9.245 2.746 6.600 9.209 1.000 7.000 9.183 5.000 9.092 2.600 9.818 2.600 9.115 2.183 3.669 7.712 4.759 5.600 9.885 6.096 -93.858 2.755 6.612 8.200 7.600 9.000 9.035 -9.176 8.972 7.600 9.600 9.000 9.532 6.824 388 691 964 1.817 5.600 9.468 2.965 -84.570 7.600 84.612 8.000 9.274 6.236 4.726 2.351 6.371 7.351 6.436 6.536 3.192 7.436 6.000 9.637 6.600 9.796 2.331 1.288 4.000 4.570 7.435 3.000 9.885 6.000 9.817 3.504 2.176 8.CC@ Year Outlay or Expense evenue Before-Tax Cash Flow Taxable Income CC@ Income Tax @fter-Tax Cash Flow Loans.791 7.020 1.192 7.764 4.000 9.532 6.464 5.600 9.637 6.086 19.000 9.521 7.030 6.000 13.142 6.479 1.826 1.600 9.274 6.371 7.241 3.036 7.000 9.363 2.028 1.600 9.496 6.649 2.565 5.000 9.030 6.000 9.000 7.309 8.600 9.600 9.430 1.600 9.218 6.

00 10% O .000.00 $ 9. Exp inc Tax ate Land Salvage Selling Price S M@ $ 600. ev increase Expense yr 1 ann.00 n 20 SL (yrs) 20 DDB (%) SOTD (yrs) 10% CC@ rate 10% $ 9.00 $ 84.000.00 evenue Yr 1 ann .00 $ 38% $ 16.600.000.000.(b) Purchase Price P Land Purchase P D@T@ $ 84.

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.

32 X.176.80 disposal tax $ effect = (27.779. $ UCC(n) = 10.823.68) Net Salvage at $ Yr n = 56.

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.

564.00 $ Land Salvage 16.330.00 Capital èain (Loss) x Tax $ Rate/2 = 1.22) 7.00 I = NPV= 5.78% ($21.00 Land Net Salvage at Yr n $ = 14.670. Land Purchase $ P 9.000.22% .000.

351 6.600 9.881 .536 3.759 5.357 7.000 7.000 9.532 6.174 7.600 9.176 8.600 9.115 2.035 -9.363 2.649 2.600 9.000 9.020 1.000 70.479 1.817 5.176 8.612 8.764 4.000 9.183 3.885 6.218 6.435 3.600 84.464 5.000 9.637 6.000 9.818 2.532 6.000 9.600 9.972 7.791 7.970 2.000 9.030 6.600 9.914 2.200 7.000 4. Land & WC Total @fterTax Cash Flow $ 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 9.817 3.092 2.331 1.600 9.980 7.209 1.600 9.371 7.204 6.612 8.808 1.036 7.028 1.824 388 691 964 1.746 6.600 9.826 1.600 9.036 7.712 4.565 5.800 1.802 1.000 9.351 6.858 2.600 9.274 6.436 6.030 6.782 2.000 9.796 2.600 9.371 7.755 6.000 9.755 6.000 9.600 9.142 6.600 9.600 9.000 9.086 6.182 6.254 2.564 2.192 7.600 9.309 8.245 2.000 9.183 5.600 9.436 6.496 6.629 1.000 9.000 9.241 3.430 1.846 -93.669 7.600 9.086 76.570 7.521 7.000 9.000 9.504 2.000 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 -84.000 9.885 6.288 4.198 4.192 7.791 7.726 2.000 7.204 6.965 -84.637 6.000 9.570 7.643 1.309 8.CC@ Year Outlay or Expense evenue Before-Tax Cash Flow Taxable Income CC@ Income Tax @fter-Tax Cash Flow Loans.600 9.468 2.142 6.908 6.274 6.000 9.236 4.

300 -$2.5%.000 $5.000 $21. i%.000 $5.000 7 +$11. i%.000) = $24.000 SOYD Deprec.000 $5.000 $5.000 +$16.$12.000 (P/è.000 .000 +$13.700 +$5.000 (P/F.000 +$5.000 $0 -$2.000 -$1.700 +$12.000 5 +$17.000 $9.810 i is too high Therefore.300 -$2.000 $5.$50.000 PW of Benefits ± PW of Cost =0 $19.000 (P/A.000 1 +$20.$3.000 Sum = (8/36) ($120.$12.300 -$2.000 4 +$20.000 $5.300 -$2.000 4 +$11.300 -$2.000 $0 $45.000 $5. Taxable Income Income Taxes at 20% $15.000 .000 3 +$14.000 =$26.000 $5.000 +$5.000 (salvage val. 8)-$3. i%.000(P/è.000(P/F.000 8 +$8.000 $12. i%.000 = $3.000 $0 -$1.000 -$1.000 +$12.000 2 +$26.000 6 +$14.210)-$3.000 $3.000 $5.12-15 SOYD Depreciation N=8 SUM = (N/2) (N + 1) = 36 1st Year Depreciation Annual Decline Year Before-Tax Cash Flow 0 -$120.700(P/A.000 $15.) Sum SOYD Deprec.842)+$12.000 +$10.700 +$14.000 Will the firm obtain a 6% after tax rate of return? PW of Cost = PW of Benefits $120. 8)+$12.000 2 +$17.000 $9. 12-16 Year Before-Tax Cash Flow 0 -$50. 8) @t i = 6% PW of Benefits =$26. Further calculations show actual rate of return to be approximately 4.000 $5.700 +$8.000 $5.700(6. Taxable Income Income Taxes at 48% $24.000 1 +$29.000 3 +$23.000(0.700 +$23.700 +$17.000 $3.000 +$7. 5) .700 +$11.000 $12.700 +$20.300 -$2.000 +$19. 5) + $5.000) = (1/36) ($120.300 -$2. the firm will not obtain a 6% after-tax rate of return.000 . i%.000 $5.000 $5.000 -$1.000 $6.000(19.300 $0 After-Tax Cash Flow -$120.000 +$26. 5) .000 5 +$8.000 -$1.000 $18.000 $6.000 $108. i%.6274) = $113.000 =0 After-Tax Cash Flow -$50.

000 (5. find that i = 14%.20 $0 $1.000 +$3. or Total Income Taxes.000 (P/A.Try i = 15% $19.000 (3.5674) .000 (5. i%.000 Try i = 10% $400 (8.000 (6.000 1. i%. i%.$20.352) .000/$4. i%.3%. Taxable Income Income Taxes at 34% 0 1 -$1.535) . 8) (P/A.000 (a) Before Tax Rate of Return $20.000 9.514) + $3. 8) .000 (P/A.000 +$4.600 +$400 -$8.000 1.6% (b) After Tax Rate of Return $20. 20) + $3.000 (0.000 =4 i* = 18.000 -$1.$3.000 -$1.605) . 12-17 Year Before-Tax Cash Flow 0 -$20.000 Sum $20.60 = -$589.$50.141 Using linear interpolation.000 =5 i* = 11.000 After-Tax Cash Flow -$20.335) .000 = 0 Try i = 9% $400 (9.000 +$466 -$1.000 = +$256.$3.000 = $5.8% (c) Year Before-Tax SL Taxable Cash Flow Deprec. 8) = $20. 8) (P/A.8 +$5. 12-18 Year Before-Tax Cash Flow DDB Deprec. i%.$20.500 $20. 8) = $20.000 -$8. Total Taxable Income.000 (5.000 = +$2.6 . i%.000/$5.151 Try i = 12% $19.397) + $5.000 Sum SL Deprec.000 $1.000 Note that the changed depreciable life does not change Total Depreciation. It does change the timing of these items.8 +$5.000 = $4. i* = 9.$50.400 +$400 -$1.40 Using linear interpolation.000 (0.775) + $5.000 (3. Income 0 -$20.500 $20.000 = -$1.000 (P/A.000 $2.000 $4.000 +$500 $400 $100 -$34 After-Tax NPW at Cash Flow 10% -$1. Taxable Income Income Taxes at 40% $2.$20.4972) .000 Income Taxes at 40% After-Tax Cash Flow -$20.000 $20.129) + $3. @fter-Tax ate of eturn PW of Benefits ± PW of Cost = 0 $400 (P/A.000 $423.

253.00 $41.970.8 $65.812.00 $25.94%) The project should be undertaken.000.00 $9.00 $15.00 $24.495.20 0.000.000.00 3 $30. $40.00 $48.000 = 15.500.00 $25.00 $41.500.00 $48.900.000.00 Factor 0.500.500.00 $12.31 $8.650.530.000.70 $11.89 $52.000 -100.048.50 $35.000.00 .650.000.900.746.100.000.00 $16.6 +$19.00 $0.50 Bn $85.000.00 $29.00 $32.9 $157.13 0.000.000.89 1 $30.000.00 $5. At 10%.000.6 -$32.60 so book value not less than salvage value.50 $21.155.2 $119.000.150.027.000.951.000.00 4 $30.000.155.00 $12.000.226.4 +$192.00 $1.00 $20.000.50 $24.00 $24.6 $875 $252.00 $17.50 UCC at year 5= Proceed S= èain on disp.00 $17.746.00 2 $30.470.4 $4.00 $5.6 $95. $15.00 $8.50 $4.408.000.00 $25.4 +$306 +$210 +$95.00 $29.07 Dep.553.000.850.00 $14.00 $8.591.00 $8.30 $12.850.00 $25.27 0.850.70 -100.038. 12-19 Year Bn-1 $100.50 $7.33 0.19 $14.000.000. (Calculator solution is 10.869.00 1 2 3 4 5 Calculation of net Salvage Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF I 0 CCA Dep.07% 12-20 SOYD= 15 Year 1 2 3 4 5 Bn-1 $120.505.00 $4.00 $17.00 $15.4 -$34 -$34 -$4.00 $4.000.00 $59.746.00 $8.6* Sum $100 $100 $13.00 Bn $80.00 5 $30.00 $28.00 $24.00 $15.019.00 $59.495.495.2 3 4 5 +$340 +$244 +$100 +$100 +$125 $240 $144 $86.500.1 Thus the rate of return exceeds 10%.00 $80.00 $8.131.408.1 * Reduced to $4.00 $85.038.961.000.000.00 $12.500.00 $2.= Tax effect è= Net S= $20.30 $30. NPW = +$19.00 $17.11 $30.00 $24.000.00 $8.

00 $6.000. Investment Salvage Net ATCF I = Bn-1 $100.000.00 $40.00 $4.00 3 $32.00 $0. Investment Salvage Net ATCF I UCC at year 5= Proceed S= èain on disp.00 2 $32.00 $10.00 0 4 5 $32.560.500.000.00 $0.00 -$2.= Tax effect è= Net S= $0.000.00 $12.61% @fter tax rate of return=11.00 $32.250.61% .000.00 $32.000.720.800.00 $26.00 $5.00 $16.00 $24.00 $32.00 $40.00 $6.250.000.00 $13.000.00 $25.00 $39.200.000.00 $0.000.00 $6.000 -$120.250.000.00 $12.840.000.000.00 $8.440.000 11.00 $24.000.00 $50.00 Bn $50.00 $33.00 $11.00 $25.00 $22.00 $24.600.00 $26.000.720.400.00 $0.00 $40.00 -$5.Calculation of net Salvage Year OR Dep.00 $0.00 $5.00 $16.250.400.000.560.00 $27.000.00 $5.280.00 $8.000.00 $40.00 $0.280.00 $5.00 $5.000 $34.00 $16.350.00 $25.00 $5.00 $12.00 $15.300.00 I = 12.700.000.250.00 5 $10.00 6 $10.00 4 $40.000.750.000.240.000.000.00 $8.500.475.00 2 $30.00 $12.000.400.000.00 Dn $50.00 $26.600.00 $2.000. BTCF Taxes Net Profit Dep.160.00 $29.00 -$9.650.000.280.000 -$100.500.000.00 $12.000.00 $24.00 -$20.000.00 -$8.000.000.00 3 $35.000.000.00 $6.00 $8.00 $10.00 $2.000.00 $25.00 $6.225.200.00 $2.720.00 -$120.00 $12.400.00 $24.150.000.000.00 $50.00 $15.88% >M@ .000.00 $25.00 $0.00 1 $32.00 $32.525.500.00 $4. therefore it was a good investment 12-21 Double Declining Balance Depreciation Year 1 2 3 4 Year OR Dep.00 $50.400.00 -$10.00 $10.00 $10.000.500.000.650.000.00 $18.000.00 -$100.00 0 1 $30.00 $50.700.000.600.500. BTCF Taxes Net Profit Dep.

000.796.00 $20.00 $43.00 $30.0 0 34.00 3 $25.600.0 0 $0.40 $31.346.00 2 $25.964.000.000.96 $1.00 -$22.293.00 $0.000.84 1 2 3 4 $30. however.600.240.00 0 $6.00 $5. but 5.56 Principal Red.240* Loan Payment Loan Repayment Year Payment 1 $25.00 $4.00 $25.60 -$10.00 -$12.880.964.00 $5.0 0 $4.00 $43.3% The purchase of the special tools for $20.29% After-Tax Rate of Return = 34.00 $8.000.000.650.02 $12.00 $10.00 $62.00 $0.96 -$689.335.379.000.935.500.00 Year 0 Net ATCF I (a) (b) = Interest $8.00 $6.796.000.00 -$20.000.04 $5.000 plus the obligation to repay the $80.00 $35.000.400.00 -$15.000 cash plus an $80.00 $4. Investment Salvage Bn-1 $80.240.00 $18.00 $12.000 cash is therefore much higher in this situation.000 loan.000.00 $0.00 OR Dep.935.000. Under the tax laws all the interest paid is deductible when computing taxable income.760.00 $18.250.120. .276.48 $6. Note.62 $290.946.986.240.946.400.469.000.0 0 $0.400.60 $2.240.860. Interest BTCF Taxes Net Profit Dep.00 $10.000 $17.276. but really $20.00 $6.00 $5.240.00 -$1.860.00 -$17.000 loan represents a leveraged situation.38 $9.44 5 $10.00 0 -$20.500.4%.00 $50.00 -$586. so the after-tax cost of the loan is not 10%. that the investment now is not just $20.250.00 $22.00 4 $25.60 $40.12-22 $25.00 $50.000.60 6 $10.00 $6.44 Balance $62.000.40 $22.00 $2.00 $0.424.276.0 0 $4.760.44 $14.96 $16.56 -$20.640. $17.000.04 $25. The resulting rate of return on the $20.000 -$28.40 $8.293.240.379.785.456.00 -$18.250.00 $22.00 $11.120.000.

00 $24.03 Dep.860.000.00 $0.00 Year OR Dep.00 $6.00 -$133.000.00 $12.000.000.000.00 $18.12-23 SOYD Depreciation SOYD=36 Year Bn-1 1 $108.000.00 $18.00 $20.000.00 $7.00 $5.000.000.000.00 4 $45.00 $21.00 $3.00 6 $24.00 $5.000.00 3 $63.000.000.000.00 $7.020.000.00 $3.000. BTCF Taxes Net Profit Dep.040.00 $12.00 $30.000.000 -$133.00 $21.00 $3.00 NPW at 15% is negative (-$29.000.060.00 $15.00 $3.000.00 $22.000.940.900.00 Initial investment=$108.862).000.00 $1.00 7 $9.00 $41.14 0.00 5 $30.00 3 $24.000. Therefore the project should not be undertaken.000.00 $9.960.000.00 2 $24.000.00 4 $24.00 $12.000.00 2 $84.00 $19.000.00 .00 7 $24.00 $18.000.000.000.000.00 $63.860.000.000.000.00 $15.22 0.000+$25000= $133.00 $17.000.000.00 $18.000.880.00 $18.08 0.000.00 $9.000 $24.00 6 $18. $24.920.000.17 0.00 $6.000.00 $1.19 0.00 5 $24.05%) $18.000.000.00 $45.00 $12.900.960.00 $9.080.120.00 $0.11 0.000.00 $13.000.980.140.00 $9.00 $9.940.000.000.00 $3.06 0.00 $9.000.000.00 $21.000.00 $21.980.00 $11.00 $4.000. (Calculator solution: i = 8.00 $24.000.000.00 $25.000.00 $0.00 8 $24.000 0 Factor 1 $24.00 8 $3.00 $6.00 $21.00 $15.00 $0.00 $3.00 $6. Investment Salvage Net ATCF 0.00 Bn $84.00 $3.00 $2.00 $15.000.000.000.880.920.100.00 $6.

33 $301.968.000.358.00 $77.70 $1.29 $1.500.00 $89.500.333.00 $2.000.333.333.33 $261.75 4 $3.80 $1.74 $2.649.33 0.57 Calculation of net Salvage Year OR Dep.56 5 $3.000.564.00 $92.000.507.000.000/($12.625.57 $1.968.00 $166.333.00 $86.33 2 $240.59 $769.322. $1.00 $1.70 -$507.38 $1.67 $32.000.56 $1.00 $224.322.= Tax effect è= Net S= $2.00 $32.58 $765.968.85 $2.000.42 $2.00 $830.166.200.177.666.000.333.107.00 -$211.00 .18 1 $1.333.00 $24.85 $830.58 Since AW<0.00 $10. 12-25 (a) Payback = $500.33 $277.00 $227.500.69 $3.00 2 $2.875.00 $333.333.333.18 $3.592.906.20 0.00 4 $240.15 $1.500.333.18 $1.11 $596.33 $29.00 $7.00 $16.33 $301.000.000.000.00 $1.491.05 ± 0.27 0.25 $307.15 $1.59 -$12.122.429.75 $903.00 -$1.00 Bn $333.250.107.43 $396.26 $2.33 $261.800. BTCF Taxes 15 Bn-1 $500.333. $166.69 $3.414. Investment Salvage Net ATCF 0 Bn $10.00 $8.00 $216.625.000 AW=-$230.00 $83.507.000 x (0.00 3 $2.000.00 $7.485. the investment is not desirable.000 -$12.00 $24.500.107.625.107.476.00 $1.00 $208.42 6 $1.12-24 Year 1 2 3 4 5 6 Bn-1 $12.08 years (b) After-Tax Payback: SOYD= Year 1 2 3 4 5 Year OR Dep.33 1 $240.00 $16.000.491.429.000.13 0.997.00 $8.00 $1.33 0 Factor 0.906.727.44 $578.00 5 $240.42 $830.74 -$139.875.000.000.000.33 $253.00 -$71.000.400.00 $232.20 $1.18 $149.00 $5.67 $73.07 Dep.872.000.00 $2.666.33 $277.000.70 UCC at year 6= Proceed S= èain on disp.00 $1.25 $4.56 $1.600.82 $1.00 3 $240.27 $2.27 CCA Dep.57 $1.333.700.25 $4.476.485.491.82 $2. BTCF Taxes Net Profit Dep.598.000.476.03)) = 2.90 $2.75 $1.00 $5.

000.000. Investment Net ATCF I = 28 Bn-1 $14.21 0.100 $517 $583 $2.500.000 -$14.00 $5.00 $32.666.00 $500.00 $7.643 $500 $3.00 $3.00 1 $3.500.00 $139.500 $100 $47 $53 $3.500 2 $3. Investment Net ATCF -$500.11 0.400.00 $8.00 $210.00 $3.00 Bn $10.600.00 0 -$14.600 $1.500 4 $3.00 -$500.000 5 $3.000.000 $600 $282 $318 $3.083 $2.500.18 0.00 $0.71% Factor 0.00 $3.00 $1.000.86 years I = 20.000.500.600 $500 $3.800.67 $124.00 $134.00 Payback period=2.600 $1.600 $3. $3.666.500 6 $3.00 $129.000.318 $3.500.200.500.222 $1.000.00 $1.14 0.000.100 $1.000.00 $44.500.613 $2.00 $1.49% 12-26 SOYD= Year 1 2 3 4 5 6 7 Year OR Dep.00 $1.000 3 $3.553 $3.600 $2.378 $2.600.00 $500.000 $2.000.600 $1.457 $1.00 $24.00 $153.04 Dep.800.67 $156.25 0. BTCF Taxes Net Profit Dep.200.00 $16.143 .00 $10.400.00 $500.07 0.00 $2.600 $752 $848 $2.00 $147.100 $987 $1.000.00 $166.000 7 $3.000.000.378 $1.500 $2.848 $2.000 10.600 $3.00 $2.00 $7.500.113 $1.000 $1.000.Net Profit Dep.600 $2.00 $150.00 $5.000.500.500 $1.

500 $3.500 $1.750 $1.740 + $3.250 $3. 20%.000 Salvage Value = $3.750 $1.740 = -$16.500 6 $5.000 $1.500 $3. 10) = -$2.500 $1.500 $1.750 $1.000 $1.000) SL Depreciation = ($18.250 $3.500 $1. 20%.500 $3.500 $3. Investment Salvage Net ATCF (a) PW 0 $16. i*.000 $1.500/year (10% tax credit) 1 $5.500 8 $5.250 $3.000 $1.5) (200.750 $1.500 $1.860= Year OR Dep.750 $1.750 $1.500 10 $5.000 $1.535 (b) Set PW = 0 at i* and solve for i*: $0 = -$16.250 $3.500 $3.$3.250 (P/A.500 $1.250 $3.750 $1.500 $3. BTCF Taxes Net Profit Dep.850 $16.750 $1.750 $1.600-$1. 10) + $3.500 $3.740 = $21. S = $3.000 $1.500 9 $5.000 = $1.750 $1.750 $1.600 Annual Cost = $16.750 $1.000 $1.750 $1.250 $3.030 Cartons/year = 200.500 $3.500 3 $5.600 Depreciation = S/L with n = 10.12-27 èIVEN: First Cost = $18.750 $1.250 $3.500 $1. i* = 16% per year.500 $3.600)/10 Initial investment=$18.500 5 $5.03) (3.750 $1.000 $1.000 . .500 2 $5. 10) + $3.500 $3.750 $1.250 (P/A.750 $1.500 $3.000 $1.5 Annual Savings = ($0. 10) by trial and error method.600 (P/F.740 $16.000 Savings bag/carton = 3.750 $1.600 $6.500 $1.000 $1.740 + $3.750 $1.500 4 $5.250 $3.750 $1.500 $1.500 7 $5.250 $3.600 (P/F.600 Savings/bag = $0. i*.500 $1.

00 $ 30.000.00 Land Salvage Selling Price S M@ X.000. ev increase 4% $ 9.000.00 5 SL (yrs) DDB (%) SOTD (yrs) CC@ rate evenue Yr 1 ann .12-28 Fed + Alta rate = 29+ 10 = 39% D@T@ Purchase Price P Land Purchase P n $ 82.

.

.

Land Purchase P $ 30.00 Land Salvage Capital èain (Loss) x Tax Rate/2 = Land Net Salvage at Yr n= Expense yr 1 ann. Exp inc Tax ate O .000.

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.

92 disposal tax effect = 1.00 $ - $ 30.14) $ 83.0 Net Salvage at Yr n 78.2 53.4 UCC(n) = 9 $ (6. $ 68.000.189.8 = 6 39% $ 30.00 $ 90.28% ($57.000.11) 9.000.98% ($167.00 10% $ 30.000.00 I = NPV= -24.58) .

640 3.645 119.360 5.000 9.599 Loans.130 6.038 6.844 Taxable Income 7.645 6.000 CC@ 1.000 6.000 9.355 2.Year 0 1 2 3 4 5 evenue 9.214 3.693 6.000 9.000 9. Land & WC -30.914 6.000 113.000 9.256 2.156 Income Tax @fter-Tax Cash Flow 2.000 9.307 2.000 Outlay or Expense Before-Tax Cash Flow 82.000 6.000 9.000 9.678 .130 6.079 Total @fterTax Cash Flow $ -112.870 2.086 2.962 2.786 5.000 0 0 0 0 0 -82.744 6.693 6.744 6.000 9.401 -82.

80 $1.204.00 $8.760.577.28 -$181.00 $14.00 4 $6.00 $69.50 1 $6.500.50 $10.00 $4.550.00 $42.880.142.500.255.017.00 -$1.00 $8.00 4 $13.925.25 $7.00 $8.060 S= $92.50 $5.600.386.50 $90.500.550.00 $7. $7.50 $11.500.00 -$2.00 Calculation of net Salvage Capital gain tax on land= Bn $85.000.00 $1.373.931.695.950.925.550.50 $7.512.00 $7.000.00 -$5.400.00 $69.020.750.78% 12-30 Year 1 2 3 4 5 6 Bn-1 $50.50 UCC at year 5= Proceed S= èain on disp.871.80 Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF 0 IRR= CCA Dep.500.00 -$1.500.329.00 $8.00 -$4.98 $0.247.925.857.825.678.00 $6.00 $6.925.000.00 -$678.750.00 $29.871.000.50 -$370.00 $7.28 Bn UCC at year 6= Proceed S= èain on disp.700 -$99.675. $4.00 $62.857.000.00 $4.00 3 $6.00 $8.00 -$1.= Tax effect è= Net S= $62.00 $20.000.000.530.500.00 $14.142.142.577.00 -$7.700 4.00 $7.19 2 $8.061.00 3 $17.329.75 6 $2.50 $4.25 Calculation of net Salvage Year OR CCA BTCF 0 CCA Dep.98 $7.98 -$2.20 -$555.500.00 $42.255.00 $4.550.695.061.760.00 $8.00 $600.068.30 $6.00 $3.50 5 $5.28 .247.00 $900.020.750.204.242.00 $76.00 -$1.500.00 $6.500.00 $92.00 $76.670.50 -$925.20 $78.00 $20.950.12-29 Year 1 2 3 4 Bn-1 $90.750.00 $29.19 $2.00 $7.= Tax effect è= Net S= 1 $2.925.695.00 $12.373.00 $27.00 -$99.80 $99.000.25 $3.50 $10.00 2 $6.000.00 $85.695.00 $6.825.25 $1.500.750.00 $6.00 $12.

755.205.470.00 $14.75 -$100. $10.00 $36. 4) (P/A.627.00 $9.00 $25.017.925.606.496.300.00 $0.000.00 $29.00 $200.56 $17.372.00 $8.00 Bn $200.00 $4. 4) = 2 Before-Tax Rate of Return = 34.00 $90.00 $5.00 4 $35.393.51 -$108. i%. i%.983.00 5 $35.9% (b) After-Tax Rate of Return Year Bn-1 1 2 3 4 $400.00 $27.216.000.00 0 CCA Dep.000.80 Bn $90.00 $7.50 $554.00 $12.520.996.00 $13.850.00 $7.00 $0.000.00 $11.00 $0.00 $25.005.00 -$2.000.500.600.80 $26.00 $14.00 CCA Dep.600.766.000 -$50.000 Payback period=3.00 $11.00 $46.000.00 $14.233.520.00 $18.400.216.000 0.809.864.750.20 $9.00 $5.44 $9. $200.00 2 $35.016.00 $5.00 $29.00 $11. the before-tax rate of return equals 0%.00 $200.00 6 $35.00 $9.80 $11.00 $23.000.000 -$100.491.372.25 $18.00 $7.00 $0.44 $25. 12-31 Year 1 2 3 4 5 6 Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF Bn-1 $100.061.00 $7.000.780.00 3 $35.00 -$1.50 $6.400.00 $8.900.216.00 $36.373.400.00 $7.00 $16.77 $3.000.00 $18.70 $832.00 $46.480.00 $17.25 -$72.520.Taxes Net Profit CCA Investment Salvage Net ATCF I = (b) -$2.900.000.000.004.00 $14.200.19 $5.600.00 $3.220.864.00 $9.00 $72.220.205.00 $10.00% Similarly.500.500.30 $2.000.372.70 -$50.80 $27.500.247.00 $0. annual benefits must be ½ ($400) = $200 (a) Before-Tax Rate of Return $400 = $200 (P/A.00 $20.130.000.857.00 $27.00 $57.080.000.233.00 $0.05 $4.80 $26.00 $57.200.95 $7.00 $10.596.00 $3.00 $0.00 $72.000.28 $4.080.507.20 1 $35.20 $15.6 years 12-32 For 2-year payback.000.000.784.00 .00 -$3.00 $18.00 $10.000.000.00 $8.

330.000.831.00 $0.00 $0.081.000.00 $200.356.00 $0.000 -$14.00 $132.00 $2.82 $1.00 $3.89 $1.77 Net S= $3.00 $1.499.595.00 4 $200.00 3 $200.570.00 $2.499.00 $1.749.00 $0.00 $200.430.50 $786.95 -$14.874.00 $5.55 $2.00 $0.00 $1.98% .30 $3.45 $1.00 $5.000.081.000.00 $1.831.00 4 $5.023.00 $68.Calculation of net Salvage Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF I 0 UCC at year 4= Proceed S= èain on disp.900. $2.00 12-33 Year Calculation of net Salvage Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF IRR= 0 CCA Dep.900.77 $7.00 $200.499.100.48% 1 2 3 4 Bn-1 $14.081.00 $11.00 $200.462.00 $200.000 11.00 $0.00 $8.00 $132.00 $0.70 Tax effect è= -$486.000.749.= Tax effect è= Net S= 1 $200.00 2 $200.00 $200.00 $0.00 $4.70 UCC at year 4= $4.100.00 $2.100.00 $1.00 $0.330.70 $1.00 $1.00 $132.00 $200.00 $68.30 Bn $11.00 $0.00 $200.00 $4.70 Proceed S= $3.501.77 1 $5.000.30 $3.50 $3.695.00 $0.570.486.= -$1.00 $2.00 $643.00 3 $5.749.787.00 $0.50 $3.00 $2.55 $3.00 èain on disp.900.00 $3.00 $0.00 $0.00 -$400 -$400 = 26.570.00 $0.00 $2.00 $8.00 $0.305.00 $132.00 2 $5.250.125.375.486.

00 5 SL (yrs) DDB (%) SOTD (yrs) Building CC@ rate Machinery Purchase Machinery CC@ rate Machinery Salvage evenue Yr 1 ann .12-34 Building Price P Land Purchase P n D@T@ $ 200. ev increase 4% $ 150.00 X.00 $ 50.000.000.000.

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00 $ 166.470.000.00 $ 70.530. 30% $ 111.000.00 15% .00 Land Salvage Selling Price S M@ 34% $ 50.

! ".

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87) $ 84.511.018. Exp inc Tax ate .75 $ (27.00 Land Salvage Capital èain (Loss) x Tax Rate/2 = Land Net Salvage at Yr n = Expense yr 1 ann.612.000.14 Land Purchase P $ 50. $ 30.

.

65 Net Salvage at Yr n = $ 166. UCC(n) = $ 166.533.000.55) ($17.00 = -6.65 $ 50.14% @C ($47.471.79) I .00 $ - $ 50.93 disposal tax effect = $ 0.83) ($59.470.17) NPV= ($159.78% 10.000.943.339.882.

000 70.981 @fterTax Cash Flow -350.000 55.790 8.000 22.000 70.000 Building CC@ 4.000 55.871 57.029 53.910 35.500 38.971 16.250 26.000 70.210 61.000 Outlay or Expense 200.032 49.500 23.000 300.000 70. Land & WC -50.862 55.120 Taxable Income 43.871 57.000 70.862 55.000 70.944 Income Tax 14.225 6.029 353.508 .699 44.000 7.743 13.CC@ Year 0 1 2 3 4 5 evenue 70.840 7.138 14.000 70.210 61.000 70.129 12.019 Loans.936 Machinery CC@ -150.526 7.489 Total @fter-Tax Cash Flow $ -400.000 0 0 0 0 0 Before-Tax Cash Flow -200.775 18.000 70.

686.56 $6.62 $8.56 Bn $50.806.983.58 $3.970.00 $1.557.000.513.56 $8.194.000.243.563.62% .486.59 $3.513.631.016.631.00 $5.506.805.61 $26.44 $1.= Tax effect è= Net S= $22.631.729.00 $12.486.58 $4.000.875.686.513.50 $3.000.19 $31.38 $1.997.318.125.875.25 $2.51 UCC at year 6= Proceed S= èain on disp.194.61 $26.75 $36.00 $3.00 $4.513.75 $805.88 $4.38 $7.426.42 $30.000 9.56 $3.000.04 $5.38 $2.50 $9.56 $5.486.193.19 $31.125.045.000 -$55.125.50 $4.243.46 $1.40 -$55.42 $1.00 $7.54 $3.57 $2.243.25 $6.85 $3. $4.01 $30.00 $43.243.757.51 $35.000.573.002.00 2 $10.00 $6.557.58 5 $10.525.63 $8.983.00 $7.49 $4.00 $5.368.54 $5.87 $6.474.774.757.07 Calculation of net Salvage Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF IRR= 0 CCA Dep.99 1 $10.961.686.573.225.99 $38.774.44 $2.983.000.875.56 4 $10.43 $8.58 $4.877.25 3 $10.486.00 $50.000.00 $4.54 6 $10.75 $36.07 $22.00 $43.12-35 Year 1 2 3 4 5 6 Bn-1 $55.313.

00 $344.382.43 $128.653.486.616.77 $371.23 $200.10 $539.800.90 $210.494.10 $210.23 $78.449.000.603.00 $450.34 Tax effect è= -$15.40 $414.498.40 $35.00 $565.00 $489.271.32 Net Profit $65.505.00 $450.340.00 -$75.717.01 $351.244.10 $210.00 $47.00 2 $1.00 3 $883.68 $45.800.449.04 $14.000.000.00 -$39.000 = 14.277.000.137.71 $158.31 $47.81 $368.000.04 Net S= $15.23 $47.722.110.24 $78.277.728.660.000.137.396.34 Calculation of net Salvage Year 0 Proceed S= $0.00 $450.000.000.00 $351.67 $109.483.271.33 $340.90 4 $539.972.000.00 $105.47 $128.00 $450.717.98 $74.23 $265.47 5 $328.172.02 $420.203.538.02 $420.00 7 $122.358.00 $450.81 $136.98 $29.00 $344.19 $81.890.90 $239.800.728.12-36 Year Bn-1 CCA Dep.24 6 $200.114.00 $883.755.000.269.98 $29.110.000.03% $416.22 .101.000 Salvage Net ATCF I -$1.00 $565.43 $128.04 1 2 3 4 5 6 7 8 OR $450.87 $277.34 UCC at year 5= $45.57 $321.244.000.885.110.885.626.538.114.77 $402.90 $212.23 $122.68 CCA Investment -$1.538.00 èain on disp.00 -$115.269.216.282.000.02 8 $74.000.244.00 $344.342.00 $450.114.43 $328.340.483.895.269.611.784.15 $143.31 $245.23 $78.382.730.00 $565.772.717.= -$45.388.796.890.02 $29. Bn 1 $1.110.172.32 Taxes $33.46 $126.277.68 BTCF $99.54 $323.626.00 $450.96 $402.00 $1.653.00 CCA $351.60 $69.895.000.728.

500.000.266.00 -$61.00 $255.050.00 $96.634.225.00 $37.50 UCC at year 5= Proceed S= èain on disp.493.00 $76.834.00 CCA $45.00 $87.12-37 Year 1 2 3 4 5 Bn-1 $300.00 Taxes $40.00 $37.13% Bn $255.550.50 $121.384.835.500.50 $123.00 $53.950.500.950.485.00 $112.00 5 $150.50 $53.00 $43.00 3 $150.000.239.85 $68.00 $26.000 Salvage Net ATCF -$300.000.000.00 $73.485.50 $58.00 $44.050.550.62 years (b)IRR= 26.00 BTCF $105.000.00 $26.000.50 $106.000.500.515.00 Net Profit $64.95 $125.225.000.877.00 $87.00 CCA $45.00 Calculation of net Salvage CCA Dep.00 $178.00 $124.50 $61.= Tax effect è= Net S= Year 0 1 OR $150.60 $75.485.000.00 $76.15 $37.00 $76.950.95 2 $150.877.615.500.00 $61.15 $23.35 (IRR>MARR.665.00 Investment -$300.50 $0.500.00 $28.000.550.91 $26.00 $37.880.000.877.225.465.239.00 $178.95 $23.000.760.450.00 $124.00 4 $150. therefore it is a desirable investment) .00 $53.000 $109.335.50 -$23.239.00 $112.465.611. $45.00 (a) Payback period=2.119.50 $48.

800.00 $7.30 8 $2.000 Salvage Net ATCF $483.00 $1.230.800.12 7 $2.00 $216.81 $1.207.20 $351.00 $1.00 $259.800.686.480.44 $377.91 $1.207.210.152.608.00 2 $9.000.00 $1.152.800.51 $898.000.800.359.887.82 $471.14% .= -$1.656.00 $921.509.200.268.40 6 $3.95 $301.00 CCA $1.00 $1.00 $1.00 $921.82 $2.00 $1.00 $648.00 $1.00 $360.800.00 $388.00 $0.359.82 $471.00 $1.540.440.63 $726.36 $425.96 Tax effect è= -$483.18 $1.96 Proceed S= $0. Bn 1 $10.51 $1.18 1 2 3 4 5 6 7 8 9 10 OR $1.00 $1.00 $1.000.64 $1.00 $1.949.14 $1.99 BTCF $800.498.49 $301.800.30 $471.00 $9.01 Taxes $320.686.86 $377.440.07 $531.00 $5.00 $1.328.00 $4.80 $1.00 $0.00 $1.00 $1.99 $1.12-38 Year Bn-1 CCA Dep.99 $1.80 $527.800.422.44 9 $1.374.28 $2.86 $1.49 $301.60 $3.00 $1.000.00 3 $7.800.800.00 $1.00 4 $5.04 $637.12 $589.152.00 $1.96 Calculation of net Salvage Year 0 UCC at year 10= $1.00 $1.800.00 $878.74 $1.40 $1.72 $1.99 $1.000.000 (b) IRR=8.00 èain on disp.760.800.49 $1.00 $0.887.315.00 $1.88 $853.000.00 5 $4.608.18 Net S= $483.00 $1.800.509.60 $737.062.00 $921.949.11 $796.440.60 $737.01 $599.200.00 $144.93 $1.683.00 $1.95 10 $1.09 $484.28 $589.86 $377.760.40 $737.18 -$10.26 $569.28 $589.98 CCA Investment -$10.800.207.20 Net Profit $480.448.00 $1.

00 $3.40 UCC at year 5= $3.123.00 2 $9.122.123.375.00 $4.00 5 $4.00 $6.00 $1.00 $6.440.686.00 $388.152.800.40 Taxes $320.760.700.876.00 $2.250.00 $878.75 -$915.000.800.550.800.440.40 Proceed S= $7.00 4 $5.50 $4.00 $1.56 Net ATCF -$10.415.80 12-39 Year 1 2 3 4 Calculation of net Salvage Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Bn $21.75 $1.75 -$25.537.00 $21.375.00 $144.800.152.20 .750.480.288.000.250. $3.75 $3.800.000.875.375.50 $3.00 $650.50 $7.00 $14.00 -$2.915.44 Net S= $5.000.00 $0.800.950.00 $4.00 $360.000.00 $1.800.800.540.00 $1.00 $1.75 $5.412.674.000.00 $921.288.915.50 CCA Dep.462.00 èain on disp.656.00 $4.00 $1.00 $6.00 $1.000.288.152.00 $14.440.000.00 8.00 $1.00 $975.313. Bn 1 $10.80 $527.00 $9.50 2 $8.60 $3.50 $1.000.50 $5.25 $1.00 $1.412.50 $3.00 $1.50 $7.56 Calculation of net Salvage Year 1 2 3 4 5 OR 0 $1.123.00 $1.000.= $3.00 $216.60 Tax effect è= $1.000.00 $1.750.608.000 $5.800.325.00 $1.00 $1.608.00 $7.00 $2.00 CCA $1.75 UCC at year 4= Proceed S= èain on disp.00 $4.00 $5.200.50 $2.000.00 $10.462.(c) Year Bn-1 CCA Dep.00 $1.00 $1.00 3 $8.00 $0.00 $259.750.625.875.00 $7.760.925.00 $10.04 $1.000 IRR= $1.= Tax effect è= Net S= 0 1 $8.686. yes.60 CCA Investment -$10.20 $351.00 $0.123.60 BTCF $800.00 3 $7.00 $3.462.00 $921.000.00 $648.00 $1.36 Net Profit $480.200. IRR would be higher) Bn-1 $25.250.674.62% (Therefore.50 4 $8.00 $3.75 $4.00 $921.00 $1.000 Salvage $5.

550.00 $1.00 $2.189.000) = $1.330.602.91 $5.397.497.481.50 $3.00 $51.000 .700.00 2 $12.210 or greater to obtain MARR 15% 12-41 Year 1 2 3 Bn-1 $20.= Tax effect è= Net S= Cap.135 ($10.170.38 $1.000 $6.250.00 $1.50 $5.572.00 $7.000.000.000.57 $5.30 12-40 (a) Bn $57.00 $46.752.000 Tax on Cap èain = 0.00 $17.00 $11.130.130.30 $8. èain Tax= $37.00 $3.000 =$10.00 IRR= 9.250.00 $7.300.000.130.781.00 $4.00 $4.00 $11.000.00 $5.250.547.= $8.120.094.100.060.30 $6.197.700.00 3 $12.611.09 $4.81 -$70.185.00 4 $12.00 Bn $17.330.00 $5.922.70 $60.350 1 $12.00 $11.00 Calculation of net Salvage UCC at year 3= Proceed S= èain on disp.40 $5.155.617.752.00 CCA Dep.00 $7.900.13 $4.00 $2.965.000 -$70.00 $3.585.617.00 $6.000.00 $5.350.00 $57.300.00 $41.00 $22.909.000.50 $6.250.00 $41.900.00 $51.633.155.00 $4.155.700.000. annual rent should be $12.000.397.60 $5.00 5 $12.62 $53.50 $4.768.60 Solving by trial and error.553.38 $82.350 (c) Calculation of net Salvage House Land Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF 0 UCC at year 5= Proceed S= èain on disp.00 $5.000.897.09 $72. $3.30 $10.70 $2.00 $46.00 $9.$10.00 $10.70 (b) Capital èain on land = $20.570.00 $8.50 $10.000.00 .300.250.87% (IRR<MARR.00 $5.102.Net ATCF -$25.553.250.000.000 $9. $3.00 $6.00 $37.670. therefore she should not buy the churn) Year 1 2 3 4 5 Bn-1 $60.327.170.50 $10.00 CCA Dep.00 $1.00 $4.617.

00 Income tax 0 $2.750.993.32 $1.00 $900.00 Taxable income 0 $5.00 $2.77 2 $5.00 $3.00 $5.500 $2.50 ATCF -20.00 $3.000.100.100.00 $2.500 $5.00 $1.77 $3.500 Year Bn-1 1 $14.430.305.00 $3.00 -$2.77 PW(12%) -$20.00 -$2.30 UCC at year 4= Proceed S= èain on disp.831.000 Rem.00 $1.00 $500.100.000.695.100.00 $2.00 -$1.00 $374.750.50 2 $8.00 $1.695.000 $5.= Tax effect è= Net S= 1 $5.570.00 $15.00 $3.00 $1.499.000 $8.00 $750.00 $6.Tax effect è= Net S= Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage 0 1 $8.500 $0 CCA Dep.570.248.570.305.00 $5.570.993.00 $4.000.045.00 $3.570.486.00 $855.337.000.000 $5.749.00 $4.00 $1.100.000.93 $5.45 $1.570.000.00 $5.00 $2.749.255.500 $2.21 $10.000 $18.39 $1.000.00 $3.248.00 $15.900.55 $2.00 -$2.350.330.000. $2.21 $1.000.000.831.250.00 $6.081.650.00 $2.500 $3.499.70 -$486.50 $2.00 -$20.70 $4.500 3 $5.00 $680.00 $5.000.00 $3.00 $1.081.000 $5.00 $2.30 -$2.000 $2.00 $3.00 $3.749.081.133.858.00 NPW= 12-42 Year 1 2 3 4 Principal pymt $2.750.70 $1. Balance $7.000 Year 0 1 2 3 BTCF -$20.900.000.00 $1.250.30 $250.00 4 $5.00 $306.00 $2.000 $9.00 $4.595.00 $2.329 .00 $1.00 3 $8.000 $750 $500 $250 Bn $11.500 Interest $1.70 $3.000 $8.00 $5.436.50 $3.486.50 Net ATCF -$20.00 2 $11.100.430.00 $2.000.900.100.499.500 4 $5.00 3 $8.000.000.00 $8.00 $1.900.00 Calculation of net Salvage Year OR CCA Interest BTCF Taxes Net Profit CCA Investment Salvage 0 -$4.00 CCA $0.900.255.00 $1.500 $2.001.00 $751.330.50 $9.000.

500 ± 0.099.0667P Where P = maximum expenditure for new equipment.800 -$2.00 $1.1317P -$35.0527 P « « « -$35.500) (0.000 « « « « 9 +$7. i%.300 $21.500 Where x = maximum purchase price for old building and lot.$5. i%.86% (b) This problem illustrates the leverage that a loan can produce. The truck and the loan are independent decisions and probably should be examined separately.000 $645.200 +$4.x . Two items worth noting: 1.000 « « $7. 12-43 Year Before-Tax Cash Flow 0 .000 10 +$7.300 x = ($21.2472) ± x .300 +$4.000 $7.200 +$4.$4.000 $7.300 = 0 At the desired i = 15% $4.800 -$2.000 + 0.500 Deprec.500 ± 0.000 + 0.00 $1.45 22. There is increased risk when investments are leveraged. Since the truck rate of return (12.0667P +$87.386.800 $0 After-Tax Cash Flow .100 12-44 Year Before-Tax Cash Flow 0 -P 1 +$87.500 ± 0.200 « « +$4.080 + $618 .500 1 +$7. After-Tax Cash Flow -P +$52.$4.0123 P .500 ± 0. Taxable Income Income Taxes at 40% 0.000 2 +$7.000 $7.1317P « « « +$87.500 ± 0.444.x .200 (5.0527 P «. « « 0.$4.200 -$2.Net ATCF IRR= -$4. 10) ± x .55 $4.5% in Problem 12-33) exceeds the loan interest rate (10%).500 ± 0. 2.000 +x + $2. ¨ Taxable Income -$3.200 +x + $2.065P Deprec.7528 =0 =0 = $23.0123 P « « « +$52.200 (P/A.300)/0.$4.080 + 0. PW of benefits ± PW of cost = 0 $4. combining the two increased the overall rate of return.500) (P/F. The cash investment is greatly reduced.2472x + $618 ± x . 10) + (+x + $2.065P 2 « « « « « 15 +$87.$4.019) + (+x + $2.800 « « -$2.000 $0 Income Taxes at 40% +$1.

From this the after-tax EUAC may be calculated (= $2.$35)x .8x + $798 + $1.$798 . Taxable Income Income Taxes at 50% After-Tax Cash Flow -$20.189 + $17.348 ± 0.1053 = $406.000 .$1. 7) = ($24x + $164) (4.100 Year 0 1 2 « « 7 Before-Tax Cash Flow -$13.$1. 12-46 SOYD Depreciation N=5 SUM = (N/2) (N + 1) = (5/2) (6) = 15 1st year depreciation Annual decline = $5.000) = (1/15) ($20. By equating the EUAC for the alternatives we get: $2.000) Deprec.000 . Taxable Income Income Taxes at 40% $1.$5.500 ± 0. 10%.000 = (5/15) ($20.348/1.Solve the after-tax cash flow for P PW of Cost = PW of Benefits P = ($52.264 « « « -$24x+$1.559) = $449.529 « « « $48x-$2.5 days.000 $24x+$164 « « « $24x+$164 $3.000 = $1. 10%.5 x x = 91. Annual Benefit of truck ownership = ($83 .000 (P/F.868) + $3.429 «.100 « « « $48x-$1.540 x = ($13.5 days @lternate @nalysis An alternate approach is to compute the after-tax cash flow of owning the truck.0123P) (P/A.5x).100 +$3.500 ± 0.529 $0 -$24x+$1.000 Set PW of Cost = PW of Benefits $13.100 Deprec. In a separate calculation the after-tax EUAC of hiring a truck is determined (= $41.000 .$1.5 x = $41.1053 P = $449.$5.189 + $17.429 $48x-$2. 8%.5x). « « $1.000 .000 $48x-$1.264 $0 After-Tax Cash Flow -$13.500 12-45 Let x = number of days/year that the trucks are used.000 (0.5132) = $116.2 which is approximately equal to 9.000 Year 0 Before-Tax Cash Flow -$20.000 = $48x .0123P) (8.540)/116.8 = 91.000 = ($24x + $164) (P/A. 15) = ($52. 7) + $3.

5A + $1.150 .500) (3.983 + $3.500 -0.000 A .6806) A = ($20.000 +A $4.150 Required Before-Tax Annual Benefit = $5.$500 (7.686 .5A + $2.000 After Tax Cash flow computation: $20.500 0.5A + $1.000 A .5A + $2.000 (0.000 -0.$9. 8%.000 -0.5A + $500 $0 0.$5.1 2 3 4 5 +A $5.$2.500 -0.000 0.5A + $1. 8%. 5) = (0.000 (P/F. 5) -$500 (P/è.5A + $1.5A + $2.500) (P/A.000 .000 = (0.$3.000 A = Before-Tax Annual Benefit A .000 A .993) .000 +$5.000 0.500 0.$4.372) + $5.000 A .000 +A $1.000 $0 -0.$1. 8%.$3.000 +A $2.5A + $2. 5) + $5.000 +A $3.5A + $2.5A + $2.5A + $500 +$5.403)/2 = $5.

000.00 $ 4.000. Exp inc Tax ate Land Salvage Selling Price S M@ 27% $ 75.000.00 I = @C NPV= 10.00 $ 70.00 10% Land Purchase P Land Salvage Capital èain (Loss) x Tax Rate/2 = Land Net Salvage at Yr n = $ 45.950.01% $76.050.00 10 27. ev increase D@T@ $ 110.000.12-47 Building Price P Land Purchase P n SL (yrs) DDB (%) SOTD (yrs) Building CC@ rate Machinery Purchase Machinery CC@ rate Machinery Salvage evenue Yr 1 ann .000.00 $ 45.000.79 .00 $ 75.5 $ 12.00 Expense yr 1 ann.

000 0 0 0 12.160 10 11 12.000 12.000 2.000 2.000 2.000 3.160 8 12.000 12.245.160 @fter-Tax Cash Flow $ (155.000 0 12.000 2.00) $ 9.000 3.160 2 12.000 0 12.000 12.000 0 12.000 8.000 0 12.000 3.00 $ 9.000.000 12.160 5 12.000 8.240 4.00 $ 9.240 0 4.5% P= 197000 Net= 174455 .000 8.840.000 3.000 2.840.000 0 12.000 8.160 7 12.240 4.240 4.000 3.00 $ 9.000 0 3.000 8.000 8.840.(P110000)*13.000 110.840.000 8.240 4.240 4.000 12.000 2.000 3.000 2.240 4.000 0 12.840.00 $ 9.160 3 12.00 $ 9.000 0 12.240 4.160 9 12.840.840.000 2.000 0 12.840.00 $ 9.240 4.000 Taxable Income Straight Line Income Tax SL Dep Taxable Income Income Tax 1 12.00 $ 9.CC@ Year BeforeTax Cash Flow Outlay or Expense evenue 0 110.000 12.000 8.840.00 $ 255.000 2.240 4.160 4 12.000 8.000 3.000 2.000 12.000 3.160 6 12.00 $ 9.00 Let P = selling Price of house Net receipts = P-($40000 x 27%).000 8.000 3.000 0 12.000 12.000 12.000 0 12.

000 ± (1.5/21) (P/è.65 $3.038.039.120 + 0.000 + (2/21) P 4 $110.00 $3.423.439.000 + (2. 15%.000 ± (5/21) P $110.000 ± (2/21) P) +$55.462.637.000.25 Bn UCC at year 4= Proceed S= èain on disp.000 + (3/21) P 2 $110.000 + (1.500 $5.000 ± (3/21) P $110.637.00 $12. $2.75 $614.173 12-49 Problem can only be solved through trial and error Year 1 2 3 Bn-1 $14.189 P = $208.00 -$1.63 $1.000 (6/21) P -($55.00 $2.039.000 (4/21) P -($55.697.000 ± (2.50 Calculation of net Salvage Year OR CCA M&I BTCF Taxes Net Profit CCA Investment Salvage CCA Dep.60 $2.325.78 $5.000 (1/21) P $110.000 ± (4/21) P $110.175.627.78 .12-48 This problem is similar to 12-44 Yr SOYD Depr.434.588.120/0.048.000 ± (1/21) P -($55.85 $1.00 $3.039.25 -$2.50 3 $6.25 -$14.00 $12.000 + (0.311.784) ± (0.000 (5/21) P -($55.5/21) P) +$55.= Tax effect è= Net S= 0 1 $6.78 2 $6.50 -$1.541 P ± 0.500.175.00 $3.000 + (3/21) P) (P/A.000 (2/21) P -($55.00 $2.697.5/21) P 3 $110.637. 6) = ($55.00 $8.937) = $208.648 = $321.588.5/21) P) +$55.175.000 ± (6/21) P $110.000 ± (2/21) P $110.627. 6) ± (0.000 ± (0.311.00 $1.50 $431. 15%.697.00 $2.007.000.000 ± (3/21) P) -P +$55.5/21) P) +$55.00 $1.50 $2.25 -$311.40 $2.* Taxable Income Income Taxes at 50% After-Tax Cash Flow 0 1 Before-Tax Cash Flow -P $110.5/21) P 5 $110.000 + (3/21) P) (3.000 ± (1/21) P) +$55.000 + (1/21) P 6 $110.000 (3/21) P -($55.588.000.50 $6.25 $6.00 $8.25 $5.5/21) P * Sum = (N/2) (N+1) = (6/2) (7) = 21 Write an equation for the After-Tax Cash Flow: P = ($55.5/21) (7.00 -$1.500.13 $2.325.

15 $31.370.272.55 $9.598.883.02 .436.752.00 $44.323.47 $13.98 $958.116.00 $9.82 Calculation of net Salvage Year OR CCA BTCF Taxes Net Profit CCA Investment Salvage Net ATCF PW(10%)= CCA Dep.46 $638.618.000.78 $6.402.15 $9.559.883.381.000.361.46 $1.29 $6.323.272.567.2 P)= èain on disp.402.23 12-50 Solving by trial and error Year 1 2 3 4 Bn-1 $52.436.890.51 $30.55 3 $20.69 $7.85 $13.78 -$1.567.58 $15.15 $31.25 $15.883.= Tax effect è= Net S= 0 1 $10.93 $9.000.269.500 $0.675.25 UCC at year 4= Proceed S (0.85 Bn $44.381.22 $4.432.00 $6.00 $7.80 -$4.675.567.597.71 $12.25 $18.54 $14.15 221.85 $2.811.890.559 $0 $9.381.51 2 $15.559 -$52.373.10 $11.71 $12.61 $21.334.78 $10.78 4 $25.49 $4.063.55 $1.00 $13.153.402.41 -$52.059.247.000.75 $7.15 $846.61 $21.924.511.Net ATCF PW (12%)= -$14.65 $6.40 Number of days car is to be rented= Therefore 222 days or more $4.58 $10.82 $15.705. $7.

70 (6.328 $ 3.20 2.751 $ 264.328 Select Lowest Cost which is Y 12-52 Taxation rate= yrs.328 3 $ 6.14 $ 1.328 12257.06 Y Ann Cost 5120 7 $ 6.70 0.570 $ (8.00) 1.500 0 $ 189.25 CTF(1/2)= 0.50 7.390 $ 201.16 11.00) $ 0.447) .38% $ $ $ $ $ $ C (10.806 $ 1.00) 2.487 $ 3.00) 2.328 11 $ (2.487 $ 3.328 BVof X(11)= BVof Y(11)= 6 $ 6.487 $ 3.487 $ 6.381 1 $ 6.00 0.00) 5.00) 8.328 2 $ 6.487 $ 3.706) $ (6.60 16.04 X Ann Cost 9980 13033.40 4.00) 7.00 (3.70 $ 0.38% 20% 5 @lternatives D $ (5.00) 2.00) 3.50 (5.00 0.56 16.92% $ $ $ $ $ $ E (15.328 10 $ 6.00 (2.50 0.328 9 $ 6.12-51 Y cost= $ 248.731) AE of X= AE of Y= AEof YX= $ 35.487 $ 3.18% $ $ $ $ $ $ F (30.487 $ 3.344 X cost= PW of X= PW of Y= PW of YX= CCA rate= 0.761364 MARR= t= 0.487 $ 3.70 $ (1.301 $ 219.35 CTF= 0.54 8.00) $ 1.1 0.150 $ 33.21% 8 $ 6.328 $ 228.80 12.487 $ 3.00 12. of Life = Cost BTCF SL Dep TI IT @TCF I = $ $ $ $ $ $ B (25.75 4 5 $ 6.487 $ 3.

ate 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% If M@ If 17%>M@ If 6%>M@ B $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 10 9 8 7 6 5 4 4 3 2 2 1 0 (0) (1) (2) (2) (3) (3) (4) (4) >17% do nothing >6% Select E Select F $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ NPW C 4 4 3 3 2 2 2 1 1 1 1 0 0 (0) (0) (1) (1) (1) (1) (1) (2) D $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ E 3 3 2 2 2 2 2 1 1 1 1 1 1 0 0 0 0 (0) (0) (0) (0) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ F 8 7 7 6 5 5 4 4 3 3 2 2 2 1 1 0 0 (0) (1) (1) (1) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 11 10 8 7 6 5 4 3 3 2 1 0 (1) (1) (2) (3) (3) (4) (4) (5) (6) Maximum $ 11 $ 10 $ 8 $ 7 $ 6 $ 5 $ 4 $ 4 $ 3 $ 3 $ 2 $ 2 $ 2 $ 1 $ 1 $ 0 $ 0 $ (0) $ (0) $ (0) $ (0) .

310 $0 30.000 $3.175 +$2.970 FW(10%) -$134. 1 -$10.000 $3.Tax -$20.000 +$22.2% 0.540 +$150.000 $2.20 BTCF SL Dep.000 $3. (d) To maximize Net Future Worth.000 $3.000 $3.000 $3.566 @lternative 2 Year 0 1.970 PW(10%) -$20.036 +$9.1 increment has a B/C ratio less than 1.500 -$1. (b) To maximize (EUAB ± EUAC).91 (a) To maximize NPW.215 ATCF -$10.970 9.9% 2.338 +$63. (e) Because the 2.10 11.902 +$47.000 +$340 +$2.650 $2.310 $0 FW(10%) -$67.500 -$1. 2 ± Alt.Tax -$10.10 11.2% from investing in Alt.10 11. .000 $3.000 +$20.650 $2. choose Alternative 1.03 Alt. (c) Based on the rate of return of 9. TI 34% Inc. TI 34% Inc.47 Alt.215. 2 instead of 1. 2 -$20.190 $0 $0 Year 0 1.20 Rate of Return B/C Ratio Alt.20 BTCF SL Dep.500 $1. reject the increment and select Alternative 1.340 EUAB-EUAC -$1.12-53 @lternative 1 Year 0 1.530 Year 0 1.20 Sum ATCF -$20.340. choose Alternative 1 with (EUAB ± EUAC) = $1.635 +$827 +$1. 1 -$10. note that the increment is unacceptable.10 11.465 EUAB-EUAC -$2.310 $0 PW(10%) -$10.10 11.836 $0 +$69.390 $0 +$1.429 +$7. Choose Alternative 1.270 +$136.650 $2.500 -$850 $4.000 $4.000 $4.500 $0 $4.20 Sum ATCF -$10.500 $2.350 +$2.970 10% 1.340 $0 +$10. choose Alternative 1 with a total present worth of $10.1 After-Tax Cash Flow Year 0 1.700 Increment 2.112 ATCF -$20.

000 $1.000 $200 -$68 $1.600 $2.400 $2.020 $1.800 SL Dep.200 $1.A ATCF -$2. 12-55 @lternative @ Year 0 1 2 3 4 5 BTCF -$11.Tax ATCF -$5.460 PW at 15% -$2.000 $0 $159 $285 $801 $828 +$73 The B.000 $0 $1.000 $1.000 $0 $0 = -$278 34% Inc.000 $1.980 $3.A has a desirable 13% rate of return.000 $1.188 @lternative B.000 $3.264 $1.000 $3.020 $3.000 $1.000 $1.000 34% Inc. TI $3.000 $1.132 $400 -$136 $1.260 $1.000 $0 $0 $1.000 $3.000 $3.000 $1.600 -$544 $2.000 $1.000 $800 $600 $400 $200 $0 $200 $400 $600 $800 34% Inc.Tax ATCF -$3.000 NPW(12%) SL Dep.980 $0 .800 -$612 $2.000 $0 $0 $3.000 -$68 $932 -$136 $864 -$204 $796 -$272 $728 @lternative B Year 0 1 2 3 4 5 BTCF -$5.000 SL Dep. Choose B.000 $3.000 $1.000 $1.000 $0 $200 $400 $1.000 -$1.@lternative @ Year 0 1 2 3 4 5 Sum B. TI $1.000 $3.000 $0 $0 $3.000 $3.000 $3.000 $0 $0 $3.12-54 @lternative @ Year 0 1 2 3 4 5 BTCF -$3.056 $1. TI $1.000 $2.000 -$1.Tax ATCF -$11.000 $0 $151 $263 $720 $726 -$140 PW at 12% -$2.

000 $9.980 $3.000 $9.000 -$1. By NPW one can see that A is the better of the two undesirable alternatives.000 $3. Select Alternative A. TI 34% Inc.000 $6.000 -$3.000 $0 $0 $9.060 $10.040 $6.960 $0 $9. .000 NPW(12%) SL Dep.000 $9.000 -$2.000 $6.@lternative B Year 0 1 2 3 4 5 BTCF -$33.260 $2.Tax ATCF -$33.202 $9.020 $7.000 $5.000 $9.000 $9.020 $10.000 +$1.000 $12.000 -$3.000 -$680 = -$953 Neither A nor B meet the 12% criterion.

High purchase price.Chapter 13: eplacement @nalysis 13-1 For the Replacement Analysis Decision Map. . 13-3 The book value of the equipment describes past actions or a $ situation. Thus. Retraining in operation and maintenance may be required. keep the bottling machine indefinitely. safety. Can be depreciated. High comfort of operation. EUAC would be a minimum for one year. The answer is the last it should be ignored in this !- analysis. long service life. Thus total EUAC is declining over time.) The answer is one year. Supplier warranty and spare parts backup available. Answer: For minimum EUAC. hence it may or may not represent market value. The statement is false. 13-4 With no resale value. (The book indicates that trade-in value may be purposely inflated as a selling strategy.) 13-7 (a) Expected good performance. the answer would be the last it depends on the data and the assumptions 13-2 The replacement decision is a function of both the defender and the challenger. 13-5 The EUAC of installed cost will decline as the service life increases. and maintenance costs that are expected to be higher in the future. energy efficiency. the appropriate analysis method is a function of the cash flows and assumptions made regarding the defender and challenger assets. May not be immediately available. (This is such a common situation that the early versions of the MAPI replacement analysis model were based on a one year remaining life for the defender. productivity. 13-6 The value to use is the present market value of the defender equipment. Sales taxes to be paid. The EUAC of maintenance is constant.

Production will be lost during the rebuilding period. productivity. No sales tax applies. EU@C of Maintenance For a 1-year useful life $2. at least partially. (e) Performance. Retraining in operation and maintenance may be required if the new unit is different from the previous one. Cost may be substantially lower than in previous options. and that the rebuild costs can be expensed.800 For a 2-year useful life . energy efficiency. In this case we compute the minimum cost life of the defender and compare the EUAC at that life against the EUAC of the best available challenger. lost production during the rebuild period. reliability may be significantly lower than in the other options. safety. The sales tax applies. No sales tax applies. This would lead to the use of Replacement Analysis Technique #2. Equipment can be depreciated. (c) All as in (a) except for still lower cost.000 (1 + 0. service life.000 $500 EUAC = $2.15) = $2. Retraining in operation and maintenance is not required.(b) All as in (a) except for lower price and probably faster delivery. 13-8 Looking at Figure 13-1: For this problem marginal cost data is available. Immediate delivery is a possibility. Cost may be only 20-50% of the new equipment.000 (0. The rebuild costs can be expensed. and is not strictly increasing. 13-9 EU@C of Capital ecovery In this situation P = S = $15. We chose the options with the smallest EUAC.000 So EUAC of Capital Recovery = $15.15)1 + $500 = $2. (d) Performance and productivity may not be as good as in option (c).250 for all useful lives.

000 $500 A FW yr 3 A EUAC A A = $2.500 = $6. 4) + $500 (P/è.000 = $4. 15%. 1) + $1.829 =A = $1. 15%.829 For a 4-year useful life $2.000 $1.000 $1.500 $1.000 (F/P. 5) = $9.000 (F/P. 4) = $1.$2.000 (F/P.963 = $1. 15%. 3) = $1.220 (A/F. 2) + $500 (F/P.963 For 3-year useful life $2. 15%. 15%.000 $2. 2) EUAC =A = $1.500 $1.305 (A/F.000 $500 A FW yr 4 A A A = $2. 15%.000 $500 A FW yr 2 A = $2. 15%. 2) + $1.000 (F/P.864 EUAC = A = $1. 3) + $500 (F/P.864 .353 = $6.220 A = $4.305 A = $9. 15%. 5) (F/P. 15%. 15%.000 $1.353 (A/F. 15%. 1) + 1.

15%.15) = EUAC of Installed Cost = $8. 3) + $900 (F/P.500 (0. 4) = $360 = $300 + [$300 (F/P.Alternate computation of maintenance in any year N: EUACN = A = $2.15) ($10. it seems unlikely that this will be economical.862 . 5) + $5. and then buy and install another one.228 = $2. 15%.$5. 15%.000 . N) + $500 + $500 (A/è.000) (A/P.800 EU@C of Maintenance EUAC1 EUAC4 EUAC5 EUAC6 EUAC7 = EUAC2 = EUAC3 = $300 = $300 + $300 (A/F.000 $3.500) (A/P. n) + (S) (i) 1 2 3 4 5 6 7 ($10. As a practical matter.400 $4.000 . 6) = $703 = $300 + [$300 (F/P.15) ($10. 15%.000 (0.100] (A/F. 7) = $1. 15%. 15%.000 .200 $2. 15%.014 = $1. 15%.074 EU@C of Installed Cost Year (P ± S) (A/P. 4) + $4. 15%. 1) + $4.15) ($10. i%.15) ($10. 2) + $2.000 (0. to minimize Total EUAC. 5) = $485 = $300 + [$300 (F/P.500) (A/P.500 (0.000 . 1) + $900] (A/F.500 = $4.100 (F/P.$6. 15%. choose the alternative with minimum EUAC of maintenance. 15%. 15%.602 = $2.000 .000) (A/P. 3) + $4.500 $6.500 $4. 13-10 Year 0 1 2 3 Salvage Value P = $10.000 Maintenance $600 $1. 2) + $3. 1) + $2.000 (0.$5.500) (A/P.000 .523 = $3.000 .000 (0. Economical life = 3 years (b) The stainless steel tank will always be compared with the best available replacement (the challenger).000 Maintenance $300 $300 $300 Year 4 5 6 7 Salvage Value $4.250 + EUAC of Maintenance Therefore. sell it to someone else.000 $3.$3. 15%.242 = $2. 2) + $900 (F/P. 15%.$4.000 $5.$4.15) ($10. 15%.000 (A/P.500 $5. 1) + $3.500 (0. It will cost a substantial amount of money to remove the existing tank from the plant. then the defender tank probably will be replaced. 6) + $5. 15%.15) ($10.$3. 15%.500] (A/F. 15%.000) (A/P. 7) + $6. If the challenger is superior. 15%. N) (a) Total EUAC = $2.000) (A/P.

13-11 For various lives.914 . determine the EUAC for the challenger assuming it is retired at the end of the period.Year 1 EUAC of Installed Cost + $8.602 $360 = $2.717 U 7 $1. 2) = $6.228 $300 = $3. 10%.000 EUAC = $12.823 3 $3.962 5 $2.074 = $2.242 $485 = $2.2 years $12.528 4 $2. 10%.000 (A/P.800 2 $4.727 6 $2.000 EUAC = $12.1 year $12. The best useful life will be the one in which EUAC is a minimum. Useful Life. 1) = $13.523 $300 = $4.862 $1.500 EUAC of Maintenance $300 = Total EUAC = $8.014 $703 = $2.936 The Economical Life is 6 years because this life has the smallest total EUAC.200 Useful Life.000 (F/P.

4) = $12. 10%.2155) = $4. 3) = $4.000 (0.5 years $12.000 (0. 1)] (A/F.2638) + [$2. 5) + [$2.3155) + $2.000 $2.825 Useful Life.000 (1 + (F/P.000 maintenance EUAC = $12.000 (A/F.000 maintenance EUAC = $12.000 (1 + (1.000 (0.4 years $12. 4) + $2.000 (A/P. 10%. 5) = $12.000 $2.000 (A/P.217 Useful Life.Useful Life.1638) = $3. 10%.854 . 10%.000 (A/P.000 EUAC = $12.3 years $12. 10%. 10%.100)] (0.

1296) = $3.000 (A/P.$166.$75.$235.$235.938 13-12 First Cost = $1.914 $4.080 + $29.000 $4.500 maintenance EUAC = [$12.000 .217 $3.488 .000 Salvage Value = $225.000 (A/F. EUAC $13. 10%.160 .000 Maintenance & Operating èradient = $75.6 years $12.800 = -$613.720 Thus.Useful Life.000 Maintenance & Operating Cost = $235. 6 yr.000 (F/A. n) .000 .000 $2.310) + $2.750 = -$610.275 + $48. 2 yr.500](A/F.$235.938 Summary Useful Life 1 yr. hence the most economic life is 5 years.000 (3.$235. n) + $225.000 MARR = 10% EUAB ± EAUC = $1.500](0. 6) = [$12. 10%.854 U Best Useful Life is 5 years $3.772) + $2.050.$103.000 (A/è.200 $6.575 = -$621.000 (F/P.000 . 3) + $2.855 . 4 yr. .$135.825 $4. 5 yr.990 + $36. 10%. 10%.000 (1. n) Try n = 4 years: EUAB ± EAUC = $331. 10%.000 $2. 3 yr.050. 5) + $2. 10%.000 . year 5 has the minimum EUAB ± EUAC.362 Try n = 5 years: EUAB ± EUAC = -$276.885 Try n = 6 years: EUAB ± EUAC = -$241.

859) = -$3.000 +$7.500 . 2) = +$1.610 = +$1. the decision is to overhaul the 1988 auto.555 +$1. the incremental before-tax rate of return is 12.414 $2.100 $1.000 +$10.236 =-$3. NPW OVERHAUL = -$1. 2) = -$1.13-13 A tabulation of the decline in resale value plus the maintenance is needed to solve the problem.000 New vs.850 $2. The 12.000 +$15.466 Decline in Value for the Year Maintenance for the Year Sum of Decline in Value + Maintenance $2.800 $2.400 $6.500 ± ($2.016 $3.10 10 Sum Reconditioned Equipment -$35.287 NPW REPLACE = +$1.000 +$7.000 -$10.859) = -$3.902 $2. Year 0 1.725 $4.575 $709 $602 $512 $536 $50 $150 $180 $200 $300 $390 $500 $2. .000 PW at 12% PW at 15% -$40.250 $1.800 (1.000 New Equipment -$85.$800 (1. reconditioned -$40. 13-14 Find: NPW OVERHAUL and NPW REPLACE Note: All costs which occur before today are $ and are irrelevant. 5%. 13-15 In a before-tax computation the data about depreciation is unneeded.800 .300 $4.705 Since the PW of Cost of the overhaul is less than the PW of Cost of the replacement car. so reject the increment and recondition the old tank car.$2. Age Value of Car New 1 yr 2 3 4 5 6 7 $11.$800 (P/A.000 +$5.7% rate of return on the increment is unsatisfactory.7%. 5%.165 $35.800 .000 +$39.200 $8.500 + $300) (P/A.000 -$40.755 $909 $902 $902 $936 From the table it appears that minimum cost would result from buying a 3-year-old car and keeping it for three years.133 +$1.631 By linear interpolation.

4) = $2. 0 1 2 3 4 -$1.000 $0 $0 $0 $0 $500 $500 $500 $500 Taxable Income $1.700/$900 = 3.700 +$900 +$900 +$900 +$900 Existing Machine BTCF -$1.000 Selling price = $1.6% (b) After-Tax Analysis New Machine Year BTCF 0 1 2 3 4 -$3.$1.13-16 (a) Before-Tax Analysis Year 0 1 2 3 4 New Machine BTCF -$3.480 $1. i%.700 .000 $0 $0 $0 $0 New Machine rather than Existing Machine BTCF -$2.700 +$900 +$900 +$900 +$900 Compute Rate of Return PW of Cost = PW of Benefit $2.$370 Existing Machine * Year BTCF SL Deprec.705 +$232 +$1.0 Rate of return = 12.700 = $900 (P/A.000 capital loss ATCF -$1.000 Book Value .700 +$900 +$900 +$900 +$900 SOYD Deprec.000* -$500 -$500 -$500 -$500 40% Income Taxes -$200** +$200 +$200 +$200 +$200 Long term capital loss foregone by keeping machine: $2.$0) = (1/10) ($3.700 .110 $740 $370 -$580 -$210 +$160 $530 40% Income ATCF Taxes -$3. 4) (P/A. Taxable Income $1.$0) .200 +$200 +$200 +$200 +$200 .132 +$84 +$984 -$64 +$836 -$212 +$688 SOYD Deprec Sum = (4/2) (5) 1st Year SOYD Annual Decline = 10 = (4/10) ($3. i%.

400 EUAC = $26.000 each $96.600 $8.132 +$984 +$836 +$688 ¨ After-Tax rate of return Existing Tool ATCF -$1. 9%.400 Compute Equivalent Uniform Annual Cost (EUAC) Initial Cost: $196.500 + 3 new x $600 = $7.000 of long term capital gains elsewhere in the firm.100 (A/P.1807) = $19.645 @lternative II: Keep 4 old machines and buy 3 new ones Initial Cost: Value of 4 old machines 4 x $2.453 Less Salvage Value: (6 x $750) (A/F.100 Total = $106. The result is a tax saving of 20% ($1.500 $879 $698 $534 $387 -$2 = 5.200 = $196.000 long term capital loss foregone would have offset $1.** The $1.172 . 8) = $106.000 each Training Program at 6 x $700 Total Savings: Annual Labor Saving Less Maintenance Total $192.000 (A/P.Existing ATCF -$2. 8) = $196. 8)= $4.800 per year Salvage Value 8 years hence= 4 old x $500 + 3 new x $750 = $4.000) = $200 is foregone.000 Training Program at 3 x $700 $2. New Machine rather than Existing Machine Year New Tool ATCF 0 1 2 3 4 -$3.0907) = -$408 Less Net Annual Benefit: = -$8.705 +$1.500 (0. 9%.500 $888 $711 $549 $400 = +$50 -$2.100 (0.500 $932 $784 $636 $488 Sum PW AT 5% PW AT 6% -$2.000 +$4.000 (0.000 3 new machines at $32.200 $12.200 +$200 +$200 +$200 +$200 New.250 Compute Equivalent Uniform Annual Cost (EUAC) Initial Cost: $106.000 $3. 9%. Initial Cost: 6 new machines at $32.1807) = $35.000 $8.96% 13-17 @lternative I: Retire the 4 old machines and buy 6 new machines.100 Annual Maintenance= 4 old x $1.

500 $20.895 $6.250) (A/F. 5) = $6.403 $14.641 $6. so we will check to see if that data is strictly increasing.000 (0.031 $6.70)5 Loss in = $4. 13-19 For this problem we have marginal cost data for the defender.500 $2.587 Decision: Choose Alternative II with its slightly lower EUAC. cost life is given at 5 years in the problem.762 $9.000 (0. 8) Add Annual Maintenance: = $4.957 $10.717 $2.800 $1.493 We see that this data is strictly increasing from the Time Line of today U onward (year 6 of the original life). Defender: Current Market Value Year Time Market = $25.750 $5.202 Annual Lost Total .Less Salvage Value: ($4.407 $6.202 $6.025 $1.640 $1. 9%.989 From this we would recommend that we keep the Defender for three more years and then replace it with the Challenger.250 (0.181 $1.750 $2.250 $5. Thus we use Replacement Analysis Technique #1 and compare the marginal cost data of the defender against the min.329 $1.750 $2.476 $1. Let¶s find the Challenger¶s min. EUAC of the Challenger.823 $1. so we will check to see if that data is strictly increasing.225 $16.250 $4.458 $1.762 $13.286 $11.000 $1.250 $2.750 $3.250 $1. 13-18 For this problem we have marginal cost data for the defender. Challenger Challenger¶s min.187 $7. Defender Current Market Value Year 0 1 2 3 4 5 6 7 8 9 10 = $25.902 $7.250 $2.750 $5. EUAC of the challenger. Cost -5 -4 -3 -2 -1 1 2 3 4 5 $25. EUAC = $27.000 $22. EUAC at its 5-year life.250 $18.312 $1.250 $3.196 $1.800 EUAC = $26.686 $8.800 $5.620 $1. 8%. This is because after three years the marginal costs of the Defender become greater than the min.076 $969 $1.063 $957 $861 $775 $5.0907) = -$385 = +$7.750 $4.90)5 = $14.762 Time Line Market Value (n) Loss in MV (n) Annual Costs (n) Lost Interest in (n) Total Marg.900 (A/P.

000 Total Marg. Thus the Replacement Decision Analysis Map would suggest that we use Replacement Analysis Technique #1.500 $5.900 (A/P.000 $16. Cost $114. 13-20 Year Time Line Salv.250 $8.500 $130.0 1 2 3 4 5 6 7 8 9 10 Line Value (n) MV (n) Costs (n) Interest in (n) Marg. This is because after three years the marginal costs of the Defender become greater than the min.003 $4.432 $6.673 $6.000 $31.000 $14.000 $10.000 $5.000 (a) Total marginal cost for this previously implemented asset is given above. EUAC at its 5-year life is: EUAC = $27.000 $1.059 $1. 8%.000 $78.000 $64.000 $25.941 $2.000 $62. After two years the MC (def) > Min. From the previous problem the Challenger¶s min.000 $90.000 $76.000 $32.000 $30.428 $6.000 $10. (b) In looking at the table above one can see that the marginal cost data of the defender is strictly increasing over the next five year period.000 $2.000 $2.285 $7. EUAC (chal): $113.832 $5.250 $20.629 $6.000 $68.250 $3.000 $12.009 $706 $7.000 $105.500 $12. EUAC of the challenger.000 $19.000 $16.202 $2.675 $2. Maint. We would keep the defender asset for two more years and then replace it with the new automated shearing equipment.000 $44.000 $74.846 $6.000 $2.500 $16.000 $2.000 $2.000 $40.000 $36.392 $4.000 $52.000 $13.978 $7.000 $17.000 > $110.000 .431 $7.000 $45.000 $18.000 $72.000 $17.000 $66. Cost -5 -4 -3 -2 -1 1 2 3 4 5 $25. EUAC of the Challenger.000 $40.000 $11.575 $6.250 $68.801 $1.000 $121.000 $17.400 $980 $686 $480 $336 $235 $165 $115 $81 $12.500 $83.000 $2.500 $98.261 $882 $618 $532 $303 $3.000 $45.950 $8.074 $2.252 $6.457 Again here the marginal costs of the Defender are strictly increasing from the Time Line of today U onward (year 6 of the original life).500 $113.000 $15.000 $35.993 $4. Lost Interest Lost MV 1 2 3 4 5 6 7 8 9 10 -5 -4 -3 -2 -1 1 2 3 4 5 $80.500 $19. Insur.573 $1. We compare the defender marginal cost data against the challenger¶s minimum EUAC.000 $16.000 $2.000 $48.000 $20.000 $2.000 $28.000 $15. Thus.500 $18.000 $20.000 $24. 5) = $6.000 $3.000 $50.989 From this we would recommend that we keep the Defender for four more years and then replace it with the Challenger. Oper.630 $3. we use Replacement Analysis Technique #1 and compare the marginal cost data of the defender against the min.000 $75.000 $70.441 $1.300 $3.000 $10.500 $17.500 $9.000 $2.315 $5.000 $10.

200 thus we keep the defender. the value is $59.300.10 $198. In the table below the minimum EU@C is at year 5 for the old paver (five years from today).000. (b) The minimum cost life of the challenger is 4 years where the EUAC = $3.46 $178. (n) 24000 7000 4000 3000 2000 1000 1000 Total MC (n) 83000 52000 48000 51000 52000 61000 71000 NPW (1-->n) $69.49 $60.000.055.702.56 $157. From Figure 13-1 the marginal cost data is available. Here we are comparing the min.000 > $3. We compare this value to the minimum EU@C for the challenger of $62.000. EUAC (def) vs.04 13-22 (a) The minimum cost life is where the EUAC of ownership is minimized for the number of years held. Because the remaining life of the defender and the life of the challenger are both 10 years we can use either the ³opportunity cost´ or ³cash flow´ approach to setting the first cost of each option (keep defender or replace with challenger). EUAC (challenger) and $4. we recommend keeping the defender for at least one more year and reviewing the data for changes. 13-24 Here we use Replacement Analysis Technique #3.200. comparing minimum EU@C defender against minimum EU@C of challenger.698. MARR% First Cost 20% 120000 YEAR OPER (n) 1 2 3 4 5 6 7 Cost 15000 15000 17000 20000 25000 30000 35000 MAIN T Cost 9000 10000 12000 18000 20000 25000 30000 MV in (n) 85000 65000 50000 40000 35000 30000 25000 Lost MV (n) 35000 20000 15000 10000 5000 5000 5000 Lost Int.400 < $6. (b) The minimum cost life of the challenger is 5 years where the EUAC = $6. min.86 $59. 13-23 (a) The minimum cost life is where the EUAC of ownership is minimized for the number of years held.09 $63.703. This would occur at 4 years for the defender where EUAC = $4. where EUAC = $4.833.87 $218.78 $133.650.13-21 In this case we first compute the total marginal costs of the defender asset. Thus. (c) Using Replacement Analysis Technique #3: Assuming that the defender and challenger costs do not change over the next 4 years we should keep the defender for four years and then reevaluate the costs with challengers at that time.300. EUAC (challenger): $4.976. Thus.277.548.898.67 $105.66 $59. and it is not strictly increasing (see Total MC column in the table below). This is because the min. we use eplacement @nalysis Technique #2. (c) Using Replacement Analysis Technique #3: èiven these costs for the defender and challenger we should replace the defender with the challenger asset now.166.400. This would occur at 1 year for the defender.84 $60.791.67 EUAC (1-->n) $83.164.909.00 $68. Let¶s show each solution: . EUAC (def) > min.

$2. 13-26 The problem.000 (0.075) = -$22 In either case we recommend that the new high efficiency machine be implemented today. @lternative @ Year BTCF 0 1. may be solved in a variety of ways. 10) = $672 EUAC (chal) = $5.Opportunity Cost @pproach EUAC (def) = 4 ($600) (A/P. 10) .000 $0 Deprec.00 EUAC (chal) = ($5.400 $0 .1490) . The problem says the challenger economic life is 10 years. 10) . but that is not part of the problem.500 (0.000 (A/P. 13-25 From the facts stated. 10) .7 -$44.500 +$280 +$230 = $6. Keep the old forklift another year. 8%.600 -$26.$10.000 $0 40% Income ATCF Taxes +$17.000 .000 (0.50 Decision: Choose the alternative with the minimum EUAC. (Using the data provided this fact could be verified.$230 = $738.$10. with a 7-year analysis period. 255.500 (A/P.10 -$50 $650 -$700 EUAC 40% Income ATCF Taxes -$6. Taxable Income -$44. 0 1 $0 $400 $0 Taxable Income -$400 40% Income ATCF Taxes $0 +$160 -$240 EUAC for one more year with old forklift = $240 Buy New Forklift Year BTCF SL Deprec.400) (A/P. Taxable Income 0 -$6.075) = $650 Cash Flow Cost @pproach EUAC (def) = $0.500 1. we see that if the old forklift is retained the EUAC is minimum for a one year useful life.$230 = $6. 25%. 25%.) Annual Cash-Flow Analysis: Keep Old Forklift @nother Year Year BTCF Deprec. A first step is to compute an after-tax cash flow for each alternative.

7) . Taxable Income $14.400 -$2.800 $0 +$12. Taxable Income 0 1.000 + $12.924 = -$4. 7) = -$49. 10%.000 $4.000 SOYD Deprec.000 (4.400 = -$56. @lternative C Year BTCF 0 1 2 3 4 5 6 7 -$56.000 $10.000 $4. 7) = -$4.000 $6.800 (4.200 +$8.000 + $7.763) = -$3.000 $0 +$7.000 $12.@lternative B This alternative is less desirable than Alternative D and may be immediately rejected.600 -$3.$800 (P/è.000 $8.000 @lternative D Year BTCF Deprec.000 $12.868) .600 +$10.200 -$1.000 40% Income ATCF Taxes -$56.000 $6.000 $8.400 +$9.000 $0 40% Income ATCF Taxes -$49.000 @lternative E (Do Nothing) Year BTCF Deprec.000 $12.800 (P/A.000 $0 $2.000 $12.000 + $7.$800 (12.800 -$4.800 (4.000 $0 -$8. 10%.200 -$4.000 $12.868) = -$14. 7) = -$56.000 $12.000 $7.800 (P/A.000 $10.000 -$2.868) = -$23. ate of eturn Solution Alternative A rather than Alternative E (Do nothing) .000 $7.000 40% Income ATCF Taxes $0 +$3.366 Choose the solution that maximizes NPW.900 = -$49. Choose Alternative C.7 $0 -$8.000 $12.000 +$800 +$12.000 (P/A.800 A NPW solution is probably easiest to compute: NPW A NPW C NPW D NPW E = -$26.000 -$800 +$11.000 $2.000 +$8.000 + $12.000 $12. 10%. 10%.7 -$49. Taxable Income 0 1.

000 $7. Alternative C rather than Alternative D Year 0 1 2 3 4 5 6 7 Alt.000 (C.400 $0 Alt. 7) .8% Reject Alternative E.7 Alt. 13-27 Book value of Machine A now = Cost ± Depreciation to date = $54.D) ATCF -$7.000 Alt.000 $7.000 $4.000 +$11.9%) Reject D.800 $1.E) ATCF -$49. E ATCF $0 -$4.7 Alt. D ATCF -$49.000 +$11.800 (A.000 $5.500 = $3.$0) = $13. If sold now = $30.400 +$9. i%. E ATCF $0 -$4.4% Reject Alternative A.500 = $16.000 .400 $2. i%.$13.000 +$7.800 (P/A. Conclusion: Choose Alternative C.E) ATCF -$26.000 $7.$0)/12 @lternate 1: Keep @ for 12 more years Year BTCF SL Deprec.000 $7.000 $7.500 40% Income ATCF Taxes .800 ¨ROR = 12.$0)/12 Machine B annual depreciation = (P ± S)/n = ($42.000 $7.800 +$8.500 Recaptured Deprec.000 .000 $7.400 +$4.$800 (P/è.200 $3.500 Machine A annual depreciation = (P ± S)/n = ($54. 7) ¨ROR > 60% (Calculator Solution: ¨ROR = 65.600 $1. D ATCF -$49.000 ± (9/12) ($54.800 ¨ROR = 6.000 .000 = $5.800 (D.000 +$12. C ATCF -$56. Alternative D rather than Alternative E Year 0 1.Year 0 1.200 +$10. A ATCF -$26.000 . Taxable Income = $4.600 +$8.800 +$12.000 $7.000 Alt.800 $5.

$1.800 +$1. Taxable Income 0 +$30.800 $0 -$23. 10%.500 $4. 10%.12 -$30.1468) .000 $4.600 +$23.500 $0 -$16.$2.000 $1.400 After-Tax Annual Cost = [$23.400 +$1.266 Choose the alternative with the smaller annual cost.800 +$1. Book Value $3.500 $0 * If A were sold the Year 0 entries would be: Year BTCF SL Deprec.000 . +$6.000 (0.$2.400 $2.12 +$2.1468) = $2.800 (2.600 $7.900 = $42.500 -$4.900 After-Tax Annual Cost = $42.800 (P/A.000* $0 $0 $0 $0 $4.500 $4.000 40% Income ATCF Taxes -$42.800 $12. 12) .600) Now U Original Year j 1 2 3 4 5 6 7 = $400 SOYD Deprec. 4)] (A/P.000 (A/P.´ @lternate 2: Buy Machine B Year BTCF SL Deprec.000 $9.487)] (0.600 $6. 10%.000 1.500 -$4. 12) = [$23.800 +$1.500 -$4.200 $800 $14.600 $1. 13-28 (a) SONAR SOYD = (8/2) (9) = 36 ¨D/yr = (1/36) ($18.000 U BV5 .500 Taxable Income -$1.0 1 2 3 4.500 $3. 0 -$42.778 The cash flow in year 0 reflects the loss of income after Recaptured Depreciation tax from not selling Machine A. This is the preferred way to handle the current market value of the ³defender.600 +$1. the entries are just the reverse.000 +$400 +$2.800 $2. Keep Machine A.800 $0 40% Income ATCF Taxes -$6.400 .200 $2.000 $16.400 .500 If A is kept.$1.900 = $3.800 $4.$3.800 +$1.

600 ± BV5 = -$2.000** ¨ Tax ATCF +$400 +$480 +$320 +$160 +$800 -$6.000 ** Loss is $1.000 0 1 2 3 CC@ Depreciation (30% $1.050) ($1.000 $2.0) $900.0 ($165) ($66.0) ($514.500 $2.520 (d) Compute the NPW of the difference between alternatives NPW @ 20% = $897.285) ($400.600 ¨ Tax Income -$1.000) $500 $500 $500 $4.0 ¨ Tax (40%) Recaptured depreciation (loss) = SV-BV BV(3)= $4.0) ($820.600 SOYD Deprec.000) ($2. -$7.000)/10 = $3.22 13-29 Here we use the Opportunity Cost Approach for finding the first costs.0) $4.014.000* -$1.$15.785 ¨ Tax Income ($1.165 (c) Year ¨@TCF = @TCFSHSS ± @TCFSonar 0 1 2 3 ($3.0) @TCF (SHSS) ($10.000 (b) Year BTCF ($10.320.600 +$480 +$320 +$2. (a) Problem as given Defender: SL depreciation = ($50.000 ± BV5 = $1.0 $1.400) $420 $1.000.0 $1.200 -$800 -$400 $2. Year 5 6 7 8 Analysis Year 0 1 2 3 $400 BTCF $3.500 per year @TCF (Sonar) ($6.600) $480 $320 $2.560 .560 * Foregone recaptured depreciation is $7.000 $1.066.550 $1.000 .200 $800 $400 $1.8 Orig.

025 ATCF $27.000 Defender: SL Depr = ($50. = Recaptured Deprec.000 ± [$50.500 b) Defender Market value Defender: SL Depr MV (today) Year 0 0 Sell Keep = $25.500 IT -$2.000 ± 7 ($3.$15. $1.500 (c) Defender Market Value = $18.000 Depr.375 -$3.000) 1 ($100) 30% Depr.500 ATCF -$76.000 = $30. TI $4.MV today Year Sell 0 Keep 0 * TI BTCF $30.375 = -$7.500 = ($50.000 Depr.025 +$2.000 -$30.500 Challenger Year 0 BTCF -$85. TI IT +$8.000 ± [$50. TI IT +$8.500)] ATCF -$76.000 Depr.000)/10 MV (today) = $18.500 per year TI -$7.500* -$4.975 -$27.000 * Recaptured Depr.500 13-30 Challenger Year BTCF 0 ($10.375 -$33.600) 35% IT $560 ATCF 18% PV ($10. * Loss = $18. = $30.000 -$30.500* +$7.000)/10 = $30.000 -$30.000) ($10.500 = $3.000 .500 ± [$50.000 ± 7 ($3.500 per year BTCF $30.975 = Taxable Inc.000 .000 = $25.500)] = $0 Depr.000) $460 $390 .375 ATCF $33.500 TI ($1. Challenger Year BTCF 0 -$85.000 ± 7 ($3.000 Depr.000 Year Sell 0 Keep 0 = $3. TI $0* $0 IT $0 $0 ATCF $30.000 -$30.500 IT +$3.$15.000 BTCF $30.500)] = $4.

000 ($429) $150 $1.825 $ 2.550 ($2.310.700) $945 $795 $571 3 ($200) $1.175) $411 $111 $49 6 ($350) $612 ($962) $337 ($13) ($5) 6 $1.429 ÷ ÷ ÷ á ÷ ÷ ÷ á ÷ 13-31 Solution three years into purchase: 15000 10000 -1000 1000 1000 35% 30% 25% First cost Initial salvage Salvage gradient Initial O&M O&M gradient Tax Rate CCA rate Interest rate Year 0 1 2 3 Capital Cost -15000 CC@ 2250 $ 3.985) $695 $495 $301 4 ($250) $1.250 ($1.678 Book Value $ 8.2 ($150) $2.080) $2.571 $1.26 BV(yr 6) = $8.275 $472 NPV= @W= ($8.925 $ 6.500) $525 $275 $142 5 ($300) $875 ($1.785 ($1.248 @T Salvage O&M cash flow Taxable Income PW Sum O&M tax E@C .

874 $ 1.279 $6.347) $ (5.874) $ (3.450) $ (6.340) $ (3.143 $ 1.373 $ 3.054 $6.312 $ 918 $ 643 $ 450 $ 315 $ 221 $ 154 $ 4.950 $ 5.367) $ (2.061 $ 2.285) $ (6.268 $ 3.7 yr min E@C .154) $ 5 $ (533) $ (1.918) $ (4.F23) Solution three years into purchase .076 -1000 -2000 -3000 -4000 -5000 -6000 -7000 -8000 $ (2.I22+$C$11.$è$14:è22)-$A$6*NPV($A$8.500 $ 1.507 $ 2.353 =NPV($A$8.050 $ 735 $ 515 $ 360 $ 8.602 $6.315) $ (7.308 $6.780 $ 2.643) $ (5.148) $11.$H$14:H22) =PMT($A$8.A22.143 $7.075 $ 4.312) $ (3.823 $8.1 4 10000 2 5 9000 3 6 8000 4 7 7000 5 8 6000 6 9 5000 7 10 4000 8 11 3000 $ 1.031 $ 6.221) $ (8.397 $6.921 $ 5.353) $ (4.

13-32 125000 80000 -2000 35% 30% 25% First cost Initial salvage Salvage gradient Initial O&M O&M gradient Tax Rate CCA rate Interest rate Year 1 2 3 4 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 8 9 10 11 Capital Cost 125000 80000 78000 76000 74000 72000 70000 68000 66000 64000 62000 60000 CC@ Book Value @T Salvage Operating 18750 31875 22313 15619 10933 7653 5357 3750 2625 1838 1286 125000 106250 74375 52063 36444 25511 17857 12500 8750 6125 4288 3001 89188 76731 67622 60855 55729 51750 48575 45963 43744 41801 40050 16000 20000 24000 28000 32000 36000 40000 44000 48000 52000 56000 Main.200 $71.197 $65.557 $65.126 $65.525 $65.618 .070 $67. 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 55000 Insurance 17000 16000 15000 14000 13000 12000 11000 10000 10000 10000 10000 O&M cash -38000 -46000 -54000 -62000 -70000 -78000 -86000 -94000 -103000 -112000 -121000 Taxable Income PW Sum O&M tax -56750 -77875 -76313 -77619 -80933 -85653 -91357 -97750 -105625 -113838 -122286 -14510 -26506 -40479 -54747 -68402 -80991 -92320 -102351 -111214 -118962 -125679 E@C $85.513 $67.037 $65.980 $66.110 $67.

The important principle in considering effects of inflation is not to mix-and-match dollars and interest rates that include. In the chapter the authors talk about how u -Ê !Ê and u effects can contribute to inflation. also called the combined rate. 14-4 Yes. or do not include. 14-3 There are a number of mechanisms that cause prices to rise. The real interest rate captures the growth of purchasing power. It measures the historical cost of a bundle of ³consumer . it does not include the effects of inflation is sometimes called the ³inflation free´ interest rate. and have in our savings accounts. 14-5 The Consumer Price Index (CPI) is a composite price index that is managed by the US Department of Labor Statistics. In the USA. The inflation rate captures the loss in purchasing power of money in a percentage rate form. In much of this book actual dollars (cash flows) are used along with a market interest rate to evaluate projects this is an example of the later type of analysis. The market interest rate. In this way the currency itself is less valuable on a per unit basis. and thus we can purchase less products. A constant dollar analysis uses real dollars and a real interest rate. such as Year-2000-based-dollars. These are the dollars that we carry around in our wallets and purses. Dollars. 14-2 Actual dollars are the cash dollars that we use to make transactions in our economy. $10. As such. are used in engineering economic analyses to evaluate projects. a then-current (or actual) dollar analysis uses actual dollars and a market interest rate. are important. the purchasing power of dollars. Real dollars represent dollars that do not carry with them the effects of inflation. goods and services with the same $1. the purchasing power of a monetary unit is reduced. and interest rates. the effect of inflation. Real dollars are expressed as of purchasing power base. what this means is that during inflationary times our dollars have less purchasing power. and the effects of inflation on interest rates. these are sometimes called ³inflation free´ dollars.Chapter 14: Inflation and Price Change 14-1 During times of inflation. combines the inflation and real rates into a single rate. or $100 dollar bill as we did in the past.

but is not satisfactory where depreciation affects the income tax computations. or in cases where we are more interested in capturing aggregate effects of inflation (such as with the CPI or PPI) one would use a composite index to incorporate/estimate how purchasing power is affected. The goods included in this index are those commonly purchased by consumers in the US economy (e. wages. If.). where all the costs and benefits change at the same rate. entertainment. %.02) = 0.941% -$1. we might use a commodity index that tracks costs of treated lumber.02)/(1 + 0. Allowable depreciation charges are based on the original equipment cost and do not increase. a ³football ticket´ index.02) i'inflation corrected = (0.05 = i¶inflation corrected + 0.967) = $19. The CPI and Producers Price Index (PPI) are examples of composite indexes.00 PW at 2. Much along the same lines. In the absence of commodity indexes. overhead. such as a labor cost index. Both commodity specific and composite indexes can be used in engineering economic analyses.00 . in the analysis. Thus the stable price assumption may be suitable in some before-tax computations. Their use depends on how the index is being used to measure (or predict) cash flows.g. 10 yrs) = $10 (F/P.941% That this is correct may be proved by the year-by-year computations. Composite indexes measure a collection of items that are related. %. Commodity specific indexes track the costs of specific and individual items.000. 7%. clothing. a material cost index. n) 0 Cash Flow in Year 0 dollars -$1.000 (1 + )-n (P/F.). The PPI measures the cost to produce goods and services by companies in our economy (items in the PPI include materials. food.goods´ over time.67 14-8 iequivalent = i¶inflation corrected + % + (i'inflation corrected) ( %) In this problem: iequivalent = 5% % = +2% iinflation corrected = unknown 0. we would use a specific labor cost commodity index to develop the estimate. 10) = $10 (1.02 + (i'inflation corrected) (0.000. we are interested in estimating the labor costs of a new production process. etc. etc.05 ± 0. housing. 14-6 The stable price assumption is really the same as analyzing a problem in Year 0 dollars. if we wanted to know the cost of treated lumber 5 years from today. etc. 14-7 F = P (F/P.02941 = 2. Year Cash Flow 0 -$1.

9612 0.02 +$40. 14-9 $20.000 (1 + %)n = $20.68 +$41.05)-14 = $29.8706 0.26 +$24.85 +$32.71 +$35. Deposit $29.9804 0.23 +$30.29 +$44.31 +$35.12 +$46.13 +$39.8880 0.84 +$41.79 +$395.7579 0.7430 0.8535 0.02 +$48.05 +$22.85 +$26.32 +$706.9423 0.9057 0.000 in Year 0 dollars n = 14 yrs P = Lump Sum deposit Actual Dollars 14 years hence = $20.8043 0.53 +$42.54 +$33.15 +$36.7730 0.78 +$19.1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$50 +$1.01 +$34.670.06 +$47.76 +$0.08 Therefore.22 +$39.20 +$41.000 0.70 +$29.6864 0. iinflation corrected = 2. the money is annual losing purchasing power.7885 0.8368 0.000 (1 + 0.65 +$47.8203 0.6730 +$49.744 At 5% interest: P = F (1 + )-n = $58.9238 0.18 +$37.90 +$37.08)14 = $58.94%.65 +$37. 14-10 To buy $1 worth of goods today will require: .7142 0.19 +$45.52 +$25.40 +$43.7002 0.7284 0.90 +$21.62 +$45.42 +$35.35 +$43.670 Since the inflation rate (8%) exceeds the interest rate (5%).24 +$27.82 +$20.744 (1 + 0.43 +$38.

%. = $1.) 14-13 Price increase = (1 + 0.$1. 5) = 45. 14-15 i = i' + + (i') ( ) 0. %.15 = i' + 0.12 + 0.501/5 = 0.76 km/liter 14-14 1. required fuel rating = 10 x 2.6 cruzados (Brazil uses cruzados.027 = 2.50 = 1.47 5 years hence.97.7% .00)/10 yrs = 9.476 x present price Therefore. 7%.845 = 1.03/1. The average price change per year is: ($1. 5) = $1.97 Thus for the ten year period $1 must be increased to $1.80 = 1.47 (1 + 0.12 (i') 1. n) = $1.45% 14-12 Number of dollars required five years hence to have the buying power of one dollar today = $1 (F/P.12 i' = 0. %.47 (F/P. 25%. is slightly greater than 6%.12 = 0.78 cruzados.F F = P (F/P.05% exactly).476 = 24.03 i' = 0.12)8 = 2.78 cruzados $1 = 32. Combining: $1. %. n) = $1 (1 + 0.7% per year 14-11 (1 + )5 (1 + ) = 1.06)5 = $1.97 .80 From tables. ( = 6. 10) = 1. 10) (F/P. For the subsequent 5 years the amount required will increase to: $1.05)5 n years hence.00 (F/P.0845 = 8.403 Number of cruzados required five years hence to have the buying power of 15 cruzados today = 15 (F/P.403 = 45.

6 1981 1986 n=5 $90. %.25 = 1.10 + 0.6 (F/P.10) (0.one for immediate use plus 4 extra pads.833 n is slightly greater than 4.50/$3. 14-17 = 0.5%.5% $2.00 n=? i = 4.5%. So purchase pads of paper.50 = $3. 4.06) = 16. n) = $2. =x = (1 + x)n ± 1 = (1 + x)4 ± 1 = 1.9 = 1.9 $109.50 $2.6% i' i 14-18 (a) $109.00 = 0.1925 (1 + x) x $3.2057 = 3. ieff 0. 4.14-16 Compute equivalent interest/3 mo. n) (P/F.5%/3 mo.045 = 0.06 + (0.06 = 0.81% .045 = 4.10 = 0. 5) = $109.6/$90. %.19250.9 (F/P. 5) % = $90.00 (P/F.

06)n = n log (1.000 (F/P. 3.113)10)] = $14. 7%. 10) = $2. Thus the actual real rate of return is less than 5% and the annuity should not be purchased.(b) CPI 1996 n=9 = 3.20) = 0.000.06 + (0.62 years 14-22 Use $97.500 [((1.540 Since the cost is $15.06) n = 27.000 (F/P. the benefits are less than the cost computed at a 5% real rate of return.05) (0.6 CPI1996 = $113. where f%=7% and n=15 $97.000 (1 + 0.81% $113.0381)9 = $159.3%.07)15 = $97.20 (1. 4%.6 (1 + 0. 11.113 (1. 15) .600 14-20 Compute an equivalent i: iequivalent = i' + + (i') ( ) = 0.113 = 11. 9) = $113.06) = 0.000 (1 + %)n. 14-21 1 log (1/0. 10) = $29.05 + 0.6 (F/P.500 (P/A.3% Compute the PW of Benefits of the annuity: PW of Benefits = $2.0 14-19 F = $20.81%.113)10 ± 1)/(0.

000 (1 + 0.508) (P/F.000 = (0.000 +0.166)10 = 0.186 @lternate Solution using an equivalent interest rate iequiv = i' + + (i') ( ) = 0.85 14-24 Cash Flow: Year $500 Kit $900 Kit 0 -$500 -$900 5 -$500 $0 (a) PW $500 kit PW $900 kit = $500 + $500 (P/F.85x + $2.700 $83. On the other hand. 15) = $66.85x + $2.06-10 Year 0 $ ATCF -$18.$18. 10%. 10%.700)/0.610 .15 (x . If ³profit´ means an enrichment.000 (F/P. rather than the savings account. Only the differences between alternatives are relevant.= $97.15 (x . 5%.000 house today is equivalent to $268.85x + $2.700 Multiply by 1 1.000 (2.300.166 So $18.10) (0.$18.$2. a $97. And if the alternative investment is at 9% there is a loss. 14-23 Let x = selling price Then long-term capital gain Tax After-Tax cash flow in year 10 Year 0 10 = x.4746x + $1.000 15 years hence. would be: $268.759) = $268. the profit is $0.$18.508 For a 10% rate of return: $18. then multiplying the price of everything does no enrich one in real terms.000 .06) = 0. compared to an alternative investment at 7%.700 ATCF -$18.1830 x + $581 x = $95.188 .4743x + $1.000 = 0.$97.06 + (0. the profit from owning the house.700 Selling price of the lot =x = ($83. If the alterate is a 5% savings account.610 = 0.000) = 0.000) = x ± 0. or being better off.85x + $2. 5) = $810 = $900 = $95. But will one have ³profited´ from the inflation? Whether one will profit from owning the house depends somewhat on an examination of the alternate use of the money. 10) = 0.000 If there is 7% inflation per year.000 0. neglecting income taxes.10 + 0.

10) = A (6.650 .21%.000 5 -$7.10 -$5.3783*) = 6. 3%.60 To minimize PW of Cost. 7%.000 + $5.000 In then-current dollars i = i' + + i' = 0.07) = 0.109 * Computed on hand calculator = PW of Benefits = A(P/A. choose $900 kit. 10%.0895*) + $50.000 in Yr 0 dollars.000/yr +A Fixed annual sum in thencurrent dollars 10 +$50. 5) = $701.915)/6.000 (P/F.5 PW $500 kit PW $900 kit = $500 + $701. 5) = $900 = $935.000 -$10.000 $0 +$7.10.$18. 10) $50.07 + 0.To minimize PW of Cost.000 (0.21%. 10.0895 = $12.1021 = 10.000 1.530) $92.650 A = ($92.03 (0.000 + $5.5 (P/F.03 + 0.0895A + $18. 8%.283 in Actual Dollars and $7.000 (8.5% Therefore. 10) +$50. 14-26 Year Cost to City (Year 0 $) Benefits to City Description of Benefits 0 -$50. 5) = $10.000 (P/A. buy Filterco.000 ¨ROR = 18.000 -$3.915 . choose $500 kit. five years hence = $500 (F/P. the year 0 $ cash flows are: Year Filterco Duro Duro ± Filterco 0 -$7. 14-25 If one assumes the 5-year hence cost of the Filterco unit is: $7.000 (F/P. (b) Replacement cost of $500 kit.21% PW of Cost $50.

365 = 40.36 36 BTCF $0 -$1.365 $1.365 Performing linear interpolation: .000 +$40. i%. 36 mo) (F/A. 36) = $40.000 (F/A.14-27 Month 0 1. i%.

.

.

5) (P/F.968 Thus. Find i'.336)/(41. 3%. before-Tax Rate of Return = 0% 14-28 Actual Dollars: F= $10.10 11.477 in A$ today (b) R$ today in (-50) purchasing power = $293.36% 14-29 (a) F = $2.15 R$ in today¶s base Inflation 3% 5% 8% = $41.50% + 0.5 6.10)50 = $293. 4%. 50) = $41.770 Real Dollars: Year 1. 5) (P/F.000 (F/P. 15) = $41.25% [(40. 5) = $18.336)] = 0.153 ± 39.365 ± 39.968 = $10. 5%. 10%. 8%.080 = 8% So. we know that i = 8% and = 8%.08 + (i') (0.6416% per month Equivalent annual interest rate i per year = (1 + 0.08 = i' + 0.006416)12 ± 1 = 0.770 (P/F.477 (P/F.000 (1 + i*)15 i* = 4.500 (1.08) i' = 0% Thus. the real growth in purchasing power has been: $18. ? @ i = 0. i = i' + + (i') ( ) 0.296 .

9) = $11. 1.5%.000 = $4. For = +5% (Inflation) .19% = $50. choose Alternative C.000 (P/A.19. 14-32 (a) R today $ in year 15 = $10.03 + 0. 8%. ic.500 + $2. 11. 5) = $236. 8) icombined = ireal + f + (ireal) ( ) = 0.428 = $2.000 (P/A.500 ( 1 + 0.000 (P/A.000 (P/A.000 (P/F.115 Here we choose Company A¶s salary to maximize PW. 8%.500 (P/è. 8.08)/1. ir%.500 (P/F.612 = $198.359 = $45.15 ± 0.000 (P/A.500 (0.14-30 (a) PW = $2. 8) = $14. 8%.05 + (0. 5) + $2.06)/1. 15) ir = (0.000 (P/A.718 (b) ic = 15% = 8% F = $10.15%.05) = $2. 8) = $4.5403) = $5. 8%.06 PW(A) PW(B) PW(C) = 1.500 (P/F.851 = $2.08 = 6. 4) + $2.7350 + 0. 6%.371 14-33 No Inflation Situation Alternative A: Alternative B: PW of Cost PW of Cost Alternative C: PW of Cost = $6. 5) = $229.500 + $2.03) (0. 8%.15)15 = $81.500 + $2. ir = (ic ± )/(1 + ) = (0.5403) = $5.5% R today $ in year 15 = $10. 8) = $2.040 14-31 Find PW of each plan over the next 5-year period. 3%.500 (P/F.688 To minimize PW of Cost.065)15 = $25.0815 PW (b) PW = 0. 5) (P/F.000 (1.000 (1.08 ± 0. 5) = $65.

7350) + $2.5403) = $6. 8) = $4.05) = 0.500 + $2. but a lot more work: Compute the PW of the 10 years of inflation adjusted rent plus utilities using 15.40 (P/A.Alternative A: Alternative B: PW of Cost PW of Cost Alternative C: PW of Cost = $6.155)-2 + « + $914 (1 + 0.21275 = 21. 8) = $4.5% interest.9246) = $33.21275 (1 + 0. the Year 1 payment is: = ($750 + $139) (12) = $7.155)-10] = 12 ($2.44) = $33. 10) = $6. 8%. 14-34 @lternative I: Continue to ent the Duplex Home Compute the Present Worth of renting and utility costs in Year 0 dollars.500 (1. choose Alternative A.495 = $2. 8) (P/F.05 + (0.500 (1.477) (0.068 (1 + 0.40 (4.21275)10)] = $6. 8) = $2.05)-1 = $6.5% = inflation rate = 5% iequivalent = 0. 21. 8%.713. 8%.000 = $4.731. 5%.155) (0. 8) (P/F.729 To minimize PW of Cost in year 0 dollars.500 (F/P.500 + $2.500 (F/P.21275)(10-1))/(0.731.155 + 0. PW year 0 = 12[$589 (1 + 0.500 (1.40 Compute an equivalent i iequivalent = i' + + (i') ( ) Where i' = interest rate without inflation = 15.500 + $2.275% PW of 10 years of rent plus utilities: = $6.731. 4) (P/F.762.155)-1 + $619 (1 + 0.477) (0. Assuming end-of-year payments. This problem illustrates the fact that the prospect of future inflation encourages current expenditures to be able to avoid higher future expenditures.40 [(1 + 0. 8%.500 + $2.216) (0. 5%. 4) + $2.275%.068 The equivalent Year 0 payment in Year 0 dollars is: $7. 5%.149 .500 (F/P.500 (1 + %)8 (P/F.149 An Alternative computation.5403) = $6.500 + $2.

650 $11.091 $5.274 $12.620 $34.36 Mortgage Balance After the 10-year Comparison Period: A¶ = $523 (P/A.656% n = 30 years x 12 = 360 payments Monthly Payment: A = ($75.000 $7.$65.36 x 12 (P/A.263 Assuming no capital gain tax is imposed. 10) [constant dollar utilities] + $50 x 12 (P/A.121 $35.$65.845 $8.865 $13.967 $5.000 $10. 240) = $523 [((1.04 I = 0.219 $5.335 Thus: $523 x 12 x 10 $71.000 $31.079 $12. 10%.000 .401 $13.500.000 $16.000 (1.750) (A/P.878 $7.00656 (1.504 = $62.5%.314 Less 5% commission = -$6. 10) [constant dollar insurance & maint.988 .3 Cost. 360) = $71.470 $9.335 Net Income from the sale = $65. 10) [actual dollar net income from sale] PW= $4.$62.746 = $54. 10%.349 $7.250 [(0.700 $8. 10) [actual dollar mortgage] + $160 x 12 (P/A.718 $9. 15.250 $32.701 $14. the Present Worth of Cost is: PW= $4.656%.28% of loan) interest payments Sale of the property at 6% appreciation per year in year 10: F = $75.00656)240 ± 1)/(0. 14-35 Year Cost.591 $15.500 + $516.702 $13.649 PWTOTAL $24.263 (0.051 in Year 0 dollars.489 $7.656%.1 Cost.145) + $50 x 12 (6.613 $4.9246) + $160 x 12 (6.555 $39. 0.080 $7.286 $6.$3.2367) = $35.014 total payments principal repayments (12.145).249 $11.120 $30.5%.051 The PW of Cost of owning the house for 10 years = $35.750 down payment plus about $750 in closing costs for a cash requirement of $4.302 $7.681 $7. 0.4 TOTAL 1 2 3 4 5 6 7 8 $4. Mortgage interest rate per month = (1+I)6 = 1.500 $4.540 $8.00656 (1.@lternative II: Buying a House $3.149 < $35.846 $4.2 Cost.250 .] . Thus $33.000 $20.288 $8.976 $11. 15.500 $8.342 $12.36 x 12 (4.00656)240)] = $62.641 $10.728 $4.06)10 = $134.317 $10.513 $41.094 (P/F.716 Less mortgage balance = -$62.00656)360 ± 1)] = -$516.762 $37.760 = $8.500 [Down payment + closing costs in constant dollars] + $516.329 and so buying a house is the more attractive alternative.00656)360)/((1.

995) + $15.9 10 $5.995 PW = -$60.41% = 122 The base year is 1993.979 $46.483 $5.85% = 3.005 $16. This is the year of which the index has a value of 100.550 $17.942 $6.04) % change = ($107 .000 (P/F.88% PSI (1992) PSI (1998) n i* i* = 89 = 132 = 6 years =? = (132/89)(1/6) ± 1 = 6.802 14-36 (a) Unknown Ruantities are calculated as follows: % change = [($100 .$107)/$107 PSI = 116 (1.36% = 104 = 2.768 $43.$104)/$104 % change = ($116 .620 $15.702 + « +$4.519 $5.$89)/$89] x 100% PSI = 100 (1.25 ± 1 = 6. 10) = $180.000 ± ($24.88% = 8.000 + $16. 25%.0517) (b) = 12.79% 14-37 (a) LCI(-1970) LCI(-1979) n i* i* (b) LCI(1980) LCI(1989) n i* i* = 100 = 250 =9 =? = (250/100)(1/9) ± 1 = 250 = 417 =9 =? = (417/250)(1/9) ± 1 (c) LCI(1990) LCI(1998) n i* i* = 417 = 550 =8 =? = (550/417)(1/8) ± 1 = 10.000 + $20.626 $6.12% .903 $4.506 $16.7% = 5. (c) (i) (ii) PSI (1991) PSI (1995) h i* i* = 82 = 107 = 4 years =? = (107/82)0.

94 = $2.0 = 107.9%. 10)= $3.4)(1/9) ± 1 = 6.10 442 1998 X 618 x/2.4 = 89.8% = [(650 ± 417)/417] x 100% = 31.6 = 12 =? = (107.350 (b) Here we need % of brick cost CBI(1970) = 442 CBI(1998) = 618 n = 18 i* =? i* = (618/442)(1/18) ± 1 = 1.10 = 618/442 x = $2. Brick Unit Cost in 2008 = 2.8% (b) CPI (1980) CPI (1989) n i* i* = 52.0/52.14-38 (a) Overall LCI change (b) Overall LCI change (c) Overall LCI change = [(250 ± 100)/100] x 100% = 150% = [(415 ± 250)/250] x 100% = 66.9% We assume the past average inflation rate continues for 10 more years.0 =9 =? = (89.3/43.9% 14-39 (a) CPI (1978) CPI (1982) n i* i* = 43.6 = 65.54 = $2.0)(1/12) ± 1 = 3.1% 14-40 (a) Year Brick Cost CBI 1970 2.3 =4 =? = (65.833 .94 (F/P.1% (c) CPI (1985) CPI (1997) n i* i* = 75. 1.6/75.54 Total Material Cost = 800 x $3.6)(1/4) ± 1 = 9.94 Total Material Cost = 800 x $2.

8 325. 2) + $298.693 (a) $89.0% 5. 3) = $19.850 $97. 25%.772 Year 2 $129.160 $14.266) (F/P.367 14-43 The total cost of the bike 10 years from today would be $2.0% 10.690 $15.0% 3. $97.467 (P/F.850 (P/F.560 $9.9 2769.770 Item Frame Wheels èearing Braking Saddle Finishes Sum= Current Cost 800 350 200 150 70 125 1695 Inflation 2.250.632 (c) FW = ($9. Insulating Labor Total Year 1 $125.614 $10.2 907.693 (P/F.463) = $391.093 $93.522 (P/F.025 14-42 Item Structural Roofing Heat etc.250) (F/P.6 89.463 $298.467 Year 3 $137.522 + $89.772 (P/F.8 .250 $273.093 (P/F.280 $35. 1) + $283. 25%. 10) = $1.5% 8. 25%.8 201. 12$. 2) + $10. 25%.14-41 EAT(today) = $330 (F/P.0% Sum= Future Cost 975.076 $37. 3) = $553. 25%.266.266 $283. 2) + ($10.463 (b) PW = $9. 25%.843 (d) PW = $273.306 $10. 25%. 1) + $10.093 + $93.0% 2.850 + $97. 25%. 1) + ($10.165 $14.522 $89.637 $36.6 269. $93.

0 172000.8% (f) see below One could predict the inflation (appreciation) in the home prices this year using a number of approaches. 12/4=3%.116 Year 1 2 3 @mt due Begin yr 15000 15750.8)/5 = 2.0 167000.0 183000.7+1.5% 8.0 Inflation for year (a) = 1. 20) + $100 (F/A.9%. 20) = $8.7+3.603 14-46 To pay off the loan Andrew will need to write a check for $ 18. 2%.2% (b) = 3.865 FYEAR 15 (TODAY) = $8.7 18115.0% (c) = 4.14-44 To minimize purchase price Mary Clare should select the vehicle from company X.0 16773.7 14-47 See the table below for (a) through (e) Year 5 years ago 4 years ago 3 years ago 2 years ago last year This year @ve Price 165000.687 FYEAR 10 = $2.4 31492. 20) + $100 (F/A.7% (e) = 3.8 Inflation 5.865 (F/P. 5 x 4=20) = $2.0 180000. .0 190000.0% Min= Future Price 30933.8 18115. One simple rule might involve using the average of the last 5 years inflation rates. 2%.0% Due= @mt due End yr 15750.8 14-45 FYEAR 5 = $100 (F/A. This rate would be (1. Car X Y Z Current Price 27500 30000 25000 Inflation 4.2+3+4.7% (d) = 1.687 (F/P.0 16773.5% 8. 20) = $15.0% 1.0% 6. 4%.8 31370.8 30933. 4%.

790 $83.611) = $136.500 $6.$85.822 -$3.500 $1.500 $1.000 $6.935 Tax on Cap.500 *Selling Price = $85. Depr.210 -$2.290 $7.210 -$2.305 -$16.000 ± 5 ($1. TI 34% Income Taxes $1.500 $6.500 SL Depreciation = ($67.720 -$2.500 Sum SL Deprec .400 -$2.159 $9.500 $6. Thus substantial inflation forces a firm to increasingly finance replacement equipment out of (costly) after-tax profit.431 $131.2% (b) Year BTCF 0 1 2 3 4 5 -$85.060 $7. 14-49 (a) Year BTCF 0 1 2 3 4 5 -$85.387 Recaptured Depr.500 After-Tax Rate of Return = 5. TI 34% Income Taxes $1.560 $9.500 $1.210 ATCF -$85.500 .500 $1.055 -$3.000 $8.000 . 10%.500 $7.500 Tax on Recap.550 .14-48 Depreciation charges that a firm makes in its accounting records allow a profitable firm to have that amount of money available for replacement equipment without any deduction for income taxes.790 $5.000 $8.500) = $2.210 -$2. If the money available from depreciation charges is inadequate to purchase needed replacement equipment.000 $8.500 = $7.978 $7.500 $1.$0)/45 = $1.000 (F/P.500 $1.935 ** On disposal.790 $5.935 .500 Book Value at end of 5 years = $85.160 $6.659 $8.000 $8.500 $1. then the firm may need also to use after-tax profit for this purpose.555 $6.500 $6.210 -$2.000 (1.486 $11. èain = (20%) ($51.000 $8.500) = $77.935* Sum SL Deprec . profit has been subjected to income taxes. there are capital gains and depreciation recapture Capital èain = $136.000 $77.500 $6.00 = $51.500 $0 -$2.604 -$2.800 $10. = $85. = (34%)($7. 5) = $85.300 $8.913 $7.000 $5.986 $9.935) = $10.000 $8.$77.220 $136. Depreciation charges produce a tax-free source of money.242** Actual Dollars ATCF -$85.790 $5.500 $1.

052 = 7. hence there is no positive rate of return.000 = 12% If this is not observed.9% @fter-Tax ate of eturn in Year 0 Dollars Year 0 1 2 3 4 5 Sum Actual Dollars ATCF -$85.626 Sum -$17 (a) Before-Tax ate of eturn ignoring inflation Since the $10.200 $1.000 principal is returned unchanged.200/$10.200 $1.555 $6.550 = $12.000 $6. Stated in Year 0 dollars.000 $1. After-Tax Rate of Return Year 0 $ ATCF -$85.000 $5.000 $650 $608 $568 $531 $7.000 = 6.4% 14-50 Year BTCF TI 42% Income Taxes 0 1 2 3 4 5 $1.200 $10. 5) + $10.07-4 1.07-2 1.937 After Tax IRR = 14.160 $6.200 $1.387 + $2. then the rate of return may be computed by conventional means. i%. .07-4 1.725 $5. i = A/P = $1.000 $696 $696 $696 $696 $10.696 $5.696 1 1.200 $1.000 ATCF Multiply by Year 0 $ ATCF -$10.757 $5.000 (P/F.07-3 1.07-3 1. 5) Rate of Return = 12% (b) @fter-Tax ate of eturn ignoring inflation Solved in the same manner as Part (a): i = A/P = $696/$10.200 (P/A.07-1 1. the total receipts are less than the cost.978 $7.Total Tax on Disposal = $10.07-2 1.000 = $1.200 -$504 -$504 -$504 -$504 -$504 -$10.431 $131. $10.200 $1.07-5 -$10.200 $1.200 $1.07-5 In year 0 dollars.669 $94.913 Multiply by 1 1.96% (c) @fter-Tax ate of eturn after accounting for inflation An examination of the Year 0 dollars after-tax cash flow shows the algebraic sum of the cash flow is -$17. i%.07-1 1.200 $1.

000 $2.60 = Taxable Income ± Income Taxes Income Taxes = $24.689.04+0.14-51 Now: Taxable Income Income Taxes After-Tax Income = $60.875 $2.227.437 $3.900(1.424 $2.384 $2.250 -$875 -$612 -$429 $250 $225 $1.000 $1.000 $4.900 Twenty Years Hence: To have some buying power.785 -$1.000 $5.000 @ctual CC@ @ctual $s Tax Net Salvage -$1.0) .804) = $242.563 $3.$C$18-$B$4)-1/2*$B$3*MAX(($B$4-$B$1).50 14-52 P= CCA= t= S= $10.786 $500 @ctual $s @TCF -$10.000 =$B$1*(1-$B$2/2)*(1-$B$2)^(7-1) Net Salvage end of yr 7 = $500 =$B$4+$B$3*IF($B$4>$B$1.$11.000 $3.451 $2.536 $2.000 $7.893 $3.000x0.714 I eal $s @TCF -$10.550 -$1.100 = $60.000 $8.153.125 $3.500 -$2.29(Taxable Income .689.$113.000 $1.804) Taxable Income = After-Tax Income + Income Taxes = $189.936 = 13.361 $2.22(TI .636 $2.22 = $11.$C$18-$B$1.04+0.000 . need: After-Tax Income = $48.194 $3.000 $6.775 $2.227.806 $4.750 $2.000 = $35.07)20 = $189.000x0.100 = $48.108 $1.16+25.60+$24.71% u ! ! ! UCC7 = $1.$113.000 30% 50% 0 7% Year 0 1 2 3 4 5 6 7 @ctual $s eceived -$10.

500 $15.750 $15.000 $13.175 -$9.882 @ctual CC@ @ctual $s Tax Net Salvage -$46.833 -$8.168 @ctual $s Tax $3.14-53 P= CCA= t= S= $103.335 $13.679 $13.701 $2.025 $149.746 $245.679 $13.882 $13.964 -$7.849 -$7.500 10% 35% 103.025 $149.06% =I u ! ! ! UCC5 =$64.000 $8.004 Net Salvage -$46.000 $9.0) 14-54 P= CCA= t= S= $103.389 $1.177 $12.389 $152.100 $230.738 $10.$C$18-$B$1.049 $13.01% u ! ! ! UCC5 = $64.46% =I .335 $13.421 5.750 $15.694 @ctual $s @TCF -$150.000 $12.750 $15.854 =$B$4+$B$3*IF($B$4>$B$1.171 $3.859 $18.064 $9.500 $ 0% @ctual $s eceived -$103.611 $12.049 $13.053 $16.500 $136.500 -$5.$C$18-$B$4)-1/2*$B$3*MAX(($B$4-$B$1).750 Year 0 1 2 3 4 5 @ctual CC@ -$5.263 $2.750 $15.168 $2.415 $2.354 @ctual $s @TCF -$150.071 $2.511 =$B$1*(1-$B$2/2)*(1-$B$2)^(5-1) eal $s @TCF -$150.175 -$9.100 eal $s @TCF -$150.849 -$7.500 $ 10% Year 0 1 2 3 4 5 @ctual $s eceived -$103.440 $15.500 10% 35% 103.678 $9.476 16.511 =$B$1*(1-$B$2/2)*(1-$B$2)^(5-1) Net Salvage end of yr 5 = $89.725 $3.964 -$7.100 7.113 $4.000 $12.833 -$8.500 $12.

$C$18-$B$4)-1/2*$B$3*MAX(($B$4-$B$1).$C$18-$B$1. 3) (P/A.31 12% < ROR < 15% (Actual ROR = 14.839. 3) (P/A.22 15% < ROR < 18% (Actual ROR = 16.4 $73.6 -$14.1 $149.4 -$18.4 $208.3 $135.4 ATCF in Actual $ ATCF in Year 0 $ -$420 -$420 $192.8%) Incremental O Year A 0 -$420 1 $183.25 $ 20.8 $180.0 $155.B B -$300 $136.78 14-55 @lternative @ Year 0 1 2 3 Cash Flow in Year 0 $ -$420 $200 $200 $200 @lternative B Year 0 1 2 3 Cash Flow in Year 0 $ -$300 $150 $150 $150 Cash Flow in Actual $ -$420 $210 $220.851.6 SL Deprec.3 A.4 $173.3%) @lternative B: $300 = $135 (P/A.5 -$20.0) Market Value in 5 years = 150000 x (1+12%)^5 house value land sale capital gain's tax net land salvage $264.5 $165.1 Ruick Approximation of Rates of Return: @lternative @: $420 = $182 (P/A.1 -$22.Net Salvage end of yr 5 = $89. 3) = $300/$135 = 2.2 ATCF in Actual $ ATCF in Year 0 $ -$300 -$300 $143. 3) = $420/$182 = 2.5 $231.5 $91.00 $160.5 SL Deprec.9 Cash Flow in Actual $ -$300 $157.3 @nalysis for @.351.2 $136.5 $200. i%. i%.5 $65.47 $140.4 -$16.B -$120 $47 .1 $134.25 $103.500. i%. TI 25% Income Tax $100 $100 $100 $57. TI 25% Income Tax $140 $140 $140 $70 $80.3 $181.854 =$B$4+$B$3*IF($B$4>$B$1. i%.6 $183.5 -$17.011.

7 $46. Choose the higher cost alternative: choose Alternative A.1 Try i = 7% NPW = -$120 + $47 (P/F. 7%.3 So the rate of return for the increment A. 7%.2 $135. 7%. 1) + $46.1 $134.1 $46.7 (P/F.1 (P/F.2 3 $181. .8 $180.B is greater than 7% (actually 8. 2) + $46.1%). 3) = +$2.

15-2 As this is a situation of ³neither input nor output fixed.Chapter 15: Selection of a Minimum @ttractive ate of eturn 15-1 The interest rates on these securities vary greatly over time.D $25 $4 9. C is preferred for 4.400 (A/P.A $25 $5.31 4. The corporate bond generally will have the highest interest rate.6%.31 6.700 .400 (0.$267 = $175.74 Salvage (resale) value = $4.5% B.0471) = $442.5% B 9. ¨ Cost ¨ Benefit ¨ Rate of Return C.2% D. 15-3 Lease: Pay $267 per month for 24 months.$0 = $4. 1%.5% < Interest Rate < 9.6% B. For interest rates between: 0% 4.C $50 $6. Purchase: A = $9.´ incremental analysis is required.D $75 $10.700 (a) Purchase ather than Lease ¨Monthly payment = $442.6% C 20% D A The problem here concerns Alternative C. Three factors that distinguish the securities: Bond Duration 20 years 20 years Municipal Bond Corporate Bond Bond Safety Safe Less Safe The importance of the non-taxable income feature usually makes the municipal bond the one with the lowest interest rate.74 ¨Salvage value = $4.96 20% Using the incremental rates of return one may determine the preferred alternative at any interest rate. 24) = $9. making it impossible to predict rates.71 .700 ¨ Rate of Return PW of Cost = PW of Benefit .

000 $50. The group would therefore only make a venture capital investment where (they think) the rate of return will be high.66% $50.500 $9.2% rate of return in other investment. (b) Items that might make leasing more desirable: 1.) Assuming the student has a single investment in which more than $2. the MARR equals the projected rate of return for the investment.700 (P/A. 15-6 The IRR for each project is calculated using the Excel function = RATE (life. the additional monthly payment of $175. 2. (and so on.000 $0 $6. One does not have. 2. The process of identifying and selecting investments is a time-consuming (and hence costly) process. the additional $175. One does not have to be concerned about the resale value of the car at the end of two years.74 (P/A. Investment in a new business. 24) = $4. Leasing is therefore preferred at all interest rates above 11.000 $9.99% 10.0% if based on the first project rejected.41% 11.000 $50. -first cost.000 $50. Project IRR First Cost A B D C 13.000 could be invested. and then the table is sorted with IRR as the key.2%.000 . annual benefit.$175.74 per month. or does not want to spend. Projects A and B are the top two projects.2% rate of return. salvage value).575 $13. 24) = $4.000 Annual Benefits $13.74 would yield an 11. 4.15% 12. i%. 3.250 Life 5 yrs 10 yrs 8 yrs 5 yrs Salvage Value $5. One can make more than 11. 3.74 i = 0. or an existing business.000 capital budget. US Treasury bonds.probably 25% or more.93% per month Thus.74 = 26. Purchase of common stock. 15-4 Investment opportunities may include: 1. or corporate bonds.000 $1.700/$175. 15-5 Venture capital syndicates typically invest money in situations with a substantial amount of risk. which fully utilize the $100. i%. Deposit of the money in a Bank. The opportunity cost of capital is 12.

000 $1.000 Annual Benefit $11. salvage value).000 $130.92% 26.500 $32.97% 10. Project IRR E H C è I B D 15.000 $20.000 $60. and then the table is sorted with IRR as the key.000 $30.000 First Cost $100.000 $12.000 $7.400 $14. annual benefit.85% 19.000 $25.000 $35. 1 and 7 with a budget of $70.01% 21.173 $6.000 $125.000 $800.000 $20.000 $100.000 $150.36% 16. Do projects 3.91% 18. Project IRR 3 1 7 5 4 2 6 36. With a budget of $500.000 $15. annual benefit.000 $95.000 $2.00% 10.000 $130.000 First Cost $40. The opportunity cost of capital is 26. 4.41% 20.000 $145.000 $13.91% Cumulative First Cost $10.000 $400.000 15-8 The IRR for each project is calculated using the Excel function = RATE (life. and 6 should be done.058 $6. Project IRR 3 1 4 6 2 7 5 28. Then the table is sorted with IRR as the key.01% 20.65% 24.00% 8.000 Annual Benefit $40.15-7 The IRR for each project is calculated using the Excel function = RATE (3.000 Life (years) 5 15 10 20 10 5 5 15-9 The IRR for each project is calculated using the Excel function = Rate (life. the opportunity cost of capital is 19.000 $30.31% 29.000 $500.00% Cumulative First Cost $40. first cost.000 $350. and then the table is sorted with IRR as the key.99% 15.000 $50.000 $300. first cost).000 $165.000 Annual Benefit $6.000 $30.000 $250.24% Cumulative First Cost $100.933 $12.00% 9.36% if based on the first project rejected.000 $240. 1.000 $200.000 $300.71% 18.000 $75.878 $6.000 $11.0% if based on the first project rejected. annual benefit.261 Life (years) 5 8 4 8 8 4 5 .794 $14. Projects 3.000 $285.200.692 $9. The top 6 projects required $260K in capital funding.000 $5.000 $25.000.000 First Cost $10.450.67% 26.000 $75. and the opportunity cost of capital based on the first rejected project is 8.0%.000 $100.000 $50.000.000 $21.000 $1.00% 13. first cost) since N = 3 for all projects.000 $40.000 $260.000 $70.000 $70.44% 12.

43% 19.000 $50.200 Life (years) 10 25 15 20 15 30 20 Salvage Value $0 -$20.000. and then the table is sorted with IRR as the key.500 $4.000 .000 $20. and 7). With a budget of $100.000 $15.25% 19. salvage value).000 $20.550 4 5 15-10 The IRR for each project is calculated using the Excel function = RATE (life.26% 16. annual benefit.000 $10.000 $350.300 $3.01% 5.00$ $300.41% 16.000 $20. 4.000 $0 $0 $10.000 $20.16% 22.50% 21.000 Annual Benefits $5.000 $20. 5. the top 5 projects should be done (6.429 $11. The opportunity cost of capital based on the first rejected project is 16. 1.41%.00% $20. Project IRR First Cost 6 5 4 1 7 3 2 26.000 $4.000 $3.500 $4.000 $20.000 $20.800 $4.A F 7.000 $4. -first cost.

including the US parks system. As the authors state. Private decision making. on the other hand. Often there are those who are advocating for particular projects. There are those who represent their own stated interests. The conflict arises when some regions. municipalities perceive that they are consistently passed over for projects that would benefit their region. However. the goal and objective of the enterprise is economic survival and growth and thus the primary objective is financial in nature (for without success financially all other objectives are moot is the firm dissolves). with key committee/subcommittee appointments can influence government spending in their districts. However. many projects. in some cases. clearly private decision-making focuses on non-monetary issues. the interstate highway. affected by. which may sub-optimize decision making if not taken. and those who are representing others¶ interests.Chapter 16: Economic @nalysis in the Public Sector 16-1 Public decision-making involves the use of public money and resources to fund public projects. most benefits provided by government are realized at the local or regional levels. or place some concern on the decision process. 16-4 This phrase refers to the fact that most benefits are confined locally for government investments. In this example. 16-2 Public decision-making is focused on u Ê of the aggregate public. Politics have an effect in this regard. . Example 16-1 describes this dilemma for a municipal project funded partly by federal money (50%). those who oppose projects. This approach balances local decisions. those who will be immediately affected by such project. and those who may be affected in the future. ³Other than investments in defense and social programs. and others reach many beyond even regional levels. Thus the ³multi-actor´ aspect of the phrase refers to the varied and wide group of ³stakeholders´ who are involved with. municipality. Powerful members in congress. This is not to say that private decision-making is entirely focuses on financials. state.´ This is true for projects funded with full or partial government money. is generally focused on increasing stakeholder wealth or investment. it still made sense to approve the project from the municipality¶s viewpoint but not the federal government. eminent domain). and state legislatures.g. states. 16-3 The general suggestion is that the viewpoint should be at least as broad as those who pay the costs and/or receive the benefits. that individual¶s goals must be subordinate (e. after the benefit estimate was revised. There is an explicit recognition in promoting the good of the whole.

and disbenefits for a nuclear power plant.Electric 16-8 (a) The conventional and modified versions of the B/C Ratio will always give consistent recommendations in terms of ³invest´ or ³do not invest´.Real . for any problem. but the resulting recommendation will always be the same.No combustion Jobs & Economy .Spent fuel storage . 16-7 This is a list of potential costs. This quantity is all in the numerator.Water cleaning Benefits Environment .Reactor vessel/core . (c) A decision-maker in favor of a particular public project would advocate the use of a longer project in the calculation of the B/C ratio. or the taxpayer opportunity cost. and subtracts these from the net benefits to the users.Coal . In the text the concepts discussed include (1) No Time Value of Money. However.0 at the same time. The Recommended Concept is to select the largest of the cost of capital.No greenhouse gas . benefits. That is. The and u versions of the B-C ratio use different algebra/math to calculate the ration. (b) Larger interest rates raise the ³cost of capital´ or ³lost interest´ for public projects because of the sometimes quite expensive construction costs.No leakage .Uranium plants Disbenefits Fission product material to contend with forever Not in my backyard Risk of Reactor . (2) Cost of Capital.At power plant . and (3) Opportunity Cost. These leaves only the projects initial costs in the denominator.At enrichment plants .Balance of plant . Advocates of a project may use the method with the larger ratio to bolster their advocacy. The u B-C ratio takes the project operating and maintenance costs paid by the sponsor.Increase tax base Increase Demand .16-5 Students will pull elements from the discussion of this topic in the textbook. the magnitude of the B/C Ratio will be different for the two methods. . Longer durations spread the large initial costs over a greater number of years.Reservoir dams . Costs Land Acquisition Site Preparation Cooling System . the government opportunity cost.Psychological Loss to Economy . A person favoring a $200 M turnpike project would want to use lower i% values in the B/C Ratio calculations to offset the large capital costs. 16-6 The benefit-cost ratio has net benefits to the users in the numerator and cost to the sponsor in the denominator.Reservoir cooling Construction . both ratios will either be greater than or less than 1.

have been known to ³stand up and gain political capital´ from projects that originally began many years before they took office. and disbenefits tend to have more uncertainty it is therefore easier to manipulate their values to make a B/C Ratio indicate a decision with your position. study. The text points out in Example 8-9 (of Chapter 8) that one definition of the point where ¨B = ¨C is that of the slope of the benefits curve equals the slope of the NPW = 0 line.000 + $50.Cost Ratio = PW of Benefits/PW of Cost = [$20. 9) (P/F.515) (0. 2 0 1 1 1 1 1 8 6 4 2 0 2 4 6 8 10 12 14 PW of Cost Values for the graph: PW of Cost (x) PW of Benefits (y) 2 0 4 6. Although this is true for all engineering economy estimates it is particularly true for public projects. who generally strive to maintain a positive public image. Because benefits. 1)]/[$100.000 + $50. Because of this it is not uncommon for there to be turnover in public policy makers.000 (0.9346)]/[$100. fund and construct public projects is generally several years (or even decades). Politicians. 7%. 7%. costs. 16-10 Benefit. costs and disbenefits are quantities that have various amounts of ³certainty´ associated with them. 1)] = [$20. 16-9 The time required to initiate.000 (6.9346)] = 0.000 (P/F.83 16-11 The problem requires the student to use calculus.(d) Benefits. 7%.6 .000 (P/A. It is much easier to estimate labor savings in a production environment than it is to estimate the impact on local hotels of new signage along a major route through town.

000 (P/A.250 = $1.000) (P/A. 30) (P/F. 10%.000 (P/A. 35)]/$1. 8%. 8%.000 .258) (0.6 19.000 + $10.000) (P/A.4 11.000 + $200.000 + $125.400.700 To minimize PW of Cost. 8%.000 + $200. is presented in problem 6-44.647. 8%.5 = optimum PW of cost dy/dx 16-12 Since we have a 40-year analysis period.200. The annual cost solution.000 = 2. Gravity Plan PW of Cost Pumping Plan PW of Cost = $2.000 .000 (0.200.4632) + ($25. 16-13 (a) Conventional B/C Ratio = [PW (Benefits ± Disabilities)]/[PW (1st Cost + Annual Cost)] = [($500. 35)]/[($1.000) (P/A.$25.8 .8 17.5 13. 40) = $2.9 (b) Modified B/C Ratio = [PW (Benefits ± Disbenefits ± Cost)]/[PW (1st Cost)] = [($500.000) (P/A. Here the problem specifies a present worth analysis.4632) = $2.000 + $50.919.925) = $2. 35)] = 1. 10%. 10) + ($25.000 (11.6 8 10 12 16 20 9.000) (11.000 (P/F.000 + $10.9 Let x = PW of Cost and y = PW of Benefits y2 ± 22x + 44 = 0 or y = (22x ± 44)1/2 = ½ (22x ± 44)(-1/2) (22) =1 (Note that the slope of the NPW = 0 line is 1) 22x ± 44 = [(1/2) (22)]2 x = (112 + 44)/22 = 7. 10%. 10) = $1.925) + $50. 8%. the problem could be solved by any of the exact analysis techniques.3 14.000 (11. 40) + $50. with a 10% interest rate.000-$25.800.$125.000 + $50.800. choose pumping plan.400.

000 (F/P. x)]/[($750 + $2.500) 35) = $2.0 (nominally). 20)]/[($750 + $2.$25. 8%.045 ($912. 10%.000 (F/A.031 One can see how Big City Carl arrived at his value of ³at least´ 25 years for the project duration.$35) (P/A.$35) (P/A. 20)] = 0.000.200. 8%. .$25. This is the minimum number of years at which the B/C ratio is greater than 1.0= [($550 .750) + $185 (P/A.004 1.000] = 1.000 (10) = $100.500) (10) = $410.000 = $7.995 1.015 ($912. 35) + $125.063 = $70. 10%.500) (365) = 912.000 (35) = 0.000 (10) = $4.35)] /[$1.750) + $185 (P/A. 35)] = 1.000 (35) The Low oad 1st Cost Annual Benefits Annual O & M Cost = $450.10%.000 These are two mutually exclusive alternatives.000 = 0.625 = $10.16-14 Using the Conventional B/C Ratio (i) Using PW (ii) Using AW B/C Ratio = 1.90 16-15 (a) B/C Ratio = [($550 .35) + $125.000) (F/A.200.000 (A/P. we use an incremental analysis process.90 (as above) B/C Ratio = ($500.000 .000 .500.0 1. x)] By trial and error: x 24 years 25 years 26 years 0. 16-16 Annual Travel Volume = (2.90 (iii) Using FW B/C Ratio = [($500. 8%.95 (b) Let¶s find the breakeven number of years at which B/C = 1.000)/[$1.500 cars/year The High oad 1st Cost Annual Benefits Annual O & M Cost = $200.10%. 8%.000 = $479.

000 (12. 10) (P/F.$15.621 16-18 Plan @ .000 (18.722) + $64. 20) (P/F. 5%.500.-Low $4.61b No Recommend investing in the Low road.256) = $879.438 + $30.-High $2.153.0460) = $762.000 (P/A.4632) + $66.6139) + $66.000 = 0.233) = $578.500. 40) = $60.722) (0. a b [($410.625 $100.500.710) (0.000 (6.116 . 5) = $1.710) + $64.000 (12.000 (9.2145) + $70.3769) + $70.000 1.000 0.$15.000 (7. it is the last justified increment. 10) + $64.000) ($15. High Road ¨ 1st Cost ¨ Annual Benefits ¨ Annual O & M Costs ¨B/¨C Justified? Do Nothing-vs.000 (6.000 (P/A.000) ($15.000 (7.456)]/$2.818) (0.Rank Order based on denominator = Low Road. 5%.468 . 5%.000 = 1.$15.000 (P/A.468 For B/C ratio = 1. 5%. 5%.628 (b) Same equation as on previous page except use 8% interest PW of Benefits = $60. 10) (P/F.710) (0.438 -$30.000 $68.468 . PW of Cost = PW of Benefits Justified capital expenditure = $1.61 16-17 (a) PW of Benefits = $60.000 (P/A. 5%.153.$100. 20) + $70.722) (0.000 $410.462) (0. 5%.116 Justified Capital Expenditure = $762.625 .000 (7. 5%.500.456)]/$4.000 (P/A.1420) = $1.07a Yes Low-vs.000 (6.07 [($68.153. 10) + $66.

000 Plan B $150.000 $300.000 Differences between @lternatives @ and B $300.000 $150.000 $150.000 $125.000 $250.A At 7% -$150 -$150 At 5% -$150 .00 0 n = 25 $125.n = 15 n = 15 $75.000 $200. Cash Flow Year A 0 -$300 B -$450 Present Worth B.000 $50.000 An examination of the differences between the alternatives will allow us to quickly determine which plan is preferred.000 $250.000 n = 10 $125.000 $450.000 n = 15 $100.000 n = 15 n = 15 n = 10 $25.000 $300.

15 15 16.000 i = 6% .0726) + $6.100 per year Benefits to the ailroad Saving in crossing guard expense = $48.06) = $1. the NPW = -142.000 (A/P. at all interest rates at or below 5%.000 = $130.000 Salvage Value = $100.A cash flow is computed at 7%.000 per year Should the overpass be built? Benefit.A must be desirable.000 per year Total = $108.700.000 (0.375* -$228 +$72 $0 +$39 +$115 +$10 -$142 -$259 +$96 $0 +$69 +$223 +$21 $0 * This is sum of -$150 ± 15 ($25) + $200 «. In other words. The increment is not desirable at i = 7%.1. 30) + $100.000 (0. The value of MARR would have to be 5% or less.800. (b) For Plan B to be chosen.30 30 31.000 per year Combined Benefits Benefits to the Public + Benefits to the State = $340/day (365 days) + $6. the increment is desirable and hence Plan B is the preferred alternative.A increment has a 5% rate of return. Choose Plan A. (a) When the Present Worth of the B.Cost atio @nalysis Annual Cost (EUAC) = $1. the increment B. 16-19 Overpass Cost = $1.000 n = 30 Benefits to Public Time Saving for 100 vehicles per day 400 trucks x (2/60) x ($10/hr) = $240 per day 600 others x (2/60) x ($5/hr) = $100 per day Total = $340 per day Benefits to the State Saving in accident investigation costs= $2.700.40 40 Sum -$75 -$250 -$125 -$300 -$250 $0 -$100 -$50 -$125 $0 -$125 +$150 -$25 +$200 $0 +$300 +$125 +$150 +$1. 6%.000 per year Saving in accident case expense = $60. The last column in the table above shows that the B.

420 Annual Benefit (EUAB) = $130.100 + $108.84 With a B/C ratio > 1.430 = $1.782.000 19.250 3 3 2.590) + $100.000 $30.000 $1.1741) = $1.30 $800.000 Plan A 10 4 20.000 19. 6%. PW of Cost = $1.000 While this problem is a simplified representation of the situation. 6%.300 $41.000 19. 5%. 30) = $1.000 $0 $50. the project is economically justified.800.50 $450.800.000 (P/F.58 $1.100/$238.570 The State portion would be ($130.590) + $100.000 $1.000 cost The railroad should contribute to the project in proportion to the benefits received.000 1.$100.200 $660.100) ($1.590 The railroad portion would be ($108.000 4. 20) Existing 10 2 20.000 $521.000 Plan B 10 4 20.1741) = $991.000 (0. 16-20 Length (miles) Number of Lanes Average ADT Autos Trucks Time Savings (minutes) Autos Trucks Accident Rate/MVM Initial Cost per mil (P) Annual Maintenance per lane per mile Total Annual Maintenance EUAC of Initial Cost = (P x miles) (A/P.900 $40.000 5 4 2.100/$238.000 Plan C 10.100 B/C= EUAB/EUAC = $238.000 19.782.000 .100) ($1.800.000 (P/F.000 1.000 = $238.000/$238.$100.800.000 1.100) ($1.782.= $129.000 (0.000 $360.000 $1.782.100/$129.420 = 1.590) = $808. @llocation of the $1.570 + $991.3 4 20.000 . it illustrates a realistic statement of benefits and an economic analysis solution to the allocation of costs.500 2 1 2.850 .40 $650.430 Note that $808.000 1. 30) = ($130.

250 Summary of @nnual Costs and Benefits Annual Highway Costs Annual Benefits Accident Savings Time Savings Additional Operating Cost* Total Annual Benefits Existing $30.900 Plan B $561.040.000 x 365 x 0.3 mi x $0.000 x 365 days x 2 min x $0.200) = $190.050 @nnual Incremental Operating Costs due to distance None for Plans A and B.50) (10-6) ( 10 mi) (365 days) (20.250 = $788.259.58 ± 2.03 1.710 Total = $144.58 ± 2.720 Time Savings Benefits to oad Users compared to Existing Highway Plan A: Autos Trucks Plan B: Autos Trucks Plan C: Autos Trucks 19.250 -$144.790 Plan C: (4.050 $979.000 = $1.03 1. Plan C Autos 19.200 $470.100 = $54.Total Annual Cost of EUAC + Maintenance $30. Benefit-Cost atios Plan A $410.58 ± 2.15 Total = $624.850 $190. as they are the same length as existing road.03 1.970 $788.400 19.720 $1.000 x 365 days x 4 min x $0.3 mi) (365 days) (20.000 ADT) ($1.000 x 365 days x 1 min x $0.000 ADT) ($1.000 x 365 days x 3 min x $0.050 $182.000 x 365 days x 3 min x $0.540 $1.18 = $19.430 .370 $205.30) (10-6) ( 10.150 = $164.300 $702.200 Plan B: (4.200) = $205.850 19.900 $561.06 = $124.000 x 365 days x 5 min x $0.200) = $182.40) (10-6) ( 10 mi) (365 days) (20.259.000 $410.830 Trucks 1.750 = $470.540/yr @nnual @ccident Savings compared to Existing Highway Plan A: (4.15 Total = $1.000 x 365 x 0.3 mi x $0.400 $653.15 Total = $416.000 * User costs are considered as disbenefits.300 Plan C $702.250 = $219.320.000 ADT) ($1.

000 (57. 15) + $2. 15) .000 x n = 15 yrs i = 6% $275.000 (P/è.000) = 1.$275.$653. 6%. The appropriate criterion is to maximize NPW at some point. 6%.17 B/C = ($1.$979.555)]/9. If we choose the beginning of 2005 for convenience.000 = +$14.463.430 . 16-21 è = $2.712 = $0 = $16.$275. 6%.712) + $2.000 (9.900) = 2.370 .00 0 Compute X for NPW = 0 NPW X = PW of Benefits ± PW of Costs = X (P/A.555) .000 (P/è.$410. 15) . 15) + $2.320.050/($410.$30.463 Therefore.42 Plan C is preferred.A rather than Existing: B rather than A: C rather than B: B/C = $653. The problem thus reduces to deciding whether to proceed in 2005 or 2006.300 . This indicates that construction should not be done prior to 19x5 as NPW is not positive.000 (57.$2.712) +$2.926 Construct in 2006 NPW 2006 = [$20.050 .$275.000 (P/A. NPW at yr 0 turns positive for the first time when X is greater than $16.000 (57.300 = 2. 6%.000 (P/è. 15) + $2.000 = $18. 15) .$275.000 = $0 = [$275.370)/($702. 6%.71 B/C = ($979.900 .000 .000 (P/A.$561.050)/($561. Construct in 2005 NPW 2005 = $18. 6%.000 = X (9.555) .

repair the road four years hence.5718) = +$52.751 epair Five Years Hence NPW YEAR 5 = $50. 15%. 15%. But.$150.8696) . In other words. 15%.8696) + $10. 15%. epair Now NPW YEAR 0 = $5.000 (P/F. 5) = $100.$10. 16-22 It is important to recognize that if Net Present Worth analysis is done.000 (5. and 3) are less than the cost times the interest rate ($150. It might be worth noting in this situation that since the benefits in the early years (Years 1.000 (P/è.000 (2. we would not expected the project to be selected (if it ever would be) until the annual benefits are greater than $22. we would find that it has an NPW at year 0 of +$49.$10. like Year 0. If a ³repair three years hence´ alternative were considered. 10) . 15%.$150.$275. .571 epair Two Years Hence NPW YEAR 2 = $20.000 (5.000 = $50. 1) = [$20. 4) = $92.000 = -$4. 2. 15%. So the decision to repair the road four years hence is correct.500).$265.000 (P/è. 1) + $10.283) + $10. 7) (P/F.950 (P/F.945.000 (2.019) . 15%. 3) + $50.4972) = +$50.000 (57.000 (P/A.$150.352) (0.$150.130 (P/F.000 (9.130 (0. 3) + $10. 6%. 5) (P/F.000 (3. then the criterion is to maximize NPW.950 NPW YEAR 0 = $100..555) . 5) -$150. 15%.172 epair Four Years Hence NPW YEAR 4 = $50.000 (P/A. 15%. 15%.15 = $22.775) + $50.000 (0.000 (P/A.000 (P/F.712) + $2.9434) = +$32. 3) .019) .000 (P/A. delaying the project will increase the NPW at Year 0.000 (5.000 (4.000] (0.000 = +$53.254 (P/F.130 NPW YEAR 0 = $53.160) (0.192 To maximize NPW at year 0.4972) -$150.000 = +$92.$150. the NPWs must be computed at a common point in time. 15%.000 (0.406 Conclusion: Construct in 2006.000] (P/F.000 = $50.000 = $20.$150.000 = $5.000 x 0. 10) . 15%.000 (P/A.950 (0.000 = +$100.254 (0.756) = +$40. 5) + $50. of course.6575) .071) + $50.500.254 NPW YEAR 0 = $92. 15%. 2) = $53. 1) . 15%.

22 We eliminate Alternative C from consideration. Year A Half capacity tunnel now plus half capacity tunnel in 20 years B Full Capacity Tunnel 0 10 20 -$300.500 . Build the half-capacity tunnel now.000 -$20.000 -$4. 5%.200 $350 $20.928 1.456 = 0.500 $175 $6.198 1.B $12. 16-24 First Cost Annual O & M Costs Salvage Value PW of Denominator Annual Benefits Annual Disbenefits PW of Numerator B/C Ratio @lt.000 -$20. ¨ First Cost ¨ Annual O & M Costs ¨ Salvage Value Do nothing. 10)] = $153.D $6.A Difference Between the alternatives -$200. but the incremental B/C ratio may be computed on the difference between alternatives.500 $700 $20.76 This is an undesirable increment of investment.000 + $4. Our rank order is B. @ $9.000 -$16.637 $2.10 @lt.16-23 This problem will require some student though on how to structure the analysis.000 $375 -$5. 40)]/[$200.60 @lt. 5%. 20) + $12.000 +$396.000 (P/F.500 $16.500 $550 $1. D $15.000 $13. Computing the cost is easy.000 (P/F. A.750 $145 $7.265 1.250 -$405 $6.000 $0 30 40 50 ¨B/¨C = [$396. B $12.500 $175 $6.874 $1.500 $17.000 -$20.000 +$12.733/$202. 30) + $12. 5%.000 -$400.@ -$3. This is a situation of providing the necessary capacity when it is needed.in other words Fixed Output.000 -$16.000 (P/F.311 $1. C $14.592 $2.000 B.34 @lt. but what is the benefit? One cannot compute the B/C ratio for either alternative.500 $150 $15.000 -$32.000 B.000 4325 $3.000 $0 +$12.000 @.000 -$20.000 $15.000 $75 $10.000 $0 -$500. D.000 (P/F.000 -$32. 5%.413 0.

500 $3.06 .2 3.29 2 13.000 $6.000 $2.054 $36.10 Yes $1.400 C $66.7 16 1.3 0.000 C $22. Our rank order is 4.66 No 4.48 No Choose Alternative 5 because it is associated with the last justified increment of investment.500 $6.1 5.07 We can eliminate project #3 from consideration.2 13. then C.3 1.5 2 1.3 3 0.6 6.215 1.200 @ Initial Investment Annual Savings Annual Costs Salvage Value $9.200 $1.7 1.33 Yes 5.34 Yes 4.746 $63.3 6.5 20 1. 5.045 $300 $350 -$563 -0.34 5 17 22 1.3 25 1.198 1.17 3 16.629 3.93 Here we eliminate Alternative B. 16-25 AW Costs (sponsor) AW Benefits (users) B/C Ratio 1 15.750 $4.795 $15. Rank order is A.89 4 10.5 1.4 10.400 $14.500 $5.719 $700 $200 $5.032 1. 1.29 6 23. ¨ AW Costs (sponsor) ¨ AW Benefits (users) ¨ B/C Ratio Justified? DN.500 $3.2 13.8 15 0. and 6.@ $9.PW of ¨ Denominator ¨ Annual Benefits ¨ Annual Disbenefits PW of ¨ Numerator ¨ B/C Ratio Justified? $13.000 (a) Conventional B/C PW Numerator PW Denominator B/C Ratio @ $21.463 0.C $12.874 $1.800 $6.28 Yes $1. 16-26 B $18.5 2.19 Yes 1.600 $5. ¨ Initial Investment ¨ Annual Savings ¨ Annual Costs Do Nothing.43 B $34.500 $150 $15.000 $9.54 No Choose Alternative A because it is associated with the last justified increment of investment.000 @.200 $1.7 1. 2.

C -$12.500 $6.817 0.@ $9.@ -$9. (c) Present Worth Year 0 1-14 15 Present Worth @ -$9.600 $5. (b) Modified B/C PW Numerator PW Denominator B/C Ratio @ $14.580 B -$18. Year ¨0 Do Nothing.450 -$2.715 B 10% C 15% We recommend Alternative A.500 .94 No We recommend Alternative A.984 $8.43 Yes $8.200 $1.400 $17.500 $2.984 $8.500 $3.500 @.400 $3.404 1.250 $6. Our rank order is A then C.000 $8.404 1.173 $11.215 1.78 B $15.442 1. (d) IRR Method IRR @ 23% Here we need the incremental analysis method.952 $47.19 Here we eliminate Alternative B.000 $3.86 C $23.324 $17.000 $6.78 Yes @.408 C -$22.000 $14.C $12.200 $6.¨ Salvage Value ¨ PW Numerator ¨ PW Denominator ¨ B/C Ratio Justified? $6. Eliminate Alternative B because IRR < MARR. ¨ Initial Investment ¨ Annual Savings ¨ Annual Costs ¨ Salvage Value ¨ PW Numerator ¨ PW Denominator ¨ B/C Ratio Justified? Do Nothing.000 $21.795 $15.200 $8.74 No We recommend Alternative A.000 $44.733 0.038 0.400 $8.500 $2.157 $19.

200)] = 8 + [$500/($500 + $1.100 -$2.450 = 4 + [$700/($700 + $2.750)] = 6 + [$1.000 -$18.47 years .500 -$7.800 -$8.750 $13.300 $29.100 $21.000 -$2.900 $8.700 $16.800 $22.200 $8.750 -$9.600 $1.750 $4.600 $12.200 23% Yes $1. (e) Simple Payback Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Alternative A (SPB) Alternative B (SPB) Alternative C (SPB) @ -$9.500 $10.900 $19.22 years = 6.¨ 1 .400 $18.600 $43.700 $5.750 -$500 $1.200 $8.200 8% No We recommend Alternative A.300 $12.500 -$16.000 $19.500 B -$18.¨ 14 ¨ 15 ¨ IRR Justified? $2.500 $3.000 -$1.400 -$5.000 = 4.250 $8.000 $15.600 + $1.600/($1.900 -$700 $1.500 -$7.000 $6.100 $10.000 -$11. C -$22.200 $9.600 -$15.300 -$5.800 $5.200 -$11.250 -$5.800)] Recommend Alternative A.250 -$14.200 $25.500 $14.32 years = 8.

000 we have more money than needed for the first six projects ($45.15 $2.72 $1.69 $1.19 $3.77 $1.00 $3.64 $0.04 0 Cumulative Cost $5 $10 $20 $35 $40 $45 $65 $85 $95 Projects ranked in order of desirability Project 5 9 10 2 1 7 6 8 3 Cost $5 $5 $10 $15 $5 $5 $20 $20 $10 NPW at 12% $1.000 (b) Ranking the 9 projects by NPW/Cost Project 1 2 3 5 6 7 8 9 10 Cost $5 $15 $10 $5 $20 $5 $20 $5 $10 Uniform Benefit $1.85 $0 (c) At $55. 2.04 0. This is the ³lumpiness´ problem.26 NPW/Cost 0. do all projects except Project #4.000). with total NPW equal to 10. 9.60 NPW/Cost 0. There may be a better solution than simply taking the first six projects. and 6 .08 0.23 NPW at 12% $0.60 $3. Cost = $115.21 0 0.72 $1.19 $0.13 0.48.03 $3.19 $0 $1.000 capital budget is: Projects 5.82 $3.13 0. we have ample money to fund Project 6.34 0.08 0.64 $0.21 0.22 $1.50 $2.65 $1.000).85 $1.50 $2. Ȉ NPW = 10. 10.26 0.16 0.65 $0.34 0.65.30 0. To maximize NPW the proper set of projects for $55. but not enough for the first seven projects ($65.Chapter 17: ationing Capital @mong Competing Projects 17-1 (a) With no budget constraint.30 0.82 $0. For this set of projects.83 $1.16 0. By trial and error we see that if we forego Projects 1 and 7. There is in this problem.

1B. 3B $15 $3. 1C $15 $40 ¨ Uniform Annual Benefit $2.6% $10 $1.59 2 Alt.2% 4 $10 11% Ȉ = $95 * The original choice of 1C is overruled by the acceptable increment of choosing 1B instead of 1C.Alt.04 0.1C $40 13.08 0. (d) Compute NPW/Cost at i = 12% for the various alternatives Project 1A 1B 1C 2A 2B 3A 3B 4 Cost $25 $50 $10 $20 $35 $25 $10 $10 Uniform Benefit $4. (c) The cutoff rate of return equals the cost of the best project foregone.7% Reject 1A Reject 1C Select 1B Reject 2A Select 2B Reject 3B Select 3A Select 4 Conclusion: Select Projects 1B.35 0. 3A. given MARR = 10%.7% 1B $50 2B. (b) Rank separable increments of investment by rate of return Alternative Cost or ¨ Cost ¨ Rate of Return For Budget of $100.2% (12%).Alt.91 $6.39 NPW/Cost 0.70 11% 4 ¨ Rate of Return Conclusion 7.28 $3. but could be considered as midway between 13.15 -$0.7% and 11.41 18.05 $6. Conclusion: Select Projects 3A.39 $2.17-2 (a) Select projects. 2B.000 1C $10 20% 1C $10* 3A $25 18% 3A $25 2A $20 16% 2A $20 1B.15 $1.57 11.22 $7. and 1B. 2B. 1C Alt.2% is rejected. with a Rate of Return of 13.7% is accepted and Project 2B with a Rate of Return of 11.2A $15 11.42 $2. 2A $15 $2. and 4.61 $9.Alt.8% 13.71 $5. 2A.14 $6.70 NPW $1. 3A.13 0.50 $3. Project 1B.56 $2.21 -0.03 .26 0.39 $4.2% 3 Alt. Incremental analysis is required.96 $2.2%. Project ¨ Cost 1 Alt 1A. Therefore the cutoff rate of return is actually 11.Alt.17 0.

26 0.Project Ranking Project Cost 1C $10 3A $25 3B $10 2A $20 1B $50 2B $35 1A $25 4 $10 NPW/Cost 0. select: 3A($25) + 2A ($20) + 1B ($50) thus Ȉ = $95 17-3 (a) Cost to maximize total ohs .p (PW of Cost) or Ohs ± P (Cost) technique.04 -0.35 0.´ for any recipient one should not pay more than necessary for a given number of ³ohs. for Mother the seven feasible alternatives (the three 0-oh alternatives are not feasible) are: Alternative Cost Ohs 1 $20 4 . Here.13 0. each person must be provided a gift.´ or more dollars for less ³ohs.21 0. This constraint destroys the validity of the NPW.03 (e) For a budget of $100 x 103.17 0. Thus while we can move the gift money around to maximize ³ohs´. The best solution is to simplify the problem as much as possible and then to proceed with incremental analysis.08 0. we cannot eliminate a gift. The number of alternatives may be reduced by observing that since the goal is to maximize ³ohs.´ For example.no budget limitation Select the most appropriate gift for each of the seven people Recipient èift Father Mother Sister Brother Aunt Uncle Cousin Total Shirt Camera Sweater Camera Candy Sweater Shirt Cost of Best èifts Oh Rating 5 5 5 5 5 4 4 Cost $20 $30 $24 $30 $20 $24 $20 $168 = $168 (b) This problem differs from those described in the book where a project may be rejected by selecting the do-nothing alternative.

If the situation is examined for each of the gift recipients. This table confirms that the gifts with the largest oh for each person cost $20 + $30 + $24 + $30 + $20 +$24 + .3 $1. for four ohs. Thus for Mother the three dominate alternatives are: Alternative 6 9 10 Cost $30 $18 $16 Ohs 5 4 2 All other alternatives are either infeasible or inferior. and $16 for three ohs. we obtain: Ohs Cost 5 Father ¨ Cost /oh $20 Cost $30 $4 4 $16 3 $12 Mother ¨ Cost /oh Cost $24 $12 $18 $4 Sister ¨ Cost /oh Cost Brother ¨ Cost /oh $30 $8 $14 $16 $16 $2 $16 $3.3 $4 2 $2 $12 $5 1 $6 $4. one must pay $30. and the two alternative costs the same as the three oh alternatives.6 $6 $12 $6 In part (a) we found that the most appropriate gifts cost $168. $18.3 2 1 $6 Ohs Cost 5 $20 4 $18 Aunt ¨ Cost /oh Cost Uncle ¨ Cost /oh Cost $12 Cousin ¨ Cost /oh $2 $24 $2 3 $16 $20 $8 $16 $4 $16 $1.4 5 6 8 9 10 $20 $24 $30 $16 $18 $16 3 4 5 3 4 2 Careful examination shows that for five ohs. The other three and four oh alternatives cost more.

The best saving available is to go from a five-oh to a four-oh gift for Brother. In this situation the replacements do not enter into the computation of NPW.$20 = $168. This makes the cost of the seven gifts = $168 . (This can be found by reading across the top of the table on the previous page. then Sister. For each project select the alternative which maximizes NPW. Further adjustments are required.$14 = $154. See the data and computations of NPW for this problem. first on Mother. Replacements (if needed) in the 16-year analysis period will produce a 12% rate of return.) For a budget limited to $112 we must forego increments of Cost/Oh that consume excessive dollars. thereby savings $14. The selected gifts are: Recipient Father Mother Sister Brother Aunt Uncle Cousin Total èift Cigars Book Magazine Magazine Calendar Necktie Calendar Ohs 3 4 4 4 1 3 1 20 Cost $12 $18 $16 $16 $6 $16 $6 $90 17-4 This problem is based on unlimited capital and a 12% MARR. The selected gifts are: Recipient Father Mother Sister Brother Aunt Uncle Cousin Total èift Shirt Book Magazine Magazine Candy Necktie Calendar Ohs 5 4 4 4 5 3 1 26 Cost $20 $18 $16 $16 $20 $16 $6 $112 (c) For a budget of $90 the process described above must be continued. In the Present Worth computations at 12%. For Project Select Alternative 1 B 2 A 3 F 4 A 5 A Data for Problems 17-4. and 17-7 . 17-5. then Father and finally a further adjustment of Sister. the NPW of the replacements will be zero.

57 +$0.59 +$0.46 $0 +$0.86 $0 +$3.86 $0 +$4.60 +$3.05 Negative +$1.46 +$0.97 +$1.45 +$3. The NPW is computed for each alternatives together with any identical replacements.10 Negative +$0.30 +$3.88 +$4.63 +$3.10 +$1.14 +$2.05 +$0.76 +$1.17 +$0.05 Negative Negative *5B and 3E have the same parameters.20 NPW .76 +$2.14 +$4. 17-5 This problem is based on unlimited capital.60 +$1.23 +$3.86 Negative +$2.63 $0 Prob. 17-7 NPW (computed for Problem 175) and p = 0.63 +$1.45 $0 Prob. 17-5 Alternative & identical replacements for 16 years NPW Negative +$3. and identical replacement throughout the 16-year analysis period.17 +$1.14 +$2.86 Negative +$2.Project Cost Useful Life Prob.95 $0 +$0.86 Negative Negative +$10.57 +$1.23 +$1.76 +$2.05 +$1.46 Negative Negative Negative Negative Negative +$0.75 +$0.10 +$2.65 +$1. From the table above the alternatives that maximize NPW will be selected: For Project 1 2 3 4 5 Select Alternative E D F A B . 17-4 Alternative at useful life NPW 1A 1B 1C 1D 1E 2A 2B 2C 2D 3A 3B 3C 3D 3E 3F 4A 4B 4C 4D 5A 5B* 5C $40 $10 $55 $30 $15 $10 $5 $5 $15 $20 $5 $10 $15 $10 $15 $10 $5 $5 $15 $5 $10 $15 2 16 4 8 2 16 8 8 4 16 16 16 16 4 16 8 16 16 8 8 4 8 Negative +$3. a 12% MARR.65 +$2.65 +$1.P (Cost) Negative +$1.53 +$13.

28 -$15 +$4. There is not net investment throughout the 8 years.94 i* is very close to 1 ½%.94 -$30 +$2.8 8 9. .16 Cash Flow 1D -$30 +$6.58 +$1. Assuming e* = 6%.75 Cash Flow 1D.1E -$10 +$4.1E -$15 +$2. Select Alternative 2D. and lower cost alternative has ROR > MARR.69 -$30 +$6. incremental analysis is required with rate of return methods. Reject 1D Reject 1C Higher cost alternative has ROR = MARR. Reject 2B Increment 2D.69 Cash Flow 1E -$15 +$3. i* will still be less than 12%.58 +$1. most of the alternatives may be eliminated by inspection. Project 1 Reject 1A Reject 1B Rate of Return < MARR Alt.75 $0 +$3.4 +$5.2B Year Cash Flow 1D Cash Flow 1E 0 -$15 -$5 1.8 +$5.30 4 -$15 $0 5.28 15% < i* < 18%.30 (The next 8 years duplicate the first) Cash Flow 1D.1E Increment Year 0 1. but at e* = 6%.17-6 To solve this problem with neither input nor output fixed. The increment between them must have a ¨ROR < MARR. Therefore. Select Alternative 1E. i* still appears to be > 12%. By careful examination. By inspection we can see there must be an external investment prior to year 8 (actually in years 6 and 7). 1E has a greater investment and a greater ROR Reject 1D 1D. Higher cost alternative 2D has a higher ROR. the problem could be lengthy. Project 2 Reject 2A Reject 2C The increment between 2D and 2A has a desirable ¨ROR = 18%. With 22 different alternatives.

3D. Select Alternative 4A. ¨ ROR = 15% The increment 3A ± 3F must have ¨ROR < 12% Select Alternative 3F.4A 0 -$5 1.Project 3 Reject 3C Reject 3B. A value of p = 0. Project 4 Reject 4B and 4C These alternatives are dominated by Alternative 4A with its higher cost and greater ROR.000. 3F with the same ROR has higher cost. and 3E Reject 3A ROR < MARR Alt. ¨ROR = 15%.000 . Select Alternative 5B. 3F.6%. Using NPW ± p (cost). The increment 5C ± 5B must have an ¨ROR < 12%. 2D. (Note that this is also the answer to 17-5) 17-7 This problem may be solved by the method outlined in Figure 17-3. With no budget constraint the best alternatives were identified in Problem 17-5 with a total cost of $65.73 Computed i* = 3.8 +$0.4@ Reject 4D Year Cash Flow 4D. Conclusion: Select 1E. 4A.2 (cost) gives: For Project Select Alternative Cost 1 E $15. the problem must be solved by trial and error until a suitable value of p is determined. Increment 4D.000. AND 5B. here we are limited to $55. Selecting the alternatives from each project with the largest positive NPW ± 0.20 (cost) is given in the table between Solutions 17-4 and 17-5. The computations for NPW ± 0. Therefore.20 proves satisfactory. Reject 4D. Project 5 Reject 5A Reject 5C Alternative 5B with the same ROR has a higher cost. Therefore.

000 $15.500.000 +$244 Therefore.000 +$98.500.000 +$3.20 20 Total Cash Flow -$5.2 3.000 -$83. Rate of Return § 18%.000 Year 0 1.000) = $1.20 20 Total Cash Flow -$500.000 $0 +$4.000.000 PW at 18% -$4.000 $55.000 $0 $0 +$1.3 ($1.700 +$750. Rate of Return § 20%.250.100.830 A3.700 +$750.000 +$3.500. Project @3 (@3.000.500.000 PW at 20% -$500.000 PW at 18% -$5.700 PW at 15% -$4.290.2 3 4 5 Total A F A A $10.000 -$85.700 +$98.Project @2 Year 0 1 2 3.191.669 $15.200.000 -$5.000 +$480.200 +$109.700 +$1.A2 -$4.4 ($1.20 20 Project A3 -$5.000 $10.1 ($1.000 -$98.@1) Expected Annual Rental Income = 0.000 $0 +$1.A2 -$4.650 .000 Project A2 -$500.000.000 (keep land) +$98.@1) Year 0 1.900.000) + 0.700 -$98.2 ($1. The first step is to compute the rate of return for each increment of investment.300 Therefore.000 -$98. Project @1.000) + 0.700 +$98. Project @3.000.000 17-8 The solution will follow the approach of Example 17-5.000) + 0.000 $5.000 Year 0 1 A3.290.no investment Project @2 (@2.290.885.000.300 +$2.000.

000 Not stated Rate of Return 25% 20% 18% 17.000.800 PW at 18% -$2.290 +$137.890 +$4.970 ¨ Rate of Return § 17.152.7% 16% 15% 14.480 +$996.500 +$214.630 +$5.519.000 $500.000 +$847.511.74% .700 3. (a) Budget = $4 million (or $4.000 1+$500.000 $2.000 = 25%.000/$2.000.000.000 +$1.000.000 Total = er ± 1 = e0.00% Project F Year 0 1 2 Total Cash Flow -$2.000.800 +$300 Actually the rate of return is exactly $500.604.A2 D E B Increment $2.1406/12)12 ± 1 = 15.250.310 -$70.785.000.1375 ± 1 = 0.000 +$1.000 value of Project A land is included.191.2 -$98.000 $500.1474 PW at 18% -$2.450 +$82.7% Note that $500.000 Any amount > $100.000 +$1.000 $4.000 Total -$74.300 20 +$2.600 +$100 Rate of Return = 18% ank order of increments of investment by rate of return Project C A2 F A3.500 +$1.20 +$1.120 -$60.8%) Project B Rate of Return = ieff Project C Year Cash Flow 0 -$2.7% (HP-12C Answer = 17.000 10 10 +$2.000.500. Project D Rate of Return = 16% Project E ieff = (1 + 0.000.000.5 million including Project A land) èo down the project list until the budget is exhausted = 14.

go down the project list until the budget is exhausted.000 How long must the tank remain in service to produce a 15% rate of return? A = $22.4972) (P/A.619 = 2 years (beyond the 5 year contract) Thus the storage tank will have a 15% rate of return for a useful life of 7 years.000 (P/A.000 = $22.5 million including Project A land) Again.000 (3.000 Salvage value at tend of 5 years = $42. so the project must be undertaken to provide the necessary plant capacity.000 A = $12. Project II: @nother sulfonation unit There is no alternative available. Install Solfonation Unit.000 Subsequent years = $0. 15%. 5) = $22.000 = $12. 15%. 17-9 Project I: Liquid Storage Tank Saving at 0. A3. Install the Liquid Storage Tank. This appears to be far less than the actual useful life of the tank to Raleigh.400 $83.001 x 12. 15%. and F.Choose Project C. 15%. 5) + $12.000 x 1. n¶) (0. A2.400 n' = ? i = 15% = $22. F.000 x 1.000 « n=5 $83. MARR = Cutoff rate of Return = Opportunity cost § 17.18% (b) Budget = $9 million (or $9. 15%. D. Project III: Packaging department expansion Cost = $150.352) + $12. n¶) (P/F.001 x 22. Choose Projects C. n¶) n¶ = 1.7%. Note that this would become a lumpiness problem at a capital budget of $5 million (or many other amounts).000 (P/A.000 .000 (P/A.1 cent per kg of soap: First five years = $0.

000 (0.000 .605) = $126.4371) = $225. 5) + $200.000 = $44.000 +$44.000 -$5.175 The rate of return is 12%.000 New Rather than Leased -$225.$42.127) + $200.000 (3. Build the new warehouse. 5) = $35.000 Rate of Return: $150. Projects 4 & 5: New warehouse or leased warehouse Cash Flow Year 0 1 2 3 4 5 Leased Warehouse $0 -$49. i%.000 +$44.000 New Warehouse -$225.000 -$49.000 -$49.000 (P/A.000 +$244.000 -$5. 5) Try i = 18% $225. i%.000 -$5.000 +$44. $225. 17-10 This is a variation of Problem 17-1.000 = $44.000 (3.000 (0.5674) $126. Reject the packaging department expansion and plan on two-shift operation.000 (P/F.000 .000 Compute the rate of return on the difference between the alternatives.000 -$5.000 -$49.000 -$5. i%.000 +$44.000 -$49.000 (P/F.$42. (a) Approve all projects except D.169 = $35. 5) Try i = 12% $150.008 The incremental rate of return is 18%. i%.000 (P/A.Annual saving in wage premium = $35. .000 +$200.

49 $1.146 0.198 0.16 $0. I.50 $800.2225 ROR 20% 9.099 0. Alternately.048 0 0.123 0. H.58 $1.277 0.050 0.37 $9.000 The first five projects (B.1601 0. 17-11 Project 1A 1B.6% 18% . H.55 $4.023 0.95 $0 $3. and J) equal $70.072 0.99 NPW/Cost 0.277 0. There is not enough money to add è. i%. F.072 0.023 0 -0.000 Annual Benefit (A) $1. and è.000.000 $15.1A 2A Cost (P) $5. Choose: B. So two possible selections are: BHIFè BHIFJCA NPW(14%) NPW(14%) = $28.23 $4.20 NPW at 14% $0.146 0.81 $7.68 $1.(b) Ranking Computations for NPW/Cost Project A B C D E F è H I J Cost $10 $15 $5 $20 $15 $30 $25 $10 $5 $10 Uniform Benefit $2.67 $3. F.81 $3.050 -0.192.2385 0.50 $3. one could delete J and add è.73 $0.36 = $28.25 -$0.198 0.337.98 $5.98 $0.123 0.000. I.26 For $85. 10) 0.81 $1.000 $5.048 Cumulative Cost $15 $25 $30 $60 $70 $95 $100 $110 $125 $145 (c) Budget = $85. but there is enough to add C and A. maximize NPW.099 Ranking: Project B H I F J è C A E D Cost $15 $10 $5 $30 $10 $25 $5 $10 $15 $20 NPW/Cost 0.53 $5.50 (A/P.

6% .50 0.2B.087.2A $10.000 (a) 1A (b) 8% (c) 1B and 2A $1.1088 1.

Both serve useful and needed functions.Chapter 18: @ccounting and Engineering Economy 18-1 Engineers and managers make better decisions when they understand the ³dollar´ impact of their decisions. both within and outside the firm. Historical and seasonal trends and a context of industry standards are also needed. Accounting data relates to all manner of activities in the business. Income Statement ± synopsis of the firm¶s profitability for a period of time. If the company has a low ratio. Accounting principles guide the reporting of cash flows for the firm. The same is true with the acid-test ratio. it doesn¶t mean the company will go out of business. 18-3 Balance Sheet ± picture of the firm¶s financial worth at a specific point in time. and local and recent financial data is not a complete basis for judging a firm¶s performance. 18-6 Today¶s weather is not a good basis to pack for a 3-month trip. It is important to understand. 18-2 The accounting function is the economic analysis function within a company it is concerned with the dollar impact of past decisions. these past decisions from management. then it probably doesn¶t have the ability to instantly pay off debt. Engineers and managers can access this information through formal and informal education means. 18-7 Not necessarily. 18-5 The two primary general accounting statements are the balance sheet and the income statement. and legal perspectives. while long-term liabilities are payments due beyond one year of the balance sheet. operational. The current ratio will provide insight into the firm¶s solvency over the short term and although a ratio of less than 2 historically indicates there could be problems. Both tests should be used as an indicator or warning sign. 18-4 Short-term liabilities represent expenses that are due within one year of the balance sheet. and account for. That doesn¶t necessarily indicate the firm will go bankrupt. .

000. Acid test ratio = ($90. Current ratio = (current assets / current liabilities) = $5.000 = $40.000)/409.5 18-11 Net profit (loss) = revenues ± expenses = $100. Current ratio = ($475K/409K) = 1.18-8 Assets = $1.000 b. Working capital = current assets .000 ± 2.000.000 b.000 = $3.000 = 0.850 .000 profit/year Revenues ± expenses = $500.000 18-10 a.000 + 175.000.000 = $663.000) = $475K ± 409K = $66.000 + 87.000 = $337.000 18-12 a.000 Total liabilities = $127. Working capital = ($90.000 Expenses Administrative Cost of goods sold Development Selling Total Total operating income 2750 18.000.000/2.000 ± 60.000 ± 337.000.000 + 210.000 900 4500 26.000.current liabilities = $5.161 c.000 + 210.000 = 2.000) ± (322.000 = $188.000.150 3.000 ± 312.648 18-13 Operating Revenues and Expenses evenue Sales Total 30.000 Equity = assets ± liabilities = $1.000 + 175.000 18-9 6 days/week * 52 weeks/year = 312 days/year in operation $1000 profit/day * 312 days/year = $312.000 30.

000 ± 405.000 =30 b.000 a.000 b. Acid test ratio = quick assets / current liabilities = $310K/442K = 0.000 Net income = profit ± taxes = $15.000/405.000 Liabilities = $315. Working capital = current assets ± current liabilities = ($110K + 40K + 10K + 250K) ± (442K) = $118.000 b. Current ratio = current assets / current liabilities = (1. 18-17 Profit = $50.0 million)/50. Net profit = net income before taxes ± taxes = $9 ± 1 = $8 million Interest coverage = (total revenues ± total expenses) / interest = ($86 ± 70)/7 = 2.000 = $15. Net income before taxes = revenue ± expenses = $86 ± 77 = $9 million b. Working capital = $503.27 c.000 = $13. and a good acid test ratio is 1 or above.50 2664.000= 20 . Current ratio = $495.28 This interest coverage is not acceptable because it should be at least 3. Acid test ratio = $295.000 + 45.Non-operating revenues & expenses Interest paid Income before taxes Taxes (@27%) Net profit (loss) 200 3650 985.73 18-15 a. This company is in major trouble unless they move inventory quickly.22 c.000/405.000 + 150.5million)/50.000 = $98.000 + 8.0 for industrial firms.701 A good current ratio is 2 or above.50 18-14 Assets = $100.000 = 1.000 ± 30.000 + 90.000 ± 5. Current ratio = current assets / current liabilities = $560K/442K = 1. 18-16 Total revenues = $51 + 35 = $86 million Total expenses = $70 + 7 = $77 million a.000 ± 2.000 = 0. Acid test ratio = quick assets / current liabilities = (1.000 + 200.000 = $503.000 = $405.000 18-18 a.

000 $600. which is not a bad situation.000 50. especially since the height of the nursery business is the spring and summer and this is a June balance sheet.100 $6.000 $420. Such high ratios as these could mean that an excessive amount of capital is being kept on hand.650. indicating the company¶s ability to repay its debts.384.000 32.768. 18-20 a. automation. etc.000 X 137 = $2.685.740.000 82. employee training. this is not always the case.000 20. b.000 $131. Interest coverage = total income / interest payments = ($455 ± 394 + 22)/22 = 3.While it may be tempting to think that a higher ratio is better.800. 18-19 Total current assets = $1740 + 900 + 2500 ± 75 = $5065 Total current liabilities = $1050 + 500 + 125 = $1675 Current ratio = $5065/1675 = 3.0238 This company¶s financial standing is good because the current ratio is greater than 2.000 $4.000 $2.000 100. although a little higher would be preferable. 18-21 a.909. Excess capital does very little for the company if it is just sitting in the bank ± it could and/or should be used to make the company more profitable through investing.250 $93 $84 .105. 18-22 @ctivity Direct material cost Direct labor cost Direct labor hours Allocated overhead Total costs Units produced Cost per unit Model S $3.000 $4.08 This is a very small ratio.000 X 137 = $8.000 X 137 = 32.000 $380. The company should compare itself to industry standards.500 64. Acid test ratio = (cash + accounts receivable) / current liabilities = ($870 + 450)/1430 = 0.530.000 20.000 64.0 and may indicate that the firm is not solvent. indicating that the company needs to assess their ability to operate efficiently in order to increase profits. Current ratio = current assets / current liabilities = $2670/1430 = 1. Net profit ratio = net profits / sales revenue = $31/(395 ± 15) = 0.77 This is a good ratio. It should be at least 3.0. b.0.000 $132 Model M Model G $1.92 This indicates that 92% of the current liabilities could be paid out within the next thirty days.87 This is below the recommended ratio of 2.

000/12.217 OverheadDeluxe = (65. all indirect manufacturing and assembly activities that support the direct costs.500 Net RevenueStandard = 1800(60) . RLW-II will want to assign costs to each. Potential categories of indirect costs that RLW-II will want to account for include costs for: ordering from and maintaining a relationship with specific vendors/suppliers.000) = $19.105.000/87.783 Total CostStandard = 50. Total direct labor = 50. and customer support/service and warranty activities.000)(35. but the deluxe bag appears far more profitable with materials-based allocation.000/115.132.131.000 hours = $5000/hour b.000 Total CostStandard = 50. all indirect quality related activities in areas such as testing. Total cost = $1.000 = $106.500/87.000 + 47.000 OverheadDeluxe = (47.000 + 16. 18-24 a.000 + 200hours*$5000/hour = $2.000.106.000 Total CostDeluxe = 65.000 + 47. Based on the presence and magnitude of the activities.000 + 15. $60. and engineering and technical support. distribution and warehousing activities.217 = $105. Total materials = 40. tools and fixtures. and storing raw materials.18-23 a.217 Total CostDeluxe = 65.000 + 40.000.500)(35. In doing this. shipping.000) = $16.000) = $15.000 Allocation of overhead OverheadStandard = (50.000 + $600. receiving. documentation and final storage.000 = $115.500 Allocation of overhead OverheadStandard = (40.500)(35. RLW-II will gain a more accurate view of the true costs of producing their products.000)(35.283 = $717 b.000/115.000 + 47.000 + 40. rework and scrap.000 = $131.000 + 65.600.500 + 19. components and sub-assemblies.000 = $2000 Net RevenueDeluxe = 1400(95) .283 Net RevenueStandard = 1800(60) .500 = $1500 In both cases the total net revenues equal $3500.783 = $132. activities related to requirements for specific and unique machinery. retrieval and all material handling activities from receiving to final shipment.000 18-25 RLW-II will use the ABC system to understand all of the activities that drive costs in their manufacturing enterprise. . shipping. activities related to packaging.217 = $2783 Net RevenueDeluxe = 1400(95) .500 = $87.500 + 19.000) = $19.

18-26 Direct Costs Machine operator wages Machine labor Overtime expenses Cost of materials Indirect Costs Insurance costs Utility costs Material handling costs Engineering drawings Cost to market the product Cost of storage Cost of product sales force Support staff salaries Cost of tooling and fixtures Machine run costs .

Solutions for Engineering Economic Analysis

Solutions for Engineering Economic Analysis

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