CH 10 Solutions Final

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

Solutions to Problems
10.1 The circumstances are when the lives for all alternatives are: (1) finite and equal, or (2)
considered infinite. It is also correct when (3) the evaluation will take lace over a secified
stud! eriod.
10.2 Incremental cash flow anal!sis is mandator! for the "#" method and $%& method. (It is
noteworth! that if unequal'life cash flows are evaluated (! "#" usin) an *+'(ased
relation that reflects the differences in cash flows (etween two alternatives, the (reakeven i,
will (e the same as the incremental i,. (-ee Ta(le 10.2 and -ection 10.1 for comments.)
10.3 .umericall! lar)est means the alternative with the lar)est /+, *+ or 0+ identifies the
selected alternative. 0or (oth revenue and service alternatives, the lar)est num(er is chosen.
0or e1amle, 2'3000 is selected over 2'10,000, and 24100 is selected over 2'30.
10.5 (a) 6and solution: *fter consultin) Ta(le 10.1, choose the *+ or /+ method at 78 for
equal lives of 7 !ears.
&omuter solution: either the /9T function or the /: function can )ive sin)le'cell
solutions for each alternative.
In either case, select the alternative with the numericall! lar)est value of *+ or /+.
(() (1) 6and solution: 0ind the /+ for each cash flow series.
/+
7
; '10,000 4 2000(/%0,178,7) 4 (<300 = 5000) (/%*,178,7)
; '10,000 4 2000(0.2<<0) 4 2300(5.0>><)
; 2>2<
/+
10
; '15,000 4 2300(/%0,178,7) 4 (10,000 = 3300) (/%*,178,7)
; 23015
/+
13
; '17,000 4 3000(/%0,178,7) 4 (15,000 = >000) (/%*,178,7)
; 211,351
/+
20
; '25,000 4 3300(/%0,178,7) 4 (20,300 = 11,000) (/%*,178,7)
&hater 10 1
PROPRI!AR" MA!RIA#. ? The 9c@raw'6ill &omanies, Inc. *ll ri)hts reserved. .o art of this 9anual ma! (e disla!ed, reroduced or
distri(uted in an! form or (! an! means, without the rior written ermission of the u(lisher, or used (e!ond the limited distri(ution to teachers and
educators ermitted (! 9c@raw'6ill for their individual course rearation. If !ou are a student usin) this 9anual, !ou are usin) it without
ermission.
; 213,<<7
/+
23
; '33,000 4 <000(/%0,178,7) 4 (2<,300 = 1<,000) (/%*,178,7)
; 211,511
-elect the 20 cu(ic meter siAe.
&omuter solution: Bse the /: function to find the /+ in a searate sreadsheet cell for
each alternative. -elect the 20 cu(ic meter alternative.
(() (2) $u! another 20 cu(ic meter truck, not a smaller siAe, (ecause it is alwa!s correct to
send the lar)est amount that is economicall! Custified.
10.3 (a) 6and solution: &hoose the *+ or /+ method at 0.38 for equal lives over <0 months.
&omuter solution: Dither the /9T function or the /: function can )ive sin)le'cell
solutions for each alternative.
(() The $%& method was the evaluation method in chater E, so rework it usin) *+.
6and solution: 0ind the *+ for each cash flow series on a er household er month
(asis.
*+
1
; 1.23 = <0(*%/,0.38,<0)
; 1.23 = <0(0.01E33)
; 1.23 ' 1.1<
; 20.0E
&hater 10 2
ermission.
*+
2
; 7.00 ' 300(*%/,0.38,<0)
; 7.00 = E.<>
; 2'1.<>
-elect ro)ram 1.
&omuter solution: Fevelo the *+ value usin) the /9T function in a searate cell for
each ro)ram. -elect ro)ram 1.
10.< Gon) to infinite life alternatives. D1amles are usuall! u(lic sector roCects such as dams,
hi)hwa!s, (uildin)s, railroads, etc.
10.> (a) The e1ected return is 12 ' 7 ; 58 er !ear.
(() "etain 9*"" ; 128 and then estimate the roCect i,. Take the risk'related return
e1ectation into account (efore decidin) on the roCect. If 128 H i, H 1>8, Iohn must
decide if the risk is worth less than 38 over 9*"" ; 128.
10.7 (a) $onds are de(t financin)
(() -tocks are alwa!s equit!
(c) Dquit!
(d) Dquit! loans are de(t financin), like house mort)a)e loan
10.E The roCect that is reCected, sa! $, and has the ne1t hi)hest "#" measure, i,
$,
in effect
sets the 9*"", (ecause itJs rate of return is a lost oortunit! rate of return. +ere an!
second alternative selected, roCect $ would (e it and the effective 9*"" would (e i,
$
.
10.10 $efore'ta1 oortunit! cost is the 1<.<8 for)one rate. Fetermine the after'ta1 ercenta)e
after the effective ta1 rate (T
e
) is calculated.
&hater 10 3
ermission.
T
e
; 0.0< 4 (0.E5)(0.20) ; 0.257
*fter'ta1 9*"" ; $efore'ta1 9*"" (1' T
e
) ; 1<.< (1 = 0.257)
; 12.578
10.11 (a) -elect 2. It is the alternative investin) the ma1imum availa(le with incremental
i, K E8.
(() -elect 3.
(c) -elect 3.
(d) 9*"" ; 108 for alternative 5 is oortunit! cost at 2500,000 level, since 5 is
the first unfunded roCect due to unavaila(ilit! of funds.
10.12 -et the 9*"" at the cost of caital. Fetermine the rate of return for the cash flow
estimates and select the (est alternative. D1amine the difference (etween the return and
9*"" to searatel! determine if it is lar)e enou)h to cover the other factors for this
selected alternative. (This is different than increasin) the 9*"" (efore the evaluation to
accommodate the factors.)
10.13 (a) 9*"" ma! tend to (e set lower, (ased on the success of the last urchase.
(() -et the 9*"" and then treat the risk associated with the urchase searatel!
from the 9*"".
10.15 (a) &alculate the two +*&& values.
+*&&
1
; 0.<(128) 4 0.5 (E8) ; 10.78
+*&&
2
; 0.2(128) 4 0.7(12.38) ; 12.58
Bse aroach 1, with a F'D mi1 of 508'<08
10.15 (cont)
(() Get 1
1
and 1
2
(e the ma1imum costs of de(t caital.
*lternative 1: 108 ; +*&&
1
; 0.<(128) 4 0.5(1
1
)
1
1
; L108 ' 0.<(128)M%0.5
; >8
&hater 10 5
ermission.
Fe(t caital cost would have to decrease from E8 to >8.
*lternative 2: 108 ; +*&&
2
; 0.2(128) 4 0.7(1
2
)
1
2
; L108 ' 0.2(128)M%0.7
; E.38
Fe(t caital cost would, a)ain, have to decreaseN now from 12.38 to E.38
&hater 10 3
ermission.
10.13 The lowest +*&& value of >.E8 occurs at the F'D mi1es of 210,000 and 223,000 loan.
This translates into fundin) (etween 2>3,000 and 2E0,000 from their own funds.

10.1< +*&& ; cost of de(t caital 4 cost of equit! caital
; (0.5)L0.<<>(78) 4 0.333(108)M 4 (0.<)L(0.5)(38) 4 (0.<)(E8)M
; 0.5L7.<<>8M 4 0.< L>.58M
; >.E0>8
10.1> (a) &omute and lot +*&& for each F'D mi1.
F'D 9i1 +*&&
100'0 15.308
>0'30 11.55
<3'33 10.33
30'30 E.>0
33'<3 E.75
20'70 12.57
0'100 12.30
(() F'D mi1 of 308'308 has the lowest +*&& value.
&hater 10 <
ermission.
10.17 (a) The sreadsheet shows a 308 ' 308 mi1 to have the lowest +*&& at E.>08.
(() &han)e the de(t rate column (& to F) to add the 108 and o(serve the new lot.
.ow de(t of 338 (F'D of 33'<3) has the lowest +*&& ; 10.178.
10.1E -olve for the cost of de(t caital, 1.
+*&& ; 10.>8 ; 0.7(<8) 4 (1'0.7) (1)
1 ; (10.> = 5.7)%0.2
; 2E.38
The rate of 2E.38 for de(t caital (loans, (onds, etc.) seems ver! hi)h.
&hater 10 >
ermission.
10.20 $efore'ta1es:
+*&& ; 0.5(E8) 4 0.<(128) ; 10.78 er !ear
*fter'ta1: Insert Dquation L10.3M into the (efore'ta1 +*&& relation.
*fter'ta1 +*&& ; (equit!)(equit! rate) 4 (de(t)((efore'ta1 de(t rate)(1=T
e
)

; 0.5(E8) 4 0.<(128)(1'0.33)
; 7.278 er !ear
The ta1 advanta)e reduces the +*&& from 10.78 to 7.278 er !ear, or 2.328 er !ear.
10.21 (a) 0ace value ; 22,300,000 ; 22,3>>,320
0.E>
(() $ond interest ; 0.052(2,3>>,320) ; 22>,0<2 ever! 3 months
5
Fividend quarterl! net cash flow ; 22>,0<2(1 ' 0.33) ; 21>,3E0

The rate of return equation er 3'months over 20(5) quarters is:
0 ; 2,300,000 = 1>,3E0(/%*,i,,70) = 2,3>>,320(/%0,i,,70)
i, ; 0.>328 er 3 months ("*TD function)
.ominal i, ; 2.E278 er !ear
Dffective i, ; (1.00>32)
5
= 1 ; 2.E<8 er !ear
10.22 (a) *nnual loan a!ment is the cost of the 21<0,000 de(t caital. 0irst, determine the
after'ta1 cost of de(t caital.
10.22 (cont)
Fe(t cost of caital: (efore'ta1 (1'T
e
) ; E8(1'0.22) ; >.028
*nnual interest 1<0,000(0.0>02) ; 211,232
*nnual rincial re'a!ment ; 1<0,000%13 ; 210,<<>
Total annual a!ment ; 221,7EE
&hater 10 7
ermission.
(() Dquit! cost of caital: <.38 er !ear on 250,000 is 22<00 annuall!.
-et u the sreadsheet with the three series. Dquit! rate is <.38, loan interest rate is
>.028, and rincile re'a!ment rate is <.38 since the annual amount will not earn
interest at the equit! rate of <.38. The difference in /+ values is:
Fifference ; 200,000 ' /+ equit! lost = /+ of loan interest aid
= /+ of loan rincile re'a!ment not saved as equit!
; 2'2<, E1<
This means the /+ of the sellin) rice in the future must (e at least 22<,E1< more than
the current urchase rice to make a ositive return on the investment, assumin) all the
current num(ers remain sta(le.
(c) *fter'ta1 +*&& ; 0.2(<.38) 4 0.7(E8(1'0.22)
; <.E1<8
10.23 Dquit! cost of caital is stated as <8. Fe(t cost of caital (enefits from ta1 savin)s.
$efore'ta1 (ond annual interest ; 5 million (0.07) ; 2320,000
&hater 10 E
ermission.
*nnual (ond interest .&0 ; 320,000(1 = 0.5) ; 21E2,000
Dffective quarterl! dividend ; 1E2,000%5 ; 257,000
0ind quarterl! i, usin) a /+ relation.
0 ; 5,000,000 ' 57,000(/%*,i,,50) ' 5,000,000(/%0,i,,50)
i, ; 1.28 er quarter
; 5.78 er !ear (nominal)
Fe(t financin) at 5.78 er !ear is cheaer than equit! funds at <8 er !ear.
(.ote: The correct answer is also o(tained if the (efore'ta1 de(t cost of 78 is used to
estimate the after'ta1 de(t cost of 78(1 ' 0.5) ; 5.78 from Dquation L10.3M.)
10.25 (a) $ank loan:
*nnual loan a!ment ; 700,000(*%/,78,7)
; 700,000(0.1>501)
; 213E,207
/rincial a!ment ; 700,000%7 ; 2100,000
*nnual interest ; 13E,207 = 100,000 ; 23E,207
Ta1 savin) ; 3E,207(0.50) ; 213,<73
Dffective interest a!ment ; 3E,207 = 13,<73 ; 223,323
Dffective annual a!ment ; 23,323 4 100,000 ; 2123,323
The *+'(ased i, relation is:
0 ; 700,000(*%/,i,,7) =123,323
(*%/,i,,7) ; 123,323 ; 0.13551
700,000
i, ; 5.E38
$ond issue:
*nnual (ond interest ; 700,000(0.0<) ; 257,000
Ta1 savin) ; 57,000(0.50) ; 21E,200
Dffective (ond interest ; 57,000 = 1E,200 ; 227,700
The *+'(ased i, relation is:
0 ; 700,000(*%/,i,,10) ' 27,700 ' 700,000(*%0,i,,10)
&hater 10 10
ermission.
i, ; 3.<8 ("*TD or I"" function)
$ond financin) is cheaer.
(() $onds cost <8 er !ear, which is less than the 78 loan. The answer is the same
(efore'ta1es.
10.23 0ace value of (ond issue ; (10,000,000)% 0.E>3 ; 210,23<,510

*nnual (ond interest ; 0.0E>3(10,23<,510) ; 21,000,000
Interest net cash flow ; 21,000,000(1 ' 0.32) ; 2<70,000

The /+'(ased rate of return equation is:
0 ; 10,000,000 = <70,000(/%*,i,,30) =10,23<,510(/%0,i,,30)
i, ; <.738 er !ear (D1cel "*TD function)
$onds are cheaer than the (ank loan at >.38 with no ta1 advanta)e.
10.2< Fividend method:
"
e
; F:
1
%/ 4 )
; 0.E3%17.70 4 0.013
; <.558
&*/9: (The return values are in ercents.)
"
e
; "
f
4 O("
m
' "
f
)
; 5.3 4 1.1E(5.E3 = 5.3)
; 3.058
&*/9 estimate of cost of equit! caital is 1.58 lower.
10.2> Fe(t caital cost: E.38 for 2< million (<08 of total caital)
&hater 10 11
ermission.
Dquit! '' common stock: 100,000(32) ; 23.2 million or 328 of total caital
"
e
; 1.10% 32 4 0.02
; 3.558

Dquit! '' retained earnin)s: cost is 3.558 for this 78 of total caital.
+*&& ; 0.<(E.38) 4 0.32(3.558) 4 0.07(3.558)
; >.778
10.27 Gast !ear &*/9 comutation: "
e
; 5.0 4 1.10(3.1 = 5.0)
; 5.0 4 1.21 ; 3.218
This !ear &*/9 comutation: "
e
; 3.E 4 1.17(3.1 = 3.E)
; 3.E 4 1.52 ; 3.328
Dquit! costs sli)htl! more in art (ecause the coman!Js stock (ecame more volatile
(ased on an increase in (eta. The safe return rate sta!ed a(out the same in the switch from
B- to Duro (onds.

10.2E Fetermine the effective annual interest rate i
a
for each lan usin) the effective interest rate
equation in chater 5. *ll the dollar values can (e ne)lected.
/lan 1:
i
a
for de(t ; (1 4 0.00373)
12
'1 ; >.2238
i
a
for equit! ; (1 4 0.03)
2
' 1 ; <.0E8
+*&&
*
; 0.3(>.2238) 4 0.3(<.0E8) ; <.<<8
/lan 2:
i
a
for 1008 equit! ; +*&&
$
; (1 4 0.03)
2
' 1 ; <.0E8

/lan 3:
i
a
for 1008 de(t ; +*&&
&
; (1 4 0.00373)
12
'1 ; >.2238
/lan 2: 1008 equit! has the lowest (efore'ta1 +*&&.
10.30 (a) Dquit! caital: 308 of caital at 138 er !ear.
&hater 10 12
ermission.
Fe(t caital: 138 in (onds and 338 in loans.
&ost of loans: 10.38 er !ear
&ost of (onds: <8 from the ro(lem statement, or determine i,.
$ond annual interest er (ond ; 210,000(0.0<) ; 2<00
0 ; 10,000 ' <00(/%*,i,,13) ' 10,000(/%0,i,,13)
i, ; <.08 ("*TD function)
$efore'ta1 +*&& ; 0.3(138) 4 0.13(<8) 4 0.33(10.38)
; 12.0>38
(() Bse T
e
; 338 to calculate after'ta1 +*&& with Dquation L10.3M inserted into
Dquation L10.1M, as mentioned at the end of -ection 10.3 in the te1t.
*fter'ta1 +*&& ; (equit!)(equit! rate) 4 (de(t)((efore'ta1 de(t rate)(1=T
e
)
; 0.3(138) 4 L0.13(<8) 4 0.33(10.3)M(1'0.33)
; 10.5>8
&hater 10 13
ermission.
10.31 0or the F'D mi1 of >08'308, +*&& ; 0.>(>.08) 4 0.3(10.358) ; 7.08
9*"" ; +*&& ; 78
(a) Indeendent roCects: These are revenue roCects. 0astest solution is to find /+ at 78
for each roCect. -elect all those with /+ K 0.
/+
1
; '23,000 4 <,000 (/%*,78,5) 4 5,000 (/%0,78,5)
/+
2
; '30,000 4 E,000 (/%*,78,5) ' 1,000 (/%0,78,5)
/+
3
; '30,000 4 13,000 (/%*,78,5) 4 20,000 (/%0,78,5)
-readsheet solution (elow shows /+ at 78 and overall i,
Indeendent: #nl! roCect 3 has /+ K 0. -elect it.
(() 9utuall! e1clusive: -ince onl! /+
3
K 0, select it.
10.32 Two indeendent, revenue roCects with different lives. 0astest solution is to find *+ at
9*"" for each roCect. -elect all those with *+ K 0. 0ind +*&& first.
&hater 10 15
ermission.
Dquit! caital is 508 at a cost of >.38 er !ear
Fe(t caital is 38 er !ear, comounded quarterl!. Dffective rate after ta1es is
*fter'ta1 de(t i, ; L(1 4 0.03%5)
5 '
1M (1' 0.3)
; 3.0E3(0.>) ; 3.3<<38 er !ear
+*&& ; 0.5(>.38) 4 0.<(3.3<<38) ; 3.158 er !ear
9*"" ; +*&& ; 3.158
(a) *t 9*"" ; 3.158, select (oth indeendent roCects (row 1> cells)
(() +ith 28 added for hi)her risk, onl! roCect + is acceta(le (row 20 cells)
&hater 10 13
ermission.
10.33 #ne aroach is to utiliAe a Pcost onl!J anal!sis and incrementall! comare alternatives
a)ainst each other without the ossi(ilit! of selectin) the do'nothin) alternative.
10.35 * lar)e F'D mi1 over time is not health! financiall! (ecause this indicates that the
erson owns too small of a ercenta)e of his or her own assets (equit! ownershi) and is
risk! for creditors and lenders. +hen the econom! is in a Pti)ht mone! situationJ
additional cash and de(t caital (loans, credit) will (e hard to o(tain and ver! e1ensive in
terms of the interest rate char)ed.
10.33 1008 equit! financin)
9*"" ; 7.38 is known. Fetermine /+ at the 9*"".
/+ ; '230,000 4 30,000(/%*,7.38,13)
; '230,000 4 30,000(7.3052)
; '230,000 4 25E,12<
; 2'7>5
-ince /+ H 0, 1008 equit! does not meet the 9*"" requirement.
<08'508 F'D financin)
Goan rincial ; 230,000(0.<0) ; 2130,000
Goan a!ment ; 130,000(*%/,E8,13)
; 130,000(0.1250<)
; 217,<0E er !ear
&ost of <08 de(t caital is E8 for the loan.
+*&& ; 0.5(7.38) 4 0.<(E8) ; 7.78
9*"" ; 7.78
*nnual .&0 ; roCect .&0 ' loan a!ment
; 230,000 = 17,<0E ; 211,3E1
*mount of equit! invested ; 230,000 ' 130,000 ; 2100,000
&alculate /+ at the 9*"" on the (asis of the committed equit! caital.
/+ ; '100,000 4 11,3E1(/%*,7.78,13)
; '100,000 4 11,3E1(7.13<>)
; 2 '>,07>
&hater 10 1<
ermission.
&onclusion: /+ H 0N a <08 de(t'508 equit! mi1 does not meet the 9*"" requirement.
10.3< Fetermine i, for each lan.
/lan 1: 708 equit! means 2570,000 funds are invested. Bse a /+'(ased relation.
0 ; '570,000 4 E0,000 (/%*,i,,>)
i
1
, ; >.308 ("*TD function)
/lan 2: 308 equit! means 2300,000 invested.
0 ; '300,000 4 E0000 (/%*,i,,>)
i
2
, ; 22.E38 ("*TD function)
/lan 3: 108 equit! means 2250,000 invested.
0 ; '250,000 4 E0,000(/%*,i,,>)
i
3
, ; 32.178 ("*TD function)
Fetermine the 9*"" values.
(a) 9*"" ; >.38 all lans
(() 9*""
1
; +*&&
1
; 0.7(>.38) 4 0.2(108) ; 7.08
9*""
2
; +*&&
2
; 0.3(>.38) 4 0.3(108) ; 7.>38
9*""
3
; +*&&
3
; 0.5(>.38) 4 0.<(108) ; E.08
(c ) 9*""
1
; (7.00 4 >.3)%2 ; >.>38
9*""
2
; (7.>3 4 >.3)%2 ; 7.1238
9*""
3
; (E.00 4 >.3)%2 ; 7.238
9ake the decisions usin) i, values for each lan.
/art (a) /art (() /art (c )
/lan i, 9*"" Q
4
9*"" Q
4
9*"" Q
4

1 >.38 >.38 . 7.00 8 . >.>38 .
2 22.E3 >.3 R 7.>3 R 7.123 R
3 32.17 >.3 R E.00 R 7.23 R
&hater 10 1>
ermission.
(
4
Ta(le le)end: SQT oses the question SIs the lan Custified in that i, K 9*""QT)
-ame decision for all 3 otionsN lans 2 and 3 are acceta(le.
10.3> (a) 0ind cost of equit! caital usin) &*/9.
"
e
; 58 4 1.03(38) ; E.238
9*"" ; E.238
0ind i, on 308 equit! investment.
0 ; '3,000,000 4 2,000,000(/%*,i,,<)
i, ; 32.<<8 ("*TD function)
The investment is economicall! acceta(le since i, K 9*"".
(() Fetermine +*&& and set 9*"" ; +*&&. 0or 308 de(t financin) at 78,
+*&& ; 9*"" ; 0.3(78) 4 0.3(E.238) ; 7.<238
The investment is acceta(le, since 32.<<8 K 7.<238.
10.37 *ll oints will increase, e1cet the 08 de(t value. The new +*&& curve is relativel!
hi)her at (oth the 08 de(t and 1008 de(t oints and the minimum +*&& oint will
move to the ri)ht.
&onclusion: The minimum +*&& will increase with a hi)her F'D mi1, since de(t and
equit! cost curves rise relative to those for lower F'D mi1es.
10.3E If the de(t'equit! ratio of the urchaser is too hi)h after the (u!out and lar)e interest
a!ments (de(t service) are required, the new coman!Js credit ratin) ma! (e de)raded.
In the event that additional (orrowed funds are needed, it ma! not (e ossi(le to o(tain
them. *vaila(le equit! funds ma! have to (e deleted to sta! afloat or )row as
cometition challen)es the com(ined comanies. -uch events ma! si)nificantl! weaken
the economic standin) of the coman!.
10.50 "atin)s (! attri(ute with 10 for U1.
*ttri(ute Imortance Go)ic
1 10 9ost imortant (10)
2 2.3 0.3(3) ; 2.3
&hater 10 17
ermission.
3 3 1%2(10) ; 3
5 3 2(2.3) ; 3
3 3 2(2.3) ; 3
'''''''
2>.3
+
i
; -core%2>.3
*ttri(ute +
i

1 0.3<5
2 0.0E0
3 0.172
5 0.172
3 0.172
1.000
10.51 "atin)s (! attri(ute with 10 for U1 and U3.
*ttri(ute Imortance VVVVVGo)icVVVVVVVV
1 100 9ost imortant (100)
2 10 108 of ro(lem
3 30 1%2(100)
5 3>.3 0.>3(30)
3 100 -ame as U1
'''''''
2E>.3
+
i
; -core%2E>.3
*ttri(ute +
iVVVV

1 0.33<
2 0.035
3 0.1<7
5 0.12<
3 0.33<
1.000
10.52 Gease cost (as an alternative to urchase)
Insurance cost
"esale value
-afet! features
/ick'u (acceleration)
-teerin) resonse
Wualit! of ride
&hater 10 1E
ermission.
*erod!namic desi)n
#tions acka)e
&ar)o volume
+arrant!
+hat friends own
10.53 &alculate +
i
; imortance score%sum and use Dq. L10.11M for "
C
:ice resident
*ttri(ute, Imortance :
iC
values
i score +
i
1 2 3
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV

1 20 0.10 3 > 10
2 70 0.50 50 25 12
3 100 0.30 30 20 23
-um ; 200 E3 31 5> ; "
C
values
-elect alternative 1 since "
1
is lar)est.
*ssistant vice resident
iC
values
i score +
i
1 2 3

1 100 0.30 23 33 30
2 70 0.50 50 25 12
3 20 0.10 10 5 3
-um ; 200 >3 <3 <> ; "
C
values
+ith "
1
; >3, select alternative 1
"esults are the same, even thou)h the :/ and asst.:/ rated oosite on factors 1 and 3.
6i)h score on attri(ute 1 (! asst.:/ is (alanced (! the :/Js score on attri(utes 2 and 3.
10.55 (a) $oth sets of ratin)s )ive the same conclusion, alternative 1, (ut the
consistenc! (etween raters should (e imroved somewhat. This result siml! shows
that the wei)hted evaluation method is relativel! insensitive to attri(ute wei)hts when
an alternative (1 here) is favored (! hi)h (or disfavored (! low) wei)hts.
(() :ice resident
Take +
C
from ro(lem 10.53. &alculate "
C
usin) Dq. L10.11M.
:
iC
VVVVVVV

&hater 10 20
ermission.
*ttri(ute +
i
1 2 3
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV

1 0.10 3 5 10
2 0.50 27 50 27
3 0.30 30 50 53
71 75 73
&onclusion: -elect alternative 2.
*ssistant vice resident
:
iC
for alternatives
*ttri(ute +
i
1 2 3
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV

1 0.30 13 20 30
2 0.50 27 50 27
3 0.10 10 7 E
33 <7 7>
&onclusion: -elect 3.
(c ) There is now a (i) difference for the asst. :/Js alternative 3 and the :/ has a
ver! small difference (etween alternatives. The :/ could ver! easil! select
alternative 3, since the "
C
values are so close.
"everse ratin) of :/ and assistant :/ makes onl! a small difference in choice, (ut it
shows real difference in ersective. "atin) differences on alternatives (! attri(ute
can make a si)nificant difference in the alternative selected, (ased on these results.
10.53 &alculate +
i
; imortance score%sum and use Dq. L10.11M for "
C
with the new factor
(environmental cleanliness) included.
Iohn as :/
&hater 10 21
ermission.
iC
values
i score +
i
1 2 3
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
1 100 0.33> 1>.E 23.0 33.>
2 70 0.27< 27.< 1>.2 7.<
3 20 0.0>1 >.1 2.7 3.<
5 70 0.27< 22.E 15.3 3.>
270 1.000 ><.3 3E.3 33.< ; "
C
+ith "
1
; ><.3, select alternative 1
.ote: This is the same selection as those of /ro(lem 10.53 for the former :/ or *sst. :/.
10.5< -um the ratin)s in Ta(le 10.3 over all si1 attri(utes.
:
iC
VVVVVV

1 2 3VV
Total 5>0 313 353
-elect alternative 2N the same choice is made.
10.5> (a) -elect * since /+ is lar)er.
&hater 10 22
ermission.
*lternati ve
ratin)s
*ttri(ut e Imort a
nce
-core
1 2 3
1. Dconomi c ret ur n K
9*""
100 30 >0 100
2. 6i)h throu)hut 70 100 <0 30
3. Gow scra rat e 20 100 50 30
5. Dnvironme nt al
cleanli nes s
70 70 30 20
(() Bse Dq. L10.11M and mana)er scores for attri(utes.
+
i
; Imortance score
-um
10.5> (cont)
*ttri(ute, Imortance "
C
VVVVV
i ($! m)r.) +
i
* $
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV

1 100 0.3> 0.3> 0.31
2 33 0.20 0.0> 0.20
3 20 0.11 0.11 0.10
5 20 0.11 0.03 0.11
1>3 0.>7 0.E2
-elect $.
(c) Bse Dq. L10.11M and trainer scores for attri(utes.
*ttri(ute Imortance "
CVVVVVVVVV
i ($! trainer) +
i
* $VV

1 70 0.50 0.50 0.3<
2 10 0.03 0.02 0.03
3 100 0.30 0.30 0.53
5 10 0.03 0.01 0.03
200 0.E3 0.E1
-elect *, (! a ver! small mar)in.
.ote: 2 methods indicate * and 1 indicates $.
&hater 10 23
ermission.
$tended $ercise Solution
1. Bse scores as recorded to determine wei)hts (! Dquation L10.10M. .ote that the scores are not
rank ordered, so a 1 indicates the most imortant attri(ute. Therefore the lowest weight is the
most important attribute. The sum or avera)e can (e used to find the wei)hts.
&ommittee mem(er
VVVVVVVVVVVVVVVVVVV
*ttri(ute 1 2 3 5 3 -um *v). +
C
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
*. &loseness to the citiAenr! 5 3 3 5 3 21 5.2 0.270
$. *nnual cost 3 5 1 2 5 15 2.7 0.17<
&. "esonse time 2 2 3 1 1 11 2.2 0.15>
F. &overa)e area 1 1 2 3 2 E 1.7 0.120
D. -afet! of officers 3 3 5 3 3 20 5.0 0.2<>
VVVVVVVVVVVVVVVVV
Totals >3 13.0 1.000
+
C
; sum%>3 ; avera)e%13
0or e1amle, +
1
; 21%>3 ; 0.270 or +
1
; 5.2%13 ; 0.270
+
2
; 15%>3 ; .17< or +
2
; 2.7%13 ; 0.17<
2. *ttri(utes $, &, and F are retained. (The Peole factorJ attri(utes have (een removed.)
"enum(er the remainin) attri(utes in the same order with scores of 1, 2, and 3.
&ommittee mem(er
VVVVVVVVVVVVVVVVVVV
*ttri(ute 1 2 3 5 3 -um *v). +
C
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
$. *nnual cost 3 3 1 2 3 12 2.5 0.5
&. "esonse time 2 2 3 1 1 E 1.7 0.3
F. &overa)e area 1 1 2 3 2 E 1.7 0.3
VVVVVVVVVVVVVVVVV
Totals 30 <.0 1.0
.ow, +
C
; sum%30 ; avera)e%<
3. $ecause the most imortant attri(ute lowest score of 1, select the two smallest R
j
values in
question 1. Therefore, the chief should choose the horse and foot otions for the ilot stud!.
&hater 10 25
ermission.
Case Stud% Solution
1. -et 9*"" ; +*&&
+*&& ; (8 equit!)(cost of equit!) 4 (8 de(t)(cost of de(t)
Dquit! Bse Dq. L10.<M
"
e
; 0.30 4 0.03 ; 7.338
13
Fe(t Interest is ta1 deducti(leN use Dqs. L10.5M and L10.3M.
Ta1 savin)s ; Interest(ta1 rate)
; LGoan a!ment = rincial ortionM(ta1 rate)
Goan a!ment ; >30,000(*%/,78,10) ; 2111,>>3 er !ear
Interest ; 111,>>3 = >3,000 ; 23<,>>3
Ta1 savin)s ; (3<,>>3)(.33) ; 212,7>0
&ost of de(t caital is i, from a /+ relation:
0 ; loan amount = (annual a!ment after ta1es)(/%*,i,,10)
; >30,000 = (111,>>3 = 12,7>0)(/%*,i,,10)
(/%*,i,,10) ; >30,000 % E7,E03 ; >.3732
i, ; 3.3>8 ("*TD function)
/lan *(30'30): 9*"" ; +*&&
*
; 0.3(3.3>) 4 0.3(7.3) ; <.738
/lan $(0'1008): 9*"" ; +*&&
$
;7.338
2. *: 30=30 F=D financin)
Bse relations in case stud! statement and the results from Wuestion U1.
TI ; 300,000 = 3<,>>3 ; 22<3,22>
Ta1es ; 2<3,22>(0.33) ; 2E2,130
&hater 10 23
ermission.
*fter'ta1 .&0 ; 300,000 = >3,000 = 3<,>>3 = E2,130
; 2E<,0E>
0ind lan i
*
, from *+ relation for 2>30,000 of equit! caital
0 ; (committed equit! caital)(*%/,i
*
,,n) 4 -(*%0, i
*
,,n) 4 after ta1 .&0
0 ; '>30,000(*%/,i
*
,,10) 4 200,000(*%0,i
*
,,10) 4 E<,0E>
i
*
, ; >.<>8 ("*TD function)
-ince >.<>8 K +*&&
*
; <.738, lan * is acceta(le.
$: 0=100 F=D financin)
Bse relations is the case stud! statement
*fter ta1 .&0 ; 300,000(1=0.33) ; 21E3,000
*ll 21.3 million is committed. 0ind i
$
,
0 ; '1,300,000(*%/,i
$
,,10) 4 200,000(*%0,i
$
,,10) 4 1E3,000
i
$
, ; <.<18 ("*TD function)
.ow <.<18H +*&&
$
; 7.338, lan $ is reCected.
"ecommendation: -elect lan * with 30'30 financin).
&hater 10 2<
ermission.
3. -readsheet shows the hard wa! (develos de(t'related cash flows for each !ear, then o(tains
+*&&) and the eas! wa! (uses costs of caital from U1) to lot +*&&.
&hater 10 2>
ermission.

CH 10 Solutions Final

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Chapter 10

Making Choices: the Method, MARR, and Multiple Attributes

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