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MS 303 / FALL 2012-2013 ASSIGNMENT 4

Submission Begin Time: December 12, 2012, Wednesday, 00:00 Submission Due Time: December 24, 2012, Monday, 16:30 Late Submission Deadline: LATE SUBMISSION IS NOT POSSIBLE FOR THIS ASSIGNMENT. Everybody should try to solve individually. Each of the identical papers will get 0 points. I. II. In this assignment, you will solve the following 5 questions manually. Submit the solutions into the boxes in front of FENS 1021. Do not use interest tables or Excel functions use only formulas and calculator same as the exam. Write each operation clearly.

Questions 1) Alternative methods 1 and 2 are propesed for a security operation. The following is comparative information. Method 1 $10,000 5 years $1,000 $12,000 $250 $1,000 $500 $400 $14,150 Method 2 $40,000 10 years $1,000 $4,000 $300 $500 $200 $2,000 $7,000

Initial Investment Useful (ADR) Life Terminal Market Value Annual Expenses
Labor Power Rent Maintenance Property Taxes and Insurance

Total Annual Expenses

Determine which is the better alternative based on an after-tax annual cost analysis with an effective income tax of 40% and an after-tax MARR of 12%, assuming the 200% DB with switchover SL method for depreciation with a final BV=0. (assume repeatability).

2) A U.S company is considering a high technology project in a foreign country. The estimated economic results for the project (after taxes), in the foreign currency (Mark), is shown in the following table for seven year analysis period being used. The company requires an 18% rate of return in U.S dollars (after taxes) on any investments in this foreign country. End of Year Cash Flow (Mark after Taxes) 0 -3,600,000 1 450,000 2 1,500,000 3 1,500,000 4 1,500,000 5 1,500,000 6 1,500,000 7 1,500,000 a) Should the project be approvable, based on PW analysis in Mark, if the devaluation of the Mark, relative to the U.S. dollar, is estimated to average 12% per year and the present exchange rate is 20 Mark per dollar? b) What is the IRR of the project in Mark? c) Based on your answer to (b), what is the IRR in U.S. dollars? 3) Consider the following replacement problem. The defender was purchased 1 year ago for 8,000 TL. Its current market value is 6,000 TL. The annual expenses and expected market values are as shown in following table. Year 1 2 3 4 Annual expense 1.200 TL 1.600 TL 1.900 TL 3.400 TL Market value 5.000 TL 3.000 TL 1.000 TL 0 TL

The initial cost of the challenger is 10,000 TL. The relevant data for the challenger is given in following table. Year Annual Expenses Market value 1 500 TL 8.000 TL 2 750 TL 6.500 TL 3 1.000 TL 5.000 TL 4 2.500 TL 4.500 TL 5 5.000 TL 4.000 TL 6 6.000 TL 3.750 TL If the annual interest rate (MARR) is 10%, conduct a replacement analysis to find economic life for challenger and determine when to replace the defender. (assume repeatability for the challenger)

4) The government is considering five mutually exclusive proposals for the improvement of the postal service. The annual equivalent costs and estimated benefits of alternatives are as follows: Annual Equivalent ($) Alternative Costs Benefits A $1,200 $1,000 B $2,000 $2,000 C $2,600 $2,800 D $4,000 $4,500 E $5,000 $5,000 Which proposal, if any should be adopted if the postal department wishes to invest if, and only if, the B-C ratio is at least 1? 5) A bridge is to be constructed now as part of a new road. An analysis has shown that traffic density on the new road will justify a two lane bridge at the present time. Because of uncertainty regarding future use of the road, the time at which an extra two lanes will be required is currently being studied. The estimated probabilities of having to widen the bridge to four lanes at various times in the future are as follows: Widen Bridge In 3 years 4 years 5 years 6 years Probability 0.1 0.2 0.3 0.4

The present estimated cost of the two-lane bridge is $2,000,000. If constructed now, the four lane bridge will cost $3,500,000. The future cost of widening a two lane bridge will be an extra $2,000,000 plus $250,000 for every year that widening is delayed. If money can earn 12% per year, what would you recommend ?