EMGT 346 HOMEWORK #2 ANSWERS

5-3
P = $50 (P/A, 10%, 4) + $50 (P/G, 10%, 4)
= $50 (3.170) + $50 (4.378)
= $377.40
5-6
P = A1 (P/A, q, i, n)
= A1 [(1 – (1.10)4 (1.15)−4)/(0.15 – 0.10)]
= $200 (3.258)
= $651.60
5-15
P = the first cost = $980,000
F = the salvage value = $20,000
AB = the annual benefit = $200,000
Remember our convention of the costs being negative and the benefits being
positive. Also, remember the P occurs at time = 0.
NPW = –P + AB (P/A, 12%, 13) + F (P/F, 12%, 13)
= –$980,000 + $200,000 (6.424) + $20,000 (0.2292)
= $309,384
Therefore, purchase the machine, as NPW is positive.
5-26
imonth = (1 + (0.045/365))30 − 1 = 0.003705
P = A[((1 + i)n − 1)/(i(1 + i)n)]
= $399 [((1.003705)60 − 1)/(0.003705 (1.003705)60)]
= $21,430
5-32
PW of CostA = $1,300
PW of CostB = $100 (P/A, 6%, 5) + $100 (P/G, 6%, 5)
= $100 (4.212 + 7.934)
= $1,215
To minimize PW of Cost, choose B.
5-35
NPWA = –$50,000 – $2,000 (P/A, 9%, 10) + $9,000 (P/A, 9%, 10) +
$10,000 (P/F, 9%, 10)
= –$50,000 – $2,000 (6.418) + $9,000 (6.418) + $10,000 (0.4224)
= –$850
NPWB = –$80,000 – $1,000 (P/A, 9%, 10) + $12,000 (P/A, 9%, 10) +
$30,000 (P/F, 9%, 10)
= –$80,000 – $1,000 (6.418) + $12,000 (6.418) + $30,000 (0.4224)
= +$3,270
(a) Buy Model B because it has a positive NPW.
(b) Select null option. The NPW of Model A is negative therefore it is better to do

678 Choose Alternative A.000 Choose two stage construction.5584) = $3.000 = $1.470) − $10.3855) + $42. 10%.000 + $2. 30) + $42.549 Alt.055 Alt.000 (0.000 (15.500 (P/F. C NPW = $1. 20) − $3.530 (11.2394) − $4. 10%.000 (P/F.000 (0. Thus we use 12 years and assume repeatability of the cash flows. 20) − $15. 4%.470) − $15.000 − $10. 5-42 Compute the PW of Cost for a 25-year analysis period. 25) = $14. Single Stage Construction PW of Cost = $22.622) + $12.622) = $23.000 (0.713 PW of Cost of 30 years of Itis = $54. 5-45 PW of Cost of 30 years of Westinghome = $45.000 per year after 25 years.500 (0.0573) = $92. B NPW = $1. 5-72 Use a 20 year analysis period: Alt. 6%.500 (P/F.890 (P/A.098.1486) − $3. 5-78 Using the PW Method the study period is a common multiple of the lives of the alternatives. 30) + $49.000 (P/F. 10%.459 The Itis bid has a slightly lower cost.000 + $100. Thus after 25 years all costs are identical.530 (P/A.200.3751) = $20.0573) = $92.000 + $75.000 + $2. 6%. Note that in both cases the annual maintenance is $100. 10%. 4%.625 (P/A.000 (P/A.000 (P/F.000 (P/A.000 (15.850 (P/A.000 − $10.600.427) + $42. 10%. 4%. 30) = $54. 6%.000 (0.625 (11.600.000 = $1.000 = $1.000 Two Stage Construction PW Cost = $14.400.470) − $20.200.890 (11. 30) = $45. 25) + $12. 10) + $42. 10) = $1. A NPW = $1.000 + $100.000 + $75.nothing or look for more alternatives.000 (P/F.000 + $2.400.850 (9. 6%.000 (0.427) + $49.962. 20) − $20.700 (9.000 + $2.700 (A/P. 25) = $22.000 = $2. . 10%. 20) − $10. 10%.000 (P/F.500 (0. 15) − $4.

681 Choose Alternative B.113 .000 F5 = −$45.359) = $39.385 = $27.80 (2.Alternative A NPW = $6. 12%. 5%.132. 12) − $15.331 = $4.500 + $2.000 − $10. 4) + (P/F. 5%. 12) − $12. 10) – $30.500 F4 = −$20. 10%.000 − $29.000 + $2. 12) − $2. 6-3 E = $60 − $15 (A/G.872 Alternative B NPW = $10.62 6-26 First.000 − ($10. 4)(A/P.000 (P/A. 3) + (P/F.000) (A/P.140 − $637 − $15. 10%. 10%.000 − ($15. 5%.000 − $26. 5%.578 = $22. 10%.000 (P/A. 4) + (P/F. 10) = $19. 12) + $1. 5%.000 − $4. 12) − $10.000 − $1. n) = $2.345 = $12. 2) = $2. 5%.000 F10 = +$30. 4%.500 + $20. 2) + (P/F.040) = $4. 10)] = $40. 10%. compute A: A = ($20.04) = $16.350. 12) + $3.91 6-32 Given: P = −$150.000 (P/G. 4) = $60 − $15 (1. 10%.000 (P/F.000)[(P/F.000 EUAC = $150. 10%. 6) + (P/F.566 + $876 − $2.80 (F/A.121 + $4.000(P/F.132.000 (P/F. 10%.070 + $956 − $12. 6) + (P/F. 10) + $4.000(A/P.80 per semiannual period Now. 8) + (P/F.000) [(P/F. 5%. 10%. 10) + $10.000 F8 = −$10. 4%. 10%.425 + $2. compute the equivalent uniform annual cost: EUAC = A (F/A.000 − $3.132. 10%. 5%. 8) (A/P. 9)] = $68.000(P/F. i%.1233) + $160 = $2.000) [(P/F. 10) + $2.000 (P/A. 10%.000 − ($12. 10%.884 + $319 − $10.000 (0. 8)] = $34. 10%.925 Alternative C NPW = $5. 5)(A/P. 10) + $45. 10%.000(P/F.000 A = −$2. 10%.000 (A/F.000 (0.

10) + $1. 7-4 The rate of return exceeds 60% so the interest tables are not useful.000 (0. F = P (1 + i)n $25.000 + $3.0570) = $8.414 and is very close to 8% from tables.71 Rate of Return = 71% 7-7 (F/A. 10) + $600 (0.000 (0.000 (A/P. it should be constructed.000/$5.400 − $300) (A/P. n) + SL + Annual Costs = ($2. 6-52 EUACgas = (P − S) (A/P. i. i%.000 annual cost of the existing pipeline.000 = $5.517 Choose Machine B to maximize (EUAB – EUAC).739 Select the electric motor.10) + $750 + $50 = $5. 12%.400 (0.084 EUACelectr = ($6.1627) + $60 + $800 = $1.0872) = $8.000 (1 + i)3 (1 + i) = ($25. 7) = −$15. 12%.411 Machine B EUAB – EUAC = − First Cost (A/P. 7) − Maintenance & Operating Costs + Annual Benefit + Salvage Value (A/F. 10%.000)1/3 = 1.003%) . (Exact = 8. 6-54 Machine A EUAB – EUAC = − First Cost (A/P.6-37 (a) EUAC = $5. 6%.600 + $8.000 − $600) (A/P.000 + $35.000 + $6.2191) − $1. 20) = $5.71 i* = 0. 12%.1770) − $400 + $13.200 + $300 = $2.000 (0.2638) + $30 + $1. 35) = 106 / 5800 = 172.052 (b) Since the EUAC of the new pipeline is less than the $5.100 (0.000 + $35. 10) − Maintenance & Operating Costs + Annual Benefit + Salvage Value (A/F.000 (0. 12%. 10%. 10) = −$25.0991) = $3. 5) + $300 (0.000 (0.500 = $2.

4546%) = 6. 20) and interpolating i = 3% + (0.192)] = 3. $223 = $1.034546)2 – 1 = 0.000 8 +$1. 20) – 1000 (P/F.0075 = $7. 5) (P/F.06924 or 6.4%. i. 20) – 1000 (P/F. i.07029 or 7. i. 20) try i = 3% 1000 =? 34 (14.000 10 +$1. NPW = 0 = +1000 – 34 (P/A.808%. 20) + 1000( P/F. r = (2) (3.8% / 2 = 3.518 +14.5026) 1000 =? 483. and ia = (1+ 0.000 x 0. r = (2) (3.000 is paid at the end of the 10 th year (20th pay period).82 + 553. i.212) + 1000 (0.018/ (67. 20) and interpolating 1000 = 34 (P/A.404% (exact value = 3.018 + 6. On closer inspection one observes that each $223 increases to $1. i%.5% 1000 =? 34 (14.000 – $7. i.692)] = 3.8)] = 3% + 3.7 = 1095.000 (P/F.5%) [67.029%.4546% (exact value = 3.8)/(1095.924%.000 The rate of return may be computed by any conventional means.5%) [59. i. .5-985.000 9 +$1.400%).50.5% [(1000 – 985.03404)2 – 1 = 0. and ia = (1 + 0. (b) The fee is $1.8 interpolating: i = 3% + 3.000 in five years.518/(59.50 = $992. So ABC Corp.52 try i = 3.46% i = 3% + (0. 5) = $223/$1.877) + 1000 (0.5 – 34 (P/A.2230 From interest tables.5% (0. NPW = 0 = 992. so (0.5537) 1000 =? 505. Rate of Return = 35% 7-40 (a) For the cash flow of the bond have i = 6.000 = 0.132) = 3.000 7 +$1.6 = 985.50.2 + 502. i%. receives $1.404%) = 6.453%).034) (1000) = $34 is paid semiannually and $1.7-22 Year Cash Flow 0 −$223 1 −$223 2 −$223 3 −$223 4 −$223 5 −$223 6 +$1.909%.

312) + $2.220 − $240. i%. i%.5 12. i%.6% Performing Linear Interpolation: (P/A.813 < $1. the increment is desirable.220 > $240.7629) = $1.583) −$5.000 Rate of Return = 15% + 3% [($247.000 Try i = 18% $65.52%) = 15.96% 7-70 Year 0 1 2 3 4 ROR X −$100 +$35 +$35 +$35 +$35 15.5 +$16.447 i ½% ¾% i* = (1/2%) + (1/4%) [(32. Select X.220 − $224.135) = $247. 13) Try i = 15% $65.877) = $224.879 > $1.5 +$16.465 < $240.845 Try i = 8% 450 (3.45)] = 0.845)/($1.000 (23.000 (4.5 +$16.845 Rate of Return = 7% + (1%) [($1.52% for 6 months Nominal annual rate of return = 2 (7.765)] = 15.387) + $2.000 (P/A.879 − $1.0% Equivalent annual rate of return = (1 + 0.242 (0.8% The ΔROR on X – Y is greater than 10%. 1%.871 21.0% Y −$50 +$16.000 (P/G.813)] = 7.68)/(32. 13) − $5.5 +$18.000 (5.0752) 2 − 1 = 15.910) −$5.5 +$18.5 17.5 +$18.242 (P/F. .5% 7-53 $240.000)/($247.71% Nominal Interest Rate = 12 (0.242 (0.7-44 Set PW of Cost = PW of Benefits $1. 4) + $2.879 − $1. Therefore.845 = $50 (P/A. 36) 32.87 − 31.87 − 31.000 (18.1% X–Y −$50 +$18. 4) Try i = 7% 450 (3. i%.71%) = 8.000 = $65.7350) = $1.

ROR.000 125.000 –$320. buy the bulldozer.000 125.000 (P/A. the situation has changed.000 = $57.5%) [ 2538 / ( 2538 + 2730 ) ] = 3.750 +$1.000 1 65.000 –60. Note that the author has failed to give a practical scenario for how the $65.000 0 122.000 benefit can be realized if the bulldozer is purchased instead of leased! 7-85 Year 0 1 2 3 A −$9.750 +$1.000 3 0 –60.000) from leasing.000 –$60.000 +$1.000 –60. The IRR is well below the firm’s interest rate on the borrowed amount ($320.000 1 25. Clearly. IRR.000 5 0 –60.000 –$320.000 + 65.000 57.000 60.850 +$1.24% from Excel). The interest rate on the borrowed amount is now well above the firm’s interest rate. Year Purchase Lease Purchase –Lease 0 –$380. (b) The firm receives $65.000 1 0 –60. 6) + 57.000 60. IRR. 6) and interpolating ROR = 4% + (0.850 +$1. so. IRR.000 60.000 (P/F.000 + 60.000 60.000 (P/F.5%) [ 5777 / ( 5777 + 960 ) ] = 4.000 0 57.200 +$100 +$100 +$100 . 6) and interpolating IRR = 3% + (0.000 NPW = 0 = –320. Year Purchase Lease Purchase – Lease 0 –$380.000 4 65.000 –60.000 2 65.000 more than it spends on operating and maintenance costs.000 NPW = 0 = -320.000 3 65. 5) + 122.000 –$60.000 (P/A.000 60.000 4 0 –60.43% (4.000 6 65.200 +$1.000 –60. so lease the bulldozer.850 B −$5. ROR. 5) + 57.42% from Excel).000 125.15 x $380.24% (also 3.43% from Excel).000 125.750 A.000 (P/A. IRR .000 and firm’s interest rate = 12%.7-81 (a) Salvage = 0.000 6 57.5% (31.000 2 0 –60.B −$4. The rate of return for the bulldozer will clearly be largest for this cash flow and is given by PW = 0 = −380. 6) and interpolating IRR = 30% + (5%) [ 9778 / ( 9778 + 22346 ) ] = 31.000 + 125.000 5 65.000 –60.000 (P/A.

9% Alternative Y: $50 = $16. i%. i*. 8) + $5.500 NPW = −$6.1% Incremental Analysis Year X−Y 0 −$50 1-4 +$15 $50 = $15 (P/A.850 (P/A. 8-2 Compute Rates of Return Alternative X: $100 = $31. Select Y. the X − Y increment is desirable.03 RORY = 12.850 +$1.5 (P/A.000 +$1.3% Select A. i*. i%. i%.7% (a) At MARR = 6%. Select Y.200 = $1.750 +$100 +$5. i%. 4) (P/A.000 (P/F.850 +$1.5 = 3. 4) = $100/$31. reject Alt.700 +$2.850 +$1.700 1 $2. (b) At MARR = 9%. the cash flow table is Year Net Cash Flow (Atlas) 0 −$6.17 RORX = 9.500 (P/F. i%.5 = 3. i%. the X − Y increment is undesirable.200 = $100 (P/A.5 (P/A. (d) At MARR = 14%. 5) Rate of Return = 11. 4) ΔRORA-B = 8. i%.750 +$1.7% B: $5.750 +$1.500 3 $3. 4) = $50/$16.850 +$1. (c) At MARR = 10%. i%.750 (P/A. Select X.750 +$1. 8-6 (a) For the Atlas mower.500 2 $2. Do nothing. 4) Rate of Return = 15% A − B: $4. X as RORX < MARR. 3) = $0 . 4) Δ RORX-Y = 7.500 (P/A.850 +$1. i%. both alternatives have ROR < MARR.4 5 6 7 8 +$1.000 +$100 +$100 +$100 +$100 Sum Rates of Return A: $9. 4) (P/A.000 = $1.750 −$5. 2) + $3.

6302) = +$562 Since NPW is positive at 8%.300 (3.900 $3.500 $2.100) + $5.800 (0.700(P/F.8163) + $3.900 + $3. 5) + $5.700(0. i*.6663) = −$68 Using Linear Interpolation: ΔROR= 6% + 1 % ($282 − $0)/($282 + $68) = 6.500 +$800 +$800 +$3.500 − $6. so choose the lower cost alternative.300 (P/A.500 $3. i*. the cash flow table is Year Net Cash Flow (Zippy) 0 −$16.300 6 $6.900 1 −5 $3.300 $3.200 +$800(4.800 NPW = −$16.300(0.200 +$800 +$800 +$6.8% The ΔROR < MARR.700(0. 5) + $6. i%. the Atlas. i%.500 $2.500 $2.300(P/F.900 + $3.993) + $6.1% (b) For the Zippy mower.300(0.700 $2.300 $3. construct a table as follows: i 12% i* 15% NPW +$16 $0 −$334 Use linear interpolation to determine ROR: ROR = 12% + 3% ($16 − $0)/($16 + $334) = 12. .800 (P/F.200 +$800(P/A.500 Difference (Zippy –Atlas) −$10.300 $3. 6) At MARR = 8% NPW = −$16.To solve for i*. i*.300 $3.212) + $5. (c) The incremental cash flow is Year Net Cash Flow (Zippy) Net Cash Flow (Atlas) 0 1 2 3 4 5 6 −$16. 3) + $3. the ROR > MARR.300 $6.700 $2.200 +$800(4.800 −$6.8396) + $3.300 NPW = −$10.7050) = +$282 Try i = 7% NPW = −$10. 6) Compute the ΔROR Try i = 6% NPW = −$10.

000= +$106. 8) + Salvage Value (P/F.8-15 Incremental Rate of Return Solution A $1. Reject A and retain C. The B − C increment is undesirable.747) + $750 (0.747) − $500 = +$201. 8%.000 B $800 C $600 D $500 Uniform Annual Benefit $122 $20 $97 $122 −$25 $23 $25 Salvage Value $750 $500 $500 $0 $0 $250 Cost Compute Incremental Rate of Return C−D B−C $100 $200 $500 10% < 0% A−C $400 1.120 −$75.000) (P/A. Reject D and retain C. so Economy is better than doing nothing.5403) − $800 = +$159.747) + $500 (0.000 $26. * .13 8-27 MARR = 10%.000 . 8) – First Cost NPWA = $122 (5. Net Present Worth Solution Net Present Worth = Uniform Annual Benefit (P/A.000 i > MARR. i*.000 (P/F.79 NPWC = $97 (5. Conclusion: Select alternative C.61 NPWD = $122 (5.36 NPWB = $120 (5. Reject B and retain C.000 + ($28.5403) − $1. 10) i 0 0.8% The C − D increment is desirable. 10) + $3.5403) − $600 = +$227. The A − C increment is undesirable.747) + $500 (0.$8. i*. 8%.n = 10 RANKING: 0 < Economy < Regular < Deluxe Δ (Economy − 0) NPW = −$75.15 ∞ * NPW $128.

i%. One can make more than 11.700 − $0 = $4.0471) = $442.700/$175. the additional monthly payment of $175.2% rate of return.2%.000 i > MARR.2% rate of return in other investment. 3. 24) = $4. 1%.000 − $13. (b) Items that might make leasing more desirable: 1.93% per month Thus.74 (P/A.74 = 26.000 .000) + [($43. One does not have. i*.74 per month. i%.74 Salvage (resale) value = $4. the additional $175.74 ΔSalvage value = $4. Purchase: A = $9.540 −$95.Δ (Regular – Economy) NPW = − ($125.700 Δ Rate of return PW of Cost = PW of Benefit $175.000) + [($79.000 − $125.000 − $6.15 ∞ * NPW $53. 10) i 0 0. or does not want to spend.71 − $267= $175.154 −$50. .000 − $75.000) − ($13.100 −$37.000 − $8. * Δ (Deluxe – Regular) NPW = − ($220.400 (A/P.000) (P/F. 24) = $9.900 $1. 2. Leasing is therefore preferred at all interest rates above 11.000)](P/A.000) − ($38.900 − $3. i*.$43.000 − $28.000 i < MARR.900) (P/F. so Regular is better than Economy.74 would yield an 11.400 (0. so Deluxe is less desirable than Regular. * 8-39 Lease: Pay $267 per month for 24 months. 10) + ($16.74 i = 0.15 ∞ * NPW $24.700 (a) Purchase rather than lease ΔMonthly payment = $442. i*. 24) = $4.700 (P/A. i*. 10) + ($6.000)](P/A. 10) i 0 0. The correct choice is the Regular model. One does not have to be concerned about the resale value of the car at the end of two years.