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

nothing or look for more alternatives.

5-42
Compute the PW of Cost for a 25-year analysis period.
Note that in both cases the annual maintenance is $100,000 per year after 25 years.
Thus after 25 years all costs are identical.
Single Stage Construction
PW of Cost = $22,400,000 + $100,000 (P/A, 4%, 25)
= $22,400,000 + $100,000 (15.622)
= $23,962,000
Two Stage Construction
PW Cost = $14,200,000 + $75,000 (P/A, 4%, 25) + $12,600,000 (P/F, 4%, 25)
= $14,200,000 + $75,000 (15.622) + $12,600,000 (0.3751)
= $20,098,000
Choose two stage construction.
5-45
PW of Cost of 30 years of Westinghome
= $45,000 + $2,700 (A/P, 10%, 30) + $42,000 (P/F, 10%, 10) +
$42,000 (P/F, 10%, 20) $3,000 (P/F, 10%, 30)
= $45,000 + $2,700 (9.427) + $42,000 (0.3855) + $42,000 (0.1486)
$3,000 (0.0573)
= $92,713
PW of Cost of 30 years of Itis
= $54,000 + $2,850 (P/A, 10%, 30) + $49,500 (P/F, 10%, 15)
$4,500 (P/F, 10%, 30)
= $54,000 + $2,850 (9.427) + $49,500 (0.2394) $4,500 (0.0573)
= $92,459
The Itis bid has a slightly lower cost.
5-72
Use a 20 year analysis period:
Alt. A NPW = $1,625 (P/A, 6%, 20) $10,000 $10,000 (P/F, 6%, 10)
= $1,625 (11.470) $10,000 $10,000 (0.5584)
= $3,055
Alt. B NPW = $1,530 (P/A, 6%, 20) $15,000
= $1,530 (11.470) $15,000
= $2,549
Alt. C NPW = $1,890 (P/A, 6%, 20) $20,000
= $1,890 (11.470) $20,000
= $1,678
Choose Alternative A.
5-78
Using the PW Method the study period is a common multiple of the lives of the
alternatives. Thus we use 12 years and assume repeatability of the cash flows.

Alternative A
NPW = $6,000 (P/A, 10%, 12) + $1,000 (P/G, 10%, 12) $10,000
($10,000 $1,000) [(P/F, 10%, 2) + (P/F, 10%, 4) + (P/F, 10%, 6) +
(P/F, 10%, 8) + (P/F, 10%, 10)]
= $40,884 + $319 $10,000 $26,331
= $4,872
Alternative B
NPW = $10,000 (P/A, 10%, 12) $2,000 (P/F, 10%, 12) $15,000
($15,000 + $2,000)[(P/F, 10%, 3) + (P/F, 10%, 6) + (P/F, 10%, 9)]
= $68,140 $637 $15,000 $29,578
= $22,925
Alternative C
NPW = $5,000 (P/A, 10%, 12) + $3,000 (P/F, 10%, 12) $12,000
($12,000 $3,000) [(P/F, 10%, 4) + (P/F, 10%, 8)]
= $34,070 + $956 $12,000 $10,345
= $12,681
Choose Alternative B.
6-3
E = $60 $15 (A/G, 12%, 4)
= $60 $15 (1.359) = $39.62
6-26
First, compute A:
A = ($20,000 $4,000) (A/P, 4%, 10) + $4,000 (0.04)
= $16,000 (0.1233) + $160
= $2,132.80 per semiannual period
Now, compute the equivalent uniform annual cost:
EUAC = A (F/A, i%, n)
= $2,132.80 (F/A, 4%, 2)
= $2,132.80 (2.040)
= $4,350.91
6-32
Given:
P = $150,000
A = $2,500
F4 = $20,000
F5 = $45,000
F8 = $10,000
F10 = +$30,000
EUAC = $150,000(A/P, 5%, 10) + $2,500 + $20,000(P/F, 5%, 4)(A/P, 5%, 10) +
$45,000(P/F, 5%, 5)(A/P, 5%, 10) + $10,000(P/F, 5%, 8) (A/P, 5%, 10)
$30,000 (A/F, 5%, 10)
= $19,425 + $2,500 + $2,121 + $4,566 + $876 $2,385
= $27,113

6-37
(a) EUAC = $5,000 + $35,000 (A/P, 6%, 20)
= $5,000 + $35,000 (0.0872)
= $8,052
(b) Since the EUAC of the new pipeline is less than the $5,000 annual cost of the
existing pipeline, it should be constructed.
6-52
EUACgas = (P S) (A/P, i%, n) + SL + Annual Costs
= ($2,400 $300) (A/P, 10%, 5) + $300 (0.10) + $1,200 + $300
= $2,100 (0.2638) + $30 + $1,500
= $2,084
EUACelectr = ($6,000 $600) (A/P, 10%, 10) + $600 (0.10) + $750 + $50
= $5,400 (0.1627) + $60 + $800
= $1,739
Select the electric motor.
6-54
Machine A
EUAB EUAC = First Cost (A/P, 12%, 7)
Maintenance & Operating Costs + Annual Benefit + Salvage Value (A/F, 12%, 7)
= $15,000 (0.2191) $1,600 + $8,000 + $3,000 (0.0991)
= $3,411
Machine B
EUAB EUAC = First Cost (A/P, 12%, 10)
Maintenance & Operating Costs + Annual Benefit + Salvage Value (A/F, 12%, 10)
= $25,000 (0.1770) $400 + $13,000 + $6,000 (0.0570)
= $8,517
Choose Machine B to maximize (EUAB EUAC).
7-4
The rate of return exceeds 60% so the interest tables are not useful.
F = P (1 + i)n
$25,000 = $5,000 (1 + i)3
(1 + i) = ($25,000/$5,000)1/3 = 1.71
i* = 0.71
Rate of Return = 71%
7-7
(F/A, i, 35) = 106 / 5800 = 172.414 and is very close to 8% from tables. (Exact = 8.003%)

7-22
Year Cash Flow
0 $223
1 $223
2 $223
3 $223
4 $223
5 $223
6 +$1,000
7 +$1,000
8 +$1,000
9 +$1,000
10 +$1,000
The rate of return may be computed by any conventional means. On closer
inspection one observes that each $223 increases to $1,000 in five years.
$223 = $1,000 (P/F, i%, 5)
(P/F, i%, 5) = $223/$1,000 = 0.2230
From interest tables, Rate of Return = 35%
7-40
(a) For the cash flow of the bond have i = 6.8% / 2 = 3.4%, so (0.034) (1000) = $34 is
paid semiannually and $1,000 is paid at the end of the 10 th year (20th pay
period).
NPW = 0 = +1000 34 (P/A, i, 20) 1000 (P/F, i, 20) and interpolating
1000 = 34 (P/A, i, 20) + 1000( P/F, i, 20)
try i = 3%
1000 =? 34 (14.877) + 1000 (0.5537)
1000 =? 505.82 + 553.7 = 1095.52
try i = 3.5%
1000 =? 34 (14.212) + 1000 (0.5026)
1000 =? 483.2 + 502.6 = 985.8
interpolating:
i = 3% + 3.5% [(1000 985.8)/(1095.5-985.8)] = 3% + 3.5% (0.132) = 3.46%
i = 3% + (0.5%) [59.518/(59.518 +14.192)] = 3.404% (exact value = 3.400%),
r = (2) (3.404%) = 6.808%, and ia = (1+ 0.03404)2 1 = 0.06924 or 6.924%.
(b) The fee is $1,000 x 0.0075 = $7.50. So ABC Corp. receives $1,000 $7.50 =
$992.50.
NPW = 0 = 992.5 34 (P/A, i, 20) 1000 (P/F, i, 20) and interpolating
i = 3% + (0.5%) [67.018/ (67.018 + 6.692)] = 3.4546% (exact value = 3.453%),
r = (2) (3.4546%) = 6.909%, and ia = (1 + 0.034546)2 1 = 0.07029 or 7.029%.

7-44
Set PW of Cost = PW of Benefits
$1,845 = $50 (P/A, i%, 4) + $2,242 (P/F, i%, 4)
Try i = 7%
450 (3.387) + $2,242 (0.7629) = $1,879 > $1,845
Try i = 8%
450 (3.312) + $2,242 (0.7350) = $1,813 < $1,845
Rate of Return = 7% + (1%) [($1,879 $1,845)/($1,879 $1,813)] = 7.52% for 6 months
Nominal annual rate of return = 2 (7.52%) = 15.0%
Equivalent annual rate of return = (1 + 0.0752) 2 1 = 15.6%
Performing Linear Interpolation:
(P/A, 1%, 36)
32.871
21.447

i
%
%

i* = (1/2%) + (1/4%) [(32.87 31.68)/(32.87 31.45)] = 0.71%

Nominal Interest Rate = 12 (0.71%) = 8.5%
7-53
$240,000 = $65,000 (P/A, i%, 13) $5,000 (P/G, i%, 13)
Try i = 15%
$65,000 (5.583) $5,000 (23.135) = $247,220 > $240,000
Try i = 18%
$65,000 (4.910) $5,000 (18.877) = $224,465 < $240,000
Rate of Return = 15% + 3% [($247,220 $240,000)/($247,220 $224,765)]
= 15.96%
7-70
Year
0
1
2
3
4
ROR

X
$100
+$35
+$35
+$35
+$35
15.0%

Y
$50
+$16.5
+$16.5
+$16.5
+$16.5
12.1%

XY
$50
+$18.5
+$18.5
+$18.5
+$18.5
17.8%

The ROR on X Y is greater than 10%. Therefore, the increment is desirable.

Select X.

7-81
(a) Salvage = 0.15 x $380,000 = $57,000 and firms interest rate = 12%.
Year
Purchase
Lease
Purchase Lease
0
$380,000
$60,000
$320,000
1
0
60,000
60,000
2
0
60,000
60,000
3
0
60,000
60,000
4
0
60,000
60,000
5
0
60,000
60,000
6
57,000
0
57,000
NPW = 0 = 320,000 + 60,000 (P/A, IRR , 5) + 57,000 (P/A, IRR, 6) and interpolating
IRR = 3% + (0.5%) [ 2538 / ( 2538 + 2730 ) ] = 3.24% (also 3.24% from Excel). The IRR is
well below the firms interest rate on the borrowed amount ($320,000) from
leasing, so lease the bulldozer.
(b) The firm receives $65,000 more than it spends on operating and maintenance
costs.
Year
Purchase
Lease
Purchase Lease
0
$380,000
$60,000
$320,000
1
65,000
60,000
125,000
2
65,000
60,000
125,000
3
65,000
60,000
125,000
4
65,000
60,000 1
25,000
5
65,000
60,000
125,000
6
65,000
0
122,000
57,000
NPW = 0 = -320,000 + 125,000 (P/A, IRR, 5) + 122,000 (P/F, IRR, 6) and interpolating
IRR = 30% + (5%) [ 9778 / ( 9778 + 22346 ) ] = 31.5% (31.42% from Excel).
Clearly, the situation has changed. The interest rate on the borrowed amount is now well
above the firms interest rate, so, buy the bulldozer. The rate of return for the
bulldozer will clearly be largest for this cash flow and is given by
PW = 0 = 380,000 + 65,000 (P/A, ROR, 6) + 57,000 (P/F, ROR, 6) and interpolating
ROR = 4% + (0.5%) [ 5777 / ( 5777 + 960 ) ] = 4.43% (4.43% from Excel).
Note that the author has failed to give a practical scenario for how the $65,000
benefit can be realized if the bulldozer is purchased instead of leased!
7-85
Year
0
1
2
3

A
$9,200
+$1,850
+$1,850
+$1,850

B
$5,000
+$1,750
+$1,750
+$1,750

A- B
$4,200
+$100
+$100
+$100

4
5
6
7
8

+$1,850
+$1,850
+$1,850
+$1,850
+$1,850

+$1,750 $5,000
+$1,750
+$1,750
+$1,750
+$1,750

+$100 +$5,000
+$100
+$100
+$100
+$100
Sum

Rates of Return
A: $9,200 = $1,850 (P/A, i%, 5)
Rate of Return = 11.7%
B: $5,000 = $1,750 (P/A, i%, 4)
Rate of Return = 15%
A B: $4,200 = $100 (P/A, i%, 8) + $5,000 (P/F, i%, 4)
RORA-B = 8.3%
Select A.

8-2
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 Analysis
Year
XY
0
$50
1-4
+$15
$50 = $15 (P/A, i%, 4)
RORX-Y = 7.7%
(a) At MARR = 6%, the X Y increment is desirable. Select X.
(b) At MARR = 9%, the X Y increment is undesirable. Select Y.
(c) At MARR = 10%, reject Alt. X as RORX < MARR. Select Y.
(d) At MARR = 14%, both alternatives have ROR < MARR. Do nothing.
8-6
(a) For the Atlas mower, the cash flow table is
Year
Net Cash Flow (Atlas)
0
$6,700
1
$2,500
2
$2,500
3
$3,500
NPW = $6,700 +$2,500 (P/A, i*, 2) + $3,500 (P/F, i*, 3) = $0

To solve for i*, 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) = 12.1%
(b) For the Zippy mower, the cash flow table is
Year
Net Cash Flow (Zippy)
0
$16,900
1
5 $3,300
6
$6,800
NPW = $16,900 + $3,300 (P/A, i%, 5) + $6,800 (P/F, i%, 6)
At MARR = 8% NPW = $16,900 + $3,300 (3.993) + $6,800 (0.6302)
= +$562
Since NPW is positive at 8%, the ROR > MARR.
(c) The incremental cash flow is
Year

Net Cash Flow

(Zippy)

Net Cash Flow

(Atlas)

0
1
2
3
4
5
6

$16,900
$3,300
$3,300
$3,300
$3,300
$3,300
$6,800

$6,700
$2,500
$2,500
$2,500 $6,700
$2,500
$2,500
$3,500

Difference
(Zippy Atlas)
$10,200
+$800
+$800
+$6,500
+$800
+$800
+$3,300

NPW = $10,200 +$800(P/A, i*, 5) + $5,700(P/F, i*, 3) + $3,300(P/F, i*, 6)

Compute the ROR
Try i = 6%
NPW = $10,200 +$800(4.212) + $5,700(0.8396) + $3,300(0.7050)
= +$282
Try i = 7%
NPW = $10,200 +$800(4.100) + $5,700(0.8163) + $3,300(0.6663)
= $68
Using Linear Interpolation:
ROR= 6% + 1 % ($282 $0)/($282 + $68) = 6.8%
The ROR < MARR, so choose the lower cost alternative, the Atlas.

8-15
Incremental Rate of Return Solution
A
$1,000

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

CD BC
$100 $200

$500

10% < 0%

AC
$400

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
NPWA = $122 (5.747) + $750 (0.5403) $1,000= +$106.36
NPWB = $120 (5.747) + $500 (0.5403) $800 = +$159.79
NPWC = $97 (5.747) + $500 (0.5403) $600 = +$227.61
NPWD = $122 (5.747) $500 = +$201.13

8-27
MARR = 10%,n = 10 RANKING: 0 < Economy < Regular < Deluxe
(Economy 0)
NPW = $75,000 + ($28,000 - $8,000) (P/A, i*, 10) + $3,000 (P/F, i*, 10)
i
0
0.15

NPW
$128,000
$26,120
$75,000

i > MARR, so Economy is better than doing nothing.

*

 (Regular Economy)
NPW = ($125,000 $75,000) + [($43,000 $28,000)
($13,000 $8,000)](P/A, i*, 10) + ($6,900 $3,000) (P/F, i*, 10)
i
0
0.15

NPW
$53,900
$1,154
$50,000

i > MARR, so Regular is better than Economy.

*

(Deluxe Regular)
NPW = ($220,000 $125,000) + [($79,000 - $43,000)
($38,000 $13,000)](P/A, i*, 10) + ($16,000 $6,900) (P/F, i*, 10)
i
0
0.15

NPW
$24,100
$37,540
$95,000

i < MARR, so Deluxe is less desirable than Regular.

The correct choice is the Regular model.
*

8-39
Lease: Pay $267 per month for 24 months.
Purchase: A = $9,400 (A/P, 1%, 24) = $9,400 (0.0471) = $442.74
Salvage (resale) value = $4,700
(a) Purchase rather than lease
Monthly payment = $442.71 $267= $175.74
Salvage value = $4,700 $0 = $4,700
Rate of return
PW of Cost = PW of Benefit
$175.74 (P/A, i%, 24) = $4,700
(P/A, i%, 24) = $4,700/$175.74 = 26.74
i = 0.93% per month
Thus, the additional monthly payment of $175.74 would yield an 11.2% rate of
return. Leasing is therefore preferred at all interest rates above 11.2%.
(b) Items that might make leasing more desirable:
1. One does not have, or does not want to spend, the additional $175.74 per
month.
2. One can make more than 11.2% rate of return in other investment.
3. One does not have to be concerned about the resale value of the car at the
end of two years.