Contemporary Engineering Economics, Fifth Edition, by Chan S. Park.

ISBN: 0-13-611848-8
2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Chapter 10 Developing Project Cash Flows

Generating Net Cash Flows
10.1 The income and cash flow statements are as below:
0

Income Statement
Revenues
Expenses
O&M
Depreciation
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow
PW(15 %)

$35,000

$35,000

$35,000

$35,000

$35,000

$35,000

$12,000
$13,000

$12,000
$20,800

$12,000
$12,480

$12,000
$7,488

$12,000
$7,488

$12,000
$3,744

$10,000
$4,000

$2,200
$880

$10,520
$4,208

$15,512
$6,205

$15,512
$6,205

$19,256
$7,702

$6,000

$1,320

$6,312

$9,307

$9,307

$11,554

$6,000
$13,000

$1,320
$20,800

$6,312
$12,480

$9,307
$7,488

$9,307
$7,488

$11,554
$3,744

($65,000)
$0
$0
($65,000)
$5,170.15

$19,000

$22,120

$18,792

$16,795

$16,795

$15,298

Since NPW(15%) > 0, This machine should be bought.

10.2 Investment in industrial robot:

0
Income Statement
Revenues
Expenses
O&M
Depreciation
Taxable Income
Income Taxes (35%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow
PW(15 %)

$150,000

$150,000

$150,000

$150,000

$150,000

$150,000

$150,000

$42,000

$67,200

$40,320

$24,192

$24,192

$12,096

$0

$108,000
$37,800

$82,800
$28,980

$109,680
$38,388

$125,808
$44,033

$125,808
$44,033

$137,904
$48,266

$150,000
$52,500

$70,200

$53,820

$71,292

$81,775

$81,775

$89,638

$97,500

$70,200
$42,000

$53,820
$67,200

$71,292
$40,320

$81,775
$24,192

$81,775
$24,192

$89,638
$12,096

$97,500
$0

($210,000)
$60,000
($21,000)
($210,000) $112,200
$261,029.59

$121,020

$111,612

$105,967

$105,967

$101,734

$136,500

Page | 1

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.3 The income and cash flow statements are as below:

0
Income Statement
Revenues
Expenses:
O&M
Depreciation

$3,833,542

$3,833,542

$3,833,542

$3,833,542

$3,833,542

$435,000
$294,872

$485,000
$307,692

$535,000
$307,692

$585,000
$307,692

$635,000
$294,872

Taxable Income
Income Taxes (35%)

$3,103,670
$1,086,285

$3,040,850
$1,064,297

$2,990,850
$1,046,797

$2,940,850
$1,029,297

$2,903,670
$1,016,285

Net Income

$2,017,386

$1,976,552

$1,944,052

$1,911,552

$1,887,386

$2,017,386
$294,872

$1,976,552
$307,692

$1,944,052
$307,692

$1,911,552
$307,692

$1,887,386
$294,872

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment (Building)
Investment(Land)
Salvage (Building)
Salvage (Land)
Gains Tax
Net Cash Flow
PW(15 %)

Annual rate

($12,000,000)
($3,500,000)
$13,500,000
$3,500,000
($1,054,487)
($15,500,000) $2,312,257
$0.00

$76,670.84

$2,284,244

$2,251,744

$2,219,244

$18,127,770

per apartment

10.4 A local delivery company

0
Income Statement
Revenues
Expenses
O&M
Depreciation

$10,000

$10,000

$3,000
$3,000

$3,000
$2,400

Taxable Income
Income Taxes (40%)

$4,000
$1,600

$4,600
$1,840

Net Income

$2,400

$2,760

$2,400
$3,000

$2,760
$2,400

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow
PW(15 %)

($15,000)
$10,000
($160)
($15,000)
$1,037.81

$5,400

$15,000

Page | 2

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.5 Investment in an answering device:

Depreciation: It is assumed that the building will be placed in service in

January during the first project year. Then, it will be depreciated based on 391 11.5
year MACRS. Using

= 0.02457 due to mid-month convention at end

39 12
of year 5, the book value for the building would be $436,965.

Gains and losses:

Property
(asset)
Land
Building
Equipment

Cost Salvage
Book
Gains
Gains
base
value
value
(losses)
taxes
$100,000 $115,000 $100,000 $115,000
$6,000
$500,000 $575,000 $436,965 $138,035 $55,214
$500,000 $50,000 $133,873 ($83,873) ($33,549)

Project cash flows

0

Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation :
Building
Equipment
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Land
Building
Machines
Gains Tax
Land
Building
Equipment
Net Cash Flow

$2,500,000

$2,500,000

$2,500,000

$2,500,000

$2,500,000

1,280,000

1,280,000

1,280,000

1,280,000

1,280,000

12,287
71,450
1,136,264
454,505

12,821
122,450
1,084,730
433,892

12,821
87,450
1,119,730
447,892

12,821
62,450
1,144,730
457,892

12,287
22,325
1,185,389
474,155

$681,758

$650,838

$671,838

$686,838

$711,233

$681,758
$83,737

$650,838
$135,271

$671,838
$100,271

$686,838
$75,271

$711,233
$34,612

($100,000)
($500,000)
($500,000)

115000
575000
50000
($6,000)
($55,214)
$33,549

($1,100,000)

$765,495

$786,108

$772,108

$762,108

$1,458,180

Page | 3

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.6 Investment in a new trench excavator:

0
Income Statement
Revenues
Expenses
Required annual digging(ft)
Number of hours to operate
Operating cost (@50/hr)
Depreciation

6400
400
$20,000
$50,000

6400
6400
6400
400
400
457
$20,000 $20,000 $22,857
$80,000 $48,000 $28,800

6400
533
$26,667
$14,400

Taxable Income
Income Taxes (35%)

($70,000) ($100,000) ($68,000) ($51,657) ($41,067)

($24,500) ($35,000) ($23,800) ($18,080) ($14,373)

Net Income

($45,500) ($65,000) ($44,200) ($33,577) ($26,693)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow

($45,500) ($65,000) ($44,200) ($33,577) ($26,693)

$50,000 $80,000 $48,000 $28,800 $14,400
($250,000)
$60,000
($10,920)
($250,000) $4,500

$15,000

$3,800 ($4,777) $36,787

Page | 4

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.7

Income Statement
Revenues
Expenses
Software development
O&M
Depreciation

$20,000
$15,000 $15,000 $15,000 $15,000 $15,000
$20,800 $33,280 $19,968 $11,981 $5,990

Taxable Income
Income Taxes (35%)

$16,200 $23,720 $37,032 $45,019 $51,010

$5,670 $8,302 $12,961 $15,757 $17,853

Net Income

$10,530 $15,418 $24,071 $29,262 $33,156

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow
PW(13%)

$72,000 $72,000 $72,000 $72,000 $72,000

$10,530 $15,418 $24,071 $29,262 $33,156

$20,800 $33,280 $19,968 $11,981 $5,990
($104,000)
0
$4,193
($104,000) $31,330 $48,698 $44,039 $41,243 $43,340
$41,202.89

Page | 5

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.8
0

Income Statement
Revenues
Expenses
O&M
Depreciation

$20,720

$20,720

$20,720

$20,720

$20,720

$15,000
$3,700

$15,000
$5,920

$15,000
$3,552

$15,000
$2,131

$15,000
$1,066

Taxable Income
Income Taxes (40%)

$2,020
$808

($200)
($80)

$2,168
$867

$3,589
$1,436

$4,654
$1,862

Net Income

$1,212

($120)

$1,301

$2,153

$2,793

$1,212
$3,700

($120)
$5,920

$1,301
$3,552

$2,153
$2,131

$2,793
$1,066

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow
PW(12%)
Decision:
IRR

($18,500)
$1,850
$112
($18,500)
($10.74)
Reject
11.98%

$4,912

$5,800

$4,853

$4,284

$5,821

10.9
0
Income Statement
Revenues
Expenses
Labor & Mat'l Costs
Depreciation

$130,000 $130,000 $130,000 $130,000 $130,000 $130,000

$30,000 $48,000 $28,800 $17,280 $17,280
$8,640
$160,000 $142,000 $161,200 $172,720 $172,720 $181,360
$64,000 $56,800 $64,480 $69,088 $69,088 $72,544

Net Income

Net Cash Flow

PW(12%)

$320,000 $320,000 $320,000 $320,000 $320,000 $320,000

Taxable Income
Income Taxes (40%)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax

$96,000

$85,200

$96,720 $103,632 $103,632 $108,816

$96,000
$30,000

$85,200
$48,000

$96,720 $103,632 $103,632 $108,816

$28,800 $17,280 $17,280
$8,640

($150,000)
$0
$0
($150,000) $126,000 $133,200 $125,520 $120,912 $120,912 $117,456
$362,986.22

Since PW(12%) > 0, this project is acceptable.

Page | 6

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.10

0
Income Statement
Revenues
Expenses
O&M
Depreciation

$50,000
$46,000

IRR

$50,000
$73,600

$50,000
$44,160

$50,000
$26,496

$50,000
$13,248

$154,000 $126,400 $155,840 $173,504 $186,752

$61,600 $50,560 $62,336 $69,402 $74,701

Net Income

Net Cash Flow

PW(15%)

$250,000 $250,000 $250,000 $250,000 $250,000

Taxable Income
Income Taxes (40%)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax

$92,400

$75,840

$93,504 $104,102 $112,051

$92,400
$46,000

$75,840
$73,600

$93,504 $104,102 $112,051

$44,160 $26,496 $13,248

($230,000)
$5,000
$8,598
($230,000) $138,400 $149,440 $137,664 $130,598 $138,898
$237,588.96

53.95%

Return on invest = 53.95%.

Page | 7

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.11 Investment in energy management system: N = 7 years

0
Income Statement
Revenues
Expenses
O&M
Depreciation

$14,000

$14,000

$14,000

$14,000

$14,000

$14,000

$14,000

$0
$18,332

$0
$24,448

$0
$8,146

$0
$4,076

$0
$0

$0
$0

$0
$0

Taxable Income
Income Taxes (35%)

($4,332) ($10,448)
($1,516) ($3,657)

$5,855
$2,049

$9,925
$3,474

$14,000
$4,900

$14,000
$4,900

$14,000
$4,900

Net Income

($2,815)

($6,791)

$3,805

$6,451

$9,100

$9,100

$9,100

($2,815)
$18,332

($6,791)
$24,448

$3,805
$8,146

$6,451
$4,076

$9,100
$0

$9,100
$0

$9,100
$0

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow
PW(12%)

($55,000)
$0
$0
($55,000)
$2,015.82

$15,516

$17,657

$11,951

$10,526

$9,100

$0
$0
$9,100

$0
$0
$9,100

Page | 8

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.12 Investment decision based on after-tax IRR:

0
Income Statement
Revenues
Expenses
O&M
Depreciation

$150,000 $150,000 $150,000 $150,000 $150,000

$30,000 $30,000
$115,958 $154,646

$30,000
$51,525

$30,000
$25,780

$30,000
$0

Taxable Income
Income Taxes (40%)

$4,042
$1,617

($34,646)
($13,858)

$68,475
$27,390

$94,220 $120,000
$37,688 $48,000

Net Income

$2,425

($20,788)

$41,085

$56,532

$72,000

$2,425 ($20,788)
$115,958 $154,646

$41,085
$51,525

$56,532
$25,780

$72,000
$0

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Net Cash Flow

($347,910)
$0
$0
($347,910) $118,383 $133,858

$92,610

$82,312

$72,000

Page | 9

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Investment in Working Capital

10.13
0

10

Income Statement
Revenues
Expenses
Production cost
Depreciation:
Building
Equipment

$775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000

$775,000

$465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000

$465,000

$38,462
$0

$36,860
$0

Taxable Income
Income Taxes (40%)

$198,833 $144,191 $180,591 $206,591 $225,103 $225,155 $225,103 $248,347 $271,539

$79,533 $57,676 $72,236 $82,636 $90,041 $90,062 $90,041 $99,339 $108,615

$273,141
$109,256

Net Income

$119,300

$163,884

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Land
Building
Machines
Gains Tax
Land
Building
Machines
Working Capital
Net Cash Flow
PW(15%)

$36,860 $38,462
$74,308 $127,348

$38,462
$90,948

$38,462
$64,948

$38,462
$46,436

$38,462
$46,384

$38,462
$46,436

$38,462
$23,192

$86,514 $108,354 $123,954 $135,062 $135,093 $135,062 $149,008 $162,923

$119,300 $86,514 $108,354 $123,954 $135,062 $135,093 $135,062 $149,008 $162,923

$111,168 $165,810 $129,410 $103,410 $84,898 $84,846 $84,898 $61,654 $38,462
($350,000)
($1,500,000)
($520,000)

($250,000)
($2,620,000) $230,467 $252,324 $237,764 $227,364 $219,959 $219,938 $219,959 $210,661 $201,385
($1,073,849.06)

$163,884
$36,860
$500,000
$800,000
$50,000
($52,500)
$111,506
($17,500)
$250,000
$1,842,250

(a) PW (15%) with working capital = $1, 073,849 , not an acceptable project.

(b) PW (15%) without working capital = $885, 645 , still not acceptable.

Page | 10

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.14
0
Income Statement
Revenues
Expenses
Operating cost
Depreciation

$65,800

$65,800

$65,800

$65,800

$65,800

$65,800

$9,150
$17,100

$9,150
$27,360

$9,150
$16,416

$9,150
$9,850

$9,150
$9,850

$9,150
$4,925

Taxable Income
Income Taxes (35%)

$39,550
$13,843

$29,290
$10,252

$40,234
$14,082

$46,800
$16,380

$46,800
$16,380

$51,725
$18,104

Net Income

$25,708

$19,039

$26,152

$30,420

$30,420

$33,621

$25,708
$17,100

$19,039
$27,360

$26,152
$16,416

$30,420
$9,850

$30,420
$9,850

$33,621
$4,925

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Working Capital
Net Cash Flow
PW(18%)

($85,500)
$5,000
($1,750)
$15,000

($15,000)
($100,500) $42,808
$54,420.65

$46,399

$42,568

$40,270

$40,270

$56,796

Since PW(18%) > 0, this project is acceptable. The IRR is 37.20%.

Page | 11

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.15
-3
Income Statement
Revenues
Expenses
R&D expenses
Production cost
Depreciation:
Building
Equipment

($500,000)

-2

($2,500,000)

-1

($2,000,000)

10

$50,000,000 $55,000,000

$60,500,000

$66,550,000

$73,205,000 $80,525,500 $72,472,950 $65,225,655

$58,703,090 $52,832,781

$40,000,000 $44,000,000

$48,400,000

$53,240,000

$58,564,000 $64,420,400 $57,978,360 $52,180,524

$46,962,472 $42,266,224

$51,282
$734,700

$51,282
$524,700

$51,282
$374,700

$49,146
$428,700

$51,282
$267,900

$51,282
$267,600

$51,282
$267,900

$51,282
$133,800

$49,146
$0

Taxable Income
Income Taxes (40%)

($500,000)
($200,000)

($2,500,000)
($1,000,000)

($2,000,000)
($800,000)

$9,522,154 $10,214,018
$3,808,862 $4,085,607

$11,524,018
$4,609,607

$12,884,018
$5,153,607

Net Income

($300,000)

($1,500,000)

($1,200,000)

$5,713,292 $6,128,411

$6,914,411

$7,730,411

$8,593,091 $9,471,731 $8,505,245

$7,716,029

$7,013,602 $6,310,446

$5,713,292 $6,128,411
$477,846 $785,982

$6,914,411
$575,982

$7,730,411
$425,982

$8,593,091 $9,471,731 $8,505,245

$319,182 $318,882 $319,182

$7,716,029
$185,082

$7,013,602 $6,310,446
$51,282
$49,146

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Building
Machines
Gains Tax
Building
Machines
Working Capital
Net Cash Flow
PW(20 %)
Decision
IRR

($300,000) ($1,500,000)

($300,000)

($1,500,000)

($1,200,000)

($1,200,000)

$14,321,818 $15,786,218 $14,175,408 $12,860,049

$5,728,727 $6,314,487 $5,670,163 $5,144,020

$51,282
$0

$11,689,336 $10,517,410
$4,675,734 $4,206,964

($2,000,000)
($3,000,000)

$1,000,000
$300,000

($5,000,000)

($500,000) ($550,000)

($605,000)

($665,500)

($732,050)

$724,730

$652,257

$196,581
($120,000)
$587,031 $5,283,278

($10,000,000)
$10,252,872.91

$5,691,138 $6,364,393

$6,885,393

$7,490,893

$8,180,223 $10,595,868 $9,549,156

$8,553,368

$7,651,914 $13,019,451

$805,255

Accept
43.28%

Page | 12

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Effects of Borrowing
10.16
Revenues
Expenses

$3,833,542

$3,833,542

$3,833,542

$3,833,542

$3,833,542

$435,000
$294,872
$1,550,000

$485,000
$307,692
$1,296,114

$535,000
$307,692
$1,016,839

$585,000
$307,692
$709,637

$635,000
$294,872
$371,715

Taxable Income
Income Taxes (35%)

$1,553,670
$543,785

$1,744,736
$610,658

$1,974,011
$690,904

$2,231,213
$780,925

$2,531,955
$886,184

Net Income

$1,009,886

$1,134,078

$1,283,107

$1,450,288

$1,645,771

$1,009,886
$294,872

$1,134,078
$307,692

$1,283,107
$307,692

$1,450,288
$307,692

$1,645,771
$294,872

O&M
Depreciation
Debt interest

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment (Building)
Investment(Land)
Salvage (Building)
Salvage (Land)
Gains Tax
Financial activities
Borrowed funds
Principal repayment
Net Cash Flow
PW(15 %)
Decision

($12,000,000)
($3,500,000)
$13,500,000
$3,500,000
($1,054,487)
15,500,000

$0
$3,048,956.65

($2,538,861)

($2,792,747)

($3,072,022)

($3,379,224)

($3,717,146)

($1,234,104)

($1,350,977)

($1,481,223)

($1,621,244)

$14,169,010

Accept

Page | 13

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.17
0
Income Statement
Revenues
Expenses
Depreciation
Debt interest

$150,000 $150,000 $150,000 $150,000 $150,000 $150,000

$67,200
$18,000

$40,320
$15,000

$12,096
$6,000

$0
$3,000

Taxable Income
Income Taxes (35%)

$87,000
$30,450

$64,800
$22,680

$94,680 $113,808 $116,808 $131,904

$33,138 $39,833 $40,883 $46,166

$147,000
$51,450

Net Income

$56,550

$42,120

$61,542

$73,975

$75,925

$85,738

$95,550

$56,550
$42,000

$42,120
$67,200

$61,542
$40,320

$73,975
$24,192

$75,925
$24,192

$85,738
$12,096

$95,550
$0

Net Cash Flow

PW(15%)

$24,192
$9,000

$150,000

$42,000
$21,000

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Financing Activities
Borrowed funds
Principal repayment

$24,192
$12,000

($210,000)
$60,000
($21,000)
$210,000
($30,000) ($30,000) ($30,000) ($30,000) ($30,000) ($30,000) ($30,000)
$0
$309,302.46

$68,550

$79,320

$71,862

$68,167

$70,117

$67,834

$104,550

Page | 14

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.18
Annual payment = $115, 000( A / P,11%,5) = $31,116
New after-tax cash flow
0
Income Statement
Revenues
Expenses
O&M
Depreciation
Debt interest
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Financing Activities
Borrowed funds
Principal repayment
Net Cash Flow
PW(15%)

$250,000

$250,000

$250,000

$250,000

$250,000

$50,000
$46,000
$12,650

$50,000
$73,600
$10,619

$50,000
$44,160
$8,364

$50,000
$26,496
$5,861

$50,000
$13,248
$3,084

$141,350
$56,540

$115,781
$46,312

$147,476
$58,990

$167,643
$67,057

$183,668
$73,467

$84,810

$69,469

$88,486

$100,586

$110,201

$84,810
$46,000

$69,469
$73,600

$88,486
$44,160

$100,586
$26,496

$110,201
$13,248

($230,000)
$5,000
$8,598
$115,000

($115,000)
$260,050.00

($18,466)

($20,497)

($22,751)

($25,254)

($28,032)

$112,344

$122,572

$109,894

$101,827

$109,015

10.19
0
Operating activities
Net income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax(40%)
Financing Activities
Borrowed funds
Principal repayment
Net Cash Flow
PW(15%)

1
$10,400
$6,666

2
$12,019
$4,445

($20,000)
$8,000
$356
$10,000
($10,000)
$15,506

($4,762)
$12,304

($5,238)
$19,582

Note: Annual installments for the loan = $10, 000( A / P,10%, 2) = $5, 762

Page | 15

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.20 Income statement approach:

Input
Tax Rate(% )=
MARR(%) =

40
18

Output
PW(i) = $290,751
IRR(%) = 68.58%

(a)
Income Statement
Revenues:
Additional revenue
Labor & materials savings
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

5-7

10

$85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000

$ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000
$ 31,438
$ 10,800
$ 107,762
$ 43,105
$64,657

$
$
$
$

53,878
7,200
88,922
35,569
$53,353

$ 38,478 $ 27,478 $ 19,646

$ 3,600
$ 107,922 $ 122,522 $ 130,354
$ 43,169 $ 49,009 $ 52,142
$64,753 $73,513 $78,212

$ 9,812
$ 140,188 $ 150,000 $ 150,000
$ 56,075 $ 60,000 $ 60,000
$84,113 $90,000 $90,000

$ 64,657 $ 53,353 $ 64,753 $ 73,513 $ 78,212 $ 84,113 $ 90,000 $ 90,000

$ 31,438 $ 53,878 $ 38,478 $ 27,478 $ 19,646 $ 9,812 $ - $ $ (220,000)
$ 20,000
$ (8,000)
$

120,000
$ (40,000) $ (40,000) $ (40,000)
($100,000) $56,095 $67,231 $63,231 $100,991 $97,858 $93,925 $90,000 $102,000

Since PW(18%) > 0, this project is acceptable.

Page | 16

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.21 (a) and (b)

Input
Tax Rate(%) =
MARR(%) =
0

Output
PW(i) =
AE(i)=

35
18
1

($1,648,462)
($527,142)
4

Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes (35%)

357,250
100,000
($457,250)
(160,038)

612,250
83,620
($695,870)
(243,555)

437,250
65,603
($502,853)
(175,998)

312,250
45,783
($358,033)
(125,312)

111,625
23,982
($135,607)
(47,462)

Net Income

($297,213)

($452,316)

($326,854)

($232,721)

($88,144)

Cash Flow Statement

Operating Activities:
Net Income
$ (297,213) $ (452,316) $ (326,854) $
Depreciation
$ 357,250 $ 612,250 $ 437,250 $
Investment Activities:
Investment
$ (2,500,000)
Salvage
Gains Tax
Financing Activities:
Borrowed funds
$ 1,000,000
Principal repayment
$ (163,797) $ (180,177) $ (198,195) $

(218,014) $ (239,816)

Net Cash Flow

(138,486) $ 180,446

($1,500,000) $ (103,760) $ (20,243) $ (87,799) $

(232,721) $ (88,144)
312,250 $ 111,625

$ 250,000
$ 146,781

Page | 17

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.22
(a) After-tax cash flow

Input
Tax Rate(%) =
MARR(%) =
0

Net Income

Net Cash Flow

35
15
1

Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes (36%)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment

Output

PW(i) =
IRR(%) =

$4,977

$13,000

$13,000

$13,000

$13,000

$13,000

$13,000

$6,431
$5,400
$1,170
$409

$11,021
$4,735
($2,755)
($964)

$7,871
$3,989
$1,140
$399

$5,621
$3,155
$4,225
$1,479

$4,019
$2,220
$6,762
$2,367

$2,009
$1,173
$9,818
$3,436

$760

($1,791)

$741

$2,746

$4,395

$6,382

$760
$6,431

($1,791)
$11,021

$741
$7,871

$2,746
$5,621

$4,395
$4,019

$6,382
$2,009

($45,000)
$4,000
$1,411
$45,000
$0

($5,545)

($6,211)

($6,956)

($7,791)

($8,725)

($9,772)

$1,646

$3,019

$1,656

$576

($312)

$4,029

(b) No meaningful IRR exists. We need to use present worth analysis.

Since PW (15%) > 0, this project is acceptable.

Page | 18

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.23 (a) and (b)

Input
Tax Rate(%) =
MARR(%) =
0

Output
PW(i) = $29,052
IRR(%) = 26.26%

40
14
1

Income Statement
Revenues (savings)
Expenses:
O&M cost
Depreciation
Debt interest

$48,000 $48,000 $48,000 $48,000 $48,000 $48,000 $48,000 $48,000

Taxable Income
Income Taxes (40%)

$14,852
5,941

$3,049 $11,930 $18,459 $23,313 $23,965 $24,657 $30,796

1,220 4,772 7,384 9,325 9,586 9,863 12,318

Net Income

$8,911

$1,830

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

11000
17148
5000

11000
29388
4563

11000
20988
4082

11000
14988
3553

11000
10716
2971

11000
10704
2331

11000
10716
1627

11000
5352
852

$7,158 $11,076 $13,988 $14,379 $14,794 $18,478

$ 8,911 $ 1,830 $ 7,158 $ 11,076 $ 13,988 $ 14,379 $ 14,794 $ 18,478

$ 17,148 $ 29,388 $ 20,988 $ 14,988 $ 10,716 $ 10,704 $ 10,716 $ 5,352
$ (120,000)
$ 10,000
$ (4,000)
$ 50,000
$ (4,372) $ (4,809) $ (5,290) $ (5,819) $ (6,401) $ (7,041) $ (7,746) $ (8,520)
($70,000) $21,687 $26,408 $22,856 $20,244 $18,303 $18,042 $17,765 $21,309

Page | 19

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Generalized Cash Flow Method

10.24 (a) with no borrowed funds:

Input Data
Tax Rate(%) =
MARR(%) =

Output
PW(9%) = $1,537

35
9

Financial Data
year
Depreciation
Book value
Salvage value
Gains tax
Loan payment schedule
Interest
Principal
Revenues
O & M costs

0
$

1
2
3
4
5
$ 2,666 $ 3,556 $ 1,185 $ 593
8,000 $ 5,334 $ 1,778 $ 593 $ - $ $ 2,000
$ (700)

$ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500

Cash Flow Statement

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.35) (Revenue)
-(1 - 0.35) (Expenses)
-(1 - 0.35) (Debt interest)
+ (0.35) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

0
($8,000)

5
$1,300

$1,625 $1,625 $1,625 $1,625

$ 933 $ 1,245 $ 415 $ 207

$1,625
-

($8,000) $2,558

$2,870

$2,040

$1,832

$2,925

Page | 20

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(b) With borrowed funds:

Input Data
Tax Rate(%)=
MARR(%)=
year
Depreciation
Book value
Salvage value
Gains tax
Loan payment schedule
Interest
Principal
Revenues
O&M costs

0
$8,000

Output
PW(9%)= $14,454

35
9
1
$2,666
5,334

2
$3,556
1,778

3
$1,185
593

4
$593
0

5
$0
0
$2,000
-700

$ 720 $ 600 $ 469 $ 326 $ 170

8,000 $ 1,337 $ 1,457 $ 1,588 $ 1,731 $ 1,887
$ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500

Cash Flow Statement

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.35) (Revenue)
-(1 - 0.35) (Expenses)
-(1 - 0.35) (Debt interest)
+ (0.35) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

0
($8,000)

5
$1,300

$1,625 $1,625 $1,625 $1,625 $1,625

(468)
(390)
(305)
(212)
(110)
933
1,245
415
207
$8,000
$ 1,337 $ 1,457 $ 1,588 $ 1,731 $ 1,887
$0

$3,427

$3,937

$3,323

$3,352

$4,702

(c) Which alternative to choose? Debt financing option is more attractive.

Page | 21

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.25 Net cash flow

Input Data
Tax Rate(%) =
MARR(%) =

Output
PW(12%) = $86,984

40
12

Financial Data
year
Depreciation
Book value
Salvage value
Gains tax
Loan payment schedule
Interest
Principal
Revenues
O&M costs

1
2
3
4
5
$ 19,292 $ 33,062 $ 23,612 $ 16,862 $ 6,028
135,000 $ 115,709 $ 82,647 $ 59,036 $ 42,174 $ 36,146
$ 50,000
$ (5,542)

$ 13,500 $ 11,289 $ 8,856 $ 6,181 $ 3,238

135,000 $ 22,113 $ 24,324 $ 26,756 $ 29,432 $ 32,375
$ 68,000 $ 68,000 $ 68,000 $ 68,000 $ 68,000

Cash Flow Statement

0
($135,000)

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.40) (Revenue)
-(1 - 0.40) (Expenses)
-(1 - 0.40) (Debt interest)
+ (0.40) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

5
$44,459

$40,800 $40,800 $40,800 $40,800 $40,800

$ (8,100) $ (6,773) $ (5,314) $ (3,708) $ (1,943)
$ 7,717 $ 13,225 $ 9,445 $ 6,745 $ 2,411
$

135,000
$ (22,113) $ (24,324) $ (26,756) $ (29,432) $ (32,375)
$0

$18,304

$22,927

$18,174

$14,404

$53,352

Page | 22

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.26 Air South Airline

0

Cash Flow Statement

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital

$ 21,700
$ (12,400)
$ (4,018)
$ 3,257

$ 21,700
$ (12,400)
$ (4,018)
$ 5,584

$ 21,700
$ (12,400)
$ (4,018)
$ 3,988

$ 21,700
$ (12,400)
$ (4,018)
$ 2,849

$ 21,700
$ (12,400)
$ (4,018)
$ 2,035

$ 21,700
$ (12,400)
$ (4,018)
$ 2,035

$ 21,700
$ (12,400)
$ (4,018)
$ 2,035

8,539

$ 10,866

10

(60,000)

(1 - 0.38)(Revenue)
-(1 - 0.38)(Expenses)
-(1 - 0.38) (Debt interest)
+(0.38)(Depreciation)
Borrowed funds
Principal repayment

54,000

Net cash flow

(6,000) $

Cash Flow Statement

9,270
11

8,131
12

7,317
13

7,317
14

Investment
Net proceeds from sale
Investment in working capital
Recovery of working capital
(1 - 0.38)(Revenue)
-(1 - 0.38)(Expenses)
-(1 - 0.38) (Debt interest)
+(0.38)(Depreciation)

5,580

21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700

(12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400)
(4,018) $ (4,018) $ (4,018)
1,017

Borrowed funds
Principal repayment
Net cash flow

15

$
$
$
$

7,317

$ (54,000)
$

6,299

PW(18%) =

5,282

$ (48,718) $

9,300

9,300

9,300

9,300

$ 14,880

$ 26,663 > 0, Accept the investment.

Page | 23

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
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Comparing Mutually Exclusive Alternatives

10.27
(a) The net after-tax cash flows for each financing option:

Option 1: Retained earnings

Input
Tax Rate(%) =
MARR(%) =
Option 1: Financing with retained earnings
0
Income Statement

Output
PW(i) = $161,321
IRR(%) = 42.46%

39
18
1

Revenues (savings)
Expenses:
O&M costs
Depreciation
Debt interest

$174,000 $174,000 $174,000 $174,000 $174,000 $174,000

Taxable Income
Income Taxes

$123,420 $103,020 $117,020 $127,020 $134,140 $143,080

48,134
40,178
45,638
49,538
52,315
55,801

$22,000
28,580

Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$75,286

$22,000
48,980

$62,842

$22,000
34,980

$71,382

$22,000
24,980

$77,482

$22,000
17,860

$81,825

$22,000
8,920

$87,279

$ 75,286 $ 62,842 $ 71,382 $ 77,482 $ 81,825 $ 87,279

$ 28,580 $ 48,980 $ 34,980 $ 24,980 $ 17,860 $ 8,920
$

(200,000)

(25,000)

($225,000) $103,866 $111,822 $106,362 $102,462

$ 30,000
$ 2,223
$ 25,000

$99,685 $153,422

Page | 24

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(b) Vermonts PW cost of owning the equipment by borrowing:

Input
Tax Rate(%) =
MARR(%) =
Option 2: Owning the equipment by borrowing
0
Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
Debt interest

Output
PW(i) = $214,469
IRR(%) = 263.36%

39
18
1

$174,000 $174,000 $174,000 $174,000 $174,000 $174,000

$22,000
$28,580
$24,000

$22,000
$48,980
$21,043

$22,000
$34,980
$17,730

Taxable Income
Income Taxes

$99,420
$38,774

$81,977
$31,971

$99,290 $113,000 $124,274 $137,868

$38,723 $44,070 $48,467 $53,769

Net Income

$60,646

$50,006

$60,567

$68,930

$75,807

$84,099

$60,646
$28,580

$50,006
$48,980

$60,567
$34,980

$68,930
$24,980

$75,807
$17,860

$84,099
$8,920

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$22,000
$24,980
$14,020

$22,000
$17,860
$9,866

$22,000
$8,920
$5,212

-$200,000
$30,000
$2,223
$25,000

-$25,000
$200,000

-$25,000

-$24,645

-$27,603

-$30,915

-$34,625

-$38,780

-$43,433

$64,581

$71,384

$64,632

$59,285

$54,888 $106,809

Page | 25

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(c) Vermonts PW cost of leasing the equipment:

Input
Tax Rate(%) =
MARR(%) =

Output
PW(i) = $170,092
IRR(%) = 101.06%

39
18

Option 3: Leasing the equipment

0

Income Statement
Revenues (savings)
Expenses:
O&M costs
Leasing costs
Debt interest

$174,000 $174,000 $174,000 $174,000 $174,000 $174,000

$55,000

$22,000
$55,000

$22,000
$55,000

$22,000
$55,000

$22,000
$55,000

$22,000
$55,000

Taxable Income
Income Taxes

-$55,000
-$21,450

$97,000
$37,830

$97,000
$37,830

$97,000
$37,830

$97,000
$37,830

$97,000 $152,000
$37,830 $59,280

Net Income

-$33,550

$59,170

$59,170

$59,170

$59,170

$59,170

$92,720

-$33,550

$59,170

$59,170

$59,170

$59,170

$59,170

$92,720

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

-$25,000

-$58,550

$22,000

$25,000

$59,170

$59,170

$59,170

$59,170

$59,170 $117,720

(d) Option 2 is the best alternative.

Page | 26

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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10.28

Option 1: Lease
PW (12%)lease = $144,000(1 0.40)(1 + ( P / A,12%,29))

= $779,483.52
Option 2: Purchase
-

Note 1: It is assumed that the property is placed in service during

January.
D1 , D30 = (11.5 /12)(1/ 39)($650, 000) = $15,972.22
D2 to D29 = (12 /12)(1/ 39)($650, 000) = $16, 666.67

Note 2: Property tax calculation:

($800,000)(0.05) = $40,000
Input
Tax Rate(% )=
MARR(%) =

40
12

$ 15,972
$ 40,000
$ (55,972)
$ (22,389)
$ (33,583)

$ 16,667
$ 40,000
$ (56,667)
$ (22,667)
$ (34,000)

$ 16,667
$ 40,000
$ (56,667)
$ (22,667)
$ (34,000)

Income Statement
Revenues:
Expenses:
Depreciation
Property tax
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment(land)
Investment(structure)
Salvage
Gains Tax
Net Cash Flow

Output
PW(i) = ($931,551)

$
$
$
$
$

16,667
40,000
(56,667)
(22,667)
(34,000)

29

30

$ 16,667 $ 15,972
$ 40,000 $ 40,000
$ (56,667) $ (55,972)
$ (22,667) $ (22,389)
$ (34,000) $ (33,583)

$ (33,583) $ (34,000) $ (34,000) $ (34,000) $ (34,000) $ (33,583)

$ 15,972 $ 16,667 $ 16,667 $ 16,667 $ 16,667 $ 15,972
$
$

(150,000)
(650,000)

$ 215,000
$ 34,556
(800,000) $ (17,611) $ (17,333) $ (17,333) $ (17,333) $ (17,333) $ 231,944

PW (12%) purchase = $931,551

Page | 27

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Option 3: Remodel
-

Note 1: Depreciation base: Remodeling cost = $300,000

D1 , D30 = (11.5 /12)(1/ 39)($300, 000) = $7,372
D2 to D29 = (12 /12)(1/ 39)($300, 000) = $7, 692

Note 2: Property tax calculation:

$660,000 (0.05) = $33,000
Cost basis for property tax=
Land + building + remodeling cost = $660,000

Income Statement
Revenues:
Expenses:
Depreciation
Property tax
Lease fee(Parking lot)
Taxable Income
Income tax
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment(Remodeling)
Salvage
Gain tax
Net Cash Flow

Input
Tax Rate(% )=
MARR(%) =

40
12

$ 7,372
$ 33,000
$9,000
$ (49,372)
$ (19,749)
$ (29,623)

$ 7,692
$ 33,000
$9,500
$ (50,192)
$ (20,077)
$ (30,115)

$ 7,692
$ 33,000
$10,000
$ (50,692)
$ (20,277)
$ (30,415)

Output
PW(i) = ($494,425)

29

30

$
$

7,692
33,000
$23,000
$ (63,692)
$ (25,477)
$ (38,215)

$ 7,372
$ 33,000
$23,500
$ (63,872)
$ (25,549)
$ (38,323)

$ (29,623) $ (30,115) $ (30,415) $ (30,715) $

$ 7,372 $ 7,692 $ 7,692 $ 7,692 $

(38,215) $ (38,323)
7,692 $ 7,372

(300,000) $ (22,251) $ (22,423) $ (22,723) $ (23,023) $

$ 30,000
$ 15,949
(30,523) $ 14,997

$
$

7,692
33,000
$10,500
$ (51,192)
$ (20,477)
$ (30,715)

(300,000)

PW(12%)remodel = $494,425
Option 3 is the least cost alternative.

Page | 28

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.29 Comparison by annual equivalent cost (all units in thousand dollars):

Book Value (n = 20)
Salvage Value
Taxable gains
Gains tax (39%)

$380.61 $423.80

$470.56

$853.00 $949.80 $1,054.60

$469.39
$526
$584.04
$183.06 $205.14

$227,78

Net Proceeds from sale $669.94 $744.66

$826.82

Plant A

Capital recovery cost with return:

A1 = ($8,530) $669.94)( A / P,12%, 20) + $669.94(0.12) = $1,132.69

After-tax O&M cost:

A2 = (1 0.39)($1,964) = $1,198.04

Depreciation tax shield:

A3 = 0.39($8,530) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)
= $172.22

Total equivalent annual cost:

A = $1,132.69 + $1,198.04 $172.22 = $2,158.51

Unit cost:

$2,158,510
= $0.04317 / kWh
50, 000, 000 kWh

Plant B

Capital recovery cost with return:

A1 = ($9, 498 $744.66)( A / P,12%, 20) + $744.66(0.12) = $1, 261.25

After-tax O&M cost:

A2 = (1 0.39)($1, 744) + $1, 063.84

Page | 29

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Depreciation tax shield:

A3 = 0.39($9, 498) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $191.76

Total equivalent annual cost:

A = $1, 261.25 + $1, 063.84 $191.76 = $2,133.33

Unit cost:
$2,133,330
= $0.04267 / kWh
50, 000, 000 kWh

Plant C

Capital recovery cost with return:

A1 = ($10,546 $826.82)( A / P,12%, 20) + $826.82(0.12) = $1, 400.41

After-tax O&M cost:

A2 = (1 0.39)($1, 632) = $995.52

Depreciation tax shield:

A3 = 0.39($10,546) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $212.92

Total equivalent annual cost:

A = $1, 400.41 + $995.52 $212.92 = $2,183.01

Unit cost:
$2,183, 010
= $0.04366 / kWh
50, 000, 000 kWh

Plant B is the most economical.

Page | 30

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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Lease -Versus - Buy Decisions

10.30
(a) Jacobs cost of leasing in present worth:
after-tax lease expense = (1 - 0.40)($12,000)
= $7,200
PW (15%)lease = $7,200 $7,200( P / A,15%,3)
= $23, 639
(b) Jacobs cost of owning in present worth:

PW of after-tax maintenance expenses:

P1 = $1, 200(1 0.40)( P / A,15%, 4)
= $2, 055

PW of after-tax loan repayment

P2 = $14,816( P / A,15%, 4)
= $42, 299

PW of tax credit (shield) on depreciation and interest:

Dn

In

Sum

$9,000

$5,400

$14,400

$5,760

$14,400

$4,270

$18,670

$7,468

$8,640

$3,005

$11,645

$4,658

$2,592

$1,587

$4,179

$1,672

P3=

Combined tax
savings

$14,674

PW of net proceeds from sale:

Total depreciation amount=

$34,632

Book value=

$10,368

Salvage=
Taxable Gain=
Gain tax=
Net proceeds from sale=

$10,000
($368)
($147)
$10,147

P4 = $10,147( P / F ,15%, 4) = $5,802

Page | 31

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
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PW (15%)buy = P1 + P2 + P3 + P4 = $23,878
(c) Should the truck be leased or purchased? The leasing option is a better
choice.

10.31

(a) PW (incremental) cost of owning the equipment:

PW of after-tax O&M

P1 = $50, 000(1 0.40)( P / A,15%, 4)

= $85, 649

PW of after-tax loan repayment:

P2 = $37,857( P / A,15%, 4)
= $108, 080

PW of tax credit (shield) on depreciation and interest:

n
Dn
In
1 $24,000 $12,000
2 $38,400 $9,414
3 $23,040 $6,570

Combined Tax Savings

$36,000(0.40) = $14,400
$47,817(0.40) = $19,126
$29,610(0.40) = $11,814

$10,353(0.40) = $4,141

$6,912

$3,441

P3 = $14, 400( P / F ,15%,1) + $19,126( P / F ,15%, 2)

+$11,814( P / F ,15%,3) + $4,141( P / F ,15%, 4)
= $37,139

Page | 32

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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PW of net proceeds from sale:

total depreciation amount = $92,352
book value = $27,648
taxable gain = $20,000 - $27,648 = -$7,648
loss credit = (0.40)(-$7,648) = -$3,059
net proceeds from sale = $20,000 -(-$3,059)
= $23,059
P4 = $23,059(P / F,15%,4)
= $13,184

PW (15%)buy = P1 + P2 + P3 + P4 = $143, 406

Input
Tax Rate(%) =
MARR(%) =
0

Output
PW(i) = ($143,406)

40
15%
1

Income Statement
Revenues (savings)
Expenses:
O&M cost
Depreciation
Debt interest

50000
24000
12000

50000
38400
9414

50000
23040
6570

50000
6912
3441

Taxable Income
Income Taxes (40%)

($86,000)
(34,400)

($97,814)
(39,126)

($79,610)
(31,844)

($60,353)
(24,141)

Net Income

($51,600)

($58,689)

($47,766)

($36,212)

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow

$ (51,600) $ (58,689) $ (47,766) $ (36,212)

$ 24,000 $ 38,400 $ 23,040 $ 6,912
$ (120,000)
$ 20,000
$ 3,059
$ 120,000
$ (25,856) $ (28,442) $ (31,286) $ (34,415)
$0

($53,456)

($48,731)

($56,012)

($40,656)

Page | 33

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(b) PW (incremental) cost of leasing the equipment:

PW of after-tax operating cost:

P1 = $40, 000(1 0.40)( P / A,15%, 4)
= $68,519

PW of after-tax leasing
P2 = $44,000(1 0.40) $44,000(1 0.40)( P / A,15%,3)
= $86,677
P = P1 + P2
= $155,196
Input
Tax Rate(%) =
MARR(%) =
0

Output
PW(i) = ($155,197)

40
15%
1

Income Statement
Revenues (savings)
Expenses:
O&M cost
Leasing cost
Debt interest

$0

$0

$0

$0

40000
$44,000

40000
$44,000

40000

$44,000

40000
$44,000

Taxable Income
Income Taxes (40%)

($44,000)
(17,600)

($84,000)
(33,600)

($84,000)
(33,600)

($84,000)
(33,600)

($40,000)
(16,000)

Net Income

($26,400)

($50,400)

($50,400)

($50,400)

($24,000)

Cash Flow Statement

Operating Activities:
Net Income
Net Cash Flow

(26,400) $ (50,400) $ (50,400) $ (50,400) $ (24,000)

($26,400)

($50,400)

($50,400)

($50,400)

($24,000)

(c) Should ICI buy or lease the equipment? The buying option is a better choice.

Page | 34

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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10.32
(a) PW of after-tax cash flow of leasing:
PW (15%)lea s e = $70, 000(1 0.4)( P / A,15%, 4)
= $119,909
(b) PW of after-tax cash flow of owning:

PW of after-tax maintenance expenses:

P1 = $10, 000(1 0.40)( P / A,15%, 4)
= $17,130

PW of after-tax loan repayment

P2 = $63, 094( P / A,15%, 4)
= $180,132

PW of tax credit (shield) on depreciation and interest:

n

Dn

In

Sum

1
2
3
4
P3=

$66,660
$88,900
$29,620
$14,820
$77,148

$20,000
$15,691
$10,950
$5,736

$86,660
$104,591
$40,570
$20,556

Combined tax
savings
$34,664
$41,836
$16,228
$8,222

PW of net proceeds from sale:

Total depreciation amount=
Book value=
Salvage=
Taxable Gain=
Gain tax=
Net proceeds from sale=

$200,000
$0
$20,000
$20,000
$8,000
$12,000

P4 = $12, 000( P / F ,15%, 4) = $6,861

PW (15%)buy = P1 + P2 + P3 + P4 = $113, 253

Page | 35

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

10.33
(a) Determine the annual cash flows for each option.
Buy option:
End of period
1
2

Cash flow elements

0
($16,170)

Investment
Net proceeds

$5,943

(0.65) I n

($1,151)

($740)

($275)

+0.35 Dn

$1,132

$1,811

$543

($4,730)
($4,749)

($5,362)
($4,291)

($6,078)
$134

Loan repayment
Net cash flow

$16,170
$0

Lease option:
End of period
1
2

Cash flow elements

0
($500)

Security deposit
Refund

3
$500

(0.65) Ln
Net cash flow

($500)

($3,315)

($3,315)

($3,315)

($3,315)

($3,315)

($2,815)

(b)
PW (13%)buy = $7, 470
PW (13%)lease = $7,981

The buy option is a better choice.

10.34
(a) Boggs PW cost of leasing:
PW (15%)leasing = (0.60)($15, 000 + $15, 000( P / A,15%, 2)
=$23,631
(b) Boggs PW cost of owning:

PW of after-tax maintenance expenses:

P1 = $5, 000(1 0.40)( P / A,15%,3)
= $6,849

Page | 36

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

PW cost of after-tax loan repayment:

P2 = $41, 635( P / A,15%,3)
= $95, 062

PW of tax credit (shield) on depreciation and interest:

n
Dn
In
Combined Tax Savings
1 $20, 000 $12, 000 $32, 000(0.40) = $12,800
2 $32, 000 $8, 444 $40, 444(0.40) = $16,178
3 $9, 600 $4, 461 $14, 061(0.40) = $5, 624
P3 = $12,800( P / F ,15%,1) + $16,178( P / F ,15%, 2)
+$5, 624( P / F ,15%,3)
= $27, 061

PW of net proceeds from sale:

total depreciation amount = $61,600
book value = $38,400
taxable gain = $50,000 - $38,400 = $11,600
loss credit = (0.40)($11,600) = $4,640
net proceeds from sale = $50,000 - $4,640
= $45,360
P4 = $45,360(P / F ,15%,3)
= $29,825
PW (15%) buy = P1 + P2 P3 P4 = $45, 025

(c) Leasing is much cheaper.

10.35
(a) Purchase with debt:

PW of after-tax revenue:
P1 = $10, 000(1 0.30)( P / A,10%,5) = $26,536

Page | 37

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

PW of after-tax expenses:
P2 = $2,500(1 0.3)( P / A,10%,5) = $6, 634

PW of after-tax loan repayment:

A = $25, 000( A / P,12%,5) = $6,935.24
P3 = $6,935.24( P / A,10%,5) = $26, 290

PW of tax credit (shield) on depreciation and interest:

n
1
2
3
4
5

Dn
$3,571
$6,122
$4,373
$3,123
$1,116

In
Combined Tax Savings
$3, 000 $6,571(0.30) = $1,971
$2,528 $8, 650(0.30) = $2,595
$1,999 $6,372(0.30) = $1,912
$1, 407 $4,530(0.30) = $1,359
$743 $1,859(0.30) = $558

P4 = $1,971( P / F ,10%,1) + $2,595( P / F ,10%, 2) + " = $6, 647

PW of net proceeds from sale:

total depreciation amount = $18,305
book value = $6,695
taxable gain = $5,000 - $6,695=($1,695)
loss credit = (0.30)($1,695) = $509
net proceeds from sale = $5,000 + $509
= $5,509
P5 = $5,509(P / F ,10%,5)
= $3,421
PW (10%) purchase = P1 + P2 + P3 + P4 + P5 = $3, 680

(b) Financial lease:

PW (10%)lea s e = (0.7)[$3500 + (10, 000 $2,500 $3,500)( P / A,10%, 4)]
= $9, 685

(c) The financial lease is a better choice.

Page | 38

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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10.36 Setting the lease payment schedule: Let X denote the annual lease receipt
from tractor lease. We will assume that these lease payments are received at
year end.

Cash Flow
Elements
Investment
Net Proceeds:
Security Deposit
+(0.65)(Rn )
+(0.35)Dn
Net Cash Flow

0
-$53,000

End of Period
1

0.65X
$5,936
0.65X
$5,936

$21,423*
-$1,500
0.65X
$1,781
0.65X
$21,704

$1,500

-$51,500

0.65X
$3,710
0.65X
$3,710

Note:

total depreciation amount = $32,648

book value = $53,000 - $32,648 = $20,352
taxable gain = $22,000 - $20,352 = $1,648
gains tax = (0.35)($1,648) = $577
net proceeds from sale = $22,000 - $577
= $21,423
Now to determine the required lease receipt at an after-tax rate of return of
10%, we solve the following equation:
$51,500 = 0.65 X ( P / A,10%,3)
+$3, 710( P / F ,10%,1) + $5,936( P / F ,10%, 2)
+$21, 704( P / F ,10%,3)
X = $16, 655 per year

Page | 39

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Short Case Studies

ST 10.1

Assume the project life is 10 years.

P W (15% ) = $4, 236(0.0745) X ( P / A ,15% ,10)
= $250,000,000
X = 157, 844 units annually

ST 10.2

(a), (b)
0

Income Statement
Revenue
Expenses:
Production costs
Depreciation :
Building
Machines
Taxable Income
Income Taxes (40%)

$
$

Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Land
Building
Machines
Gains Tax
Land
Building
Equipment
Net Cash Flow

$
$
$

5-7

10-11

12

51,000

51,000

51,000

51,000

85,000

$ 136,000

$ 136,000

$ 136,000

$ 136,000

36,000

36,000

36,000

36,000

60,000

96,000

96,000

96,000

96,000

$
$

1,106
14,290

$
$

1,154
24,490

$
$

1,154
17,490

$
$

1,154
12,490

$
$

1,154
8,930

$
$

1,154
4,460

1,154

1,154

1,106

(396) $ (10,644) $
(158) $ (4,258) $

(3,644) $
(1,458) $

1,356
542

$
$

14,916
5,966

$
$

34,386
13,754

$
$

38,846
15,538

$
$

38,846
15,538

$
$

38,894
15,558

(237) $

(6,386) $

(2,186) $

814

8,950

20,632

23,308

23,308

23,337

$
$

(237) $
15,396 $

(6,386) $
25,644 $

(2,186) $
18,644 $

814
13,644

$
$

8,950
10,084

$
$

20,632
5,614

$
$

23,308
1,154

$
$

23,308
1,154

$
$

23,337
1,106

$
$
$

8,000
30,000
10,000

(5,000)
(45,000)
(100,000)

$
$
$
($150,000)

$15,158

PW(15%) =

($38,794)

$19,258

$16,458

$14,458
IRR =

$19,034

$26,246

$24,462

$24,462

(1,050)
437
(3,504)
$68,326

9.60%

Note: A true sense of capital gains is only realized for the sale of land.
(c) Project is not acceptable.

Page | 40

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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ST 10.3 Morgantown Mining Company

(a) Unit-production method
(Units are thousand dollars)
0

10

Income Statement

Revenues (savings)
Expenses:
O&M
Depreciation
Taxable Income
Income Taxes(40%)
Net Income

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$2,400
$1,880
$5,220
$2,088
$3,132

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

$3,132
$1,880

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
($19,300)
Salvage
Gains Tax
Working capital
($2,500)
Net Cash Flow
($21,800)

$500

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$5,012

$2,500
$8,012

Page | 41

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(b) 7 year MACRS

(Units are thousand dollars)
0

10

Income Statement

Revenues (savings)
Expenses:
O&M

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

$9,500

Depreciation
Taxable Income
Income Taxes(40%)

$2,400
$2,758
$4,342
$1,737

$2,400
$4,727
$2,373
$949

$2,400
$3,376
$3,724
$1,490

$2,400
$2,411
$4,689
$1,876

$2,400
$1,723
$5,377
$2,151

$2,400
$1,722
$5,378
$2,151

$2,400
$1,723
$5,377
$2,151

$2,400
$861
$6,239
$2,496

$2,400
$0
$7,100
$2,840

$2,400
$0
$7,100
$2,840

Net Income

$2,605

$1,424

$2,235

$2,814

$3,226

$3,227

$3,226

$3,744

$4,260

$4,260

$2,605
$2,758

$1,424
$4,727

$2,235
$3,376

$2,814
$2,411

$3,226
$1,723

$3,227
$1,722

$3,226
$1,723

$3,744
$861

$4,260
$0

$4,260
$0

$4,260

$500
($200)
$2,500
$7,060

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Working capital
Net Cash Flow

($19,300)

($2,500)
($21,800)

$5,363

$6,151

$5,610

$5,224

$4,949

$4,949

$4,949

$4,604

Page | 42

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

ST 10.4

Given:
Savings = $314,000 + $35,000 = $349,000 per year
Materials (resin) = $350(400) = $140,000 per year
Cost base = $187,000 + $10,000 + $15,000 = $212,000
Taxable gain = $30,000

(a) Equity financing (retained earnings):

Input
Tax Rate(%)=
MARR(%)=
0

Output
PW(i)=
IRR(%)=

40
20
1

$181,889
50.80%
4

Income Statement
Revenues (savings)
Expenses:
O&M costs
Resin
Software development
Depreciation

$349,000

$349,000

$349,000

$349,000

$349,000

$349,000

$36,000
$140,000
$20,000
42,400

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

67,840

40,704

24,422

24,422

12,211

Taxable Income
Income Taxes (40%)

$110,600
44,240

$105,160
42,064

$132,296
52,918

$148,578
59,431

$148,578
59,431

$160,789
64,316

$66,360

$63,096

$79,378

$89,147

$89,147

$96,473

66,360
42,400

63,096
67,840

79,378
40,704

89,147
24,422

89,147
24,422

96,473
12,211

Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

(212,000)
30,000
(12,000)
($212,000)

$108,760

$130,936

$120,082

$113,569

$113,569

$126,684

Page | 43

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(b) Debt financing (term loan): annual installment = $212,000(A/P, 13%, 6) = $53,032
Tax Rate(%)=
MARR(%)=
0

40
20

PW(i)=
IRR(%)=

$349,000

$349,000

$349,000

$36,000
$140,000
$20,000
42,400
27,560

$36,000
$140,000

Taxable Income
Income Taxes (40%)
Net Income

$244,004
#NUM!
4

$349,000

$349,000

$349,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

67,840
24,249

40,704
20,507

24,422
16,278

24,422
11,500

12,211
6,101

$83,040
33,216

$80,911
32,365

$111,789
44,716

$132,299
52,920

$137,077
54,831

$154,688
61,875

$49,824

$48,547

$67,074

$79,380

$82,246

$92,813

49,824
42,400

48,547
67,840

67,074
40,704

79,380
24,422

82,246
24,422

92,813
12,211

Income Statement
Revenues (savings)
Expenses:
O&M costs
Resin
Software development
Depreciation
Debt Interest

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed Funds
Principal repayment
Net Cash Flow

(212,000)
30,000
(12,000)
212,000

$0

(25,472)

(28,784)

(32,526)

(36,754)

(41,532)

(46,931)

$66,752

$87,603

$75,252

$67,048

$65,137

$76,092

Page | 44

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(c) Lease financing (financial lease):

Tax Rate(%)=
MARR(%)=
0

40
20

PW(i)=
IRR(%)=

$185,396
156.94%

$349,000

$349,000

$349,000

$349,000

$349,000

$349,000

$36,000
$140,000
$20,000
$62,560

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$36,000
$140,000

$62,560

$62,560

$62,560

$62,560

Income Statement
Revenues (savings)
Expenses:
O&M costs
Resin
Software development
Lease Payment

$62,560

$0

Taxable Income
Income Taxes

($62,560)
($25,024)

$90,440
36,176

$110,440
44,176

$110,440
44,176

$110,440
44,176

$110,440
44,176

$173,000
69,200

Net Income

($37,536)

$54,264

$66,264

$66,264

$66,264

$66,264

$103,800

(37,536)

54,264

66,264

66,264

66,264

66,264

103,800

($37,536)

$54,264

$66,264

$66,264

$66,264

$66,264

$103,800

Cash Flow Statement

Operating Activities:
Net Income
Net Cash Flow

(d) The best financing method is the term loan option.

Page | 45

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

ST 10.5

(a) The net cash flows for each alternative over 10 years:
Installing AGVS:

Input Data
Tax Rate(%)=
MARR(%)=

Output
PW(9%)= ($167,864)

35
15

Financial Data
year
Depreciation
Book value
Interest payment
Principal payment
O&M costs
Cash Flow Statement

Investment
Net proceeds from sale
-(1 - 0.35) (Expenses)
-(1 - 0.35) (Debt interest)
+ (0.35) (Depreciation)
Borrowed funds
Principal repayment
Net Cash Flow

0
$159,000
159,000
$20,000

1
$22,721
136,279
15,900
(26,044)
$20,000

2
$38,939
97,340
13,296
(28,648)
$20,000

3
$27,809
69,531
10,431
(31,513)
$20,000

4
$19,859
49,672
7,280
(34,664)
$20,000

5
$14,199
35,473
3,813
(38,131)
$20,000

6
$14,183
21,290

7
$14,199
7,091

8
$7,091
(0)

$20,000

$20,000

$20,000

10
$0
(0)

$0
(0)

$20,000

$0

(all units in thousands of dollars)

0
($159,000)

10

($13,000) ($13,000) ($13,000) ($13,000)

(10,335)
(8,642)
(6,780)
7,952
13,629
9,733
$159,000
(26,044) (28,648) (31,513)

($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000)

(4,732)
(2,478)
6,951
4,970
4,964
4,970
2,482
0

($13,000) ($41,426) ($36,662) ($41,560)

($45,445) ($48,640)

(34,664)

$0
0

(38,131)
($8,036)

($8,030) ($10,518) ($13,000)

$0

Page | 46

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
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Leasing gas-powered lift trucks (payable at the end of each year):

total annual expenses = $5,465 + $6,317
+ $1,660 + $58,653 + $10,000
= $82,095
annual net cash flow = - (1 - 0.35)($82,095)
= -$53,362 per year

(b) & (c) The incremental cash flows (AGVS option Gas truck option)

PW (i )agvs - gas = $13, 000 + $11,933( P / F , i,1)

+$16, 700( P / F , i, 2) + $11,803( P / F , i,3) + $7,919( P / F , i, 4) + $4, 719( P / F , i,5)
+$45,329( P / F , i, 6) + $45,329( P / F , i, 7) + $42,845( P / F , i,8) + $40,362( P / F , i,9)
+$53,362( P / F , i,10)
=0
IRR = 104.24% > 15%
Select the AGVS option.

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