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SOAL :

1. What equivalent annual end-of-year payments for the next 6 year are

equivalent to paying $5,000 now and $10,000 6 years from now if interest is

6% compounded annualy ?

2. $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,200

0 1 2 3 4 5 6 7 10

For the value shown on the time diagram and a 12% nominal interest rate,

find:

a. Present value at time 0

b. Future value at the end of year 10

3. A payment of $2,000 will be realized today with additional payments of

$1,000 at the end of each the next 5 years. Assume a nominal interest rate of

20% is appropriate and calculate the following :

a. Determine the future value of all the payments at the end of five years

from now

b. What is the future value 5 years from now of the $2,000 plus $1,000

annual payments if the 20% nominal interest rate is compounded semi-

annually?

c. What semi-annual payments are equivalent to the $1,000 payments each

year if the 20% interest is compounded semi-annualy?

4. What is the present value of $5,00 payments to be made at the end of each 6

month period for the next 10 years if interest is 8% compounded semi-

annually?

5. Calculate the present, future and equivalent annual end of the period values

for the series of incomes present of the following time diagram. Assume an

interest rate of 15%.

P=? A1=$100 A1=100 A2=$150 A2=$150 A3=$200 A3=$200 F=?

0 1..5 6...10 1115

SOAL :

1. a foreman in a processing plant wants to evaluate whether to rebuild and

repair five existing assets or replace them with four new assets that are more

productive and capable of providing the same service as the current five

machines. Four new assets can be acquired at time zero for a total cost of

$240,000. The total maintenance, insurance and operating costs for the new

equipment is $20,000 at time 0, $40,000 at year 1, $50,000 at year 2 and

$30,000 at year 3. The anticipated salvage for these assets after three years is

$100,000. The alternative is to repair the existing machines for total cost of

$50,000 at time zero. However this approach will realize much higher

operating cost over the next three years. In addition to repair cost, the total

operating cost for the repaired assets is estimated at $20,000 at time zero but

that escalates to $140,000 in each years one and two and $70,000 in year

three. The salvage for the existing assets after three years of service is

anticipated to be zero. The used machines have no salvage minimum rate of

return on invested capital is nominal 15,0%. Use present worth cost analysis

using rate of return and net present value to determine which alternative is

economically preferred.

2. Two remediation alternatives are currently under consideration. You have

been asked to evaluate the economics of each alternative. Alternative 1

involves the installation of an active vapor extraction system with off gas

treatment. This alternative has a time zero cost of $170,000 and an operating

live of 5 years. Operating and maintenance costs are estimated at $35,000 at

the end of each of years one through five. Estimated salvage at the end of the

year 5 is $50,000. Alternative 2 involves a bio-remediation process that will

require 10 years of treatment with quarterly sampling estimated to cost

$125,000 per quarter through the end of the year ten.

3. Machine A has an initial cost of $100,000, an estimated service period of

10 years and an estimated salvage value of $20,000 at the end of 10 years.

Estimated end of year annual disbursement for operation and maintenance are

$10,000. A major of overhaul costing $10,000 will be required at the end of 5

years an alternate machine B has an intial cost of $80,000 and an estimated

zero salvage value at the end of the 10 years service period with estimated

zero end of the years disbursement for operation and maintenance of $60,000

for the first year, $6,500 for the second year and increasing $5,000 is

thereafter. Using a minimum are of 10%, compare the present worth cost of

10 years services from machines A and B.

SOAL :

1. Consider rate of return and NPV analysis of project that may have an initial

cost of either $20 million or $36 million depending on final engineering

considerations. The project is expected to generate profits of $6 million per

year for either 5, 10 or 20 years with zero salvage value. Use a 10% minimum

discount rate.

2. Two soil vapor extraction alternatives are being considered in the cleanup of a

farmer plant site. For a minimum rate of return of 10% per year, which option

would you consider to be economically best? Use present worth cost and net

present value analysis in supporting youre decision assuming the same

remediation service is realized using either alternative 1 or 2 with no impact

on revenue generation.

Alternative 1, would involve drilling a total of twelve wells on a 50 foot

radius. The well cost are incurred at time zero and are estimated to be

$10.000 per well. End of year operation and maintenance costs are estimated

to be total $1.000 per well per year. The total life of this operation is

estimated to be five yaers.

Alternative 2, would involve drilling a total of six wells on a 100 foot radius.

The well costs are incurred at time zero at a cost of $10.000 per well. End of

years operating and maintenance costs are estimated to total $1.000 per well

per yaer. The total life of this operation is estimated to be fifteen years.

3. An new project will require development cost of $60 millons at time zero

and $100 million at the of 2 years from time zero with incomes of $40

mollion per year at the end of year 1, 2, and 3 incomes of $70 million per year

at the end of years 4 through 10 with zero salvage value predicted at the end

of year 10. Calculate the rate of return for this project.

4. A corporation has invested $250.000 in a project that is expected to generate

$100 profit per year for years 1 through 5 plus a $150.000 salvage value at

the end of year 5. It is purposed that the profits an salvage value from this

investment will be reinvested immediately each year in year estate that is

projected to have a $2.000.000 value at the end 6 years from now. Calculate

the project rate of return.

5. The time zero initial investment of $55.000 and a year 1 investment of

$45.000 in project A generate incomes of $30.000 per year 2 though 10 with

zero salvage. For a 12% minimum discount rate, determine investment net

value on a present, annual and future basis. Per analysis the effect on net

value from including reinvestment of revenues at the 12% minimum discount

rate in the net value analysis. Rever to revenue reinvestment 12% as project

B.

3.5 Problem Set 5

SOAL :

The time diagram shows costs and revenue for a 6 year project life with research

costs in years -1 and 0 (year 0 represent the start of production with negative

numbering of pre-production years). To simplify the cash flow analysis, consider

the project to be non-mineral of petroleum, so depletion is not applicable. Assume

the year 0 equipment cost is placed into service at year 0 with straight line, 5 year

life depreciation starting at year 0 with the half-year convention. Escalation of

year 1 through 5 sales and operating costs is projected to be a washout. Project

salvage value is zero. Other tax-able income and tax obligation assumed to exist

against which to use tax deductions in any year. The effective tax rate is 40%. All

values are in thousands of dollars.

Research or

exploration

Research or cost = 100 Annual sales = 250 250

Exploration

Cost = 150 Eq. cost = 200 Annual OC = 90 90

L=0

-1 0 1 ... 5

Assume the escalated dollar minimum DCFROR is 15% and make the following

two analysis :

a. calculate project DCFROR assuming the evaluation is being made prior to

year -1, so none of the project dollar values shown on diagram are sunk.

b. Make DCFROR analysis to determine if project development should

continue, assuming the evaluation is being made after the year -1 costs have

already been incurred (so they are sunk) but prior to incurring the year 0

costs. Assume the year -1 research or explanation costs have generated no

assets of value for sale to outside interests, therefore, no opportunity costs

will be incurred from keeping the property for continued development.

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