You are on page 1of 5


3.1 Problem Set 1

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,
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-
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-
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

3.2 Problem Set 2

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.

3.3 Problem Set 3

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

3.4 Problem Set 4

3.5 Problem Set 5
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
Research or cost = 100 Annual sales = 250 250
Cost = 150 Eq. cost = 200 Annual OC = 90 90
-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.