Engineering Economy 255330

Assignment 7

Chapter 8 Rate of return Analysis : Multiple Alternative Due Date: 8.9 A total of $50,000 was available for investing in a project to reduce insider theft in an appliance warehouse. Two alternatives indentified as Y and Z were under consideration. The overall rate of return on the $50,000 was determined to be 40%, with the rate return on the $20,000 increment between Y and Z at 15%. If Z is the higher first-cost alternative, (a) what is the size of the investment required in Y and (b) what is the rate of return on Y? ((a) $30,000 ,(b) i = 56.7%) 8.15 A company that manufactures amplified pressure transducers is trying to decide between the machines shown below. Compare them on the basis of rate of return, and determine which should be selected if the company’s MARR is 15% per year. ( i=17.4% ; Select machine requiring extra investment : variable speed)
Variable speed
First cost, $ Annual operating cost, $/year Overhaul in year 3, $/year Overhaul in year 4, $/year Salvage value, $ Life, years Dual speed

-250,000 -231,000

-39,000 50,000 6

-225,000 -235,000 -26,000 10,000 6


8.16 The manager of a canned food processing plant is trying to decide between two labeling machines. Determine which should be selected on the basis of rate of return with a MARR of 20% per year. (i=30.3% ; select machine B)
Machine A
First cost, $ Annual operating cost, $/year Salvage value, $ Life, years Machine B

-15,000 -1,600 3,000 2

-25,000 -400 4,000 4

8.26 A manufacturing company is in need of 3000 square meters for expansion because of a new 3year contract it just won. The company is considering the purchase of land for $50,000 and erecting a temporary metal structure on it at a cost of $90 per square meter. At the end of the 3-year period, the company expected to be able to sell the land for $55,000 and the building for $60,000. Alternatively, the company can lease space for $3 per square meter per month, payable at the beginning of each year. Use an AW-based rate of return equation to determine which alternative is preferred. The MARR is 28% per year. (i=25.8% ; Lease space )

8.30 An independent dirt contractor is trying to determine which size dump truck to buy. The contractor known that as the bed size increase, the net income increase, but he is uncertain whether the incremental expenditure required for the larger trucks is justified. The cash flows associated with each size truck are estimated below. The contractor’s MARR is 18% per year, and all trucks are expected to have a useful life of 5 years. (a) Determine which size truck should be purchased. (b) If two trucks of different size are to be purchased, what should be the size of second truck? ((a) Purchase 25 m3 truck ,(b) purchase 20 cm3)
Truck Bed Size, Cubic Meters Initial Investment, $ Annual Operating Cost, $/year Salvage Value $ Annual Income, $/year

8 10 15 20 25

-30,000 -34,000 -38,000 -48,000 -57,000

-14,000 -15,500 -18,000 -21,000 26,000

+2000 +2500 +3000 +3500 +4600

+26,500 +30,000 +33,500 +40,500 +49,000

8.34 A rate of return analysis was initiated for the infinite-life alternatives below. (a) Fill in the blanks in the incremental rate of return column on the incremental cash flow portion of the table. (E vs F : i=65%,E vs G: i=28.3%, E vs H: i= 20%, F vs G: i=10%, F vs H:i=11%, G vs H:i=11.7%) (b) How much revenue is associated with each alternative? (Revenue E=$4000, F=$10,500 , G= $12,500 ,H=$16,000 ) (c) What alternative should be selected if they are mutually exclusive and the MARR is 16%? (Select alternative F) (d) What alternative should be selected if they are mutually exclusive and MARR is 11%? (Select alternative H) (e) Select the two best alternatives at a MARR of 19%. (Select alternative F and G)
Alternative Alternative's investment, $ Alternative's Rate of Return, % Incremental Rate of Return, %, on Incremental Cash Flow When Compared with Alternative E F G H 11.7 11.7 -


-20,000 -30,000 -50,000 -80,000

20 35 25 20

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