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CHAPTER 2

1. What future amount of money will be accumulated 10 years from now by


investing $1,000 now plus $2,000 5 years from now at 6% interest
compounded annually.

2. What is the present value of $500 payments to be made at the end of each year
period for the next 10 years if interest is 8% compounded annually?

3. What equivalent annual end-of-year payments for the next 6 years are
equivalent to paying $5,000 now and $10,000 6 years from now if interest is
6% compounded annually?

4. What monthly car mortgage payments for the next 36 months are required to
amortize a present loan of $3,000 if interest is 12% compounded monthly?

5. What amount of money must be deposited in a savings account at the end of


each quarter for the next 5 years to accumulate $10,000 in 5 years if interest is
6% compounded quarterly?

6. What is the present value of $1,000 payments to be made at the end of each 6
year period for the next 10 years if interest is 8% compounded semi annually?

7. What is the present worth of prospective $2,000 payments to be made at the


end of 2 years, 4 years and 6 years from now if interest is 8% compounded
quarterly? What quarterly payments are equivalent to the $2,000 payments
every 2 years?

8. An investor plans to invest $1,000 at the end of every year for 20 years at 10%
interest compounded annually. What is the expected value of this investment

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20 years from now? What single sum of money invested now at 10%
compounded annually would generate the same expected future worth?

9. What is the future value 5 years from now of a present amount of $2,000 and
end-of-years payments of $1,000 for each of the next 5 years if interest is 20%
compounded annually? What semi-annual payments are equivalent to the
$1,000 payments each year if the 20% interest is compounded semi-annually?
What is the future worth 5 years from now of the $2,000 plus $1,000 annual
payments for semi-annual compounding?

10. What effective annual interest rate is equivalent to 20% compounded


quarterly?

11. What nominal annual interest rate is equivalent to an effective annual interest
rate equal to 20% if interest is compounded quarterly?

12. What sum of money will be accumulated in 40 years if :


a) $1.000 is invested at the end of each of the next 40 years at 15% rate of
return compounded annually?
b) $1.000 is invested at the end of the first year, $1,000 is invested at the end
of the second year and each succeeding year’s investment is $100 higher
than the previous year’s investment for 40 years at 15% compounded
annually?
c) What single investment at time zero would generate the part “a” future
worth?

13. It is estimated that a mineral deposit will produce 20,000 tons of ore this
coming year and that production will decrease 500 tons per year each year
thereafter until the end of 20 years from now. It is estimated that profit after
mining expenses will be $6 per ton for the next 9 years and $8 per ton the
remaining 11 years. What is the present value of future profit from this mine
for an interest rate of 8%? For an interest rate of 20%?
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14. Company A owns a patent with 15 years of remaining life. Company B is
paying royalties to Company A for a license to the patent. It is estimated that
royalty payments for the next 15 years will be $6,000 per year for the first 5
years, $8,000 per year for the next 4 years and $10,000 per year for the last 6
years. Company B offers to prepay the expected royalty payments for $7,000
now. If Company A considers 10% per year to be its minimum acceptable
return an investment, should it accept the prepayment offer for $7,000 now or
take the royalty payments year by year?

15. What uniform annual payments for the next 15 years are equivalent to the non-
uniform series of royalty payments described in Problem 14?

16. A machine which has a 10 year life will cost $11,000 now with annual
operating costs of $500 the first year and increasing $50 per year each of the
next 9 years. If the salvage value is estimated to be $2,000 at the end of the
10th year, what is the equivalent annual cost of operating this machine for the
next 10 years if other opportunities exist to have the investment dollars
invested where they would earn an 8% annual rate of return?

17. A person engaged in making small loans offers to lend $2,000 with the
borrower required to pay $89.30 at the end of each month for 30 months in
order to extinguish the debt. By appropriate use of your time value of money
factor tables, find the approximate period interest rate per month. What is the
equivalent nominal interest rate per annum? What is the effective interest rate
per annum?

18. For the series of incomes shown on the following time diagram, if 12% per
year is the minimum rate of return find :

a) The600
present
700worth800
of income
900at year
10000. 1100 1200 1200 1200 1200
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0 1 2 3 4 5 6 7 8 9 10
b) The future worth of income at the end of year 10.

19. Determine the sum of money that must be invested today at 9% interest
compounded annually to give an investor annuity (annual income) payments of
$5,000 per year for 10 years starting 5 years from now?

20. Determine the monthly mortgage payments that will pay off a $6,000 car loan
with 36 equal end-of-month payments for a :
a) 10% per year simple or add-on interest rate.
b) 10% per year compound interest rate.

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CHAPTER 3

1. A subdivider offers lots for sale at $2,500 with $500 to be paid down now and
$500 to be paid at the end of each year for the next 4 years with no interest to
be charged. In discussing possible purchase you will find that you can get the
same lot for $2,250 cash. You also find that on a time purchase there will be a
service charge of $50 at the date of the purchase to cover legal and
administrative expenses. What rate of interest will actually be paid if the lot is
purchased on this time plan? This is what incremental rate of return will be
received on the incremental purchasing investment compared to time
payments? Draw the cumulative cash position diagram for your ROR result.

2. The owner of the patent is negotiating a contract with a corporation that will
give the corporation the right to use the patent. The corporation will pay the
patent owner $3,000 a year at the end of each of the next 5 years, $5,000 at the
end of year for the next 8 years and $6,000 at the end of each year for the final
3 years of the 16 year life of the patent. If the owner of this patent wants a
lump sum settlement 3 years from now in lieu of all 16 payments, at what price
would he receive equivalent value if his minimum rate of return is 8% before
income taxes?

3. Machine A has an initial cost of $50,000; an estimated service period of 10


years and an estimated salvage value $10,000 at the end of the 10 years.
Estimated end-of-year annual disbursements for operation and maintenance are
$5,000. A major overhaul costing $10,000 will be required at the end of 5
years. An alternate Machine B has an initial cost of $40,000, an estimated zero
salvage value at the end of the 10 years service period with estimated end-of-
year annual disbursements for operation and maintenance are $8,000 for the
first year, $8,500 for the second year and increasing $500 each year thereafter.
Using a minimum ROR of 10%, compare the equivalent annual costs of 10-
years service from Machine A and B.

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4. A project has an initial cost of $120,000 and an estimated salvage value after
15 years of $70,000. Estimated average annual receipts are $25,000. Estimated
average annual disbursements are $15,000. Assuming that annual receipts and
disbursements will be uniform, compute the prospective rate of return before
taxes.

5. A man plans to purchase a home for $50,000. Property taxes are expected to be
$900 a year and insurance about $200 a year. Annual repair and maintenance is
estimated at about $400. An alternative is to rent a house of about the same size
for $400 a month (Approximate the rent as $4,800 end of year payments). If
6% before taxes is minimum attractive rate of return on the investment in the
house, what must the resale value be 10 years hence for the equivalent annual
cost of ownership to equal the equivalent annual cost of renting.

6. An old 30 year life $1,000 bond matures in 20 years and pays semi-annual
dividends of $40. What rate of return compounded semi-annually does the
bond yield if you pay $800 for it and hold it until maturity assuming the
analysis is made on the first day of a new semi-annual dividend period? If the
bond is callable 8 years from now at face value, what could an investor pay for
the bond and be assured of receiving annual returns of 6% compounded semi-
annually? Neglect the possibility of bankruptcy by the bond issuer.

7. What can be paid for the bond in problem 6 if a 10% return compounded semi-
annually is desired a bond call is considered a negligible probability?

8. An investor has $5,000 in a bank account at 7% interest compounded annually.


She can use this sum to p for $13,000. She expects that in 10 years she will be
able to sell the land for the purchase of a plot of land. During that period she
will have to pay $200 a year in property taxes and insurance. Should she make
the purchase? Base your decision on rate of return analysis and verify your
conclusion with the future value analysis.
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9. A new project will require developments costs of $60 million at time zero and
$100 million at the end of 2 years from time zero with incomes $40 million per
year at the end of years 1, 2 and 3; and incomes $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.

10. Equipment is being leased from an equipment manufacturer for $500,000 per
year beginning of year payments and the lease expires 3 years from now. It is
estimated that a new lease for the succeeding 4 years on similar new equipment
will provide the same service and will cost $750,000 per year with the
beginning of year payments. The equipment manufacturer is offering to
terminate the present lease today and to sell the lessee new equipment for $2
million now which together with a major repair cost of $600,000 4 years from
now should provide the needed equipment service for the next 7 years when
salvage value is estimated to be 0 for both the purchase and leasing options.
Use equivalent annual cost analysis for a minimum rate of return of 20% to
determine if leasing or purchasing is economically the best approach to provide
the equipment service for the next 7 years. Verify your conclusion with ROR
and NPV analysis.

11. A person is considering an investment situation that requires the investment of


$100,000 now and $200.000 a year from now to generage profits of $90,000
per year starting at year 2 and running through year 10 ( a 9 year profit year
period) with projected salvage value of $150,000 at the end of year 10.
Determine the rate of return for this investment and draw the cumulative cash
position diagram for year 0 through 3.

12. A firm is evaluating whether to lease or purchase a fleet of 4 heavy trucks. The
trucks can be purchased for a cost of $240,000 and operated for maintenance,
insurance and general operating costs of $20,000 at year 0, $40,000 at year 1,
$50,000 at year 2 and $30,000 at year 3 (putting operating costs at the closest
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points in the time to where they are incurred) with an expected salvage value of
$100,000 at the end of year 3. The trucks could be leased for $120,000 per
year, for the 3 years, with monthly payments, so consider $60,000 lease cost at
year 0, $120,000 per year at years 1 and 2 and $60,000 at year 3, putting lease
costs at the closest points in the time to where they are incurred. The lease
costs include maintenance costs of $10,000 at year 0, $20,000 at year 1 and 2,
and $10,000 at year 3. If the minimum rate of return is 15% before tax
considerations, use present worth cost analysis determine if economic analysis
dictates leasing or purchasing. Verify your conclusion with ROR, NPV and
PVR analysis.

13. 500,000 lbs per year raw material are needed in a production operation (treat as
end-of-year requirements). This material can be purchased for $0.24 per pound
or produced internally for operating costs of $0.20 per pound if a $40,000
machine is purchased. A major repair of $10,000 will be required on the
machine after 3 years. For a 5 year project life, zero salvage value and a 30%
minimum rate of return before tax considerations, determine whether the
company should purchase the equipment to make the raw material.
a) Use incremental ROR, NPV and PVR analysis.
b) Verify your result from A with present worth cost analysis.

14. Development of a new oil field will require capital cost expenditures of $10
million at time zero and $20 million at year 1 to cover costs for lease
acquisition, drilling, well completion, pipeline, roads and other contingencies.
Production will start in year 2 and is estimated to yield annual net revenues
(revenues after operating costs and royalties) of $12 million at the end of years
2, 3 and 4 with revenues declining by an arithmetic gradient of $1 million per
year starting in year 5 until the project terminates at the end of year 15 when
salvage value is estimated to be 0. Calculate the rate of return for this project.
If the net revenues are reinvested at a5% annually compounded rate of return
as they are received, what will be the growth rate of return on invested dollars

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over the 15 year project life? Also calculate NPV and PVR for the 15%
minimum ROR.

15. A corporation has invested $250,000 in a project that is expected to generate


$100,000 profit per year for years 1 through 5 plus a $150,000 salvage value at
the end of year 5. It is proposed that the profits and salvage value from this
investment will be reinvested immediately each year in real estate that is
projected to have a $2 million value at the end of 6 years from now. From the
combination of these two projects, what is the growth rate of return on the
$250,000 initial investment? What is the real estate reinvestment project rate of
return?

16. A heavy equipment manufacturer plans to lease a $100,000 machine for 30


months with an option to buy at the end of that time. The manufacturer wants
to get 1% per month compound interest on the unamortized value of the
machine each month and wants the unamortized value of the machine to be
$25,000 at the end of the 30th month. What uniform monthly beginning-of-
month lease payments must the company charge for each of the 30 months so
that these payments plus a $25,000 option to buy payment at the end of 30
months will recover the initial $100,000 value of the equipment plus interest?
What interest is paid by the lessee during the third month of the lease? What is
the unamortized investment principal after fourth payment is made?

17. A 20-year loan is being negotiated with a savings and loan company. $50,000
is to be borrowed at 8% interest compounded quarterly with mortgage
payments to be made at the end of each quarter over a 20-year period. To
obtain the loan the borrower must pay at the time he takes out the loan. This
means the borrower must pay 2% of $50,000 or a $1,000 fee at time zero to
obtain the $50,000 loan. If the borrower accepts the loan under these conditions
determine the actual nominal interest rate compounded quarterly that he will
pay.

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18. Two development alternatives exist to bring a new project into production. The
first development approach would involve equipment and development
expenditures of $1 million at year 0 and $2 million at year 1 generate incomes
of $1.8 million per year and operating expenses of $0.7 million per year
starting in year 1 for each of years 1 through 10 when the project is expected to
terminate with zero salvage value. For a minimum rate of return of 15%,
evaluate which of the alternatives is economically better using
a) ROR analysis
b) NPV analysis
c) PVR analysis

19. An investor is interested in purchasing a company and wants you to determine


the maximum value of the company today considering the opportunity cost of
capital is 20%. The company assets are in two areas. First, an existing
production operation was developed by the company over the past two years
for equipment and development costs of $100,000 two years ago, $200,000 one
year ago; and cost and revenues that cancelled each other during the past year.
It is projected that revenue minus operating expense net profits will be
$120,000 per year at the end of each of the next 12 years when production is
expected to terminate with a zero salvage value. The second company assets is
a mineral property that is projected to be developed for a $350.000 future cost
one year from now with expected future profits of $150.000 per year starting
two years from now and terminating 10 years from now with a zero salvage
value.

20. A company is considering replacement of an existing natural gas boiler system


with a coal fired boiler system that would cost $5 million at time zero. The
value of an existing natural gas boiler system is estimated to be nil at time zero.
Natural gas energy, maintenance and labor operating costs in year 1 are
estimated to be $2.5 million with the natural gas boiler system and to escalate
by a constant arithmetic gradient of plus $0.4 million per year in years 2
through 20 with a zero salvage value at the end of year 20. Coal energy,
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maintenance and labor operating costs in year 1 are estimated to be $2 million
for the coal boiler system and to escalate by a constant arithmetic gradient of
plus $0.2 million per year in years 2 through 20 with a $1 million salvage value
at the end of year 20. If the minimum rate of return is 15%, determine the most
economical boiler system using.
a) Present worth costs analysis.
b) Incremental ROR analysis.
c) NPV analysis
d) PVR analysis

21. Based on the following data for a petroleum project, calculate the before tax
annual cash flow, ROR, NPV and PVR for a 15% minimum ROR. Then
calculate the breakeven crude oil price that, if received uniformly from years 1
through 5, would give the project a 15% ROR. Cost dollar and production units
in thousands.

Year 0 1 2 3 4 5
Production, bbls 62 53 35 24 17
Price, $ per bbl 26.0 26.0 26.0 27.3 28.7
Intangible (IDC) 750 250
Tangible 670
Mineral Rights Acquisition 100
Operating costs 175 193 212 223 256

Royalties are 14% of revenues


Liquidation value in year 5 is zero

22. The following data relates to a mining project with increasing waste rock or
overburden to ore ratio as the mine life progresses, giving declining production
per year. Calculate the before tax annual cash flow, ROR, NPV, and PVR for a

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15% minimum ROR. Then calculate the breakeven price per ton of ore that, if
received uniformly from years 1 through 5, would give the project a 15% ROR.
Cost dollar and production units in thousands.

Year 0 1 2 3 4 5
Production, ton of ore 62 53 35 24 17
Price, $ per ton 26.0 26.0 26.0 27.3 28.7
Mineral development 750 250
Mining equipment 670
Mineral Rights Acquisition 100
Operating costs 175 193 212 223 256

Royalties are 14% of revenues


Liquidation value in year 5 is zero

23. A machine in use now has a zero net salvage value and is expected to have an
additional two years of useful life but its service is needed for another 6 years.
The operating costs with this machine are estimated to be $4,500 for the next
year use at year 1 and $5,500 at year 2. The salvage value will be 0 in two
years. A replacement machine is estimated to cost $25,000 at year 2 with
annual operating costs of $2,500 in its first year of use at year 3, increased by
arithmetic gradient series of $500 per year following years. The salvage value
is estimated to be $7,000 after 4 years of use (at year 6). An alternative is to
replace the existing machine now with a new machine costing $21,000 and
annual operating costs of $2,000 at year 1. The salvage value is estimated to be
$4,000 at the end of year 6. Compare the economics of these alternatives for a
minimum ROR of 20% using a 6 year life by :
a) Present worth cost analysis.
b) Equivalent annual cost analysis.
c) Incremental NPV analysis.

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24. Discount rates on U.S treasury bills (T-bills) are different from normal
compound interest discount rate because T-bills interest effectively is paid at
the time T-bills are purchased rather than at the maturity date of the T-bills.
Calculate the nominal annual rate of return compounded semi-annually to be
earned by investing in a 6-months $10,000 T-bill with a 15% annual discount
rate.

25. A company wants you to use rate of return analysis to evaluate the economics
of buying the mineral rights to a mineral reserve for a cost of $1.5 million at
year 0 with expectation that mineral development costs of $5 million and
tangible equipment costs of $4 million will be spent at year 1. The mineral
reserves are estimated to be produced uniformly over an 8 year production life
(evaluation years 2 through 9). Since escalation of operating costs each year is
estimated to be offset by escalation of revenues, it is projected that profit will
be constant at $4 million per year in each of evaluation years 2 through 9 with
a $6 million salvage value at the end of year 9. Calculate the project rate of
return, then assume a 15% minimum rate of return and calculate the project
growth rate of return, NPV and PVR.

26. A company is evaluating the economics of whether to purchase a coal mining


property now at year 0 for a $10 million acquisition cost with plans to spend a
significant amount of capital for development during year 1 to start producing
coal in year 2. It is estimated annual profit will be $20 million at year 2
(assume end of year 2) and that profit will escalate by $2 million per year
through year 7 and then remain constant through year 15 when coal reserves
will be depleted and the project terminated with an estimated zero salvage
value. In addition to the $10 million year acquisition cost, what total capital
cost can be incurred at year 0 and at year 1 (with 30% at year 0 and 70% at
year 1) to develop the coal mine and breakeven with receiving a 20% rate of
return on invested dollars over the 15 year project life?

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27. To achieve a 20% rate of return on invested capital, determine the maximum
cost than can be incurred today to acquire oil and gas mineral rights to a
property that will be developed 3 years from now for estimated escalated dollar
(actual) drilling and well completion costs of $2.5 million with an expected net
profit of $1.5 million projected to be generated at year 4 and declining by an
arithmetic gradient of $200,000 per year in each year after year 4 for eight
years of production (evaluation years 4 through 11). Salvage value is estimated
to be zero. If the oil and gas mineral rights are already owned by an investor
whose minimum ROR is 20%, what range of sale values for these mineral
rights would make the owner’s economics of selling better than holding the
property for development 3 years from now for the sated profits?

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CHAPTER 4

1. If a year 0 cost of $300,000 is incurred for equipment replacement, an existing


project (A) is expected to maintain the generation of $450,000 before-tax
profits each year for year 1 through 10. Two alternatives are being considered
for improvement (project B) and improvement combined with expansion
(project C) with projected costs and revenues as shown on the time diagrams.
All dollar values are expressed in thousands of dollar.

A) C=300 I=450 I=450 ………………………………… I=450


1 L=0
2 0 1 2 …………………………………… 10 1
… 2
… ………

B) C=900 I=550 I=550 ………………………………… I=550 ………

1 ………
L=0

2 ………
0 1 2 …………………………………… 10 1

… ……
2

… 10
………

… I=750 ………

… C=1,200 C=800 I=850 ………………………………… I=850
C) ………


1 ………
L=0


2 ……
… 0 1 2 …………………………………… 10 1

… 10
2



… ………

… ………
10

… ………

… ………

… ……

… 10


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For
… a minimum rate of return of 15% and considering the alternatives to be
mutually
… exclusive, determine whether project “A”, “B” or “C” is

economically best using ROR, NPV and PVR. Then increase the minimum

ROR
10 to 25% from 15% over the entire 10 year evaluation life and re-evaluate
the alternative using any valid analysis.

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2. A company is analyzing the economics of leasing a parcel of land for 6 years
for year 0 lease payment of $80,000. The land would be used a product
marketing center requiring construction of a $200,000 building on the land in
year 0 and it is estimated that it would generate annual revenues of $290,000
and annual operating costs of $160,000 at the end of years 1 through 6. The
lease contract stipulates that at the end of year 6 the building must be torn
down and the property restored to its initial conditions and this is estimated to
cost $360,000 at the end of year 6. Use rate of return analysis to determine if
this project is economically viable for a 20% minimum ROR. Verify your
results with NPV. What minimum ROR will make project economics a
breakeven with investing elsewhere?

3. A double pipe heat exchanger with steam in the shell is to be insulated to


reduce heat loss to surroundings. The thickness of insulation, initial cost and
project annual cost of heat loss are given in the following table. If the
minimum ROR is 20% before taxes, determine the optimum thickness of
insulation life of 6 years with a zero salvage value

Insulation Annual Heat Loss


Initial Cost ($)
Thickness (inches) Cost ($)
0 0 1400
1 1200 800
2 1800 600
3 2500 500
4 3500 400

Base your results on Net Present Value, then verify them using Present Worth
Cost Analysis.

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4. You have been asked to make rate of return analysis to support or reject the
economic viability of project development that has the estimated potential of
generating $450,000 revenue per year and operating costs of $310,000 per year
for each of the next 10 years (assume end-of year 1 through 10 values). A
company has agreed to construct and finance the project for deferred payments
of $50,000 per year at the end-of-year 2, 3 and 4 with final lump sum purchase
cost of $1,4000,000 to be made at the end-of-year 5. The year ten salvage value
is estimated to be $300,000. Make rate of return analysis to evaluate project
economics for minimum rates of return of
a) 5%
b) 15%
c) 50%
Do NPV results your conclusion?

5. It is proposed to achieve labor cost savings on a manufacturing process by


installing one of two possible equipment automation changes. New capital
equipment cost and projected savings are follows:

Equipment Cost Project Annual


($) Savings ($)
150,000 80,000
Change 1
230,000 115,000
Change 2

a) For a 6 year evaluation life, which change, if any, should be selected i =


40% before tax? Use NPV Analysis and assume zero salvage values.
b) Is there any evaluation life other than 6 years that would switch the
economic evaluation result found in (a)? if yes, what is the breakeven life
for which there are no economic differences between the alternatives?

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6. Rank non-mutually exclusive alternatives A and B using PVR Analysis for i =
15%.

C = 200 C = 230
C = 100 I = 110 I = 110 I = 110 I = 110 I = 110
A)
L=0
0 1 2 3 4 …………… 8
….

C = 200 C = 180
C = 100 I = 110 I = 20 I = 110 I = 110 I = 110
B)
L=0
0 1 2 3 4 …………… 8
….

7. Two mutually exclusive unequal life investment alternatives, A and B, must be


evaluated to determine the best economic choice for I = 20%. The investment
(C), incomes (I) and salvage values (L), are shown on the time diagram in
thousands dollars.

C = 100 I = 40 I = 40 I = 40 I = 40 I = 40
A)
L = 100
0 1 2 3 4 5

C = 150 I = 60 I = 60 I = 60
B)
L = 150
0 1 2 3

a) Determine the dual rates of return that result from direct incremental ROR
analysis of B-A.
b) Evaluate project using NPV Analysis
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c) Evaluate project using incremental Growth ROR Analysis
d) Evaluate project using PW cost Modified incremental ROR Analysis
e) Is the economic choice affected by reducing the minimum ROR to 10%
from 20%?

8. A friend offers to give you 10 payments of $1,000 at annual time periods 0


through 10 except year 3 if you give him $9,000 at year 3 as shown on the
diagram. All values are in dollars.

I = 1,000 I = 1,000 I = 1,000 C = 9,000 I = 1,000 I = 1,000

0 1 2 3 4 ………….. 10
.

Evaluate this income, investment, income opportunity shown on the time


diagram for before tax minimum rate of return of 10% and 20%.
a) Use NPV Analysis.
b) Analyze the project using Present Worth Cost Modified ROR Analysis.

9. A new process can be developed and operated at Levels A or B with capital


costs, sales and operating costs as shown. All values are in thousands of
dollars.

Sales = 75 Sales = 75
C = 100 Op. Costs = 35 Op. Costs = 35
A)
L=0
0 1 ……………………………………… 5

Sales = 100 Sales = 100


C = 150 Op. Costs = 45 Op. Costs = 45
B)
L=0
0 1 ……………………………………… 5

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If i = 20%, which level of investment should be selected? Use NPV Analysis
and verify your results with ROR and PVR Analysis. If the minimum ROR is
reduced to 12%, what is the economic choice? If the minimum ROR is reduced
to 12% for years 1 and 2 and 20% for years 3, 4 and 5, what is the economic
choice?

10. Mining rights to an ore deposit estimated to contain 60,000 units of ore with
estimated market value of $20 per unit will be purchased for $150,000. The ore
can be removed in either 2, 4, 6 or 8 years depending upon the level of mining
investment selected. The following table gives the appropriate cost above the
purchase cost for production investment and production in thousands:

Recovery Time (year) 2 4 6 8

Production Investment ($) 390 330 185 160

Operating Cost/Unit Recovered ($) 10 10 10 10

Unit Recovered per year 30 15 10 7.5

If the property value will be neglible after the ore is exhausted, what level of
mining production investment should be selected if the before tax minimum
ROR is 20%? Use :
a) ROR Analysis
b) NPV Analysis
c) Future Worth Profit Analysis. Compare the future worth profits (at the end
of year 8 for i = 20%) generated by starting with $540,000 and assuming
any money not put into a project is invested elsewhere at i = 20%.

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11. Evaluate mutually exclusive alternatives A, B and C using NPV Analysis for i
= 15%. Verify your results with PVR Analysis.

Rev = $110/yr
C = $75 I = $136 OC = $50/yr ………………………………
A)
1 L=0
2 -1 0 1 …………………………………… 20 1
… 2
… ………
… Rev = $121/yr ………
… C = $82 I = $160 OC = $55/yr ……………………………… ………
B)

1 ………
L=0

2 ……
… -1 0 1 …………………………………… 20 1
10
… 2


Rev = $135/yr ………


… C = $85 I = $170 OC = $60/yr ……………………………… ………
…C) ………

…1 L=0
………

…2 -1 0 1 1
…………………………………… 20……

…… 2
10

…… ………
10
…… ………
…… ………
…… ………
…… ……
…… 10
……

10




12. Use…ROR Analysis to compare project A involving the investment of $240,000
10
to generate a series of equal end-of-year revenues of $50,000 per year for 5
years plus a salvage value of $240,000 at the end of year 5 and project B
involving the investment $240,000 to generate a series of equal end-of-year
revenues of $98,500 per year for 5 years with zero salvage value. The projects

21
are mutually exclusive and the minimum ROR is 10%. Verify your results with
NPV Analysis.

13. Determine the best economic way for a research manager to allocate $500,000
in the following non-mutually exclusive projects if i = 20%.

A) C = $200,000 I = $90,000 I = $90,000


L=0
0 1 ……………………………………… 6

B) C = $500,000 I = $300,000 I = $300,000


L=0
0 1 ……………………………………… 3

C) C = $300,000 I = $120,000 I = $120,000


L = $100,000
0 1 ……………………………………… 5

14. If alternatives A and B are mutually exclusive projects, use ROR Analysis to
determine which is economically best if i = 15%

C = $20,000 I = $12,000 I = $12,000


A)
L = $20,000
0 1 ……………………………………… 12

C = $28,000 I = $14,000 I = $14,000


B)
L = $28,000
0 1 ……………………………………… 12

15. Three unequal life investment alternatives with costs, profits and salvage
values as shown on the diagram are being considered.

22
A) C = $160,000 I = $150,000 I = $150,000
L = $50,000
0 1 ……………………………………… 5

B) C = $320,000 I = $275,000 I = $300,000


L = $70,000
0 1 ……………………………………… 4

C) C = $480,000 I = $500,000 I = $500,000


L = $100,000
0 1 ……………………………………… 3

Assume $480,000 is available to invest and other opportunities exist to invest


all available dollars at a 20% ROR. Use NPV Analysis to determine how the
$480,000 should be spent from an economic view-point if the alternatives are
non-mutually exclusive. The use NPV Analysis to determine which of the
alternatives A, B or C is the best if the alternatives are mutually exclusive.
Verify these results with PVR Analysis.

23
CHAPTER 5

24
CHAPTER 6

25
CHAPTER 7

26
CHAPTER 8

27
CHAPTER 9

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