1. XYZ Company constructs a powerhouse. If the company invested $2.

4 million in the project

that resulted in profits of $760,000 per year for five years, what rate of return did the company
make on its investment? Solve by interpolation, and show your work.

Solution:
760000 760000 760000 760000 760000

0 1 2 3 4 5

24000000

P = A(P/A,i%,n)
2400000 = 760000 (P/A,i%,n)
3.158 = (P/A,i%,n)

At i = 15% P/A = 3.352

At i = 18% P/A = 3.127

For accuracy up to 3 decimal places we have 300 units in 3%.

For a unit change P/A, the % changes by = 300/(3.352-3.127) = 1333.33 units

For a change of 3.352-3.158 = 0.194 unit change in P/A, the units of change in % = 0.194 x 1333.33
= 258.667 or 2.58%

Answer: Hence i = 15+2.586 = 17.586% (Rate of Return)

2. Habib Rafiq Construction Company is considering two projects. Project A requires an investment
of $50,000. Estimated annual receipts for 20 years are $20,000; estimated annual costs are $12,500.
An alternative project, B, requires an investment of $75,000, has annual receipts for 20 years of
$28,000, and has annual costs of $18,000. Assume both projects have a zero salvage value, and that
minimum acceptable rate of return is 12 percent/year.

(a) What is the present worth of each project?

(b) Which project should be recommended?
(c) Repeat parts (a) and (b) for the case where project B has a lifetime of 40 years, using
least common multiples.

Solution:
Project A
20000 20000 20000 20000

0 1 2 19 20

12000 12000 12000 12000

5000

Project B 28000 28000 28000 28000

0 1 2 19 20

18000 18000 18000 18000

75000

a)

Project A

PW of Costs = 50000 + 12000(P/A,12%,20) = 139628$

PW of Benefits = 20000(P/A,12%,20) = 149380$

Project B

PW of costs = 75000+18000(P/A,12%,20) = 209442$

PW of benefits = 28000(P/A,12%,20) = 209132$

b)

Project A NPW = PW of benefits – PW of costs = 9752$

Project B NPW = PW of benefits – PW of costs = -310$

Recommend Project A

20000 20000 20000 20000

0 1 2 19 20

12000 12000 12000 12000

5000
c)
Project A

28000 28000 28000 28000

0 1 2 19 20

18000 18000 18000 18000

75000
Project B

Project A

PW of costs = 50000+12000(P/A,12%,20) + 50000(1+0.12)^-20 +

12000(P/A,12%,20)(1+0.12)^-20 = 154102.7831 $

PW of benefits = 20000(P/A,12%,40) = 164880

Project B

PW of costs = 75000+18000(P/A,12%,40) = 223392$

PW of benefits = 28000(P/A,12%,40) = 230832$

3. A construction company is considering two backhoes. Backhoe A has an initial cost of

$2,500,000, has annual operating and maintenance costs of $800,000, and requires overhauls every
five years at a cost of $1,250,000. Backhoe B is more sophisticated, including computer controls; it
has an initial cost of $5,750,000, has annual operating and maintenance costs of $600,000, and
requires overhauls every 10 years at a cost of $3,000,000. Using an interest rate of five percent per
year, determine the capitalized cost for each design and recommend which one should be chosen.

Solution:
0 1 2 3 4 5

800000 800000 800000 800000 800000+1250000

Backhoe A
2500000

0 1 2 3 4 5
Backhoe B
600000 600000 600000 600000 600000+3000000

5750000

4. A car was bought for $20,000. If it has a useful life of 10 years and a salvage value of $5,000, how
much will it be depreciated in the 9th year, using the 150% declining balance schedule?
Solution:

N = 10, S.V = 5000$ P=20000$

Sum of
depreciatio
Year Depreciation For Year T BV
n charge
upto year t

0 0 0 0.00 20000.00
1 (1.5/10) x BV(t-1) 3000 3000.00 17000.00
2 (1.5/10) x BV(t-1) 2550.00 5550.00 14450.00
3 (1.5/10) x BV(t-1) 2167.50 7717.50 12282.50
4 (1.5/10) x BV(t-1) 1842.38 9559.88 10440.13
5 (1.5/10) x BV(t-1) 1566.02 11125.89 8874.11
6 (1.5/10) x BV(t-1) 1331.12 12457.01 7542.99
7 (1.5/10) x BV(t-1) 1131.45 13588.46 6411.54
8 (1.5/10) x BV(t-1) 961.73 14550.19 5449.81
9 (1.5/10) x BV(t-1) 817.47 15367.66 4632.34
10 (1.5/10) x BV(t-1) 694.85 16062.51 3937.49

Hence depreciation at the end of 9th year is = 817.47$. Total depreciation upto 9th year is
15367.66$.

4. ABC builders recently purchased a new crane for $50,000. It is expected to last for 14 years and
have an estimated salvage value of $8,000. Determine the depreciation charge on the crane for the
third year of its life and the book value at the end of 8 years, using sum-of digits depreciation.

Solution:

P = 50000$ n = 14 SV= 8000$

BV-SV = 50000$-8000$ = 42000$

Sum of
depreciatio
Year Depreciation For Year T BV
n charge
upto year t

0 0 0 0.00 42000.00
1 (14/105) x 42000$ 5600 5600.00 44400.00
2 (13/105) x 42000$ 5200 10800.00 39200.00
3 (12/105) x 42000$ 4800 15600.00 34400.00
4 (111/105) x 42000$ 4400 20000.00 30000.00
 5 (10/105) x 42000$ 4000 24000.00 26000.00
6 (9/105) x 42000$ 3600 27600.00 22400.00
7 (8/105) x 42000$ 3200 30800.00 19200.00
8 (7/105) x 42000$ 2800 33600.00 16400.00
9 (6/105) x 42000$ 2400 36000.00 14000.00
10 (5/105) x 42000$ 2000 38000.00 12000.00
11 (4/105) x 42000$ 1600 39600.00 10400.00
12 (3/105) x 42000$ 1200 40800.00 9200.00
13 (2/105) x 42000$ 800 41600.00 8400.00
14 (1/105) x 42000$ 400 42000.00 8000.00

Depreciation charge for the 3rd year = 4800$

Book value at the end of 8 years = 16400$