1. A machine has a cost of $3,500.

The annual maintenance costs of the machine are

forecast to be $900 in the first year, $1,000 in the second year and $1,200 in the third
year of ownership. The residual value of the machine is expected to be $2,100 after two
years and $1,600 after three years. The cost of capital of the company is 11% per year.
Calculate which project the company should accept?

2. Two mutually exclusive projects are being considered:

 Project A has an NPV of $47m and is expected to last three years.

 Project B has an NPV of $58m and is expected to last four years.
It is anticipated that if either project is chosen it will be possible to repeat it for the
foreseeable future. The cost of capital of the company is 13% per year. Calculate which
project the company should accept?
3. You are evaluating two different pollution control options.
A filtration system will cost $1.1 million to install and $60,000 annually, before taxes,
to operate. It will have to be completely replaced every five years.
A precipitation system will cost $1.9 million to install but only $10,000 per year to
operate. The precipitation equipment has an effective operating life of eight years.
Straightline depreciation is used throughout, and neither system has any salvage
value. Which option should we select if we use a 12 percent discount rate? The tax
rate is 34 percent.
4. Franks is looking at a new sausage system with an installed cost of $560,000. This
cost will be depreciated straight-line to zero over the project’s five-year life, at the end
of which the sausage system can be scrapped for $85,000. The sausage system will
save the firm $165,000 per year in pretax operating costs, and the system requires an
initial investment in net working capital of $29,000. If the tax rate is 34 percent and
the discount rate is 10 percent, what is the NPV of this project?
5. Your firm is contemplating the purchase of a new $720,000 computer-based order
entry system. The system will be depreciated straight-line to zero over its five-year
life. It will be worth $75,000 at the end of that time. You will save $260,000 before
taxes per year in order processing costs, and you will be able to reduce working
capital by $110,000 (this is a one-time reduction). If the tax rate is 35 percent, what is
the IRR for this project?
6. In the previous problem, suppose your required return on the project is 20 percent and
your pretax cost savings are $300,000 per year. Will you accept the project? What if
the pretax cost savings are $240,000 per year? At what level of pretax cost savings
would you be indifferent between accepting the project and not accepting it?
7. A five-year project has an initial fixed asset investment of $270,000, an initial NWC
investment of $25,000, and an annual operating cash flow of $42,000. The fixed asset
is fully depreciated over the life of the project and has no salvage value. If the
required return is 11 percent, what is this project’s equivalent annual cost, or EAC?
8. You are evaluating two different silicon wafer milling machines. The Techron I costs
$290,000, has a three-year life, and has pretax operating costs of $67,000 per year.
The Techron II costs $510,000, has a five-year life, and has pretax operating costs of
$35,000 per year. For both milling machines, use straight-line depreciation to zero
over the project’s life and assume a salvage value of $40,000. If your tax rate is 35
percent and your discount rate is 10 percent, compute the EAC for both machines.
Which do you prefer? Why?
9. Compact fluorescent lamps (CFLs) have become more popular in recent years, but do
they make financial sense? Suppose a typical 60-watt incandescent light bulb costs
$.50 and lasts 1,000 hours. A 15-watt CFL, which provides the same light, costs $3.50
and lasts for 12,000 hours. A kilowatt-hour of electricity costs $.101, which is about
the national average. A kilowatt-hour is 1,000 watts for 1 hour. If you require a 10
percent return and use a light fixture 500 hours per year, what is the equivalent
annual cost of each light bulb?