Home Assignment -1

1. A Manufacturing company is planning an expansion to a refrigerating facility. Two Alternative site-design

proposals are being considered that use a MARR of 10%. Plan A require an expenditure of $350,000 for
land which will retain its value in 10 years, while plan B requires $425,000 for land which will also retain
its value in 10 years. The estimated income increase due to facility availability is annualized at $ 248,000
per year. The company requires that a life of 10 years be used for the analysis. Which proposal should be
selected? Data (in $) associated with the proposals are as follows:
Proposal A Proposal B
Building and Installation 600,000 400,000
Compressor 100,000 85,000
Expected Energy Cost:
First Year 65,000 65,000
Increase for each additional Year 3000 35000
Maintenance Costs (after every 4th year) 20,000 50,000
Estimated Salvage Value 35,000 18,000

2. An oil well is expected to produce 100,000 barrels of oil during its first 4 production years. However, its
subsequent production (yield) is expected to decrease to 90,000 barrels per year for the remaining years.
The oil well has a proven reserve of 1,000,000 barrels.
(a) Suppose that the price of oil is expected to be $30 per barrel for next several years. What would be the
present worth of the anticipated revenue stream at an interest rate of 12% per year over next 7 years?
(b) Suppose that the price of oil is expected to start at $30 per barrel during the first 4 years, but to
increase to $40 for the remaining years, what would be the annual worth of the anticipated revenue
stream at an interest rate of 12% per year over next 7 years?

3. There is a continuing requirement for standby electrical power at a public utility service facility. Equipment
alternative “S1” involves an initial cost of Rs 72000, a 9 year useful life, annual expenses of Rs 2200 the first
year and increasing Rs 300 per year thereafter, and the net market value of Rs 8400 at the end of the useful
life. Alternative “S2” has an initial cost of Rs 90000, a 12 year useful life, annual expenses of Rs 2100 the
first year and increasing at the rate of 5% per year thereafter, and a net market value of Rs 13000 at the
end of useful life. The current interest rate is 10% per year. Which alternative is preferred using Present
Worth method?
4. A new building to house Manufacturing Facilities be constructed on the campus to strengthen income
generation. A design utilizing a combination earth-work bowl with a steel upper deck and press box is being
considered. The following cost estimates (in $) have been developed
First cost of complete construction 32,000
Paint steel structure every 6 years 2,000
Replace iron grouting’s every 10 years 4,000
Repave machine foundations every 12 years 3,000
Annual Maintenance 1,500
Assuming 25-year life and negligible salvage value, determine the minimum annual revenue that must be
generated to justify the project when the Interest rate is 7%.
 Home Assignment-II
1. An asset for drilling was purchased and placed in service by a petroleum production company. Its
cost Basis is Rs 60000and it has an estimated Market value of Rs 12000 at the end of an estimated
useful life of 14 years. Compute the depreciation amount in the third year and the Book Value at the
end of the Fifth year by using (i) straight line method (ii) SYD Method.
2. A firm purchased a pump and motor for $1925 installed. It was soon discovered that the pump has been
improperly selected for the required head and discharge. As a result the power bill for operating the
pump will be $900 for each year.
A new pump, suited to the requirements, is available for $2450 installed, with a guarantee that power
costs will not exceed $500 annually. The original pump and motor can be exchanged for $375 with this
new pump. Assume an 8 year study period with no salvage value for both the pumps at the end of the
period. The firm uses a minimum attractive rate of return of 12%, should the existing pump be replace?
If so, when?
3. Two routes are under consideration for a new interstate highway segment. The long route would be 25
kilometres and would have an initial cost of $21 million. The short trans mountain route would span 10
kilometres and would have an initial cost of $45 million. Maintenance costs are estimated at $40,000
per year for the long route and $15,000 per year for the short route. Additionally, a major overhaul and
resurfacing will be required every 10 years at a cost of 10% of the first cost of each route. Regardless of
which route is selected, the volume of traffic is expected to be 400,000 vehicles per year. If the vehicle
operating expense is assumed to be $0.35 per kilometre and the value of reduced travel time for the
short route is estimated at $900,000 per year, determine which route should be selected, using a
conventional B/C analysis. Assume a 15 year life for each road, an interest rate of 6% per year. (1 million
= 1000000)
4. A company is considering replacing 15 workstations which are on a STAR network. These workstations
have a total salvage value of $8500. The existing system could last for another 3 years with a system
update that will cost $4500 immediately. Also, after the update, the current system will have the
following associated data
Year Salvage value($) Operating & Maintenance Costs ($)
1 7000 13000
2 3500 18000
3 1000 23000
The new workstations will cost $8000 each ($8000*15=$120,000 in total), and implementation for all
the computers will cost $1500. The technological life of the new equipment is 5 years and salvage value
decreases from the first cost by 28% per year. Operating costs will be $4000 for each of the first 2 years
(due to warranty issues) and will be $8000, $10000, and $13000 for years 3 through 5respectievelyu.
Should the company opt for replacement? If so, when? Use MARR of 8% per annum.