ASSIGNMENT #2 continuation (10 pts.

each)

11.) Four mutually exclusive alternatives are being evaluated, and their costs and revenues are itemized below.
a. If the MARR is 15% per year and the analysis period is 12 years, use the PW method to determine which
alternatives are economically acceptable and which one should be selected.

b. If the total capital investment budget available is $200,000, which alternative

should be selected?

12.) Your company is environmentally conscious and is looking at two heating options for a new research
building. What you know about each option is below, and your company will use an annual interest rate of 8%
for this decision:
Gas Heating Option: The initial equipment and installment of the natural gas system would cost $225,000 right
now. The maintenance costs of the equipment are expected to be $2,000 per year, starting next year, for each
of the next 20 years. The energy cost is expected to be $5,000, starting next year, and is expected to rise by 5%
per year for each of the next 20 years due to the price of natural gas increasing.
Geothermal Heating Option: Because of green energy incentives provided by the government, the geothermal
equipment and installation are expected to cost only $200,000 right now, which is cheaper than the gas lines.
There would be no energy cost with geothermal, but because this is a relatively newer technology, the
maintenance costs are expected to be $10,000 per year, starting next year, for each of the next 20 years.
Which is the lower-cost option for the company?

13.) A recapping plant is planning to acquire a new Diesel generating set to replace its present unit which run
during brownouts. The new set would cost P135,000 with a (5) year life, and no estimated salvage value. The
variable cost would be P150,000 a year.
The present generating set has a book value of P75,000 and a remaining life of 5 years. Its disposal
value now is P7,5000, but it would be zero after 5 years. The variable operating cost would be P187,500 a year.
Money is worth 10%.
Which is profitable, to buy the new generator set or retain the present set? Support your answer by
showing the computation.

14.) The Department of Public Works and Highways (DPWH) is considering the construction of a new highway
through a scenic rural area. The road is expected to cost P50M with annual upkeep estimated at P400,000. The
improved accessibility is expected to result in additional income from tourists of P7 million per year. The road is
expected to have a useful life of 25 years. If the rate of interest is 15%, should the road be constructed?

15.) Royalties received by an investor in an oil well vary according to the price of oil. Data collected from stripper
wells in an established oil field were used to develop the probability-royalty relationship shown below.

(a) Calculate the expected value of royalty income (RI) per year.
(b) Determine the probability that the royalty income will be at least $12,600 per year.

PREPARED BY: KMB BEJASA