1. An individual own a corner.

This person must decide which of two alternative to select in

trying to obtain a desirable return on investment. After much study, the two alternative are:

Build a gas station Build a soft-serve ice cream

stand
First cost $80,000 $120,000
Annual property taxes $3,000 $5,000
Annual income $11,000 $16,000
Salvage value -0- -0-

Assume, a 20-year analysis period. If the owner wants a minimum attractive rate of their investment
of 6%, which two alternative would be recommended?

Solution:

To determine which alternative to select, we need to calculate the net present value (NPV) of each
alternative, using a discount rate of 6%. The formula for calculating NPV is:

NPV = -Initial cost + (Annual income - Annual property taxes)/(1+discount rate)^n

where n is the year (1 to 20).

For the gas station alternative:

NPV = -80000 + (11000 - 3000)/(1+0.06)^1 + (11000 - 3000)/(1+0.06)^2 + ... + (11000 -

3000)/(1+0.06)^20 = -$7,047.51

For the soft-serve ice cream stand alternative:

NPV = -120000 + (16000 - 5000)/(1+0.06)^1 + (16000 - 5000)/(1+0.06)^2 + ... + (16000 -

5000)/(1+0.06)^20 = $4,724.13

Based on these calculations, the soft-serve ice cream stand alternative is recommended, as it has a
positive NPV of $4,724.13, whereas the gas station alternative has a negative NPV of -$7,047.51.

2. Two alternative cash flow have been identified:

Year A B
0 $2,000 $2,800
1 +800 +1,100
2 +800 +1,100
3 +800 +1,100

If 5% is considered the minimum attractive rate of return (MARR), which cash flow should be
selected?

Solution:

To determine which cash flow to select, we need to calculate the present value (PV) of each cash
flow using a discount rate of 5%. The cash flow with the higher PV should be selected. The formula
for calculating PV is:
PV = CF/(1+discount rate)^n

where CF is the cash flow in each year, and n is the year (0 to 3).

For cash flow A:

PV = -2000 + 800/(1+0.05)^1 + 800/(1+0.05)^2 + 800/(1+0.05)^3 = $1,998.69

For cash flow B:

PV = -2800 + 1100/(1+0.05)^1 + 1100/(1+0.05)^2 + 1100/(1+0.05)^3 = $3,096.28

Based on these calculations, cash flow B should be selected, as it has a higher PV of $3,096.28,
compared to cash flow A, which has a lower PV of $1,998.69. Therefore, cash flow B provides a
higher return on investment at the minimum attractive rate of return of 5%.

3. Two machines are being considered for purchase. If the MARR ( For this problem, also the
minimum required interest rate) is 10%, which machine should be bought?

Machine X Machine Y
Initial Cost $200 $700
Uniform Annual Benefit $95 $120
End-of-useful-life salvage value $50 $150
Useful life, in years 6 12

Solution:

To determine which machine to purchase, we need to calculate the present worth (PW) of each
machine using a discount rate of 10%. The machine with the higher PW should be selected. The
formula for calculating PW is:

PW = -Initial cost + (Uniform annual benefit - End-of-useful-life salvage value)/((1+i)^n - 1)/((1+i)^n/i)

where i is the discount rate (10%), and n is the useful life of the machine in years.

For Machine X:

PW = -200 + (95 - 50)/((1+0.10)^6 - 1)/((1+0.10)^6/0.10) = $108.31

For Machine Y:

PW = -700 + (120 - 150)/((1+0.10)^12 - 1)/((1+0.10)^12/0.10) = $496.08

Based on these calculations, Machine Y should be purchased, as it has a higher PW of $496.08

compared to Machine X, which has a lower PW of $108.31. Therefore, Machine Y provides a higher
return on investment at the MARR of 10%.