Project Appraisal Exercises

7. A local council plans to purchase a new garbage truck. Two models are
equally acceptable. Which truck would you recommend they purchase on
economic grounds?

Model A Model B
Purchase Price ($) 50,000 60,000
Operating Cost (Annual)($) 9,000 7,000

The expected life of each truck is 5 years with zero salvage value and an interest
rate of 7%.

8. (After DeGarmo et al ,1984) The Highridge Water District needs an

additional supply of water from Steep Creek. The engineer has selected two plans
for comparison.

(a) Gravity plan: Divert water at a point 10 miles up Steep Creek and carry it
through a pipeline by gravity to the district.
(b) Divert water at a point near the district and pump it through 2 miles of pipeline
to the district. The pumping plant can be built in two stages, with one-half
capacity installed initially and the other one-half 10 years later.

All costs are to be repaid within 40 years, with interest at 8%. Salvage values can
be ignored. During the first 10 years, the average use of water will be less than the
average during the remaining 30 years. Costs are as follows:

Gravity Pumping
Initial investment $2,800,000 $1,400,000
Additional investment in tenth year None $200,000
Operation, maintenance, and $10,000/year $25,000/year
replacements
Power cost:
Average first 10 years None $50,000/year
Average next 30 years None $100,000/year

Required: Select the more economical plan for a 40-year period on the basis of
present worth.

CV492 Project Appraisal Exercises Page 1

9. Compare the following two projects using present value analysis over a life
of 25 years at discount rates of 15% and 8%. Comment on the difference. The
capital costs and incomes for each project are:

Project Capital Cost Annual Income

1 $100,000 $20,000
2 $30,000 $11,000

10. (After DeGarmo et al, 1984) A construction company is going to purchase

several heavy-duty trucks. Its M.A.R.R. before taxes is 18%. It is considering two
makes, and the following relevant data are available.

Wiltsbilt Big Mack

Cost $10,000 $15,000
Life (estimated by 3 years 5 years
manufacturer)
Salvage value at end of life $2,000 $3,000
Annual out-of-pocket costs $4,000 $3,000

(a) Which type of truck should be selected when the repeatability assumption is
appropriate?
(b) Which type of truck would you recommend if the study period is limited to 3
years (coterminated assumption) and it is estimated that a Big Mack truck will
have a salvage value of $5,600 at that time?

11. Three alternative schemes are being considered for the provision of
machinery for a pumping station. For each scheme the capital cost, annual running
cost and salvage value are indicated below. Determine the most economical
proposal, assuming a constant discount rate of 8%, to provide a pumping facility
for an indefinite number of years.

Note The expected life of each scheme is different.

Scheme A B C
Capital Cost $25,000 $50,000 $35,000
Annual Cost $3,000 $2,000 $2,500
Salvage $5,000 $7,000 $6,000
Value
Life (years) 10 29 16

CV492 Project Appraisal Exercises Page 2

12. The Department of Highways is considering building motorways between
Apple Town, Banana City, and Coconut Village. Three options are being
considered:
• Option 1 involves a motorway connecting Apple Town and Banana City only.
• Option 2 involves a motorway connecting Banana City and Coconut Village only.
• Option 3 involves both of the motorways in the previous options plus a bypass around
Banana City connecting the two motorways.

Benefits and costs are given in the following table.

Option 1 Option 2 Option 3

Construction Cost 100,000,000 50,000,000 170,000,000
Operating Cost 4,000,000 2,000,000 7,000,000
Annual Benefit 12,000,000 5,000,000 20,000,000
Salvage Value 30,000,000 20,000,000 60,000,000

All motorways are expected to have a 50 year life. The Department of Highways
always uses a discount rate of 7%. Determine which option should be selected
using Benefit Cost Ratio.

13. (After DeGarmo et al, 1984) A company has the opportunity to take over a
redevelopment project in an industrial area of a city. No immediate investment is
required, but it must raze the existing buildings over a 4-year period and at the end
of the fourth year invest $2,400,000 for new construction. It will collect all
revenues and pay all costs for a period of 10 years, at which time the entire project,
and the properties thereon, will revert to the city. The net cash flow is estimated to
be as follows:

Year End Net Cash Flow

1 +$500,000
2 +$300,000
3 +$100,000
4 -$2,400,000
5 +$150,000
6 +$200,000
7 +$250,000
8 +$300,000
9 +$350,000
10 +$400,000

CV492 Project Appraisal Exercises Page 3

Tabulate net present worth versus the interest rate and determine whether multiple
I.R.R.'s exist.

14. A company is considering investing in one of three different projects.

Year A B C
0 -2400 -2400 -2400
1 600 800 500
2 600 800 700
3 600 800 900
4 600 800 1100
5 600 800 1300

The company would consider each project to have a discount rate of 10%. For each
project determine the conventional payback period, the discounted payback period,
and the net present value.

CV492 Project Appraisal Exercises Page 4