Arda Sahin 64807

INDR 202 - Engineering Economics - Spring 2022

Homework 5 (due by 23.59 on May 13th )

Instructions:
• You can work individually or in groups of maximum two students.
• Your name and ID number should be clearly stated at the beginning of the first page. In
case of a group work, both students’ names and ID numbers must be stated.
• You should submit your homework electronically on Blackboard. You can either type
your solutions or scan a handwritten document. Please upload only a single pdf file (NO
PHOTOS OR ZIP FILES).
• A single submission is expected from each group. Please avoid uploading two works by
both of the group members.
• For every question, you should write the whole solution and then select the right answer.
Answers that do not include a clear solution methodology will receive maximum 10% of the
grade for the question.
• You are not allowed to collaborate with others (except for your teammate). Please write
the following statement at the beginning of your homework (if you fail to do so, you will
lose 5% of the total available points):
“I (We) hereby declare that I (we) have completed this assignment individually (as the
group), without support from anyone else.”
• Late submissions will not be graded unless an approval is granted before the deadline.
• If you use a computation tool such as excel please clearly indicate your reasoning on your
solution document.

Question 5.1 (10pts)

A company considers to buy a new equipment, which costs $75,000 including delivery charges
and applicable taxes. The company estimates that the aquisition of this equipment would lead
to the following additional revenues and operating expenses (excluding depreciation):

1
End of Additional Additional Operating Expenses, Allowed Tax Cashflow Cashflow

←aqB%%%→¥◦
Year Operating Revenue Excluding Depreciation Depreciation

§
1 $72,000 $32,000 $10,718 " 450
27
2 $65,000 $28,400 $18,368 4592 36 600 750
000 33
3 $74,000 $29,000 $13,118 3280 45 32 400
200
4 $82,000 $38,800 $9,368 2342 43 24 750
000
5 $64,000 $31,000 $6,698 1675 33 Is
750

6 $50,000 $25,000 $3,345 836 2g 000

The projected revenue is assumed to be in cash in the year indicated, and all the additional
operating expenses are expected to be paid in the year in which they are incurred. The estimated
salvage value for the equipment at the end of the sixth year is $7,000. The firm’s e↵ective tax rate
is 25%. What is the equivalent annual cash flow the firm can expect by owning and operating
this equipment at an interest rate of 13%? (Clearly show your work)
A) $13,090 CashInflow Present Value ( 0/013 irlyer)
28520
B) $13,474 32680 →

25094 7128097 -75000

]
☆ C) $13,282 32042
25003 = ☐ 097
D) Answers A, B and C are not correct 37030 21 308 p ◦%→?j
"

34742 14 342
2, uz , g yo ,

19 586 A=
1
7 °O° t,,gg
 Question 5.2 (10pts) A large scale factory needs 65,000,000 kWh of electrical energy a year,
with a maximum demand of 15,000 kW. The local utility company currently charges $0.065 per
kWh—a rate. The company’s engineers consider installing a 15,000-kW steam-turbine plant in
0
the existing land of the factory. Three types of plants have been proposed (units in thousands of
dollars) and are given in Table.

Plant A Plant B Plant C 2081000/63 noooooo

=D -034

Total investment (excluding land) $9,500 $11,400 $12,000 181 I 007/65 soooooo 0.0278 =

Annual operating cost:

Fuel $1,165 $905 $845 17350001 05000000=0.0266
Labor $700 $700 $700
O&M $165 $143 $125
Supplies $50 $50 $50
Insurance and property taxes $11 $13 $15
Total 2091 1811 1735
The service life of each plant is expected to be 15 years. The plant investment will be subject
to a 15-year MACRS property classification. The expected salvage value of the plant at the end
of its useful life is 10% of its original investment. The firm’s MARR is known to be 15%. The
firm’s e↵ective income tax rate is 30%. Determine the unit power cost ($/kWh) for each plant.
A) $0.0502/kWh, $0.0527/kWh, $0.0537/kWh
B) $0.0472/kWh, $0.0492/kWh, $0.0499/kWh
C) $0.0569/kWh, $0.0575/kWh, $0.0579/kWh

•
D) Answers A, B and C are not correct

Question 5.3 (15pts) A company considerings acquiring a new heavy-duty truck. The purchase
price is $120,000, and an additional $30,000 is required to modify the equipment for special use
by the company. The truck falls into the MACRS seven-year classification (the tax life), and it
will be sold after five years (the project life) for $55,000. The purchase of the truck will have no
e↵ect on revenues, but it is expected to save the firm $65,000 per year in before-tax operating
costs, mainly labor. The firm’s marginal tax rate is 20%. Assume that the initial investment is to
be financed by a bank loan at an interest rate of 10% payable annually. Determine the after-tax
cash flows and the net present worth of the investment for this project if the firm’s MARR is
known to be 15%.

⑥
150000
A) $118,059 0 150000 150 =

,•!,É¥"s
B) $133,600 I 128 565
C) $90,022
97 079.43
D) Answers A, B and C are not correct 2

> *iɥiɥ ! ! !:* g.

) 4
^ 70 095.72
sadat -50k$
d

55k ( 1.1515

, -67=-118.059
2
 9224g

↓,,Ñ↑↑ 94%2%0
→

Constant )

73%8
#

145900%727 ,,
↓
,
233727
Question 5.4 (15pts) A firm has just received a special order from a client. The following
financial data have been collected:
• This two-year project requires the purchase of special-purpose equipment for $62,000. The
equipment falls into the MACRS five-year class.
55703
• The machine will be sold for $32,000 (today’s constant dollars) at the end of two years.

:
• The project will bring in additional annual revenue of $122,000 (actual dollars), but it is
expected to incur an additional annual operating cost of $55,800 (today’s constant dollars).
• The project requires an investment in working capital in the amount of $15,000 at n=0.
In each subsequent year, additional working capital needs to be provided at the general
inflation rate. Any investment in working capital will be recovered after the project is
terminated.
• To purchase the equipment, the firm expects to borrow $57,000 at 12% over a two-year
period. The remaining $5,000 will be taken from the firm’s retained earnings. The firm
will make equal annual payments of $33,727 (actual dollars) to pay o↵ the loan.
• The firm expects a general inflation of 6% per year during the project period. The firm’s
marginal tax rate is 27%, and its market interest rate is 15%.
Compute the after-tax cash flows in actual dollars. What is the equivalent present value of this

27787J
amount at time 0?
A) $37,964
B) $45,672
C) $52,923

•
D) Answers A, B and C are not correct

Question 5.5 (10pts) H.S.A. group has just invested $800,000 in a manufacturing process that is
estimated to generate an after-tax annual cash flow of $300,000 in each of the next five years. At
the end of year 5, no salvage value for the manufacturing process is expected. If a manufacturing
problem delays the start-up of the plant for one year (leaving only four years of process life),
what additional after-tax cash flow will be needed to maintain the same present worth as would
be experienced if no delay occurred considering that the MARR is 10%?
A) $65,852
30000011.1 = 272727
• B) $94,641
C) $105,563
D) Answers A, B and C are not correct

at Marr % to
PU of cashflow ( 84641) for 2,314,5hr gas

94641 ( 1. 1)
"
+84641 ( 1.45
Ipt
=

= 94641 ( 1.112 t 94641 ( I.

782/6 1- 71105 t 64 641 1- 58765=272727 ④

3
 590542
¥!]
Question 5.6 (10pts) A publishing company considers introducing a new morning newspaper.
= 108830

Its direct competitor charges $0.25 at retail. The fixed cost of editors, reporters, rent, pressroom
expenses, and wire-service charges to be $350,000 per month. The variable cost of ink and paper
is $0.08 per copy, but advertising revenues of $0.05 per paper will be generated. To print the
morning paper, the publisher has to purchase a new printing press, which will cost $620,000. The
365/-12
press machine will be depreciated according to a seven-year MACRS class. The press machine
will be used for 10 years, at which time its salvage value would be about $100,000. Assume 365 g

%Éx¥
"
issues per year, a 27% tax rate, and a 13% MARR. How many copies per day must be sold to
break even at a retail selling price of $0.20 per paper?
A) 81,345 copies per day
B) 72,427 copies per day
↑ 29458
↓ ↓
C) 63,843 copies per day
590542 0.20+0.05-0.08=0-17
⑧
=

D) Answers A, B and C are not correct

10883015°
966 should be sold 458830/0.17×30 =
9
copies
Question 5.7 (10pts) A corporation is trying to decide whether to buy the patent for a product
.

designed by another company. The decision to buy will mean an investment of $12 million, and
the demand for the product is not known. If demand is light, the company expects a return of
$2.3 million each year for three years. If demand is moderate, the return will be $4.8 million each
year for four years, and high demand means a return of $6.9 million each year for four years. It is
estimated the probability of a high demand is 0.35, and the probability of a light demand is 0.2.
The firm’s (risk-free) interest rate is 15%. Calculate the expected present worth of the patent.
(All figures represent after-tax values.)
✗ 0.2
2.3M / I. Is + 2.SN/( 1.1512 +2.3M / 1.153
-6 748 582
A) $2,111,810 Light! -12M
⑦⑥
=
+

4.8M
/I. is
+
4.841.152 4.811.153 896 ✗ D. 45
4.8M¢
Moderate -12Mt t 1-
1 703
B) $1,874,237 :
.
,gu =

C) $2,564,594 High :
-12M + 6- 9M / i. ist 6.9M / i.
get
-
. -
6.
9m11 ,gy
.
=
7.699353 × 0-35

D) Answers A, B and C are not correct =

2 111 180

Question 5.8 (10pts) You are considering three mutually exclusive projects with the following
cash flows:

Projected Cash Flows 4. em 0 → s .

Probabilities Project A Project B Project C I → 0 . 893

2 → 0 797
Investment required 1.00 $100,000 $150,000 $200,000
.

3 → 0 712
0.35 $30,000 $40,000 $50,000 .

Annual cash flows for 5 years 0.45 $40,000 $55,000 $68,000 y → 0 .

635

0.20 $50,000 $67,000 $70,000 5 → 0 .

567

Compute the mean and variance of NPW distribution for each project using i = 12%. Assume 0
that project cash flows are mutually independent. Which project has a higher probability of losing
money? You must calculate probabilities for each alternative. (Hint: use normal approximation)

⑥ A) Project A A = -100 +
0.35-[30×4.604] t 0.45×[40×4.604] 1- 0.2 [50×4.0041
B) Project B 1-77254
=

smaller
C) Project C
D) Answers A, B and C are not correct
expected profit
0.35×40×4.604 1- 0.45×6.004×55 1-0.2×4.604×67
B. = -150 t

= 1-90.098

C = Got
. - -
-

4
c= 85908
 /
Question 5.9 (10pts) A company is planning to issue stock to finance an investment. The annual
return to the market portfolio is expected to be 28% and the current risk-free interest rate is
8%. The company’s analysts further believe that the expected return to the project will be 35%
annually. What is the maximum beta value that would induce the auto maker to issue the stock?
A) 1.15
Re = stock Return
0.8
B) 1.25 0.808
D- 35 0.28
-

B Beta Get Re=Bx[ Rm Rf] + Rf

DD
C) 1.35 = -

D) Answers A, B and C are not correct

Rm Return N
= Mrbet

Risk-free
p=÷÷=↳s
Rate
Rf =