ECE 192, Spring 2023

Tutorial # 8

1) Ridgely Custom Metal Products (RCMP) must purchase a new tube bender. It is
considering two alternatives that have the following characteristics:

Construct a break-even graph showing the present worth of each alternative as a

function of interest rates between 6 percent and 20 percent. Which is the preferred
choice at 8 percent interest? Which is the preferred choice at 16 percent interest? What
is the break-even interest rate?

2) A new software package is expected to improve productivity at Suretown Insurance.

However, because of training and implementation costs, savings are not expected to
occur until the third year of operation. Annual savings of approximately $10000 are
expected, increasing by about $1000 per year for the following five years. After this
time (eight years from the implementation), the software will be abandoned with no
scrap value. Construct a sensitivity graph showing what would happen to the present
worth of the software with 7.5 percent and 15 percent increases and decreases in the
interest rate, the $10000 base savings, and the $1000 savings gradient. MARR is 15
percent. What variable is more sensitive?

3) Westmount Waxworks is considering buying a new wax melter for its line of replicas of
statues of government leaders. There are two choices of supplier, Finedetail and
Simplicity. Their proposals are as follows:

Management thinks the company will sell about 30,000 replicas per year if there is
stability in world governments. If the world becomes very unsettled so that there are
frequent overturns of governments, sales may be as high as 200,000 units a year.
Westmount Waxworks uses a MARR of 15 percent for equipment projects.

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ECE 192, Spring 2023

a) Who is the preferred supplier if sales are 30,000 units per year? Use an annual
worth comparison.
b) Who is the preferred supplier if sales are 200,000 units per year? Use an annual
worth comparison.
c) How sensitive is the choice of supplier to sales level? Experiment with sales
levels between 30,000 and 200,000 units per year. At what sales level will the
costs of the two melters be equal?

4) A regional municipality is studying a water supply plan for the area to the end of the
year 2050. To satisfy the water demand, one suggestion is to construct a pipeline from a
distant lake. It is now the end of 2010. Construction would start in the year 2015 (five
years from now) and take five years to complete at a cost of $20 million per year (the
first payment will be in the year 2016). Annual maintenance and repair costs are
expected to be $2 million and will start the year following project completion (all costs
are based on current estimates). From a predicted inflation rate of 3 percent per year, and
the real MARR, city engineers have determined that a MARR of 7 percent per year is
appropriate. Assume that all cash flows take place at the end of the year and that there is
no salvage value at the end of 2050.
a) Find the present worth of the project.
b) Construct a sensitivity graph showing the effects of 5 percent and 10 percent
increases and decreases in the construction costs, maintenance costs and inflation
rate. To which is the present worth most sensitive?