0 Blank-Tarquin: Level Two: Tools for 6. Annual Worth Analysis The McGraw-Hill Engineering Economy, Fifth Evaluating Alternatives Companies, 2002 Edit

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0 Blank-Tarquin: Level Two: Tools for 6. Annual Worth Analysis The McGraw-Hill Engineering Economy, Fifth Evaluating Alternatives Companies, 2002 Edition Blank-Tarquin: Level Two: Tools for 6.

10 0 Blank-Tarquin: Level Two: Tools for 6. Annual Worth Analysis The McGraw-Hill Engineering Economy, Fifth Evaluating Alternatives Companies, 2002 Edition Blank-Tarquin: Level Two: Tools for 6. Annual Worth Analysis The McGraw-Hill Engineering Economy, Fifth Evaluating Alternatives Companies, 2002 Edition PROBLEMS CHAPTER6 Annual Worth Analysis towers. A single-user license will cost $4000 per year. A site license has a onetime cost of $10,000. A structural engineering consulting company is trying to decide between 2 alternatives; first to buy one single-user site license now, 1 year from now, and 2 years from now, and second, to buy a site license now. Determine which strategy should be adopted at an interest rate of 12% per year for a 5-year planning period. 6.9 A company that manufactures amplified pressure transducers is trying to decide between the machines shown below. Compare them on the basis of annual worth using an interest rate of 15% per year. First cost, $ Annual operating cost, $/year Overhaul in years 2 and 4, $ Overhaul in year 5, $ Salvage value, $ Life, years Variable Speed -45,000-31,000-12,000 10,000 8 Dual Speed -24,000-35,000-6,000 8, J.O (a) Compare the alternatives below on the basis of an annual worth analysis using an interest rate of 16% per year. First cost, $ Operating cost in year 1, $ Increase in operating cost each year, $/year Salvage value, $ Life, years Alternative x y z -150, , ,000-80,000-60,000-48,000-3,000-2,500-1,000 20,000 32,000 36, (b) Determine the present worth value for each alternative. Which alternative is the most economical? A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the "shell" will cost $150,000 and is expected to have a $65,000 salvage value in 8 years. Alternatively, the company can lease a clamshell for $30,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other stripmining companies whenever possible, an activity that is expected to yield revenues of $10,000 per year. If the company's minimum attractive rate of return is 20% per year, should the clamshell be purchased or leased on the basis of an annual worth analysis? A state highway department is trying to decide whether it should "hot-patch" a short section of an existing county road or resurface it. If the hot-patch method i~ used, approximately 300 cubic meters of material would be required at a cost of $700 per cubic meter (in place). Additionally, the shoulders will have to be improved at the same time at a cost of $24,000. These improvements will last 2 years, at which time they will have to be redone. The annual cost of routine maintenance on the patched up road would be $5000. Alternatively, the state can resurface the road at a cost of $850,000. This surf ace will last 10 years if the road is maintained at a cost of $2000 per year beginning 4 years from now. No matter which alternative is selected, the road will be completely rebuilt in 10 years. At an interest rate of 9% per year, which alternative should the state select on the basis of an annual worth analysis? 6.13 (a) Compare the following alternatives on an annual worth basis at an interest rate of 18% per year. First cost, $ Annual operating cost, $/year Annual revenues, $/year Salvage value, $ Life, years Petroleum Based Feedstock -250, , ,000 50,000 6 Inorganic Based Feedstock -110,000-65, ,000 20,000 4 (b) If the projects are independent, wbjch of them should be implemented? 6J.4 A city that is trying to attract a minorleague hockey team is considering two options for an ice arena. The first option would involve remodeling an existing arena that is currently used for rodeos, car shows, and religious events. It has a seating capacity of 5000 with no super-boxes or other high-revenue amenities. The remodeling cost will be $10 million now and $2 million in 4 years. The annual M&O costs will be borne by the hockey team and therefore will not be included in this analysis. The city will share in the concession stand revenue, which is expected to be $70,000 the first year, $65,000 the second, and $60,000 per year through year 10, after which the building will have to be renwdeled again. Alternatively, the city can attempt to pass a bond issue for construction of a new 10,000-seat arena. The city already has the land, but the building will cost $40 million. The city's share of the concessions, box rentals, and parking fees will be $190,000 each year of the arena's 40-year life. At an interest rate of 10% per year, which alternative is more attractive on the basis of an annual worth analysis? Permanent Investments and Projects 6J.5 Determine the perpetual equivalent annual worth of an investment of $400,000 at time 0 and $50,000 per year thereafter (forever) at an interest rate of 10% per year The cash flow associated with a project having an infinite life is $100,000 now, $30,000 each year, and an additional $50,000 every 5 years beginning 5 years from now. Determine its perpetual equivalent annual worth at an interest rate of 20% per year A philanthropist working to set up a permanent endowment wants to deposit a uniform amount of money each year, starting now and for 10 more (11 deposits), so that $10 million per year will be available for research related to planetary colonization. If the first $10 million grant is to be awarded 11 years from now, what is the size of the uniform donations, if the fund will generate income at a rate of 15% per year? 6.18 The costs associated with a certain robotic arm are $40,000 now and $24,000 per year, with a $6000 salvage value after 3 years. Determine the perpetual equivalent annual worth of the robot at an interest rate of 20% per year. The cost associated with maintaining major highways follows a predictable pattern. There are usually no costs for the first 2 years, but thereafter maintenance is required for restriping, weed control, light replacement, shoulder repairs, etc. For one section of a particular highway, these costs were $6000 in year 3, $7000 in year 4, and amounts increasing by $1000 per year through year 15, after which they remained constant through the highway's 40-year life. Assuming it is replaced with a similar roadway, what is the perpetual equivalent annual cost, at an interest rate of 10% per year?

Overall ROR: 30,000(0.20) + 70,000(0.14) = 100,000(x) x = 15.8% Prepare a tabulation of cash flow for the alternatives shown below.

Overall ROR: 30,000(0.20) + 70,000(0.14) = 100,000(x) x = 15.8% Prepare a tabulation of cash flow for the alternatives shown below. Chapter 8, Problem 2. What is the overall rate of return on a $100,000 investment that returns 20% on the first $30,000 and 14% on the remaining $70,000? Chapter 8, Solution 2. Overall ROR: 30,000(0.20)