Problem 1: Mason is responsible for buying some specialized equipment for his co
ID: 1172295 • Letter: P
Question
Problem 1: Mason is responsible for buying some specialized equipment for his company. The equipment has an initial cost of $10,000 and annual operating costs of $1000. For the first four years there will be no maintenance costs. However, in years 5 through 10 the maintenance cost will be $500. Additionally, the equipment will need to be recalibrated in year five, which will cost $2000. The salvage value of the equipment in year 10 (just after the annual operating costs and maintenance costs are paid) is $1000. Determine the present value of the equipment. Assume an interest rate of 8%.
Problem 2: A phone company is expanding their facilities to serve a new manufacturing plant. The new plant will require 2000 phone lines this year, and another 2000 lines after expansion in 10 tears. The plan will operate for 30 years. The phone company has two options.
Option 1: Provide one cable now with the capacity to serve all 4000 lines. The cable will cost $20,000 and will have annual maintenance costs of $1500.
Option 2: Provide a cable with capacity to serve 2000 lines now and a second cable to serve the other 2000 lines in ten years. Each cable will cost $15,000 and will have annual maintenance of $1000 per cable.
Assuming a MARR of 10%, determine:
A) which alternative should be selected
B) if the demand for the additional 2000 lines occurs after five years (instead of ten) which alternative should be chosen
Problem 3: A company needs a new grinder. Compute the present worth for the mutually exclusive alternatives and identify which option is better. Assume an interest rate of 6% and that the grinder will be replaced with an identical model at the end of its life.
Option 1: Initial cost of $4500, annual costs of $300, salvage value of $500, life of 5 years
Option B: Initial cost of $5500, annual costs of $400, no salvage value, life of 10 years
Problem 4: A company is installing a new high speed elevator in their building. They received bids from the Otis Elevator Company and Dover Corporation. If the company's interest rate is 20%, which bid should be accepted?
Otis: Installed cost of $45,000, annual costs of $2700, salvage value of $3000, life of 10 years
Dover: Installed cost of $54,000, annual costs of $2850, salvage value of $4500, life of 15 years
Problem 5: A developer must construct a sewage treatment plant and deposit sufficient money in an account to pay the $5000 per year operating cost and to replace the plant every 40 years. The plant, and the future replacement plants will cost $150,000 each. If the account will pay 8% interest, how much does the developer need to deposit?
Explanation / Answer
Problem 1:
Thus the present value of the equipment is -$18,966.74
The formula's can be viewed below:
A B C=A*B Year Initial cost Annual operating costs Maintenance cost Cost of recaliberation Salvage value Net cash flow 1+r PVIF PV 0 -10,000 0 0 0 0 -10,000.00 1.08 1.0000 -10,000.00 1 -1,000 0 0 0 -1,000.00 0.9259 -925.93 2 -1,000 0 0 0 -1,000.00 0.8573 -857.34 3 -1,000 0 0 0 -1,000.00 0.7938 -793.83 4 -1,000 0 0 0 -1,000.00 0.7350 -735.03 5 -1,000 0 -2,000 0 -3,000.00 0.6806 -2,041.75 6 -1,000 -500 0 0 -1,500.00 0.6302 -945.25 7 -1,000 -500 0 0 -1,500.00 0.5835 -875.24 8 -1,000 -500 0 0 -1,500.00 0.5403 -810.40 9 -1,000 -500 0 0 -1,500.00 0.5002 -750.37 10 -1,000 -500 0 1,000 -500.00 0.4632 -231.60 NPV -18,966.74