Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
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Question
Chapter 5, Problem 21P
(a):
To determine
Calculate the present worth.
(b):
To determine
Calculate the payback period.
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Students have asked these similar questions
Consider the two mutually exclusive projects described in the table below. (Note: Each part of the question requires a
written answer.)
a) Assuming 9% minimum attractive rate of return (MARR), should either of the two projects be accepted?
Why?
b) Assuming 16% MARR, should either of the two projects be accepted? Why?
c)
For any positive value of the MARR, divide the possible MARR values into ranges with different decisions;
describe and discuss what decision would be made in each range and why. You will need to calculate the
crossover rate to determine the precise MARR where the decision changes. Include an NPV profile table and
chart to illustrate your answer.
Year
0
1
2
3
4
5
Cash Flow
Cash Flow
Project A
Project B
-450,000
-700,000
200,000
200,000
150,000
200,000
100,000
200,000
100,000
200,000
75,000 200,000
Saved
235
XYZ Gadget Company is currently considering which investment projects it should undertake. The following list of projects along with the
estimated rate of return of each project is presented to the executive management team:
Project A (8.5%)
Project B (7%)
Project C (6%)
Project D (11%)
Project E (5.5%)
The current interest rate in the loanable funds market is 5%. However, if an increase in government borrowing pushes the interest rate to
7.5%, we would expect the company to discontinue investment plans for all but,
of its planned projects.
Identify the special cash flow category for each of the following.
While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product. Ultimately that project was not pursued. You are now evaluating a new project and would locate production inside of this building. What type of cash flow is the cost of the building?
You hope to increase membership at your yoga studio by opening a smoothie bar inside of the yoga studio. When considering the feasibility of the smoothie bar, what type of cash flow is the increased studio membership?
Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books. What type of cash flow are the lost sales on the older book?
You currently operate a taco truck but are considering converting the food truck into a bubble tea truck. What type of cash flow are the profits currently earned…
Chapter 5 Solutions
Contemporary Engineering Economics (6th Edition)
Ch. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - If a project costs 100,000 and is expected to...Ch. 5 - Refer to Problem 5.2, and answer the following...Ch. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - Prob. 8PCh. 5 - Consider the cash flows from an investment...Ch. 5 - Prob. 10P
Ch. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - Prob. 17PCh. 5 - Prob. 18PCh. 5 - Consider the project balances in Table P5.19 for a...Ch. 5 - Your RD group has developed and tested a computer...Ch. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Prob. 29PCh. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Prob. 32PCh. 5 - Geo-Star Manufacturing Company is considering a...Ch. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - Prob. 39PCh. 5 - Prob. 40PCh. 5 - Prob. 41PCh. 5 - Prob. 42PCh. 5 - Two methods of carrying away surface runoff water...Ch. 5 - Prob. 44PCh. 5 - Prob. 45PCh. 5 - Prob. 46PCh. 5 - Prob. 47PCh. 5 - Prob. 48PCh. 5 - Prob. 49PCh. 5 - Prob. 50PCh. 5 - Prob. 51PCh. 5 - Prob. 52PCh. 5 - Prob. 53PCh. 5 - Prob. 54PCh. 5 - Prob. 55PCh. 5 - Prob. 56PCh. 5 - Prob. 57PCh. 5 - Prob. 58PCh. 5 - Prob. 59PCh. 5 - Prob. 1STCh. 5 - Prob. 2ST
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Similar questions
- You are considering the following project: It pays you $2,500 at the end of the first year, costs $8,500 by the end of the second year and brings $6,800 a year after. What is the project's internal rate of return(s), exact external rate of return and the approximate external rate of return it current MARR is 14%?arrow_forwardConsider the following investment opportunity: Capital Investment (End of Year 0) Expenses (per year) Revenues (geometric series) $450,000 $25,000 $60,000 in the first year, increasing 5% per year following Market value (End of Year 20) Study Period (years) MARR (per year) $90,000 20 years 10% 10% Interest Tablearrow_forwardThe construction of a bypass road needs a capital investment of $200,000 and $10,000 would be required each year for maintenance. The annual benefits to the project have been estimated to be $60,000. The study period(estimated life) of the project is 10 years. The MARR is set at 12%. a. What is the discounted payback period(in years)? b. Detemine whether this is a good investment using Modified Benefit-Cost Ratio method with Present Worth(PW). c. Using Conventional Benefit-Cost Ratio method with PW but the MARR is set at 12%, is this project acceptable?arrow_forward
- The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,500,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 9%, and project Delta has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $400,000 Year 4 $475,000arrow_forwardConsider the cashflow (n = 10 years, MARR = e = 14%) Cash Flow A Investment Revenues P 180,000 P 350,000 per year Expenses P 400,000 per year for the first 3 years, decreasing by P 50,000 per year thereafter a. Calculate the Internal Rate of Return (IRR) of each project. b. Calculate the External Rate of Return (ERR) of each project. Salvage Value P 40,000arrow_forwardConsider the two investments with the following sequences of cash flows Compute for i* for each investment What are the NPW of each alternatives with an MARR of 15% If A & B are mutually exclusive, which project is more economically desirable? (Incremental)arrow_forward
- Three investments are being studied by Bright Star Construction Limited. The table below provides the estimated cash flow for each of the three investments over the next five years. Due to budget constraints, Bright Star can only select one investment out of the three investments. At a MARR (Minimum Acceptable Rate of Return) of 12%, answer the following. Investment 1 2 3 a) b) Initial Cost $9,000,000 $5,000,000 $7,000,000 Expenses per Year $3,000,000 $1,500,000 $2,000,000 Return at end of year 5 $38,000,000 $20,000,000 $29,000,000 Use a rate of return method to determine the economically best investment for Bright Star. Are you expecting different results if the comparison is based on Annual Worth? (Hint: no calculations are needed). c) What are the case(s) in which a rate of return method is recommended? d) Is it always necessary for the alternative with the highest rate of return to be the best alternative?arrow_forwardThe Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $265,000 at the end of each of the next two years. At the end of the third year, the company will receive payment of $625,000. The company can speed up construction by working an extra shift. In this case, there will be a cash outlay of $575,000 at the end of the first year followed by a cash payment of $625,000 at the end of the second year. Use the IRR rule to show the (approximate) range of opportunity costs of capital at which the company should work the extra shift Please answer fast I give you upvotearrow_forwardYou are faced with making a decision on a large capital investment proposal. The capital investment amount is $640,000. Estimated annual revenue at the end of each year in the eight year study period is $180,000. The estimated annual year-end expenses are $42,000 starting in year one. These expenses begin decreasing by $4,000 per year at the end of year four and continue decreasing through the end of year eight. Assuming a $20,000 market value at the end of year eight and a MARR = ε =12% per year, answer the following questions. Using AW, determine whether this proposal is acceptable. What is the ERR of this proposal? Is it acceptable? What is the IRR of this proposal? Is it acceptable? What is the simple and discounted payback period for this proposal?arrow_forward
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