Case Study Exercise 4The city of Kelowna, British Columbia, is considering various proposals regarding theimprovement of old buildings in the city. All proposals can increase the lifespan of buildings,but the benefits differ in each plan. An incremental B/C analysis was initiated, but the engineerconducting the study left recently.(a) Using a 20-year study period and an interest rate of 8% per year, fill in the blanks inthe incremental B/C columns of the table.(b) Which alternative should be selected?AB/C Ratio When Compared with AlternativeRPAlternativePW ofCost, $B/C RatioQMillionPORS101.12.83402.42.83501.4801.8S

The Benefit-Cost Ratio (B/C Ratio) is a financial metric used to evaluate the profitability or…

Answered: The city of Kelowna, British Columbia,…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 5PA

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4. A city is planning to invest $710,000 for a water treatment plant and need to select projects from the following list. Select any or all of the following independent projects using a MARR of 10% per year (HINT: Calculate PW for all feasible bundles, show PW values for all feasible bundles in the solution and select the bundle). What is the largest PW value? Project Initial Annual cost Salvage Value Life, Investment years 4 A -140,000 -300,000 50,000 45,000 В 90,000 150,000 -10,000 4 -590,000 100,000
Economics The government plans to increase the capacity of her existing water transmission lines in Cebu City. Two plans are under consideration. Plan A requires the construction of a parallel pipeline, the flow being maintained by gravity. The initial cost is P189376952 and the life is 50 years, with an annual operating cost of P7825990 for the 1st 25 years and P10659043 for the next 25 years. Plan B requires the construction of a booster pumping station costing P100M with the life of 50 years. The pumping equipment cost an additional amount of P25M, it has a life of 25 years and a salvage value of P2M. The annual operating cost is P5M. Using the Present Value (PV) Method and an interest of 22% cpd. annually, what is the PV of Plan A?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
The city of Oak Ridge is evaluating three mutually exclusive landscaping plans for refurbishing a public greenway. Benefits to the community have been estimated by a landscaping committee, and the costs of planting trees and shrubbery, as well as maintaining the greenway, are summarized below. The city’s cost of capital is 8% per year, and the planning horizon is 10 years. Which landscaping plan will you recommend based on B/C ratio analysis? Landscaping plan A B C Initial planning cost $75,000 $50,000 $65,000 Annual maintenance expense 4,000 5,000 4,700 Annual community benefits 20,000 18,000 20,000
One of two alternatives will be selected to reduce flood damage in a rural community in central Arizona. The estimates associated with each alternative are available. Use B/C analysis at a discount rate of 6% per year over a 20-year study period to determine which alternative should be selected. For analysis purposes only, assume that the benefits of reduced flood damage are available in years 5, 13, and 18 of the study period. Retention Pond Channel Initial Cost, $ 960,000 2,600,000 Annual Maintenance , $/Year 92,000 30,000 Reduced Flood Damage, $ 200,000 550,000 The AB/C ratio is The alternative that should be selected is the retention pond v
One of two alternatives will be selected to reduce flood damage in a rural community in central Arizona. The estimates associated with each alternative are available. Use B/C analysis at a discount rate of 8% per year over a 20-year study period to determine which alternative should be selected. For analysis purposes only, assume the flood damage would be prevented in years 3, 9, and 18 of the study period. Retention Pond Channel Initial cost, $ 880,000 2,900,000 Annual maintenance, $/year 92,000 30,000 Reduced flood damage, $ 200,000 600,000
The state government of Pahang is planning to build a new concrete dam for hydroelectric facility in Jerantut district. Besides generating power, the dam which equipped with flood control system also be built for tourism attraction. The government already identified 2 potential, locations, A or B. The estimated benefits and costs for both locations under consideration are shown in Table 3. The interest Q4 (a) rate for 20 years and 40 years life span are 5% and 7% respectively. Table 3: Estimated costs and benefits Cost and Benefit (RM Location million) A В Initial cost 180 210 Operational and maintenance costs per year Power sales per year Environmental impact per year 1.1 1.5 1.0 1.5 2.3 Recreation benefits per year 2.5 3.1 Irrigation benefits per year 3.2 4.1 Flood control per year 1.5 1.2 (i) Determine the cost, benefit and disbenefit for 20 and 40 years of project life span using present worth (PW) method. (ii) Justify the most suitable location based on the benefit-cost analysis.
(Analysis of Alternatives) Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 years a vacant lot next to one of its stores to serve as a parking lot for customers. Management is considering the following bids involving two different qualities of surfacing for a parking area of 12,000 square yards. Bid A: A surface that costs $5.75 per square yard to install. This surface will have to be replaced at the end of 5 years. The annual maintenance cost on this surface is estimated at 25 cents per square yard for each year except the last year of its service. The replacement surface will be similar to the initial surface. Bid B: A surface that costs $10.50 per square yard to install. This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year, at an estimated cost of 9 cents per square yard. InstructionsPrepare computations showing which bid should be accepted by Wal-Mart. You may assume that the cost of…
Solar and conventional power alternatives are available to provide energy for monitoring equipment at a remote irrigation canal site. The estimates associated with each alternative have been developed. Use the B/C method to select one at an interest rate of 7% per year over a 5-year study period. One of the alternatives must be selected. Alternative Conventional Solar Initial cost, $ 200,000 1,300,000 Annual power cost, $/year 80,000 9,000 Salvage value, $ — 150,000
The city of Oak Ridge is evaluating three mutually exclusive landscaping plans for refurbishing a public greenway. Benefits to the community have been estimated by a landscaping committee, and the costs of planting trees and shrubbery, as well as maintaining the greenway, are summarized below. The city’s discount rate is 8% per year, and the planning horizon is 10 years. Solve, a. Use the B–C ratio method to recommend the best plan when annual maintenance expenses offset annual benefits in the numerator. b. Repeat Part (a) when annual maintenance expenses add to total costs in the denominator. Which plan is best? c. Should the recommendations in Part (a) and (b) be the same? Why or why not?
Six sites have been identified for a parking lot in downtown Blacksburg. Because the sites are plots of land, their salvage value and investment cost are identical. A 10-year study period has been specified, and the MARR is 20% per year. Which site should be chosen based on the IRR criterion? E Click the icon to view the altematives description. Which alternative would you choose as a base one? Choose the correct answer below. More info O A. Alternative C B. Alternative F c. Alternative A *D. Alternative B A B D F O E. Alternative D Investment cost $80 S130 $230 S370 $470 S700 OF. Alternative E (thousands) Annual revenue $13 $35.5 $48 $101.5 $123.5 $153.5 minus expense (thousands) IRR on total investment Analyze the difference between the base altemative and the second-choice alternative IRR A( C )= %. (Round to one decimal place.) 16.2% 27.3% 20.9% 27.4% 26.3% 21.9% - B Print Done
MAIN PROJECT lums University is considering investing in an online book ordering and information service, which will be managed by 2 employees. The following estimates relate to the costs of starting the service and the subsequent revenues from it. The initial investment needed to start the service, including the installation of additional phone lines and computer equipment, will be $1,000,000. These investments are expected to have a life of 4 years with 0 salvage value.The investments will be depreciated straight line over the four-year life.The revenues in the first year are expected to be $1500,000, growing 20% in year 2, and 10% in the two years following.The salaries and other benefits for the employees are estimated to be $150,000 in year 1, and grow 10% a year for the following three years.The cost of the books is assumed to be “0.60” of the revenues in each of the four years.The non-cash working capital, which includes the inventory of books needed for the service and the…

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