The following three mutually exclusive alternative proposals are being considered for flood proofing a factorybuilding that is located in an area subject to occasional flooding by a nearby river.1. Do nothing: Damage to the building in a moderate flood is $11,000 and in a severe flood it is $24,000.2. Protect the building with a one-time initial expenditure of $20,000 so that the building can withstandmoderate flooding without any damage and withstand severe flooding with only a $12,000 damage.3. Protect the building with a one-time initial expenditure of $32,000 so that the building can withstand anyflooding with no damage at all.In any year, there is a 20% probability of moderate flooding and a 10% probability of severe flooding. Using aMARR of 12% per year and a service life of 8 years, determine which of the three alternatives is the mosteconomical.(a) Calculate EUAC values for each scenario (use negative numbers for costs)The expected EUAC for the "Do Nothing" alternative is $ 3724 (Round to the nearest whole number.)The expected EUAC for Alternative 2 is $ 3994 (Round to the nearest whole number.)The EUAC for Alternative 3 is $13466 (Round to the nearest whole number.)(b) The most economical alternative isA. Alternative 3B. Do nothingOC. Alternative 2

Equivalent Annual Cost (EAC) is the yearly cost of owning, operating, and maintaining an asset over…

Answered: The following three mutually exclusive…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 13E

See similar textbooks

Similar questions

Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
In the aftermath of Hurricane Thelma, the U.S. Army Corps of Engineers is considering two alternative approaches to protect a freshwater wetland from the encroaching seawater during high tides. The first alternative, the construction of a 5-mile long, 20-foot-high levee, would have an investment cost of $25,000,000 with annual upkeep costs estimated at$725,000. A new roadway along the top of the levee would provide two major benefits: (1) improved recreational access for fishermen and (2) reduction of the driving distance between the towns at opposite ends of the proposed levee by 11 miles. The annual benefit for the levee has been estimated at $1,500,000. The second alternative, a channel-dredging operation, would have an investment cost of $15,000,000. The annual cost of maintaining the channel is estimated at $375,000. There are no documented benefits for the channel-dredging project. Using a MARR of 8% and assuming a 25-year life for either alternative, apply the incremental B–C…
An area on the Colorado River is subject to periodic flood damage that occurs, on the average, every two years and results in a $2,000,000 loss. It has been proposed that the river channel be straightened and deepened, at a cost of $2,500,000, to reduce the probable damage to not over $1,600,000 for each occurrence during a period of 20 years before it would have to be deepened again. This procedure would also involve annual expenditures of $80,000 for minimal maintenance. One legislator in the area has proposed that a better solution would be to construct a flood-control dam at a cost of $8,500,000, which would last indefinitely, with annual maintenance costs of not over $50,000. He estimates that this project would reduce the probable annual flood damage to not over $450,000. In addition, this solution would provide a substantial amount of irrigation water that would produce annual revenue of $175,000 and recreational facilities, which he estimates would be worth at least $45,000 per…
In building a highway, the district engineer is faced with the alternatives of building a 4-lane underpass that would take care of all future needs of building or a 2-lane underpass now and a second underpass 20 years later. For the 4-lane underpass:First cost = ₱ 400,000Annual maintenance cost = ₱ 10,000No salvage valueFor the 2-lane underpass:First cost = ₱ 270,000Annual maintenance cost = ₱ 8,000No salvage valueWhich of the following gives us the best alternative that should be adopted by showing the difference of its equivalent present worth
Assume that to comply with the Air Quality Control Act of 1989, a company must install three smokestack scrubber units to its ventilation stacks at an installed cost of $335,000 per unit. An estimated $100,000 per unit in fines could be saved each year over the five-year life of the ventilation stacks. The cost of capital is 14% for the firm. a) Draw the timeline with the cash flows for the project. b) Calculate the NPV of the project and make the decision to accept/reject. Briefly explain.
A large mudslide caused by heavy rains will cost Sabino County $1,000,000 per occurrence in lost property tax revenues. In any given year, there is one chance in 100 that a major mudslide will occur. A civil engineer has proposed constructing a culvert on a mountain where mudslides are likely. This culvert will reduce the likelihood of a mudslide to near zero. The investment cost would be $50,000, and annual maintenance expenses would be $2,000 in the first year, increasing by 5% per year thereafter. If the life of the culvert is expected to be 20 years and the cost of capital to Sabino County is 7% per year, should the culvert be built?
The Tennessee Department of Highways is trying to decide whether it should “hot-patch” a short stretch of an existing highway or resurface it. If the hotpatch method is chosen, approximately 500 cubic meters of material would be required at a cost of $800/cubic meter (in place). If hot-patched, the shoulders will have to be improved at the same time at a cost of $24,000. The shoulders must be maintained at a cost of $3000 every 2 years. The annual cost of routine maintenance on the patched road is estimated to be $6000. Alternatively, the state can resurface the road at a cost of $500,000. If maintained properly, at a cost of $2000 per year beginning in the second year, the surface will last for 10 years. The shoulders would require reworking at the end of the fifth year at a cost of $15,000. Regardless of the method selected, the road will be completely rebuilt in 10 years. At an interest rate of 9%, which alternative should be chosen?
The international environmental management standard ISO 14000 requires that Oliver, the pollution control officer of BUCENG, must install suitable pollution control equipment. He is considering two of them, one based on the principle of neutralization and the other of precipitation. They cost Php 7,500,000 and Php 4,500,000 respectively; both are expected to last 5 years and have salvage values of Php 1,500,000 and Php 1,050,000 respectively. The chemical needed for the neutralization-based equipment costs Php 500,000 per year, while for the other Php 950,000 per year. Their annual maintenance costs are Php 5,000 and Php 7,500 respectively. Develop a cashflow table to help Oliver visually compare the data pertaining to the two alternatives.
A one-mile section of a roadway in Florida has been washed out by heavy rainfall. The county is considering two options for rebuilding the road. Pertinent data are presented below. If the county’s MARR for this type of project is 5% per year, which replacement option should be chosen? Stateyour assumptions.
The city council wants the municipal engineer to evaluate three alternatives for supplementing the city water supply. The first alternative is to continue deepwell pumping at an annual cost of $10,500. The second alternative is to install an 18-inch pipeline from a surface reservoir. First cost is $25,000 and annual pumping cost is $7000. The third alternative is to install a 24-inch pipeline from the reservoir at a first cost of $34,000 and annual pumping cost of $5000. The life of each alternative is 20 years. For the second and third alternatives, salvage value is 10% of first cost. With interest at 8%, which alternative should the engineer recommend? Use present worth analysis.
A steel pedestrian overpass must either be reinforced or replaced. Reinforcement would cost $25,000 and would make the overpass adequate for an additional 6 years of service. If the overpass is torn down now, the scrap value of the steel would exceed the removal cost by $15,000. If it is reinforced, it is estimated that its net salvage (market) value would be $18,000 at the time it is retired from service. A new pre- stressed concrete overpass would cost $140,000 and would meet the foreseeable requirements of the next 40 years. Such a design would have no scrap value or market value. It is estimated that the annual expenses of the reinforce overpass would exceed those of the concrete overpass by $3,200. Assume that money costs 8% per year, what would you recommend?
The Department of Public Works is trying to decide between "patching" a road or repaving it completely. If the "patching" system is used, approximately 300 cubic meters of material will be required, at $25 per cubic meter (on site). Additionally, the berms will need to be re-constructed, which will cost $3000. The annual cost of routine maintenance of the "patched" road would be $4000. Repairs would only last 2 years, after which they would have to be re-made. The other alternative is for the department to repave the entire road, which would cost $65,000. This area would last 10 years if the road were maintained at a cost of $15000 per year, starting in 4 years. Regardless of which alternative is chosen, the road will be rebuilt within 10 years. If the interest rate is 13% per year, which alternative should the department select, based on present value?

SEE MORE QUESTIONS

Recommended textbooks for you

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Managerial Accounting: The Cornerstone of Busines…

Accounting

ISBN:

9781337115773

Author:

Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:

Cengage Learning

CONCEPTS IN FED.TAX., 2020-W/ACCESS

Accounting

ISBN:

9780357110362

Author:

Murphy

Publisher:

CENGAGE L

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Managerial Accounting: The Cornerstone of Busines…

Accounting

ISBN:

9781337115773

Author:

Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:

Cengage Learning

CONCEPTS IN FED.TAX., 2020-W/ACCESS

Accounting

ISBN:

9780357110362

Author:

Murphy

Publisher:

CENGAGE L

SEE MORE TEXTBOOKS