Engineering Economy (17th Edition)
17th Edition
ISBN: 9780134870069
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 13, Problem 11P
To determine
Whether the firm should purchase or rent the machine.
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Air Alberta is considering replacing the firm's regional jets with a new model, which has a total
purchase price of $15 million.
The new jets will generate additional revenue of $3.5 million per year for the 20 years of the
useful life of the jets. Expected added operational costs of the jets are 25% of revenues.
Air Alberta expects to use the new jets for 20 years, at which time, they would be replaced. The
company estimates that all the new planes could be sold for a total of $4.7 million (salvage
value).
The new regional jets have a CCA rate of 25% (d = .25). Air Alberta has a corporate tax rate of
35%. The purchase would require a $2,000,000 increase in net working capital, which would be
returned to Air Alberta when it sold the jets after 20 years.
Required:
Using a discount rate of 15%, calculate the NPV of the new jet purchase. Prepare a short
memo and discuss your recommendation on the purchase of the regional jets.
Julie’s Bakeshop bought a loaf bread machine for P500,000 on June 1, 2010. It is estimated that it will have a useful life of 10 years, a scrap value of P10,000, production of 400,000 loaves of bread and working hours of 150,000. The company uses the machine for 15,000 hours in 2010 and 20,000 hours in 2011. The machine produces 40,000 loaves in 2010 and 50,000 loaves in 2011. Compute the depreciation in 2011 using (a) output method (b) working hours/service method.
A new machine will cost $200,000. Its maximum useful life is 8 years. The expected market value (MV) of the machine at the end of year 1 is $100,000, and it is expected to decline by $15,000 each year afterwards. The annual operating cost (AOC) is projected to be $75,000 during the first year of operation, and it is expected to rise by 15% every year afterwards. Assuming 11% minimum attractive rate of return, calculate the economic service life of the machine. Your calculations need to include a table with the following columns: Year, MV, AOC, Capital Recovery, Annual Worth (AW) of AOC, and Total AW. Illustrate your analysis with a properly labeled chart, featuring the number of years of service on the horizontal axis, and capital recovery, annual worth of the AOC, and total annual worth on the vertical axis (click to format the vertical axis and check the box “Values in reverse order” so that the axis displays rising cost as movement up). Please provide a written statement clearly…
Chapter 13 Solutions
Engineering Economy (17th Edition)
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