Principles of Engineering Economic Analysis
6th Edition
ISBN: 9781118163832
Author: John A. White, Kenneth E. Case, David B. Pratt
Publisher: Wiley, John & Sons, Incorporated
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Question
Chapter 9, Problem 12P
a:
To determine
Calculate the cost basis.
b:
To determine
Calculate the net market value.
c:
To determine
Calculate the depreciation and book value with double declining balance depreciation.
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1
You want to implement an automatic control in the production process of a factory. The cost Initial is $130,000, useful life is 10 years, and salvage value is zero. It is estimated that it will produce a net savings of $60,000 per year, before depreciation, interest, and taxes. They have two financing alternatives. The first (A) is a credit from the equipment supplier for 60% of the total cost, 6% annual interest, in five equal annual payments, the first at the end of the first year. The second (B) is a bank loan for the entire amount of the investment with a 12% annual interest that must be settled in four equal annuities, the first at the end of the first year. The equipment is depreciated on a straight line basis, 50% taxes are paid and the MARR of the company is 10%. Determine the best financing alternative from the point of economic view, using mixed TMAR and an analysis period of 10 years.
Answer: NPV = $122,637.43; NPVB = $98,317.42. Option A must be selected.
K
ces
Jane quit her job at Telus where she earned $36,000 a year. She cashed in $40,000 in corporate
bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus
and set up a commuter service between Maple Ridge and Vancouver. There are 300 people who
will pay $800 a year each for the commuter service; $650 from each person goes for gas,
maintenance, insurance, depreciation, etc.
(a) What are Jane's total revenues?
(b) What are Jane's explicit costs?
(c) What is Jane's accounting profit?
(d) List two important implicit costs that Jane has not included.
(e) What is Jane's pure economic profit (loss)? What actions should Jane take based on her pure
economic profit (loss)?
company is planned to install new automated plastic molding press.
Four different presses are available as follows:
Press 1
Press 2 Press 3 Press 4
Capital Investment $24,000 $30,000 $49,000
$52,000
Useful Life (year)
5
5
5
5
Annual Expenses
Power ($)
Labor ($)
Maintenance ($)
Tax & Insurance ($)
2,720
26,400
1,600
480
2,720
24,000
1,800
608
4,800
16,800
2,600
992
4,800
14,800
2,000
1,040
Assume that each press has the same output capacity (120,000 units per year) and all units
can be sold (the selling price is $0.375 per unit. Additional capital invested is expected to earn
at least 10%.
a) Sketch Cash Flow Diagram for the four choices
b) Which press should be chosen (use Present Worth PW method?
Chapter 9 Solutions
Principles of Engineering Economic Analysis
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