You have been assigned the task of comparing the economic results of three alternative designs for a state government public works project. The estimated values for various economic factors related to the three designs are given above. The MARR being - PowerPoint PPT Presentation

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You have been assigned the task of comparing the economic results of three alternative designs for a state government public works project. The estimated values for various economic factors related to the three designs are given above. The MARR being

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Title: You have been assigned the task of comparing the economic results of three alternative designs for a state government public works project. The estimated values for various economic factors related to the three designs are given above. The MARR being


1
  • You have been assigned the task of comparing the
    economic results of three alternative designs for
    a state government public works project. The
    estimated values for various economic factors
    related to the three designs are given above. The
    MARR being used is 9 and the analysis period is
    15 years.
  • a. Use the conventional benefit/cost ratio
    method, with AW as the equivalent worth measure,
    to select the preferred design for the project.
  • b. Use the modified B/C ratio method, with PW as
    the equivalent worth measure, to select the
    preferred design for the project.

2
  • (a) Design 1 CR (9) 1,240,000(A/P,9,15) -
    90,000(A/F,90/o,15) 150,815
  • B/C 315,000 147,800 1.27 gt 1
  • 150,815 215,000
  • Design I is an acceptable base
    alternative.

Select Design 3.
3
  • (b) Design 1
  • B/C (315,000 147,800 - 215,000)(P / A, 9,
    15) 1.64 gt1
  • 1,240,000 - 90,000 (P/F, 9, 15)
  • Design 1 is an acceptable base alternative.

Select Design 3.
4
  • 9-28 Your company manufactures circuit boards and
    other electronic parts for various commercial
    products. Design changes in part of the product
    line, which are expected to increase sales, will
    require changes in the manufacturing operation.
    The cost basis of new equipment required is
    220,000 (MACRS five-year property class assets).
    Increased annual revenues, in year zero dollars,
    are estimated to be 360,000. Increased annual
    expenses, in year zero dollars, are estimated to
    be 239,000. The estimated market value of
    equipment at the end of the six-year analysis
    period is 40,000. General price inflation is
    estimated at 4.9 per year the total escalation
    rate on annual revenues is 2.5, and for annual
    expenses it is 5.6 the after-tax MARR (in
    market terms) is 10 per year and t 39.
  • a. Based on an after-tax, actual dollar analysis,
    what is the maximum amount that your company can
    afford to spend on the total project (i.e.,
    changing the manufacturing operations)? Use the
    PW method of analysis.
  • b. Develop (show) your ATCF in real dollars.

5
  • Annual revenues in year k (A) 360,000(1.1025)k
  • Annual expenses in year k (A) - 239,000(l.056)
    k
  • The values in the following table are expressed
    in A.

PW(10) ?ATCFk (P/F, 10,k) 136,557
Total investment that can be afforded (including
new equipment) 136,557 220,000 356,557
6
(b) ATCFk (R) ATCF(A)(P/F, 4.9, k)
7
  • 10 - 13
  • A new steam flow monitoring device must be
    purchased immediately by a local municipality.
    These most likely estimates have been developed
    by a group of engineers
  • Capital investment - 140,000
  • Annual savings 25,000
  • Useful life 12 years
  • Market value (end of year 12) 40,000
  • MARR 10/year
  • Because considerable uncertainty surrounds these
    estimates, it is desired to evaluate the
    sensitivity of PW to 50 changes in the most
    likely estimates of (a) annual savings, (b)
    useful life, and (c) interest rate (MARR). Graph
    the results and determine to which factor the
    decision is most sensitive.

8
At the most likely estimates PW(10) - 140,000
25,000 (P/A, 10, 12) 40,000 (P/F, 10, 12)
43,086 At a -50 change in
Life(example) PW(10) - 140,000 25,000 (P/A,
10, 6) 840,000 (P/F, 10, 6) - 140,000
25,000 (4.3553) 40,000 (0.5645) - 8,538
9
Decision is most sensitive to the estimate of
Annual Saving
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