Con E 221 Homework 6
Due Monday, March 10
50 points
1) A contractor has three options for purchasing a new crane. She can pay $500,000
in cash (option 1) or she can pay $100,000 in cash and annual payments of
$100,000 for five years (option 2) or she can pay nothing up front and make
$50,000 annual payments for 15 years (option 3). Assume an effective interest
rate 7%, and ignore maintenance costs and salvage. Which is the best option for
the contractor using net present value analysis? (15 points)
2) A real estate developer has $50,000,000 in capital funds available for projects.
His MARR is 12%. The following projects are available for development. If his
decision criteria were maximum ROR, which ones would he choose, and why?
Assume equal risk for each project and ignore O & M costs. (20 points)
Project
1
2
3
4
5
Initial cost
20,000,000
10,000,000
35,000,000
12,000,000
5,000,000
Lease rate
2,000,000/yr 1,250,000/yr 6,000,000/yr 3,000,000/yr 1,500,000/yr
Lease term
25 years
12 years
20 years
10 years
5 years
3) Assume you are bidding a long-term highway and heavy project that will require
five years to complete. You are asked to provide hourly charges for each piece of
equipment on the project, which will remain constant for the duration of the
project. You plan to lease a piece of earth moving equipment that costs $100,000
up front, with annual lease payments of $10,000, and maintenance costs of $1000
the first month going up by $100 each month over the five year term of the lease.
Assume an MARR of 10%, no salvage, and 1750 hours of use each year. Using
net present value as a basis for capital budgeting, what should you quote as the
hourly rate for the equipment, excluding profit and overhead? (10 points) What if
you used future value (at the end of the project)- would you quote a different rate?
If so, what would it be? (10 points)