Exam Name___________________________________ SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. Answer the question. 1) Cougar Telemarketing is considering establishing a call center. The initial cost will be $2,750,000 with a $27,500 market value any time within a 13-year period. The fixed cost of the center will be $830,000 per year with an average variable cost of $3.00 per call. Cougar expects to generate revenue of $5.25 per call with a capacity of 110,000 calls for the first year. The company also expects to increase the capacity uniformly each year. At an interest rate of 2% per year, determine the uniform amount the capacity must increase each year so that the company can recover its investment in 3 years. 1) Answer: Uniform amount of increase per year = 687,934 units Explanation: Let G = uniform amount of increase per year sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m AWRevenue = $(5.25 - 3.00)[110,000 + G(A/G, 2%, 3)] = $247,500 + $(2.22)G AWCost = $2,750,000(A/P, 2%, 3) + $830,000 - $27,500(A/F, 2%, 3) = $2,750,000(0.3468) + $830,000 - $27,500(0.3268) = $1,774,713.00 Th Set Revenue = Cost: G = [$1,774,713.00 - $247,500]/$(2.22) = 687,934 units 1 https://www.coursehero.com/file/13758304/c11/ 2) Ginger has agreed to a lawsuit settlement of $600,000 with a certain pharmaceutical company. The company has offered options to pay her the awarded money. After discussing the terms with the company, she expects that the company should be able to pay her back within 3-5 years. Ginger has developed the following estimates. Which option should she select, if her personal MARR is 13% per year? Option A B - Pessimistic C - Most likely D - Optimistic Delay period 5 years 4 years 3 years 2) Cash Flow Estimates, $ $600,000 now $131,000 per year for every year the payment is delayed. $161,200 per year for every year the payment is delayed. $211,500 per year for every year the payment is delayed. Answer: PWA(13%) = $600,000 PWB(13%) = $460,753.20 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m PWC(13%) = $479,489.40 PWD(13%) = $499,393.80 PWA(13%) > PWD(13%) > PWC(13%) > PWB(13%); therefore, Ginger should select option A. Explanation: Option A: PW(13%) = $600,000 Option B: PW(13%) = $(131,000)(P/A, 13%, 5) = $460,753.20 Option C: PW(13%) = $(161,200)(P/A, 13%, 4) = $479,489.40 Option D: PW(13%) = $(211,500)(P/A, 13%, 3) = $499,393.80 Th PWA(13%) > PWD(13%) > PWC(13%) > PWB(13%); therefore, Ginger should select option A. 2 https://www.coursehero.com/file/13758304/c11/ 3) Two processes are under consideration for a certain production. Process A requires acquisition of a new machine that is estimated to have an initial cost of $65,000 and a salvage value of $52,000 at the end of its useful life of 6 years. In addition, the process requires a fixed cost of $47,000 per year and a variable cost of $250 per day. Alternatively, Process B requires the use of human labor. The process will need 6 workers, each earning $200 per day and will have a fixed cost of $36,000 per year and additional variable costs of $200 per day. Determine the minimum number of days per year required for the two processes to break even at an interest rate of 2% per year. 3) Answer: 12.49 days per year Explanation: Let X = number of breakeven days per year AWA = -$65,000(A/P, 2%, 6) - $47,000 + $52,000(A/F, 2%, 6) - $250X = -$65,000(0.1785) - $47,000 + $52,000(0.1585) - $250X = -$50,360.50 - $250X sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m AWB = -$(6)(200)X - $36,000 -$200X = -$(1400)X -$36,000 Set AWA= AWB: -$1400X - $36,000X = -$50,360.50 - $250 -$1150X = -$14,360.50 X = -$14,360.50/ -$1150 = 12.49 days per year 4) Two machines are under consideration for a new production line. Machine X costs $50,000 and is expected to have a salvage value of $6500 at the end of its useful life of 5 years. It will have a fixed cost of $16,000 per year and a variable cost of $55 per unit per year. On the other hand, machine Y costs $55,000 and is expected to have a salvage value of $7000 at the end of its useful life of 7 years. It will have a fixed cost of $14,500 per year and a variable cost of $58 per unit per year. Determine the quantity that must be produced for the two machines to break even at an interest rate of 3% per year. Answer: 1094 units per year Explanation: Let Q = number of breakeven units per year AWX = -$50,000(A/P, 3%, 5) - $16,000 + $6500(A/F, 3%, 5) - $55Q = -$50,000(0.2184) - $16,000 + $6500(0.1884) - $55Q = -25,695.40 - $55Q Th AWY = -$55,000(A/P, 3%, 7) - $14,500 + $7000(A/F, 3%, 7) - $58Q = -$55,000(0.1605) - $14,500 + $7000(0.1305) - $58Q = -$22,414.00 - $58Q Set AWX = AWY: $(58- 55)Q = $3281.40 Q = 1094 units per year 3 https://www.coursehero.com/file/13758304/c11/ 4) 5) A distribution center wants to evaluate an alternative product tracking system. The system has an initial cost of $500,000 and a salvage value of $80,000 at the end of its useful life of 7 years. The operating cost is estimated to be $550 per metric ton of product moved per day. The center can handle between 30 and 50 tons per day. Analyze the sensitivity of the PW to changes in a 10-metric-ton increment of product moved. Use an interest rate of 3% per year and 200 days of work per year. 5) Answer: PW30(3%) = -$20,994,942.00 PW40(3%) = -$27,848,272.00 PW50(3%) = -$34,701,602.00 Explanation: PW30(3%) = -$500,000 - $(550)(30)(200)(P/A, 3%, 7) + $80,000(P/F, 3%, 7) = -$500,000 - $(3,300,000)(6.2303) + $80,000(0.8131) = -$20,994,942.00 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m PW40(3%) = -$500,000 - $(550)(40)(200)(P/A, 3%, 7) + $80,000(P/F, 3%, 7) = -$500,000 - $(4,400,000)(6.2303) + $80,000(0.8131) = -$27,848,272.00 PW50(3%) = -$500,000 - $(550)(50)(200)(P/A, 3%, 7) + $80,000(P/F, 3%, 7) = -$500,000 - $(5,500,000)(6.2303) + $80,000(0.8131) = -$34,701,602.00 6) The estimated cash flows of an investment project are shown below. Item Initial investment, $ Annual revenue, $ Annual expense, $ Market value, $ Project life, years Estimated Cash Flows 55,000 7000 4500 1800 8 Sensitivity Range ±5% ±10% ±10% ±15% ±5% Using an interest rate of 2% per year, analyze the sensitivity of the PW to changes in initial investment and annual revenue, and determine the breakeven percentage changes of these two factors. Th Answer: Sensitivity to changes in initial investment: +5%: PW(2%) = -$37,899.95 -5%: PW(2%) = -$32,399.95 Breakeven percent change = -64% Sensitivity to changes in annual revenue: +10%: PW(2%) = -$30,022.10 -10%: PW(2%) = -$40,277.80 Breakeven percent change = 68.55% 4 https://www.coursehero.com/file/13758304/c11/ 6) Explanation: PW(2%) = -$55,000 + ($7000 - $4500)(P/A, 2%, 8) + $1800(P/F, 2%, 8) = -$55,000 + ($2500)(7.3255) + $1800(0.8535) = -$35,149.95 Sensitivity to changes in initial investment: +5%: PW(2%) = -$55,000(1.05) + ($7000 - $4500)(P/A, 2%, 8) + $1800(P/F, 2%, 8) = -$37,899.95 -5%: PW(2%) = -$55,000(0.95) + ($7000 - $4500)(P/A, 2%, 8) + $1800(P/F, 2%, 8) = -$32,399.95 Breakeven percent change: PW(2%) = 0 = -$55,000(1 + X%) + ($7000 - $4500)(P/A, 2%, 8) + $1800(P/F, 2%, 8) X = -0.64 or X = -64% change in initial investment sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Sensitivity to changes in annual revenue: +10%: PW(2%) = -$55,000 + [$(7000)(1.1)- $4500](P/A, 2%, 8) + $1800(P/F, 2%, 8) = -$30,022.10 -10%: PW(2%) = -$55,000 + [$(7000)(0.9)- $4500](P/A, 2%, 8) + $1800(P/F, 2%, 8) = -$40,277.80 Th Breakeven percent change: PW(2%) = 0 = -$55,000 + [$(7000)(1 + X%) - $4500](P/A, 2%, 8) + $1800(P/F, 2%, 8) X = [35,149.95]/[51,278.50] = 0.6855 Or X = 68.55% change in annual revenue 5 https://www.coursehero.com/file/13758304/c11/ 7) The estimated cash flows of an investment project are shown below. Item Initial investment, $ Net annual revenue, $/year Market value, $ Project life, years Optimistic 745,000 81,500 39,500 7 Most likely 750,000 80,000 38,000 7 7) Pessimistic 755,000 79,500 37,000 7 Using a MARR of 14% per year, determine the AW for each of the three estimation conditions. Answer: AWo = -$88,552.60 AWm = -$91,358.40 AWp = -$93,117.60 Explanation: AW(optimistic) = -$745,000(A/P, 14%, 7) + $81,500 + $39,500(A/F, 14%, 7) = -$745,000(0.2332) + $81,500 + $39,500(0.0932) sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m = -$88,552.60 AW(most likely) = -$750,000(A/P, 14%, 7) + $80,000 + $38,000(A/F, 14%, 7) = -$750,000(0.2332) + $80,000 + $38,000(0.0932) = -$91,358.40 AW(pessimistic) = -$755,000(A/P, 14%, 7) + $79,500 + $37,000(A/F, 14%, 7) = -$755,000(0.2332) + $79,500 + $37,000(0.0932) = -$93,117.60 8) A manufacturer of an inspecting and profiling web controller has a fixed cost of $83,000 per year and variable costs of $60 per unit produced. If the product is sold at $90 per unit, determine the breakeven quantity per year for the company. Answer: Q = 2767 units Th Explanation: Q = $83,000/ ($90 - $60) = 2767 units 6 https://www.coursehero.com/file/13758304/c11/ 8) 9) Wolfpack, Inc., a textile manufacturing company, is considering opening a production and shipping facility to keep up with demand for its pillows. The facility is expected to require an initial investment of $190,000 and will have a $36,000 salvage value after 5 years. Net annual revenue is estimated to be $100,000. Determine how sensitive the decision to invest in the new facility is to the estimates of initial cost and net annual revenue. Use a MARR of 4% per year and a 5-year study period. 9) Answer: If the change in initial cost is greater than 150%, the investment in the new facility would no longer be acceptable. If the change in net annual revenue is lower than -64.00%, the investment in the new facility would no longer be acceptable. Explanation: PW(4%) = -$190,000 + $100,000(P/A, 4%, 5) + $36,000(P/F, 4%, 5) sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Let X = change in initial cost that would reverse decision PW(4%) = 0 = -$190,000(1+ X%) + $100,000(P/A, 4%, 5) + $36,000(P/F, 4%, 5) X = 1.50 If the change in initial cost is greater than 150%, the investment in the new facility would no longer be acceptable. Let Y = change in net annual revenue that would reverse decision PW(4%) = 0 = -$190,000 + $100,000(1 + Y%)(P/A, 4%, 5) + $36,000(P/F, 4%, 5) Y = -0.64 If the change in net annual revenue drops by -64.00%, the investment in the new facility would no longer be acceptable. 10) Two different machines are under consideration for a reengineering project. Machine X is expected to have an initial cost of $74,000 and an expected life of 7 years. It will have a fixed cost of $10,000 per year and a variable cost of $60 per unit per year. Process Y is expected to have a useful life of 9 years. It will have a fixed cost of $8500 per year and a variable cost of $57 per unit per year. Determine the amount the company can spend on Machine Y so the two machines will break even at an interest rate of 11% per year. Assume the current process capacity of 150 units per year is used for the analysis. Answer: Initial cost of machine Y = $97,745.29 Explanation: Let P = initial cost of machine Y AWX = -$74,000(A/P, 11%, 7) - $10,000 - $(60)(150) = -$74,000(0.2122) - $10,000 - $9000 = -$34,702.80 Th AWY = -$P(A/P, 11%, 9) - $8500 - $(57)(150) = -$P(0.1806) - $17,050 Set AWX = AWY: P = [-$34,702.80 + $17,050]/ (-0.1806) = $97,745.29 7 https://www.coursehero.com/file/13758304/c11/ 10) Answer Key Testname: C11 1) Uniform amount of increase per year = 687,934 units 2) PWA(13%) = $600,000 PWB(13%) = $460,753.20 PWC(13%) = $479,489.40 PWD(13%) = $499,393.80 PWA(13%) > PWD(13%) > PWC(13%) > PWB(13%); therefore, Ginger should select option A. 3) 12.49 days per year 4) 1094 units per year 5) PW30(3%) = -$20,994,942.00 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m PW40(3%) = -$27,848,272.00 PW50(3%) = -$34,701,602.00 6) Sensitivity to changes in initial investment: +5%: PW(2%) = -$37,899.95 -5%: PW(2%) = -$32,399.95 Breakeven percent change = -64% Sensitivity to changes in annual revenue: +10%: PW(2%) = -$30,022.10 -10%: PW(2%) = -$40,277.80 Breakeven percent change = 68.55% 7) AWo = -$88,552.60 AWm = -$91,358.40 AWp = -$93,117.60 8) Q = 2767 units 9) If the change in initial cost is greater than 150%, the investment in the new facility would no longer be acceptable. Th If the change in net annual revenue is lower than -64.00%, the investment in the new facility would no longer be acceptable. 10) Initial cost of machine Y = $97,745.29 8 https://www.coursehero.com/file/13758304/c11/ Powered by TCPDF (www.tcpdf.org)