2
Prepare solutions for the given problems. Problem # 1
through 11 worth 10 points each and problem # 12 and 13
worth 5 points each.
As needed
1. Consider three alternatives A, B, and “do-nothing.” Construct a choice table
for interest rates from 0% to 100%. (Review Chapter 8)
Year
0
1
2
3
4
5
A
-100
30
30
30
30
30
B
-150
43
43
43
43
43
2. Wayward Airfreight, Inc. has asked you to recommend a new automatic
parcel sorter. You have obtained the following bids: (Review Chapter 8)
SHIP-R
First Cost
$184,000
Salvage Value
$38,300
Annual Benefit
$75,300
Yearly Maintenance & Operating $21,000
Useful life, in years
7
SORT-Of
$235,000
$44,000
$89,000
$21,000
7
U-SORT-M
$180,000
$14,400
$68,000
$12,000
7
a. Construct a choice table for interest rates from 0% to 100%.
b. Using a MARR of 15% and a rate of return analysis, which alternative, if
any, should be selected?
3. Consider a project that may be constructed to full capacity now or may be
constructed in two stages. (Review Chapter 9)
Construction Alternative
Costs
Two-stage construction
Construct first stage now
$100,000
Construct second stage n years from now $118,000
Full-capacity construction
Construct full capacity now
$142,000
Other Factors
• All facilities will last for 40 years regardless of when they are
installed; after 40 years, they will have zero salvage value.
• The annual cost of operation and maintenance is the same for both
two-stage construction and full-capacity construction.
• Assume an 8% interest rate.
Plot “age when second stage is constructed” versus “costs for both
alternatives.” Mark the breakeven point on your graph. What is the
sensitivity of the decision to second-stage construction 16 or more
years in the future?
4. A robot has just been installed at a cost of $81,000. It will have no salvage
value at the end of its useful life. (Review Chapter 10)
Savings per Year Probability Useful Life (years) Probability
$18,000
$20,000
$22,000
0.2
0.7
0.1
12
5
4
1/6
2/3
1/6
a. What is the joint probability distribution for savings per year and useful
life?
b. Define optimistic, most likely, and pessimistic scenarios by using both
optimistic, both most likely, and both pessimistic estimates. What is the
rate of return for each scenario?
5. The RX Drug Company has just purchased a capsulating machine for
$76,000. The plant engineer estimates the machine has a useful life of 5
years and no salvage value. Compute the depreciation schedule using:
(Review Chapter 11)
a. Straight-line depreciation
b. Double declining balance depreciation (assume any remaining
depreciation is claimed in the last year)
c. 100% bonus depreciation
d. MACRS
6. Consider a $6500 piece of machinery, with a 5-year depreciable life and an
estimated $1200 salvage value. The projected utilization of the machinery
when it was purchased, and its actual production to date, are as follows:
(Review Chapter 11)
Year Projected Production (tons) Actual Production (tons)
1
3500
3000
2
4000
5000
3
4500
Not yet Known
4
5000
Not yet Known
5
5500
Not yet Known
Compute the depreciation schedule using
a.
b.
c.
d.
e.
Straight line
Double declining balance
100% bonus depreciation
MACRS
Unit of production (for first 2 years only)
7. A firm’s annual revenues are $850,000. Its expenses for the year are
$615,000 and it claims $135,000 in depreciation expenses. What does it pay
in taxes, and what is its after-tax income? Use tax rate as 21%
(Review Chapter 12)
8. A major industrialized state has a state corporate tax rate of 9.6% of taxable
income. If a corporation has a state taxable income of $275,000, what is the
total state and federal income tax it must pay? Also, compute its combined
incremental state and federal income tax rate.
(Review Chapter 12)
9. An injection – molding machine has a first cost of $1,050,000 and a salvage
value of $225,000 in any year. The maintenance and operating cost is
$235,000 with an annual gradient of $75,000. The MARR is 10%. What is
the most economic life? (Review Chapter 13)
10. As a recent graduate, you are considering employment offers from three
different companies. However, in an effort to confuse you and perhaps make
their offers seem better, each company has used a different purchasing
power base for expressing your annual salary over the next 5 years. If you
expect inflation to be 2.5% for the next 5 years and your personal (real)
MARR is 5%, which plan would you choose? (Review Chapter 14)
• Company A: A constant $60,000 per year in terms of today’s
purchasing power.
• Company B: $50,000 the first year, with increases of $5,500 per year
thereafter.
• Company C: A constant $70,000 per year in terms of Year-5-based
purchasing power.
11.For the following two different facilities, name at least three benefits, three
disbenefits, and three costs. Also, what stakeholder viewpoints will need to
be considered? (Review Chapter 16)
a. Nuclear power plant
b. A municipal landfill and incineration facility
12.Matbach Industries has $930,000 in current assets and $470,000 in fixed
assets less $180,000 in accumulated depreciation. The firm’s current
liabilities total $370,000, and the long-term liabilities $115,000. (Review
Chapter 17)
a. What is the firm’s equity?
b. If the firm’s stock and capital surplus total $305,000, what is the value
for retained earnings?
13.From the following data, taken from the balance sheet of Petra’s Widget
factory, determine the working capital, current ratio, and quick ratio.
(Review Chapter 17)
Cash
$110,000
Net accounts and notes receivable
$325,000
Retailer’s inventories
$210,000
Prepaid expense
$6,000
Accounts and notes payable (short term) $300,000
Accrued expenses
$187,000