TM 661
Chapter 4
Solutions 1
6) An investment of $20,000 for a new condenser is being considered. Estimated alsvage
value of the condenser is $5,000 at the end of an estimated life of 6 years. Annual
income each year for the 6 years is $8,500. Annual operating expenses are $2,300.
Assume money is worth 15% compounded annually. Determine the following
measures of investment worth.
5,000
Soln:
6,200
1
2
3
4
5
6
20,000
a.
Present Worth
NPV = -20,000 + 6,200 (P/A, 15, 6) + 5,000 (P/F, 15, 6)
= -20,000 + 6,200 (3.7845) + 5,000 (.4323)
= 5,625
>0
Good Investment
b.
Annual Worth
= -20,000 (A/P, 15, 6) + 6,200 + 5,000 (A/F, 15, 6)
= -20,000 (.2642) + 6,200 + 5,000 (.1142)
= 1,487
>0
Good Investment
Note:
= 5,625 (A/P, 15, 6)
= 1,487
Chapter 4
Solutions 1
TM 661
Chapter 4
Solutions 1
6) Cont.
5,000
6,200
1
2
3
4
5
6
20,000
Soln:
e.
Internal Rate of Return
Find i such that PWR(i) = PWC(i)
20,000 = 6,200 (P/A, i, 6) + 5,000 (P/F, i, 6)
i
0.15
0.18
0.2
0.24
0.25
PWR
25,625
23,537
22,292
20,102
19,609
PWC
20,000
20,000
20,000
20,000
20,000
IRR = 24%
e.
External Rate of Return
Find I such that PWR(15%) = PWC(i)
20,000 = 6,200 (P/A, 15, 6) + 5,000 (P/F, 15, 6)
Note that this equation is not a function of i. Therefore, we can not use it. Instead, let
us equate the Future worth of Costs with the Future worth of Revenues.
20,000(1+i)6 = 6,200 (F/A, 15, 6) + 5,000
Chapter 4
Solutions 2
TM 661
6)
Chapter 4
Solutions 1
Cont.
20,000(1+i)6 = 6,200 (F/A, 15, 6) + 5,000
at i = 0.20
20,000 (1.2)6 = 6,200 (8.7537) + 5,000
59,720 = 65,838
at i = 0.22
20,000 (1.22)6 = 65,838
ERR = 22%
(Note: Text gives ERR = 20%. Let me know if you see an
error I’ve made.)
f. Savings Investment Ratio
SIR = PWR(15%) / PWC(15%)
= 25,625 / 20,000
= 1.28
Chapter 4
Solutions 3
TM 661
Chapter 4
Solutions 1
16) A flood control project has a construction cost of $2,000,000, an annual maintenance
cost of $50,000, and a major repair at 5-year intervals of $250,000. If the interest rate
is 8% annually, determine the total capitalized cost required to fund the project.
Soln:
5
10 . . .
50
250
250
2,000
Find the equivalent annual maintenance.
A
= 50 + 250 (A/F, 8, 5)
= 50 + 250 (.1705)
= 92.625
Pc = P + A/i
= 2,000 + 92.625/.08
= 3,157.812
Total capitalized cost for the project is $3,157,812
Chapter 4
Solutions 4