Deck 9: Other Analysis Techniques

Question 1

Case Study 9
A major equipment purchase is being considered by Metro Atlanta. The initial cost is determined to be $1,000,000. It is estimated that this new equipment will save $100,000 the first year and increase gradually by $50,000 every year for the next 6 years. MARR=10%

-The payback period for this equipment purchase.

A) 8 years
B) 6 years
C) 5 years
D) 10 years.

Answer 1

5 years

Question 2

Case Study 9
A major equipment purchase is being considered by Metro Atlanta. The initial cost is determined to be $1,000,000. It is estimated that this new equipment will save $100,000 the first year and increase gradually by $50,000 every year for the next 6 years. MARR=10%

-The B/C ratio for this investment is ___________.

A) 1.48
B) 0.92
C) 0.51
D) 1.13

Answer 2

0.92

Question 3

Case Study 9
A major equipment purchase is being considered by Metro Atlanta. The initial cost is determined to be $1,000,000. It is estimated that this new equipment will save $100,000 the first year and increase gradually by $50,000 every year for the next 6 years. MARR=10%

-The NFW of this investment is ___________.

A) -$72,678
B) -$66,756
C) -$116,129
D) -$142,398

Answer 3

-$142,398

Question 4

The B/C ratio of an investment of $10,000 that provides a benefit of $1,500 at the beginning every year for 10 years is __________, if money is worth 9%.

A) 2.50
B) 1.38
C) 1.79
D) 1.05

Question 5

Table 9
Data for four mutually exclusive alternatives are given in the table below. Assume a life of 7 years and a MARR of 9%,
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } & \begin{array} { l } \text { Alt. D } \\\text { Do Nothing }\end{array} \\\hline \text { Iritial Cost } & \$ 5,600 & \$ 3,400 & \$ 1,200 & \$ 0 \\\hline \text { EUAB } & \$ 1,400 & \$ 1,000 & \$ 400 & \$ 0 \\\hline \text { Salvage Value } & \$ 400 & \$ 0 & \$ 0 & \$ 0 \\\hline\end{array}$$

-The ?B /?C ratio for the first increment, (C-D) is _____________.

A) 1.19
B) 0.84
C) 1.68
D) 1.86

Question 6

Table 9
Data for four mutually exclusive alternatives are given in the table below. Assume a life of 7 years and a MARR of 9%,
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } & \begin{array} { l } \text { Alt. D } \\\text { Do Nothing }\end{array} \\\hline \text { Iritial Cost } & \$ 5,600 & \$ 3,400 & \$ 1,200 & \$ 0 \\\hline \text { EUAB } & \$ 1,400 & \$ 1,000 & \$ 400 & \$ 0 \\\hline \text { Salvage Value } & \$ 400 & \$ 0 & \$ 0 & \$ 0 \\\hline\end{array}$$

-The ?B /?C ratio for the second increment, (B-C) is _____________.

A) 1.37
B) 0.84
C) 1.45
D) 1.86

Question 7

Table 9
Data for four mutually exclusive alternatives are given in the table below. Assume a life of 7 years and a MARR of 9%,
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } & \begin{array} { l } \text { Alt. D } \\\text { Do Nothing }\end{array} \\\hline \text { Iritial Cost } & \$ 5,600 & \$ 3,400 & \$ 1,200 & \$ 0 \\\hline \text { EUAB } & \$ 1,400 & \$ 1,000 & \$ 400 & \$ 0 \\\hline \text { Salvage Value } & \$ 400 & \$ 0 & \$ 0 & \$ 0 \\\hline\end{array}$$

-The ?B /?C ratio for the third increment, (A-B) is _____________.

A) 0.84
B) 0.92
C) 0.75
D) 0.69

Question 8

Table 9
Data for four mutually exclusive alternatives are given in the table below. Assume a life of 7 years and a MARR of 9%,
$$\begin{array} { | l | l | l | l | l | } \hline & \text { Alt. A } & \text { Alt. B } & \text { Alt. C } & \begin{array} { l } \text { Alt. D } \\\text { Do Nothing }\end{array} \\\hline \text { Iritial Cost } & \$ 5,600 & \$ 3,400 & \$ 1,200 & \$ 0 \\\hline \text { EUAB } & \$ 1,400 & \$ 1,000 & \$ 400 & \$ 0 \\\hline \text { Salvage Value } & \$ 400 & \$ 0 & \$ 0 & \$ 0 \\\hline\end{array}$$

-The best alternative using B/C ratio analysis is ____________.

A) Alt. C
B) Alt. A
C) Alt. B
D) Alt. D

Question 9

Tara invests $2,500 today and another $1,500 a year from now. Her investments starting year 2 keeps increasing by $100 every year for the next 10 years from today. She stops investing from year 11 until year 20. If she earns a rate of return of 7% on her investments, determine future worth of her investments 20 years from now?

A) $39,134
B) $61,175
C) $48,184
D) $59,290

Question 10

Using the cost and benefits data for four different alternatives in table below, find the best alternative using the payback period analysis. MARR=7%
$$\begin{array} { | l | l | l | l | l | } \hline \text { Year } & \text { A } & \mathrm { B } & \mathrm { C } & \mathrm { D } \\\hline 0 & - \$ 9,000 & - \$ 12,000 & - \$ 10,000 & - \$ 12,000 \\\hline 1 & 2,000 & 3,500 & 0 & 0 \\\hline 2 & 2,000 & 0 & 1,000 & - 2,000 \\\hline 3 & 2,000 & 3,000 & 2,000 & 0 \\\hline 4 & 2,000 & 3,500 & 3,000 & 18,000 \\\hline 5 & 1,000 & 0 & 4,000 & 0 \\\hline 6 & 3,000 & 3,000 & 5,000 & 0 \\\hline\end{array}$$

A) A
B) B
C) C
D) D

Question 11

Given the data for two alternatives, choose the better alternative using the B/C ratio analysis. MARR = 8%
$$\begin{array} { l c c } \quad \text { Alternative } & \mathbf { X } & \mathbf { Y } \\\text { First cost } & \$ 100,000 & \$ 140,000 \\\text { Operating costs/year } & 50,000 & 60,000 \\\text { Benefits /year } & 100,000 & 120,000 \\\text { Dis-benefits/year } & 30,000 & 25,000 \\\text { Life in years } & 5 & 10\end{array}$$

A) Alt. X
B) Alt. Y

Question 12

Tech Engineering is considering whether to lease or buy earth-moving equipment.
MARR =8%
The costs of buying an earth mover are as follows.
Purchase Price = $150,000
Life = 10 years
Salvage value = $12,000
Maintenance = $1,800/year
Insurance = $1,200 /year
Operating cost day = $300/day
If the equipment is leased, in addition to incurring an operating cost of $300 per day, the company has to pay a rental fee of $100 per day.
Determine the minimum number of days per year that the company has to use the earth mover in order justify buying the equipment.

Question 13

Given the financial data in the table below for two mutually exclusive alternatives, determine the value "X" for the two alternatives to be equally attractive. Use an interest rate of 9% per year.
$$\begin{array} { | l | l | l | } \hline & \mathrm { P } & \mathrm { Q } \\\hline \text { Iritial cost } & \$ 2,500 & \$ 4,000 \\\hline \text { Annual benefit } & 400 & \mathbf { X } \\\hline \text { Salvage value } & 1,200 & 1,500 \\\hline \text { Life } & { 5 \text { years } } \\\hline\end{array}$$

Question 14

The payback period analysis is the not the best decision making method for high tech industry as the method chooses the best choice based on how fast an investment can be recovered.

Question 15

For an alternative to be considered as a viable alternative, the benefit /cost ratio must be greater than or equal to 1.

Question 16

If the B/C ratio for three alternatives A, B, and C are 2.8, 3.3 and 1.95 respectively, the best alternative is always "B" as it has the largest B/C ratio.

Question 17

Sensitivity analysis is concerned with determining how much variation in financial data, the decision maker can have to affect the economic decision

Question 18

A continuous improvement team has helped to save $20,000 for the company on a process that will not be changed for the next 10 years. If the team has spent $50,000 on the improvement project, the net present worth (NPW) of savings on this improvement project is $150,000 at a MARR of 5%.