Deck 5: Present-Worth Analysis

Question 1

Answer 1

Question 2

Consider the following two investment alternatives: Suppose that your firm needs either machine for only 2 years. The net proceeds from the sale of machine B are
estimated to be $200. What should be the required net proceeds from the sale of machine A so that both
machines could be considered economically indifferent at an interest rate of 10%?

Answer 2

Question 3

A newly constructed water-treatment facility cost $2 million. It is estimated that the facility will need
revamping to maintain the original design specification every 30 years at a cost of $1 million. Annual repairs
and maintenance costs are estimated to be $100,000. At an interest rate of 6%, determine the capitalized cost of
the facility.

Answer 3

Question 4

Your R&D group has developed and tested a computer software package that assists engineers to control the
proper chemical mix for the various process manufacturing industries. The total investment in developing the
product was estimated to be $1,500,000. If you decide to market the software, your first year operating net cash
flow is estimated to be $1,000,000. Because of market competition, product life will be about 4 years, and the
product's market share will decrease by 25% each year over the previous year's share. You are approached by a
big software house which wants to purchase the right to manufacture and distribute the product. Assuming that
your interest rate is 15%, for what minimum price would you be willing to sell the software?

Question 5

A manufacturing company is considering two mutually exclusive machines E1 and E2 with the following cash
flow information: Which machine would you recommend if the company needs either machine for only 5 years? Assume a MARR
of 12% and either machine would be available at the same cost over the next 5 years.

Question 6

A manufacturing company is considering the purchase of a new CNC lathe, which will cost $60,000 and has an
annual maintenance cost of $8,000. A few parts in the lathe need to be replaced once every 5 years to enable
smooth running of the lathe. This would cost an additional $20,000 (once every 5 years). Assuming that the lathe
would last 15 years under these conditions, what is the total equivalent cost (present value) of this investment at
an interest rate of 12%? (Assume that there will be no appreciable salvage value at the end of 15 years.)

Question 7

An investment project costs P. It is expected to have an annual net cash flow of 0.125P for 20 years.
(a) What is the project's payback period?
(b) What is the discounted payback period at

Question 8

You are considering buying an old house that you will convert into an office building for rental. Assuming that
you will own the property for 10 years, how much (the maximum amount) would you be willing to pay for the
old house now given the following financial data?