Solutions to Chapter 12 Problems

12-1 EUACnothing = (0.01)($1,000,000) = $10,000

⎛ $2,000[1 − (P/F, 7%, 20)(F/P, 5%, 20) ] ⎞

EUACculvert = ⎜ $50,000 + ⎟ (A/P, 7%, 20) = $7,688
⎝ 0.07 − 0.05 ⎠

The EUAC of building the culvert is less than the EUAC of a mudslide (with no culvert). Building the
culvert is economical.

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12-2 Build the 4−lane bridge now:
PW = −$3,500,000

Build 2−lane bridge now, add two lanes later:

Year of
Expansion
k PW of Expansion Expenses
3 − [$2,000,000 + (3)($250,000)](P/F,12%,3) = − $1,957,450
4 − [$2,000,000 + (4)($250,000)](P/F,12%,4) = − $1,906,500
5 − [$2,000,000 + (5)($250,000)](P/F,12%,5) = − $1,844,050
6 − [$2,000,000 + (6)($250,000)](P/F,12%,6) = − $1,773,100

E(PW) = − $2,000,000 − $1,957,450(0.1) − $1,906,500(0.2) − $1,844,050(0.3)

− $1,773,100(0.4)
= −$3,839,500
Decision: The four−lane bridge should be built now.

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12-3 Set E(PW) of the difference between the two alternatives equal to zero and use a trial and error
procedure to solve for the interest rate.
E(PW)Δ = 0 = − $3,500,000 + $2,000,000
6
+ ∑ [$2,000,000 + $250,000(N)] (P/F,i ',N) Pr(N)
N=3
Δ

i E(PW)Δ
12% $339,500
15 113,875
18 −78,368

An interest rate of i = 15% will not reverse the initial decision to build the four−lane bridge now. The
two−lane bridge would be preferred for interest rates greater than:

⎛ 113,875 ⎞
i = 0.15 + 0.03 ⎜ ⎟ = 0.1678 or 16.78%.
⎝ 192,243⎠

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12-4 Revenue = 1,000,000 × $20 = $20,000,000
Operating expenses = $20,000,000 × 0.2 = $4,000,000
Profit = 20,000,000 – 4,000,000 = $16,000,000

(a) E(PW) = {$16,000,000(P/A,12%,10) – $200,000}(0.10)

= $9020320 ≥ 0, a good purchase.
(b) E(PW) = {$16,000,000(P/A, 12%, 7) – $200,000} (0.10)
= $7282080 ≥ 0, good purchase.
(c) Similar to part (a) find profit for various in production rate varies at ± 20%.

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12-5 E ( R ) = 5 × 0.1 + 10 × 0.25 + 20 × 0.28 + 30 × 0.30 = 17.6
E ( S ) = 50 × 0.25 + 60 × 0.35 + 70 × 0.20 = 47.5
E (C ) = E ( R ) ⋅ E ( S ) = (17.6)(47.5) = 836
V ( R) = (5)2 (0.1) + (10) 2 (0.25) + (20) 2 (0.28) + (30) 2 (0.30) − (17.6) 2 = 99.75
V ( S ) = (50) 2 (0.25) + (60) 2 (0.35) + (70) 2 (0.20) − (47.5) 2 = 608.75
V (C ) = V ( R.S ) = ( E ( R)) 2 V ( S ) + ( E ( S ) 2 )V ( R) + V ( R) V ( S )
= (17.6) 2 (608.75) + (47.5) 2 (99.75) + (99.75)(608.75) = 474350.15
SD (C ) = 688.730

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12-6
Annual Cost of Expected Annual Expected Total
Hurricane Financing the Rebuild Property Damage Annual Cost
Category (A) (B) (A) + (B)
5 $5,082,000 $ 500,000 $ 5,582,000
4 $3,630,000 $ 1,000,000 $ 4,630,000
3 $2,541,000 $ 3,000,000 $ 5,541,000
2 $1,452,000 $ 5,000,000 $ 6,452,000
1 $ 726,000 $10,000,000 $10,726,000

(A) = Capital Investment × (A/P, 6%, 30)

(B) = $100,000,000 × Probablility of storm exceeding levee height

Therefore, protect the city from a category 4 hurricane.

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12-7 Expected equivalent annual costs given that one main power failure occurs and the backup generator is
needed:

Capital Annual Total

Recovery O&M Annual Cost of Backup Annual
Alternative Amount* Expenses Failure Cost
R −$30,032 −$5,000 −($400,000)(0.04) = −$16,000 −$51,032
S −26,092 −7,000 −($400,000)(0.05) = −20,000 −53,092
T −32,435 −4,000 −($400,000)(0.02) = −8,000 −44,435
*
From Chapter 5, CR(10%) = −(Capital Invest.)(A/P,10%,10) + (MV)(A/F,10%,10)

To minimize total annual cost, recommend Alternative T.

If two main power failures occur per year, the expected equivalent costs become:

Alternative R
Pr{0 failures} = (0.96)(0.96) = 0.9216
Pr{1 failure } = 2(0.96)(0.04) = 0.0768
Pr{2 failures} = (0.04)(0.04) = 0.0016
1.0000

Annual cost of Backup Failure = −$400,000(0.0768) + 2(−$400,000)(0.0016)

= −$32,000
Alternative S
Pr{0 failures} = (0.95)(0.95) = 0.9025
Pr{1 failure } = 2(0.95)(0.05) = 0.0950
Pr{2 failures} = (0.05)(0.05) = 0.0025
1.0000
Annual cost of Backup Failure = −$400,000(0.0950) + 2(−$400,000)(0.0025)
= −$40,000

Alternative T
Pr{0 failures} = (0.98)(0.98) = 0.9604
Pr{1 failure } = 2(0.98)(0.02) = 0.0392
Pr{2 failures} = (0.02)(0.02) = 0.0004
1.0000
Annual cost of Backup Failure = −$400,000(0.0392) + 2(−$400,000)(0.0004)
= −$16,000

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12-7 continued

Capital Annual Total

Recovery O&M Annual Cost of Backup Annual
Alternative Amount* Expenses Failure * Cost
R −$30,032 −$5,000 −$32,000 −$67,032
S −26,092 −7,000 − 40,000 −73,092
T −32,435 −4,000 −16,000 −52,435
*
Note for each alternative, the annual cost of "failure" given 2 occurences per year is twice the cost
given 1 occurrence per year. A logical result.

Again, Alternative T is selected. This answer should be obvious since Alternative T is the most reliable
alternative.

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12-8 Skiing Annual Annual Net Annual
Days Revenues Expenses Receipts (NAR)
80 (500)(80)($10) = $400,000 −$1,500(80) = −$120,000 $280,000
100 $400,000 + (400)(20)($10) = $480,000 −$1,500(100) = −$150,000 $330,000
120 $480,000 + (300)(20)($10) = $540,000 −$1,500(120) = −$180,000 $360,000
E(NAR) = $280,000 (0.60) + $330,000 (0.3) + $360,000 (0.10) = $303,000
i = 25% /yr.; N = 5 yr.; Project cost = $900,000
E(PW) = −$900,000 + $303,000 (P/A, 25%, 5) = −$85,142 < 0
Do not build the lift.

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12-9 Capital Investment = $900,000; Annual O&M expenses = $1,500 per day
No. of People/Day Demand (X)
Total Days Person−Days
Per Year First 80 Next 20 Next 20 Per Year p(X)
80 500 − − 40,000 0.6
100 500 400 − 48,000 0.3
120 500 400 300 54,000 0.1
Annual Revenue (R) = $10 (Person−Days/Year)

80−Day Season (40,000 Person−Days)

EOY BTCF Depr. TI T(40%) ATCF
0 -$900,000 --- --- --- -$900,000
1 280,000 $ 64,286 $215,714 -$86,286 193,714
2 280,000 128,571 151,429 -60,571 219,429
3 280,000 128,571 151,429 -60,571 219,429
4 280,000 128,571 151,429 -60,571 219,429
5 280,000 128,571 151,429 -60,571 219,429
6 280,000 128,571 151,429 -60,571 219,429
7 280,000 128,571 151,429 -60,571 219,429
8 280,000 64,286 215,714 -86,286 193,714

PW80 (15%) = −$900,000+[$193,714 + $219,429 (P/A,15% 6)](P/F,15% 1)

+ $193,714 (P/F,15%, 8)
= $53,920

100−Day Season (48,000 Person−Days)

EOY BTCF Depr. TI T(40%) ATCF
0 -$900,000 --- --- --- -$900,000
1 330,000 $ 64,286 $265,714 -$106,286 223,714
2 330,000 128,571 201,429 -80,571 249,429
3 330,000 128,571 201,429 -80,571 249,429
4 330,000 128,571 201,429 -80,571 249,429
5 330,000 128,571 201,429 -80,571 249,429
6 330,000 128,571 201,429 -80,571 249,429
7 330,000 128,571 201,429 -80,571 249,429
8 330,000 64,286 265,714 -106,286 223,714

PW100 (15%) = −$900,000+[$223,714 + $249,429(P/A, 15%, 6)](P/F, 15%, 1)

+$223,714 (P/F, 15%, 8)
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12-9 continued
= $188,545

120−Day Season (54,000 Person−Days)

EOY BTCF Depr. TI T(40%) ATCF

0 -$900,000 --- --- --- -$900,000
1 360,000 $ 64,286 $295,714 -$118,286 241,714
2 360,000 128,571 231,429 -92,571 267,429
3 360,000 128,571 231,429 -92,571 267,429
4 360,000 128,571 231,429 -92,571 267,429
5 360,000 128,571 231,429 -92,571 267,429
6 360,000 128,571 231,429 -92,571 267,429
7 360,000 128,571 231,429 -92,571 267,429
8 360,000 64,286 295,714 -118,286 241,714

PW120 (15%) = −$900,000+[$241,714 + $267,429(P/A,15%, 6)](P/F,15,% 1)

+$241,714(P/F,15%, 8)
= $269,320
Days of
Skiing (X) p(X) PW(ATCF) E[PW(X)] [PW(X)]2 p(X)[PW(X)]2
80 0.6 53,920 32,352 2,907,366,400 1,744,419,840
100 0.3 188,545 56,564 35,549,217,025 10,664,765,108
120 0.1 269,320 26,932 72,533,262,400 7,253,326,240
E(PW) = $115,848 E[(PW)2] = 19,662,511,188 ($)2

E(PW) = Σ [p(X) PW(ATCF)] = $115,848

V(PW) = Σ {p(X) [PW(X)]2} − [E(PW)]2 = 19,662,511,188 − (115,848)2

= 6,241,752,084 ($)2
SD(PW) = [V(PW)]1/2 = $79,005

Recommend that the lift be installed since E(PW) = $115,848 > 0 and one SD ($79,005) is only 68% of
E(PW).

740
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12-10 Depreciation

0.8($100,000)
SL amount = = $20,000
4

ADS: d1 = d5 = $20,000/2 = $10,000

d2 = d3 = d4 = $20,000

After−tax analysis

Let $A1,L = cost savings in first year (before−taxes) for performance level L.
PWAT(12%) = −$100,000 + (0.4)(0.2)($100,000)
$ A [1 − ( P / F ,12%,5)( F / P,6%,5)]
+ (1 − 0.4) 1, L
0.12 − 0.06
+ 0.4($20,000)(P/A,12%,3)(P/F,12%,1)
+ 0.4($10,000)[(P/F,12%,1) + (P/F,12%,5)]
= −$92,000 + 2.407($A1,L) + $17,157 + $5,841
= 2.407($A1,L) − $69,002, L = 1, 2, 3, 4

Performance
Level (L) p(L) PWAT(12%) E(PWAT)
1 0.15 − $14,854 − $2,227
2 0.25 15,243 3,811
3 0.35 37,387 13,085
4 0.25 74,937 18,734
Total: $33,403

E(PWAT) = $33,403; implement the project.

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12-11 PW ( N ) = −$500000 + $200000 ( P/A,12%, N ).

N PW(N) P(N) PW(N).P(N) PW(N)2 PW(N)2.

(×106) P(N)(×106)
1 –321420 0.1 –32142 103310.8 10331.08
2 –161980 0.1 –16198 26237.5 2623.75
3 –19640 0.3 –5892 385.72 115.716
4 107460 0.2 21492 11547.65 2309.53
5 220960 0.2 44192 48823.32 9764.66
6 322280 0.1 32228 103864.3 10386.43

E ( PW ( N )) = 43680 E ( PW ( N )2 ) = 35531.16 ×106

V ( PW ) = 35531.166 ×106 − (43680) 2 = 3.36 × 1010
SD ( PW ) = 183303.02

(b) P(PW(N)<0) = 0.5, May be recommended as W(PW(N)) is larger than SD(PW)

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12-12 (a) EOY Net Cash Flow
j 0 1 2 PW(j)
1 −$29,000 $6,000 $17,500 −$10,551
2 −29,000 6,000 19,000 −9,417
3 −29,000 6,000 23,000 −6,392
4 −29,000 12,000 20,000 −3,443
5 −29,000 12,000 24,600 35
6 −29,000 12,000 28,000 2,606
7 −29,000 19,000 22,400 4,459
8 −29,000 19,000 27,500 8,315
9 −29,000 19,000 31,000 10,962
In Millions
j PW(j) p(j) PW(j) • p(j) [PW(j)]2 [PW(j)]2 • p(j)
1 −$10,551 0.02 −$211 111.32 2.23
2 −9,417 0.04 −377 88.67 3.55
3 −6,392 0.14 −895 40.86 5.72
4 −3,443 0.12 −413 11.85 1.42
5 35 0.30 11 − −
6 2,606 0.18 469 6.79 1.22
7 4,459 0.06 268 19.88 1.19
8 8,315 0.08 665 69.14 5.53
9 10,962 0.06 658 120.15 7.21
E(PW) = $175 E[(PW) ] = 28.07 × 106 ($)2
2

V(PW) = 28.07 ×106 − (175)2 = 28.04 ×106 ($)2

SD(PW) = (28.04 ×106 )1/2 = $5,295

(b) Pr{PW > 0} = 0.30 + 0.18 +0.06 + 0.08 + 0.06 = 0.68

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12-13 (a) im = MARR = 15%; General inflation rate (f) = 4%
Increase rate for annual revenues = 6.48%

$40,000[1 − ( P / F ,15%, N )( F / P,6.48%, N )

PW(N) = −$100,000 +
0.15 − 0.0648
In Millions
N PW(N) p(N) PW(N) • p(N) [PW(N)]2 [PW(N)]2 • p(N)
1 −$65,218 0.03 −$1,957 $4,253.39 127.60
2 −33,012 0.10 −3,301 1,089.79 108.98
3 −3,192 0.30 −958 10.19 3.06
4 24,418 0.30 7,325 596.24 178.87
5 49,983 0.17 8,497 2,498.30 424.71
6 73,654 0.10 7,365 5,424.91 542.49
E(PW)=$16,971 E[(PW) ] = 1,385.71 × 106 ($)2
2

V(PW) = 1,385.71 × 106 − (16,971)2 = 1,097.7 × 106 ($)2

SD(PW) = (1,097.7 × 106)1/2 = $33,131
(b) Pr(PW > 0} = 0.30 + 0.17 + 0.10 = 0.57
. − 0.04
015
(c) ir = = 0.10577 or 10.577%
1.04
6
E(AW)R$ = ∑ PW(N ) (A/P,10.577%,N) p(N) = $1,866
N =1

The project appears questionable. The E(PW) is positive but the SD(PW) is approximately two
times the expected value. Also the Pr{PW > 0} = 0.57 is only somewhat attractive.

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12-14 Notice that the probable extra capital investment for project B is a negative consideration to the
selection of this project. But let's examine the expected value and variance of cash inflows for both
projects to see if they might compensate for the higher capital investment for project B. The expected
cash inflow for project A is $1,840 per year, while the expected cash inflow for project B is $1,670.
The variance of project A is 86,400 $2 and the variance of project B is 1,374,100 $2, so project A has a
greater expected value of cash inflows and smaller variance of cash inflows than project B. Project A
appears to be the clear choice (it probably has a lower capital investment too). Note that in this
problem, risk and reward do not travel in the same direction. As the risk (variance) of project B goes
up, its reward (expected annual cash flow becomes lower.

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12-15 μ = 16 weeks from Table of Z distribution

x−μ 18 − 16
1.28 = =
σ σ
2
σ= = 1.5625
1.28

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 48 − 50
12-16 Z = = −0.707
8
Pr ( x > 48) = 1 − 0.2420 = 75.8%

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12-17 (a) k E(Xk) Ck E(Fk) (P/F,15%,k) PW[E(Fk)]
0 −$41,167 1 −$41,167 1.0000 −$41,167
1 − 2,208 2 − 4,416 0.8696 − 3,840
2 10,600 1 10,600 0.7561 8,015
3 6,067 4 24,268 0.6575 15,956
4 4,817 5 24,085 0.5718 13,772
5 17,333 1 17,333 0.4972 8,618
2
k V(Xk) [Ck(P/F)] V[PW(Fk)]
0 1,361,111 1.0000 1,361,111
1 11,736 3.0248 35,499
2 71,111 0.5717 40,653
3 17,778 6.9169 122,969
4 6,944 18.1739 56,759
5 90,000 0.2472 22,249
5
E(PW) = ∑
k=0
PW[E(Fk)] = $1,354

5
V(PW) = ∑k=0
V[PW(Fk)] = 1,639,240 ($)2

(b) Assumption: The PW of the net cash flow is a normally distributed random variable with μ =
E(PW) and σ2 = V(PW).
⎧ 0 − $1,354 ⎫
Pr{PW ≥ 0} = 1 − Pr{PW ≤ 0} = 1 − Pr ⎨Z ≤ ⎬
⎩ 1,639,240 ⎭
= 1 − Pr{Z ≤ −1.06}
= 1 − 0.1446
= 0.8554

(c) Yes; if PW (at i = MARR) > 0 then the IRR > MARR. Therefore, it is correct to conclude that
Pr{IRR ≥ MARR} = Pr{PW ≥ 0}.

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12-18 E[( PWA )(12%)] = −[20000 + 8000( P/A, 12%, 10)] + 2000( P/F , 12%, 10)
= −20000 − 8000 (5.6502) + 2000(0.3220) = −$64557.6
V [ PWA (12%)] = (600) 2 ( P/A,12%,10) 2 + (900) 2 ( P/F ,12%,10) 2
= 11576897.65$2
E[ PWB (12%)] = −10500( P/A, 12%,10) = −$59327.1
V [ PWB (12%)] = (1200) 2 [ P/A,12%,10]2
= (1200)2 [5.6502]2 = 45971654.46 $2

Now Let Y = PWA − PWB (i.e B − A)

find Pr (Y > 0)
E (Y ) = E ( PWA ) − E ( PWB ) = −5230.5
V (Y ) = V ( PWA ) + V ( PWB ) = 57548552.11
⎡ 0 − (−5230.5) ⎤
Pr (Y ≥ 0) = Pr ⎢ Z ≥ ⎥
⎣ 57548552.11 ⎦
= Pr [ Z ≥ 0.689] = Pr [ Z ≤ −0.689]
0.2451

12-19
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 EOY E(B – A) V(B + A)
0 –5,000 490,000
1 2,500 410,000
2 0 500,000
3 2,000 552,500
4 –1,500 610,000

At i = 15%
E[ PW ( B − A)] = −5000 + 2500( P/F , 15%, 1) + 0 + 2000( P/F , 15%,3) − 1500( P/F , 15%, 4)
= −$2368.7

V [ PW ( B − A)] = 490000 + 410000( P/F , 15%, 1) +

500000 ( P/F , 15%, 2) + 552500 ( P/F , 15%, 3)
+610000 ( P/F , 15%, 4) = 1936652.75

σ ( PWA→ B ) = V ( PW ( B − A)) = $1391.63.

750
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12-20
(a)

Random Life Nearest Investment– Salvage Equivalent

Number RN whole 150000 (A/P, Value AW
5+ (7 − 5)
100 Numbe 12%, N) (A/F, 12%,
r N)
13 5.26 5 –41610 3148 –38462
51 6.02 6 –36480 1971.2 –38451.2
35 6.02 6 –36480 1971.2 –38451.2
90 6.8 7 –32865 991.0 –31874
SUM = –147238.4
μ = –$36809.6

(b) Variance
(−38462 − μ ) 2 + (−38451.2 − μ ) 2 + (−38451.2 − μ ) 2 + (−31874 − μ ) 2
=
3
= 10,827, 414.84$ .2

751
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12-21 Monte Carlo Simulation for the Proposed Project

Random Investment Three Project Life, N N to One Random Annual AW

Normal 200,000 + Random = 5+ Nearest Number Receipts [− P(A/P, 10%, N) + A
Deviate RND * Numbers RN/999(15−5) Integer + MV(A/F, 10%, N]
10,000
RND P RN N N R A AW

1.102 211,020 131 6.311311 6 4 16,000 −34,450.192

0.148 201,480 513 10.13514 10 5 16,000 −187,80.796
2.372 223,720 350 8.503504 9 4 16,000 −24,837.792
−0.145 198,550 904 14.04905 14 7 16,000 −12,943.235
0.104 201,040 440 9.404404 9 9 22,000 −14,900.544
1.419 214,190 107 6.071071 6 4 16,000 −35,178.024
0.069 200,690 507 10.07508 10 5 16,000 −18,652.263
0.797 207,970 782 12.82783 13 6 16,000 −15,282.176
−0.393 196,070 258 7.582583 8 8 22,000 −16,743.518
−0.874 191,260 504 10.04505 10 3 16,000 −17,118.002
SUM −208,886.54

The estimate of AW based on ten repititions of the experiment is −$208,886.54.

An estimate of the standard deviation of AW can be found by:

∑ ( AW − E[W ])
i
2

σ [ AW ] = i =1

K −1

σ = 7,992.784

Due to reasons of space only 10 of the simulation trials are presented here. It can be noticed that these
estimates are within the range of the real value and will get even closer with more trials.

752
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12-22 Although the present worth of Alternative 2 is higher than the present worth of Alternative 1, it may be
wise to select Alternative 1 since the probability of present worth being greater than zero for Alternative
1 is greater and there is less variability in present worth for Alternative 1.

753
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12-23 Given: MARR = 8% per year; Analysis Period = 8 years

PWNew Product = −$1,000,000(P/F, 8%, 2)

+[0.6($200,000)+0.4($280,000)](P/A,8%,6) (P/F,8%,2)
= $62,165

PWDo Nothing = $0; Select New Product

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12-24 E[PW(15%)] = −300k + 100k (P/A,15%,N) + 20k (P/F,15%,N)
(7 k ) 2 ( P / A,15%,2 N )
V[PW(15%)] = 0 + + (3k)2 (P/F,15%,2N)
2.15
Pr (IRR ≥ 15%) ≥ 0.90 or Pr(PW ≥ 0 | i = 15%) ≥ 0.90

Step 1: Try N = 4 years, E[PW(15%)] = −300k + 285.5k + 11.4k = −3.1k

(49 x106 )( P / A,15%,8)

V[PW(15%)] = + (9x106) (P/F,15%,8)
2.15

= (102.27 x 106) + (2.94 x 106)

= 105.21 x 106 ; ( σ = $10,257)

⎡ 0 − (−3.1k ) ⎤
Pr (PW ≥ 0 | i = 15%) = Pr ⎢ S ≥ ⎥
⎣ 10.257k ⎦

= Pr (S ≥ 0.30) ≅ 0.38

Step 2: Try N = 5 years, E[PW(15%)] = −300 + 335,2 + 9.9 = 45.1k

(49 x106 )( P / A,15%,10)

V[PW(15%)] = + (9x106) (P/F,15%,10)
2.15

= (114.38 x 106) + (2.22 x 106)

= 116.6 x 106 ; ( σ = $10,798)

⎡ 0 − (45.1k ) ⎤
Pr (PW ≥ 0 | i = 15%) = Pr ⎢ S ≥ ⎥
⎣ 10.798k ⎦

= Pr (S ≥ −4.18) ≅ 0.99

Hence, N = 5 years is the smallest value permissible.

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12-25 Start at 2 : PW(10)%) for BA = −250k (P/A,10%,5)(0.75)

−150k (P/A,10%,5)(0.25) – 5,500k + 2,000k (P/F,10%,5)

= −5,111,14k

Therefore, select RA
2
If at PW(10%) for RA = −1,000k (P/A,10%,5)(0.60)

−1,200k (P/A,10%,5)(0.50) – 25k = −4,119.06k

Bottom branch at 1 : PWBUILD(10%) = [−200k(P/A,10%,5)

−4,119.06k (P/F,10%,50}(0.2) – 150k (P/A,10%,10)(0.6)

−300k (P/A,10%,10)(0.2) – 10,500k + 17,00k (P/F,10%,10)

= −$5,531.33k

Top branch at 1 : PWRENT(10%) = −900k [1−(P/F,10%,10)(F/P,7%,10)](0.55)

−700k [10(P/F,10%,1)](0.45) – 25k

= −$6,875,73k

Therefore, choose to build.

756
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 Solutions to Spreadsheet Exercises

12-26
A B C D E F
1 MARR = 12% Useful Life Probability
Capital
2 Investment = $ 521,000 14 0.3
Annual
3 Savings = $ 48,600 15 0.4
Increased
4 Revenue = $ 31,000 16 0.3
5
6
7 Useful Life prob (N) PW E(PW) PW^2 p(N)[PW]^2
8 14 0.3 $ 6,602 $ 1,981 4.359E+07 1.308E+07
9 15 0.4 $ 21,145 $ 8,458 4.471E+08 1.788E+08
10 16 0.3 $ 34,129 $ 10,239 1.165E+09 3.494E+08
11 Totals = $ 20,677 $ 541,360,618
12
13 E(PW) $ 20,677
14 V(PW) = $ 113,806,908
15 SD(PW) = $ 10,668
16
17
18 The revised estimates for useful life have resulted in an increased E (PW) and a reduced SD(PW).

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12-27 Left as an individual exercise.

758
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