ENGR 301 - Assignment 6

Deadline: due 16:00, Thursday November 17, 2016

Assignments must be submitted on-line using the multiple choice answer sheet
on the Moodle course website. No submissions will be accepted after the deadline.

Question 6-1

How much would the owner of a building be justified in paying for a sprinkler system that will save $750
a year in insurance premiums if the system has to be replaced every 20 years and has a salvage value
equal to 10% of its initial costs? Assume money is worth 6%.

The best (closest) answer is:  $8888  $7987  $9656  $8410

Question 6-2

A machine costs $980,000 to purchase and will provide $200,000 a year in benefits. The company plans
to use the machine for 13 years, and then will sell the machine for scrap, receiving $20,000. The company
interest rate is 12%. Which one of the following statements is correct?

(a) NPW = $980,000 + $200,000 (P/A,12%,13) + $20,000 (P/F,12%,13)

(b) NPW = –$980,000 + $200,000 (P/A,12%,13) + $20,000 (P/F,12%,13)
(c) NPW = –$980,000 + $200,000 (P/A,12%,13) – $20,000 (P/F,12%,13)
(d) NPW = $980,000 – $200,000 (P/F, 12%,13) – $20,000 (P/A,12%,13)

 answer (a)  answer (b)  answer (c)  answer (d)  none

Question 6-3

The General Hospital is evaluating new office equipment offered by four companies. In each case the
interest rate is 15% and the useful life of the equipment is 4 years. Use a Net Present Worth analysis to
determine the company from which you should purchase the equipment.

Company A Company B Company C Company D

First cost $15,000 $18,000 $25,000 $20,000
Maintenance and operating cost (annual) 1,600 1,100 400 900
Annual benefit 8,000 9,000 13,000 11,000
Salvage value 3,000 3,500 6,000 4,500

 Company A  Company B  Company C  Company D  none

Question 6-4

How much must be deposited in an account to have annual withdrawals of $1000 forever? Interest is
compounded quarterly and the interest rate is 9% for the first 10 years and 10% thereafter.

 $9,922  $10,000  $10,964  $10,280

Question 6-5

A pump is needed for 10 years at a remote location. The pump can be driven by an electric motor if a
power line is extended to the site. Otherwise a gasoline engine will be used. Use a present worth cash
flow analysis, using the following data and a 10% interest rate, to determine how the pump should be
powered. Calculate PWgas (present worth for gasoline option) and PWelectric (present worth for electric
option).

Gasoline Electric
First Cost $2400 $6000
Annual Operating cost 1200 750
Annual Maintenance 300 50
Salvage value 300 600
Life in years 5 10

Which of the following statements is the best answer:

(a) PWgas = – $7,900; PWelectric = – $10,685; Choose gasoline pump

(b) PWgas = – $15,550; PWelectric = – $17,588; Choose gasoline pump
(c) PWgas = – $12,805; PWelectric = – $10,685; Choose electric pump
(d) PWgas = – $10,508; PWelectric = – $9,685; Choose electric pump

 answer (a)  answer (b)  answer (c)  answer (d)  none

Question 6-6

The General Hospital is evaluating new office equipment offered by three companies. Interest rate is 8%.

Company A Company B Company C

Cost $500 $600 $700
Annual benefit 130 115 100
End of useful life salvage value 0 250 180
Useful life (yrs) 5 5 10

Use an annual cash flow analysis to determine from which company you should purchase the equipment.

 Company A  Company B  Company C  none

Question 6-7

If the analysis rate is 12%, compute the value of X that makes the two alternatives equally desirable.

A B
Cost $800 $1000
Uniform annual benefit $230 $230
Useful life, in years 5 X

 6 years  7 years  8 years  9 years

Questions 6-8 and 6-9

The General Hospital is evaluating new office equipment offered by four companies. The useful life of
the equipment is 4 years.

Company A Company B Company C Company D

First cost $15,000 $18,000 $25,000 $20,000
Maintenance and 1,600 1,100 400 900
operating cost (annual)
Annual benefit 8,000 9,000 13,000 11,000
Salvage value 3,000 3,500 6,000 4,500

6-8: The internal rate of return for Company A is close to:

 20%  25%  30%  35%

6-9: When doing an incremental analysis looking at it from an investment perspective the companies need
to be ranked as follows:

 A-B-C-D  A-B-D-C  C-D-B-A  D-C-B-A

Question 6-10

The General Hospital is evaluating new office equipment offered by three companies.

Company A Company B Company C

Cost $500 $600 $700
Annual benefit 130 115 100
End of useful life 0 250 180
salvage value
Useful life (yrs) 5 5 10

The incremental rate of return between Company B and Company C is close to:

 7.5%  8.5%  9.5%  10.5%

Question 6-11
For the following diagram, compute the rate of return:

 12%  15%  18%  21%

Question 6-12

Peter Minuit bought an island from the Manhattoes Indians in 1626 for $24 worth of beads and trinkets.
The 1991 estimate of the value of the land on this island was $12 billion (1 billion = 109). What rate of
return would the Indians have received if they had retained title to the island rather than selling it for $24?
The rate of return is close to:

 4.3%   5.6%  6.6%  7.8%

Question 6-13

Two mutually exclusive alternatives A and B are being considered:

Year 0 1 2 3 4 5
A –$2500 746 746 746 746 746
B –$6000 1664 1664 1664 1664 1664

The minimum attractive rate of return is 8%. After calculation we can find that the internal rates of return:
for A, IRRA = 15%, for B, IRRB = 12% and for B–A, IRRB–A = 9.8%. Which of the following statements
is correct?

(a) Select A because IRRA > IRRB

(b) Select neither A nor B because IRRA > MARR and IRRB > MARR
(c) Select B because IRRB–A > MARR
(d) Select A because IRRB–A > MARR

 answer (a)  answer (b)  answer (c)  answer (d)  none