1

PEMEX, Mexico’s petroleum corporation, has an estimated budget for oil and gas
exploration that includes equipment for three offshore platforms as shown. Use PW
analysis to select the best alternative at a MARR of 12% per year.

Platform X Y Z
First cost, $ million -300 -450 -510
M & O, $ million per year -320 -290 -230
Salvage value, $ million 75 50 90
Estimated life, years 20 20 20

The present worth of platform X is $-

million, the present worth of platform Y is $−
and the present worth of platform Z is $−
x y z
P/A (12%,20) 7.4694 -2390.21 -2166.13 -1717.96
P/F (12%,20) 0.1037 7.78 5.19 9.33
Sum -2382.43 -2160.94 -1708.63
-2682.43 -2610.94 -2218.63

-2682.43 -2610.94 -2218.63

2 A sports mortgage is the brainchild of Stadium Capital Financing Group, a company

headquartered in Chicago, Illinois. It is an innovative way to finance cash-strapped
sports programs by allowing fans to sign up to pay a “mortgage” over a certain number
of years for the right to buy good seats at football games for several decades with
season ticket prices locked in. The locked-in price period is 50 years in California.
Assume you and your brother went to UCLA.
Your brother, Harold, purchases a $40,000 mortgage and pays for it now to get season
tickets for $290 each for 50 years, while you, being a three-time alumnus of the same
university, are able to buy season tickets at $390 in year 1, with prices increasing by $20
per year for 50 years.
NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to
return to this part.

Which of you made the better deal at an interest rate of 8% per year?
The present worth of Harold's investment is $
and the present worth of your investment is $
Harol me
Present -$40,000
Pay -$290 390
y 50 Increasexyear 20
i 8%
 P/A (8%,50) 12.2335 P/A (8%,50) 12.2335
P/F (8%,50) 0.0213 P/G (8%,50) 139.5928

-$40,000 4771.065
-$3,548 2791.856
-$43,547.72 $7,562.92

3 A sports mortgage is the brainchild of Stadium Capital Financing Group, a company

headquartered in Chicago, Illinois. It is an innovative way to finance cash-strapped
sports programs by allowing fans to sign up to pay a “mortgage” over a certain number
of years for the right to buy good seats at football games for several decades with
season ticket prices locked in. The locked-in price period is 50 years in California.
Assume you and your brother went to UCLA.
Your brother, Harold, purchases a $40,000 mortgage and pays for it now to get season
tickets for $290 each for 50 years, while you, being a three-time alumnus of the same
university, are able to buy season tickets at $390 in year 1, with prices increasing by $20
per year for 50 years.
NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to
return to this part.

What should Harold have been willing to pay UCLA upfront for the mortgage to make
the two plans exactly equivalent economically if the rate of interest is 8% per year?
(Assume Harold has no reason to give extra money to UCLA at this point and that the
seats are the same level and next to each other.)
Harol me
Present $40,000
Pay $290 390 P/A
y 50 Increasexyear 20
i 8% $3,548
$4,015.21
1 $11,110.64 $3,548
A/P (8%,50) 0.08174 $11,110.64 $4,015.21

4 Yvonne’s father was a true believer in “giving back.” He endowed a program 35 years
ago to help students receive degrees when they are short on funds.
How much money was contributed 35 years ago if it earned at a rate of 13% per year
(with no withdrawals) and is now sufficient to provide a perpetual income of $26,000
annually beginning this year, year 35?
The amount of money that was contributed 35 years ago is $

A $26,000 P/F(13%,34) 0.015679526

i 13%
n 35
0.978678771 -0.04913046
a/i $200,000 -1992%
$226,000
$408
63.7774393509
 $3,135.91 $3,543.57

5
If Yvonne wants to start her own scholarship fund that generates $26,000 annually
starting next year, what is the amount she must contribute if earnings remain at 13%
per year?
The amount she must contribute if earnings remain at 13% per year is $

7.692307692 113%
$200,000 $23,009
$200,000

6
A company that makes food-friendly silicone (for use in cooking and baking pan
coatings) is considering four independent projects shown, all of which can be
considered to be viable for only 10 years. The company’s MARR is 15% per year.

Project A B C D
First cost, $ -950 -1550 -4100 -6100
Annual net
income, 150 310 1000 1300
$/year
Salvage
5 6 8 7
value, $

Determine which projects to implement. Financial values are in $1000 unit

P/A(15%,10) 5.0188
P/F(15,10) 0.2472

A B C D
752.82 1555.83 5018.80 6524.44
1.24 1.48 1.98 1.73
-195.94 7.31 920.78 426.17

7 Parker Hannifin of Cleveland, Ohio, manufactures CNG fuel dispensers. It

needs replacement equipment to streamline one of its production lines for a new
contract, but it plans to sell the equipment at or before its expected life is reached at an
estimated market value for used equipment.

Select between the two options using the corporate MARR of 15% per year and a
future worth analysis for the expected use period.

Option D E 15%
First Cost -$96,000 -$106,000
AOC, per
Year -$19,000 -$10,000
 Expected
Market Value
$7,500 $6,250
Expected Use 3 6

F/P (15%,6) 2.3131 -$204,481 -$326,471.83

F/A (15%,3) 3.4725
F/A (15%,6) 8.7537
F/P (15%,3) 1.5209

D E
-$222,058 -$245,189 -$368,064 3.834
-$88,500 -$134,600 -$87,537 -$166,320 -$368,064
-$166,320 $6,250 $18,907 -$166,320 $3
$7,500 0 -$515,477.55 $18,907
-$515,477.55 -$326,475.60 -$515,477.55

8 A theft-avoidance locking system has a first cost of $10,000, an AOC of $7,000, and no
salvage value after its 3-year life. Assume that you were told the service provided by
this asset would be needed for only 5 years. This means that the asset will have to be
repurchased and kept for only 2 years.

What would its market value, call it M, have to be after 2 years in order to make its
annual worth the same as it is for its 3-year life cycle at an interest rate of 10% per
year? Determine the market value M using factors.
The market value M is $

First Cost -$10,000 A/P 3 0.40211

AOC -7000 A/P 2 0.57619
No salvage 3 A/F 0.47619
Total year 5
i 10%

3 $11,021.10 $4,021 $11,021

2 $12,762 $5,762 $12,762
-$1,741
m -$3,655.68 -$3,655.68

9 A company that manufactures magnetic flow meters expects to undertake a project

that will have the cash flows estimated.

First cost, $ -800000

Equipment
replacement
-300000
cost in year
2, $
 Annual
operating -950000
cost, $/year
Salvage
250000
value, $
Life, years 4

At an interest rate of 10% per year, what is the equivalent annual cost of the project?
Find the AW value using tabulated factors.
The equivalent annual cost of the project is $−

P/F,10%,2 0.8264
A/P,10%,4 0.31547
A/F,10%,4 0.21547
-252376
-247920 53867.5 -78211.3224
-1047920 -896132.5 53867.5
-330587.3224 -950000
-$1,226,719.82 -1226719.82

-$1,226,719.82

10
A remotely located air sampling station can be powered by solar cells or by running an
above ground electric line to the site and using conventional power. Solar cells will cost
$17,400 to install and will have a useful life of 5 years with no salvage value. Annual
costs for inspection, cleaning, and other maintenance issues are expected to be $2,100.
A new power line will cost $26,000 to install, with power costs expected to be $1,000
per year. Since the air sampling project will end in 5 years, the salvage value of the line
is considered to be zero.

NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to
return to this part.
At an interest rate of 10% per year and using an AW analysis, which alternative should
be selected?
The annual worth of installing solar cells is $−
And the annual worth of installing a new power line is $−
The alternative to be selected is
Solar New power
Cost -$17,400 -$26,000
Life 5 5
Salvage value 0 0
Anual -$2,100 -1000
i 10%

A/P 0.2638 0.2638 P/A 3.7908

-$6,690 -$7,859
-$7,961
-$6,690
 At an interest rate of 10% per year and using an AW analysis, what must be the first
11 cost of the above ground line to make the two alternatives equally attractive
economically?
The first cost of the above ground line to make the two alternatives equally attractive
economically is $

-$5,690
-$21,569.83

12 The Briggs and Stratton Commercial Division designs and manufacturers small engines
for golf turf maintenance equipment. A robotics-based testing system with support
equipment will ensure that their new signature guarantee program entitled "Always
Insta-Start" does indeed work for every engine produced.

Pull System Push System

First cost of
equipment -$1,150,000 -$2,250,000
AOC per Year
-$660,000 -$460,000
Salvage Value
$95,000 $70,000
Estimated
8 8
Life

Compare the annual worth of the two systems at MARR = 11% per year. Select the
better system.

A/P 10%, 8 0.18744 0.18744

A/F 10%, 8 0.08744 0.08744

-$215,556 -$421,740
$8,307 $6,121
-$660,000 -$460,000
-$867,249 -$875,619

13 Determine the salvage value for the push system that will make the company
indifferent to the two systems. Also, MARR = 11% per year.
The salvage value for the push system is determined to be $ in $1000 units

-$445,509 $14,491
$14,491 $165,723
$165,722.78

14 Assume you won a worldwide lottery that pays $1.15 million in year 0, $5 million in year
1, and $200,000 in years 9 through 100. Assuming that 100 years is as “long” as infinity,
calculate the perpetual equivalent annual worth for years 1 through infinity at an
interest rate of 8% per year. (Enter your answer in dollars and not in millions.)
The perpetual equivalent annual worth for years 1 through infinity is $
 Income $1,150,000
year 1 $5,000,000
year 9 $200,000
8% A/P 8%, 1 1.08
8% A/F 8%, 8 0.17401
P/F 8%, 1 0.9259
P/F 8%, 8 0.5403 1/
0.5002
12.500 $92,000
$92,000 $4,629,500 $370,360
$370,360 $2,500,000 $2,500,000 $108,060
$2,500,000 $108,060 $1,150,000 $570,420
$570,420.00 $8,279,500
$662,360

15
At 20 years old, Josh is an avid saver. He wants to put an equal amount each year from
age 21 to 50 (30 years) such that starting at age 65 he can make a guaranteed annual
withdrawal of $20,000 forever without touching the corpus, which will be the
inheritance money for his family. He will make no deposits during the years of age 51
through 65. At a conservative return of 6.5% per year for all the years, what amount
must he invest each year from age 21 through 50?

The amount that must be invested each year is $

Income $50,000
i 7% 7% 65%

2.57184100656 6.614366163 $769,231

2.41487418457 2.571841007 5.614366163 $3,688
$769,230.77 86.37486405
$299,097.33
$3,462.78
P/F,7%.15 0.3624
A/F,6.5,30 0.01157744225
P/F 0.41410024853 0.388826524 $3,462.78

$3,687.86

16
Amigo Mobility, which manufactures battery-powered mobility scooters, has $675,000
to invest. The company is considering three different battery projects that will yield the
following rates of return:
Deep cycle = 21%
Wet/flooded = 33%
Lithium ion = 21%
The initial investment required for each project is $175,000, $100,000, and $400,000,
respectively. If Amigo’s invests in all three projects, what will be its overall rate of
return?
 The rate of return is

$675,000
$175,000 0.25925925926
$100,000 0.14814814815
$400,000 0.59259259259

21% 0.05444444444
33% 0.04888888889
21% 0.12444444444
22.78%

17 Consider the cash flows shown.

Year 0 1 2 3 4
Revenues, $ $0 $25,000 $19,000 $4,000 $28,000
Costs, $ -$6,000 -$30,000 -7000 -$6,000 -$13,500

Identify the number of possible i* values.

-$6,000 -$5,000 $12,000 -$2,000 $14,500

18 The State of Chiapas, Mexico, decided to fund a program for improving reading skills
in elementary school students. The first cost is $275,000 now and an update amount
of $100,000 every 5 years forever. Determine the perpetual equivalent annual cost at
an interest rate of 12% per year.
The perpetual equivalent annual cost is determined to be –$

1 -$275,000
2 -$100,000
i 12%
n 5 0.762341683

A/F,12%,5 0.15741 -$131,175

-$33,000 -$406,175
-$15,741 -$48,740.97
-$48,741

19
An engineer calculated the PW values for four alternatives to develop a remotely
controlled vibrations control system for offshore platform applications. The results in
the table use a MARR of 14% per year.

Alternative I J K L
YEARS 3 4 12 6
PW n $16.08 $31.12 -$257.46 -$20.00
PW over 6
years, $ $26.94 $15.78 -$653.29 -$20.00
 PW over 12
years, $ $39.21 $60.45 -$257.46 -$20.00

Determine which alternative should be selected if the alternatives are mutually exclusive

20 Possitives
12.2335
Project A B C D
First cost, $ -950000 -1550000 -4100000 -6100000

Annual net
150000 310000 1000000 1300000
income, $/year

Salvage value,
5000 6000 8000 7000
$

Determine which projects to implement. Financial values are in $1000 uni

P/A(15%,10) 5.0188
P/F(15,10) 0.2472

A B C D
752820.00 1555828.00 5018800.00 6524440.00
1236.00 1483.20 1977.60 1730.40
-195944.00 7311.20 920777.60 426170.40
 -$4,021
-$11,021
-$5,762
-$5,259
-$11,044
-$3,791
-$7,859