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Chapter 5 - Practice Questions

The document summarizes examples of present worth analysis for selecting between equipment alternatives and lease options. It provides the costs and cash flows for various electric-powered, gas-powered, and solar-powered equipment over 5 years and calculates their present worth values at a 10% discount rate to select the alternative with the lowest cost. It also analyzes two office lease options over 6-9 years and calculates their present worth values at a 15% discount rate to select the lower-cost option. Finally, it applies future worth analysis to determine the minimum selling price for a store chain after 3 and 5 years of ownership to realize a required 25% rate of return.

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Muhammad Saad Bin Akbar
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7 views10 pages

Chapter 5 - Practice Questions

The document summarizes examples of present worth analysis for selecting between equipment alternatives and lease options. It provides the costs and cash flows for various electric-powered, gas-powered, and solar-powered equipment over 5 years and calculates their present worth values at a 10% discount rate to select the alternative with the lowest cost. It also analyzes two office lease options over 6-9 years and calculates their present worth values at a 15% discount rate to select the lower-cost option. Finally, it applies future worth analysis to determine the minimum selling price for a store chain after 3 and 5 years of ownership to realize a required 25% rate of return.

Uploaded by

Muhammad Saad Bin Akbar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 5

Present Worth
Analysis
Lecture slides to accompany

Engineering Economy
7th edition

Leland Blank
Anthony Tarquin

5-1
Perform a present worth analysis of equal-service machines with the
costs shown below, if the MARR is 10% per year. Revenues for all the
three alternatives are expected to be the same

Electric- Gas- Solar-


Cost Type
Powered Powered Powered
First cost, $ -2,500 -3,500 -6,000
Annual operating cost, $ -900 -700 -50
Salvage value, $ 200 350 100
Life, years 5 5 5

1-3
 The salvage values are considered a “negative” cost, so a
“+” sign precedes them
 The PW of each machine is calculated at i = 10% for n = 5
years

 PWE = – 2,500 – 900(P/A,10%,5) + 200(P/F,10%,5) = $ – 5,788


 PWG = – 3,500 – 700(P/A,10%,5) + 350(P/F,10%,5) = $ – 5,936
 PWS = – 6,000 – 50(P/A,10%,5) + 100(P/F,10%,5) = $ – 6,127

 The electric-powered machine is selected since the PW of its


costs is the lowest (it has the numerically largest PW value)
 A project engineer is assigned to start up a new office in a city
where a 6-year contract has been finalized

 Two lease options are available, each with a first cost, annual
lease cost, and deposit-return estimates as shown below:
Location A Location B
First cost, $ -15,000 -18,000
Annual lease cost, $ -3,500 -3,100
Deposit return, $ 1,000 2,000
Lease term, years 6 9
 Determine which lease option should be selected based on
a present worth comparison, if the MARR is 15% per year
 PWA = – 15,000 – 15,000(P/F,15%,6) + 1,000(P/F,15%,6) –
15,000 (P/F,15%,12) + 1,000(P/F,15%,12) +
1,000(P/F,15%,18) – 3,500(P/A,15%,18) = $ - 45,036

 PWB = – 18,000 – 18,000(P/F,15%,9) + 2,000(P/F,15%,9) +


2,000(P/F,15%,18) – 3,100(P/A,15%,18) = $ - 41,384

 Location B is selected, since it costs less in PW terms; that is,


the PWB value is numerically larger than PWA
 A company purchased a store chain for $75 million three years ago

 There was a net loss of $10 million at the end of year 1 of


ownership

 Net cash flow is increasing with an arithmetic gradient of $+5


million per year starting the second year, and this pattern is
expected to continue for the foreseeable future. Expected MARR of
25% per year

 [1] The company has just been offered $159.5 million to sell the
store. Use FW analysis to determine if the MARR will be realized at
this selling price

 [2] If the company continues to own the chain, what selling price
must be obtained at the end of 5 years of ownership to make the
MARR?
[1] Find the future worth in
year 3 at i = 25% per year
and an offer price of $159.5
million

 FW = – 75(F/P,25%,3) –
10(F/P,25%,2) –
5(F/P,25%,1) + 159.5 = –
168.36 + 159.5 = $ –8.86
million

 No, the MARR of 25% will


not be realized if the $159.5
million offer is accepted
[2] Determine the future worth 5 years
from now at 25% per year

 FW = – 75(F/P,25%,5) –
10(F/A,25%,5) +
5(A/G,25%,5)(F/A,25%,5) = $ –
246.81 million

 The offer must be for at least


$246.81 million to make the MARR

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