1. Consider the following investment project:
|
n
|
An
|
i
|
|
0
|
- $42,000
|
10%
|
|
1
|
32,400
|
11
|
|
2
|
32,400
|
13
|
|
3
|
32,400
|
15
|
|
4
|
32,400
|
12
|
|
5
|
32,400
|
10
|
Suppose the company's reinvestment opportunities change over the life of the project as shown in the preceding table (i.e., the firms MARR changes over the life of the project). For example, the company can invest funds available now at 10% for the first year, 11% for the second year, and so forth. Calculate the net present worth of this investment and determine the acceptability of the investment.
2. Gene Research, Inc., just finished a 4-year program of R&D and clinical trial. It expects a quick approval from the Food and Drug Administration. If Gene markets the product its own, the company will require $30 million immediately (n = 0) to build a new manufacturing facility, and it is expected to have a 10-year product life. The R&D expenditure in the previous years and the anticipated revenues that the company can generate over the next 10 years are summarized as follows:
|
Period (n)
|
Cash Flow (Unit: $ million)
|
|
-4
|
-$10
|
|
-3
|
-10
|
|
-2
|
-10
|
|
-1
|
-10
|
|
0
|
-10-30
|
|
1-10
|
100
|
Merck, a large drug company is interested, in purchasing the R&D project and the right to commercialize the product from Gene Research, Inc.; it wants to do so immediately (n = 0). What would be a starting negotiating price for the project from Merck? Assume that Gene's MARR=20%.
3. To decrease the costs of operating a lock in a large river, a new system of operation is pro- posed. The system will cost $650,000 to design and build. It is estimated that it will have 1 to be reworked every 10 years at a cost of $100,000. In addition, an expenditure of $50,000 will have to be made at the end of the fifth year for a new type of gear that will not be available until then. Annual operating costs are expected to be $30,000 for the first 15 years and $35,000 a year thereafter. Compute the capitalized cost of perpetual service at i = 8%.
1. Two methods of carrying away surface runoff water from a new subdivision are being evalu- ated: Method A. Dig a ditch. The first cost would be $60,000, and $25,000 of redigging and shaping would be required at five-year intervals forever.
Method B. Lay concrete pipe. The first cost would be $150,000, and a replacement would be required at 50-year intervals at a net cost of $180,000 forever. At i = 12% which method is the better one?
2. Consider the following two mutually exclusive projects:
|
n
|
Cash Flow of Salvage value of B1 B1
|
Cash Flow of Salvage value of B2 B2
|
|
0
|
-$ 18,000
|
-$ 15,000
|
|
1
|
-2,000 6000
|
-$ 2,100 6,000
|
|
2
|
-2,000 4000
|
-$ 2,100 3,000
|
|
3
|
-2,000 3000
|
-$ 2,100 1,000
|
|
4
|
-2,000 2000
|
|
|
5
|
-2,000 2000
|
|
Salvage values represent the net proceeds (after tax) from disposal of the assets if they are sold at the end of each year. Both B1 and B2 will be available (or can be repeated) with the same costs and salvage values for an indefinite period.
(a) Assuming an infinite planning horizon, which project is a better choice at MARR = 12%?
(b) With a 10-year planning horizon, which project is a better choice at MARR = 12%?
6. A patriotic group of firefighters is raising money to erect a permanent (i.e., infinite life) monument in New York City to honor those killed in the line of duty. The initial cost of the monument will be $150,000, and the annual maintenance will cost $5000. There will be an additional one-time cost of $20,000 in 2 years to add names of those who were missed initially. At an interest rate of 6% per year, how much money must they raise now in order to construct and maintain the monument forever?