Problems

1- The cash flow of an investment is shown below. What is the NPW (/=15%)?

2- Mr. "X", a friend of yours, is asked to invest in the following project:

Installation and operation of a facility with a life span of five years. The initial investment is $90M. It will have a net profit of $25M/Yr the first two years and $30M/Yr in years 3,4, and 5. At the end of year 5, it has to be disposed of at a cost of $10M with no resale value. If he has the money and his opportunity cost of money is 10% (i=10%), would you advise him to invest or not? Yes? No? Why? Explain.

3- Hosbol Corporation has purchased a system for $1 million. The net income from operating this system is $300,000 per year. Assuming a life of five years and no salvage value, what is the Net Present Worth (NPW) ofthis system (i=10%)?

4- Equipment is bought for an initial cost of $20,000. Its operation will result in a net income of $6,000/Yr for the first year, increasing by $1,000 each year after year 1. At the end of the fifth year, the equipment is sold for $5,000. The prevailing interest rate for the next five years is estimated at 10%.

a. Draw the cash flow diagram for this project.

b. Calculate the NPW.

5- Production equipment is bought at an initial price of $10,000. The annual operation and maintenance cost is $100. The salvage value at the end of the 15-year life is $500. Using MARR of 10%, calculate the net present worth. Another model of the equipment with the same initial price and annual cost brings in an income of $1,100 per year but has no salvage value at the end of its 15-year life. As an investor, would you invest in a or b? Why?

6- Board members at Darbol Corporation received two proposals for a machine they may want to purchase. They also can choose to invest their capital and receive an interest rate of 15% annually. Using the following data about the machine, what is their most economical course of action? Use the net present worth method.

Data Machine A Machine B

Initial Cost

$180,000 $240,000

Salvage Value $40,000

$45,000

Annual Benefit $75,000

$89,000

Annual Cost $21,000

$21,000

Life

5 years

10 years

7- Members of the board at ACE Corporation received three proposals for a machine they may want to purchase. They also can choose to invest their capital and receive an interest rate of 15% annually. Using the following data about the machines, what is their most economical course of action? Use a 10-year life span.

Data Machine A Machine B Machine C

Initial Cost

$180,000

$235,000

$200,000

Salvage Value

$38,300

$44,800

$14,400

Annual Benefit

$75,300

$89,000

$68,000

Annual Cost

$21,000

$21,000

$12,000

8- Mr. "X", a friend of yours, is asked to invest in either of the following two mutually exclusive projects. His MARR is 10%.

a. A car repair system is offered with an initial cost of $30,000 and a net annual income of $15,000. The system will have a salvage value of $9,000 at the end of its three-year life.

b. A car cleaning operation is offered with $40,000 initial cost, net annual income of $20,000 for the first three years, and $5,000 for the last three years of its life. Its salvage value at the end of its six-year life is $6,500. What do you recommend he should do?

9- A venture group is contemplating investment in either of the following proj ects:

a. Establish a cosmetic store with an initial cost of $100,000 and an annual net income of $20,000; the business is estimated to have a resale value of $300,000 after a four-year life.

b. Take over a beauty parlor with an $80,000 initial payment and an annual net income of $25,000 for four years. The lease will end at the end of the four years with no obligation on either side.

He will pay you $2,000 to make him a recommendation based on sound economic analysis. What would you recommend? (Assume an interest rate of 8%.)

10- A local internet provider advertises its no-time-limit service with a one-year subscription of $20 per month, two years at $11/month, and three years at $9/month. If you need to have a service from this company and your cost of money is 6%, which option do you take?

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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