## 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?