ADDITIONAL PROBLEMS AND FE EXAM REVIEW QUESTIONS 5.39 One assumption inherent in the present worth ‘method of analysis is that (2) The alternatives will be used only through the life of the shoriest-fived alternative. (The alternatives will be used only through the life of the Jongest-lived altematve. o @ ‘When only one alternative can be selected from ‘wo or more, the alternatives are said to be: (a) Mutually exclusive (2) Independent altematives ccomrect comparison by the present werth method AlternativeA Alternatives Fist cost $ 50.000 —60,000 Anal operating cost, 10.000 4000 Speryear Salvage value, § 13.000 15,000 Life, years 3 6 (2) 9 =3 years for A and n= 3 years for B (8 2 =3 yeas for Aard n= 6 years for B 0 (4 Note cf the avove 5.43. The value ofthe future worthforalternative Pat an interest rate of 896 per year is clases to: p o Fist eos “23p00 33,000 Anpudloperingeot, 4000-2500, Speryear Savage value $ 3000 1.000. Life, years 8 6 5.A4 ‘The present worth of $50,000 now, $10,000 per year {n.years 1 through 15, and $20,000 per year in years 16 throug) infinity at 10% per year is closest to: (2) Less than $169,000 (_ s—169.580 511 For the mutually exclusive altematives shown, the ‘one(s) that shouldbe select Aernative Pw.s A ~25,000 B = 12,000 c 10.000 D (a) Only @ Onlya o (@ Oni 5.42. ‘The alternatives shown are to be compared on the basis of thle present worth values. Atan interest rate of 10% per year, the values of 1 that you should use inthe uniform seres factors to make a 546 In comparing altematives | and J by the present ‘worth method, the value of 2 that must be used in 11,000(€/4,i2) for altematve is: @ 3 wxe @ 18 @ 3% {In comparing alternatives 1 and J by the present ‘worth method, the equation that yields the present worth of alterrative Js: (@ PW, = ~250,000 + 40,000(/4.158,6) + 25,000(P/F. 15%.) (O) PWWASI=25O:O00EE2BNONCEA.15%.6) + 35,000(7/F15%.6) (4. PW, = ~250,000 = 26,000(F/4,15%.6) + 35,000(P/F,15%8) (@ PW, = ~250,000 — 26,000(774,15%,6) - 35,000(F/F.15%.5) In comparing altematives [and J by the present wort method, the equation tht yilé te present ‘worth of alterative lis: GPW, = ~150,00 + L.000(27A,19%5) + 25,0001F/7.15%3) (PAY, = ~ 150,000 + 1100002715550) + 25 0001F/F15%6) (9 PW, = ~180,000 + 11,000¢F/4.1585,6) + 175,000(P{F.15%,3) + 25.000(F)F,15%.6) PAW, = =150,000 + 11,000(F{A.15%.6) = 125,000(P/F,15%,3) + 25,000(P}F,15%,6) ‘Problems 549 and 5.50 are based on the following information. sar 548 @ Machine X__ Machine Y Inial eos, $ 80,000 —#5,0005.44 “The present worth of $50,000 now, $10,000 per year in years 1 through 15, and $20,000 per year in years 106 through infinity at 10% per years closest to: (@) Lessthan $168,000 (9 S~169.580 ( $~195.730 ‘A donor (you) wishes to start an endowment that vill provide scholarship money of $40,000 per year beginning in year 5 and continuing indefinitely. If the university eams 10% per year on the endow ‘meat, the amount you must donate now is closest to: ( $~225.470 () $~218.300 (9 S=en200 (9 $-293.820 Problems A6through 5 4Rare based on the following ee Alternative |_ Alternative ) nial east, $ =150000 =250000 Amal income, § pee yoat 20000 10000, Aamalespenss,S peryear — -9000 14,000 Salvage valu, S 25000 35000, Life, years 3 6 ‘The intrest rate is 15% per year 5.51 The capitalized cost of $10,000 every 5 years ‘forever, staring now at an tnterest rate of 10% per yea, closes to: (@ $-13,520 ( $=16.380 (o 520380 (a s=3250 ‘Problems 5:49 and 550 are based on the following Problems ‘Machine X__MachieY Initial cos, $ 80.000 -95000 Aanal opting cos, peryear 20,000 15,000 Salvage vale, $| 10.900 sa000 Life, years 2 4 ‘The interest rate is 10% per year 5.49 The equation that will calculate the present worth of machine Xi ,000(F74,10%,4) — 80,000(77F10%.2) + 10.000(P/F.10%.4) (GPW, = ~86.000 ~ 20,000(F/4,10%,2) + 10,000(F/F,10%.2) ‘M.000CFI.0942) + 10000(7/F10%.0) 5.50 im comparing the machines on a present wort basis. the presen worthof machine Y is clases Gp sau12220 ( $=122,000 (G S=163,040 (d_S=175.980 5.52 Atm interest rate of 10% per yea, the capital ‘cost of $10,000 in year 0, $5000 per yearin years 1 trough 5, and $1600 per year thereafter forever is 5.43 FWp = -23,000(F/P,8%,6) -20,000(F/P,8%,3) - 4,000(F/A,8%,6) + 3000 -23,000(1.5869) -20,000(1.2597) - 4,000(7.3359) + 3000 = $-88,036 Answer is (a) 5.44 CC =$-173,941 Answer is (c) — 10,000(P/A, 10%, 15) — (20,000/0.10)(P/F,10%,15) 10,000 — 10,000(7.6061) — (20,000/0. 10)(0.2394)5.45 CC =(-40,000/0.10)(P/F,10%,4) = (-40,000/0.10)(0.6830) = $-273,200 5.50 PWy = -95,000 ~ 15,000(P/A,10%,4) + 30,000(P/F,10%,4) = $-122,059 Answer is (b) -95,000 — 15,000(3.1699) + 30,000(0.6830) 5.51 CC =-10,000 - [10,000(A/F,10%,5)]/0.10 = -10,000 - [10,000(0.16380)]/0.10 -26,380 Answer is (c) 5.52 CC -35,163 Answer is (b) 70) ‘The internal rate of return on a investment refers {othe interest rate earned onthe: (2) Initial investment (q Money recovered from an investment (a) Income from an investment 7.61 A conventional (or simple) cash flow series is one ‘wherein: 1) The algebraic signs on the net cash flows ‘bange only nee. (8) The interest rate you get isa simple intrest rate (6. The total ofthe net cashflows Is equa 1 0, (a) The total of the cumulative cash flows is equal 00. 702 According to Descartes’ rule of sign, fora met ‘cash low sequence of — — + +~ +, the mumber of possible values is: fa 2 ws 4 (as 10,000 — 5000(P/A, 10%,5) ~ (1000/0. 10)(P/F,10%,5) 0,000 — 5000(3.7908) — (1000/0.10}(0.6209) 7100 A-company that uses a minimum attractive rate of return of 10% per years evaluating new processes to improve operational efficiency. The estimates associated wilh candidate processes are shown. Altemative_Altrntive Pit cost, § =s000—— —30.000 Atal as S pe yar = 12.000 Salvage vale, 8 s.000 fe years 6 “The statement that is most corect is: (a) Thealteratives are revenue alternatives. 1d) The alternatives are cost allematives. (0 Thealteratives are revenue alternatives and DN isan option. (d)Thealtematives ate cast altematives and DN fs an option. 767 SclentiicInstrumens, ne ses a MARR of 8% per year, The company is evaluating a new process to Teduce water effluents From its manufacturing pro- ‘cesses, The estimate assofated with the proces fol lows. In evaluating the process on the basis ofa rate ‘ofreturn analysis, the carrect equation to use is:7.58. All of the following mean the same as rate of return except (2) Tntermal rate of return (4) Time for return of capital (Interest rate (Return on investment 7.63 According to Norstrom’s criterion, the one state- reat below that is correct is (2) The cumulative cash flow must stat out positively (The cumulative cash flow must start out negatively. (©The cumulative cashflow must equal 0. (The net cash flow mast start out positively. 704 According to Deseartes’ rule and Norstom'serite- ion, the number of positive 2 values for the following cash flow sequence i: Year 1 zs Revense,$ [25,00 15,000 4000 18,000, Cost,s [30,00 7.000 6,000 12,000, om 2 © 3 @4 “705 For the net cash flows and cumulative cash flows ‘shown, the valve of xis: NCES Cumulative | +1800 NCES “+15.000 29.900 16000 75.000 x00 41,000 +9000 +1000 (a s7000 ($16,000 (© _ 36,000 (a $50,000 759 708 ‘The numerical value of /in a rate of return equa- tion can range from: (2) 0640 100% @ Ot {6 ~100% to +100% (100% 10% ‘feta alysis, the comect equation 1 uses Naw Proce Fisteost § — 10.000 NCE. pet yas 13,000 Savage vale § 000 Lite yous 2 (@0-= ~40.000 + 13,00017/4.18) + 5000(0/413) (0 ~40000(4/223) + 13.000 + s00004/F13) (6 0 —4n00(F7213) + 13.000(8/4.18) + 000 (a Any ef the above ‘When one is using the modified ROR method tore move multiple ROR values. an additional estimate ‘needed besides the cash flows and ther timings: (a) The ROIC value (External rate of return (@_Tnvestment rate (@) Ioteral rate of return ‘For the following cashflows, the modified rate of return method uses a borrowing rate of 10%, and ‘an invesiment rate Is 1256 per year. The correct ‘computation forthe present wor in yeurO is: Yor | 2 2 5 Ne, ooo 00 19.000 25,000 (a) ~10,000 ~ 19,000(F/F.12%,4) (10.000 ~ 19,000(F/F 12%.4) + 25,000(F/,10%5)8.38 8.39 840 at When conducting a rate of retum (ROR) analysis, involving multiple mutually exclusive altema- tives, the first step isto: (a) Rank the alternatives according to decreas- {ng intial investment cost (b) Rank the alternatives according to increasing initia investment cost (Calculate the present worth of each altema- tive using the MARR (d)_ Find the LCM between all of the alternatives, In comparing mutually exclusive alternatives by the ROR method, you should: (a) Find the ROR of each altemative and pick the one with the highest ROR (B Select the alternative whose incremental ROR isthe highest (0 Select the alternative with ROR = MARR that has the lowest intial investment cost o When comparing independent projects by the ROR method, you should: (a) Find the ROR of each project and pick the ‘ones with the highest ROR o (0 Select the project with an overall ROR = (Select the project with the largest initial in- ‘vestmeat that hasbeen incrementally justified Ofthe following scenarios, alternative Y requires a higher initial investment than alternative X, and 843 844 For these alternatives, the sum of the incremental ‘cash flows is BA, Yeor A 8 ° 10.0001 =14000 1 +2,500 +4000 2 +2.500 4.000 3 +2500 +4000 4 +2300 +4000 5 +2500 +4000 (a)_ $2500 (BH) $3500, (@ $0000 ($8000 Helical Systems, Inc. uses a minimum attractive rate of return of 8% per year, compounded annu- ally. The company is evaluating two new pro ‘cesses for improving the efficiency of its manu- facturing operation. The cash flow estimates associated with each process are shown below. A ‘correct equation to use for an incremental rate of return analysis i: Process | Fit cos. $ 40000 Annual cost, $ per year —15,000 Salvage value § 5000 Life, years 3 (quo TOLUONRRONO(?/A. 3) + 1007/73) ( 0= ~40,000(4/P.AP,3) ~ 15,000 + 5000(4/F.AF".3) (9 0= ~30,000(4/P.a7,3) ~ 12,000 + 6000(A/E.AF*.3)sai 8.42 Of the following scenarios, alternative V requires higher intial investment than alternative X, and the MARR is 20% per year. The only scenario that requires an incremenial investment analysis to select an altemative is that (2) Xhasan overall ROR of 22% per year, and Y has an overall ROR of 249% per year (OX hasan overall ROR of 19% per year, and Y thas an overall ROR of 23% per year (Q Xhasan overall ROR of 18% per year, and Y has an overall ROR of 19% per year (@ hasan overall ROR of 28% per year, an Y tas an overall ROR of 26% per year Alternatives whose cash flows (excluding the salvage value) ae all negative ae called: (a) Revenue alternatives (0) Nonconventional alematives (© Costalternatives: (d)_ Independent alternatives 845, umeey Bt 9) (9 0-= ~50,000(4/ Par 3) ~ 12,000 + 8000(4/ F.AF*.3) (d 0-= ~10,000 ~ 3000(P/4,47,3) + 1000(7/ F473) For the four indepenient projects shown, the one or ‘ones (o select using a MARR of 14% per year are: Rete of Return, Project ‘per Year A 4 B 2 c 5B D 0 (a) Onlyc (9 Only. (@ Can't tell; need to conduct incremental analysisProblems 846 through #48 are Based on the following information. ive alternative ar being evaluated by the incremental rate of etura method. tecrnetal overtinon __Sstsof tra AMernstne inartnen,S vera OW RE CDE A 250096 — 273 94 353 250 Bo =33000 15 = 0 sas 24 © -wom 134 = 6s 78 D 80000254 = 6k E 75000 202 ° 848 Ifthe projects are mutually exclusive andthe min mum atactive tate of retum Is 14% per year the best alternative is cm @B oC WE Problems 8.46 through 4.48 are based on the following information. Five sleratives ar belag evaluated by the incremental sale of retura method. tat overt non _tea oar, Se ‘Awrnatue vesonen.$ Ve OM ABC DE A 20086 TS OA AS 25D Bo T3300 151 <0 sas 24 © “top 134 — 65 273 D = ~sopm a4 = 68 E =15000 mz 2 848 the projects are mutually exclusive andthe mini- ‘mum attractive rate of relum is 14% per year, the Dest alternative is @B wc om WE ar aus sar aus 1 the projects are mutually exclusive and the [MARR Is 20% per year, the best alternative is: @es wc @ D @eE the projects are independent, instead of mutually ‘exclusive. the one or anes to select atan MARR of 18% per year are: (@ Banc BD ade (0 DandE. (@ BCande 1 the projects are mutually exchsive and the [MARR is 20% per year, the best alternative is: @B oc wD @e the projects are independent, instead of mutually ‘exclusive, the one or ones to select atan MARR of 1836 pe year ae: (@ Bade @ BDade (0 Dante (@ BCandE