SMJC 3123 Process Economy and Project Management

Assignment 2

Question 1

Environmental recovery company RexChem Partners plans to finance a site reclamation project that
will require a 4-year cleanup period. If the company borrows $4.1 million now, how much will the
company have to get at the end of each year in order to earn 15% per year, compounded quarterly
on its investment?

Question 2

How much would your parents have to deposit each month into an account that grows at a rate of
12% per year, compounded semiannually, if they want to have $80,000 at the end of year 3 to cover
part of your college expenses? Assume no interperiod compounding.

Question 3

Fieldsaver Technologies, a manufacturer of precision laboratory equipment, borrowed $2 million to

renovate one of its testing labs. The loan was repaid in 2 years through quarterly payments that
increased by $50,000 each time. At an interest rate of 12% per year, compounded quarterly, what
was the size of the first quarterly payment?

Question 4

Leonard, a company that manufactures explosion-proof motors, is considering two alternatives for
expanding its international export capacity. Option 1 requires equipment purchases of $900,000
now and $560,000 two years from now, with annual M&O costs of $79,000 in years 1 through 10.
Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning
now through the end of year 10. Neither option will have a significant salvage value. Use a present
worth analysis to determine which option is more attractive at the company’s MARR of 20% per
year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered
recently.)

Question 5

You and your partner have become very interested in cross-country motorcycle racing and wish to
purchase entry-level equipment. You have identified two alternative sets of equipment and gear.
Package K has a first cost of $160,000, an operating cost of $7000 per quarter, and a salvage value of
$40,000 after its 2-year life. Package L has a first cost of $210,000 with a lower operating cost of
$5000 per quarter, and an estimated $26,000 salvage value after its 4-year life. Which package offers
the lower present worth analysis at an interest rate of 8% per year, compounded quarterly?
Question 6

A small strip-mining coal company is trying to decide whether it should purchase or lease a new
clamshell. If purchased, the “shell” will cost $150,000 and is expected to have a $65,000 salvage
value after 6 years. Alternatively, the company can lease a clamshell for only $20,000 per year, but
the lease payment will have to be made at the beginning of each year. If the clamshell is purchased,
it will be leased to other strip-mining companies whenever possible, an activity that is expected to
yield revenues of $12,000 per year. If the company’s MARR is 15% per year, should the clamshell be
purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the
same for both options.

Question 7

Beaver, a city in the United States, is attempting to attract a professional soccer team. Beaver is
planning to build a new stadium that will cost $250 million. Annual upkeep is expected to amount to
$800,000. The turf will have to be replaced every 10 years at a cost of $950,000. Painting every 5
years will cost $75,000. If the city expects to maintain the facility indefinitely, what is the estimated
capitalized cost at i = 8% per year?

Submission by

Date: 10 April 2018

Time: 3pm

Location: Assignment Collection Box (Room 5.27)