Question #1 John Davis, a recent IE graduate from Tennessee Technological University, bought an SUV for $30,000 with a down payment of $10,000. John had a little business on the side and did not have a girlfriend when he was at school and hence he was able to save the $10,000 for his dream car. He expects to take good care of the car and the dealership, owned by John’s uncle, agrees to take the car back for $8,000 at the end of 4 years. If the monthly payment is $400, what is the nominal interest rate on this loan? What is the effective interest rate? Question #2 Given the alternatives below: Select the one best alternative if MARR = 8%. Use incremental rate of return analysis. Data Do-Nothing A B C D First Cost 0 $4,000 $3,000 $6,000 $5,000 Annual Benefit 0 623 531 1,020 712 Life 10 Years ROR 9% 12% 11% 7% Select the one best alternative if MARR = 8%. Use incremental rate of return analysis. Question #3 Using Rate of Return Analysis, determine the most economical alternative below. Assume a minimum attractive rate of return of 6%, and a 5-year life with no salvage value for each. The alternatives are mutually exclusive. Data Alternatives A B C D Initial Cost $400,000 $100,000 $500,000 $200,000 Annual Costs $900 $12,000 $23,000 $9,000 Annual Benefits $101,800 $39,700 $148,200 $55,200 Question #4 Given the cash flows in the table below for three different alternatives, determine which alternative should be selected using FW analysis, if the interest rate is 8%. Year Cash Flow, $ Alt. A Alt. B Alt. C 0 -5,300 -10,000 -8,200 1 1,800 2,000 0 2 1,800 3,000 0 3 1,800 4,000 4,500 4 2,800 4,500 7,000 Question #5 Your company evaluates proposals using a 2.5-year payback period. You have two alternatives for a new boring machine. Alt. A costs $10,000 and will last for six years. Alt.A will save $5,000 in year one and $2,000 in year two. Alt. B will cost $15,000 and will last for six years. Alt.B will save $7,000 in year one and $1,000 in year two. Assume a MARR of 12%. (a) What savings in year 3 is needed to make Alt.A an acceptable project? (b) What savings in year 3 is needed to make B an acceptable project? (c) If you believe that the year 3 savings will be $7,000 for A and $9,000 for B, which will you buy? Question #6 MGM Industries in Hendersonville has received quotes for one of its vinyl extrusions from two different vendors A and B for its vinyl windows. The quality of these extrusions have been varying and consequently the cost of manufacturing windows using these two different makes of vinyl extrusion also has been varying. The varying costs based on the probabilities of quality are given in table below. Determine the better vendor between A and B. Vendor A Prob.Defect. 0.10 0.24 0.09 0.12 0.18 0.16 0.11 Mfg. Cost $20 25 19 21 23 22 20.80 Vendor B Prob.Defect. 0.15 0.12 0.18 0.05 0.25 0.08 0.17 Mfg. Cost 20 18 25 14 $30 16 22 Question #7 An investment opportunity has the potential of generating yearly revenues with the associated probabilities for the next five years as shown below. The salvage value at the end of five years is 0. The potential revenue in any given year is independent of any other year. Determine the mean and standard deviation of the present worth, using an interest rate of 12%. Potential Revenue, $ Probability 20,000 0.30 30,000 0.40 50,000 0.20 60,000 0.10 Question #8 Your oil company must decide whether to drill a well at a cost of $500,000 on a piece of leased property or to sell the lease for $1,000,000. The lease was purchased in 2003 for $120,000 and is on a prospect in a fairly well established field. Thus far, 65 wells have been drilled in the field. The results of drilling are 15 dry holes, 12 gas producers, 18 oil wells, and 20 wells producing both oil and gas. The present worth of all future production for each type of well is as follows: gas, $2,550,000; oil, $4,500,000; and both gas and oil, $3,600,000. If the decision is to be based on maximum expected value, what should be done? Question #9 Tara Enterprises in Hendersonville, Tennessee bought office furniture and equipment at a cost of $200,000. The total salvage value of this equipment is estimated to be 10% of the initial cost at the end of a depreciable life of 8 years. Determine the book value for this asset at the end of years 2 and 4 using the: a. Straight Line Method b. MACRS method Question #10 Given: First Cost, P = $6,500 Depreciation Salvage Value, S = $1,200. Depreciation Life, N= 5 Years Year Projected Production , units Actual Production , units 1 3,500 3,000 2 4,000 5,000 3 4,500 6,000 4 5,000 4,500 5 5,500 6,000 Total 24,500 Develop a depreciation schedule using the following three methods. i. SL Method ii. SOYD Method iii. Unit of Production Method (UOP)
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