Assignment 2

1. You are planning to purchase an equipment that costs Rs. 30,000 and is
expected to last 12 years with a Rs. 3,000 salvage value. The annual operating
expenses are expected to be Rs. 9,000 for the first 4 years but owing to
decreased use, the operating costs will decrease by Rs. 400 per year for the
next 8 years. Alternatively you can purchase a highly automated machine at a
cost of Rs. 58,000. This machine will last only 6 years because of its high
technology and delicate design, and its salvage value will be Rs. 15,000.
Because it is so automated, its operating cost will be only Rs. 4,000 per year.
If the companys minimum attractive rate of return is 20% per year, which
machine should be selected on the basis of a present-worth analysis?
2. CMDA has expected the first cost of a new city-owned amusement park to be
Rs. 35,000. They expect to improve the park by adding new rides every year
for the next 5 years at a cost of Rs. 6,000 per year. Annual operating costs are
expected to be Rs. 12,000 the first year, and these will increase by Rs. 2000
per year until year 5. After that time, the operating expenses will remain at Rs.
20,000 per year. CMDA expects to receive Rs. 11,000 in profits the first year,
Rs. 14,000 the second, and amounts increasing by Rs. 3,000 per year until year
8, after which the net profit will remain the same. Calculate the capitalized
cost of the park, if the interest rate is 6% per year.
3. Compare the alternatives shown below on the basis of EUAW, using a
compounded interest rate of 15%
Option A
Option B
First Cost (Rs.)
18,000
25,000
Annual Cost (Rs.)
4000
3600
Salvage Value (Rs.)
3000
2500
Life (years)
3
4
4. You want to construct a dam on a river. Six sites have been suggested. The
construction costs and average annual benefits (income) for each dam is given
below. If a MARR of 6% is required, and dam life is long enough to be
considered infinite for analysis purposes, which location will you select?
Site
Construction Cost (Rs.)
Annual Income (Rs.)
A
60,00,000
3,50,000
B
80,00,000
4,20,000
C
30,00,000
1,25,000
D
1,00,00,000
4,00,000
E
50,00,000
3,50,000
F
1,10,00,000
7,00,000

5. You have to install a pipeline and are considering 5 sizes of pipe. The costs are
shown below. Assume all pipes will last 15 years, and your MARR is 8%,
which pipe size would you choose using (a)Present-Worth method and (b)
incremental Rate of Return method

Initial
Investment
Installment
Cost
AOC

Pipe Size (mm)

200
240
Rs.13180
Rs. 15850

140
Rs. 9180

160
Rs. 10510

300
Rs. 30530

600

800

1400

1500

2000

6000

5800

5200

4900

4800

6. A construction company bought a 180,000 metric ton per year capacity

earthmover 3 years ago at a cost of Rs. 55,000. The expected life at the time of
purchase was 10 years with a Rs. 5000 salvage value and an annual operating
cost of Rs. 2700. A 480,000 metric ton per year replacement mover is under
consideration. This mover will cost Rs. 40,000, have a life of 12 years, a
salvage value of Rs. 3500 and an annual operating cost of Rs. 7200. Compute
the required trade-in value of the presently owned mover if the replacement
mover is bought and i=12%
7. You have to make a decision to keep your present car or purchase a new one.
A new car will cost Rs. 10,00,000, will last you 7 years, have annual
maintenance costs of Rs. 20,000 the first year increasing by Rs. 10000 per
year thereafter, and will sell for Rs. 3,00,000 in 7 years. If you retain the
current car, the expected trade-in value and annual maintenance are given
below.
Additional Years
Annual Maintenance
Trade-In Value (Rs.)
Retained
Cost (Rs.)
1
1,80,000
2,50,000
2
1,50,000
2,00,000
3
1,50,000
1,50,000
You will not consider keeping the car for more than an additional 3 years, at
which time you anticipate a Rs. 1,00,000 sales price. If all other costs are
considered equal for the two cars, use i=15% to determine when to purchase a
new car.
8. 3 sites are being considered for flood control dams (sites A, B and C). The
construction costs are Rs. 10 Crore, Rs. 12 Crore and Rs. 20 Crore
respectively. In addition, the respective annual maintenance costs are expected
to be Rs. 1,50,000, Rs. 2,00,000 and Rs. 2,30,000 respectively. In addition, a
Rs. 7,50,000 expenditure will be required every 10 years at each site. The
present cost of flood damage is Rs. 2 Crore per year. If only Dam A is
constructed, the flood damage will be reduced to Rs. 1.6 Crore per year. If
only Dam B is built, the flood damage will be reduced to Rs. 1.2 Crore per
year. If only Dam C is built, the flood damage will be reduced to Rs. 77 Lakhs
per year. The dams are at different branches of a large river and therefore
either one or all dams can be constructed and the decrease in flood damages

would be additive. If the interest rate is 5% per year, determine which dams, if
any, should be built based on a Benefit/Cost analysis. The dams will be
permanent.
9. You are considering insulating your attic to prevent heat loss. You are
considering Type A and Type B insulation. Type A insulation can be installed
for Rs. 160, and Type B for Rs. 240. You expect to save Rs. 35 per year in
heating and cooling with Type A. If the interest rate is 6%, how much money
should you save per year in order to justify Type B insulation if you want to
recover your investment in7 years?
10. A company is trying to decide whether to start a new product line or purchase
a small company that makes a similar product instead. It is not possible to do
both. To make the product for a 3 year period will require an initial investment
of Rs. 2,50,000. The expected annual cash flows with probabilities given in
brackets are Rs. 75,000(0.5), Rs. 90,000(0.4) and Rs. 1,50,000(0.1)
The small company will cost Rs. 4,50,000 now. Market surveys
indicate a 55% chance of increased sales for the company and a 45% chance
of severe decreases with annual cash flow of Rs. 25,000. If decreases are
experienced in the first year, the newly acquired company will be sold
immediately (during year 1) at a price of Rs. 2,00,000. Increased sales could
be Rs. 1,00,000 for the first 2 years. If this occurs, a decision to expand after 2
years at an investment of Rs. 1,00,000 will be considered. This expansion
could generate cash flows with indicated probabilities in brackets as follows:
Rs. 1,20,000 (0.3), Rs. 1,40,000 (0.3) and Rs. 1,75,000 (0.4). If expansion is
not chosen, the current size would be maintained with anticipated sales to
continue. Assume there are no salvage values on any investments.
Use this description and a 15% per year return to:
a. Construct a decision tree with all values and probabilities
b. Determine the expected values at the decision node after 2 years provided
increased sales are experienced
c. Determine what decision should be made now to offer the greatest return
possible to the company