Cost Estimation

FinalExam-2.xlsx

1

Problem 1	4.5	POINTS
A company is contemplating 3 different type of business to build on its property:
Business	Cost	Net Annual Income	Salvage Value
Hotel	$ 2,300,000	$ 450,000	$ 230,000
Bar	$ 850,000	$ 250,000	$ 75,000
Assume each has an estimated life of		15	years
Construct graph and a choice table for interest rates between 0-100%

Problem 2	4.5	POINTS
A company has computers that cost a total of			$ 100,000	and a salvage value of	$ 10,000	after	10	years
Determine the book value of the of equipment after 3 years using
a	MACRS depreciation
b	Straight Line deprecciation
c	Sum of Year Digits depreciation
d	Double Declining Balance depreciation

Problem 3	4.5	POINTS
A company purchased a new truck for			$ 120,000
It will be leased to a small machine shop for			$ 25,000	per year for 8 years
Assume after tax MARR is		10%
Assume combined tax rate is		40%
Is this investment justified?

Problem 4	4	POINTS
The XYZ Brick company expects to receive $78,000 per year from its investments
over the next 20 years. If the company's interest rate is 8.7% and inflation rate is 2.8%,
determine the present value of cash flows.
Similar to Problem 14-46
Years	20
Inflation	2.80%
MARR	8.70%

Problem 5	4.5	POINTS
Ten capital spending proposals have been made to budget committee as members prepare their annual budget.
Each independent project has a 7 year life and no salvage value.
	Project	First Cost ($K)	Annual Benefit ($K)	IRR
	A	15	2.98	9.00%
	B	22	5.58	16.82%
	C	8	1.53	7.87%
	D	24	5.55	13.73%
	E	16	4.37	19.43%
	F	38	9.81	17.43%
	G	38	7.81	10.02%
	H	13	3.49	18.81%
	I	7	1.67	14.75%
	J	16	3.2	9.20%
a.) Rank order all projects based on desirability.					2.5	Points
b.) Based on MARR of 14% which projects should be approved?					1	Points
c.) If only $80K is available, which projects would be approved?					1	Points
A Rank is calculated according to profitability index
Any investor expects higher rate of return while investing in any project.
B Based on MARR of 14%, project should be approved if rate of return >= MARR. Hence projects B, E, F, H, I can be approved.
C If only $80k is available, projects E, H, F, B should be approved.

Problem 6	4	POINTS
Wildlife Department of Virginia are considering 4 mutually exclusive investments,
by means of a benefit-cost ratio method. Assuming a 12% MRR and 20 year life.
		1	2	3	4
Annual net costs ($M)		17.6	14.7	17.4	11.2
Annual net benefits ($M)		22.1	14.1	17.8	14.6
Use a B/C ratio to determie best alternative

Problem 7	4	POINTS
Office Furniture unlimited produces 2 types of desks:
	Standard	Executive
Direct Labor Costs	$ 500,000	$ 595,000
Direct Material Costs	$ 390,000	$ 595,000
Selling Price	$ 769	$ 1,649
Units produced	1,250	775
Total Indirect (overhead) costs for firm =		$ 48,500
a	Use Direct Labor Costs to allocate overhead costs
b	Use Direct Material Costs to allocate overhead costs

Extra credit	1	POINTS
Two alternative moors are being compared.
Which investment has the better discounted paybackperiod if i =			12%	?
Year	A	B
0	$ (19,000)	$ (22,500)
1	$ 5,500	$ 6,800
2	$ 5,500	$ 6,800
3	$ 5,500	$ 6,800
4	$ 5,500	$ 6,800
5	$ 5,500	$ 6,800