Solutions to-end-of chapter problems engineering economy 7th edition

DN, then 2 vs. Select option 1 b Judy: Compare 1 vs. Select option 2 c Chen: Compare 2 vs. DN, then 1 vs. Perform the incremental comparisons J vs.

Perform incremental comparison. TA: TA has less cost for same effectiveness; professor is dominated. TA vs. Public planning includes the design of projects and efforts necessary to implement the strategy, once finalized. Challenger is placed first below.

Challenger listed first. For Z to be justified, the incremental comparison of W vs. The benefits would have to increase. Find BW in the incremental comparison. Debt capital loans becomes more expensive and harder to acquire. See plot in problem The answer before taxes is the same as that after taxes. First, determine the after-tax cost of debt capital.

Set up the spreadsheet with the three series. Equity rate is 6. Also, the safe return rate decreased 0. In the event that additional borrowed funds are needed, it may not be possible to obtain them. Available equity funds may have to be depleted to stay afloat or grow as competition challenges the combined companies. Such events may significantly weaken the economic standing of the company.

Conclusion: Both financing plans make the project economically attractive. Find WACC first. However, project R has a return of 6. With gains, the return on equity capital is much larger for the highly leverage investment, but it may be much more risky.

VP rated opposite on factors 1 and 3. High score on attribute 1 by Asst. A: 50—50 D—E financing Use relations in case study statement and the results from Question 1. Recommendation: Select plan A with financing.

Spreadsheet shows the hard way develops debt-related cash flows for each year and the easy way uses costs of capital from 1 to plot WACC. The costs associated with doing so would thus represent the true cost of keeping the presently-owned asset. In doing so, he is likely to miss out on what would have been a very profitable situation in buying the Charger. When this challenger replaces the defender now or later , it will be repeated in succeeding life cycles.

ESL is now 8 or 9 years, with a flat AW curve for several years. Therefore, keep the defender three years and then replace it with a used vehicle just like the one that is currently owned.

To make the decision, compare AW values. In keeping the defender, the opportunity to receive money is foregone. This might result in inaccurate pricing of goods or services provided by the challenger.

Keep the defender for 3 years 2. Use the defender for 2 years and the challenger for 1 year 3. Use the defender for 1 years and the challenger for 2 years 4. Use the challenger for all three years. Therefore, keep the defender 1 year and then replace it with the challenger b The PW values are placed in the year cell prior to when the year starts for challenger. Spreadsheet screen shot shows the AW of the current system defender D for its retention period with close-down cost in last year, followed by annual contract cost challenger C for years in effect.

Do not replace. Four options are present, but they have the same conclusion. Answer is a The defender should be kept for 2 more years and then replaced with another used machine just like the one presently owned. The ESL is 13 years. Year 13 is predicted to require the 4th rebuild; the pump will not be used beyond 13 years anyway.

Compare the results in 2 and 3 with that in 1 and comment on them. No bundle with X and Y are listed; 12 remain. Considering the selection restrictions, the 9 viable bundles are: DN 4 34 1 13 3 23 Not acceptable bundles: 2, 12, 14, 24, , , Select bundle 4. Select projects A, B and C. Alternatively, use a spreadsheet. Develop a scatter chart. Largest PW is for project Q. Answer is b The breakeven point falls substantially to , when the lower FC is in effect.

Note: To guarantee that the cell computations in column C correctly track when the breakeven point falls below ,, the same IF statement is used in all cells. With this feature, sensitivity analysis on the , estimate may also be performed. It has the smaller slope of 5 versus 25 for the buy option. Painting and blasting is not done at end of year Set the AW relations equal.

See note above. A spreadsheet solution for all three parts follows. Payback between 6 and 7 months. Solve for np in PW relation. Payback just over 7 months. Resolve for N. Therefore, the cost difference would increase.

If hardness removal were discontinued, the extra cost for its removal column 4 in Table 1 would be zero for all alternatives. Therefore, the best alternative continues to be number 3. Therefore, in order for the dollars to have the same value i.

Subtract the future value of each payment from the bond face value 5 years from now. Both amounts take purchasing power into account. Do the answers seem reasonable? Stocks: Possibly, if the economy and selected corporate stocks do very well. Bonds: Probably not, the discount required is far more than given when a bond is purchased. This is why, in part, the fixed-income investments are losers when inflation is a sincere factor.

If a single allocation basis had been used throughout, the rate would have had to increase for each basis. Make has annual indirect costs. Cost driver is the number of bags handled, some of which are lost or damaged. Significant change took place, especially at MEX. Another basis could be guest-dollars, that is, total amount of money a guest spends. Price for standard should go up. Premium model makes a good profit at current price under ABC Overall — Not a correct impression when costs are examined.

Market value is the amount that could be received if the asset is offered for sale on the open market. Tax depreciation is used to determine the annual tax-deductible amount. They are not necessarily the same amount. The adjusted basis means some depreciation has been charged. These are commonly different, usually shorter, than the anticipated useful life of an asset used in the economic evaluation.

It is an allowance for the wear and tear, deterioration, or obsolescence of the property. The recovery period and method of depreciation are the primary differences. Even if not using the property, it is in service when it is ready and available for its specific use. Depreciating stops when property is retired from service, even if its cost is not fully recovered. The taxpayer can elect the Section deduction instead of recovering the cost through depreciation deductions.

Develop the scatter chart to plot book values. The round-off errors are noticeable. MACRS is accelerated compared to SL depreciation because more of the first cost is written off in the early years of the recovery period. Book values are close for both ways. The relations used to determine the values row 50 are indicated first row 3. By Equation [16A. S indicates the selected method and amount. Marginal rate: The portion of each taxable dollar of TI that is paid in taxes on the last dollar of income, e.

Indexing: Updating of the TI limits not the rates each year to account for inflation and other factors. Use Eq. The CFAT expression removes the capital investment or adds salvage but does not consider depreciation, since it is a non-cash flow. Spreadsheet solution follows. Taxes are best when low country 1. This increases the CFAT considerably in the last year. This will reduce taxes on the gains.

If there are no gains, carry-forward and carry-back allowances may apply. For a capital gain, it is the difference between the sales price and the unadjusted basis first cost of the asset. If it is a capital loss, the netting of losses against gains can affect AW.

The tax savings will be applied to the challenger, since the savings is realized only if the challenger is bought. Thus, a capital loss will render the challenger more attractive. DR is involved on the defender trade in. Defender trade depreciation recapture must be included. Succession options Option Defender Challenger 1 2 years 1 year 2 1 2 3 0 3 2.

Find AW for defender and challenger for 1, 2 and 3 years of retention. Calculate CFAT for 1, 2, and 3 years of ownership. There is DR each year. Engineering VP has the better economic strategy. The only option is the defender for 5 years and the challenger for 5 years. This work is protected by Canadian copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning.

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