Exam 2017-2018 B5IT / B5ITE:

Question 1:
Equipment is purchased for $ 75,000. Its estimated useful life is 6 years, with a resale
value of $ 8,500. The total operating cost is estimated to be $ 4,500 per year, and the
total ownership cost including other company cost is $ 5,300 per year. It is also
estimated that its total operating time will be 2,400 hours per year. If the minimum
required internal rate of return (IROR) is 10%, use the IROR method to calculate
the equipment’s minimum hire rate per hour?
Solution:
NPW  75,000  9,800  (P/A, 10%, 6)
 2100X  (P/A, 10%, 6)  8500  (P/F, 10%, 6)  0
0  75,000  (9,800  4.3553)  (2100X  4.3553)
 (8,500  0.5645)
 X  12.34 $ / hour

Question 2:
It is required to calculate the breakeven point for the three options listed in the table
below. Which alternative do you recommend?
Annual Fixed cost Variable Cost Sell price
Alternative
($) ($/Unit) ($/Unit)
A 45,000 19 23
B 57,000 15 33
C 67,000 11 46

Solution:
1. Breakeven point calculation:
For A 45,000  19X  23X  X  11250 units
For B 57,000  15X  33X  X  3167 units
For C 67,000  11X  46X  X  1915 units
2. To select which alternative is best find breakeven point for each alternatives:
For A and B:
Total cost A = Total cost B
45,000  19X  57,000  15X  X  3000 units
For A and C:
Total cost A = Total cost C
45,000  19X  67,000  11X  X  2750 units
For C and B:
Total cost C = Total cost B
 67,000  11X  57,000  15X  X  2500 units
Draw the relationship between the total cost and unit for each alternatives:
From the fig. we find:
Value of X 0 3000 2750 2500
Alternative A 45,000 102,000 97,250 92,500
Alternative B 57,000 102,000 98,250 94,500
Alternative C 67,000 100,000 97,250 94,500

- If the production is less than 2750 units,

then alternative A is the best.
- If the production is greater than 2750
units alternative C is the best.

Question 3:

For the ivestment project represented by the net cash flows shoen in table below. Using
the interest rate of 12% per year, Use the arihtmetic gradient interest factor calculate:
i) The net present worth.
ii) Discounted payback period.
iii) The internal rate of return.
End of Year 0 1 2 3 4 5 6
13,000 17,000 14,000 13,000 14,000 15,000
Cash Flow $ -26,000
-2,000 -5,000 -1,000 -3,000 -3,000 -5,000
Solution:
The net cash flows are:
End of Year 0 1 2 3 4 5 6
Cash Flow $ -26,000 11,000 12,000 13,000 10,000 11,000 10,000

1) PW  26000  11000  (P/A,12%,3)  1000  (P/G,12%,3)  10,000(P/F,12%,4)

 11,000(P/F,12%,5)  10,000(P/F,12%,6)
 26,000  (11,000  2.4018)  (1,000  2.2208)  (10,000  0.6355)  (11,000  0.5674)
 (10,000  0.5066)  203,030 $

2) At 3rd year:
Pw  26,000  11,000  (P/F, 12%, 1)  12,000  (P/F, 12%, 2)  13,000  (P/F, 12%, 3)
 26,000  (11,000  0.8929)  (12,000  0.7972)  (13,000  0.7118)  2641.7  0
At 2nd year
Pw  26,000  11,000  (P/F, 12%, 1)  12,000  (P/F, 12%, 2)
 26,000  (11,000  0.8929)  (12,000  0.7972)  6611.7  0
by interpolation we find discounted payback period  2.715 years

3) When i  12%  Pw =20,303 $

When i  18%
PW  26000  11000  (P/A,18%,3)  1000  (P/G,18%,3)  10,000(P/F,18%,4)
 11,000(P/F,18%,5)  10,000(P/F,18%,6)
 26,000  (11,000  2.1743)  (1,000  1.9354)  (10,000  0.5158)  (11,000  0.4371)
 (10,000  0.3704)  13,522.8 $
by interpolation we find i  29.97%
when i  30 %
PW  26000  11000  (P/A, 30%, 3)  1000  (P/G, 30%,3)  10,000(P/F, 30%,4)
 11,000(P/F, 30%,5)  10,000(P/F, 30%,6)
 26,000  (11,000  1.8161)  (1,000  1.5020)  (10,000  0.3501)  (11,000  0.2693)
 (10,000  0.2072)  4014.4 $
when i  35 %
PW  26000  11000  (P/A, 35%, 3)  1000  (P/G, 35%,3)  10,000(P/F, 35%,4)
 11,000(P/F, 35%,5)  10,000(P/F, 35%,6)
 26,000  (11,000  1.6959)  (1,000  1.3616)  (10,000  0.3011)  (11,000  0.2230)
 (10,000  0.1652)  1132.5 $
when i  40 %
PW  26000  11000  (P/A, 40%, 3)  1000  (P/G, 40%,3)  10,000(P/F, 40%,4)
 11,000(P/F, 40%,5)  10,000(P/F, 40%,6)
 26,000  (11,000  1.5889)  (1,000  1.2391)  (10,000  0.2603)  (11,000  0.1859)
 (10,000  0.1328)  1307.1 $
by interpolation we find i  37.32%

Question 4:
The following table shows the cash flow for the purchase of an equipment with the
projected running costs, revenue and resale value. Calculate the internal rate of return
of this investment?
 Equipment Cost $ Operating Cost $
End of Revenue
Maintenance
Year Investment Resal Labor Fuel Hire $
& Repair
0 350,000
1 20,000 22,000 5,000 200,000
2 20,000 22,000 11,000 200,000
3 22,000 24,000 16,000 190,000
4 150,000 22,000 24,000 20,000 190,000
Solution:
Cash flow for this equipment is:
Let i  10%
 Pw  350,000  153,000(P/F,10%,1)
 147,000(P/F,10%,2)  128,000(P/F,10%,3)
 274,000(P/F,10%,4)  193881.5 $
Let i  15%
 p W  350,000  153,000(P/F,15%,1)
 147,000(P/F,15%,2)  128,000(P/F,15%,3)
 274,000(P/F,15%,4)  136351.7 $
By interpolation we find i  26.85 %
Let i  30%
 p W  350,000  153,000(P/F,20%,1)
 147,000(P/F,20%,2)  128,000(P/F,20%,3)
 274,000(P/F,20%,4)  8860.5 $
Let i  35%
 p W  350,000  153,000(P/F,25%,1)
 147,000(P/F,25%,2)  128,000(P/F,25%,3)
 274,000(P/F,25%,4)  16201.4 $
By interpolation we find i  31.77 %