WORK SHEET-II

1. An appraisal of three alternatives, mutually exclusive projects, A, B, and C, is being made for a company that
requires a return of at least 10% on its invested capital. The estimated details of the investment are shown in the
table below. Draw cash flow diagram of each alternatives.

Dollar ($) Project A Project B Project C

Initial cost 100,000 150,000 280,000
Salvage Value Nil Nil 40,000
Net annual receipt 18,400 30,600 42,300
Life, years 8 8 10

2. Project costs birr 2000. We expect a return of birr 600 per year for 10 years. The project is then sold with
salvage value of birr 400 and operation cost is birr 100 in the first year and increase by birr 50 per year.
Determine the rate of return (ROR)?
3. How many kilometers must be driven year for leasing & buying to cost the same? And give suggestion Use
10% interest and year end cost. Leasing birr 0.15 per kilometer buying birr 5000 purchase cost, 3 year life,
salvage birr 1200, birr 0.04 kilometer for gas and oil, birr 500 per year for insurance.
4. Cement Production Company has invested $10 million to construct a cement Production plant. The plant can
process 5,600 kilograms of cement in an hour, and will operate 4,000 hours per year. The expected operating
costs would be $4 million per year. The plant is expected to have a useful life of 15 years, with a net salvage
value of $900,000. The firm’s MARR is 8% -- a market based rate.
a. What is the minimum amount that the company should charge its customers per quintal of Cement?
b. If the firm has a policy that the investment must be assessed over a 5 year study period, what would be
the minimum amount to charge? In other words, how would your answer to part (a) change?
c. How would the answer to part (a) change if the 8% MARR was an inflation free rate, with general
inflation expected to be 3% per year over the study period.
5. Determine by using incremental benefit-cost ratio method which one project will be selected

Projects Project A Project B Project C Project D Project E

Pw Cost 4000 2000 6000 1000 9000
Pw Benefit 7330 4700 8730 1340 9000
B/C 1.83 2.35 1.46 1.34 1

6. If a mill building is constructed of reinforced concrete (option-1), it will have an estimated initial cost of
$200,000 and no maintenance costs for the first 10 years. A building to serve a similar purpose but erected in
 structural steel-work and clad in plastic coated metal sheets (option-2) has an initial cost of $160,000 but the
steel-work needs to be painted every 2 years at a cost of $14,000. With interest at 10%, which is the cheapest
investment considered over the first 10 years of the building life?
7. If a proposal for the installation of equipment in a factory require a capital investment now of 10,000 birr, what
saving per year must be shown over the next 10 years to justify the expenditure at an interest rate of 5%?
8. A pipe line is proposed to be laid from an existing pumping station to a nearby reservoir. Two alternate
possible pipe sizes are considered:

Pipe Size Cost/hr of pumping (Birr) First cost of Construction (Birr)

A 5 80,000
B 3 160,000

Both pipe sizes have a life of 15 years, with no salvage values and interest rate is 6%
a. Which is the most economical pipe size, if the total number of hours of pumping per year is 5000hr.
compare using equivalent annual worth & Present Worth methods?
b. How many hours of pumping per year are required to make the two pipe sizes equally economical?
9. A new highway of 25m wide is in the stage of being designed. A considerable portion of the highway has to be
cut deeply (10m) in the surrounding terrain of sandy soils. If they are steep, they will require a lot of
maintenance due to erosion during heavy rainfall. If they are flat, they require extra excavation during the
construction of the highway. The capital cost of excavation and disposal of the soil is 3USD Per m3

Slope Annual slope maintenance (USD) Total Excavation (m3) per km

1:1 (n=1) 80,000 Per km 250,000 + 100,000 =350,000
1:2 (n=2) 50,000 Per km 250,000 + 200,000 =450,000
1:3 (n=3) 34,000 Per km 250,000 + 300,000 =550,000
1:4 (n=4) 24,000 Per km 250,000 + 400,000 =650,000

The capital cost of the road deck is 250,000 USD per km.The useful life of the project is 50 years. Annual
maintenance of the road deck costs 3,000 USD per km.The interest rate is 5%. Use Annual worth Method to
determine the most economic side slope of the cut?

Assignment -1. (Individual assignment)

1. Using benefit-cost ratio analysis, a 5-year useful life, and a 15% MARR, determine which of the following
Alternatives should be selected.

Alternatives A B C D E
Cost, ETB 1000 2000 3000 4000 5000
Uniform annual benefit, ETB/year 370 690 830 1260 1500

2. The cash flows for three alternatives are as follows, Based on payback period, which alternative should be
selected?

Year A B C Year A B C
0 -5000 -6000 -9000 4 3000 2500 2000
1 -4000 -3000 0 5 3500 2000 2000
2 2000 3500 2000 6 4000 1500 2000
3 2500 3000 2000

3. Data for two alternatives are as follows:

Alternatives A B
Cost, ETB 800 1000
Uniform annual benefit, ETB/year 230 230
Useful life, in years 5 x

If the MARR is 12%, compute the value of X that makes the two alternatives equally desirable.
4. What is the cost of Alt. B that will make it at the breakeven point with Alt. A, assuming a 12% interest rate?

Alternatives A B
Cost, ETB 1500 X
Uniform annual benefit, ETB/year 400 650
Salvage value, ETB 1000 2000
Useful life, in years 6 6

5. Consider two alternatives:

Alternatives A B
Cost, ETB 5000 3000
Uniform annual benefit, ETB/year 750 750
Useful life, in years Infinity X

Assume that Alt.B is not replaced at the end of its useful life. If the MARR is 10%, what must be the useful life of
B to make Alternatives A and B equally desirable?
6. Three mutually exclusive alternatives are being considered:

Alternatives A B C
Initial Cost, $ 5000 4000 3000
Benefit at end of the , first year, ETB 2000 2000 2000
Uniform benefit at end of subsequent years, ETB/year 1000 1250 1000
Useful life, in years 6 5 4

At the end of its useful life, an alternative is not replaced. If the MARR is 10%, which alternative should be
selected?

(a) Based on the discounted payback period?

(b) Based on benefit-cost ratio analysis?

7. Given the following four mutually exclusive alternatives and using 8% for the MARR, Based on the
incremental rate of return which alternative should be selected?

Alternatives A B C D
Initial Cost, ETB 7500 5000 5000 8500
Uniform benefit, ETB/year 1600 1200 1000 1700
Useful life, in years 10 10 10 10

8. QZY, Inc. is evaluating new widget machines offered by three companies. The machines have the following
characteristics:

Companies Company A Company B Company C

Initial Cost, ETB 15,000 25,000 20,000
Maintenance and operating cost,
1,600 400 900
ETB/year
Uniform benefit, ETB/year 8,000 13,000 9,000
Salvage value, ETB 3,000 6,000 4,500
Useful life, in years 4 4 4

MARR=15%. Using rate of return analysis, from which company, if any, should you purchase the widget machine?

9. The company treasurer is uncertain which of four depreciation methods the firm should use for office furniture
that costs 50,000 ETB and has a zero salvage value at the end of a 10-year depreciable life. Compute the
depreciation schedule for the office furniture using the methods listed below:

(a) Straight line.

(b) Double declining balance.
 (c) Sum-of-years.

10. A small company manufactures a certain product. Variable costs are 20 ETB per unit and fixed costs are 10,875
ETB. The price-demand relationship for this product is P=-0.25Q+ 250, where P is the unit sales price of the
product and Q is the annual demand. Use the data (and helpful hints) that follow to work out answers to parts
(a)-(d).
Set up your graph with dollars on the y axis, (between 0 and 70,000 ETB) and, on the x axis, demand D: (units
produced or sold), between 0 and 1000 units.

(a) Develop the equations for total cost and total revenue.
(b) Find the breakeven quantity (in terms of profit and loss) for the product.
(c) What profit would the company obtain by maximizing its total revenue?
(d) What is the company's maximum possible profit?