EXERCISE 4: ENGR.

CALAQUE, DARIO JR
SITUATION 01. The board of directors of Halliburton International has just approved an $18
million world-wide engineering construction design contract. The services are expected to
generate new annual net cash flows of $3 million. The contract has a potentially lucrative
repayment clause to Halliburton of $3 million at any time that the contract is canceled by
either party during the 10 years of the contract period.
1. If i =15%, compute the payback period.
The 15% payback period is np=15.3 years
2. Determine the no-return payback period and compare it with the answer for i 15%. This
is an initial check to determine if the board made a good economic decision. Show both hand
and spread-sheet solutions.
No-return payback period requires only 5 years.

3. A utility company is considering the following plans to provide a certain service required
by present demand and the prospective growth of demand for the coming 18 years. Plan R
requires an immediate investment of ₱500,000 in property that has an estimated life of 18
years and with 20% terminal salvage value. Annual disbursements for operation and
maintenance will be ₱50000. Annual property taxes will be 2% of first costs.
Plan S requires an immediate investment of ₱300,000 in property that has an estimated life
of 18 years with 20% terminal salvage value. Annual disbursements for its operation and
maintenance during the first 6 years will be ₱40,000. After 6 years, an additional investment
of ₱400,000 will be required in property having an estimated life of 12 years with 40%
terminal salvage value. After this additional property is installed annual disbursements for
operation and maintenance of the combined property will be ₱60,000. Annual property taxes
will be 2% of the first cost of property in service at any time. Money is worth 12%. What
would you recommend? Plan S

4. The president of a local company expects a product to have a profitable life of between 1
and 5 years. Help her determine the breakeven number of units that must be sold annually
(without any return) to realize payback for each of the time periods 1 year, 2 years, and so
on up to 5 years. The cost and revenue estimates are as follows:
Fixed costs: Initial investment of $80,000 with $1000 annual operating cost.
Variable cost: $8 per unit.
Revenue: Twice the variable cost for the first 5 years and 50% of the variable cost thereafter.

Payback years 1 2 3 4 5
Units per year 10,125 5125 3458 2625 2125

SITUATION 02. Chris and her father just purchased a small office building for $160,000 that
is in need of a lot of repairs, but is located in a prime commercial area of the city. The
estimated costs each year for repairs, insurance, etc. are $18,000 the first year, increasing by
$1000 per year thereafter. At an expected 8% per year return, use spreadsheet analysis to
determine the payback period if the building is
5. Kept for 2 years and sold for $290,000 sometime beyond year 2.
(The 8% return payback period is between 3 and 4 years)
6. Kept for 3 years and sold for $370,000 sometime beyond 3 years.
(The 8% return payback period is between 5 and 6 years)

7. Determine the capitalized cost of an asset whose cost is ₱100,000, salvage value is
₱10,000, life is 15 years at 5%.
₱183416.1177
8. A suspension bridge was constructed for ₱24M. The annual maintenance cost is ₱0.5M. If
the rate of interest is 6%, calculate the capitalized cost of the bridge including maintenance.
₱32.33M
9. An item is purchase for ₱100,000. Annual cost are ₱18,000 using 8% interest rate. What is
the capitalized cost of the perpetual service?
₱325000
10. The first cost of a certain equipment is ₱180,000 and having a salvage value of ₱20,000
at the end of its life of 5 years. If money is worth 8% compounded annually. Compute the
capitalized cost. ₱520912.9091

SITUATION 03. In marble block quarrying operation; hand rock drills costing ₱50,000 each
are used. It has a drilling rate of 10cm/min, produces 10 cu. m of block per month and
consumes 60 liters of diesel fuel for compressor drive, per rock drill per cubic meter,
produced utilizing 1 worker per drill.
A modern equipment quarry bar mounted rock drill is being offered for ₱180,000 per unit
and has drilling rate of 60cm/min that will produce 60cu.m of block per month, but
consumes 120 liters of diesel fuel for the compressor drive, per 6 cubic meters of block
produces, utilizing 2 workers per quarry bar drill.
Consider diesel fuel at ₱6/ liter at the quarries, worker earning ₱80/day, 25 days per month,
5 years life of both drills with 20% salvage value. Neglecting cost of money, other cost at
₱500/cu. m and marble blocks sold at ₱2000/cu. m.
11. Would you recommend the purchase of the new equipment? Purchase modern rock drill
12. What is the payout period of the better drill? 2.356months