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Questions and Answers of Economics

List at least three factors that affect the MARR, and discuss how each one affects it.
State whether each of the following involves debt financing or equity financing.(a) $10,000 taken from one partner's savings account to pay for equipment repair (b) Issuance of preferred stock worth
Helical Products, Inc. uses an after-tax MARR of 12% per year. If the company's effective tax rate (federal, state, and local taxes) is 40%, determine the company's before-tax MARR.
The owner of a small pipeline construction company is trying to figure out how much he should bid in his attempt to win his first "big" contract. He estimates that his cost to complete the project
A group of private equity investors provided $16 million to a start-up company involved in making high-technology detection systems for drugs and other types of contraband. Immediately after the
Five projects were ranked in decreasing order by two measures-rate of return (ROR) and present worth (PW)-to determine which ones should be funded, with the total initial investment not to exceed $18
Tom, the owner of Burger Palace, determined that his weighted average cost of capital is 8%. He expects a return of 4% per year on all of his investments. A proposal presented by the owner of the
Electrical generators produce not only electricity, but also heat from conductor resistance and from friction losses in bearings. A company that manufactures generator coolers for nuclear and gas
Determine the debt-to-equity mix when Applied Technology bought out Southwest Semiconductor using financing as follows: $12 million from mortgages, $5 million from retained earnings, $10 million from
Business and engineering seniors are comparing methods of financing their college education during their senior year. The business student has $30,000 in student loans that come due at graduation.
Two public corporations, first Engineering and Midwest Development each show capitalization of $175 million in their annual reports. The balance sheet for First Engineering indicates a total debt of
Forest Products, Inc. invested $50 million. The company's overall D-E mix is 60-40.What is the return on the company's equity, if the net income is$5 million on a revenue base of $6 million?
Determine the weighted average cost of capital for a company that manufactures miniature triaxial accelerometers for space-restricted applications. The financing profile, with interest rates, is as
Growth Transgenics Enterprises (GTE) is contemplating the purchase of its rival. One of GTE's genetics engineers got interested in the financing strategy of the buyout. He learned there are two plans
Midac Corporation wants to arrange for $50 million in capital to finance the manufacturing of a new consumer product. The current plan is 60% equity capital and 40% debt financing. Calculate the WACC
A public corporation in which you own common stock reported a WACC of 11.1% for the year in its report to stockholders. The common stock that you own has averaged a total return of 7% per year over
BASF will invest $14 million this year to upgrade its ethylene glycol processes. This chemical is used to produce polyester resins to manufacture products varying from construction materials to
A couple planning for their child's college education can fund part of or all the expected $100,000 tuition cost from their own funds (through an education IRA) or borrow all or part of it. The
Over the last few years, Carol's Fashion Store, a statewide franchise, has experienced the D-E mixes and costs of debt and equity capital on several projects summarized below.(a) Plot debt, equity,
For Problem use a spreadsheet to(a) Determine the best D-E mix(b) Determine the best D-E mix if the cost of debt capital increases by 10% per year, for example, 13.0% increases to14.3%.
The cash flow plan associated with a debt financing transaction allowed a company to receive $2,800,000 now in lieu of future interest payments of $196,000 per year for 10 years plus a lump sum of
A company that makes several different types of skateboards, Jennings Outdoors incurred interest expenses of $1,200,000 per year from various types of debt financing. The company borrowed $19,000,000
Molex Inc., a manufacturer of cable assemblies for polycrystalline photovoltaic solar modules, requires $3.1 million in debt capital. The company plans to sell 15-year bonds that carry a dividend of
Tri-States Gas Producers expects to borrow $800,000 for field engineering improvements. Two methods of debt financing are possible-borrow it all from a bank or issue debenture bonds. The company will
The Sullivan Family Partnership plans to purchase a refurbished condo in their hometown for investment purposes. The negotiated $200,000 purchase price will be financed with 20% of savings (retained
The initial public offering price for the common stock of SW Refining is $23 per share, and it will pay a first-year dividend of $0.92 per share. If the appreciation rate in dividends is anticipated
The cost of debt capital is lower after taxes than before taxes. The cost of equity capital is more difficult to estimate using the dividend method or the CAPM model, for example, yet the
H2W Technologies is considering raising capital to expand its offerings of 2-phase and 4-phase linear stepper motors. The beta value for its stock is 1.41. Use the capital asset pricing model and
Management at Hirschman Engineering has asked you to determine the cost of equity capital based on the company's common stock. The company wants you to use two methods: the dividend method and the
Common stocks issued by Meggitt Sensing Systems paid stockholders $0.93 per share on an average price of $18.80 last year. The company expects to grow the dividend rate at a maximum of 1.5% per year.
Last year a Japanese engineering materials corporation, Yamachi Inc., purchased some U.S. Treasury bonds that return an average of 4% per year. Now, Euro bonds are being purchased with a realized
The engineering manager at FXO Plastics wants to complete an alternative evaluation study. She asked the finance manager for the corporate MARR. The finance manager gave her some data on the project
Why is it financially unhealthy for an individual to maintain a large percentage of debt financing over a long time, that is, to be highly leveraged?
In a leveraged buyout of one company by another, the purchasing company usually obtains borrowed money and inserts as little of its own equity as possible into the purchase. Explain some
Grainger and Company has an opportunity to invest $500,000 in a new line of direct-drive rotary screw compressors. Financing will be equally split between common stock ($250,000) and a loan with an
Fairmont Industries primarily relies on 100% equity financing to fund projects. A good opportunity is available that will require $250,000 in capital. The Fairmont owner can supply the money from
Omega Engineering Inc. has an opportunity to invest $10,000,000 in a new engineering remote control system for offshore drilling platforms. Financing will be split between common stock sales
A new annular die process is to be installed for extruding pipes, tubes, and tubular films. The phase I installed price for the dies and machinery is $2,000,000. The manufacturer has not decided how
Shadowland, a manufacturer of air-freightable pet crates, has identified two projects that, though having a relatively high risk, are expected to move the company into new revenue markets. Utilize a
Two friends each invested $20,000 of their own (equity) funds. Stan, being more conservative, purchased utility and manufacturing corporation stocks. Theresa, being a risk taker, leveraged the
A consulting engineer asked a company manager to assign importance values (0 to 100) to five attributes that will be included in an alternative evaluation process. Determine the weight of each
Ten attributes were rank-ordered in terms of increasing importance and were identified as A, B, C, . . . , and J. Determine the weight of (a) Attribute C (b) Attribute J.
A team of three people submitted the following statements about the attributes to be used in a weighted attribute evaluation. Use the statements to determine the normalized weights if assigned scores
Different types and capacities of crawler hoes are being considered for use in a major excavation on a pipe-laying project. Several supervisors who served on similar projects in the past have
John, who works at Swatch, has decided to use the weighted attribute method to compare three systems for manufacturing a watchband. The vice president and her assistant VP have evaluated each of
The Athlete's Shop has evaluated two proposals for weight lifting and exercise equipment. A present worth analysis at i = 15% per year of estimated revenues and costs resulted in PWA = $440,000 and
Gentech, Inc. financed a new product as follows: $5 million in stock sales at 13.7% per year, $2 million in retained earnings at 8.9% per year, and $3 million through convertible bonds at 7.8% per
If the after-tax rate of return for a cash flow series is 11.2% and the corporate effective tax rate is 39%, the approximated before-tax rate of return is closest to:(a) 6.8%(b) 5.4%(c) 18.4%(d) 28.7%
Medzyme Pharmaceuticals has maintained a 50-50 D-E mix for capital investments. Equity capital has cost 11%; however, debt capital that historically cost 9% has now increased by 20% per year. If
The importance values (0 to 100) for five attributes are shown below. The weight to assign to attribute 1 is:(a) 0.16(b) 0.20(c) 0.22(d) 0.25Attribute Importance Score1 ......... 552 ......... 453
For eight attributes rank-ordered in terms of increasing importance, the weighting of the sixth attribute is closest to:(a) 0.17(b) 0.14(c) 0.08(d) 0.03
Determine the cost of equity capital to Hy-Lok USA if the company sells 500,000 shares of its preferred stock at a 5% discount from its price of$130. The stock carries a $10 per year dividend.
Multiple Choice Questions1. The term opportunity cost refers to:(a) The first cost of an alternative that has been accepted for funding(b) The total cost of an alternative that has been accepted for
Pizza Hut Corporation has decided to enter the catering business in three states within its Southeastern U.S. Division, using the name Pizza Hut At-Your-Place. To deliver the meals and serving
In a replacement study, what is meant by "taking the nonowner's viewpoint"?
An asset that was purchased 3 years ago for $100,000 is becoming obsolete faster than expected. The company thought the asset would last 5 years and that its book value would decrease by $20,000 each
As a muscle car aficionado, a friend of yours likes to restore cars of the 60s and 70s and sell them for a profit. He started his latest project (a 1965 Shelby GT350) four months ago and has a total
In conducting a replacement study wherein the planning horizon is unspecified, list three assumptions that are inherent in an annual worth analysis of the defender and challenger.
A civil engineer who owns his own design/build/operate company purchased a small crane 3 years ago at a cost of $60,000. At that time, it was expected to be used for 10 years and then traded in for
Equipment that was purchased by Newport Corporation for making pneumatic vibration isolators cost $90,000 two years ago. It has a market value that can be described by the relation $90,000 – 8000
A piece of equipment that was purchased 2 years ago by Toshiba Imaging for $50,000 was expected to have a useful life of 5 years with a $5000 salvage value. Its performance was less than expected,
For equipment that has a first cost of $10,000 and the estimated operating costs and year-end salvage values shown below, determine the economic service life at i = 10% peryear.
To improve package tracking at a UPS transfer facility, conveyor equipment was upgraded with RFID sensors at a cost of $345,000. The operating cost is expected to be $148,000 per year for the first 3
Economic service life calculations for an asset are shown below. If an interest rate of 10% per year was used in making the calculations, determine the values of P and S that were used in calculating
The initial cost of a bridge that is expected to be in place forever is $70 million. Maintenance can be done at 1-, 2-, 3-, or 4-year intervals, but the longer the interval between servicing, the
A construction company bought a 180,000 metric ton earth sifter at a cost of $65,000. The company expects to keep the equipment a maximum of 7 years. The operating cost is expected to follow the
An engineer determined the ESL of a new $80,000 piece of equipment and recorded the calculations shown below. [Note that the numbers are annual worth values associated with various years of
A large, standby electricity generator in a hospital operating room has a first cost of $70,000 and may be used for a maximum of 6 years. Its salvage value, which decreases by 15% per year, is
A piece of equipment has a first cost of $150,000, a maximum useful life of 7 years, and a market (salvage) value described by the relation S = 120,000 – 20,000 k , where k is the number of years
Determine the economic service life and corresponding AW value for a machine that has the following cash flow estimates. Use an interest rate of 14% per year and handsolution.
Use the annual marginal costs to find the economic service life for Problem on a spreadsheet. Assume the salvage values are the best estimates of future market value. Develop an Excel chart of annual
In Example the market value (salvage value) series of the proposed $38 million replacement kiln (GH) dropped to $25 million in only 1 year and then retained 75% of the previous year's market value
In a one-year-later analysis, what action should be taken if?(a) All estimates are still current and the year is nD,(b) All estimates are still current and the year is not nD,(c) The estimates have
Based on company records of similar equipment, a consulting aerospace engineer at Aerospatiale estimated AW values for a presently owned, highly accurate steel rivet inserter.If Retained This AW
In planning a plant expansion, MedImmune has an economic decision to make-upgrade the existing controlled-environment rooms or purchase new ones. The presently owned ones were purchased 4 years ago
Three years ago, Witt Gas Controls purchased equipment for $80,000 that was expected to have a useful life of 5 years with a $9000 salvage value. Increased demand necessitated an upgrade costing
A recent environmental engineering graduate is trying to decide whether he should keep his presently owned car or purchase a more environmentally friendly hybrid. A new car will cost $26,000 and have
A pulp and paper company is evaluating whether it should retain the current bleaching process that uses chlorine dioxide or replace it with a proprietary "oxypure" process. The relevant information
A machine that is critical to the Phelps-Dodge copper refining operation was purchased 7 years ago for $160,000. Last year a replacement study was performed with the decision to retain it for 3 more
A crushing machine that is a basic component of a metal recycling operation is wearing out faster than expected. The machine was purchased 2 years ago for $400,000. At that time, the buyer thought
The data associated with operating and maintaining an asset are shown below. The company manager has already decided to keep the machine for 1 more year (i.e., until the end of year 1), but you have
A machine that cost $120,000 three years ago can be sold now for $54,000. Its market value for the next 2 years is expected to be $40,000 and $20,000 one year and 2 years from now, respectively. Its
The projected market value and M&O costs associated with a presently owned machine are shown (next page). An outside vendor of services has offered to provide the service of the existing machine at a
BioHealth, a biodevice systems leasing company, is considering a new equipment purchase to replace a currently owned asset that was purchased 2 years ago for $250,000. It is appraised at a current
For the estimates in Problem use a spreadsheet-based analysis to determine the first cost for the augmentation of the current system that will make the defender and challenger break even. Is this a
Herald Richter and Associates, 5 years ago, purchased for $45,000 a microwave signal graphical plotter for corrosion detection in concrete structures. It is expected to have the market values and
State what is meant by the cash flow approach to replacement analysis, and list two reasons why it is not a good idea to use this method.
ABB Communications is considering replacing equipment that had a fi rst cost of $300,000 five years ago. The company CEO wants to know if the equipment should be replaced now or at any other time
The table below shows present worth calculations of the costs associated with using a presently owned machine (defender) and a possible replacement (challenger) for different numbers of years.
Nano Technologies intends to use the newest and fi nest equipment in its labs. Accordingly, a senior engineer has recommended that a 2-year-old piece of precision measurement equipment be replaced
An industrial engineer at a fiber-optic manufacturing company is considering two robots to reduce costs in a production line. Robot X will have a first cost of $82,000, an annual maintenance and
A 3-year-old machine purchased for $140,000 is not able to meet today's market demands. The machine can be upgraded now for $70,000 or sold to a subcontracting company for $40,000. The current
Two processes can be used for producing a polymer that reduces friction loss in engines. Process K, which is currently in place, has a market value of $165,000 now, an operating cost of $69,000 per
In Example, the in-place kiln and replacement kiln (GH) were evaluated using a fixed study period of 6 years. This is a significantly shortened period compared to the expected 12-year life of the
Nabisco Bakers currently employs staff to operate the equipment used to sterilize much of the mixing, baking, and packaging facilities in a large cookie and cracker manufacturing plant in Iowa. The
In 2008, Amphenol Industrial purchased a new quality inspection system for $550,000. The estimated salvage value was $50,000 after 8 years. Currently the expected remaining life is 3 years with an
A CNC milling machine purchased by Proto Tool and Die 10 years ago for $75,000 can be used for 3 more years. Estimates are an annual operating cost of $63,000 and a salvage value of $25,000. A
Hydrochloric acid, which fumes at room temperatures, creates a very corrosive work environment, causing steel tools to rust and equipment to fail prematurely. A distillation system purchased 4 years
Engine oil purifier machines can effectively remove acid, pitch, particles, water, and gas from used oil. Purifier A was purchased 5 years ago for $90,000. Its operating cost is higher than expected,
In looking for ways to cut costs and increase profit (to make the company's stock go up), one of the company's industrial engineers (IEs) determined that the equivalent annual worth of an existing

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