3-8 An investor has $50,000 in a bank account at 7% interest compounded annually. She can use this sum to pay for the purchase of a plot of land. She expects that in 10 years she will be able to sell the land for $130,000. During that period she will have to pay $2,000 a year in property taxes and insurance. Should she make the purchase? Base your decision on a rate of return analysis and verify your conclusion with future value analysis. -4 A project has an initial cost of $120,000 and an estimated salvage value after 15 years of $70,000. Estimated average annual receipts are $25,000. Estimated average annual disbursements are $15,000. Assuming that annual receipts and disbursements will be uniform, compute the pro- spective rate of return before taxes. 3-10 Equipment is being leased from a dealer for $500,000 per year with beginning of year payments and the lease expires three years from now. It is estimated that a new lease for the succeeding four years on similar new equipment will provide the same service and will cost $750,000 per year with beginning of year payments. The first payment under the new lease occurs at the beginning of year four. The equipment manufacturer is offering to terminate the present lease today and to sell the lessee new equipment for $2 million now which together with a major repair cost of $600,000 at the end of year four should provide the needed equip- ment service for a total of seven years, after which the salvage value is estimated to be zero. Use present worth cost analysis for a minimum rate of return of 20% to determine if leasing or purchasing is economically the best approach to provide the equipment service for the next seven years. Verify your conclusion with ROR and NPV analysis. sum at that point 3-12 A firm is evaluating whether to lease or purchase four trucks. The four trucks can be purchased for a total cost of $240,000 and operated for maintenance, insurance, and general operating costs of $20,000 at time 0, $40,000 at year 1, $50,000 at year 2, and $30,000 at year 3 (putting operating costs at the closest points in time to where they are incurred) with an expected salvage value of $100,000 at the end of year 3. The four trucks could be leased for $120,000 per year, for the 3 years, with monthly payments, so consider $60,000 lease cost at year 0, $120,000 per year at years 1 and 2, and $60,000 at year 3, putting lease costs at the closest point in time to where they are incurred. The lease costs include maintenance costs but do not include insurance and general operating costs of $10,000 at year 0, $20,000 per year at years 1 and 2, and $10,000 at year 3. If the minimum rate of return is 15%, use present worth cost analysis to determine if economic analysis dictates leasing or purchasing. Verify your conclusion with ROR, NPV, and PVR analysis. 3-18 Two development alternatives exist to bring a new project into pro- duction. The first development approach would involve equipment and development expenditures of $1.0 million at year 0 and $2.0 million at year 1 to generate incomes of $1.8 million per year and operating expenses of $0.7 million per year starting in year 1 for each of years 1 through 10 when the project is expected to terminate with zero salvage value. The second development approach would involve equipment and development expenditures of $1 million at year 0 and expenses of $0.9 million at year 1 to generate incomes of $2 million per year and oper- ating expenses of $0.9 million per year starting in year 2 for each of years 2 through 10 when the project is expected to terminate with zero salvage value. For a minimum rate of return of 15%, evaluate which of the alternatives is economically better using rate of return, net present value, and present value ratio analysis techniques. 3-21 The following data relates to an oil and gas lease. Costs and production are in thousands. Production is in barrels of oil equivalent (BOE). Year 0 1 2 3 4 5 Production, (BOE) 175 100 75 55 35 Intangible Drilling 7,500 2,500 Tangible Equipment 6,700 Lease Bonus 1,000 Operating Costs 1,750 1,000 750 500 250 Selling Price, $/BOE 80.00 80.00 80.00 80.00 80.00 Royalties are 12.5% of gross revenue. Liquidation Value $0 1) Calculate the annual before-tax cash flows for years 0-5. 2) Determine the project ROR, NPV, and PVR for a minimum rate of return of 15%. 3) Determine the break-even product selling price in years 1 through 5 that would provide the investor with a 15% ROR. 3-23 A machine in use now has a zero net salvage value and is expected to have an additional two years of useful life but its service is needed for another 6 years. The operating costs with this machine are estimated to be $4,500 for the next year of use at year 1 and $5,500 at year 2. The salvage value will be 0 in two years. A replacement machine is estimated to cost $25,000 at year 2 with annual operating costs of $2,500 in its first year of use at year 3, increased by an arithmetic gradient series of $500 per year in following years. The salvage value is estimated to be $7,000 after 4 years of use (at year 6). An alternative is to replace the existing machine now with a new machine costing $21,000 and annual operating costs of $2,000 at year 1, increasing by an arithmetic gradient of $500 each following year. The salvage value is estimated to be $4,000 at the end of year 6. Compare the economics of these alternatives for a minimum ROR of 20% using a 6 year life by: A) Present worth cost analysis. B) Equivalent annual cost analysis. C) Incremental NPV analysis. 3-25 A company wants you to use rate of return analysis to evaluate the economics of buying the mineral rights to a mineral reserve for a cost of $1,500,000 at time 0 with the expectation that mineral development costs of $5,000,000 and tangible equipment costs of $4,000,000 will be spent at year 1. The mineral reserves are estimated to be produced uniformly over an 8-year production life (evaluation years 2 through 9). Since escalation of operating costs each year is estimated to be offset by escalation of revenues, it is projected that profit will be constant at $4,000,000 per year in each of evaluation years 2 through 9 with a $6,000,000 salvage value at the end of year 9. Calculate the project rate of return, then assume a 15% minimum rate of return and calculate the project growth rate of return, NPV, and PVR. 3-30 A gas pipeline manager has determined that he will need a compressor to satisfy gas compression requirements over the next five years or 60 months. The unit can be acquired for a time 0 investment of $1,000,000. The cost of installation at time zero is $75,000 and a major repair would be required at the end of year 3 for an estimated $225,000. The com- pressor would be sold at the end of year five for $300,000. The alter- native is to lease the machine for a year 0 payment of $75,000 to cover installation costs and beginning of month lease payments of $24,000 per month for 60 months. Lease payments include all major repair over the term of the lease. The nominal discount rate is 12% compounded monthly. Use present worth cost analysis for annual periods to determine whether leasing or purchasing offers the least cost method of providing service. Verify this conclusion with equivalent monthly cost analysis