A company is considering investing up to 1.5 million dollars in an investment portfolio consisting of a set of the following five independent capital projects (all of these projects will end at the end of 10 years). The initial investment for Project 1, 2, 3, 4, and 5 is $300k, $400k, $450k, $500k, and $600k, respectively. The annual return for these projects are $80k, $100k, $105k, $125k and $140k and the salvage value for these projects at the end of year 10 are $50k, $50k, $60k, $75k and $75k, respectively. Projects 2 and 4 are mutually exclusive. Also, project 1 is contingent on either or both projects 2 and 3. The company's MARR is 10%. Determine the optimal investment portfolio given that:

a) The investment opportunities are indivisible.

b) The investment opportunities are divisible.

ENGMT 510 - ECONOMICS AND FINANCIAL STUDIES FOR ENGINEERS 1. Do I purchase insurance for my HDTV? Five years ago, I bought a Samsung 60" 3D 1080p 240Hz LED Smart HDTV for $3000. I was assured that it had a useful life of 10 years. I also purchased insurance for my TV for $300. The insurance covers all the repairs and replacements during the first four years, i.e., they will replace it with a brand new system if it fails for any reason even if it is my fault, like dropping it on the floor. If the TV fails after four years from the time of purchase, I will receive the book value minus a deductible (which is $500). Now, at the end of year 5, my TV has stopped working. The repair man says the repair is both time consuming and expensive and suggests that I file a claim with the insurance. Using each of the following depreciation methods, calculate the amount of money that I will receive from the insurance. a) Straight line depreciation b) Declining balance depreciation (while the salvage value is zero at the end of the useful life, for the DB method, you can assume that the salvage value is close to zero, e.g., $0.01, in order to be able to calculate depreciation) c) MACRS-GDS depreciation 2. The following problem is loosely based on an actual project at Mother Earth Organic Mushrooms, a Pennsylvania-based company. The company is considering acquiring a new automatic packaging and labeling line for its packing facility. Two different models with varying features, O&M costs, and salvage values are considered. The following table provides the summary financial information for the two alternatives. The company's MARR is 15%. EOY 0 1 2 3 IRR PW(15%) a) b) c) d) Net Cash Flow Model 1 Model 2 -$10,000 -$20,000 $5,500 0 $5,500 0 $5,500 $40,000 30% ? ? $6,301 Compute the IRR for Model 2. Compute the NPW for Model 1. Based on the NPW, which model should the company select? Confirm your answer in part (c) by comparing the two alternatives using the IRR. 3. Massachusetts lottery winner, 94, sues to get lump-sum payment - Dec 29, 2004 In 2004, a Massachusetts woman won 5.6 million dollars in the lottery, which would have paid her an initial gross payment of $283,770 and 19 more yearly payments of $280,000 each (the first payment is at time 0 and the other payments occur at 1, 2, 3, ..., 19). The only issue was that the winner, Louise Outing, was 94 years old at the time. ''In March, I will be 95 years old. Do you realize that? Ninety-five in March...Now, you know I'm not going to live 20 years." the Everett woman said in a telephone interview. She wants the Massachusetts State Lottery Commission to cut her a check immediately for the full $5.6 million, minus taxes. But the commission has so far rejected that request, saying Megabucks winners get 20-year annuities, not lump-sum payments. Ticket sales were 4 million dollars. Assume an interest rate of 10%. a. Assuming that the payments are made over 20 years, how much money the lottery commission will have in their bank immediately after the last payment of $280,000? b. If the commission had decided to pay Ms. Outing a lump sum at that time, how much would that be (before-tax amount)? 4. This problem is based on an actual project at Shell Oil Company while the data have been disguised to protect the company's proprietary information. A deep water well in the Gulf of Mexico can take months to drill. A well consists of multiple concentric strings of casing (pipe) beginning with the outermost string. A drilling unit or \"rig\" drills through the bottom of each successive casing to a new depth and then cements a new inner string into the last section of the hole drilled. These steps are planned out in advance although variations in the time to complete each step are quite common. The casing, cement, drilling fluids, supporting equipment, etc. are assembled in advance and staged at the vendor's yards (slips) for shipment offshore. Offshore supply vessels pick up the materials at port and transport the material offshore to the drilling unit. Since the cost of an offshore rig going idle due to a lack of material is extremely high, the company is considering procuring an additional vessel to meet maximum expectations to maximize drilling efficiency. There are two different types of vessels (200 and 400), each can hold a different amount of cargo and travels at a different speed. A type-200 vessel can be purchased for $450,000, has an estimated life of 12 years with no salvage value at the end of its useful life, and has an annual operations and maintenance (O&M) cost of $100,000. A type400 vessel, on the other hand, can be purchased for $1,000,000, has an estimated life of 24 years, a salvage value of $180,000 at the end of its useful life, and an annual O&M cost of $72,000. Given a 5% per year expected rate of return, which vessel should be purchased based on a) The present worth (PW)? b) The future worth (FW)? c) The annual worth (AW)? 5. You would like to purchase a $1,000 sofa from Honest Furniture store. The owner, Mr. Honest, says he will work with you to arrange a payment plan over the next 12 months. He says he normally charges 12% interest per year and calculates the interest on $1,000 at 12% as $120, which makes the total $1120. He then divides $1,120 by 12 months, which makes the monthly payment $93.33. He then says, "I feel generous today, just pay me $90 at the end of each month for a year." Perform the necessary analysis and determine whether there is anything wrong with this deal and Mr. Honest's statements. 6. PizzaPizza is considering two college towns, Collegeville and University City, to open their new store this August, just in time for the fall semester. The Collegeville location requires an initial investment of $126,000, whereas the University City location requires $185,000. From the student population and the competition, the finance team estimates the revenue at Collegeville to be $48,000 a year and the revenue at University City to be $56,000. Assuming a hurdle rate of 15%, how long it will take to get the investment back for each location? Include the time value of money in your analysis. 7. In a typical year, J. B. Hunt Transport Services Inc. (JBHT) purchases hundreds of new over-theroad tractors. A certain type of tractor has a retail price of $100,000. End-of-year book values (based on MACRS-GDS for a 5-year property), salvage values, and annual operations and maintenance (O&M) costs over its useful life are provided in the following table. EOY 1 2 3 4 5 6 Book Value $80,000 $48,000 $28,800 $17,280 $5,760 0 Salvage Value $53,000 $39,000 $28,000 $18,000 $14,000 $6,000 O&M Costs $15,000 $21,000 $27,000 $34,000 $42,000 $49,000 Determine the economic life of this type of tractor given that the MARR is 10% and the marginal tax rate is 40%. 8. A company is considering investing up to 1.5 million dollars in an investment portfolio consisting of a set of the following five independent capital projects (all of these projects will end at the end of 10 years). The initial investment for Project 1, 2, 3, 4, and 5 is $300k, $400k, $450k, $500k, and $600k, respectively. The annual return for these projects are $80k, $100k, $105k, $125k and $140k and the salvage value for these projects at the end of year 10 are $50k, $50k, $60k, $75k and $75k, respectively. Projects 2 and 4 are mutually exclusive. Also, project 1 is contingent on either or both projects 2 and 3. The company's MARR is 10%. Determine the optimal investment portfolio given that: a) The investment opportunities are indivisible. b) The investment opportunities are divisible. 9. The injection molding machines need to be replaced. The list is narrowed down to two options based on various parameters like screw diameter, injection pressure, injection capacity, rate, rpm, etc. You are asked to make a recommendation based on the following financial information. The Cincinnati Milacron Plastic Injection Molding Machine costs $80,000 and the Kawaguchi machine costs $120,000. Based on the capacity of these machines, it can be safely estimated that the revenue for Cincinnati will be $30,000 for year 1 and $41,500 for Kawaguchi. It is also assumed that the capacity could be increased and thereby the revenue by 20% every year for the next few years. The maintenance costs for both machines will be $2,000 and the amount will increase by $5,000 every year for the next few years. According to other companies that use similar machines, these machines are capable of producing products for 5 years before major breakdowns occur. Since this is a rough estimate, you can use straight line depreciation over the next five years. The marginal tax rate for this company is 40%. a) Assuming an after-tax MARR of 15%, calculate the PW of the after-tax cash flow. b) Perform a sensitivity analysis by changing the after-tax MARR from 10% to 20%. Hint: You can use Excel's DATA TABLE to facilitate calculations