EXERCISES ON COMPARISON OF ALTERNATIVES 1. As a supervisor of facilities management department, you consider mobile cranes to be critical equipment. The purchase o of new medium sized, truck mounted crane is being evaluated. The engineering economic estimates on the two best alternatives are as follow: Alternatives B Investment (first) cost $272,000 $316,000 Annual costs 28.000 19.300 Useful life 9 Market (salvage value) 25,000 40,000 You have selected the longest useful life (9 years) for the study period and would lease a crane for the final 3 years under alternative A. Based on the previous experience, the estimated annual leasing cost at that time will be $36,000 per year. The MARR is 15%. Show that the same selection is made based on (a) the PW of the total cash flow, (b) the IRR method, and (c) the PW on incremental net cash flow. 2. Three alternative designs are being considered for potential improvement project related to the operation of an engineering department. The projected cashflows are shown below. The MARR is 15%. End of year A B $200,000-$230,000-$212.500 1 90.000 108.000 -15.000 2 90.000 108,000 122,500 3 90,000 108.000 122,500 90,000 108,000 122,500 5 90.000 108.000 122,500 90,000 108,000 122.500 a. Determine the best alternative using incremental analysis. 4 6 3. Your company has purchased equipment for $50,000 that will reduce materials. After 8 years there will be no further need for the machine, since the machine is especially designed, it will have no salvage value at the time. Determine the amount of depreciation each year using the following methods: a. Straight line method b. Sum of the year's digit method. c. Declining balance by 200%. d. Sinking fund method, an interest of 10% for 8 years. EXERCISES ON COMPARISON OF ALTERNATIVES 1. As a supervisor of facilities management department, you consider mobile cranes to be critical equipment. The purchase o of new medium sized, truck mounted crane is being evaluated. The engineering economic estimates on the two best alternatives are as follow: Alternatives B Investment (first) cost $272,000 $316,000 Annual costs 28.000 19.300 Useful life 9 Market (salvage value) 25,000 40,000 You have selected the longest useful life (9 years) for the study period and would lease a crane for the final 3 years under alternative A. Based on the previous experience, the estimated annual leasing cost at that time will be $36,000 per year. The MARR is 15%. Show that the same selection is made based on (a) the PW of the total cash flow, (b) the IRR method, and (c) the PW on incremental net cash flow. 2. Three alternative designs are being considered for potential improvement project related to the operation of an engineering department. The projected cashflows are shown below. The MARR is 15%. End of year A B $200,000-$230,000-$212.500 1 90.000 108.000 -15.000 2 90.000 108,000 122,500 3 90,000 108.000 122,500 90,000 108,000 122,500 5 90.000 108.000 122,500 90,000 108,000 122.500 a. Determine the best alternative using incremental analysis. 4 6 3. Your company has purchased equipment for $50,000 that will reduce materials. After 8 years there will be no further need for the machine, since the machine is especially designed, it will have no salvage value at the time. Determine the amount of depreciation each year using the following methods: a. Straight line method b. Sum of the year's digit method. c. Declining balance by 200%. d. Sinking fund method, an interest of 10% for 8 years