Name ____________________________ HW 5 IT 45000 - Div _______ Fall 2015 Dr. Sutton IT 45000 - Production Cost Analysis HW 5 1. When evaluating projects using the present worth method, how do you know which ones to select, if alternatives are: a. 3. Independent? b. 2. Page 2 of 5 Mutually exclusive? A company that manufactures amplified pressure transducers is trying to decide between the machines shown in the table. Compare them if interest is 15% per year, using present worth analysis. The manager of engineering at the 900-megawatt Hamilton Nuclear Power Plant has three options to supply personal safety equipment to employees. Two are vendors who sell the items, and a third will rent the equipment for $50,000 per year, but for no more than 3 years per contract. These items have relatively short lives due to constant use. The MARR is 10% per year. Determine which of the three options is cheaper over a study period of 2 years. Initial cost ($) AOC ($/yr) Overhaul in yr 3 ($) Overhaul in yr 4 ($) Salvage value Life (years) Variable Speed -250,000 -231,000 -----140,000 50,000 6 Dual Speed -224,000 -235,000 -26,000 ----10,000 6 Vendor R -$75,000 -$27,000 --------2 Vendor T -$125,000 -$12,000 ----$30,000 3 Rental ---------$50,000 ----3 max Cash Flow Initial cost AOC Annual rental Salvage value Life (years) IT 45000 - Production Cost Analysis HW 5 Page 3 of 5 4. Two methods are under consideration for producing the case for a portable hazardous material photoionization monitor. A plastic case will require an initial investment of $75,000 and will have an annual operating cost of $27,000 with no salvage value after 2 years. An aluminum case will require an investment of $125,000 and will have annual costs of $12,000. Some of the equipment can be sold for $30,000 after its 3-year life. If interest is 10% per year, which case should be selected on the basis of present worth analysis? 5. The GAO is considering three different plans for operating a small weapons production facility. Plan A would involve renewable 1-year contracts with payments of $1 million at the beginning of each year. Plan B would be a 2-year contract. It would require four payments of $600,000 each, with the first one paid now and the other three at 6-month intervals. Plan C would be a 3-year contract. It would entail a payment of $1.5 million now and another payment of $0.5 million 2 years from now. Assuming that the GAO could renew any of the plans under the same conditions if it desires to, which plan is better? Use PW analysis and an interest rate of 6% per year, compounded semiannually. IT 45000 - Production Cost Analysis HW 5 6. If you want to be able to withdraw $80,000 per year forever beginning 30 years from now, how much will you have to have in your retirement account (that earns 8% per year interest) in a. 8. Year 29? b. 7. Page 4 of 5 Year 0? Compare the alternatives shown in the table on the basis of their capitalized costs, using an interest rate of 12% per year compounded quarterly. Initial cost Quarterly income Salvage value Life (years) Alt E -200,000 30,000 50,000 2 Alt F -300,000 10,000 70,000 4 Alt G -900,000 40,000 100,000 A local company is considering an external long-term (indefinite) contract offer that will significantly improve the energy efficiency of their imaging systems. The payment schedule has two large payments in the first years with continuing payments thereafter. The proposed schedule is $200,000 now, $300,000 four years from now, $50,000 every 5 years, and an annual amount of $8000, beginning 15 years from now. Determine the PW at 6% per year. IT 45000 - Production Cost Analysis HW 5 9. Page 5 of 5 What is the bond interest rate on a $20,000 bond that has semiannual interest payments of $1500 and a 20-year maturity date? 10. General Electric issued 1000 mortgage bonds 3 years ago with a face value of $5000 each and a bond interest rate of 8% per year with dividends payable semiannually. The bonds have a maturity date 20 years from the date they were issued. If the interest rate in the market place is 10% per year, compounded semiannually, what is the present worth of one bond to an investor who wishes to purchase it today