solve the question

If an alternative has a salvage value, how is it han- dled in the calculation of a B/C ratio relative to benefits, disbenefits, costs, or savings? The cost of grading and spreading gravel on a short rural road is expected to be $300,000. The road will have to be maintained at a cost of $25,000 per year. Even though the new road is not very smooth, it allows access to an area that previously could only be reached with off-road vehicles. The improved accessibility has led to a 150% increase in the property values along the road. If the previ- ous market value of a property was $900,000, calculate the B/C ratio using an interest rate of 6% per year and a 20-year study period. Arsenic enters drinking water supplies from natu- ral deposits in the earth or from agricultural and industrial practices. Since it has been linked to cancer of the bladder, kidney, and other internal organs, the EPA has lowered the arsenic standard for drinking water from 0.050 parts per million to 0.010 parts per million (10 parts per billion). The annual cost to public water utilities to meet the new standard is estimated to be $200 per house- hold. If it is estimated that there are 90 million households in the United States and that the lower standard can save 50 lives per year valued at $4,000,000 per life, what is the benefit/cost ratio of the regulation?For the data of Exercise 1.4 on page 13, compute both the mean and the variance in "flexibility" for both company A and company B. Does there appear to be a difference in flexibility between company A and company B? Reference: Exercise 1.4: In a study conducted by the Department of Mechanical Engineering at Virginia Tech, the steel rods supplied by two different companies were compared. Ten sample springs were made out of the steel rods supplied by each company, and a measure of flexibility was recorded for each. The data are as follows: Company A: 9.3 8.8 6.8 8.7 8.5 6.7 8.0 6.5 9.27.0 Company B: 11.0 9.8 9.9 10.2 10.1 9.7 11.0 11.1 10.2 9.6 (a) Calculate the sample mean and median for the data for the two companies. (b) Plot the data for the two companies on the same line and give your impression regarding any apparent differences between the two companies.CASE STUDY WHICH IS BETTER-DEBT OR EQUITY FINANCING? Background Information Pizza Hut Corporation has decided to enter the catering busi- Plan A is debt financing for 50% of the capital ($750,000) ness in three states within its Southeastern U.S. Division, with the 8% per year compound interest loan repaid over using the name Pizza Hut At-Your-Place. To deliver the meals 10 years with uniform year-end payments. (A simplifying as- and serving personnel, it is about to purchase 200 vans with sumption that $75,000 of the principal is repaid with each custom interiors for a total of $1.5 million. Each van is ex- annual payment can be made.) pected to be used for 10 years and have a $1000 salvage Plan B is 100% equity capital raised from the sale of $15 value. per share common stock. The financial manager informed the A feasibility study completed last year indicated that the engineer that stock is paying $0.50 per share in dividends and At-Your-Place business venture could realize an estimated that this dividend rate has been increasing at an average of annual net cash flow of $300,000 before taxes in the three 5% each year. This dividend pattern is expected to continue, states. After-tax considerations would have to take into ac- based on the current financial environment. count the effective tax rate of 35% paid by Pizza Hut An engineer with Pizza Hut's Distribution Division has Case Study Exercises worked with the corporate finance office to determine how to best develop the $1.5 million capital needed for the purchase 1. What values of MARR should the engineer use to deter- of vans. There are two viable financing plans. mine the better financing plan? 2. The engineer must make a recommendation on the fi- Taxes = (taxable income )(tax rate) nancing plan by the end of the day. He does not know Taxable income = net cash flow how to consider all the tax angles for the debt financing - loan interest in plan A. However, he does have a handbook that gives He decides to forget any other tax consequences and use these relations for equity and debt capital about taxes this information to prepare a recommendation. Is A or B and cash flows: the better plan? Equity capital. no income tax advantages 3. The division manager would like to know how much the WACC varies for different D-E mixes, especially After-tax net cash flow = (before-tax net cash flow)(1 - tax rate) about 15% to 20% on either side of the 50% debt finance ing option in plan A. Plot the WACC curve and compare Debi capital: income tax advantage comes from interest its shape with that of Figure 10-2. paid on loans After-tax net cash flow = before-tax net cash flow - loan principal - loan interest - taxesA proposal to reduce traffic congestion on 1-5 has a B/C ratio of 1.4. The annual worth of benefits minus disbenefits is $560,000. What is the first cost of the project if the interest rate is 6% per year and the project is expected to have a 20-year life? Oil spills in the Gulf of Mexico have been known to cause extensive damage to both public and pri- vate oyster grounds along the Louisiana and Mis- sissippi shores. One way to protect shellfish along the shoreline is to release large volumes of fresh- water from the Mississippi River to flush oil out to sea. This procedure inevitably results in death to some of the saltwater shellfish while preventing more widespread destruction to public reefs. Oil containment booms and other temporary struc tures can also be used to intercept floating oil be- fore it damages sensitive fishing grounds. If the Fish and Wildlife Service spent $110 million in year 0 and $50 million in years 1 and 2 to mini- mize environmental damage from one particular oil spill, what is the benefit-to-cost ratio provided the efforts resulted in saving 3000 jobs valued at a total of $175 million per year? Assume disbenefits associated with oyster deaths amounted to $30 mil- lion in year 0. Use a 5-year study period and an interest rate of 8% per year. On-site granular ferric hydroxide (GFH) systems can be used to remove arsenic from water when daily flow rates are relatively low. If the operating cost is $600,000 per year and the public health benefits are assumed to be $800,000 per year, what initial investment in the GFH system is necessary to guarantee a modified B/C ratio of at least 1.0? Assume that the equipment life is 10 years and the interest rate is 6% per year.A recent environmental engineering graduate is try- ing 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 annual operation and maintenance costs of $1200 per year with an $8000 salvage value in 5 years (which is its estimated economic service life). The presently owned car has a resale value now of $5000; one year from now it will be $3000, two years from now $2500, and 3 years from now $2200. Its operating cost is expected to be $1900 this year, with costs increasing by $200 per year. The presently owned car will definitely not be kept longer than 3 more years. Assuming used cars like the one presently owned will always be available, should the presently owned car be sold now, 1 year from now, 2 years from now, or 3 years from now? Use annual worth calculations at i = 10% per year and show your work. A pulp and paper company is evaluating whether it should retain the current bleaching process that uses chlorine dioxide or replace it with a proprie- tary "oxypure" process. The relevant information for each process is shown. Use an interest rate of 15% per year to perform the replacement study. Current Process Oxypure Process Original cost 6 -450,000 years ago, $ Investment cost -700,000 now, $ Current market 25,000 value, $ Annual operating - 180,00 0 -70,000 cost, $/year Salvage value, $ 50,000 Remaining life, 10 yearsBioHealth, a biodevice systems leasing company, is considering a new equipment purchase to re- place a currently owned asset that was purchased 2 years ago for $250,000. It is appraised at a cur- rent market value of only $50,000. An upgrade is possible for $200,000 now that would be adequate for another 3 years of lease rights, after which the entire system could be sold on the international circuit for an estimated $40,000. The challenger, which can be purchased for $300,000, has an ex- pected life of 10 years and a $50,000 salvage value. Determine whether the company should up- grade or replace at a MARR of 12% per year. As- sume the AOC estimates are the same for both alternatives. For the estimates in Problem 11.30, 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 maximum or minimum for the up- grade, if the current system is to be retained?The proportion of people who respond to a certain mail-order solicitation is a continuous random variable X that has the density function f(x) = 2(3+2) 0