Question
You work in the Technical Service of a Municipality and you study the implementation of the Urban Development Program, for the needs of which the
You work in the Technical Service of a Municipality and you study the implementation of the "Urban Development Program", for the needs of which the Municipality will have to proceed with the pedestrianization of urban areas in the next 6 years. According to your calculations, 24,000 m2 of paving slabs are required per year. Consider the following solutions for the supply of tiles: 1st solution: Supply from a private company, for P=10 / m2 for the 1st year and annual price increase by g = 2% for the next 5 years (multiply the immediately previous price by 1.02). 2nd solution: The Municipality should produce the pavement slabs in its own unit. The value of the unit today (t = 0) is U = 250,000, the unit requires maintenance worth M = 150,000 after 3 years (t = 3) and the value of the unit at the end of the 6-year period (t = 6) is calculated in SV = 80,000. In addition, the operating cost of the unit is fixed equal to CO = 90,000 / year and the cost of raw materials to be used for the production of pavement slabs is estimated at CM = 3.75 / m2. Assuming that all annual costs in both solutions are accounted for at the beginning of each year: (a) Draw a diagram illustrating the relationship between net present value (PW) and return for both solutions and for return values i = 0.06 - 0.18 with step 0.02. What are the main conclusions you draw from the curves of the diagram? (b) Which of the two solutions is more advantageous for return i = 0.08 and which for return i = 0.18? (c) Calculate the purchase price of pavement slabs by the private company, constant for all years, so that the two solutions are equivalent for return i = 0.06.
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