Tutorial Sheet -1 (UNIT-1)

1. To withdraw the following $1,000 payment series, determine the minimum deposit (P) you should
make now if your deposits earn an interest rate of 10 %, compounded annually. Note that you are
making another deposit at the end of year 7 in the amount of $500. With the minimum deposit P, your
balance at the end of year 10 should be zero.

End of the period Deposit Withdrawal

0 P
1-6 $1,000
7 $500
8-10 1,000

(a)P=$4,912 (b) P=$4,465

(c) P=$5,374 (d) P=$5912

2. Consider the following cash flow series. What value of C makes the deposit series equivalent to the
withdrawal series at an interest rate of 12% compounded annually?
(a)C=$200 (b) C=$282.70
(c)C=$39 4.65 (d) C=$458.90

3. Find the value of X so that the two cash flows below are equivalent for an interest rate of 10%.
4. Part of the income that a machine generates is put into a sinking fund to replace the machine when it
wears out. If $2,000 is deposited annually at 7% interest, how many years must the machine be kept
before a new machine costing $30,000 can be purchased?

5. Compute the value of P in the cash flow diagram below. Assume i=8%.

6. Find the equivalent present worth of the cash receipts where i=10%. In other words, how much do you
have to deposit now (with the second deposit in the amount of $200 at the end of the first year) so that
you will be able to withdraw $200 at the end of second year, $120 at the end of third year, and so forth,
where the bank pays you a 10% annual interest on your balance?

7. What value of A makes the two annual cash flows equivalent at 10% interest, compounded annually?

8.
9. From the cash flow diagram, find the value of C that will establish the economic equivalence between
the deposit series and the withdrawal series at an interest rate of 8% compounded annually.

(a) $1,335 (c) $1,283

(b) $862 (d) $828
10. Consider the following two investment alternatives:
Suppose that your firm needs either machine for only 2 years. The net proceeds from the sale of
machine B is estimated to be $200. What should be the required net proceeds from the sale of machine
A so that both machines could be considered economically indifferent at an interest rate economically
indifferent at an interest rate of 10%?
End of the year Net cash flow
Machine A Machine B
0 -$1,000 -$2,000
1 900 2500
2 800 800+200
3 700

(a)$700 (b)$750
(c)$800 (d)$850

11. Consider the following two mutually exclusive service projects with project lives of 3 years and 2 years,
respectively. (The mutually exclusive service projects will have identical revenues for each year of
service.) The interest rate is known to be 12%
End of the year Net cash flow
Project A Project B
0 -$1,000 -$800
1 -400 -200
2 -400 -200+0
3 -400+200 (salvage)

If the required service period 6 years, and both projects can be repeated with the given costs and better
service projects are unavailable in the future, which project is better and why? Choose from the
following options:
(a) Select project B because it will save you $344 in present worth over the required service period.
(b) Select project A because it will cost $1,818 in NPQ each cycle, with only one replacement, whereas
project B will cost $1,138 in NPW each cycle, with two replacements.
(c) Select project B because its NPW exceeds that of project A by %680
(d) None of the above.

12. A manufacturing company is considering the purchase of a new CNC lathe, which will cost $60,000 and
has an annual maintenance cost of $8,000. A few parts in the lathe need to be replaced once every 3
years to enable smooth running of the lathe. This would cost an additional $20,000 (once every 3years).
Assuming that the lathe would last indefinitely under these conditions, what is the capitalized
equivalent cost of this investment at an interest rate pf 10%.
(a)$140,000 (b)$140,159
(c)$200,000 (d)$200,400

13. Your firm is considering the purchase of an old office building with an estimated remaining service life
of 25 years. The tenants have recently signed long-term leases, which leads you to believe that the
current rental income of $150,000 per year will remain constant for the first 5 years. Then the rental
income will increase by 10% for every 5-year interval over the remaining asset life. For example, the
annual rental income would be $165,000 for year 6 through 10, $181,500 for year 11 through 15,
$199,650for year 16through 20, and $219,615 for year 21 through 25. You estimate that operating
expenses, including income taxes, will be $45,000 for the first year, and that they will increase by
$3,000 each year thereafter. You estimate that razing the building and selling the lot on which it stands
will realize a net amount of $50,000 at the end of the 25-year period. If you had the opportunity to
 invest our money elsewhere, and thereby earn interest at the rate of 12% per annum, what would be
the maximum amount you would be willing to pay for the building and lot at the present time?

14. Two alternative machines are being considered for a manufacturing process. Machine A has a first cost
of $75,200 and its salvage value at the end of 6 years of estimated service life is $21,000. The operating
costs of this machine are estimated to be $6,800 per year. Extra income taxes are estimated at $2,400
per year. Machine B has a first cost of $44,000, and its estimated salvage value at the end of 6 years’
service is estimated to be negligible. The annual operating cost will be $11500. Compare these two
alternatives by present worth method at i=13%.

15. An electric motor is rated at 10 horse-powers (HP) and costs $800. Its full load efficiency is specified to
be 85%. A newly designed, high-efficiency motor of the same size has an efficiency of 90%, but costs
$1,200. It is estimated that the motors will operate at a rated 10 HP output for 1,500 hours a year, and
the cost of energy will be $0.07 per kilowatt-hour. Each motor is expected to have a 15-year life. At the
end of 15 years, the first motor will have a salvage value of $50, and the second motor will have a
salvage value of $100. Consider the MARR to be 8%. (Note: 1HP =0.7457Kw.)
(a) Determine which motor should be installed based on the NPW criterion.
(b) In (a), what if the motors operated 2500 hours a year? Would the same motor in (a) be the choice?

16. An industrial frim can purchase a special machine for $40,000. A down payment of $4,000 is required,
and the balance can be paid in five equal year-end instalments at 7% interest on the unpaid balance. As
an alternative, the machine can be purchased for $36,000 in cash. If the firm’s MARR is 10%, determine
which alternative should be accepted, based on the annual equivalent method.

17. An industrial firm is considering purchasing several programmable controllers and automating their
manufacturing operations. It is estimated that the equipment will initially cost$100,000 and the labour
to install it will cost $35,000. A service contract to maintain the equipment will cost $5000 per year.
Trained service personnel will have to be hired at an annual salary of $30,000. Also estimated is an
approximate $10,000 annual income-tax savings (cash inflow). How much will this investment in
equipment and services have to increase the annual revenues after taxes to break even? The equipment
is estimated to have an operating life of 10 years with no salvage value because of obsolescence. The
firm’s MARR is 10%.

18. Dan ford Company, a farm –equipment manufacturer, currently produces 20,000 units of gas filters for
use in its lawnmower production annually. The following costs are reported based on the previous
year’s production: It is anticipated that gas-filter production will last 5 years. If the company continues
to produce the produce the product in-house, the annual direct material costs will increase at the rate of
5%.
(For example, the annual material costs during the first production year will be $63,000.) The direct
labour will also increase at the rate of 6% per year. However, the variable overhead costs would
increase at the rate of 3% but the fixed overhead would remain at the current level over the next 5 year.
Tompkins Comp0any has offered to sell Dan ford 20,000 units of gas filters for $25 per unit. If Dan ford
accepts the offer, some of the manufacturing facilities currently used to manufacture the gas filter could
be rented to a third party at annual rental of $ 35,000. Additionally, $3.5 per unit of the fixed heard
applied to gas filter production would be eliminated. The firms’ interest rate is known to be 15%. What
is the unit cost of buying the gas filter from the outside source? Should Den ford accept Tompkins offer,
and why?

19. An electrical automobile can be purchased for $25,000. The automobile is estimated to have a life of 12
years, with annual travel of 20,000 miles. Every 3 year, a new set of batteries will have to be purchased
at a cost of $3,000. Annual maintenance of the vehicle is estimated to cost $700 per year. The cost of
recharging the batteries is estimated at $0.015 per mile. The salvage value of the batteries and the
 vehicle at the end of 12 years is estimated at $2,000. Consider the MARR to be 7%. What is the cost per
mile to own and operate this vehicle, based on the above estimates? The $3,000 cost of the batteries is a
net value with the old batteries traded in for the new ones.

20. A certain factory building has an old lighting system, and lighting this building cost, on average, $20,000
a year. A lighting consultant tells the factory supervisor that the lighting bill can be reduced to 8,000 a
year if $50,000 were invested in relighting the factory building. If the new lighting system is installed,
an incremental maintenance cost of $3,000 per year must be considered. If the old lighting system has
zero salvage value, and the new lighting system is estimated to have life of 20 years, what is the net
annual benefit for this investment in new lighting? Consider the MARR to be 12%. Also consider that the
new lighting system has zero salvage value at the end of its life.

21. Travis Wenzel has $2,000 to invest. Usually, he would deposit the money in his savings account, which
earns 6% interest, compounded monthly. However, he is considering three alternative investment
opportunities: Option 1: Purchasing a bond for $2,000. The bond has a face value of $2,000 and pays
$100 every 6 months for 3 years. The bond matures in 3 years.
Option 2: Buying and holding a growth stock that grows 11% per year for 3 years.
Determine the equivalent annual cash flows for each option, and select the best option.

22. A chemical company is considering two types of incinerators to burn solid waste generated by a
chemical operation. Both incinerators have a burning capacity of 20 tons per day. The following data
have been compiled for comparison:

Incinerator A incinerator B
Installed cost $1,200,000 $750,000
Annual O&M $50,000 $80,000
Cost
Service life 20 years 10 years
Salvage value $60,000 $30,000
Income taxes $40,000 $30,000

If the firm’s MARR is known to be 13%, determine the processing cost per ton of solid waste by each
incinerator. Assume that incinerator B will be available in the future at the same cost.