EMSE 6410, Summer 2017

Final Exam
EMSE 6410, Summer 2017
2
Problem #1 (15%)
A company with an effective income tax rate of 40 percent and an after-tax MARR of 12 percent must choose from two mutually exclusive projects:
Alternative 1 Alternative 2
Initial cost $11,000 $33,000
Uniform annual net benefits $4,000 $9,000
Depreciation method Straight line MACRS
Depreciation life 3 years 3 years
Salvage value $2,000 $0
Useful life 5 years 5 years
Actual market value at end of useful life $2,000 $2,000
Determine which project should be selected by using present worth analysis.
Final Exam
EMSE 6410, Summer 2017
3
Problem #2 (15%)
An office supply company has purchased a light-duty delivery truck for $15,000. The
truck will be depreciated under the MACRS with a property class of five years. The
truck’s MV is expected to decrease by $2,500 per year. It is anticipated that the purchase
of the truck will increase the company’s revenue by $10,000 annually, while the
associated operating expenses are expected to be $3,000 annually. The company has an
effective tax rate of 40% and its after-tax MARR is 15% per year.
If the company plans to keep the truck only two years, what would be the after-tax
present worth of this investment?
Final Exam
EMSE 6410, Summer 2017
4
Problem #3 (15%)
In the ABC Company, decisions regarding approval of proposals for capital investment
are based upon a stipulated MARR of 18% per year. Which of the four packaging devices
should be selected? Analyze the three alternatives using a 10 year study period and the:
a. Present Worth method and select the best one.
b. Incremental Analysis method and select the best one.
A C D B
Initial Capital Investment $38,000 $55,000 $60,000 $50,000
Annual Expenses $11,000 $16,300 $16,800 $14,100
Final Exam
EMSE 6410, Summer 2017
5
Problem #4 (15%)
A man wishes to set aside some money for his daughter’s college education. His goal is
to have a bank savings account containing an amount equivalent to $20,000 in today’s
dollars at the girl’s 18th birthday. The estimated inflation rate is 8%. If the bank pays 5%
compounded annually, what lump sum should he deposit on the child’s 4th birthday?
Final Exam
EMSE 6410, Summer 2017
6
Problem #5 (15%)
An air handling system must be purchased for your company. The best estimates for the
first costs, yearly costs (O&M) and yearly benefits (Energy savings) are given below.
However, uncertainty exists about the disposal cost and energy savings. The MARR is
5%; taxes and inflation can be ignored.
System Life First Cost O&M/Yr. Energy
Savings/Yr.
Disposal Cost
at End of Life
AH2000 10 yrs. -$10,000 -$2,000 $5,000 -$4,000
Create a Sensitivity Graph (“spider plot”) on the following page to show +/- 50%
deviations in the Present Worth of the system for two of the variables above: Disposal
Cost at end of life and Energy savings/yr. (Note: only five calculations of the PW are
needed calculated to define the graph lines for the two variables: the base case PW and
the PW for the +50% and –50% values of each of the two variables.)
Final Exam
EMSE 6410, Summer 2017
7
Problem #6 (10%)
Define depreciation and explain why and how it is used. Describe the differences
between the most commonly used methods.
Final Exam
EMSE 6410, Summer 2017
8
Problem #7 (15%)
Your company operates a fleet of light trucks that are used to provide contract delivery
services. As the engineering and technical manager, you are analyzing the purchase of 55
new trucks as an addition to the fleet. These trucks would be used for a new contract the
sales staff is trying to obtain. If purchased, the trucks would cost $21,200 each; estimate
use is 20,000 miles per year per truck; estimated operation and maintenance and other
related expenses (year-zero dollars) are $0.45 per mile, which is forecasted to increase at
the rate of 5 percent per year; and the trucks are MACRS (GDS) three-year property class
assets. The analysis period is four years; tax rate = 38 percent; MARR = 15 percent per
year (after taxes; includes an inflation component); and the estimated market value at the
end of four years (in year-zero dollars) is 35 percent of the purchase price of the vehicles.
The estimate is expected to increase at the rate of 2 percent per year.
Based on an after-tax, actual dollar analysis, what is the annual revenue required by your
company from the contract to justify the expenditures before any profit is considered?
This calculated amount for annual revenue is the break-even point between purchasing
the trucks and which other alternative?