Engineering Economic Analysis

Problems 265

Plan

Cost of Borrowed Money

Improyements. Type of Business

A $ 75,000 Conventional gas station

with service facilities for

lubrication, oil changes,

etc.

Automatic carwash facil-

ity with gasoline pump

island in front

Discount gas station (no

service bays)

Gas station with low-cost,

quick-carwash facility

B 230,000

c 30,000

D 130,000

*Cost of improvements does not include the $70,000

Cost of Capital

In each case, the estimated useful life of the im-

provements is 15 years. The salvage value for each is

estimated to be the $70,000 cost of the land. The net

annuat income, after paying all operating expenses,

is projected as follows:

Plan

A

B

C

D

Net Annual Income

$23,300

44,300

10,000

27,500

If the oil company expects a 10% rate of return on its

investments, which plan (if any) should be selected?

8-6 A firm is considering three mutually exclusive alter-

natives as part of a production improvement program.

The alternatives are as follows:

Installed cost

Uniform annual benefit

U sefullife, in years

A

$10,000

1,625

10

C

$20,000

1,890

20

B

$15,000

1,625

20

For each alternative, the salvage value at the end-

of-useful-life is zero. At the end of 10 years, Alt.A

could be replaced by another Awith identical cost

and benefits. The MARR is 6%. If the analysis period

is 20 years, which alternative should be selected?

8-7 Given the following four mutually exclusive alterna-
tive,s and using 8% for the MARR, which alternative
should be selected?

First cost

Uniform annual benefit

U sefullife, in years

End-of-useful-life

salvage value

Computed rate of return

A

$75

16

10

o

D

$85

17

10

o

B

$50

12

10

o

C

$50

10

10

o

16.8% 20.2% 15.1% 15.1%

(Answer: A)

8-8 Consider the following three mutually exclusive

alternatives:

A

$200

59.7

B

$300

77.1

C

$600

165.2

First cost

.Uniform annual

benefit

Useful life,

in years

End-of-useful-life

salvage value

Computed rate

of return

For what range of values of MARR is Alt. C the

preferred alternative? Put your answer in the follow-

ing form: "Alternative C is preferred when_ % .:::

MARR.:::_%.".

(^555)

o o o

15% 9% 11.7%

8-9 Consider four mutually exclusive alternatives,each

having an 8-year useful life:

If the minimum attractive rate of return is 8%, which

alternative should be selected?

8-10 Three mutually exclusive projects are being consid-

.ered:

When each project reaches the end of its useful life,

it would be sold for its salvage value and there would

be no replacement. If 8% is the desired rate of return,

which project should be selected?

--------. -- ..- --_.----

--- -- --

A B C D

First cost $1000 $800 $600 $500

Uniform annual 122 120 97 122

benefit

Salvagevalue^7505005000

A B C

First cost $1000 $2000 $3000

Uniform annual 150 150 0

benefit

Salvagevalue^100027005600

Usefullife,^56. 7

in years