Engineering Economic Analysis

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486 SELECTION OF A MINIMUM ATTRACTIVERATEOF RETURN

Each alternative has a lO-year usefu11ife and no sal-

vage value. Over what range of interest rates is C the

preferred alternative? (Answer:4.5% <i:S 9.6%)

15-3 Frequently we read in the newspaper that one should

lease an automobile rather than buying it. For a

typical 24-month lease on a car costing $9400, the

monthly lease charge is about $267. At the end of the

24 months, the car is returned to the lease company

(which owns the car). As an alternative, the same car

could be bought with no down payment and 24 equal

monthly payments, with interest at a 12% nominal an-

nual percentage rate. At the end of 24 months the car

is fully paid for. The car would then be worth about

half its original cost.

(a)Over what range of nominal before-tax interest

rates is leasing the preferred alternative?

(b)What are some of the reasons that would

make leasing more desirable than is indicated

in(a)?

15-4 Assume you have $2000 available for investment for

a 5-year period. You wish toinvest the money-

not just spend it on fun things. There are obviously

many alternatives available. You should be willing to

assume a modest amount of risk of loss of some or

all of the money if this is necessary, but not a great

amount of risk (no investments in poker games or

at horse races). How would you invest the money?

What is your minimum attractive rate of return?

Explain.

15-5 There are many venture capital syndicates that consist
of a few (say, eight or ten) wealthy people who com-
bine to make investments in small and (hopefully)
growing businesses. Typically, the investors hire a
young investment manager (often an engineer with
an MBA) who seeks and analyzes investment oppor-
tunities for the group. Would you estimate that the
MARR sought by this group is more or less than 12%?
Explain.

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15-6 A factory has a$100,000capital budget. Determine

JJL~. ",:hich project(s! should be funded and the opportu_mty cost of capItal.

15-7 Chips USA is considering the following projects to

_improve their production process. Chips have a short

life, so a 3-year horizon is used in evaluation. Which

projects should be done if the budget is $70,000?

What is the opportunity cost of capital?

Project

1 2 Y 4 5 6 7

First Cost

$20,000

30,000

10,000

5,000

25,000

15,000

40,000

Benefit

$11,000

14,000

~,000

2,400

13,000

7,000

21,000

15-8 National Motors's Rock Creek plant is considering

_the following projects to improve the company's pro-duction process. Which projects should be done if the

budget is $500,000? What is the opportunity cost of

capital?

15.2 Consider four mutually exclusivealternatives:

A B C D

Initial cost $0 $100 $50 $25

Uniform annual 0 16.27 9.96 5.96

benefit

Computedrate 0% 10% 15% 20%

of return

Annual Life Salvage

Project First Cost Benefits (years) Value

A $50,000 $13,500 (^5) $5000
B 50,000 9,000 (^100)
C 50,000 13,250 (^51000)
D 50,000 9,575 (^86000)
Annual Life
Project First Cost Benefit (years)
(^1) $200,000 $50,000 15
(^2) 300,000 70,000 10
(^3) 100,000 40,000 5
(^4) 50,000 12;500 10
(^5) 250,000 75,000 5.
(^6) 150,000 32,000 20
(^7) 400,000 125,000 5