Engineering Economic Analysis

266 INCREMENTAL ANALYSIS

8-11 Consider three mutually exclusive alternatives:

Year

o

1

2

3

4

Do Nothing

o

o

o

o

o

BuyX

-$100.0

+31.5

+31.5

+31.5

+31.5

BuyY

-$50.0

+16.5

+16.5

+16.5

+16.5

Which alternative should be selected:

(a)If the minimum attractive rate of return equals

6%?

(b) If MARR=9%?

(c) If MARR=10%?

(d) IfMARR =14%?

(Answers: (a)X;(b) Y; (c) Y; (d)Do nothing)

8-12 Consider the three alternatives:

8-13

Which alternative should be selected:

(a) IfMARR =6%?

(b)IfMARR =8%?

(c) If MARR=1O%?

A firm is considering two alternatives:

Initial cost

Uniform annual benefits.

Salvage value at end of useful life

Useful life, in years

A

$10,700

2,100

o

8

B

$5500

1800

o

4

8-14

At the end of 4 years, anotherBmay be purchased

with the same cost, benefits, and so forth. If the

MARR is 10%, which alternative should be selected?

Consider the following alternatives:

Initial cost

Uniform annual benefits

A

$300

41

C

$200

35

B

$600

98

Each alternative has a lO-year useful life and no

salvage value. If the MARR is 8%, which alternative

should be selected?

8-15 Given the following:

Year

o

1

X

-$10

+15

Y

-$20

+28

Over what range of values ofMARR isYthe preferred

alternative?

8-16 Consider four mutually exclusive alternatives:

The analysis period is 8 years. At the end of 2, 4, and

6 years, Alt. Awill have an identical replacement.

AlternativeBwill have a single identical replacement

at the end of 4 years. Over what range of values of

MARR is Alt.Bthe preferred alternative?

8-17 Consider the three alternatives:

8-18

Each alternative has a lO-year useful life and lio

salvage value. Based on a MARR of 15%, which

alternative should be selected? Where appropriate,

use an external interest rate of 10% to transform a

cash flow to one sign change before proceeding with

rate of return analysis.

A new 1O,000~square-meter warehouse next door to

the Tyre Corporation is for sale for $450,000. The

terms offered are $100,000 down with the balance

being paid in 60 equal monthly payments based on

15% interest. It is estimated that the warehouse would

have a resale value of $600,000 at the end of 5 years.

Tyre has the needed cash available and could buy

the warehouse but does not need all the warehouse

space at this time. The Johnson Company has offered

to lease half the new warehouse for $2500 a month.

Tyre presently rents and utilizes 7000 square me-

ters of warehouse space for $2700 a month. It has the

option of reducing the rented space to 2000 square

-- - --

Year A B Do Nothing

(^0) -$100 -$150 0
(^1) +30 +43 0
(^2) +30 +43 0
(^3) +30 +43 0
4 +30 +43 0
(^5) +30 +43 0
A B C 'D
Initial cost $770.00 $1406.30 $2563.30 0
Uniform annual 420.00 420.00 420.00 0
benefit
Useful life,^2480
in years
Computed rate 6.0% 7.5% 6.4% 0
of return
A B C
Initial cost $1500 $1000 $2035
Annual benefitin each 250 250 650
of first 5 years
Annual benefit in each (^450250145)
of subsequent5 years