I
536 RATIONING CAPITAL AMONG COMPETING PROJECTS
after all expenses, for the subsequent 18 years are
as follows:
Annual Rental Income
$1,000,000
1,100,000
1,200,000
1,900,000Probability
0.1
0.3
0.4
0.2The property (building and land) probably can be sold
for $3 million at the end of 20 years.Project Eo'An insurance company is seeking to
borrow money for 90 days at 13 3/4%per annum,
compounded continuously.
Project C: A financier owns a manufacturing
company. The firm desires additional working
capital to allow it to increase its inventories of
raw materials and finished products. An invest-
ment of $2 million will allow the company to
obtain sales that in the past the company had to
forgo. The additional capital will increase com-
pany profits by $500,000 a year. The financier
can recover this additional investment by order-
ing the company to reduce its inventories and to
return the $2 million. For planning purposes, as-
sume the additional investment will be returned
at the end of 10 years.
ProjectD: The owners ofSunrisemagazine are
seeking a loan of $500,000 for 10 years at a 16%
interest rate.
Project E:The Galveston Bank has indicated a
willingness to accept a deposit of any sum of
money over $100,000, for any desired duration,
at a 14.06% interest rate, compounded monthly.
It seems likely that this interest rate will be avail-
able from Galveston, or some other bank, for the
next several years.
Project F:A car rental company is seeking a loan
of $2 million to expand its fleet of automobiles.
The Company offers to repay the loan by paying
$1 million at the end of Year 1 and $1,604,800
at the endof Year2..·If there is $4 million available for investment now
(or $4.5 million if the ProjectAland is sold), which
projects should be selected? What is the MARR in
this situation?
·If there is $9 million available for investment now
(or $9.5 million if the ProjectAland is sold), which
projects should be selected?-- -- ---17-9 The Raleigh Soap Company has been offered a 5-year
contract to manufacture and package a leading brand
of soap for Taker Bros. It is understood that the con-
tract will not be extended past the 5 years because
Taker Bros. plans to build its own plant nearby. The
contract calls for 10,000 metric tons (one metric ton
equals 1000 kg) of soap a year. Raleigh normally pro-
duces 12,000 metric tons of soap a year, so production
for the 5-year period would be increased to 22,000
metric tons. Raleigh must decide what changes, if
any, to make to accommodate this increased produc-
tion. Five projects are under consideration.Project 1: Increase liquid storage capacity.
Raleigh has been forced to buy caustic soda in.
tank truck quantities owing to inadequate stor-
age capacity. If another liquid caustic soda tank
is installed to hold 1000 cubic meters, the caus-
tic soda may be purchased in railroad tank car
quantities at a more favorable price. The result
would be a saving of 0.1 cent per kilogram of
soap. The tank, which would cost $83,400, has
no net salvage value.
Project2: Acquire another sulfonation unit. The
present capacity of the plant is limited by the
sulfonation unit. The additional 12,000 metric
tons of soap cannot be produced without an ad-
ditional sulfon~tion unit. Another unit can be
installed for $320,000.
Project 3: Expand the packaging department.
With the new contract, the packaging department
must either work two 8-hour shifts or have an-
other packaging line installed. If the two-shift
operation is used, a 20% wage premium must be
paid for the second shift. This premium would
amount to $35,000 a year. The second pack-
aging line could be installed for $150,000. It
would have a $42,000 salvage value at the end
of 5 years.
Project 4: Build a new warehouse. The exist-
ing warehouse will be inadequate for the greater
production. It is estimated that 400 square me-
ters of additional warehouse is needed. A new
warehouse can be built on a lot beside the exist-
ing warehouse for $225,000, including-the land.
The annual taxes, insurance, and other owner-
ship costs would be $5000 a year. It is believed
the warehouse could be sold at the end of 5 years
for $200,000.