Engineering Economic Analysis

Project 5: Lease a warehouse. An alternative

to building an adqitional warehouse would be

to lease warehouse space. A suitable warehouse

one mile away could be leased for $15,000 per

year. The $15,000 includes taxes, insurance, and

so forth. The annual cost of moving materials to

this more remote warehouse would be $34,000

a year.

The contract offered by Taker Bros. is a favor-

able one, which Raleigh Soap plans to accept. Raleigh

management has set a 15% before-tax minimum at-

tractive rate of return as the criterion for any of the

projects. Which projects should be undertaken?

Ten capital spending proposals have been made to the

budget committee as the members prepare the annual

budget for their firm. Each independent project has a

5-: .life and no salvage value.

(a) sed on a MARR of 14%, which projects should
be approved?
(b) Rankorder all the projectsin orderof desirability.
(c)If only $85,000 is available, which projects
should be approved?

Problems 537

17-11 Mike Moore's microbrewery is considering produc-

tion of a new ale called Mike's Honey Harvest Brew.

To produce this new offering he is considering two

independent projects. Each of these projects has two

mutually exclusive alternatives and each alternative

has a useful life of 10 years and no salvage value.

Mike's MARR is 8%. Information regarding the

projects and alternatives are given in the following

table:

Project! Alternative

Annual

Cost Benefit

Project 1. Purchase new

fermenting tanks

Alt.A:5000-gallon tank

Alt.B:15,000-gallon tank

Project 2. Purchase bottle filler

and capper

Alt.A:2500-bottle/hour

machine

Alt.B:5000-bottle/hour

machine

$ 5000

10,000

$1192

1992

15,000^3337

25,000^4425

Use incremental rate of return analysis to complete

the following worksheet.

Use this information to determine:

(a)Which projects should be funded if only $15,000

is available. ~ ...~ ~

(b)The cutoff rate of return if only $15,000 is

available.

(c) Which projects should be funded if $25,000 is

available.

--

Uniform

Initial Annual Computed

Cost Benefit Rate of

Project (thousands) (thousands) Return

A $10 $2.98 15%

B 15 5.58 25

C 5 1.53 16

D 20 5.55 12

E 15 4.37 14

F 30 9.81 19

G 25 7.81^17

H^10 3.49^22

I 5 1.67 20

J 10 3.20 18

Annual

Proj./Alt. Cost,P Benefit,A AlP, i,10 IRR

lA $ 5,000 $1192 0.2385 20%

IB-IA 5,000^800 0.1601

2A 15,000.^3337

2B-2A 10,000