Response to the following questions:
1. A state park project has an initial cost of $20,000 and is expected to produce a 10-year series of net benefits of $3,500. The salvage value is $5,000 at the end of the tenth year. If r = 12%, what is the benefits cost ratio?
2. The costs of a given municipal project are $8,000, $12,000, $10,000, $12,000 and $15,000. What is the equivalent average cost (EAC) of this project if r = 12%?
3. A county school district undertakes a project with an initial cost of $19,912 and net benefits of $10,000 at the end of years 1, 2, and 3, with $5,000 realized at the end of year 4. What is the internal rate of return on this project?
4. The city treasurer of Mayberry is trying to make a decision about local garbage disposal and ask for your help. The two alternatives are to continue with the current garbage service contract or to purchase a garbage truck. The duration of the service contract and the life of the garbage truck are both five years. The total benefits to Mayberry are the costs that can be avoided by purchasing the new garbage truck rather than continuing with the service contract.
Purchasing the garbage truck would cost the city $60,000 plus the salary of the driver, which is $35,000 per year. Expected maintenance costs on the truck are $2,000 per year and fuel expenses are expected to be $1000 per year. The scrap value of the truck at the end of five years is estimated to be $12,000. The current garbage collection contract costs $50,000 per year. The treasurer notes that Mayberry city guidelines use a 3% discount rate for project analysis.
The treasurer asks you to calculate three measures - NPV B/C ratio, and IRR - in order to compare the alternatives. After calculating these measures, which alternative would you suggest that the treasurer accept?
benefits over a seven-year period. After seven years the vehicle will have a salvage value of $2000. The discount rate used by the state is 12%. If the state needs 100 cars, which option should it choose?
5. Using the information in the following table, calculate the benefits-costs ratio. Based on this ratio is the project acceptable? The opportunity cost is 8%. What is the ratio if the opportunity cost is assumed to 3%?
|
Year
|
0
|
1
|
2
|
3
|
|
Costs
|
$10000
|
5000
|
|
|
|
Benefits
|
|
4000
|
6000
|
8000
|
6. The city engineer is considering a sewer project with the following cash flows. Should she accept the project if the opportunity cost is 10%?
|
0
|
1
|
2
|
3
|
|
-925
|
+1000
|
+1400
|
-1500
|
|
Initial Investment
|
|
|
Clean-up Costs
|
7. On the basis of the following information, which project is preferable? Assume a 5% opportunity cost and a salvage value of zero.
|
Project Initial Cost
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
1 20,000
|
8,000
|
8,000
|
5,000
|
5,000
|
8,000
|
|
2 30,000
|
12,000
|
12,000
|
8,000
|
8,000
|
7,000
|
8. The city of Springfield will need to replace a water purification machine eight years from today. The machines cost today is $612,250. Economist forecast a compound rate of inflation over the next eight years at 3%. How much money will the city treasurer have to
deposit each year to have the sum necessary to purchase the machine? Assume that r = 8%
9. The initial cost of a nuclear storage facility is $8,934,477. In addition, it will have annual operating costs of $58,000 in perpetuity. What is the present value of these flows at an opportunity cost of 9.6%?
Benefits-Costs Analysis:
1. Tipton County has $10,000 to invest for a period of four years. The county is offered the following investment alternatives. Remember the entire $10,000 must be invested. The county's opportunity cost is 9%. Which alternative should the county approve; if any?
a. Investment A cost $5,000 per unit and last for four years. This investment yields $2,800 every two years.
b. Investment B costs $8000 and produces $2,400 per year for four years.
c. Investment C is in units of $2,500 and yields $1,000 per unit per year for four years.
d. Investment D costs $10,000 and produces $15,000 at the end of year four.
2. A road project has the following benefits and costs. The alternative social rate of return is 11%. Is this a desirable project?
|
Year 0
|
1
|
2
|
3
|
|
Costs $1500
|
|
200
|
|
|
Benefits
|
750
|
750
|
750
|
3. An investment of $100,000 by a city yields a nominal benefit of $250,000 after three years. If the nominal discount rate is 10%, what is the net present value of the investment? Next, suppose the inflation rate is 7% per year, what is the net present value in real terms?
4. The state of Alabama is considering two options for upgrading its fleet of state patrol cars. It can purchase new vehicles at $67,000 each. It has been estimated that each vehicle will produce $15,000 in benefits per year for seven years. After seven years the vehicle will have a salvage value of $10,000. Alternatively, the state can purchase refurnished vehicles for $38,000 each. Each vehicle is estimated to produce $13,000 in.