SOLUTIONS TO CHAPTER 11 PROBLEMS
Capital Planning and Budgeting
11-1. Capital financing is normally performed independently of the capital investment
(allocation) function where engineering economy studies take place. Thus, capital
11–2. Most engineering economy projects are not concerned with capital financing in which various
amounts of borrowed capital and equity capital are obtained. This is because most projects
11-3 (a) Borrowing– money is borrowed by the corporation with a fixed rate of
interest attached to pay for the usage.
11-4. (a) Preliminary Planning and Cost of Capital: A significant amount of planning must
be done to ensure that engineering and other types of projects selected for
implementation support the long term goals of the corporation. Also, the after-tax
weighted average cost of capital must be determined because it is an important
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11–5. More than one MARR may be used by a company when different prospective projects have
11-6. Left to the student to answer.
11-7. Two main purposes of post-mortem reviews:
(a) To provide bases for adjustments and more reliable estimates on future
11-8. Degrees of dependency between two or more projects range over a continuum from
“prerequisite” to “mutually exclusive” as explained in Table 11-2.
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11-9. (a) Keep Old:
Capital recovery = ($6,000-$1,000)(A/P,15%,3) + $1,800(0.15) = $2,110
Oper. Disb. 720
11–10. (a)
t=0.40
Yr. BTCF Depr. Taxable Inc. Income Taxes ATCF
0 (-)$6,000 – (-)+$1,000(1) (+)-$ 400 (-)$5,600
Keep Old 1-3 – 720 –$1,000 – 1,720 + 688 – 32
3 + 1,800 – – 200(2) + 80 + 1,880
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11-11. (a) Purchase:
Cash Inflows = $20,000
CR Cost = ($56,000-$10,000)(A/P,10%,3) + $10,000(0.10) = 19,497
11-12. Based on the use of equity money of the firm.
t=0.40
Buy Yr. BTCF Depre. Taxable Inc. Income Taxes AT CF
0 0 – – – 0
1-20 -$ 100,000 –$100,000 -$200,000 +$ 80,000 –$ 20,000
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11-13.
Yr. BTCF Depre.
Taxable
Income
t = 0.25
Taxes ATCF
Beginning
Lease Of each -$ 35,000 – -$ 35,000 +$ 8,750 -$ 26,250
year
(2) Capital Loss = Book Value – Selling Price
= [$100,000-3($20,000)]-$0 = $40,000
Annual Worths
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11-14. Net annual benefits of new equipment if purchased:
Material savings – Labor Increase – Maintenance = $5,000 – $2,000 – $1,000
a Recovery of previously claimed depreciation taxed at ordinary rate(i.e 50%)
AW(15%) = -$20,000(A/P,15%,5) + $3,000 + $750(A/F,15%,5) = -$2,855
Net Benefits with leasing:
Material Savings – Labor increase = $5,000 – $2,000 = $3,000
Assume annual lease is paid at end of year.
Refundable Deposit = $2,000
Assume refundable deposit acts in manner similar to working capital, i.e. it is
Year BTCF Depre. TI IT(50%) ATCF
0 -$20,000 — — — -$20,000
1 2,000 $4,000 -$2,000 $1,000 3,000
2 2000 4000 2000 1000 3000
3 2000 4000 2000 1000 3000
4 2000 4000 2000 1000 3000
5 2000 4000 2000 1000 3000
5 1500 1500a -750 750
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11-15.
EOY Capital
Investment Annual
Net Cash
Income
PW(10%)
A1 -500000
90000 53014
A A2 -650,000 110,000 25,906
A3 -700,000 115,000 6,629
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11-16.
PWC(15%) = -120,000 + $25,000(P/F,15%,1) + $50,000(P/F,15%,2)
+ 85,000(P/F,15%,3)
= -$4,729
Integer L.P. Setup:
Maximize PW = 4,478XA – 645XB – 4,568XC – 4,729XD
11-17. Maximize PW = 0.12 XA + 2.47XB+ 1.85 XC
Subject to 4 XA + 4.5 XB + XC ≤ 5
X
A + XB ≤ 1
X
C ≤ XA
7,000 XA + 9,000 XB + 3,000XC ≤ 10,000
X
A , XB , XC = 0 or 1
Proposal
MEC A B C D Investment
1 0 0 0 0 0
2 1 0 0 0 $100,000
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Solving yields: XA = 0, XB = 1, XC =0
Objective function = $2.47
11-18 Maximize PW = 4,574 XA + 2,832XB+ 5,577 XC + 4,248 XD
11-19 Recommendations differ for Projects A and C
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SOLUTIONS TO CHAPTER 12 PROBLEMS
Introduction to Risk and Uncertainty
12-1. Left to the student
12-2. Bias in the data and its assessment.
12-3. Generally speaking, none are under the direct control of the analyst.
However, “obtaining more information before the decision is made” is
somewhat under the control of the analyst.
12–4. If a given project is vital for the survival of the company, starting the
analysis immediately after decision point two is warranted (e.g., your
12-5. It might be reasonable to add the step immediately after decision point (1). If, for
example, a given project’s fixed commitments exceed the amount of money that
the company is willing or able to borrow, such a project is clearly not a contender.
12-6. Left to the student
12-7. Descriptive c,f,g,h,I,k,l
Prescriptive a,b,d,e,j
12-8.
Alternative Expected Payoff
Pr (Payoff ≥ 0)
Al -$40(0.1)+ $30(0.7)+ $20(0.2) = $21 0.9
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12-9. __ Alternative _____________ Expected Payoff _____________ Pr (Payoff ≥ 0)
A1 $110(0.4) – $20(0.6) = $32 0.4
12-10. Left to student.
12-11. Left to student.
12–13. (a) First rank the repair costs in increasing order
250 250 250 500 500 500 750 750 750 1000
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12-13. (continued)
(d)
12-14. (a) Y = useful life
6years
6
124(5)4
E(Y) =
++
=
146
12-15. (a)
µ
=($15,000+$9,000)/2=$12,000
−
000,12000,12$
12-16.
Direct Labor
(
X
)
: EX) =[$79.000+4($95,000)+$95,000] / 6 =$92,388
V(X)=[($95,000-$79,000)/6]2= 7,111,111
Direct Material (Y): E(Y) =[$60,000+4($66,000)+$67,000]/6 =$65,187
V
(
Y
)
=[
(
$67,000-$60,000
)
/6]2= 1,361,111
12-17. Left to the student
12-18. Left to the student
147
µ