Title Engineering Economy Depreciation Interest Present Value United States Dollar Taxes 230.0 KB 37
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Page 36

Problem 8

What is the incremental annual after-tax benefit of replacing the old machine at an interest rate of 15%?

A. \$6,648
B. \$7,069
C. \$421
D. \$960

Part III: Problem Solving

Problem 1

A proposed project which requires an investment of \$10,000 (now) is expected to generate a series of five payments

in constant dollars. It begins with \$6,000 at the end of first year but increasing at the rate of 5% per year thereafter.

Assume that the average inflation rate is 4% and the market interest rate is 11% during this inflationary period. What

is the equivalent present worth of this investment?

Problem 2

Minolta Machine Shop purchased a computer-controlled vertical drill press for \$100,000. The drill press is classified

as a 7-year MACRS property. Minolta is planning to use the press for 5 years. Then Minolta will sell the press at the

end of service life at \$20,000. There is a working capital recovery of \$22,000 at the end of 5 years and no further

working capital is required in the future. The net annual revenues are estimated to be \$110,000. If the estimated net

cash flow at the end of year 5 is \$72,000, what are the estimated operating and maintenance expenses in year 5.

Minolta's income tax rate is 34%.

Problem 3

Harry Wilson, a mechanical engineer at Lehigh Manufacturing, has found that the anticipated profitability of a

newly developed motion detector for its popular home security device product line can be estimated as follows:

NPW = 40.28V(2X - 11) - 77,860

where V is the number of units produced and sold, and X is the sales price per unit. Harry also found that V

parameter value could occur anywhere over the range of 1000 to 6000 units and the X parameter value anywhere

between \$20 to \$40 per unit.

Suppose both V and X are statistically independent uniform random variables with the following means and

variances:

E[V]

Var[V]

E[X]

Var[X]

=

=

=

=

3500

2,083,333

30

33

What is the mean and variance of the NPW?

If V and X are mutually independent discrete random variables with the following probabilities:

V X
Event

1000

3000

6000

Probability

.30

.40

.30

Event

20

30

40

Probability

.30

.50

.20

What is the probability that the NPW would exceed \$7,000,000?