Exam 6: Comparison and Selection Among Alternatives

A major bakery- cafe chain is evaluating whether they should consolidate its two offices into one location when the two leases expire. In addition, the company also needs to decide if they want to purchase or lease the new location. The estimated costs for these three alternatives are as follows: Alternative Continue Leasing Separate Offices Lease Combined Office Purchase Combined Office Initial costs - - \ 270,000 Annual lease \ 53,550 \ 63,000 - Annual maintenance costs - - \ 6000 Lease period 4 12 - Market value at the end of year 12 - - \ 216,000 Which alternative should be selected based on the annual worth method? Use a MARR of 11% and a study period of 12 year(s).

Two delivery methods have been proposed for a standard delivery method for new bridge constructions in Oregon to overcome traditional design- bid- build models that do not adequately account for site conditions and constructability, and often lead to additional expenses. One alternative must be selected to represent the delivery method specified in the RFP. Based on data from recent bridge construction projects of comparable size, we can estimate the savings from reduced redesign costs, risk management costs, and overhead costs during the life of the construction contract over the traditional delivery model. The estimated costs of a 18- month contract are the following: Alternative Construction manager /General\nobreakspacecontractor Design- Build Preconstruction and design costs \ 80,000 \ 90,000 Monthly savings \ 4000 \ 6500 Project life, months 18 18 Which alternative should be selected based on the present worth method? Use a MARR of 4%, compounded monthly. Assume other benefits and costs are negligible.

A manufacturing company is deciding between three maintenance plans for a new waste management system. Plan A needs a single prepayment of $59,000 at the beginning of the year and the contract needs to be renewed every 3 years. Plan B is a two- year contract and requires a payment of $19,470 at the end of year 1 and another payment of $20,060 at the end of year 2. Plan C provides a three- year services with two payments of $29,500 made at the end of years 1 and 3. Which maintenance plan should be selected based on the present worth method? Assume the company uses a MARR of 11% and a study period of 6 years.

A manufacturing firm is considering two models of lathes. Model A will have an initial cost of $29,000, an operating cost of $2750, and a salvage value of $6500 after 6 years. Model B will have an initial cost of $36,500, an operating cost of $2200, and a $7750 resale value after 12 years. At an interest rate of 10% per year, which model should the consulting firm buy?

VB Flantronics Inc. is a company that designs, makes, and sells computer and home entertainment sound systems, along with a line of headphones and microphones for personal digital media. The company is trying to decide whether it should purchase or lease a building for its manufacturing and research- and- development operation in China. If the building is leased, a payment will have to be made at the beginning of each year. The estimated costs are the following: Alternative Purchase Lease Initial Cost \ 320,000 - Lease - \ 40,000 Annual Operating Costs \ 8500 \ 7000 Salvage Value \ 80,000 - Life, years 7 1 Which alternative should be recommended based on the present worth method? Use a MARR of 9%.

Two structural designs for a large public monument in Indonesia are under evaluation. Use the repeatability assumption and the CW method to determine which design should be selected if the service period of the monument is indefinite and the interest rate is 2% per year. Alternative A B Initial costs \ 310,000 \ 325,000 Annual maintenance costs \ 23,000 \ 24,500 Usual life, years 8 11

A textile company is considering opening a production and shipping facility in Dallas to keep up with demand for its pillows. The 105,000- square- foot facility, if purchased, will require an initial investment of $255,000 and an annual operating cost of $68,500. It will have a $80,000 salvage value after 8 years. Alternatively, the facility can be leased with annual rent of $51,000 in year 1 and increasing by $1000 per year. If the company's minimum attractive rate of return is 6% per year, compounded quarterly, should the facility be purchased or leased?

The Pentagon is deciding between two models of light- duty support vehicles proposed by two high- technology defense contractors. The costs associated with each model are shown below. Which model should be selected if the MARR is 16% per year based on the future worth method? Alternative Initial R\&D costs \ 481,000 \ 496,000 Non- recurring \ 47,000 \ 72,000 investment costs (Years 1,3, and 5) Recurring costs \ 15,000 in year 4, \ 16,500 in year 4, increasing by \ 500 until increasing by \ 400 until year 10 year 10 Annual maintenance costs \ 3000 \ 5000 Disposal costs \ 3000 \ 3500 Life, years 14 14

Two flash vaporizer machines are considered for the upgrade of biodiesel production. An engineer is asked to perform analyses to select the best machine. He prepares the following information for the evaluation. Machine X has a useful life of 8 years and machine Y has a useful life of 11 years. Compute the market value of Machine Y at the end of year 8 and determine which machine should be selected based on annual worth method using an interest rate of 13% per year and a study period of 8 years. Machine x Y First costs \ 29,000 \ 32,000 Net annual revenue \ 10,500 \ 12,000 Market value at the end of the \ 6900 \ 6000 useful life Life, years 8 11

A slip sheet manufacturer is considering two machines. An engineer is asked to perform analyses to select the best machine. She prepares the following information for the evaluation. All machines have a useful life of 5 years. If the company's MARR is 4% per year, which machine should be selected. Machine X Y First costs \ 52,000 \ 37,000 Annual expenses \ 5750 \ 8050 Annual revenue \ 15,250 \ 15,750 Salvage value \ 23,400 \ 5550 IRR (\%) 9.10 5.62

A manufacturer of automated optical inspection (AOI) devices is deciding on a project to increase the productivity of the manufacturing processes. The estimated costs for the two feasible alternatives being compared are shown below. Use the ERR method to determine which alternative should be selected if the analysis period is 8 years and the reinvestment rate equals the company's MARR of 4% per year. Alternative Initial costs \ 30,000 \ 45,000 Net annual cash flow \ 4,500 \ 7,000 Life, years 8 8

Compare the alternatives shown below on the basis of their future worth, using an interest rate of 18% per year. Which alternative should be selected? ernative tial costs \ 238,000 \ 213,000 \ 293,000 nual revenues \ 69,000 in year 1, increasing by \ 190 each year \ 114,000 \ 69,000 in years 1 to 5, \ 69,570 in years 6 to 16 nual expenses \ 20,000 \ 20,000 vage value \ 6000 \ 25,000 \ 6000 e, years 16 \ 9000 16

A thermoplastic film manufacturer is trying to decide between four types of thermoforming molding processes to be added to its molding operation. The estimated costs and revenue are shown below. Compare them on the basis of rate of return and determine which process should be selected if the company's MARR is 6% per year. rrnative Vacuum forming Pressure forming Drape forming Free blowing ial costs \ 31,000 \ 51,000 \ 43,000 \ 45,000 rual expenses \ 3300 \ 3000 \ 3200 \ 3800 iual revenue \ 7300 \ 11,000 \ 9700 \ 10,800 age value \ 3100 \ 5100 \ 4300 \ 4500 years 8 8 8 8 (\%) 2.66 6.87 6.03 6.68 rrnative Vacuum forming Pressure forming Drape forming Free blowing ial costs \ 31,000 \ 51,000 \ 43,000 \ 45,000 rual expenses \ 3300 \ 3000 \ 3200 \ 3800 iual revenue \ 7300 \ 11,000 \ 9700 \ 10,800 age value \ 3100 \ 5100 \ 4300 \ 4500 years 8 8 8 8 (\%) 2.66 6.87 6.03 6.68 rrnative Vacuum forming Pressure forming Drape forming Free blowing ial costs \ 31,000 \ 51,000 \ 43,000 \ 45,000 rual expenses \ 3300 \ 3000 \ 3200 \ 3800 iual revenue \ 7300 \ 11,000 \ 9700 \ 10,800 age value \ 3100 \ 5100 \ 4300 \ 4500 years 8 8 8 8 (\%) 2.66 6.87 6.03 6.68

Two grandparents are considering purchasing a baby bond for their first grandson. They are deciding between two bonds with the same face value of $42,000. Both bonds are offered at the same price of $37,000. Bond A has interest of 2.5% per year, payable quarterly, and matures in 6 years. Bond B, issued 2 years ago, has interest of 2.75% per year, payable semiannually, and a 8- years maturity date. If the current market rate is 3% per year, compounded quarterly, which bond should be purchased?

A large textile company is trying to decide among three alternatives of sludge dewatering processes. The costs associated with these alternatives are shown below. Alternative Y will need an upgrade of $9700 at the end of year 2. At the end of year 2, alternative Z would be replaced with another alternative Z having the same installed and operating costs. If the MARR is 14% per year, which alternative should be chosen? Alternative X Y Z Installed costs \ 68,500 \ 48,500 \ 33,500 Annual operating costs \ 6000 \ 4000 \ 5000 Overhaul cost in year 2 - \ 9700 - Salvage value \ 33,250 \ 28,250 \ 15,750 Useful life, years 8 4 2

You are deciding between three types of water heaters. The associated costs are shown below. At the end of year 5, the electricity and oil water heaters need to be replaced with the same model at the purchased prices. Which alternative should be selected on the basis of their future worth at an interest rate of 12% per year? e ernative Electricity Gas Oil ce of water ter \ 32,000 \ 27,000 \ 29,000 2.0 0.57 0.75 l cost \ 0.075/ \ 0.000009/ \ 0.000009/ nual intenance ts \ 1000 \ 200 \ 500 e, years 5 10 5 ernative Electricity Gas Oil ce of water ter \ 32,000 \ 27,000 \ 29,000 2.0 0.57 0.75 l cost \ 0.075/ \ 0.000009/ \ 0.000009/ nual intenance ts \ 1000 \ 200 \ 500 e, years 5 10 5 Hint: The estimated annual cost of operation for gas and oil heaters equals 365 x 41045/EF x Fuel Cost per Btu and the estimated annual cost of operation for electric water heaters equals 365 x 12.03/EF x Electricity Cost per kWh.

A manufacturer of Neighborhood Electric Vehicles (NEVs) plans to upgrade its parts inventory tracking system. Two alternatives are under consideration. The estimated costs of each alternative are provided below. At the end of 9 years, alternative E will need to be upgraded with additional costs of $19,300 over the initial cost of the system. The upgrade will reduce the annual maintenance costs by $2000 over the next 9 years. Which alternative should be selected on the basis of their future worth at an interest rate of 17% per year and a study period of 18 years? Assume negligible salvage value. Alternative E F First costs \ 386,000 \ 401,000 Annual maintenance costs \ 60,000 \ 58,500 Life, years 9 18

An insulated shipping container supplier is considering expanding its product line. Three materials with different insulation properties are under consideration. The following information is prepared for the economic evaluation of the best material. If the company's MARR is 4% per year and the study period is 5 years, use an AW- based incremental rate of return equation to determine which alternative is preferred. Assume the salvage value is negligible. Material Q R S First costs \ 46,000 \ 58,000 \ 61,000 Net annual revenue \ 10,000 in year 1, increasing by \ 100 per year thereafter \ 11,900, increasing by \ 450 per year thereafter \ 13,450 IRR (\%) 5.93 5.15 5.14 Incremental IRR (\%) Q - R 2.50\% - S 2.79\% 5.09\% -

In response to the new federal regulation to provide the public with safe and wholesome seafood, an Alaska seafood processor is considering two new sanitation control systems to help monitor its seafood processing operations. System X has a useful life of 20 years and requires an installed cost of $33,000 and annual maintenance cost of $7000. Some of the equipment can be sold at $2200 at the end its useful life. System Y has a useful life of 10 years. The system will cost $16,500 to install and will involve an annual maintenance fee of $8500. At the end of year 10, system Y can be upgraded for $23,100 to have the same capability and will last another 10 years. However, the upgraded system will require an annual maintenance fee of $8700. The salvage value for the system Y is negligible. Which system should be selected based on the present worth method? Assume the company uses a MARR of 5% per year.

Cassandra sets up a savings plan for her retirement. She plans to make a quarterly payment of $3250 into a savings account that earns 11% per year, compounded quarterly. After 3 years, she will have an option to continue making $3250 quarterly payments or to switch to an annual savings plan that earns higher interest of 11.25% per year and requires annual payments of $13,000. If she plans to retire 13 years from now, which option will offer more money in the savings plan at that time?