1. TM 661 Chapter 5 Solutions 1
5.4) Consider the net cash flows and salvage values for each of alternatives 1 and 2 having lives 3 and 5 years respectively.
Soln:
Chapter 5 1

2. TM 661 Chapter 5 Solutions 2
5-10) A firm has available 4 proposals A, B, C, D. Proposal is contingent on acceptance of either proposal C or proposal D. In addition, proposal C is contingent on proposal D, while proposal D s contingent on either proposal A or proposal B. The firm has a budget limitation of $500,000. The cash flows are as follows:
Initial Costs
A = 250,000
B = 350,000
C = 50,000
D = 38,000
Soln: Note we did not need to include the entire cash flow since only the initial costs affect the initial budget of $500,000.
Alternative Acceptable Reason
A, B, C, D no exceeds budget
A, B, C no exceeds budget
A, B, D no exceeds budget
A, C, D yes
A, C no C contingent on D
A, B no exceeds budget
A, D yes
B, C, D yes
B, C no C is contingent on D
B, D yes
C, D no D is contingent on A or B
A no A is contingent on C or D
B yes
C no C is contingent on D
D no D is contingent on A or B
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3. TM 661 Chapter 5 Solutions 3
5-23) Two mutually exclusive proposals, each with a life of 5 years, are under consideration. MARR is 12%. Each proposal has the following cash flow profile.
Soln:
a. Net Present Worth A
NPW = -30, ,300 (P/A, 12, 5)
= -30, ,300 (3.6048)
= $ 3,525 B
NPW = -42, ,625 (3.6048)
= $3,511
Choose A
b. Incremental Method
NPW = -12, ,325(3.6048)
= -14
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4. TM 661 Chapter 5 Solutions 3 5-23) (Cont) Soln:
c. Equivalent Annual Worth A
EUAW = -30,000 (A/P, 12, 5) + 9,300
= -30,000 (0.2774) + 9,300
= $ 978 B
EUAW = -42,000 (0.2774) + 12,625
= $ 974
Choose A
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5. TM 661 Chapter 5 Solutions 5
5-36) An aluminum extrusion plant manufactures a particular product at a variable cost of $0.04 per unit, including material costs. The fixed costs associated with manufacturing the product equal $30,000 per year. Determine the break-even value for annual sales if the selling price per unit is a) $0.40, b) $0.30, and c) $0.20.
Soln:
Let S = selling price
Profit = SX - 30, X
= (S - .04)X -30,000
Since profit = 0 at breakeven
X = 30,000 / (S - .04)
a. X = 30,000 / ( )
= 83,333
b. X = 30,000 / ( )
= 115,384
c. X = 30,000 / ( )
= 187,500
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6. TM 661 Chapter 5 Solutions 6
5-37) Owners of a nationwide motel chain are considering locating a new motel in Snyder, Arkansas. The complete cost of building a 150-unit motel is $5 million. The firm estimates that the furnishings will cost $1,875,000 initially and every 5 years thereafter. Annual operating and maintenance cost for the facility is estimated to be $125,000. The average rate for a unit is anticipated to be $55 per day. A 15 year planning horizon is used by the firm in evaluating new ventures of this type. Salvage value is estimated at $1 million. Determine the breakeven if the daily occupancy is estimated to be 10%.
Soln: I set up a spreadsheet showing revenues and costs. Revenues were based on an occupancy rate in cell C3. Net present worth is computed at 10%. I then just altered cell C3 until I got a NPV relatively close to 0. I compute an occupancy rate of 37.5%.
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