Ingenieria Economica Solucion Cap 10

Chapter 10

Making Choices: the Method, MARR, and Multiple Attributes

Solutions to Problems

1. The circumstances are when the lives for all alternatives are: (1) finite and equal, or (2) considered infinite. It is also correct when (3) the evaluation will take place over a specified study period.

2. Incremental cash flow analysis is mandatory for the ROR method and B/C method. (It isnoteworthy that if unequal-life cash flows are evaluated by ROR using an AW-based relation that reflects the differences in cash flows between two alternatives, the breakeven i* will be the same as the incremental i*. (See Table 10.2 and Section 10.1 for comments.)

3. Numerically largest means the alternative with the largest PW, AW or FW identifies the selected alternative. For both revenueand service alternatives, the largest number is chosen. For example, $-5000 is selected over $-10,000, and $+100 is selected over $-50.

4. (a) Hand solution: After consulting Table 10.1, choose the AW or PW method at 8% for equal lives of 8 years.

Computer solution: either the PMT function or the PV function can give single-cell solutions for each alternative.


In either case,select the alternative with the numerically largest value of AW or PW.

(b) (1) Hand solution: Find the PW for each cash flow series.

PW8 = -10,000 + 2000(P/F,18%,8) + (6500 – 4000) (P/A,18%,8)
= -10,000 + 2000(0.2660) + 2500(4.0776)
= $726

PW10 = -14,000 + 2500(P/F,18%,8) + (10,000 – 5500) (P/A,18%,8)
= $5014

PW15 = -18,000 +3000(P/F,18%,8) + (14,000 – 7000) (P/A,18%,8)
= $11,341

PW20 = -24,000 + 3500(P/F,18%,8) + (20,500 – 11,000) (P/A,18%,8)
= $15,668

PW25 = -33,000 + 6000(P/F,18%,8) + (26,500 – 16,000) (P/A,18%,8)
= $11,411

Select the 20 cubic meter size.

Computer solution: Use the PV function to find the PW in a separate spreadsheet cell for each alternative.Select the 20 cubic meter alternative.
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(b) (2) Buy another 20 cubic meter truck, not a smaller size, because it is always correct to spend the largest amount that is economically justified.

5. (a) Hand solution: Choose the AW or PW method at 0.5% for equal lives over 60 months.

Computer solution: Either the PMT function or the PV function can give single-cellsolutions for each alternative.

(b) The B/C method was the evaluation method in chapter 9, so rework it using AW.
Hand solution: Find the AW for each cash flow series on a per household per month
basis.


AW1 = 1.25 – 60(A/P,0.5%,60)
= 1.25 – 60(0.01933)
= 1.25 - 1.16
= $0.09

AW2 = 8.00 - 500(A/P,0.5%,60)= 8.00 – 9.67
= $-1.67

Select program 1.


Computer solution: Develop the AW value using the PMT function in a separate cell for each program. Select program 1.
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10.6 Long to infinite life alternatives. Examples are usually public sector projects such as dams, highways, buildings, railroads, etc.


10.7 (a) The expected return is 12 - 8 = 4% peryear.
(b) Retain MARR = 12% and then estimate the project i*. Take the risk-related return
expectation into account before deciding on the project. If 12% < i* < 17%, John must
decide if the risk is worth less than 5% over MARR = 12%.

10.8 (a) Bonds are debt financing
b) Stocks are always equity
c) Equity
d) Equity loans are debt financing, like housemortgage loan

10.9 The project that is rejected, say B, and has the next highest ROR measure, i*B, in effect sets the MARR, because it’s rate of return is a lost opportunity rate of return. Were any second alternative selected, project B would be it and the effective MARR would be i*B.

10.10 Before-tax opportunity cost is the 16.6% forgone rate. Determine the after-tax percentage after the...