Chapter NO 01 :Foundations of Engineering Economy

Example 1.6

Part (a)

P 5000
n 5
i 5%

A $1,154.87

Part(b)
P 5000
i 7%
n 3

F ($6,125.22)

Example 1.7

Year Cash flow

0 5000
1 1000
2 1000
3 1000
4 1000
5 1000
6 0
i 6%
F ($14,067.91)

Example 1.9
A 1000000
n 4
i 12%

F= ($4,779,328.00)

Example 1.10
YEAR Cash Flow
0 0
1 2000
2 2000
3 2000
4 2000
5 2000
6 3000
7 3000
8 3000

i 8.50%

P= 73179.15194621

Example 1.11
Year Cash Flow
0 2500
1 650
2 625
3 600
4 575
5 550
6 525
7 500
8 625

i 10%

P@7 $2,708.63

Example 1.14
P 100000
N 3
i 10%

F ($133,100.00)

Example 1.15
i 10%
P 100000
n 1
n 2
n 3

F@1 ($110,000.00)
F@2 ($121,000.00)
F@3 ($133,100.00)

Example 1.17

i 8%
Part (a)
End of year Revenue interest earned
0 0
1 200000 0
2 200000 16000
3 300000 33280
4 300000 59942
109222

Part(b)

End of year Revenue interest earned

0 0
1 200000 0
2 200000 16000
3 600000 33280
4 600000 83942
133222

Part(b)
i 3.85%

End of year Revenue interest earned

0 0
1 200000 0
2 200000 7700
3 300000 15696
4 300000 27851
51247
eering Economy

(a) Find Annual series

(b) Find Futyre Worth

Find Future Worth

Find Future Worth

Find Present Worth

Find the worth @ 7year

Find F @3

Find the F @1 ,2,3

(a) Determine the total interest and total revenue after 4 years
(b) if estimated revenue increases from $300,000 to $600,000 in years 3 and 4.
(c) if inflation is estimated to be 4% per year.

Cumulative interest revenue with interest

0 200000
16000 216000
49280 333280
109222 359942
1109222

Cumulative interest revenue with interest

0 200000
16000 216000
49280 633280
133222 683942
1733222

Cumulative interest revenue with interest

 0 200000
7700 207700
23396 315696
51247 327851
1051247
Cumulative revenue with interest

200000
416000
749280
1109222

Cumulative revenue with interest

200000
416000
749280
1109222

Cumulative revenue with interest

 200000
407700
723396
1051247
Chapter No 2: How Time and interest Effect Money
Example 2.1
P= 10000
n= 20 year
i= 8%
F= ($46,609.57) Ans

Example 2.2 (a)

(b)

For (a) Part

P= 200
i= 10%
n 3
F_3 ($266.20) Ans

For part b
F 200
i 10%
n 4
P ($136.60)

Example 2.3

A 6000
i 16%
n 9
P ($27,639.26)

Example 2.4
Part (a)
A 50
i 10%
n 5
p $189.54

Part (b)
P 200
i 10%
n 5
A $52.76

Example 2.5

A 1000000
i 14%
n 8 year
F ($13,232,760.16) Ans

Example 2.6

For (a) Part

A 50
i 10%
n 5 year
F ($305.26)

part (b)
F 305.26
i 4.50%
n 5 year
A ($55.80)

Example 2.7

i 7.70%
n 10 year
P/A ($6.80)

Example 2.9
G= 100
Year investment
0
1 500
2 600
3 700
4 800
5 900
 6 1000
7 1100
8 1200
9 1300
10 1400

i 5%
part (a)

P=NPV $7,026.07

Part (b)

A=PMT ($909.91)

Example 2.10

G= -25
Year Investment TIME
2012 0
2013 100 1
2014 75 2
2015 50 3
2016 25 4
i 10%
Part (a)
P @ 10 $207.53

Part(b)
A @ 10 ($65.47)

Example 2.11

i= 8%
F. COST -8000
n 6
Salvage=S 200
Cost in 1 year -1700
gradient =g 11%

Part(a)
P with S $126.03

Part (b)

P with g -10125.11162561
Equivalent P
Total value P= ($17,999.08) Ans

Example 2.12

i 10%
g 12%
A 50
n 5

P= 152.8

F= ($246.09)

Example 2.13

P ($30,000)
F $50,000
n 5 Year

ROR 11%

Example 2.14

Year Cash Flow

0 0
1 -5000
2 -5000
3 -5000
4 -5000
5 -5000
6 -5000
7 -5000
 8 -5000
9 -5000
10 -5000
11 -5000
12 -5000
13 -5000
14 -5000
15 95000

ROR 4%

IRR 4%

Example 2.15

P ($200)
A $50

Value of i No of years

10% 5.3596124235075
15% 6.5560818367463
20% 8.8274691195894
interest Effect Money
Find Future amount in year 20

The equivalent investment needed if the plant is built in 2015 (Future)

The equivalent investment needed had the plant been constructed in the year 2008.
Actual Investment Done in 2012 Which is present At t = 0

How much money should you be willing to pay now for

First find present value than in part b convert all to Annual value
Find Future Value of 1Million per year for 8 year starting next year

( a ) What is the equivalent future worth of the estimated revenues after 5 years at 10% per year?
(b) Convert F into annual series with interest of 4.5%

Determine the PA factor value for i 7.75% and n 10 years

(a) present worth and (b) annual series amounts, if public funds earn at a rate of 5% per year
(a) In equivalent present worth values,
(b) Given the planned investment series, what is the equivalent annual amount

Determine the equivalent present worth of (a) modification (b) maintainance cost at 8% per year,with geomatric gradient of 1
Determine Present and Future worth at 10% interest with geomatric gradient of 12%

If Laurel made a $30,000 investment in a friend’s business and received $50,000 5 years later, determine the rate of return.

Find the ROR and IRR

Determine the number of years required to generate 10%, 15%, and 20% per year
Chapter No 3: Combining Factors and Spreadsheet Functions

Example 3.1
YEAR Cash Flow
0 5000
1 0
2 0
3 500
4 500
5 500
6 500
7 500
8 500
i 8%
P@2 $2,311.44

P@0 $1,981.69

Total P = $7,311.44

Example 3.2

Year Cash Flow

0 $0
1 $0
2 $0
3 ($8,000)
4 ($8,000)
5 ($8,000)
6 ($8,000)
7 ($8,000)
8 ($8,000)
i 16%
P value -2190687.2225497300%

A ($5,043.49)

Example 3.3

Year Cash Flow

0 $20,000
1 $20,000
2 $20,000
3 $20,000
 4 $20,000
5 $20,000
6 $20,000
7 $20,000
8 $20,000
9 $20,000
10 $20,000
11 $20,000
12 $20,000
13 $20,000
14 $20,000
15 $20,000
16 $20,000
17 $20,000
18 $20,000
19 $20,000
20 $20,000
i 16%
F @ 6 $10,000
F @ 16 $15,000

P from A ($118,576.82)
P from F @ 6 ($4,104.42)
P from F @ 16 ($1,395.61)

Total P ($124,076.85) Ans

Example 3.4

i= 16%

year series single

0 $0 $0
1 $0 $0
2 $0 $0
3 $20,000 $0
4 $20,000 $0
5 $20,000 $0
6 $20,000 $10,000
7 $20,000 $0
8 $20,000 $0
 9 $20,000 $0
10 $20,000 $0
11 $20,000 $0
12 $20,000 $0
13 $20,000 $0
14 $20,000 $0
15 $20,000 $0
16 $20,000 $15,000
17 $20,000 $0
18 $20,000 $0
19 $20,000 $0
20 $20,000 $0
21 $20,000 $0
22 $20,000 $0

Example 3.5
year Annual series Gradient
0 0 0
1 100 0
2 100 0
3 100 0
4 100 0
5 100 50
6 100 100
7 100 150
8 100 200
i= 15%
P@A ($448.73)
P@G $165.10
Total P= ($283.63)
A= $63.21

Example 3.6
i 15%
Year Annual Gradient
0 0 0
1 50 0
2 50 0
3 50 0
4 50 20
5 50 40
6 50 60
7 50 80
A $68.25

Example 3.8
Year Cash Flow
0 0
1 -7000
2 -6000
3 -5000
4 -4000
5 -3000
6 0
7 0
8 0
9 0
10 0
11 20000
12 16000
13 12800
14 10240
15 8192

i 8%

P= ($5,130.25)
readsheet Functions

Find the Present value

First find Present Worth and transfer to Annual series

Calculate the present value?

Total present worth P T in year 0
Future worth F in year 22
Annual series over all 22 years
Annual series over the fi rst 10 years
Annual series over the last 12 years

value calculated Result

Present worth of series 0.0000000000%

Present worth of singles $5,500.03

1. Present worth total 550003.0486096770%

2. Future worth total ($144,025.99)

3. Annual series over 22 years $914.94

4. Annual series for final 10 year $1,137.96

5. Annual series for last 12 year ($4,668.56)

Find Present value and then convert to annual series

Find the equivalent Annual series

Find the present woth
 Chapter No 5: Present worth
Example 5.1 Calculation of Present Worth NCF
First cost, $ $-4500 -4500 3500 -6000
Annual operating cost (AOC), $/year $-900 -900 -700 -50
Salvage value S, $ $200 -900 -700 -50
Life, years 8 -900 -700 -50
MARR 10% -900 -700 -50
-900 -700 -50
-900 -700 -50
-900 -700 -50
-900 -700 -50
200 350 100
NPV -Rs8,378.74 -Rs78.19 -Rs5,658.49

Example 5.3 MARR 15% Calculating Present Worth at year 6 and 8

-1500 -1800
-3500 -3100
-3500 -3100
-3500 -3100
-3500 -3100
-3500 -3100
-3500 -3100
1000 -3100
NPV -Rs12,495.44 -3100
-3100
2000
NPV -Rs13,997.86

Example 5.4 MARR 12% Present Worth Analysis

-20 -22
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-1.94 -2.1
-0.94 0.1
NPV -Rs27.36 -Rs29.60

Example 5.5 MARR 25% Find Futue worth at year 3

-75000000 years 3
 1000000 NPV 56800000
5000000
NPV -Rs56,800,000.00
FV -Rs110,937,500.00

Example 5.6 Initial cost M&O cost NCF MARR 5% Find Present,Future , Ann
-150000 -150000 years 10
-50000 -5000 -45000
-50000 -5000 -45000
-50000 -5000 -45000
-50000 -5000 -45000
-50000 -8000 -42000
-50000 -8000 -42000
-50000 -8000 -42000
-50000 -8000 -42000
-50000 -8000 -42000
-50000 -8000 -42000
NPV -Rs461,857.83
FV Rs5,809,198.12
AW -Rs402,045.13
CC AW/MARR
CC -Rs8,040,902.51

Example 5.7 Find CC?

Initial -8000
Annual -25
MARR 5%
CC -500
worth at year 3
nd Present,Future , Annual Worth and CC
Chapter No 6: Annual Worth Analysis

Example 6.1 Find Annual Worth at year 6

Initial
-15000
-3500
-3500
-3500
-3500
-3500
-3500
Salvage 1000
PV -45036
MARR 15%
Life 6
AW Rs11,900.17

Example 6.2
NCF MARR 12% Find Annual Worth and Capital Recovery at year 8
8000000
5000000
900
900
900
900
900
900
900
Salvage 500
Life 8
PW Rs11,132,261.90
AW -Rs2,240,955.95
CR AW-A
CR -Rs2,241,855.95

Example 6.3
MARR 10% Find Annual Worth at year 5
4600
1000
1100
1200
1300
 1400
Salvage 300
Life 5
PW Rs8,405.74
AW -Rs2,217.41

Example 6.4 MARR 8% Find Annual Worth of the given Cash flow
Initial Extra cost NCF
-20000 -20000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
-9000 -2000 -7000
40 40
Life 12
PW -Rs67,349.85
AW Rs8,936.99

Example 6.6 MARR 7% Finding the Annual Worth at year 15

Initial 8530
3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
Life 15
PW Rs33,508.17
AW -Rs3,679.02

Example 6.7 MARR 8% Find Annual Worth at year 5

-15000
-6000
-6000
-6000
-6000
20
Life 4
PW -Rs38,976.00
AW Rs9,744.00
 Chapter No 7: Rate of Return Analysis

Example 7.1 Finding the ROR for 4 years

Loan -1000
315.47
315.47
315.47
315.47
Life 4
ROR 10%

Example 7.2 Finding the ROR for 10 years

initial -200000
15000
15000
15000
15000
15000
15000
15000
15000
15000
15000
Salvage 300000
Life 10
ROR 10%

Example 7.3 Finding the ROR for 10 years

Initial NCF
-400000 -400000
-300000 75000
-300000 75000
-300000 75000
-300000 75000
-300000 75000
-300000 75000
-300000 75000
-300000 75000
-300000 75000
-300000 -225000
Life 10
ROR 5%
 Example 7.4 Finding the ROR for 3 years
NCF
2000
-500
-8100
6800
Life 3
ROR 7%

Example 7.5 Finding the ROR for 3 years

Investment Rate 12%
2000 Borrowing Rate 8.50%
-500
-8100
6800
Life 3
EROR value 9%

Example 7.6 Finding the ROIC for 3 years

2000
-500
-8100
6800
Life 3
ROIC 7%

Example 7.7 Finding the ROR for 10 years

-3000000
1000
1000
1000
1000
1000
1000
1000
1000
1000
4000000
Life 10
Interest Rate 3%
 Chapter No 8: Rate of Return Multiple Alternatives

Example 8.1

Cash Flow Incremental

Solution: Years Used Press New Press Cash Flow
0 -15000 -21000 -6000
1--25 -8200 -7000 1200
25 750 1050 300

Example 8.2

Solution Incremental
Net Cash Flows Cash flow
Year Type A Type B B-A
0 -70000 -95000 -25000
1 -9000 -7000 2000
2 -9000 -7000 2000
3 -9000 -7000 2000
4 -9000 -7000 2000
5 -9000 -7000 2000
6 -9000 -7000 2000
7 -9000 -7000 2000
8 -74000 -7000 67000
9 -9000 -7000 2000
10 -9000 -7000 2000
11 -9000 -7000 2000
12 -9000 -92000 -83000
13 -9000 -7000 2000
14 -9000 -7000 2000
15 -9000 -7000 2000
16 -74000 -7000 67000
17 -9000 -7000 2000
18 -9000 -7000 2000
19 -9000 -7000 2000
 20 -9000 -7000 2000
21 -9000 -7000 2000
22 -9000 -7000 2000
23 -9000 -7000 2000
24 -4000 3000 7000
Totals -411000 -338000 73000

Example 8.3

A B
Initial cost -8000 -13000
Annual cos -3500 -1600
Salvage 0 2000
Life 10 5

MARR 12%

Solution
Vendor A Vendor B
Year Cash Flow Cash Flow
0 -8000 -13000
1 -3500 -1600
2 -3500 -1600
3 -3500 -1600
4 -3500 -1600
5 -3500 -12600
6 -3500 -1600
7 -3500 -1600
8 -3500 -1600
9 -3500 -1600
10 -3500 400

incremental i*

Check: PW @12%
 Example 8.4

Air Cleanser Pure Heaven

Filter 1 Filter 2

Initial cost
per -1000 -1500
aircraft
Savings 375
per year 700 for year 1, decreasing 100 per year
Life 5 5

Solution

Filter 1 Filter 1 Filter 2

Cash Flow Incremen Incremen
$100 tal Cash tal PW
Cash flow
Year 100$ Rate, I % PW, $100 PW, $100 Flow $100
0 -1000 0% 875 -1500 1000 -500 125
1 375 10% 422.00 700 467.00 325 45
2 375 20% 121.00 600 103.00 225 -18
3 375 30% -87.00 500 -158 125 -71
4 375 40% -237.00 400 -352 25 -115
5 375 50% -349.00 300 -500 -75 -151
60% -435.00 -616 -181

i* values 25.41% 23.57% 16.89%

 Example 8.7

Machine 1 Machine 2 Machine 3 Machine 4

First Cost -5000 -6500 -10000 -15000
AOC -3500 -3200 -3000 -1400
Salvage 500 900 700 1000
Life 8 8 8 8

Solution
Year Machine 1 Machine 2 Machine 3 Machine 4
First Cost -5000 -6500 -10000 -15000
AOC -3500 -3200 -3000 -1400
Salvage 500 900 700 1000

Incremen
tal
Comparis
on 2 to 1 3 to 2 4 to 2

Incremen
tal 0
Investme
nt -1500 -3500 -8500

Incremen
tal Cash 1
Flow 300 200 1800
2 300 200 1800
3 300 200 1800
4 300 200 1800
5 300 200 1800
6 300 200 1800
7 300 200 1800
8 700 0 1900

Incremen
tal i* 14.57% -18.77% 13.60%

Incremen
tal
justified? Yes No Yes

Alternativ
e
Selected 2 2 4
 Example 8.8

Alternative A B C D
Initial
Cost -6000 -7000 -9000 -17000
AOC 2000 3000 3000 3500
Salvage 0 200 300 1000
Life 3 4 6 12

MARR 15%

Solution

MARR 15%
Alternative A B C D
Initial
Cost -6000 -7000 -9000 -17000
AOC 2000 3000 3000 3500
Salvage 0 200 300 1000
Life Year 3 4 6 12

Incr. ROR
Comparis
on Actual CF Actual CF Actual CF Actual CF C to B D to C

Incr.
Investme
nt 0 -6000 -7000 -9000 -17000 -2000 -8000

Incr. Cash
Flow 1 2000 3000 3000 3500 0 500
LCM, $per
year 2 2000 3000 3000 3500 0 500
3 2000 3000 3000 3500 0 500
4 3200 3000 3500 6800 500
5 3000 3500 0 500
6 3300 3500 -8700 9200
7 3500 0 500
8 3500 6800 500
9 3500 0 500
10 3500 0 500
11 3500 0 500
12 4500 100 1200

overall i* 0.00% 26.32% 24.68% 17.87%

Retain or
eliminate
? Eliminate Retain Retain Retain
Incr. i* 19.42% 11.23%

Incr.
justified? Yes No

Alternativ
e
Selected C C
AW at
MARR -628.00 588 656 398
PW at
MARR -3403.00 3188 3557 2159

Alternativ
e
Selected No No Yes No
Incremental
Incremental
Cash Flow
-5000
1900
1900
1900
1900
-9100
1900
1900
1900
1900
3900

12.65%

$137.67
 CHAPTER NO 9: Benefit/Cost Analysis

EXAMPLE 9. 1

for n=4
Award amount $20
Gradient $5
interest rate 6%
years 4

for n=10
benefits $8
disbenefits $0.60
Annual cost $2

solution:
For Annual worth =?
n amount present value

1 $20 ($18.87)
2 $15 ($13.35)
3 $10 ($8.40)
4 $5 ($3.96)
PV ($44.57)
AW $12.86

Conventional B/C
B/C $0.50

Modified B/C
B/C 0.419781641075361

The proposal is not justified economically since both measures are less than 1.
Example 9. 2

Pw of investment $71.89
pw of benefits $167.41
pw of costs $26.87
pw of disbenefits $80.12

solution:
for the public project perspective
Modified B/C 0.840450688551954

Since the proposal is not economically acceptable because B/C < 1

from the private corporation view point

PI 1.95493114480456

Since the proposal is economically justified because PI > 1

Example 9.3

Design A Design B
Conctruction Cost,$ 10,000,000 15,000,000
Building maintenance cost, $/year 35,000 55,000
Patient Usage Copay,$/year 450,000 200,000
Interest rate 5% 5%
years 30 30
disbenefits, $/year 500,000 400,000
solution:
PART A ( No dibenefits estimate are considered)
1. Aw of the costs is the sum of construction and maintenance cost

Aw of A $685,514.35

Aw of B 1,030,771.526204150
Aw of B is larger then Aw of A, so it is the alternative to be economically justified

2. The incremental Costs

$345,257.18
3. The annual worth of benefits is derived fron the patient usage copay
250,000

4. The incremental B/C ratio

$0.72

5.The B/C ratio is less than 1, indicating the extra costs associated with design B are not justified.Therefore, design A is selec

PART B ( disbenefits are considered)

The annual worth of disbenfits
100,000

B/C ratio $1.01

so the design B is economically justified. In this case the inclusion of disbenefits has reversed the previous econom

Example 9.4

open Trench(OT) Trench Tunnel(TT)

Distance, miles 6.8 6.3
First cost,$ per foot 700 Trench for 2 miles: 700
Trench for 4.3 mile 2100
Time to complete, month 24 36
Construction support customers,per month 250000 175000
Ancillary expenses,$ per month
Environmental 150000 20000
Safety 140000 60000
Community Interaction 20000 5000
interest rate 3% 3%
no of years 2 3
no of month per years 12 12
LCM of these time periods 50 50
1 miles/ feet 5280

solution:
construction support customers, per year 3000000 2100000
Pw of construction support costs $5,740,409.09 $5,940,083.85

pw of construction 25132800 55070400

Pw $30,873,209.09 $61,010,483.85

Aw ($1,199,902.54) ($2,371,202.62)
The trench tunnel alternative has larger equivalent equivalent costs against the open trench alternatves

The incremental costs is:

($1,171,300.08)

The difference between ancillary expenses defines the incremental benefits for TT

Total ancillary expenses per month 310000.03 85000

Total ancillary expenses per year 3720000.36 1020000

PW anc $7,118,107.96 $2,885,183.58

AW anc ($276,648.79) ($112,134.09)

The incremental Benefits:

($164,514.70)

B/C ratio 0.140454782596274

since B/C < 1 , so the Trench Tunnel is not economically justified

Example 9.5

Program(1 Total personnel(2)cost / person,$(3)ar History (4)

1 50 5000 0.5
2 35 4500 3.1
3 57 8000 1.9
4 24 2500 2.1
5 12 5500 2.9
6 87 3800 0.6
solution:
Program(1Total personnel(2) Cost/person (C,$) Patents per YCER, 5=(3)/(4) program cos
4 24 2500 2.1 1190.476190476 60000
2 35 4500 3.1 1451.612903226 157500
5 12 5500 2.9 1896.551724138 66000
3 57 8000 1.9 4210.526315789 456000
6 87 3800 0.6 6333.333333333 330600
1 50 5000 0.5 10000 250000
tified.Therefore, design A is selected for the construction bid.

as reversed the previous economic decisions

en trench alternatves
commulative cost (7)=Σ(6)
60000
217500
283500
739500
1070100
1320100
Chapter No 10: MARR and Multiple Attributes

Example 10.1

Commercial loan for debt financing $10 million at 6.8% per year
Retained earnings from partnering corporations $4 million at 5.2% per year
Sale of stock (common and preferred) $6 million at 5.9% per year
There are three existing international vertical farming projects with capitalization and WACC
values as follows:
Project 1: $5 million with WACC 1 = 7.9%
Project 2: $30 million with WACC2 = 10.2%
Project 3: $7 million with WACC3 =4.8%
Compare the WACC for the Hong Kong (HK) project with the WACC of the existing projects.

To Find
Compare the WACC for the Hong Kong (HK) project with the WACC of the existing projects?

Solution:
WACC for Hongkong=0.3(5.9%)+0.2(5.2%)+0.5(6.8%)=6.210%

WACC for Existing projects= 0.119(7.9%) + 0.714(10.2%) + 0.167(4.8%) = 9.025%

Example 10.2

To Find:
compute the cost of debt capital (a) before taxes and (b) after taxes from the company perspective?

Solution:

Years Before tax cash flow After tax cash flow

0 980 980
1 -80 -56
2 -80 -56
3 -80 -56
4 -80 -56
5 -80 -56
6 -80 -56
 7 -80 -56
8 -80 -56
9 -80 -56
10 -1080 -1056
Cost of debt Capital 8% 6% (IRR Formula Used)

Example 10.3

To Find
Cost of common stock capital?

Solution:
The premium of 5% represents the term Rm-Rf in Equation:
R e =2.0 + 1.09(5.0) = 7.45%
Since this cost is lower than 9%, SafeSoft should issue common stock to finance this new
venture.

Example 10.4
Three auto parts manufacturing companies have the following debt and equity capital amounts
and D-E mixes. Assume all equity capital is in the form of common stock.
Amount of Capital
Company Debt($ in Millions) Equity($ in Millions)
A 10 40

B 20 20

C 40 10
Assume the annual revenue is $15 million for each one and that after interest on debt is considered
the net incomes are $14.4, $13.4, and $10.0 million, respectively. Compute the return on
common stock for each company, and comment on the return relative to the D-E mixes.
Solution:
Divide the net income by the stock (equity) amount to compute the common stock return. In
million dollars,
ReturnA=14.4/40 =0.36
ReturnB=13.4/20 =67
ReturnA=10.01/10 =1.00
As expected, the return is by far the largest for highly leveraged C, where only 20% of the
company is in the hands of the ownership. The return is excellent, but the risk associated with
this fi rm is high compared to A, where the D-E mix is only 20% debt.

Example 10.5

Solution
Assume an additive weighting model is appropriate and apply the weighted attribute method. Equa-
tion [10.12] determines the Rj measure for the four alternatives. As an illustration, for proposal 3,
R3 = 0.30(95) + 0.20(60) + 0.05(90) + 0.35(85) + 0.10(100)
=28.5+ 12.0 + 4.5 + 29.8 + 10.0
84.8
The four totals in Figure 10–6 (columns G through J, row 8) indicate that proposal 3 is the
overall best choice for the attributes and weights published in the RFP
Value rating (Vij) Evaluation Measure Rj
Attribute NormalizedProposal Proposal Proposal Proposal Proposal Proposal
weight 1 2 3 4 1 2
Constructi 0.3 95 60 95 95 28.5 18
Delivery ti 0.2 60 100 60 60 12.5 20
Contract f 0.05 100 80 90 100 5 4
Price 0.35 20 55 85 65 7 19.3
Lifetime co 0.1 100 20 100 100 10 2
Total 1 63 63.3
Example 10.6

Airline Corporate D-E Amount Borrowed, Equity Capital

Company Mix, % $B Available, $ B
National 30-70 1.5 5
Global 65-35 3.25 3.7
PanAm 91-94 4.55 6.7

Solution
Determine the level of post-FullServe equity capital using the following relation, in $ billions.
Equity capital = pre-FullServe level + returned capital - loan repayment
National: Equity capital = 5.0 + 1.0 - 1.50 = $4.50
Global: Equity capital = 3.7 + 1.0 -3.25 = $1.45
PanAm: Equity capital = 6.7 + 1.0 - 4.55 = $3.15
Comparing the equity capital levels (Table 10–1) with the levels above indicates that the
FullServe effort reduced equity amounts by 10% for National, 60% for Global, and 53%
for PanAm. The debt capital to fund the failed FullServe effort has affected National
airlines the least, in large part due to its low D-E mix of 30%–70%. However, Global
and PanAm are in much worse shape financially, and they now must maintain business
with a significantly lower ownership level and much reduced ability to obtain future
capital—debt or equity

Example 10.7
Solution
The capital is available for one of the two mutually exclusive alternatives. For plan 1, 100%
equity, the financing is specifically known, so the cost of equity capital is the MARR, that is,
8%. Only alternative A is acceptable; alternative B is not since the estimated return of 5.9%
does not exceed this MARR.
Under fi nancing plan 2, with a D-E mix of 25–75,
WACC = 0.25(14.5) + 0.75(8.0) = 9.625%
Now, neither alternative is acceptable since both ROR values are less than MARR=
WACC = 9.625%. The selected alternative should be to do nothing, unless one alternative
absolutely must be selected, in which case noneconomic attributes must be considered.
2% per year

ization and WACC

existing projects.

existing projects?

he company perspective?
ance this new

quity capital amounts

D-E Mix (%–%)

20-80

50-50

80-2
est on debt is considered
e the return on
he D-E mixes.

on stock return. In

only 20% of the

risk associated with

d attribute method. Equa-

stration, for proposal 3,

roposal 3 is the

Evaluation Measure Rj
Proposal Proposal
3 4
28.5 28.5
12 12
4.5 5
29.8 22.8
10 10
84.8 78.3
ation, in $ billions.

cates that the

bal, and 53%

ain business
For plan 1, 100%
he MARR, that is,
d return of 5.9%

one alternative
e considered.
Chapter No 11: Replacement and Retention

Example 11.2

Interest rate 10%

First cost $20,000
Year Market value AOC Capital Recovery AW of AOC
1 10,000 -5000 -12000 -5000
2 8000 -6500 -7714 -5714
3 6000 -8000 -6230 -6405
4 2000 -95000 -5878 -7072
5 0 -12500 -5276 -7961

Example 11.3
ESL Analysis
Year Market value AOC Capital Recovery AW of AOC
1 25 -3.4 -18.7 -3.4
2 18.75 -3.74 -14.65 -3.56
3 14.06 -4.11 -12.59 -3.72
4 10.55 -4.53 -11.2 -3.88
5 7.91 -4.98 -10.16 -4.04
6 5.93 -7.98 -9.36 -4.43
7 4.45 -6.02 -8.73 -4.58
8 3.34 -6.63 -8.23 -4.73
9 2.5 -7.29 -7.81 -4.88
10 1.88 -8.02 -7.48 -5.03
11 1.41 -8.82 -7.2 -5.19
12 1.06 -9.7 -6.97 -5.35
formulas,year 12 18.75 -13.965 #NUM! #NUM!

Year Market value AOC Loss in market value Lost Interest

1 25 -3.4 -13 -5.7
2 18.75 -3.74 -6.25 -3.75
3 14.06 -4.11 -4.69 -2.81
4 10.55 -4.53 -3.52 -2.11
5 7.91 -4.98 -2.64 -1.58
6 5.93 -7.98 -1.98 -1.19
7 4.45 -6.02 -1.48 -0.89
8 3.34 -6.63 1.11 -0.67
9 2.5 -7.29 -0.83 -0.5
10 1.88 -8.02 -0.63 -0.34
11 1.41 -8.82 -0.47 -0.28
12 1.06 -9.7 -0.35 -0.21
formulas,year 12 7.9125 -8.019
Example 11.4
Year Market value AOC capital recovery AW of AOC
1 40000 -5000 -15000 -5000
2 32000 -7000 -13000 -5500
3 25000 -9000 -12000 -6800
4 20000 -11000 -11000 -7700
5 16000 -13000 -10000 -8600
6 13000 -15000 -9700 -9400
7 10000 -17000 -9000 -10243
8 8000 -19000 -8600 -11009
9 6000 -21000 -8000 -11700
10 5000 -23000 -7800 -12000

Example 11.5
Years Market Value AOC capital recovery AW of AOC
1 22 -5 -3.3 -5.2
2 22 -6 -3.3 -5.76
3 22 -7 -3.3 -6.29
4 20 -8 -3.7 -6.79
5 18 -10 -3.89 -7.27
6 18 -11 -3.76 -7.72

Example 11.7
Presently own argumentadouble capacity
P -70000 -175000 -190000
AOC -1500 -1500 -2500
S -15100 21000 19000
n 9 12 12

Example 11.8
opt pt GH 1 2
A 1 5 -8.05 -14
B 2 4 -9.06 -9
C 3 3 -9.59 -9.3
D 4 2 10 -10
E 5 1 11 -11
F 6 0 11.5 -11
 0
0.5
-2000
1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 Cap
-4000 0
0.5 1 1.5 2
Total AW -6000 -2000
-8000 -4000
-17000

AW
-10000 -6000
-13429 -12000
-8000
-12634 -14000
-10000
-12950 -16000
-12000
-13237 -18000
years -14000

Total AW
-22.1
-18.21
-16.31
-15.31
-14.21
-13.8
-13.31
-12.95
-12.69
-12.51
-12.39
-12.32
-22.1

Marginal cost for years Marginal Cost

-22.1 -22.1
-13.74 -18.21
-11.64 -16.31
-10.15 -15.31
-9.2 -14.21
-10.64 -13.8
-8.4 -13.31
-8.41 -12.95
-8.62 -12.69
-9.02 -12.51
-9.57 -12.39
-10.57 -12.32
-22.1
Total AW of Cost
-20000 Total AW of Cost
-19524 -18400
0 2 4 6 8 10 12
-19245 -18600
-18800
-19123
-19000
-19126 -19200
-19229 -19400
-19408 -19600
-19800
-19648
-20000
-19933 -20200
-20251 -20400

Total AW of Cost
-8.05 Total average of cost
-9.06 0
0 1 2 3 4 5 6 7
-9.59 -2
-4
-10.49
-6
-11.16 -8
-11.47 -10
-12
-14

3 4 5 6 $M
-14 -14 -14 -14 -48
-15 -15 -15 -15 -47
-9 -16 -16 -16 -46
-10 -10 -18 -18 -46
-11 -11 -11 -22 -46
-11 -11 -11 -11 -43
 Capital Recovery
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
-2000
-4000
-6000
-8000
-10000
-12000
-14000
Chapter NO 12: Independent Projects with budget Limitation

Example 12.1
PW?

Bundle Project Initial inv Annual netPresent worth

1A -10000 2800 3600
2B -15000 2900 -1100
3C -8000 2600 4700
4D -6000 2500 6800
5 AC -16000 5500 8483
6 AD -18000 5400 9400

Example 12.2
PW?

Project Initial Inv Bundle Present worth

A -8000 1 66404
B -15000 2 -1019
C -8000 3 984
D -8000 4 -784
AC -16000 5 7860

Example 12.4
Ranking by IROR
IROR, % Project Cumulative Investment, $
44 1 8000
26 5 13000

Ranking by PI
PI Project Cumulative Investment, $
1.18 1 8000
1.19 5 13000

Ranking by PW
PW, $ Project Cumulative Investment, $
7130 1 8000
1015 3 16000
Chapter No 13: Break Even and Pay Back Analysis

Example 13.6
Breakeven analysis?

Initial Investment 80000

AOC 1000
Revenue 16
Variable Cost 8

Break even analysis

Years units
1 10000
2 5000
3 3000
4 2500
5 2100

Example 13.7
AW?

Year Machine 1 Machine 2

0 -80000 -110000
1 25000 22000
2 25000 22000
3 25000 22000
4 27000 22000
5 22000
6 25000
193 -2868

Example 13.8
PW?
Sold after 2 years Sold after 3 years
Year cost per year Price PW at 8% Price PW at 8%
0 -160000
1 -18000
2 -19000
3 -20000 290000 21379
4 -21000 290000 -11110 370000 47690
5 -22000 290000 -41510 370000 12525
6 -23000 370000 -20572
7 -24000 370000 -51250
 units
12000
10000
8000
6000
4000
2000
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5