4. Two options are available for setting up a wireless meter scanner and control

Question

4. Two options are available for setting up a wireless meter scanner and controller. A simple setup is good for 2 years and has an initial cost of $14,000, no salvage value, and an operating cost of S26,000 per year. A more permanent system has a higher first cost of $73,000, but it has an estimated life of 6 years and a salvage value of $13,000. It costs only $14,000 per year to operate and maintain. If the two options are compared using an incremental rate of return, what are the incremental cash flows in (a) year 0 and (b) year 2? 5. The Texas Department of Transportation (TxDOT) is considering two designs for crash barriers along a reconstructed portion of I-10. Design 2B will cost $3 million to install and $135,000 per year to maintain. Design 4R will cost $3.7 million to install and $70,000 per year to maintain. Calculate the rate of return and determine which design is preferred if TxDOT uses a MARR of 6% per year and a 15-year project period 6. Five mutually exclusive revenue alternatives that have infinite live s are under consideration for increasing productivity in a manufacturing operation. The initial costs and cash flows of each project are shown. If the MARR is 13% per year, which alternative should be selected? Alternative Initial cost, S7,000-23,000-9,000-3,000-16,000 Cash flow, $ per 1,000 3.500 1.400 500 2.200 year Rate of return 14.3 15.2 156 16.7 138 (vs DN). %

Explanation / Answer

4.

5 answer

Present value of cost of Design 2B = Present value of cash flows = $4,311,120

Present value of cost of Design 4R = Present value of cash flows = $4,379,840

Design 2B is preferred as its cost is less by $68,720

6 ANSWER

Present value of perpetuity of cash flows = cash flow/r

NPV = dicounted cash inflow - discounted cash outflow

Since, NPV ob alternate B is positive ($26.32) it should be selected

year Cash Flow Simple Setup ($) Permanent Setup ($) Incremental cash flows ($) a 0 initial outflow 14,000 73,000 -59000 b 2 Operating cost 26,000 14,000 12000

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