Comparison Exercise 2

1. A city with a minimum acceptable rate of return of 10% is accepting bids to build a bridge. You are a contractor who will bid on building a new steel and concrete bridge with a life of 35 years. It has no annual operating expenses. At the end of the life of such a bridge, there is a net charge of $7,000 to remove it. Your competitor offers a wooden bridge with an initial cost of $25,000. It has maintenance disbursements of $3,000 per year and a life of 20 years. There is no charge for the removal of the wood bridge at the end of its life.You will provide a bid to the city for the construction cost of the steel and concrete bridge. What is the largest bid you can submit to remain competitive with the wooden bridge?

2. The government requires a company to install pollution control equipment. The three technologies available are described below. The MARR is 8%. Which should be selected.

Technology A requires an initial investment of $750,000 and has a life of 12 years. It's operating cost is $100,000 in the first year with the cost increasing by $50,000 in each year of its life. Thus the cost is $150,000 in the second year, $200,000 in the third year and so on. It has no salvage value or disassembly cost.

Technology B requires an initial investment of $1,200,000. It has a life of 8 years with uniform operating cost of $200,000 per year. To disassemble this alternative at the end of its life costs $400,000.

Technology C requires an initial investment of $2,000,000. It has a life of 8 years with no operating cost. The equipment must be refurbished at the end of four years for a cost of $600,000. It has no salvage or disassembly cost at the end of its life.

3. A professor is concerned about the upkeep of his lawn. He has three alternatives. The first is to replace the lawn with green cement. This costs $5000 and lasts twenty years. The cement must be cleaned every five years. The cleaning costs $500 and occurs at the end of years 5, 10 and 15. At the 20th year the cement must be removed at a cost of $1000.

The second alternative is to hire a lawn service. This option costs $1000 per year. The payment must be made at the beginning of each year. This service can be purchased for any number of years.

The third alternative is to talk his son into mowing the lawn. This requires an investment of $1500 in garden equipment and has annual costs of $200 (end of the year) for garden supplies. This alternative will work for only three years. The garden equipment will be worthless at this time.

Considering only the economics of the situation, rank the alternatives in order of preference. Give values for each alternative. Which should be chosen? Use the equivalent uniform annual cost method. The professor's minimum acceptable rate of return is 20%.

4.   A building manager must purchase equipment for washing windows. For $1,000 he can purchase the rigging and scaffolds for a manual system. The labor expense for the manual system is $3,000 per year. The equipment will last for five years with no salvage. For $4,000 he can purchase automatic equipment which lasts only three years, but it can be sold at that time for $1,000. The labor expense for the automatic equipment is only $1,000 per year. Select the best alternative using the annual worth method. The minimum acceptable rate of return is 12%.

5. Three options to purchase a machine are described below. Do a present worth analysis to select one of the three. Formulas should use as few time value of money factors as possible. The minimum acceptable rate of return is 10%.

Option A. The machine costs 300 initially. Annual costs are zero in the first four years. In years 5 through 10 the costs increase by 20 in each year. The life is ten years.

Option B. The machine costs 300 initially. Annual costs are 40 for the first five years and zero thereafter. The life is ten years.

Option C. The machine costs 300 initially. Annual costs are zero throughout the life. The life is five years.