Comparison Exercise

 

 

 

 

1. A company wants to provide a luxury car for its president. A local car dealer offers three options to obtain a 1993 Buick Park Avenue.

a. Buy the car with cash. The purchase price of $30,000. The car will last for 6 years. The resale value of the car after 6 years is $5000.

b. Lease the car for 36 months. The lease arrangement requires a $3,000 down payment and 36 monthly payments of $400. At the end of the 36 month period the car is returned to the dealer with no final cash payment.

c. The same lease option as b, except at the end of 36 months the car is purchased from the dealer. The payment required after 36 months is $20,000. The car will last another 3 years for a total of 6 years. The resale value when the car is finally disposed of is $5000.

Make the most economical decision for the company. Its minimum acceptable rate of return on investments is 21% a year or 1.75% per month.

2. A company produces toxic waste, and recent governmental regulations require that the company find some way to dispose of the waste. You are charged with investigating three options.

a. Purchase the land for a waste dump. The land costs $3,000,000 and will accommodate your needs for waste disposal for 6 years. At the end of the six years you must pay an additional $1,000,000 to establish perpetual care for the site.

b. Contract for waste disposal with a service company. For a three year contract, the service company requires an initial payment of $1,000,000 and an annual end of year payment of $500,000. The contract is renewable at the end of the three years with the same terms.

c. Contract with the waste service company with the same costs as in part b, but you can exercise an option to purchase a portion of the service company's waste disposal site. The cost of the purchase, which will take place three years from now, is $2,000,000. The site will hold your waste for another 3 years (beyond the three years of the original plan). There is no payment required at the end of the six years of this option.

Perform an economic analysis that determines the most economical plan for dealing with your toxic waste. Your company's minimum acceptable rate of return on investments is 8%.
3. You are considering purchasing a new copy machine for your office. One of the options, we call it A, has already been analyzed using your company's minimum acceptable rate of return, 20%. The machine has a six year life, and the net present worth considering the investment, all costs over the six year period, and the salvage value has been computed. The Net Present Worth of the cost of the machine is $20,000. Compare this machine to each of the following alternatives. Except for the salvage values, there is no revenue associated with the alternatives.

a. Alternative B has an initial cost of $10,000. Its operating cost in the first year is $1000, and it increases by $500 in each year thereafter. It has a four year economic life. At the end of the four years it has a salvage value of $2,000. Which is better A or B?

b. Alternative C has an initial cost of $8,000 and it lasts only two years. It has an operating cost or $1000 per year and its salvage value is zero. Which is better A or C?

4. a. Compare three alternative uses of some parcel of land. One and only one alternative must be chosen. The data concerning the alternatives are shown below. Use an incremental annual worth method to choose the best one. The MARR is 35%.

 Alternative  A  B C
 Initial Investment  100,000  80,000  50,000
 Net Annual Income  50,000  40,000  30,000
 Life  5  5  5
 Salvage  100,000  80,000  50,000

b. Compare three alternative mechanisms to perform some function. The data concerning the alternatives are shown below. The revenues associated with the alternatives are equal and are therefore irrelevant to the problem. One and only one of the alternatives must be chosen. Use an incremental present worth method to choose the best one. The MARR is 25%.

 Alternative  A  B C
 Initial Investment  100,000  70,000  50,000
 Annual Costs  30,000  40,000  50,000
 Life  5  5  5
 Salvage  0  0  0