The managers of a company are considering an investment with the following estimated cash flows. MARR is 20% per year. The company is inclined to make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment is known to be within ±4%. Annual expenses are known to be within ± 10%. The annual revenue, market value, and useful life estimates are known to be within ±20%. a. Analyze the sensitivity of PW to changes in each estimate individually. Based on your results, make a recommendation regarding whether or not they should proceed with this project. Graph your results for presentation to management. b. The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them in accordance with the need for more accurate estimates (from highest need to lowest

The managers of a company are considering an investment with the following estimated cash flows. MARR is 20% per year. The company is inclined to make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment is known to be within ±4%. Annual expenses are known to be within ± 10%. The annual revenue, market value, and useful life estimates are known to be within ±20%. a. Analyze the sensitivity of PW to changes in each estimate individually. Based on your results, make a recommendation regarding whether or not they should proceed with this project. Graph your results for presentation to management. b. The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them in accordance with the need for more accurate estimates (from highest need to lowest

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

MARR is 8%
For a certain potential investment project, we have the following estimates: Capital investment I Annual revenues R $100,000 $30.000 Annual expenses $9.000 Market value $10,000 Useful life 10 years MARR 15% a. Find the breakeven market value. b. Find the breakeven annual expense. c. Is the decision more sensitive to changes in market value or annual expense? How do you know?
Consider the following two investment alternatives. Determine the range of investment costs for Alternative B (i.e., min. value
Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7-year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years. Welder B costs $320,000, has a 5-year life, and is expected to generate annual net cash inflows of $68,900 in each of the 5 years. Kaneb's cost of capital is 16%. Using the equivalent annual annuity method, which alternative should be chosen and what is its NPV?
Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $8.000.000; Value Lodges estimates furnishings for the motel will cost an additional $700.000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900.000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5-year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, a MARR of 12%/year, 365 operating days/year, and ignoring the cost of land, should the motel be built? Base your decision on an internal rate of return analysis.…
The Gigadigit Manufacturing Inc. is considering to produce a new product. The following data have been provided to management: Sales price S17.50/unit Equipment cost S250,000 Incremental overhead cost |550,000/year Sales and marketing cost $150,000/year Operating and maintenance cost $25/operating hour Production time/1,000 units 100 hours Packaging and shipping cost s0.50/unit Planning horizon Minimum attractive rate of return 15% 5 years The managers would like to know the viability of this product and how it would roll out in sales. (a) To give them basis and insight what is the break-even value of units that must be sold annually to keep the product viable? (b) If the target revenue is from 30,000 units sold, what is the expected profit? (C) If the profit drops by 13% due to equipment replacement, how much must have been the cost of the alternative equipment? (d) Provide graph for (a)
The present worth of a multi-year investment with all positive cash flows (incomes) other than the initial investment is $10,000 at MARR = i%. If MARR changes to (i + 1)%, the present worth will be a. Less than $10,000 b. Equal to $10,000 c. Greater than $10,000 d. Cannot determine without the cash flow profile and a value for i.
Carlisle Company has been cited and must invest in equipment to reduce stack emissions or face EPA fines of $23,500 per year. An emission reduction filter will cost $85,000 and have an expected life of 5 years. Carlisle's MARR is 10%/year. Part a Your answer is incorrect. What is the future worth of this investment? $ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±10.
Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5- year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, a MARR of 12%/year, 365 operating days/year, and ignoring the cost of land, should the motel be built? Base your decision on an internal rate of return analysis.…
Value Lodges owns an economy motel chain and is considering building a new 200-unit motel. The cost to build the motel is estimated at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5- year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, and 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, a MARR of 12% / year, 365 operating days/year, and ignoring the cost of land, should the motel be built? Base your decision on an internal rate of return analysis.…
Economics Using the repeatability assumption, what is the the value X) of the investment cost of Alternative 2 that will cause it to breakeven with Alternative 1,. assuming MARR= 12% per year Alternative 1 Alternative 2 $3,000 $1,800 $1,000 $2,000 5 years $X $2,500 $1,200 $4,000 7 years Investment cost Annual receipts Annual expenses Salvage value Useful life
Hospital is evaluating the purchase of new office equipment from three vendors. Assume MARR=15% and 4 year useful life on all equipment. Select best vendor. What is the best vendor?