www.elsolucionario.org Instructor’s Manual Contemporary Engineering Economics Fourth Edition Chan S Park Auburn University Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Preface This Instructor's Manual to Contemporary Engineering Economics contains detailed solutions to all the end-of-chapter problems The problem solutions follow topical headings to indicate the generic content of each problem The headings are provided to aid you in selecting your preferred mix of problem types for homework assignments • • • • • Contemporary Engineering Economics contains nearly 570 problems Many of them come with multiple-part questions, bringing the total number of questions to nearly 900 The Park’s online OneKey Course Management Site provides another 280 selftest questions This OneKey site is designed primarily to help students develop a working knowledge of the concepts and principles of engineering economics Most questions in this guide are structured in multiple-choice format as these types of exam questions are tested on the Fundamentals of Engineering (FE) exam and, increasingly, in introductory engineering economics courses The problems listed under ``Short Case Studies" require more involved assumptions, solution steps, and calculations Please note that your independent solutions to the text problems may yield answers slightly different from mine due to rounding differences In some cases, the interpretations and assumptions students bring to the problems may differ from my own in creating them, again resulting in different answers A comprehensive set of lecture notes in PowerPoint format is also available to instructors who adopt the text Having made these disclaimers, I wish to emphasize that it is my and the publisher's intention to provide the most accurate solutions possible Thus, if you discover typo errors, or disagree strongly with the interpretation and assumptions required of a particular solution, please not hesitate to report your concerns to me at the e-mail address below so they may be corrected in subsequent printings I will also plan on posting any errors on the book's web site under "Instructor Resources." Finally, I want to thank Major Hyun Jin Han for his assistance in preparing this manual Chan S Park Department of Industrial & Systems Engineering Auburn University, Auburn, AL 36849 Voice mail: (334) 844-1428 E-mail: park@eng.auburn.edu Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Part One Basics of Financial Decisions Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 www.elsolucionario.org Chapter Engineering Economic Decisions There are no end-of-chapter questions in this introductory chapter However, the following questions could be added as a part of instruction: Ask students to review the contents of The Wall Street Journal for the past months Then, identify and categorize the types of investment decisions appeared in the journal according to the types of strategic economics decisions discussed in Section1.5 Work in small groups and brainstorm ideas about how a common appliance, device or tool could be redesigned to improve it in some way Identify the steps involved and the economic factors, which you would need to consider prior to making a decision to manufacture the redesigned product A detailed design and actual cost estimates are not required Some items, which could be considered for this redesign exercise, are: a shopping cart, telephone, can opener, screwdriver, etc Many oil price forecasts in the early 2000 indicated that the price of oil in the year 2005 would be in excess of $50 per barrel What is the price today? Why are these prices so difficult to predict? Imagine what the consequences would be if you used these pessimistic estimates in your economic analysis What would be some practical ways to handle project uncertainty? Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Chapter Understanding Financial Statements Financial Statement 2.1 (a) • • • • Current assets = $150,000 + $200,000 + $150,000 + $50,000 + $30,000 = $580,000 Current liabilities = $50,000 + $100,000 + $80,000 = $230,000 Working capital = $580,000 - $230,000 = $350,000 Shareholder’s equity = $100,000 + $150,000 + $150,000 + $70,000 = $470,000 (b) EPS = $500,000/10,000 = $50 per share (c) Par value = $15; capital surplus = $150,000/10,000 = $15; Market price = $15 + $15 = $30 per share 2.2 (a) Working capital = Current assets – Current liabilities; Working capital requirements = Changes in current assets – Changes in current liabilities WC req = (+$100,000 - $20,000) – (+$30,000 - $40,000) = $90,000 (b) Taxable income = $1,500,000 - $650,000 - $150,000 - $20,000 = $680,000 (c) Net income = $680,000 - $272,000 = $408,000 (d) Net cash flow: A Operating activities = net income + depreciation – WC = $408,000 + $200,000 - $90,000 = $518,000 B Investing activities = equipment purchase = ($400,000) C Financing activities = borrowed fund = $200,000 D Net cash flow = $518,000 - $400,000 + $200,000 = $318,000 2.3 (a) Debt ratio = $55,663/$513,378 = 10.84% (b) Time-interest-earned ratio: not defined (c) Current ratio = $377,833/$55,663 = 6.79 Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 (d) Quick ratio = ($377,833 – 0)/$55,633 = 6.79 (e) Inventory turn over ratio: not defined (f) DSO = ($24,582 - $632)/($102,606/360) = 84.03 days (g) Total assets turnover ratio = $102,606/$513,378 = 0.20 times (h) Profit margin on sales = -$9,034/$102,606 = -8.8% (i) Return on total assets = (-$9,034 + 0)/(($513,378 + $36,671)/2) = -3.28% (j) Return on common equity = -$9,034/(($457,713 + $17,064)/2) = -3.81% (k) Price-earning ratio = $56.67/-0.10 = -566.70 (l) Book value per share = $457,715,000/90,340,000 = $5.07 (Note: The total number of outstanding shares in year 2005 was 90,340,000.) 2.4 (a) Debt ratio = ($922,653 + $113,186)/$4,834,690 = 42.10% (b) Time-interest-earned ratio = ($432,342 + $36,479)/$36,479 = 12.85 times (c) Current ratio = $3,994,084/$1,113,186 = 3.59 times (d) Quick ratio = ($3,994,084 - $1,080,083)/$1,113,186 = 2.62 times (e) Inventory turn over ratio = $8,391,409/(($1,080,083 + $788,519)/2) = 8.98 times (f) DSO = ($1,123,901 - $5,580)/($8,391,409/360) = 47.98 days (g) Total assets turnover ratio = $8,391,409/$4,834,696 = 1.74 times (h) Profit margin on sales = $293,935/$8,391,409 = 3.5% (i) Return on total assets = ($239,935 + $36,479(1 – 0.3201))/(($4,834,696 + $2,410,568)/2) = 8.80% (j) Return on common equity = $293,935/(($2,793,091 + $1,181,326)/2) = 14.79% Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 www.elsolucionario.org (k) Price-Earning ratio = $65/$1.13 = $57.52 Note: Assumed a share price of $65 The stock prices were fluctuating between $78.93 and $52.25 during the fourth quarter (l) Book value per share = $2,793,091,000/247,004,200 = $11.30 (Note: The total outstanding number of shares in year 2005 was 247,004,200.) 2.5 • • • • Given Olson’s EPS = $8 per share; Cash dividend = $4 per share; Book value per share = $80; Changes in the retained earnings = $24 million; Total debt = $240 million; Find debt ratio = total debt/total assets Net Income EPS = = $8 X Where X = the number of outstanding shares Total shareholders' equity = $80 X Retained earnings = Net income – Cash dividend; Net income = 8X from EPS relationship and the total cash dividend = 4X, so we rewrite 8X – 4X = $24 million, or X = million shares Book value = • From book value per share, we know that total shareholders’ equity = 80X, or $480 million; Total assets = Total liabilities + Total shareholders’ equity = $240 million + $480 million = $720 million • Debt ratio = $240 million/$720 million = 0.33 2.6 (b) 2.7 (b) 2.8 (d) 2.9 (b) Short Case Studies ST2.1 & ST2.2 – Not given Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Chapter 3: Interest Rate and Economic Equivalence Types of Interest 3.1 $10,000 = $5,000(1 + 0.08 N ) • Simple interest: (1 + 0.08 N ) = = 12.5 years N= 0.08 $10,000 = $5,000(1 + 0.07) N • Compound interest: (1 + 0.07) N = N = 10.2 years • Simple interest: I = iPN = (0.08)($1,000)(5) = $400 • Compound interest: I = P[(1 + i ) N − 1] = $1,000(1.4693 − 1) = $469 • Option 1: Compound interest with 8%: F = $3,000(1 + 0.08) = $3,000(1.4693) = $4,408 • Option 2: Simple interest with 9% $3,000(1 + 0.09 × 5) = $3,000(1.45) = $4,350 3.2 3.3 • Option is better 3.4 End of Year Principal Repayment Interest payment $1,671 $1,821 $1,985 $2,164 $2,359 $900 $750 $586 $407 $212 Remaining Balance $10,000 $8,329 $6,508 $4,523 $2,359 $0 Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Equivalence Concept 3.5 3.6 P = $12,000( P / F , 5%, 5) = $12,000(0.7835) = $9,402 F = $20,000( F / P, 8%, 2) = $20,000(1.1664) = $23,328 Single Payments (Use of F/P or P/F Factors) 3.7 (a) F = $5,000( F / P, 5%, 8) = $7,388 (b) F = $2,250( F / P, 3%,12) = $3,208 (c) F = $8,000( F / P, 7%, 31) = $65,161 (d) F = $25,000( F / P, 9%, 7) = $45,700 3.8 (a) P = $5,500( P / F ,10%, 6) = $3,105 (b) P = $8,000( P / F , 6%,15) = $3,338 (c) P = $30,000( P / F , 8%, 5) = $20,418 (d) P = $15,000( P / F ,12%, 8) = $3,851 3.9 (a) P = $10,000( P / F ,13%, 5) = $5,428 (b) F = $25,000( F / P,13%, 4) = $40,763 3.10 F = 3P = P (1 + 0.12) N log = N log(1.12) N = 9.69 years Contemporary Engineering Economics, Fourth Edition, By Chan S Park ISBN 0-13-187628-7 © 2007 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 15.10 Given: ke = 0.30 (a) ie = (70 / 70)(0.30) = 0.3 id = (1 − 0.40)[(10 / 30)(0.14) + (20 / 30)(0.12)] = 0.076 k = (0.076)(0.30) + (0.3)(0.70) = 0.2328 (b) ie = r f + β ⎡⎣ rM − r f ⎤⎦ = 0.06 + 1.2(0.12 − 0.06) = 0.132 (c) k = (0.076)(0.30) + (0.132)(0.70) = 0.1152 15.11 Given: ie = 18%, id = (0.12)(1 − 0.36) = 0.0768 k = (0.4)(0.0768) + (0.6)(0.18) = 13.87% (a) Net equity flow method: PW (18%) = $35,847 > , accept the project Income Statement $90,000 $90,000 Revenue Expenses $10,000 $10,000 O&M $28,580 $48,980 Depreciation $9,600 $8,089 Interest $90,000 $90,000 $90,000 $10,000 $10,000 $10,000 $34,980 $24,980 $8,930 $6,396 $4,501 $2,378 Taxable Income Income Taxes $41,820 $22,931 $38,624 $50,519 $68,692 $15,055 $8,255 $13,904 $18,187 $24,729 Net Income $26,765 $14,676 $24,719 $32,332 $43,963 Cash Flow Statement Cash from operation $26,765 $14,676 $24,719 $32,332 $43,963 Net Income $28,580 $48,980 $34,980 $24,980 $8,930 Depreciation ($200,000) $50,000 Investment/Salvage $1,278 Gains Tax $80,000 ($12,593) ($14,104) ($15,796) ($17,692) ($19,815) Loan Repayment ($120,000) $42,752 $49,552 $43,903 $39,620 $84,356 Net cash flow PW(18%) = $35,847 Page | Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 www.elsolucionario.org © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 (b) Cost of capital method: PW (13.87%) = $41,300 > , accept the project Income Statement Revenue Expenses O&M Depreciation $90,000 $90,000 $90,000 $90,000 $90,000 $10,000 $10,000 $10,000 $10,000 $10,000 $28,580 $48,980 $34,980 $24,980 $8,930 Taxable Income Income Taxes $51,420 $31,020 $45,020 $55,020 $71,070 $18,511 $11,167 $16,207 $19,807 $25,585 Net Income $32,909 $19,853 $28,813 $35,213 $45,485 Cash Flow Statement Cash from operation Net Income Depreciation Investment/Salvage Gains Tax $32,909 $19,853 $28,813 $35,213 $45,485 $28,580 $48,980 $34,980 $24,980 $8,930 ($200,000) $50,000 $1,278 Net cash flow ($200,000) $61,489 $68,833 $63,793 $60,193 $105,693 PW(13.87%) = $41,300 15.12 (a) Net equity flow method: Income Statement Revenue Expenses Depreciation Interest (15%) $45,000 $45,000 $45,000 $45,000 $45,000 $20,000 $32,000 $19,200 $11,520 $9,000 $7,665 $6,130 $4,365 $5,760 $2,335 Taxable Income Income Taxes (30%) $16,000 $5,335 $4,800 $1,600 $19,670 $29,115 $36,905 $5,901 $8,735 $11,072 Net Income $11,200 $3,734 $13,769 $20,381 $25,834 Cash Flow Statement Cash from operation Net Income Depreciation Investment/Salvage Gains Tax Loan Repayment $11,200 $3,734 $13,769 $20,381 $25,834 $20,000 $32,000 $19,200 $11,520 $5,760 ($100,000) $30,000 ($5,544) $60,000 ($8,899) ($10,234) ($11,769) ($13,534) ($15,564) Net cash flow ($40,000) $22,301 $25,501 $21,200 $18,366 $40,485 PW(20%) = $33,689 ∴ The project is acceptable Page | Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 (b) Cost of capital method: ie = 20%, id = (0.15)(1 − 0.30) = 0.105 k = (0.6)(0.105) + (0.4)(0.2) = 14.3% Income Statement Revenue Expenses Depreciation $45,000 $45,000 $45,000 $45,000 $45,000 $20,000 $32,000 $19,200 $11,520 $5,760 Taxable Income Income Taxes $25,000 $13,000 $25,800 $33,480 $39,240 $7,500 $3,900 $7,740 $10,044 $11,772 Net Income $17,500 $9,100 $18,060 $23,436 $27,468 Cash Flow Statement Cash from operation Net Income Depreciation Investment/Salvage Gains Tax $17,500 $9,100 $18,060 $23,436 $27,468 $20,000 $32,000 $19,200 $11,520 $5,760 ($100,000) $30,000 ($5,544) Net cash flow ($100,000) $37,500 $41,100 $37,260 $34,956 $57,684 PW(14.3%) = $39,268 ∴ The project also is acceptable 15.13 (a) Using ie = 15% : Machine A Income Statement Revenue Expenses O&M Depreciation Interest(10%) $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $8,000 $8,000 $1,200 $8,000 $12,800 $1,044 $8,000 $7,680 $873 $8,000 $4,608 $685 $8,000 $4,608 $478 $8,000 $2,304 $250 Taxable Income Income Taxes (35%) $2,800 $980 ($1,844) ($646) $3,447 $1,206 $6,707 $2,347 $6,914 $2,420 $9,446 $3,306 Net Income $1,820 ($1,199) $2,240 $4,359 $4,494 $6,140 Cash Flow Statement Cash from operation Net Income $1,820 ($1,199) $2,240 $4,359 $4,494 $6,140 Depreciation $8,000 $12,800 $7,680 $4,608 $4,608 $2,304 Investment/Salvage ($40,000) $4,000 Gains Tax ($1,400) Loan Repayment $12,000 ($1,555) ($1,711) ($1,882) ($2,070) ($2,277) ($2,505) Net cash flow ($28,000) $8,265 PW(15%) = $2,979 $9,890 $8,038 $6,897 $6,825 $8,539 Page | Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Machine B Income Statement Revenue Expenses O&M Depreciation Interest (10%) $28,000 $28,000 $28,000 $28,000 $28,000 $28,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $12,000 $19,200 $11,520 $6,912 $6,912 $3,456 $1,800 $1,567 $1,310 $1,028 $717 $376 Taxable Income Income Taxes (35%) $4,200 $1,470 ($2,767) ($968) $5,170 $1,809 $10,060 $10,371 $14,168 $3,521 $3,630 $4,959 Net Income $2,730 ($1,798) $3,360 $6,539 $6,741 $9,209 Cash Flow Statement Cash from operation Net Income $2,730 ($1,798) $3,360 $6,539 $6,741 $9,209 Depreciation $12,000 $19,200 $11,520 $6,912 $6,912 $3,456 Investment/Salvage ($60,000) $8,000 Gains Tax ($2,800) Loan Repayment $18,000 ($2,333) ($2,566) ($2,823) ($3,105) ($3,416) ($3,757) Net cash flow ($42,000) $12,397 $14,835 $12,058 $10,346 $10,237 $14,108 PW(15%) = $5,030 ∴ Machine B should be better (b) Using k = 0.7(0.15) + 0.3(0.10)(1 − 0.35) = 12.45% : Machine A Income Statement Revenue Expenses O&M Depreciation $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $8,000 $8,000 $8,000 $12,800 $8,000 $7,680 $8,000 $4,608 $8,000 $4,608 $8,000 $2,304 Taxable Income Income Taxes (35%) $4,000 $1,400 ($800) ($280) $4,320 $1,512 $7,392 $2,587 $7,392 $2,587 $9,696 $3,394 Net Income $2,600 ($520) $2,808 $4,805 $4,805 $6,302 Cash Flow Statement Cash from operation Net Income $2,600 Depreciation $8,000 Investment/Salvage ($40,000) Gains Tax ($520) $12,800 $2,808 $7,680 $4,805 $4,608 $4,805 $4,608 $6,302 $2,304 $4,000 ($1,400) ($40,000) $10,600 $12,280 $10,488 $9,413 $9,413 $11,206 Net cash flow PW(12.45%) = $3,178 Page | 10 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 www.elsolucionario.org © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Machine B Income Statement Revenue Expenses O&M Depreciation $28,000 $28,000 $28,000 $28,000 $28,000 $28,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $12,000 $19,200 $11,520 $6,912 $6,912 $3,456 Taxable Income Income Taxes (35%) $6,000 $2,100 Net Income $3,900 ($1,200) $6,480 ($420) $2,268 $4,212 $7,207 $7,207 $9,454 Cash Flow Statement Cash from operation Net Income $3,900 ($780) $4,212 Depreciation $12,000 $19,200 $11,520 Investment/Salvage ($60,000) Gains Tax $7,207 $6,912 $7,207 $6,912 $9,454 $3,456 $8,000 ($2,800) Net cash flow ($780) $11,088 $11,088 $14,544 $3,881 $3,881 $5,090 ($60,000) $15,900 $18,420 $15,732 $14,119 $14,119 $18,110 PW(12.45%) = $5,410 ∴ Machine B should still be better (c) Both methods provide the same decision Capital Budgeting 15.14 Based on the investment opportunity curve below, the firm’s optimal capital budget would be $177 million, if there is no restriction on the firm’s debt limit However, with a budget limit of $100 million, the firm may select projects and first Since these two projects alone consume $95 million, the firm may have two choices about utilizing the remaining $5 million funds First one is to find any projects whose rates of return exceed the cost of capital Project comes close to meeting this requirement However, the firm’s borrowing rate is 18%, which is greater than the rate of return from project Therefore, the projects that should be included in the $100 million budget would be projects and If money has to be raised from outside, the firm should raise only $95 million Page | 11 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Rate of Return 90% 80% 40% 32% 30% 22% 15% rate Borrowing (18%) Lending (12%) Capital budget ($ Million) 15.15 (a) Present worth analysis: With no budget restriction, select alternatives 1,2,3,4,7,13, and 14 The total NPW from the projects is $2,196 j PW(8%) $303 $501 $661 $46 -$66 -$814 $47 j 10 11 12 13 14 PW(8%) -$208 -$165 -$272 -$1,017 -$248 $126 $512 (b) With a budget limit of $1,800, select alternatives 1, 2, 3,4,13, and 14 The total amount of investment required is $1,756 Page | 12 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Short Case Studies ST 15.1 (a) • Total market value = Present value of its expected future net cash flows + the value of current assets ($5M) • Total market value =stock price per share* number of share outstanding = $18(1M) = $18M Present value of its expected future net cash flows = $13M (b) Income before tax = $3.5M Earnings = $2.1M Income before tax (1-tax rate) = Earnings Tax rate = 40% (c) • The case when the financing source is known, we use interest rate of equity ( ie ) as MARR, MARR = ie c ie = c ke , since we have only one source of equity, issuing common new ce stocks Debt to equity ratio = total debt/ total equity = 12000/18000 = 2/3 Games Inc intends to maintain its current debt to equity ratio when financing to purchase new equipment Therefore, they will be financing the cost of new equipment, $10M, the amount of $4M from debt of long term debt and $6M from equity of stock Therefore, cc = ce = $6M D1 = D0 (1 + g) =1.9(1+0.225) = $2.3275, P0 = 1.8, fc = 0.11 g with the average dividend from 2004 to 2009 1/4 ⎛ 1.9 ⎞ g=⎜ ⎟ ⎝ ⎠ ke = − = 0.174 D1 + g = 0.3193 P0 (1 − fc ) Page | 13 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 www.elsolucionario.org © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 MARR= ie = • ce ke = 31.93% cc The case when the financing source is unknown, we use k (WACC) as MARR, MARR= k k = id cd ce + ie cd + ce cd + ce cs ks (1 − t m ) , interest rate of term loan after tax = 10% cd c ie = c ke = 0.3193% from the first case ce id = Games Inc intends to maintain its current debt to equity ratio when financing to purchase new equipment Therefore, they will be financing the cost of new equipment, $10M, the amount of $4M from debt of long term debt and $6M from equity of stock Therefore, cc = ce = $6M, cs = cd = $4M MARR = k = id cd ce + ie = 21.56% cd + ce cd + ce (d) The current stock price*(shares outstanding) = $18(1M) PW of increasing profit after installing and operating the new machine = $6,534K The number of shares to be sold to net $6,000K = $6,000K / {(1-fc)*stock price per share} = 374,532 shares The most likely estimate for Games’ stock price = {the current total stock price + increasing profit after installing and operating the new machine}/ total shares outstanding = {18M +6,534K }/ (1,000,000+374,532)shares = $17.85 Finally, the most likely estimate for Games’ stock price may be $ $17.85 Page | 14 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Note) The income statement and cash flows of most likely case are like below: Income statement Inflation Revenue Expense Depreciation Debt Interest rate $48,400 $38,720 $1,445 $400 $7,835 $3,134 $4,701 (1000US$) $53,240 $31,944 $1,234 $400 $19,662 $7,865 $11,797 (1000US$) 10% 10% Taxable income Income taxes(40%) Net income Cash flow statement Operating activities Net income Depreciation $4,701 $1,445 $11,797 $1,234 Investment activities Investment Salvage Gains tax financing activities Borrowed funds Principal repayment Common stock Cash dividend Net cash flow(Actual $) PW= • • -$10,000 $5,929 -$557 10% $4,000 $6,000 $0 -$796 $5,350 -$4,000 -$6,742 -$880 $6,782 $6,534 Depreciation base: • Equipment: $10,000,000 • Installation expense: (20 employees)(40 hours per week)(2 weeks)($50 per hour) = $80,000 • Depreciation base :$10,080,000 (in today’s dollars) • D1: $10, 80,000 (0.1429) = $1,440,432; D2: $10,800,000(0.2449) = $2,468,592 With the half-year convention, D2 = $1,234,296 Salvage value calculation: • Market value of the equipment decreases at an annual rate of 30% Therefore, the salvage value at the end of year would be $10,000,000(1 – 0.70)2 = $4,900,000 (in today’s dollars) The market value (inflated) two years from now would be $5,929,000 (e) Not provided Page | 15 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 ST 15.2 (a) There are 40 alternatives including the “do-nothing” alternative Alternative (j) Projects Selected First year Expenditure 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 (1,4) (1,7) (2,4) (2,7) (1,6) (2,6) (2,5) (2,3) (1,5) (1,4,7) (1,4,6) (1,4,5) (1,7,6) (1,7,5) (2,4,6) (2,4,5) (2,4,7) (2,7,6) (2,7,5) (2,3,4) (2,3,7) (2,3,6) (2,3,5) (1,4,7,6) (1,4,7,5) (2,4,7,6) (2,4,7,5) (2,3,4,6) (2,3,4,5) (2,3,7,6) (2,3,7,5) (2,3,4,6,7) (2,3,4,5,7) ‐ 300,000 100,000 50,000 50,000 50,000 70,000 350,000 370,000 150,000 170,000 500,000 300,000 150,000 100,000 350,000 420,000 550,000 400,000 570,000 420,000 350,000 200,000 220,000 370,000 170,000 150,000 170,000 300,000 150,000 620,000 470,000 420,000 270,000 350,000 200,000 370,000 220,000 420,000 270,000 Second year Expenditure ‐ 300,000 100,000 300,000 300,000 10,000 100,000 10,000 400,000 310,000 ‐ 300,000 600,000 500,000 300,000 110,000 100,000 400,000 10,000 310,000 400,000 700,000 410,000 310,000 310,000 600,000 510,000 500,000 800,000 110,000 410,000 410,000 710,000 600,000 900,000 510,000 810,000 610,000 910,000 Engineering Hours ‐ 4,000 7,000 6,000 3,000 3,000 ‐ 10,000 4,000 13,000 7,000 4,600 7,600 10,000 9,000 7,000 10,000 10,600 13,000 4,600 7,000 13,600 16,000 13,000 7,600 7,000 15,000 9,000 9,600 12,000 10,600 13,000 13,600 16,000 15,600 18,000 9,600 12,000 15,600 18,000 Page | 16 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 www.elsolucionario.org © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 (b) Only 17 alternatives are feasible as shown in part (a) (c) Without knowing the exact cash flow sequence for each project over the project life, it is not feasible to determine the optimal capital budget ST 15.3 (a) Select A and C with FW(10%) = $4,894 Since there are $500 left over after selecting A and C, this left-over is lent out at 10% for periods Therefore, the total amount available for lending at the end of period is calculated as follows: F = $4,894 + $500( F / P,10%,3) = $5,559.60 (b) Select B and C The total amount available for lending at the end of period is $5,740 (c) With a budget limit of $3,500, the reasonable MARR should be the lending rate of 10% (You select A and C and have $500 available for lending.) ST 15.4 (a) The debt repayment schedule for the loan from the equipment manufacturer: n Loan Repayment Interest Principal Loan Balance $2,000,000 $200,000 $125,491 $1,874,509 $187,451 $138,040 $1,736,469 $173,647 $151,844 $1,584,625 $158,463 $167,028 $1,417,597 $141,760 $183,731 $1,233,866 $123,387 $202,104 $1,031,762 $103,176 $222,315 $809,447 $80,945 $244,546 $564,901 $56,490 $269,001 $295,901 10 $29,590 $295,901 $0 Page | 17 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 (b) The flotation costs and the number of common stocks to raise $8,500,000: $8,500, 000 flotation cost = − $8,500, 000 = $749,184 − 0.081 $8,500, 000 = 205,537 shares number of shares = (1 − 0.081)($45) (c) The flotation costs and the number of $1,000 bonds to raise $10.5 million: $10,500, 000 − $10,500, 000 = $203,364 − 0.019 $10,500, 000 = 11,893units number of bonds = (1 − 0.019)($900) flotation cost = Page | 18 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 ST 15.5 Income Statement Revenue Electricity Bill Excess power Expenses O&M Misc Standby power Overhead Overhaul Depreciation Unit Inter Equipment Interest (9%) (a) The net cash flow the cogeneration project with bond financing 10 11 12 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $1,500,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $1,500,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $1,500,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $1,000,000 $6,400 $1,280,000 $500,000 $100,000 $1,070,370 $950,000 $160,000 $1,070,370 $855,000 $96,000 $1,070,370 $770,000 $57,600 $1,070,370 $693,000 $57,600 $1,070,370 $623,000 $28,800 $1,070,370 $590,500 $0 $0 $0 $0 $0 $1,070,370 $1,070,370 $1,070,370 $1,070,370 $1,070,370 $1,070,370 Taxable Income $2,143,230 $1,633,230 $292,230 $1,915,630 $1,992,630 $591,430 $2,152,730 $2,743,230 $1,243,230 $2,743,230 $2,743,230 $2,743,230 Net Income $1,371,667 $1,045,267 $187,027 $1,226,003 $1,275,283 $378,515 $1,377,747 $1,755,667 $795,667 $1,755,667 $1,755,667 $1,755,667 $1,371,667 $1,045,267 $187,027 $1,226,003 $1,275,283 $378,515 $1,377,747 $1,755,667 $795,667 $1,755,667 $1,755,667 $1,755,667 $500,000 $100,000 $950,000 $160,000 $855,000 $96,000 $770,000 $57,600 $693,000 $57,600 $623,000 $28,800 $590,500 $590,501 $590,502 $590,503 $590,504 $295,000 Cash Flow Statement Cash from operation Net Income Depreciation Unit Inter Equipment Investment/Salvage Unit Inter Equipment Gains Tax Loan Repayment Net cash flow PW(27%) = ($10,000,000) ($500,000) $1,000,000 $490,136 ($11,893,000) $10,500,000 $0 $1,971,667 $2,155,267 $1,138,027 $2,053,603 $2,025,883 $1,030,315 $1,968,247 $2,346,168 $1,386,169 $2,346,170 $2,346,171 ($8,352,196) $5,879,590 Page | 19 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 www.elsolucionario.org © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 (b) The maximum annual lease amount that ACC is willing to pay is $1,183,771 (By Excel Goal Seek) Income Statement Revenue Electricity Bill Excess power Expenses O&M Misc Standby power Overhead Lease 10 11 12 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $6,120,000 $480,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $6,120,000 $480,000 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $500,000 $1,000,000 $1,000,000 $6,400 $6,400 $1,280,000 $1,280,000 $1,183,771 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 $500,000 $1,000,000 $6,400 $1,280,000 $1,183,771 Taxable Income Income Taxes (36%) $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $2,629,829 $946,738 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 $2,629,829 $946,738 Net Income $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 Cash from operation Net Income $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 $1,683,090 Net cash flow PW(27%) = $0 $5,879,590 Page | 20 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ All rights reserved This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 In case of an operating lease, the lesser is responsible for maintaining the equipment in good condition during the lease period, so we may assume that the lesser would be responsible for bearing the overhaul costs Page | 21 ... regarding permission (s) , write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458 Contemporary Engineering Economics, Fifth Edition, by Chan S Park ISBN: 0-13-611848-8... is also available to instructors who adopt the text Having made these disclaimers, I wish to emphasize that it is my and the publisher 's intention to provide the most accurate solutions possible... multiple-part questions, bringing the total number of questions to nearly 900 The Park? ? ?s online OneKey Course Management Site provides another 280 selftest questions This OneKey site is designed primarily