Indicate whether the following characteristics are primarily associated with public sector or private sector projects.
(a) Profits
(b) Taxes
(c) Disbenefits
(d) Infinite life
Question 2(5 points)
The estimated annual cash flows for a proposed city government project are costs of $450,000 per year, benefits of $600,000 per year, and disbenefits of $100,000 per year. Determine the B/C ratio.
Question 3(5 points)
The estimated annual cash flows for a proposed city government project are costs of $450,000 per year, benefits of $600,000 per year, and disbenefits of $100,000 per year. Determine the value of B – C.
Question 4(5 points)
The modified B/C ratio for a city-owned hospital heliport project is 1.7. If the initial cost is $1 million and the annual benefits are $150,000, what is the amount of the annual M&O costs used in the calculation, if a discount rate of 6% per year applies? The estimated life is 30 years.
Question 5(5 points)
Solar and conventional alternatives are available for providing energy at a remote space research site. The costs associated with each alternative are shown below. Use the B/C method to determine which system should be selected at a discount rate of 0.75% per month over a 6-year study period.
Conventional
Solar
Initial cost, $
2,000,000
4,500,000
M&O cost, $/month
50,000
10,000
Salvage value, $
0
150,000
Question 6(5 points)
Three alternatives identified as X, Y, and Z were evaluated by the B/C method. The analyst, Joyce, calculated project B/C values of 0.92, 1.34, and 1.29. The alternatives are listed in order of increasing total equivalent costs. She isn’t sure whether an incremental analysis is needed.
If these are independent projects, which alternatives must be compared incrementally?
Question 7(5 points)
The four mutually exclusive alternatives below are being compared using the B/C method. What alternative, if any, should be selected?
Incremental B/C
Initial
When Compared
Investment,
with Alternative
Alternative
$ Millions
B/C Ratio
J
K
L
M
J
20
1.10
—
K
25
0.96
0.40
—
L
33
1.22
1.42
2.14
—
M
45
0.89
0.72
0.80
0.08
—
Question 8(5 points)
When a B/C analysis is conducted,
Question 9(5 points)
In a conventional B/C ratio,
Question 10(5 points)
In a modified B/C ratio analysis,
Question 11(5 points)
In evaluating three mutually exclusive alternatives by the B/C method, the alternatives were ranked in terms of increasing total equivalent cost (A, B, and C, respectively), and the following results were obtained for the project B/C ratios: 1.1, 0.9, and 1.3. On the basis of these results, you should
Question 12(5 points)
Identify a basic assumption made specifically about the challenger alternative when a replacement study is performed.
Question 13(5 points)
New microelectronics testing equipment was purchased 2 years ago by Mytesmall Industries at a cost of $600,000. At that time, it was expected to be used for 5 years and then traded or sold for its salvage value of $75,000. Expanded business in newly developed international markets is forcing the decision to trade now for a new unit at a cost of $800,000. The current equipment could be retained, if necessary, for another 2 years, at which time it would have a $5000 estimated market value. The current unit is appraised at $350,000 on the international market, and if it is used for another 2 years, it will have M&O costs (exclusive of operator costs) of $125,000 per year. Determine the values of P, n, S, and AOC for this defender if a replacement analysis were performed today.
Question 14(5 points)
Halcrow, Inc., expects to replace a downtime tracking system currently installed on CNC machines. The challenger system has a first cost of $70,000, an estimated annual operating cost of $20,000, a maximum useful life of 5 years, and a $10,000 salvage value anytime it is replaced. At an interest rate of 10% per year, determine its economic service life and corresponding AW value.
Question 15(5 points)
What is meant by the opportunity-cost approach in a replacement study?
Question 16(5 points)
Why is it suggested that the cash flow approach not be used when one is performing a replacement study?
Question 17(5 points)
The economic service life of an asset is:
Question 18(5 points)
In a replacement study conducted last year, it was determined that the defender should be kept for 3 more years. Now, however, it is clear that some of the estimates made last year for this year and next year have changed substantially. The proper course of action is to:
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