Chapter 6

As shown in the cash flow diagram, there is an annual disbursement of money that varies from year to year from $100 to $300 in a fixed pattern that repeats forever. If interest is 10%, compute the value of A, also continuing forever, that is equivalent to the fluctuating disbursements.

• $ 188.30

• $ 195.03

• $ 198.94

• $ 210.67

Compute the value of C for the following diagram, based on “10% interest rate".

• $ 28.09

• $ 33.25

• $ 35.72

• $ 39.58

Two pumps are being considered for purchase. If interest is 7%, which pump should be bought. Assume that Pump B will be replaced after its useful life by the same one.

• Pump A

• Pump B

In addition to the do-nothing alternative, three alternatives are being considered for improving the operation of an assembly line. Each of the alternatives has a 10-year life and a scrap value equal to 10% of its original cost. If interest is 8%, which alternative should be adopted.

• Plan A

• Plan B

• Plan C

Two possible routes for a power line are under study. Data on the routes are as follows:

If 7% interest rate is used, should the power line be routed around the lake or under the lake ?

• Route under the lake.
• Route around the lake.

A certain industrial firm desires an economic analysis to determine which of two different machines should be purchased. Each machine is capable of performing the same task in a given amount of time. Assume the minimum attractive return is 8%. The following data are to be used in this analysis:

Which machine would you choose?

• Machine X

• Machine Y

Consider the following three mutually exclusive alternatives:

Assume that alternatives A, B, and C are replaced with identical replacements at the end of their useful lives, and an 8% interest rate, which alternative should be selected?

• Alternative A

• Alternative B

• Alternative C

Consider the following two mutually exclusive alternatives:

Alternative B may be replaced with an identical item every 20 years at the same $150 cost and will have the same $24 uniform annual benefit. Using a 10% interest rate, and an annual cash flow analysis, determine which alternative should be selected.

• Alternative A

• Alternative B

A manufacturer is considering replacing a production machine tool. The new machine, costing $3700, would have a life of 4 years and no salvage value, but would save the firm $500 per year in direct labor costs and $200 per year indirect
labor costs. The existing machine tool was purchased 4 years ago at a cost of $4000. It will last 4 more years and will have no salvage value at the end of that time. It could be sold now for $1000 cash. Assume that money is worth 8% and that the difference in taxes, insurance, and so forth, for the two alternatives is negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.

• A new machine should be purchased

• A new machine should NOT be purchased