Assignment 4:

Date of Submission: 22/04/2015

1. The city of Garden Ridge, Florida, has received designs for a new patient room wing to
the municipal hospital from two architectural consultants. One of the two designs must
be accepted in order to announce it for construction bids. The costs and benefits are the
same in most categories, but the city financial manager decided that the estimates below
should be considered to determine which design to recommend at the city council
meeting next week and to present to the citizenry in preparation for an upcoming bond
referendum next month.
Design A
Design B
Construction cost,
Building maintenance cost, $/year
Patient usage copay, $/year

2.

$ 10,000,000
35,000
450,000

15,000,000
55,000
200,000

The patient usage copay is an estimate of the amount paid by patients over the
insurance coverage generally allowed for a hospital room. The discount rate is 5%,
and the life of the building is estimated at 30 years.
(a) Use incremental B/C analysis to select design A or B.
(b) Once the two designs were publicized, the privately owned hospital in the directly
adjacent city of Forest Glen lodged a complaint that design A will reduce its own
municipal hospitals income by an estimated $500,000 per year because some of the
day-surgery features of design A duplicate its services. Subsequently, the Garden
Ridge merchants' association argued that design B could reduce its annual revenue by
an estimated $400,000, because it will eliminate an entire parking lot used by their
patrons for short-term parking. The city financial manager stated that these concerns
would be entered into the evaluation as dis-benefits of the respective designs. Redo
the B/C analysis to determine if the economic decision is still the same as when disbenefits were not considered.
As our case unfolds, the consultant, Joel Whiterson, has pieced together some of the
B/C analysis estimates for the 84-inch Jolleyville transmission main study completed
last year. The two options for constructing this main were open trench (OT) for the
entire 6.8-mile distance or a combination of trenching and bore tunneling (TT) for a
shorter route of 6.3 miles. One of the two options had to be selected to transport
approximately 300 million gallons per day (gpd) of treated water from the new WTF3
to an existing aboveground reservoir.
The general manager of Allen Water Utilities has stated publicly several times that the
trench-tunnel combination option was selected over the open-trench alternative based
on analysis of both quantitative and non-quantitative data. He stated the equivalent
annual costs in an internal e-mail some months ago, based on the expected construction
periods of 24 and
36 months, respectively, as equivalent to
AW 0T = $1.20 million per year
AW TT = $2.37 million per year
This analysis indicated that the open-trench option was economically better, at that
time. The planning horizon for the transmission mains is 50 years; this is a reasonable
study period, Joel concluded. Use the estimates below that Joel has unearthed to
perform a correct incremental B/C analysis and comment on the results. The interest
(discount) rate is 3% per year, compounded annually, and 1 mile is 5280 feet.

Distance,miles
First cost, $ per foot

Open trench (OT)

6.8
700

Time to complete, months

24
Construction support costs, $ per month 250,000
Ancillary expenses, $ per month:
Environmental
150,000
Safety
140,000
Community interface
20,000

Trench-tunnel (TT)
6.3
Trench for 2.0 miles: 700
Tunnel for 4.3 miles: 2100
36
175,000
20,000
60,000
5,000

3 Schlitterbahn Waterparks of Texas, a very popular water and entertainment park

headquartered in New Braunfels, has been asked by four different cities outside of
Texas to consider building a park in their area. All the offers include some version of
the following incentives:
Immediate cash incentive (year 0)
A 10% of first-year incentive as a direct property tax reduction for 8 years
Sales tax rebate sharing plan for 8 years
Reduced entrance (usage) fees for area residents for 8 years
Below table summarizes the estimates for each proposal, including the present
worth of the initial construction cost and anticipated annual revenue. The annual M&O
costs are expected to be the same for all locations. Use incremental B/C analysis at 7%
per year and an 8-year study period to advise the board of directors if they should
consider any of the offers to be economically attractive.

4.

Indira Industries is a major producer of diverter dampers used in the gas turbine power
industry to divert gas exhausts from the turbine to a side stack, thus reducing the noise
to acceptable levels for human environments. Normal production level is 60 diverter
systems per month, but due to significantly improved economic conditions in Asia,
production is at 72 per month. The following information is available.
Fixed costs FC = $2.4 million per month
Variable cost per unit v = $35,000
Revenue per unit r = $75,000
(a) How does the increased production level of 72 units per month compare with the
current breakeven point?
(b) What is the current profit level per month for the facility?

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8.

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(c) What is the difference between the revenue and variable cost per damper that is
necessary to break even at a significantly reduced monthly production level of 45 units,
if fixed costs remain constant?
A small aerospace company is evaluating two alternatives: the purchase of an automatic
feed machine and a manual feed machine for a finishing process. The auto feed machine
has an initial cost of $23,000, an estimated salvage value of $4000, and a predicted life
of 10 years. One person will operate the machine at a rate of $12 per hour. The expected
output is 8 tons per hour. Annual maintenance and operating cost is expected to be
$3500.
The alternative manual feed machine has a first cost of $8000, no expected salvage
value, a 5-year life, and an output of 6 tons per hour. However, three workers will be
required at $8 per hour each. The machine will have an annual maintenance and
operation cost of $1500. All projects are expected to generate a return of 10% per year.
How many tons per year must be finished to justify the higher purchase cost of the auto
feed machine?
Guardian is a national manufacturing company of home health care appliances. It is
faced with a make-or-buy decision. A newly engineered lift can be installed in a car
trunk to raise and lower a wheelchair. The steel arm of the lift can be purchased
internationally for $3.50 per unit or made in-house. If manufactured on site, two
machines will be required. Machine A is estimated to cost $18,000, have a life of 6
years, and have a $2000 salvage value; machine B will cost $12,000, have a life of 4
years, and have a $500 salvage value (carry-away cost). Machine
A will require an overhaul after 3 years costing $3000. The annual operating cost for
machine A is expected to be $6000 per year and for machine B is $5000 per year. A
total of four operators will be required for the two machines at a rate of $12.50 per hour
per operator. In a normal 8-hour period, the operators and two machines can produce
parts sufficient to manufacture 1000 units. Use a MARR of 15% per year to determine
the following.
(a) Number of units to manufacture each year to justify the in-house (make) option.
(b) The maximum capital expense justifiable to purchase machine A, assuming all other
estimates for machines A and B are as stated. The company expects to produce 10,000
units per year.
The president of a local company expects a product to have a profitable life of
between 1 and 5 years. Help her determine the breakeven number of units that must
be sold annually (without any return) to realize payback for each of the time periods 1
year, 2 years, and so on up to 5 years. The cost and revenue estimates are as follows:
Fixed costs: Initial investment of $80,000 with $1000 annual operating cost.
Variable cost: $8 per unit.
Revenue: Twice the variable cost for the first 5 years and 50% of the variable cost
thereafter.
Underwater electroacoustic transducers were purchased for use in SONAR
applications. The equipment will be DDB depreciated over an expected life of 12
years. There is a first cost of $25,000 and an estimated salvage of $2500. (a) Calculate
the depreciation and book value for years 1 and 4. (b) Calculate the implied salvage
value after 12 years.
Freeport-McMoRan Copper and Gold has purchased a new ore grading unit for
$80,000. The unit has an anticipated life of 10 years and a salvage value of $10,000.
Use the DB and DDB methods to compare the schedule of depreciation and book
values for each year. Solve by hand and by spreadsheet.

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The Outback Steakhouse main office has purchased a $100,000 online document
imaging system with an estimated useful life of 8 years and a tax depreciation
recovery period of 5 years.
Compare the present worth of total depreciation for (a) the SL method, (b) the DDB
method, and (c) DDB-to-SL switching. Use a rate of i = 15% per year. (d) Use
MACRS to depreciate the same asset for a 5-year recovery period, and compare PWd
values.
Temple-Inland Corporation has negotiated the rights to cut timber on privately held
forest acreage for $700,000. An estimated 350 million board feet of lumber is
harvestable.
(a) Determine the depletion amount for the first 2 years if 15 million and 22 million
board feet are removed.
(b) After 2 years the total recoverable board feet was re-estimated upward to be 450
million from the time the rights were purchased. Compute the new cost depletion
factor for years 3 and later.
A cooling-water pumping station at the LCRA plant costs $600,000 to construct, and
it is projected to have a 25-year life with an estimated salvage value of 15% of the
construction cost. However, the station will be book-depreciated to zero over a
recovery period of 30 years. Calculate the annual depreciation charge for years 4, 10,
and 25, using (a) straight line depreciation and(b) DDB depreciation, (c) What is the
implied salvage value for DDB?