ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Chapter 16, Problem 44P

(a)

To determine

The capital expenditure for the project.

(b)

To determine

The effect on capital expenditure due to increase in interest rate.

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For each of the following problems, (a) draw the cash flow diagram (as needed); (b) present clean and clear manual solutions to the problem; (c) highlight the final answer (only the final answer as required by the problem) by enclosing it within a box. No use of excel The Ecology Group wishes to purchase a piece of equipment for recycling of various metals. Machine 1 costs $123,000, has a life of 10 years, an annual cost of $5,000, and requires one operator at a cost of $24 per hour. It can process 10 tons per hour. Machine 2 costs $70,000, has a life of 6 years, an annual cost of $2,500, and requires two operators at a cost of $24 per hour each to process 6 tons per hour. Assume interest rate at 7% per year and 2080 hours per work year. Determine the annual breakeven tonnage of scrap metal and select the better machine for a processing level of 1,500 tons per year.
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If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods always agree. Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project Y Project Z 0 -$1,500 -$1,500 1 $200 $900 2 $400 $600 3 $600 $300 4 $1,000 $200 NPV (Dollars) 800 600 Project Y 400 Project Z 200 -200 0246 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? O The methods agree. O The methods conflict.
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