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Engineering economy 7th Edition Leland Blank, Anthony Tarquin - Solutions

List at least three factors that affect the MARR, and discuss how each one affects it.
State whether each of the following involves debt financing or equity financing.(a) $10,000 taken from one partner's savings account to pay for equipment repair (b) Issuance of preferred stock worth $1.3 million (c) Short-term loan of $75,000 from a local bank (d) Issuance of $3 million worth of
Helical Products, Inc. uses an after-tax MARR of 12% per year. If the company's effective tax rate (federal, state, and local taxes) is 40%, determine the company's before-tax MARR.
The owner of a small pipeline construction company is trying to figure out how much he should bid in his attempt to win his first "big" contract. He estimates that his cost to complete the project will be $7.2 million. He wants to bid an amount that will give him an after-tax rate of return of 15%
A group of private equity investors provided $16 million to a start-up company involved in making high-technology detection systems for drugs and other types of contraband. Immediately after the investment was made, another investment opportunity came up for which the investors didn't have enough
Five projects were ranked in decreasing order by two measures-rate of return (ROR) and present worth (PW)-to determine which ones should be funded, with the total initial investment not to exceed $18 million. Use the results below to determine the opportunity cost for eachmeasure.
Tom, the owner of Burger Palace, determined that his weighted average cost of capital is 8%. He expects a return of 4% per year on all of his investments. A proposal presented by the owner of the Dairy Choice next door seems quite risky to Tom, but is an intriguing partnership opportunity. Tom
Electrical generators produce not only electricity, but also heat from conductor resistance and from friction losses in bearings. A company that manufactures generator coolers for nuclear and gas turbine power plants undertook a plant expansion through financing that had a debt-equity mix of 45-55.
Determine the debt-to-equity mix when Applied Technology bought out Southwest Semiconductor using financing as follows: $12 million from mortgages, $5 million from retained earnings, $10 million from cash on hand, and $20 million from bonds.
Business and engineering seniors are comparing methods of financing their college education during their senior year. The business student has $30,000 in student loans that come due at graduation. Interest is an effective 4% per year. The engineering senior owes $50,000, 50% from his parents with
Two public corporations, first Engineering and Midwest Development each show capitalization of $175 million in their annual reports. The balance sheet for First Engineering indicates a total debt of $87 million, and that of Midwest Development indicates a net worth of $62 million. Determine the
Forest Products, Inc. invested $50 million. The company's overall D-E mix is 60-40.What is the return on the company's equity, if the net income is$5 million on a revenue base of $6 million?
Determine the weighted average cost of capital for a company that manufactures miniature triaxial accelerometers for space-restricted applications. The financing profile, with interest rates, is as follows: $3 million in stock sales at 15% per year, $4 million in bonds at 9%, and $6 million in
Growth Transgenics Enterprises (GTE) is contemplating the purchase of its rival. One of GTE's genetics engineers got interested in the financing strategy of the buyout. He learned there are two plans being considered. Plan 1 requires 50% equity funds from GTE's retained earnings that currently earn
Midac Corporation wants to arrange for $50 million in capital to finance the manufacturing of a new consumer product. The current plan is 60% equity capital and 40% debt financing. Calculate the WACC for the following scenario:Equity capital: 60%, or $35 million, via common stock sales for 40% of
A public corporation in which you own common stock reported a WACC of 11.1% for the year in its report to stockholders. The common stock that you own has averaged a total return of 7% per year over the last 3 years. The annual report also mentions that projects within the corporation are 75% funded
BASF will invest $14 million this year to upgrade its ethylene glycol processes. This chemical is used to produce polyester resins to manufacture products varying from construction materials to aircraft and from luggage to home appliances. Equity capital costs 14.5% per year and will supply 65% of
A couple planning for their child's college education can fund part of or all the expected $100,000 tuition cost from their own funds (through an education IRA) or borrow all or part of it. The average return for their own funds is 7% per year, but the loan is expected to have a higher interest
Over the last few years, Carol's Fashion Store, a statewide franchise, has experienced the D-E mixes and costs of debt and equity capital on several projects summarized below.(a) Plot debt, equity, and weighted average cost of capital.(b) Determine what mix of debt and equity capital provided the
For Problem use a spreadsheet to(a) Determine the best D-E mix(b) Determine the best D-E mix if the cost of debt capital increases by 10% per year, for example, 13.0% increases to14.3%.
The cash flow plan associated with a debt financing transaction allowed a company to receive $2,800,000 now in lieu of future interest payments of $196,000 per year for 10 years plus a lump sum of $2,800,000 in year 10. If the company's effective tax rate is 33%, determine the company's cost of
A company that makes several different types of skateboards, Jennings Outdoors incurred interest expenses of $1,200,000 per year from various types of debt financing. The company borrowed $19,000,000 in year 0 and repaid the principal of the loans in year 15 in a lump-sum payment of $20,000,000. If
Molex Inc., a manufacturer of cable assemblies for polycrystalline photovoltaic solar modules, requires $3.1 million in debt capital. The company plans to sell 15-year bonds that carry a dividend of 6% per year, payable semiannually. Molex has an effective tax rate of 32% per year. Determine(a) The
Tri-States Gas Producers expects to borrow $800,000 for field engineering improvements. Two methods of debt financing are possible-borrow it all from a bank or issue debenture bonds. The company will pay an effective 8% per year to the bank for 8 years. The principal on the loan will be reduced
The Sullivan Family Partnership plans to purchase a refurbished condo in their hometown for investment purposes. The negotiated $200,000 purchase price will be financed with 20% of savings (retained earnings) which consistently makes 6.5% per year after all relevant income taxes are paid. Eighty
The initial public offering price for the common stock of SW Refining is $23 per share, and it will pay a first-year dividend of $0.92 per share. If the appreciation rate in dividends is anticipated to be 3.2% per year, determine the cost of equity capital for the stock offering.
The cost of debt capital is lower after taxes than before taxes. The cost of equity capital is more difficult to estimate using the dividend method or the CAPM model, for example, yet the after-tax and before-tax cost of equity capital is the same. Why are the after-tax rates not the same for
H2W Technologies is considering raising capital to expand its offerings of 2-phase and 4-phase linear stepper motors. The beta value for its stock is 1.41. Use the capital asset pricing model and a 3.8% premium above the risk-free return to determine the cost of equity capital if the risk-free
Management at Hirschman Engineering has asked you to determine the cost of equity capital based on the company's common stock. The company wants you to use two methods: the dividend method and the CAPM. Last year, the first year for dividends, the stock paid $0.75 per share on the average of
Common stocks issued by Meggitt Sensing Systems paid stockholders $0.93 per share on an average price of $18.80 last year. The company expects to grow the dividend rate at a maximum of 1.5% per year. The stock volatility is 1.19, and other stocks in the same industry are paying an average of 4.95%
Last year a Japanese engineering materials corporation, Yamachi Inc., purchased some U.S. Treasury bonds that return an average of 4% per year. Now, Euro bonds are being purchased with a realized average return of 3.9% per year. The volatility factor of Yamachi stock last year was 1.10 and has
The engineering manager at FXO Plastics wants to complete an alternative evaluation study. She asked the finance manager for the corporate MARR. The finance manager gave her some data on the project and stated that all projects must clear their average (pooled) cost by at least 4%.(a) Use the data
Why is it financially unhealthy for an individual to maintain a large percentage of debt financing over a long time, that is, to be highly leveraged?
In a leveraged buyout of one company by another, the purchasing company usually obtains borrowed money and inserts as little of its own equity as possible into the purchase. Explain some circumstances under which such a buyout may put the purchasing company at economic risk.
Grainger and Company has an opportunity to invest $500,000 in a new line of direct-drive rotary screw compressors. Financing will be equally split between common stock ($250,000) and a loan with an 8% after-tax interest rate. The estimated annual NCF after taxes is $48,000 for the next 7 years. The
Fairmont Industries primarily relies on 100% equity financing to fund projects. A good opportunity is available that will require $250,000 in capital. The Fairmont owner can supply the money from personal investments that currently earn an average of 7.5% per year. The annual net cash flow from the
Omega Engineering Inc. has an opportunity to invest $10,000,000 in a new engineering remote control system for offshore drilling platforms. Financing will be split between common stock sales ($5,000,000) and a loan with an 8% per year interest rate. Omega's share of the annual net cash flow is
A new annular die process is to be installed for extruding pipes, tubes, and tubular films. The phase I installed price for the dies and machinery is $2,000,000. The manufacturer has not decided how to finance the system. The WACC over the last 5 years has averaged 10% per year.(a) Two financing
Shadowland, a manufacturer of air-freightable pet crates, has identified two projects that, though having a relatively high risk, are expected to move the company into new revenue markets. Utilize a spreadsheet solution to(a) Select any combination of the projects if the MARR is equal to the
Two friends each invested $20,000 of their own (equity) funds. Stan, being more conservative, purchased utility and manufacturing corporation stocks. Theresa, being a risk taker, leveraged the $20,000 and purchased a $100,000 condo for rental property. Considering no taxes, dividends, or revenues,
A consulting engineer asked a company manager to assign importance values (0 to 100) to five attributes that will be included in an alternative evaluation process. Determine the weight of each attribute using the importance scores.Attribute
Ten attributes were rank-ordered in terms of increasing importance and were identified as A, B, C, . . . , and J. Determine the weight of (a) Attribute C (b) Attribute J.
A team of three people submitted the following statements about the attributes to be used in a weighted attribute evaluation. Use the statements to determine the normalized weights if assigned scores are between 0 and 100.Attribute Comment_______________1. Flexibility (F) ........The most important
Different types and capacities of crawler hoes are being considered for use in a major excavation on a pipe-laying project. Several supervisors who served on similar projects in the past have identified some of the attributes and their view of relative importance. For the information that follows,
John, who works at Swatch, has decided to use the weighted attribute method to compare three systems for manufacturing a watchband. The vice president and her assistant VP have evaluated each of three attributes in terms of importance to them, and John has placed an evaluation from 0 to 100 on each
The Athlete's Shop has evaluated two proposals for weight lifting and exercise equipment. A present worth analysis at i = 15% per year of estimated revenues and costs resulted in PWA = $440,000 and PW B = $390,000. In addition to this economic measure, three more attributes were independently
Gentech, Inc. financed a new product as follows: $5 million in stock sales at 13.7% per year, $2 million in retained earnings at 8.9% per year, and $3 million through convertible bonds at 7.8% per year. The company’s WACC is closest to:(a) 9% per year(b) 10% per year(c) 11% per year(d) 12% per
If the after-tax rate of return for a cash flow series is 11.2% and the corporate effective tax rate is 39%, the approximated before-tax rate of return is closest to:(a) 6.8%(b) 5.4%(c) 18.4%(d) 28.7%
Medzyme Pharmaceuticals has maintained a 50-50 D-E mix for capital investments. Equity capital has cost 11%; however, debt capital that historically cost 9% has now increased by 20% per year. If Medzyme does not want to exceed its historical weighted average cost of capital (WACC), and it is
The importance values (0 to 100) for five attributes are shown below. The weight to assign to attribute 1 is:(a) 0.16(b) 0.20(c) 0.22(d) 0.25Attribute Importance Score1 ......... 552 ......... 453 ......... 854 ......... 305 ......... 60
For eight attributes rank-ordered in terms of increasing importance, the weighting of the sixth attribute is closest to:(a) 0.17(b) 0.14(c) 0.08(d) 0.03
Determine the cost of equity capital to Hy-Lok USA if the company sells 500,000 shares of its preferred stock at a 5% discount from its price of$130. The stock carries a $10 per year dividend.
Multiple Choice Questions1. The term opportunity cost refers to:(a) The first cost of an alternative that has been accepted for funding(b) The total cost of an alternative that has been accepted for funding(c) The rate of return or profit available on the next-best alternative that had to be
Pizza Hut Corporation has decided to enter the catering business in three states within its Southeastern U.S. Division, using the name Pizza Hut At-Your-Place. To deliver the meals and serving personnel, it is about to purchase 200 vans with custom interiors for a total of $1.5 million. Each van is
In a replacement study, what is meant by "taking the nonowner's viewpoint"?
An asset that was purchased 3 years ago for $100,000 is becoming obsolete faster than expected. The company thought the asset would last 5 years and that its book value would decrease by $20,000 each year and, therefore, be worthless at the end of year 5. In considering a more versatile, more
As a muscle car aficionado, a friend of yours likes to restore cars of the 60s and 70s and sell them for a profit. He started his latest project (a 1965 Shelby GT350) four months ago and has a total of $126,000 invested so far. Another opportunity has come up (a 1969 Dodge Charger) that he is
In conducting a replacement study wherein the planning horizon is unspecified, list three assumptions that are inherent in an annual worth analysis of the defender and challenger.
A civil engineer who owns his own design/build/operate company purchased a small crane 3 years ago at a cost of $60,000. At that time, it was expected to be used for 10 years and then traded in for its salvage value of $10,000. Due to increased construction activities, the company would prefer to
Equipment that was purchased by Newport Corporation for making pneumatic vibration isolators cost $90,000 two years ago. It has a market value that can be described by the relation $90,000 – 8000 k, where k is the years from time of purchase. Experience with this type of equipment has shown that
A piece of equipment that was purchased 2 years ago by Toshiba Imaging for $50,000 was expected to have a useful life of 5 years with a $5000 salvage value. Its performance was less than expected, and it was upgraded for $20,000 one year ago. Increased demand now requires that the equipment be
For equipment that has a first cost of $10,000 and the estimated operating costs and year-end salvage values shown below, determine the economic service life at i = 10% peryear.
To improve package tracking at a UPS transfer facility, conveyor equipment was upgraded with RFID sensors at a cost of $345,000. The operating cost is expected to be $148,000 per year for the first 3 years and $210,000 for the next 3 years. The salvage value of the equipment is expected to be
Economic service life calculations for an asset are shown below. If an interest rate of 10% per year was used in making the calculations, determine the values of P and S that were used in calculating the AW for year3.
The initial cost of a bridge that is expected to be in place forever is $70 million. Maintenance can be done at 1-, 2-, 3-, or 4-year intervals, but the longer the interval between servicing, the higher the cost. The costs of servicing are estimated at $83,000, $91,000, $125,000, and $183,000 for
A construction company bought a 180,000 metric ton earth sifter at a cost of $65,000. The company expects to keep the equipment a maximum of 7 years. The operating cost is expected to follow the series described by 40,000 + 10,000 k, where k is the number of years since it was purchased ( k = 1, 2,
An engineer determined the ESL of a new $80,000 piece of equipment and recorded the calculations shown below. [Note that the numbers are annual worth values associated with various years of retention; that is, if the equipment is kept for, say, 3 years, the AW (years 1 through 3) of the first cost
A large, standby electricity generator in a hospital operating room has a first cost of $70,000 and may be used for a maximum of 6 years. Its salvage value, which decreases by 15% per year, is described by the equation S = 70,000(1 – 0.15) n, where n is the number of years after purchase. The
A piece of equipment has a first cost of $150,000, a maximum useful life of 7 years, and a market (salvage) value described by the relation S = 120,000 – 20,000 k , where k is the number of years since it was purchased. The salvage value cannot go below zero. The AOC series is estimated using AOC
Determine the economic service life and corresponding AW value for a machine that has the following cash flow estimates. Use an interest rate of 14% per year and handsolution.
Use the annual marginal costs to find the economic service life for Problem on a spreadsheet. Assume the salvage values are the best estimates of future market value. Develop an Excel chart of annual marginal costs (MC) and AW of MC over 7 years.
In Example the market value (salvage value) series of the proposed $38 million replacement kiln (GH) dropped to $25 million in only 1 year and then retained 75% of the previous year's market value through the remainder of its 12-year expected life. Based on the experience with the current kiln, and
In a one-year-later analysis, what action should be taken if?(a) All estimates are still current and the year is nD,(b) All estimates are still current and the year is not nD,(c) The estimates have changed?
Based on company records of similar equipment, a consulting aerospace engineer at Aerospatiale estimated AW values for a presently owned, highly accurate steel rivet inserter.If Retained This AW Value,Number of Years $ per Year1............. –62,0002............. –51,0003.............
In planning a plant expansion, MedImmune has an economic decision to make-upgrade the existing controlled-environment rooms or purchase new ones. The presently owned ones were purchased 4 years ago for $250,000. They have a current "quick sale" value of $20,000, but for an investment of $100,000
Three years ago, Witt Gas Controls purchased equipment for $80,000 that was expected to have a useful life of 5 years with a $9000 salvage value. Increased demand necessitated an upgrade costing $30,000 one year ago. Technology changes now require that the equipment be upgraded again for another
A recent environmental engineering graduate is trying to decide whether he should keep his presently owned car or purchase a more environmentally friendly hybrid. A new car will cost $26,000 and have annual operation and maintenance costs of $1200 per year with an $8000 salvage value in 5 years
A pulp and paper company is evaluating whether it should retain the current bleaching process that uses chlorine dioxide or replace it with a proprietary "oxypure" process. The relevant information for each process is shown. Use an interest rate of 15% per year to perform the replacementstudy.
A machine that is critical to the Phelps-Dodge copper refining operation was purchased 7 years ago for $160,000. Last year a replacement study was performed with the decision to retain it for 3 more years. The situation has changed. The equipment is estimated to have a value of $8000 if "scavenged"
A crushing machine that is a basic component of a metal recycling operation is wearing out faster than expected. The machine was purchased 2 years ago for $400,000. At that time, the buyer thought the machine would serve its needs for at least 5 years, at which time the machine would be sold to a
The data associated with operating and maintaining an asset are shown below. The company manager has already decided to keep the machine for 1 more year (i.e., until the end of year 1), but you have been asked to determine the cost of keeping it 1 more year after that. At an interest rate of 10%
A machine that cost $120,000 three years ago can be sold now for $54,000. Its market value for the next 2 years is expected to be $40,000 and $20,000 one year and 2 years from now, respectively. Its operating cost was $18,000 for the first 3 years of its life, but the M&O cost is expected to be
The projected market value and M&O costs associated with a presently owned machine are shown (next page). An outside vendor of services has offered to provide the service of the existing machine at a fixed price per year. If the presently owned machine is replaced now, the cost of the fixed-price
BioHealth, a biodevice systems leasing company, is considering a new equipment purchase to replace a currently owned asset that was purchased 2 years ago for $250,000. It is appraised at a current market value of only $50,000. An upgrade is possible for $200,000 now that would be adequate for
For the estimates in Problem use a spreadsheet-based analysis to determine the first cost for the augmentation of the current system that will make the defender and challenger break even. Is this a maximum or minimum for the upgrade, if the current system is to be retained?
Herald Richter and Associates, 5 years ago, purchased for $45,000 a microwave signal graphical plotter for corrosion detection in concrete structures. It is expected to have the market values and annual operating costs shown below for its remaining useful life of up to 3 years. It could be traded
State what is meant by the cash flow approach to replacement analysis, and list two reasons why it is not a good idea to use this method.
ABB Communications is considering replacing equipment that had a fi rst cost of $300,000 five years ago. The company CEO wants to know if the equipment should be replaced now or at any other time over the next 3 years to minimize the cost of producing miniature background suppression sensors.Since
The table below shows present worth calculations of the costs associated with using a presently owned machine (defender) and a possible replacement (challenger) for different numbers of years. Determine when the defender should be replaced using an interest rate of 10% per year and a 5-year study
Nano Technologies intends to use the newest and fi nest equipment in its labs. Accordingly, a senior engineer has recommended that a 2-year-old piece of precision measurement equipment be replaced immediately. This engineer believes it can be shown that the proposed equipment is economically
An industrial engineer at a fiber-optic manufacturing company is considering two robots to reduce costs in a production line. Robot X will have a first cost of $82,000, an annual maintenance and operation (M&O) cost of $30,000, and salvage values of $50,000, $42,000, and $35,000 after 1, 2, and
A 3-year-old machine purchased for $140,000 is not able to meet today's market demands. The machine can be upgraded now for $70,000 or sold to a subcontracting company for $40,000. The current machine will have an annual operating cost of $85,000 per year and a $30,000 salvage value in 3 years. If
Two processes can be used for producing a polymer that reduces friction loss in engines. Process K, which is currently in place, has a market value of $165,000 now, an operating cost of $69,000 per year, and a salvage value of $50,000 after 1 more year and $40,000 after its maximum 2-year remaining
In Example, the in-place kiln and replacement kiln (GH) were evaluated using a fixed study period of 6 years. This is a significantly shortened period compared to the expected 12-year life of the challenger. Use the best estimates available throughout this case to determine the impact on the
Nabisco Bakers currently employs staff to operate the equipment used to sterilize much of the mixing, baking, and packaging facilities in a large cookie and cracker manufacturing plant in Iowa. The plant manager, who is dedicated to cutting costs but not sacrificing quality and hygiene, has the
In 2008, Amphenol Industrial purchased a new quality inspection system for $550,000. The estimated salvage value was $50,000 after 8 years. Currently the expected remaining life is 3 years with an AOC of $27,000 per year and an estimated salvage value of $30,000. The new president has recommended
A CNC milling machine purchased by Proto Tool and Die 10 years ago for $75,000 can be used for 3 more years. Estimates are an annual operating cost of $63,000 and a salvage value of $25,000. A challenger will cost $130,000 with an economic life of 6 years and an operating cost of $32,000 per year.
Hydrochloric acid, which fumes at room temperatures, creates a very corrosive work environment, causing steel tools to rust and equipment to fail prematurely. A distillation system purchased 4 years ago for $80,000 can be used for only 2 more years, at which time it will be scrapped with no value.
Engine oil purifier machines can effectively remove acid, pitch, particles, water, and gas from used oil. Purifier A was purchased 5 years ago for $90,000. Its operating cost is higher than expected, so if it is not replaced now, it will likely be used for only 3 more years. Its operating cost this
In looking for ways to cut costs and increase profit (to make the company's stock go up), one of the company's industrial engineers (IEs) determined that the equivalent annual worth of an existing machine over its remaining useful life of 3 years will be $-70,000 per year. The IE also determined

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