Evaluating Single Project: PROBLEM SET: Money-Time Relationships

PROBLEM SET: Money-Time Relationships
Evaluating Single Project
1. A machine can be overhauled today for P5,000, and will save P500 in operating
expenses every year for 5 years. If the MARR is 10% per year, is the overhaul
desirable?
2. A printing firm is to acquire P10,000 worth of printing equipment with an expected
life of 15 years. Auxiliary equipment that can be coupled with the printing equipment
can reduce operating costs by P10,000 annually. If the firm has a 25% cost of capital,
what must the maximum cost be for the auxiliary equipment?
3. A project is estimated to require an initial investment of P80,000 in physical assets,
which would have an economic life of 10 years and be worth P10,000 in salvage
value at the end of that time. The estimated gross annual savings will be P17,000
and the out of pocket expenses will be P1,400 per year. The opportunity cost of
capital before income taxes, is 10%. Determine the advisability of the investment
using: a) AW, b) PW, c) FW, and d) IRR.
4. It is estimated that insulation of steam pipes in a factory will reduce the fuel bill by as
much as 20%. The cost of insulation is P9,000 and the annual cost of taxes and
insurance is 5% of the initial cost. With the insulation, the annual fuel bill is P18,000.
If the insulation is worthless after 6 years of use, and a minimum return of 12% is
desired, would it be worthwhile to invest in the insulation? Use ERRR method.
5. A small company XYZ Corporation is in the business of cleaning bottles for large soft
drink makers. It presently owns a bottle-cleaning machine that operates for 5,000
hours per year at the rate of 50 bottles being cleaned per hour. XYZ charges P0.10
per cleaned bottle. The machine may be renovated to increase its output by an
additional 20 cleaned bottles per hour, with no increase in its current operating cost
which amounts to P10,000 annually. The renovation will cost P50,000 (as financed
by bonds, P10,000; and retained earnings, P440,000) will extend the machine’s life to
5 years, and will result to zero salvage value at the end of that time. Is the renovation
acceptable? Explicit cost for bonds is 15% while for retained earnings is 20%.
6. An existing warehouse is worth P500,000, and the average value of the goods stored
is P800,000. Total insurance cost on the warehouse and inventory is P10,000
annually. If a proposed sprinkling system is installed in the warehouse, the insurance
cost will be reduced to three fourths of the original cost. The cost of the sprinkler
system is P20,000 and the additional annual cost for maintenance and inspection
would be P500. The required write-off period for the entire investment in the
sprinkler system is 20 years. The operation of the warehouse is now providing the
firm a 12% return on the original investment.
7. A company has an opportunity to increase its production level of Mr. Kleen detergent
bar. The price of the detergent will remain at P5 per unit for the next 10 years. The
additional annual operating expenses include a fixed amount of P10,000 for
electricity plus P2 per unit of detergent produced in selling expenses. The project will
last for ten years. To execute this project, the company must purchase a new machine
for P200,000 that will have no value at the end of its life. How many units of Mr.
Kleen must be sold each year so that the project will have an IRR of 10%?
ENGECON: Applications of Money-Time Relationships 1

8. A computer facility is requested to serve the data processing needs of a manufacturing
firm. In addition, after office hours, computer time may be sold to outside users at a
rate of P50 per hour. The computer will cost the company P200,000 and the expected
useful life is 5 years at the end of which, the facility can be sold for P10,000. Annual
revenues from this endeavor are estimated at a fixed P200,000. Maintenance for the
asset will amount to P150,000 yearly for the tapes, diskettes and air-conditioning.
Assume MARR = 25% per annum. How many after-office hours should be used to
make the proposal to be barely acceptable?
Evaluating Different Projects (Same Lives)
1. A company is planning to install a new automated plastic molding press. Four

different presses are available. The essential differences in initial investment and
operating costs for these mutually exclusive cost alternatives are as follows:
Alternative
A B C D
Investment P6,000 P7,600 P12,400 P13,000
Useful Life (yr.) 5 5 5 5
Annual Operation & Maintenance
Power 680 680 1,200 1,260
Labor 6,600 6,000 4,200 3,700
Maintenance 400 450 650 500
Property taxes & insurance 120 152 248 260
Total annual Costs P7,800 P7,282 P6,298 P5,720
Each press will produce the same number of units. However, because of different
degrees of mechanization, some require different amounts and grades of labor and
have different operation and maintenance costs. None is expected to have a salvage
value, and the selected study period is 5 years, the same as the common useful life.
Any capital invested is expected to earn at least 10% before taxes. Which press
should be chosen? Use PW, AW & FW methods.
2. In an automotive parts plant, a study team is analyzing an improvement project to

increase the productivity of a flexible manufacturing center. The estimated cash
flows for the three feasible alternatives being compared are shown in the table. The
analysis period is 6 years, and the MARR for the capital investments at the plant is
20%. Using ERR method, which alternative should be selected?
EOY A B C
0 -640,000 -680,000 -755,000
1 262,000 -40,000 205,000
2 290,000 392,000 406,000
3 302,000 380,000 400,000
4 310,000 380,000 390,000
5 310,000 380,000 390,000
6 260,000 380,000 324,000

3. The estimated initial investment cost, and the annual operating and maintenance costs
(based on 1,500 hours of operation per year), for four alternative designs of a diesel-
powered air compressor are shown, as well as the estimated salvage value for each
design at the end of the common 5-year useful life. The perspective of these cost
estimates is that of the typical user (construction company, plant facilities
department, government highway department, and so on). The study period is 5
years, and the MARR is 20%. Based on this information, determine the preferred
alternative design using the IRR method.
A B C D
Investment P100,000 P140600 P148,200 P122,000
Annual cost 29,000 16,900 14,800 22,100
Useful Life (yr.) 5 5 5 5
Salvage Value 10,000 14,000 25,600 14,000
Evaluating Different Projects (Different Lives)
1. Bulaklak Oil Company must install anti-pollution equipment in a new refinery in

Bataan to meet clean air legislation. It is considering five types of equipment, and the
following data are available:
Kampupot Kalasutsi Katuray
Investment P1,500,000 P1,000,000 P1,400,000
Revenue/yr. 594,210 480,000 590,433
Disbursement/yr.
Power 24,000 16,000 18,000
Labor 63,000 53,328 56,000
Maintenance 20,000 15,000 16,000
Estimated Life, yr. 8 5 6
Salvage Value (% I) 10 12 15
Method of Depreciation SL SYD DDB
If MARR is 20%, use IRR method to determine which proposal to accept.
2. MARR = 20%. Use PW method.

A B C D
Initial Cost P190,000 P130,000 P100,000 P50,000
Life (yr.) 4 6 7 4
Salvage Value 10% of initial cost
Net Cash Flows
1 75,000 50,000 40,000 40,000
2 75,000 60,000 50,000 40,000
3 80,000 70,000 60,000 40,000
4 80,000 80,000 50,000 50,000
5 - 70,000 60,000 40,000
6 - 70,000 60,000 -
7 - - 60,000 -
Depreciation Method DDB SL SYD DB

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PROBLEM SET: Money-Time Relationships

Evaluating Single Project

ENGECON: Applications of Money-Time Relationships 1

Evaluating Different Projects (Same Lives)

1. A company is planning to install a new automated plastic molding press. Four

2. In an automotive parts plant, a study team is analyzing an improvement project to

ENGECON: Applications of Money-Time Relationships 2

Evaluating Different Projects (Different Lives)

1. Bulaklak Oil Company must install anti-pollution equipment in a new refinery in

2. MARR = 20%. Use PW method.

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