A retrofitted heating system is being considered for an office building. The system can bepurchased and installed for $ (501,000), and it will save an estimated (101,000) kilowatt-hours(kWh) of electric power each year over a 6-year period. A kilowatt-hour of electricity costs$1.164.The market value (MV) of the system will be $ (8,100) at the end of six years, and the annualoperating and maintenance expenses (O&M) for the system are $ (5,100).MARR is15% per year.(a) Use the conventional benefit-cost (B/C ratio) for Present Worth method to make arecommendation.(i)(ii)Compute the conventional B/C ratio. Round your answer to 2 decimal places.Should this system be purchased? Why?(b) Use the modified benefit-cost (B/C ratio) for Present Worth method to make arecommendation.(i)Compute the modified B/C ratio. Round your answer to 2 decimal places.Should this system be purchased? Why?(ii)(c) Assume that the electricity costs will increase at the inflation rate of 3% per year.(i)(ii)Compute the conventional B/C ratio. Round your answer to 2 decimal places.Should this system be purchased? Why?

Benefit cost ratio:The benefit-cost ratio, a vital financial metric, measures the relative value of…

Answered: A retrofitted heating system is being…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
A restaurant is considering the purchase of new tables and chairs for their dining room with an initial investment cost of $515,000, and the restaurant expects an annual net cash flow of $103,000 per year. What is the payback period?
A grocery store is considering the purchase of a new refrigeration unit with an Initial Investment of $412,000, and the store expects a return of $100,000 in year one, $72000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period?
If a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Conestoga Plumbing plans to invest in a new pump that is anticipated to provide annual savings for 10 years of $50,000. The pump can be sold at the end of the period for $100,000. What is the present value of the investment in the pump at a 9% interest rate given that savings are realized at year end?
The expenses included in the fabrication of a wind turbine for a planned Wind Farm is $73,000 annually. A wise Electrical Engineer developed an alternative that by spending $16,000 now to modify the rotor blades and adjust the gear box, the yearly cost will decrease to $58,000 next year and $52,000 at the end of year 2 until 5. If the interest rate is 10% per year, what is the present worth of the cost savings because of the modification and adjustment?
A new equipment is being considered to replace an old equipment in a facility. The equipment would cost $7,480 and it would require a special maintenance at year 10 of the life expectancy of the equipment, which is of 15 years (also life of the project). The new equipment will generate savings in the order of $1,000 per year. If a discount rate of 6% is used what is the maximum cost of the maintenance at year 10 to make the project to be considered as a feasible option? answer is 4000 but how
A retrofitted space-heating system is being considered for a small office building. The system can be purchased and installed for $120,000, and it will save an estimated 300,000 kilowatt-hours (kWh) of electric power each year over a six-year period. A kilowatt-hour of electricity costs $0.10, and the company uses a MARR of 15% per year in its economic evaluations of refurbished systems. The market value of the system will be $8,000 at the end of six years, and additional annual operating and maintenance expenses are negligible. what is the benefit–cost ratio of the project if the general inflation rate is 4% per year and the market value is negligible? The market interest rate (im) is 18% per year, and the annual savings are expressed in year-zero dollars.

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