SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 1
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40,
43, 46, and 49
1.1 Time value of money means that there is a certain worth in having money and the
worth changes as a function of time.
1.4 Nearest, tastiest, quickest, classiest, most scenic, etc
1.7 Minimum attractive rate of return is the lowest rate of return (interest rate) that
companies or individuals consider to be high enough to induce them to invest their
money.
1.10 Rate of increase = [(29 22)/22]*100 = 31.8%
1.13 Profit = 8 million*0.28 = $2,240,000
1.16 (a) Equivalent future amount = 10,000 + 10,000(0.08)
= 10,000(1 + 0.08)
= $10,800
(b) Equivalent past amount: P + 0.08P = 10,000
1.08P = 10,000
P = $9259.26
1.19 80,000 + 80,000(i) = 100,000
i = 25%
1.22 Simple: 1,000,000 = 500,000 + 500,000(i)(5)
i = 20% per year simple
Compound: 1,000,000 = 500,000(1 + i)5
(1 + i)5 = 2.0000
(1 + i) = (2.0000)0.2
i = 14.87%

1.25 Plan 1: Interest paid each year = 400,000(0.10)

= $40,000
Chapter 1

Total paid = 40,000(3) + 400,000

= $520,000
Plan 2: Total due after 3 years = 400,000(1 + 0.10)3
= $532,400
Difference paid = 532,400 520,000
= $12,400
1.28 (a) FV(i%,n,A,P) finds the future value, F
(b) IRR(first_cell:last_cell) finds the compound interest rate, i
(c) PMT(i%,n,P,F) finds the equal periodic payment, A
(d) PV(i%,n,A,F) finds the present value, P.
1.31 For built-in Excel functions, a parameter that does not apply can be left blank when
it is not an interior one. For example, if there is no F involved when using the PMT
function to solve a particular problem, it can be left blank because it is an end
function. When the function involved is an interior one (like P in the PMT
function), a comma must be put in its position.
1.34 Highest to lowest rate of return is as follows: Credit card, bank loan to new
business, corporate bond, government bond, interest on checking account
1.37 End of period convention means that the cash flows are assumed to have occurred
at the end of the period in which they took place.
1.40 The cash flow diagram is:

P=?
i = 15%

0 1

$40,000

1.43

4 = 72/i
i = 18% per year

1.46

2P = P + P(0.05)(n)
n = 20
Answer is (d)

1.49 Answer is (c)

Chapter 1

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 2
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43, 46,
49, 52, 55, 58, 61, 64, 67, 70, 73, 76, 79, and 82
2.1

1. (F/P,8%25) = 6.8485; 2. (P/A,3%,8) = 7.0197; 3. (P/G,9%,20) = 61.7770;

4. (F/A,15%,18) = 75.8364; 5. (A/P,30%,15) = 0.30598

2.4

P = 600,000(P/F,12%,4)
= 600,000(0.6355)
= $381,300

2.7 P = 75(P/F,18%,2)
= 75(0.7182)
= $53.865 million
2.10 P = 162,000(P/F,12%,6)
= 162,000(0.5066)
= $82,069
2.13 P = 1.25(0.10)(P/F,8%,2) + 0.5(0.10)(P/F,8%,5)
= 0.125(0.8573) + 0.05(0.6806)
= $141,193
2.16 A = 1.8(A/P,12%,6)
= 1.8(0.24323)
= $437,814
2.19 P = 75,000(P/A,15%,5)
= 75,000(3.3522)
= $251,415
2.22 P = 2000(P/A,8%,35)
= 2000(11.6546)
= $23,309
2.25 (a) 1. Interpolate between n = 32 and n = 34:
1/2 = x/0.0014
x = 0.0007
(P/F,18%,33) = 0.0050 0.0007
= 0.0043

Chapter 2

2. Interpolate between n = 50 and n = 55:

4/5 = x/0.0654
x = 0.05232
(A/G,12%,54) = 8.1597 + 0.05232
= 8.2120
(b) 1. (P/F,18%,33) = 1/(1+0.18)33
= 0.0042
2. (A/G,12%,54) = {(1/0.12) 54/[(1+0.12)54 1}
= 8.2143
2.28

(a) G = $5 million (b) CF 6 = $6030 million (c) n = 12

2.31 (a) CF 3 = 280,000 2(50,000)

= $180,000
(b) A = 280,000 50,000(A/G,12%,5)
= 280,000 50,000(1.7746)
= $191,270
2.34

A = 14,000 + 1500(A/G,12%,4)
= 14,000 + 1500(1.3589)
= $16,038

2.37 50 = 6(P/A,12%,6) + G(P/G,12%,6)

50 = 6(4.1114) + G(8.9302)
G = $2,836,622
2.40 For g = i, P = 60,000(0.1)[15/(1 + 0.04)]
= $86,538
2.43

First find P and then convert to F:

P = 2000{1 [(1+0.10)7/(1+0.15)7}]}/(0.15 0.10)
= 2000(5.3481)
= $10,696

F = 10,696(F/P,15%,7)
= 10,696(2.6600)
= $28,452
2.46 g = i: P = 1000[20/(1 + 0.10)]
= 1000[18.1818]
= $18,182
2.49

Simple: Total interest = (0.12)(15) = 180%

Compound: 1.8 = (1 + i)15

Chapter 2

i = 4.0%
2.52 1,000,000 = 600,000(F/P,i,5)
(F/P,i,5) = 1.6667
i = 10.8% (Spreadsheet)
2.55 85,000 = 30,000(P/A,i,5) + 8,000(P/G,i,5)
i = 38.9%
(Spreadsheet)
2.58

2,000,000 = 100,000(P/A,5%,n)
(P/A,5%,n) = 20.000
From 5% table, n is between 40 and 45 years; by spreadsheet, 42 > n > 41
Therefore, n = 41 years

2.61

10A = A(F/A,10%,n)
(F/A,10%,n) = 10.000
From 10% table, n is between 7 and 8 years; therefore, n = 8 years

2.64

P = 61,000(P/F,6%,4)
= 61,000(0.7921)
= $48,318
Answer is (c)

2.67 109.355 = 7(P/A,i,25)

(P/A,i,25) = 15.6221
From tables, i = 4%
Answer is (a)
2.70 P = 8000(P/A,10%,10) + 500(P/G,10%,10)
= 8000(6.1446) + 500(22.8913)
= $60,602.45
Answer is (a)
2.73 F = 100,000(F/A,18%,5)
= 100,000(7.1542)
= $715,420
Answer is (c)
2.76

A = 100,000(A/P,12%,5)
= 100,000(0.27741)
= $27,741
Answer is (b)

2.79 F = 10,000(F/P,12%,5) + 10,000(F/P,12%,3) + 10,000

= 10,000(1.7623) + 10,000(1.4049) + 10,000
Chapter 2

= $41,672
Answer is (c)
2.82

60,000 = 15,000(P/A,18%,n)
(P/A,18%,n) = 4.000
n is between 7 and 8
Answer is (b)

Chapter 2

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 3
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43, 46,
49, 52, 55, 58, and 61
3.1 P = 100,000(260)(P/A,10%,8)(P/F,10%,2)
= 26,000,000(5.3349)(0.8264)
= $114.628 million
3.4 P = 100,000(P/A,15%,3) + 200,000(P/A,15%,2)(P/F,15%,3)
= 100,000(2.2832) + 200,000(1.6257)(0.6575)
= $442,100
3.7 A = [0.701(5.4)(P/A,20%,2) + 0.701(6.1)(P/A,20%,2)((P/F,20%,2)](A/P,20%,4)
= [3.7854(1.5278) + 4.2761(1.5278)(0.6944)](0.38629)
= $3.986 billion
3.10 A = 8000(A/P,10%,10) + 600
= 8000(0.16275) + 600
= $1902
3.13 A = 15,000(F/A,8%,9)(A/F,8%,10)
= 15,000(12.4876)(0.06903)
= $12,930
3.16 A = [20,000(F/A,8%,11) + 8000(F/A,8%,7)](A/F,8%,10)
= [20,000(16.6455) + 8000(8.9228)]{0.06903)
= $27,908
3.19 100,000 = A(F/A,7%,5)(F/P,7%,10)
100,000 = A(5.7507)(1.9672)
A = $8839.56
3.22 Amt year 5 = 1000(F/A,12%,4)(F/P,12%,2) + 2000(P/A,12%,7)(P/F,12%,1)
= 1000(4.7793)(1.2544) + 2000(4.5638)(0.8929)
= $14,145

3.25 Move unknown deposits to year 1, amortize using A/P, and set equal to $10,000:
x(F/A,10%,2)(F/P,10%,19)(A/P,10%,15) = 10,000
x(2.1000)(6.1159)(0.13147) = 10,000
Chapter 3

x = $5922.34
3.28 Find P at t = 0 and then convert to A:
P = $22,994
A = 22,994(A/P,12%,8)
= 22,994(0.20130)
= $4628.69
3.31 Amt year 3 = 900(F/A,16%,4) + 3000(P/A,16%,2) 1500(P/F,16%,3)
+ 500(P/A,16%,2)(P/F,16%,3)
= 900(5.0665) + 3000(1.6052) 1500(0.6407)
+ 500(1.6052)(0.6407)
= $8928.63
3.34 P = [4,100,000(P/A,6%,22) 50,000(P/G,6%,22)](P/F,6%,3)
+ 4,100,000(P/A,6%,3)
= [4,100,000(12.0416) 50,000(98.9412](0.8396)
+ 4,100,000(2.6730)
= $48,257,271
3.37

First find P at t = 0 and then convert to A:

P = $82,993
A = 82,993(A/P,12%,5)
= 82,993(0.27741)
= $23,023

3.40

40,000 = x(P/A,10%,2) + (x + 2000)(P/A,10%,3)(P/F,10%,2)

40,000 = x(1.7355) + (x + 2000)(2.4869)(0.8264)
3.79067x = 35,889.65
x = $9467.89 (size of first two payments)

3.43

Find P in year 1 and then find A in years 0-5:

P g (in yr 2) = (5)(4000){[1 - (1 + 0.08)18/(1 + 0.10)18]/(0.10 - 0.08)}
= $281,280
P in yr 1 = 281,280(P/F,10%,3) + 20,000(P/A,10%,3)
= $261,064
A = 261,064(A/P,10%,6)
= $59,943

3.46

Find P in year 1 and then move to year 0:

P (yr 1) = 15,000{[1 (1 + 0.10)5/(1 + 0.16)5]/(0.16 0.10)}
= $58,304

Chapter 3

P = 58,304(F/P,16%,1)
= $67,632
3.49 P = 5000 + 1000(P/A,12%,4) + [1000(P/A,12%,7) 100(P/G,12%,7)](P/F,12%,4)
= $10,198
3.52 P = 2000 + 1800(P/A,15%,5) 200(P/G,15%,5)
= $6878.94
3.55

P = 7 + 7(P/A,4%,25)
= $116.3547 million
Answer is (c)

3.58 Balance = 10,000(F/P,10%,2) 3000(F/A,10%,2)

= 10,000(1.21) 3000(2.10)
= $5800
Answer is (b)
3.61 100,000 = A(F/A,10%,4)(F/P,10%,1)
100,000 = A(4.6410)(1.10)
A = $19,588
Answer is (a)

Chapter 3

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 4
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43, 46,
49, 52, 55, 58, 61, 64, 67, 70, and 73
4.1 (a) monthly (b) quarterly (c) semiannually
4.4 (a) 1 (b) 4 (c) 12
4.7 (a) 5% (b) 20%
4.10 i = (1 + 0.04)4 1
= 16.99%
4.13 0.1881 = (1 + 0.18/m)m 1; Solve for m by trial and get m = 2
4.16 (a) i/week = 0.068/26
= 0.262%
(b) effective
4.19 From 2% table at n=12, F/P = 1.2682
4.22 F = 2.7(F/P,3%,60)
= $15.91 billion
4.25 P = 1.3(P/A,1%,28)(P/F,1%,2)
= $30,988,577
4.28 F = 50(20)(F/P,1.5%,9)
= $1.1434 billion
4.31 i/wk = 0.25%
P = 2.99(P/A,0.25%,40)
= $113.68
4.34

P = (14.99 6.99)(P/A,1%,24)
= 8(21.2434)
= $169.95

4.37 2,000,000 = A(P/A,3%,8) + 50,000(P/G,3%,8)

A = $117,665
Chapter 4

4.40

Move deposits to end of compounding periods and then find F:

F = 1800(F/A,3%,30)
= $85,636

4.43 Move monthly costs to end of quarter and then find F:

Monthly costs = 495(6)(2) = $5940
End of quarter costs = 5940(3) = $17,820
F = 17,820(F/A,1.5%,4)
= $72,900
4.46

4.49

0.127 = er 1
r/yr = 11.96%
r /quarter = 2.99%
i = e0.02 1 = 2.02% per month
A = 50(A/P,2.02%,36)
= 50{[0.0202(1 + 0.0202)36]/[(1 + 0.0202)36 1]}
= $1,968,000

4.52 Set up F/P equation in months:

3P = P(1 + i)60
3.000 = (1 + i)60
i = 1.85% per month (effective)
4.55

First move cash flow in years 0-4 to year 4 at i = 12%:

F = $36,543
Now move cash flow to year 5 at i = 20%:
F = 36,543(F/P,20%,1) + 9000
= $52,852

4.58

Answer is (d)

4.61 Answer is (d)

4.64

i/semi = e0.02 1 = 0.0202 = 2.02%

Answer is (b)

4.67 P = 7 + 7(P/A,4%,25)
= $116.3547 million
Answer is (c)
4.70 PP>CP; must use i over PP (1 year); therefore, n = 7
Answer is (a)
4.73 Deposit in year 1 = 1250/(1 + 0.05)3
Chapter 4

= $1079.80
Answer is (d)

Chapter 4

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 5
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43, 46,
49, 52, 55, 58, 61, and 64
5.1 A service alternative is one that has only costs (no revenues).
5.4 (a) Total possible = 25 = 32
(b) Because of restrictions, cannot have any combinations of 3,4, or 5. Only 12 are
acceptable: DN, 1, 2, 3, 4, 5, 1&3, 1&4, 1&5, 2&3, 2&4, and 2&5.
5.7 Capitalized cost represents the present worth of service for an infinite time. Real
world examples that might be analyzed using CC would be Yellowstone National
Park, Golden Gate Bridge, Hoover Dam, etc.
5.10 Bottled water:

Cost/mo = -(2)(0.40)(30) = $24.00

PW = -24.00(P/A,0.5%,12)
= $-278.85

Municipal water: Cost/mo = -5(30)(2.10)/1000 = $0.315

PW = -0.315(P/A,0.5%,12)
= $-3.66
5.13 PW JX = -205,000 29,000(P/A,10%,4) 203,000(P/F,10%,2)
+ 2000(P/F,10%,4)
= $-463,320
PW KZ = -235,000 27,000(P/A,10%,4) + 20,000(P/F,10%,4)
= $-306,927
Select material KZ
5.16

i/year = (1 + 0.03)2 1 = 6.09%

PW A = -1,000,000 - 1,000,000(P/A,6.09%,5)
= -1,000,000 - 1,000,000(4.2021)
(by equation)
= $-5,202,100

PW B = -600,000 600,000(P/A,3%,11)
= $-6,151,560
Chapter 5

PW C = -1,500,000 500,000(P/F,3%,4) 1,500,000(P/F,3%,6)

- 500,000(P/F,3%,10)
= $-3,572,550
Select plan C
5.19

FW purchase = -150,000(F/P,15%,6) + 12,000(F/A,15%,6) + 65,000

= $-176,921
FW lease = -30,000(F/A,15%,6)(F/P,15%,1)
= $-302,003
Purchase the clamshell

5.22

CC = -400,000 400,000(A/F,6%,2)/0.06
=$-3,636,267

5.25 CC = -250,000,000 800,000/0.08 [950,000(A/F,8%,10)]/0.08

- 75,000(A/F,8%,5)/0.08
= $-251,979,538
5.28 Find AW of each plan, then take difference, and divide by i.
AW A = -50,000(A/F,10%,5)
= $-8190
AW B = -100,000(A/F,10%,10)
= $-6275
CC of difference = (8190 - 6275)/0.10
= $19,150
5.31

CC = 100,000 + 100,000/0.08
= $1,350,000

5.34

No-return payback refers to the time required to recover an investment at i = 0%.

5.37

0 = -22,000 + (3500 2000)(P/A,4%,n)

(P/A,4%,n) = 14.6667
n is between 22 and 23 quarters or 5.75 years

5.40

250,000 500n + 250,000(1 + 0.02)n = 100,000

Try n = 18: 98,062 < 100,000
Try n = 19: 104,703 > 100,000

Chapter 5

n is 18.3 months or 1.6 years.

5.43 LCC = 2.6(P/F,6%,1) 2.0(P/F,6%,2) 7.5(P/F,6%,3) 10.0(P/F,6%,4)
-6.3(P/F,6%,5) 1.36(P/A,6%,15)(P/F,6%,5) -3.0(P/F,6%,10)
- 3.7(P/F,6%,18)
= $-36,000,921
5.46 I = 10,000(0.06)/4 = $150 every 3 months
5.49

Bond interest rate and market interest rate are the same.
Therefore, PW = face value = $50,000.

5.52

I = (V)(0.07)/2
201,000,000 = I(P/A,4%,60) + V(P/F,4%,60)
Try V = 226,000,000: 201,000,000 > 200,444,485
Try V = 227,000,000: 201,000,000 < 201,331,408
By interpolation, V = $226,626,340

5.55 PW = 50,000 + 10,000(P/A,10%,15) + [20,000/0.10](P/F,10%,15)

= $173,941
Answer is (c)
5.58 PW X = -66,000 10,000(P/A,10%,6) + 10,000(P/F,10%,6)
= $-103,908
Answer is (c)
5.61

CC = -10,000(A/P,10%,5)/0.10
= $-26,380
Answer is (b)

5.64 Answer is (a)

Chapter 5

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 6
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, and 31
6.1

The estimate obtained from the three-year AW would not be valid, because the AW
calculated over one life cycle is valid only for the entire cycle, not part of the cycle.
Here the asset would be used for only a part of its three-year life cycle.

6.4 AW centrifuge = -250,000(A/P,10%,6) 31,000 + 40,000(A/F,10,6)

= $-83,218
AW belt = -170,000(A/P,10%,4) 35,000 26,000(P/F,10%,2)(A/P,10%,4)
+ 10,000(A/F,10%,4)
= $-93,549
Select centrifuge.
6.7 AW X = -85,000(A/P,12%,3) 30,000 + 40,000(A/F,12%,3)
= $-53,536
AW Y = -97,000(A/P,12%,3) 27,000 + 48,000(A/F,12%,3)
= $-53,161
Select robot Y by a small margin.
6.10 AW C = -40,000(A/P,15%,3) 10,000 + 12,000(A/F,15%,3)
= $-24,063
AW D = -65,000(A/P,15%,6) 12,000 + 25,000(A/F,15%,6)
= $-26,320
Select machine C.
6.13

AW land = -110,000(A/P,12%,3) 95,000 + 15,000(A/F,12%,3)

= $-136,353
AW incin = -800,000(A/P,12%,6) 60,000 + 250,000(A/F,12%,6)
= $-223,777
AW contract = $-190,000

Use land application.

6.16 AW 100 = 100,000(A/P,10%,100)
= $10,001
Chapter 6

AW = 100,000(0.10)
= $10,000
Difference is $1.
6.19

AW = -100,000(0.08) 50,000(A/F,8%,5)
= -100,000(0.08) 50,000(0.17046)
= $-16,523

6.22 Find P in year 1, move to year 9, and then multiply by i. Amounts are in $1000.
P -1 = [100(P/A,12%,7) 10(P/G,12%,7)](F/P,12%,10)
= $1055.78
A = 1055.78(0.12)
= $126.69
6.25 Find PW in year 0 and then multiply by i.
PW 0 = 50,000 + 10,000(P/A,10%,15) + (20,000/0.10)(P/F,10%,15)
= $173,941
6.28

Note: i = effective 10% per year.

A = [100,000(F/P,10%,5) 10,000(F/A,10%,6)](0.10)
= $8389

6.31 AW = -800,000(0.10) 10,000

= $-90,000
Answer is (c)

Chapter 6

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 7
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43, 46,
49, 52, and 55
7.1 A rate of return of 100% means that the entire investment is lost.
7.4 Monthly pmt = 100,000(A/P,0.5%,360)
= 100,000(0.00600)
= $600
Balloon pmt = 100,000(F/P,0.5%,60) 600(F/A,0.5%,60)
= 100,000(1.3489) 600(69.7700)
= $93,028
7.7

0 = -30,000 + (27,000 18,000)(P/A,i%,5) + 4000(P/F,i%,5)

Solve by trial and error or Excel
i = 17.9 %
(Excel)

7.10

0 = -10 4(P/A,i%,3) - 3(P/A,i%,3)(P/F,i%,3) + 2(P/F,i%,1) + 3(P/F,i%,2)

+ 9(P/A,i%,4)(P/F,i%,2)
Solve by trial and error or Excel
i = 14.6%
(Excel)

7.13

(a) 0 = -41,000,000 + 55,000(60)(P/A,i%,30)

Solve by trial and error or Excel
i = 7.0% per year
(Excel)
(b) 0 = -41,000,000 + [55,000(60) + 12,000(90)](P/A,i%,30)
0 = -41,000,000 + (4,380,000)(P/A,i%,30)
Solve by trial and error or Excel
i = 10.1% per year
(Excel)

7.16

0 = -110,000 + 4800(P/A,i%,60)
(P/A,i%,60) = 22.9167
Use tables or Excel
i = 3.93% per month

(Excel)

7.19 0 = -950,000 + [450,000(P/A,i%,5) + 50,000(P/G,i%,5)] )(P/F,i%,10)

Solve by trial and error or Excel
Chapter 7

i = 8.45% per year

(Excel)

7.22 In a conventional cash flow series, there is only one sign change in the net cash
flow. A nonconventional series has more than one sign change.
7.25 Tabulate net cash flows and cumulative cash flows.
Quarter
0
1
2
3
4
5
6
7
8

Expenses
-20
-20
-10
-10
-10
-10
-15
-12
-15

Revenue
0
5
10
25
26
20
17
15
2

Net Cash Flow Cumulative

-20
-20
-15
-35
0
-35
15
-20
16
-4
10
+6
2
+8
3
+11
-13
-2

(a) From net cash flow column, there are two possible i* values

(b) In cumulative cash flow column, sign starts negative but it changes twice.
Therefore, Norstroms criterion is not satisfied. Thus, there may be up to
two i* values. However, in this case, since the cumulative cash flow is
negative, there is no positive rate of return value.
7.28 The net cash flow and cumulative cash flow are shown below.
Year
0
1
2
3
4

Expenses, $ Savings, $
-33,000
0
-15,000
18,000
-40,000
38,000
-20,000
55,000
-13,000
12,000

Net Cash Flow, $

-33,000
+3,000
-2000
+35,000
-1000

Cumulative, $
-33,000
-30,000
-32,000
+3000
+2000

(a) There are four sign changes in net cash flow, so, there are four possible
i* values.

7.28 (cont) (b) Cumulative cash flow starts negative and changes only once. Therefore,
there is only one positive, real solution.
0 = -33,000 + 3000(P/F,i%,1) - 2000(P/F,i%,2) + 35,000(P/F,i%,3)
-1000(P/F,i%,4)
Chapter 7

Solve by trial and error or Excel

i = 2.1% per year
(Excel)
7.31

Tabulate net cash flow and cumulative cash flow values.

Year
1
2
3
4
5
6
7
8
9
10

Cash Flow, $
-5000
-5000
-5000
-5000
-5000
-5000
+9000
-5000
-5000
-5000 + 50,000

Cumulative, $
-5,000
-10,000
-15,000
-20,000
-25,000
-30,000
-21,000
-26,000
-31,000
+14,000

(a) There are three changes in sign in the net cash flow series, so there are three
possible ROR values. However, according to Norstroms criterion regarding
cumulative cash flow, there is only one ROR value.
(b) Move all cash flows to year 10.
0 = -5000(F/A,i,10) + 14,000(F/P,i,3) + 50,000
Solve for i by trial and error or Excel
i = 6.3%

(Excel)

(c) If Equation [7.6] is applied, all F values are negative except the last one.
Therefore, i is used in all equations. The composite ROR (i) is the same
as the internal ROR value (i*) of 6.3% per year.

Chapter 7

7.34 Apply net reinvestment procedure because reinvestment rate, c, is not equal
to i* rate of 44.1% per year (from problem 7.29):
F 0 = -5000
F 1 = -5000(1 + i) + 4000
= -5000 5000i + 4000
= -1000 5000i
F 2 = (-1000 5000i)(1 + i)
= -1000 5000i 1000i 5000i2
= -1000 6000i 5000i2

F 0 < 0; use i
F 1 < 0; use i
F 2 < 0; use

i
F 3 = (-1000 6000i 5000i2)(1 + i)
= -1000 6000i 5000i2 1000i 6000i2 5000i3
= -1000 7000i 11,000i2 5000i3
F 3 < 0; use i
2
3
F 4 = (-1000 7000i 11,000i 5000i )(1 + i) + 20,000
= 19,000 8000i 18,000i2 16,000i3 - 5,000i4
F 4 > 0; use c
F 5 = (19,000 8000i 18,000i2 16,000i3 - 5,000i4)(1.15) 15,000
= 6850 9200i 20,700i2 18,400i3 - 5,750i4
Set F 5 = 0 and solve for i by trial and error or spreadsheet.
i = 35.7% per year
7.37

(a) i = 5,000,000(0.06)/4 = $75,000 per quarter

After brokerage fees, the City got $4,500,000. However, before brokerage
fees, the ROR equation from the Citys standpoint is:
0 = 4,600,000 75,000(P/A,i%,120) - 5,000,000(P/F,i%,120)
Solve for i by trial and error or Excel
i = 1.65% per quarter

(Excel)

(b) Nominal i per year = 1.65(4)

= 6.6% per year
Effective i per year = (1 + 0.066/4)4 1
= 6.77% per year

Chapter 7

7.40

i = 5000(0.10)/2
= $250 per six months
0 = -5000 + 250(P/A,i%,8) + 5,500(P/F,i%,8)
Solve for i by trial and error or Excel
i = 6.0% per six months

(Excel)

7.43

Answer is (c)

7.46

0 = -60,000 + 10,000(P/A,i,10)
(P/A,i,10) = 6.0000
From tables, i is between 10% and 11%
Answer is (a)

7.49 0 = -100,000 + (10,000/i)(P/F,i,4)

Solve for i by trial and error or Excel
i = 9.99%% per year
Answer is (a)
7.52

(Excel)

250 = (10,000)(b)/2
b = 5% per year payable semiannually
Answer is (c)

7.55 Since the bond was purchased for its face value, the interest rate received by the
purchaser is the bond interest rate of 10% per year payable quarterly. Answers (a)
and (b) are correct. Therefore, the best answer is (c).

Chapter 7

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 8
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, and 43
8.1 (a) The rate of return on the increment has to be larger than 18%.
(b) The rate of return on the increment has to be smaller than 10%.
8.4 The rate of return on the increment of investment is less than 0.
8.7

(a) Incremental investment analysis is not required. Alternative X should be

selected because the rate of return on the increment is known to be lower
than 20%
(b) Incremental investment analysis is not required because only Alt Y has ROR
greater than the MARR
(c) Incremental investment analysis is not required. Neither alternative should be
selected because neither one has a ROR greater than the MARR.
(d) The ROR on the increment is less than 26%, but an incremental investment
analysis is required to determine if the rate of return on the increment equals or
exceeds the MARR of 20%
(e) Incremental investment analysis is not required because it is known that
the ROR on the increment is greater than 22%.

8.10

Year
0
1
2
3
4
5
6

Machine A
-15,000
-1,600
-1600
-15,000 1600 + 3000
-1600
-1600
+3000 1600

Machine B
-25,000
-400
-400
-400
-400
-400
+6000 400

BA
-10,000
+1200
+1200
+13,200
+1200
+1200
+4200

8.13 (a) Find rate of return on incremental cash flow.

0 = -3000 200(P/A,i,3) + 4700(P/F,i,3)
i = 10.4% (Excel)
(b) Incremental ROR is less than MARR; select Ford.

8.16 0 = -10,000 + 1200(P/A,i,4) + 12,000(P/F,i,2) + 1000(P/F,i,4)

Solve for i by trial and error or Excel
Chapter 8

i = 30.3%
(Excel)
Select machine B.
8.19 Find P to yield exactly 50% and the take difference.
0 = -P + 400,000(P/F,i,1) + 600,000(P/F,i,2) + 850,000(P/F,i,3)
P = 400,000(0.6667) + 600,000(0.4444) + 850,000(0.2963)
= $785,175
Difference = 900,000 785,175
= $114,825
8.22 Find ROR for incremental cash flow over LCM of 4 years
0 = -50,000(A/P,i,4) + 5000 + (40,000 5000)(P/F, i,2)(A/P, i,4) + 2000(A/F,i,4)
Solve for i by trial and error or Excel
i = 6.1%
(Excel)
i < MARR; select semiautomatic machine
8.25 Find ROR on increment of investment.
0 = -500,000(A/P,i,10) + 60,000
i = 3.5% < MARR
Select design 1A
8.28

(a) A vs DN: 0 = -30,000(A/P,i,8) + 4000 + 1000(A/F,i,8)

Solve for i by trial and error or Excel
i = 2.1% (Excel)
Method A is not acceptable
B vs DN: 0 = - 36,000(A/P,i,8) + 5000 + 2000(A/F,i,8)
Solve for i by trial and error or Excel
i = 3.4% (Excel)
Method B is not acceptable
C vs DN: 0 = - 41,000(A/P,i,8) + 8000 + 500(A/F,i,8)
Solve for i by trial and error or Excel
i = 11.3% (Excel)
Method C is acceptable

8.28 (cont)
D vs DN: 0 = - 53,000(A/P,i,8) + 10,500 - 2000(A/F,i,8)
Solve for i by trial and error or Excel
i = 11.1% (Excel)
Method D is acceptable

Chapter 8

(b) A vs DN: 0 = -30,000(A/P,i,8) + 4000 + 1000(A/F,i,8)

Solve for i by trial and error or Excel
i = 2.1%
(Excel)
Eliminate A
B vs DN: 0 = - 36,000(A/P,i,8) + 5000 + 2000(A/F,i,8)
Solve for i by trial and error or Excel
i = 3.4% (Excel)
Eliminate B
C vs DN: 0 = - 41,000(A/P,i,8) + 8000 + 500(A/F,i,8)
Solve for i by trial and error or Excel
i = 11.3% (Excel)
Eliminate DN
C vs D: 0 = - 12,000(A/P,i,8) + 2,500 - 2500(A/F,i,8)
Solve for i by trial and error or Excel
i = 10.4% (Excel)
Eliminate D
Select method C
8.31 (a) Select all projects whose ROR > MARR of 15%. Select A, B, and C
(b) Eliminate alternatives with ROR < MARR; compare others incrementally:
Eliminate D and E
Rank survivors according to increasing first cost: B, C, A
B vs C: i = 800/5000
= 16% > MARR

Eliminate B

C vs A: i = 200/5000
= 4% < MARR

Eliminate A

Select project C

8.34 (a) Find ROR for each increment of investment:

E vs F: 20,000(0.20) + 10,000(i) = 30,000(0.35)
i = 65%
E vs G: 20,000(0.20) + 30,000(i) = 50,000(0.25)

Chapter 8

i = 28.3%
E vs H: 20,000(0.20) + 60,000(i) = 80,000(0.20)
i = 20%
F vs G: 30,000(0.35) + 20,000(i) = 50,000(0.25)
i = 10%
F vs H: 30,000(0.35) + 50,000(i) = 80,000(0.20)
i = 11%
G vs H: 50,000(0.25) + 30,000(i) = 80,000(0.20)
i = 11.7%
(b) Revenue = A = Pi
E: A = 20,000(0.20) = $4000
F: A = 30,000(0.35) = $10,500
G: A = 50,000(0.25) = $12,500
H: A = 80,000(0.20) = $16,000
(c) Conduct incremental analysis using results from part (a):
E vs DN: i = 20% > MARR eliminate DN
E vs F: i = 65% > MARR eliminate E
F vs G: i = 10% < MARR eliminate G
F vs H: i = 11% < MARR eliminate H
Select Alternative F
(d) Conduct incremental analysis using results from part (a).
E vs DN: i = 20% >MARR, eliminate DN
E vs F: i = 65%
> MARR, eliminate E
F vs G: i = 10%
< MARR, eliminate G
F vs H: i = 11%
= MARR, eliminate F
Select alternative H

8.34 (cont)
(e) Conduct incremental analysis using results from part (a).
E vs DN: i = 20% > MARR, eliminate DN
E vs F: i = 65%
> MARR, eliminate E
F vs G: i = 10%
< MARR, eliminate G
F vs H: i = 11%
< MARR, eliminate H
Select F as first alternative; compare remaining alternatives incrementally.

Chapter 8

E vs DN: i = 20% > MARR, eliminate DN

E vs G: i = 28.3% > MARR, eliminate E
G vs H: i = 11.7% < MARR, eliminate H
Select alternatives F and G
8.37

Answer is (c)

8.40 Answer is (d)

8.43 Answer is (b)

Chapter 8

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 9
Solutions included for problems: 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 32, 34, 37, 40, and 43
9.1

(a) Public sector projects usually require large initial investments while many
private sector investments may be medium to small.
(b) Public sector projects usually have long lives (30-50 years) while private sector
projects are usually in the 2-25 year range.
(c) Public sector projects are usually funded from taxes, government bonds, or user
fees. Private sector projects are usually funded via stocks, corporate bonds, or
bank loans.

9.4

Some different dimensions are:

1. Contractor is involved in design of highway; contractor is not provided with the
final plans before building the highway.
2. Obtaining project financing may be a partial responsibility in conjunction with
the government unit.
3. Corporation will probably operate the highway (tolls, maintenance,
management) for some years after construction.
4. Corporation will legally own the highway right of way and improvements until
contracted time is over and title transfer occurs.
5. Profit (return on investment) will be stated in the contract.

9.7 (a)

Chapter 9

(b) Change cell D6 to $200,000 to get B/C = 1.023.

9.10 All parts are solved on the spreadsheet once it is formatted using cell references.

Chapter 9

9.13

(a) By-hand solution: First, set up AW value relation of the initial cost, P
capitalized a 7%. Then determine P for B/C = 1.3.
1.3 =

600,000____
P(0.07) + 300,000

P = [(600,000/1.3) 300,000]/0.07 = $2,307,692

9.16 Convert all estimates to PW values.
PW disbenefits = 45,000(P/A,6%,15) = $437,049
PW M&O Cost = 300,000(P/A,6%,15) = $2,913,660
B/C = 3,800,000 437,049__
2,200,000 + 2,913,660

= 0.66

9.19 Calculate the AW of initial cost, then the 3 B/C measures of worth. The roadway
should not be built.

Chapter 9

9.22

Alternative B has a larger total annual cost; it must be incrementally justified.

Incr cost = (800,000 600,000) + (70,000 50,000)(P/A,8%,20)
= $396,362
Incr benefit = (950,000 250,000)(P/F,8%,6)
= 441,140
Incr B/C = 441,140/396,362 = 1.11
Select alternative B

9.25

East coast site has the larger total cost. Select east coast site.

Chapter 9

9.28 (b) Location E

B = 500,000 30,000 50,000 = $420,000
C = 3,000,000 (0.12) = $360,000
Modified B/C = 420,000/360,000 = 1.17
Location E is justified.
Location W
Incr B = $200,000
Incr D = $10,000
Incr C = (7 million 3 million)(0.12) = $480,000
Incr M&O = (65,000 25,000) 50,000 = $-10,000
Note that M&O is now an incremental cost advantage for W.
Modified incr B/C = 200,000 10,000 + 10,000
480,000
W is not justified; select location E
9.32

= 0.42

Combine the investment and installation costs, difference in usage fees define
benefits. Use the procedure in Section 9.3 to solve. Benefits are the incremental
amounts for lowered costs of annual usage for each larger size pipe.

Chapter 9

1, 2. Order of incremental analysis:

3.
4.

Size

130

150

200

230

Total first cost, $ 9,780 11,310 14,580 17,350

Annual benefits, $ -200
600
300
Not used since the benefits are defined by usage costs.

5-7. Determine incremental B and C and select at each pairwise comparison of

defender vs challenger.
150 vs 130 mm
C = (11,310 9,780)(A/P,8%,15)
= 1,530(0.11683)
= $178.75
B = 6,000 5,800
= $200
B/C = 200/178.75
= 1.12 > 1.0
Eliminate 130 mm size.
200 vs 150 mm
C = (14,580 11,310)(A/P,8%,15)
= 3270(0.11683)
= $382.03
B = 5800 5200
= $600
B/C = 600/382.03
= 1.57 > 1.0
Eliminate 150 mm size.
230 vs 200 mm
C = (17,350 14,580)(A/P,8%,15)
= 2770(0.11683)
= $323.62
B = 5200 4900
= $300
B/C = 0.93 < 1.0
Eliminate 230 mm size.
Select 200 mm size.
9.34 (a) Site D is the one selected.

Chapter 9

(b) For independent projects, select the largest three of the four with B/C > 1.0.
Those selected are: D, F, and E.
9.37

(a) Find benefits for each alternative and then calculate incremental B/C ratios.
Benefits for P:
Benefits for Q:
Benefits for R:
Benefits for S:

1.1 = BP /10
2.4 = BQ/40
1.4 = BR/50
1.5 = BS/80

Incremental B/C for Q vs P

B/C = 96 11 = 2.83
40 10
Incremental B/C for R vs P
B/C = 1.48

9.37 (cont) Incremental B/C for S vs P

B/C = 1.56

Chapter 9

BP = 11
BQ = 96
BR = 70
BS = 120

Incremental B/C for R vs Q

B/C = -2.60
Disregard due to less B for more C.
Incremental B/C for S vs Q
B/C = 0.60
Incremental B/C for S vs R
B/C = 1.67
(b) Select Q
9.40

Answer is (a)

9.43

Answer is (c)

Chapter 9

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 10
Solutions included for: 2, 5, 8, 11, 12, 14, 16, 20, 23, 24, 27, 29, 32, 35, 38, 41, 44, and 46

10.2

Incremental cash flow analysis is mandatory for the ROR method and B/C
method. (See Table 10.2 and Section 10.1 for comments.)

10.5

(a) Hand solution: Choose the AW or PW method at 0.5% for equal lives over 60
months.
Computer solution: Either the PMT function or the PV function can give singlecell solutions for each alternative.
(b) The B/C method was the evaluation method in chapter 9, so rework it using
AW.
Hand solution: Find the AW for each cash flow series on a per household per
month basis.
AW 1 = 1.25 60(A/P,0.5%,60)
= $0.09
AW 2 = 8.00 - 500(A/P,0.5%,60)
= $-1.67
Select program 1

10.8

(a)
(b)
(c)
(d)

10.11 (a)
(b)
(c)
(d)

Bonds are debt financing

Stocks are always equity
Equity
Equity loans are debt financing, like house mortgage loans
Select 2. It is the alternative investing the maximum available with
incremental i* > 9%
Select 3
Select 3
MARR = 10% for alternative 4 is opportunity cost at $400,000 level

10.14 (a) Calculate the two WACC values.

Chapter 10

WACC 1 = 0.6(12%) + 0.4 (9%) = 10.8%

WACC 2 = 0.2(12%) + 0.8(12.5%) = 12.4%
Use approach 1, with a D-E mix of 40%-60%
(b) Let x 1 and x 2 be the maximum costs of debt capital.
Alternative 1: 10% = WACC 1 = 0.6(12%) + 0.4(x 1 )
x 1 = [10% - 0.6(12%)]/0.4
= 7%
Debt capital cost would have to decrease from 9% to 7%.
Alternative 2: 10% = WACC 2 = 0.2(12%) + 0.8(x 2 )
x 2 = [10% - 0.2(12%)]/0.8
= 9.5%
Debt capital cost would, again, have to decrease; now from 12.5% to 9.5%
10.16 WACC = cost of debt capital + cost of equity capital
= (0.4)[0.667(8%) + 0.333(10%)] + (0.6)[(0.4)(5%) + (0.6)(9%)]
= 7.907%
10.20 Before-taxes: WACC = 0.4(9%) + 0.6(12%) = 10.8% per year
After-tax:
After-tax WACC = (equity)(equity rate) + (debt)(before-tax debt rate)(1T e )
= 0.4(9%) + 0.6(12%)(1-0.35)
= 8.28% per year
10.23 Equity cost of capital is stated as 6%.
Debt cost of capital benefits from tax savings.
Before-tax bond annual interest = 4 million (0.08) = $320,000
Annual bond interest NCF = 320,000(1 0.4) = $192,000
Effective quarterly dividend = 192,000/4 = $48,000
Find quarterly i* using a PW relation.
0 = 4,000,000 - 48,000(P/A,i*,40) - 4,000,000(P/F,i*,40)
i* = 1.2% per quarter = 4.8% per year (nominal)
Debt financing at 4.8% per year is cheaper than equity funds at 6% per year.
(Note: The correct answer is also obtained if the before-tax debt cost of 8% is
used to estimate the after-tax debt cost of 8%(1 - 0.4) = 4.8%.)
10.24 (a) Bank loan:
Annual loan payment = 800,000(A/P,8%,8) = $139,208
Principal payment = 800,000/8 = $100,000
Annual interest = 139,208 100,000 = $39,208
Tax saving = 39,208(0.40) = $15,683
Chapter 10

Effective interest payment = 39,208 15,683 = $23,525

Effective annual payment = 23,525 + 100,000 = $123,525
The AW-based i* relation is:
0 = 800,000(A/P,i*,8) 123,525
i* = 4.95%
Bond issue:
Annual bond interest = 800,000(0.06) = $48,000
Tax saving = 48,000(0.40) = $19,200
Effective bond interest = 48,000 19,200 = $28,800
The AW-based i* relation is:
0 = 800,000(A/P,i*,10) - 28,800 - 800,000(A/F,i*,10)
i* = 3.6%
(RATE or IRR function)
Bond financing is cheaper.
(b) Bonds cost 6% per year, which is less than the 8% loan. The answer is the
same before-taxes.
10.27 Debt capital cost: 9.5% for $6 million
Equity -- common stock: 100,000(32) = $3.2 million or 32% of total capital
R e = 1.10/ 32 + 0.02 = 5.44%
Equity -- retained earnings: cost is 5.44% for this 8% of total capital.
WACC = 0.6(9.5%) + 0.32(5.44%) + 0.08(5.44%) = 7.88%
10.29 Determine the effective annual interest rate i a for each plan.
12
Plan 1: i a for debt = (1 + 0.00583) -1 = 7.225%
2
i a for equity = (1 + 0.03) - 1 = 6.09%
WACC A = 0.5(7.225%) + 0.5(6.09%) = 6.66%
2
Plan 2: i a for 100% equity = WACC B = (1 + 0.03) - 1 = 6.09%
12
Plan 3: i a for 100% debt = WACC C = (1 + 0.00583) -1 = 7.225%
Plan 2: 100% equity has the lowest before-tax WACC.
10.32 Two independent, revenue projects with different lives. Select all those with
AW > 0.
Equity capital is 40% at a cost of 7.5% per year
Debt capital is 5% per year, compounded quarterly. Effective rate after taxes is

Chapter 10

After-tax debt i* = [(1 + 0.05/4)4 - 1] (1- 0.3) = 3.5665% per year

WACC = 0.4(7.5%) + 0.6(3.5665%) = 5.14% per year
MARR = WACC = 5.14%

(a) At MARR = 5.14%, select both independent projects.

(b) With 2% added for higher risk, only project W is acceptable.

10.35 100% equity financing

MARR = 8.5% is known. Determine PW at the MARR.
PW = -250,000 + 30,000(P/A,8.5%,15) = $-874
Conclusion: 100% equity does not meet the MARR requirement
Chapter 10

60%-40% D-E financing

Loan principal = 250,000(0.60) = $150,000
Loan payment = 150,000(A/P,9%,15) = $18,609 per year
Cost of 60% debt capital is 9% for the loan.
WACC = 0.4(8.5%) + 0.6(9%) = 8.8%
MARR = 8.8%
Annual NCF = project NCF - loan payment = $11,391
Amount of equity invested = 250,000 - 150,000 = $100,000
PW = -100,000 + 11,391(P/A,8.8%,15) = $ -7,087
Conclusion: 60% debt-40% equity mix does not meet the MARR requirement
10.38 All points will increase, except the 0% debt value. The new WACC curve is
relatively higher at both the 0% debt and 100% debt points and the minimum
WACC point will move to the right.
Conclusion: The minimum WACC will increase with a higher D-E mix, since
debt and equity cost curves rise relative to those for lower D-E mixes.
10.41

Attribute
1
2
3
4
5

Importance
100
10
50
37.5
100
297.5

_____Logic________
Most important (100)
10% of problem
1/2(100)
0.75(50)
Same as #1

W i = Score/297.5

10.41 (cont) Attribute

1
2
3
4
5

W i____
0.336
0.034
0.168
0.126
0.336
1.000

10.44 (a) Both sets of ratings give the same conclusion, alternative 1, but the
consistency between raters should be improved somewhat. This result simply
Chapter 10

shows that the weighted evaluation method is relatively insensitive to attribute

weights when an alternative (1 here) is favored by high (or disfavored by low)
weights.
Vice president

(b)

V ij _______
Attribute
Wi
1
2
3
_______________________________________
1
2
3

0.10
0.40
0.50

3
28
50
81

4
40
40
84

10
28
45
83

Select alternative 2
Assistant vice president
V ij for alternatives
Attribute
Wi
1
2
3
_______________________________________
1
2
3

0.50
0.40
0.10

15
28
10
53

20
40
8
68

50
28
9
87

Select 3
Rating differences on alternatives by attribute can make a significant
difference in the alternative selected, based on these results.
10.46. Sum the ratings in Table 10.5 over all six attributes.
V ij ______
1
Total

470 515

3__
345

Select alternative 2; the same choice is made.

Chapter 10

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 11
Solutions included for problems 3, 5, 9, 11, 15, 17, 21, 24, 27, 30, 33, 36, and 39
11.3

The consultants (external or outsiders) viewpoint is important to provide an

unbiased analysis for both the defender and challenger, without owning or using
either one.

11.5

P = market value = $350,000

AOC = $125,000 per year
n = 2 years
S = $5,000

11.9

(a) The ESL is 5 years, as in Problem 11.8.

(b) On the same spreadsheet, decrease salvage by $1000 each year,

and increase AOC by 15% per year. Extend the years to 10. The ESL is
relatively insensitive between years 5 and 7, but the conclusion is ESL = 6
years.

Chapter 11

11.11 (a) For n = 1: AW 1 = -100,000(A/P,18%,1) 75,000 +

100,000(0.85)1(A/F,18%,1)
= $ -108,000
For n = 2: AW 2 = -100,000(A/P,18%,2) 75,000 - 10,000(A/G,18%,2)
+ 100,000(0.85)2(A/F,18%,2)
= $ - 110,316
ESL is 1 year with AW 1 = $-108,000.
(b) Set the AW relation for year 6 equal to AW 1 = $-108,000 and solve for P, the
required lower first cost.
AW 6 = -108,000 = -P(A/P,18%,6) 75,000 - 10,000(A/G,18%,6)
+ P(0.85)6(A/F,18%,6)
-108,000 = -P(0.28591) 75,000 10,000(2.0252) + P(0.37715)(0.10591)
0.24597P = -95,252 + 108,000
P = $51,828
The first cost would have to be reduced from $100,000 to $51,828. This is a
quite large reduction.

Chapter 11

11.15 Spreadsheet and marginal costs used to find the ESL of 5 years with
AW = $-57,141.

11.17

Defender: ESL = 3 years with AW D = $-47,000

Challenger: ESL = 2 years with AW C = $-49,000
Recommendation now is to retain the defender for 3 years, then replace.

11.21 (a) The n values are set; calculate the AW values directly and select D or C.
AW D = -50,000(A/P,10%,5) 160,000
= $-173,190
AW C = -700,000(A/P,10%,10) 150,000 + 50,000(A/F,10%,10)
= $-260,788
Retain the current bleaching system for 5 more years.
(b) Find the replacement value for the current process.
-RV(A/P,10%,5) 160,000 = AW C = -260,788
RV = $382,060
This is 85% of the first cost 7 years ago; way too high for a trade-in value now.
11.24 (a) By hand: Find ESL of the defender; compare with AW C over 5 years.
For n = 1: AW D = -8000(A/P,15%,1) 50,000 + 6000(A/F,15%,1)
Chapter 11

= $-53,200
For n = 2: AW D = -8000(A/P,15%,2) 50,000 + (-3000 + 4000)(A/F,15%,2)
= $-54,456
For n = 3: AW D = -8000(A/P,15%,3) - [50,000(P/F,15%,1) +
= -$57,089
The ESL is now 1 year with AW D = $-53,200
AW C = -125,000(A/P,15%,5) 31,000 + 10,000(A/F,15%,5)
= $-66,807
Since the ESL AW value is lower that the challenger AW, Richter should
keep the defender now and replace it after 1 year.
(b) To make the decision, compare AW values.
AW D = $-53,200
AW C = $-66,806
Select the defender now and replaced after one year.

11.27 (a) By hand: Find the replacement value (RV) for the in-place system.
-RV(A/P,12%,7) 75,000 + 50,000(A/F,12%,7) = -400,000(A/P,12%,12)
50,000 + 35,000(A/F,12%,12)
RV = $196,612
11.27 (cont) (b) By spreadsheet: One approach is to set up the defender cash flows for
increasing n values and use the PMT function to find AW. Just over 4 years
will give the same AW values.

Chapter 11

11.30 (a) If no study period is specified, the three replacement study assumptions in
Section 11.1 hold. So, the services of the defender and challenger can be
obtained (it is assumed) at their AW values. When a study period is specified
these assumptions are not made and repeatability of either D or C alternatives
is not a consideration.
(b) If a study period is specified, all viable options must be evaluated. Without a
study period, the ESL analysis or the AW values at set n values determine the
AW values for D and C. Selection of the best option concludes the study.
11.33 (a) Option
1
2
3
4
5
6
7
8

Chapter 11

Defender
0
0
0
0
3
3
3
3

Challenger
5
6
7
8
2
3
4
5

A total of 5 options have AW = $-90,000. Several ways to go; defender can be

replaced now or after 3 years and challenger can be used from 2 to 5 years,
depending on the option chosen.
(b) PW values cannot be used to select best options since the equal-service
assumption is violated due to study periods of different lengths. Must us AW
values.
11.36 Answer is (a)
11.39 Answer is (c)

Chapter 11

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 12
Solutions included for problems: 2, 4, 7, 10, 13, 15, 19, 22, and 25
12.2

Any net positive cash flows that occur in any project are reinvested at the MARR
from the time they are realized until the end of the longest-lived project being
evaluated. In effect, this makes the lives equal for all projects, a requirement to
correctly apply the PW method.

12.4

Considering the $400 limitation, the viable bundles are:

Projects
DN
2
3
4
2, 3
2, 4
3, 4

Investment
$ 0
150
75
235
225
385
310

12.7 (a) Select project B for a total of $200,000, since it is the only one of the three
single projects with PW > 0 at MARR = 12% per year.

12.7 (cont) (b) Use SOLVER to find the necessary minimum NCF.

Chapter 12

Chapter 12

12.10 (a) Set up spreadsheet and determine that the Do Nothing bundle is the only
acceptable one, and that PW C = $-6219. Since the initial investment occurs at
time t = 0, maximum initial investment for C at which PW = 0 is
-550,000 + (-6219) = $-543,781
(b) Use SOLVER with the target cell as PW = 0 for project C. Result is MARR =
9.518%.

Chapter 12

12.13 (a) PW values are determined at MARR = 15% per year.

Bundle
1
2
3
4
5

Projects
1
2
3
4
1,3

Initial
investment, $
-1.5 mil
-3.0
-1.8
-2.0
-3.3

1,4

-3.5

3,4

-3.8

NCF,
Life,
$ per year years
360,000
8
600,000
10
520,000
5
820,000
4
880,000
1-5
360,000
6-8
1,180,000
1-4
360,000
5-8
1,340,000
520,000

PW at 15%
$115,428
11,280
- 56,856
341,100
58,572

1-4
5

456,528

284,244

Select projects 1 and 4 with $3.5 million invested.

12.15

Budget limit, b = $16,000

Bundle
1

MARR = 12% per year

NCF for
years 1 through 5
$1000,1700,2400,
3000,3800
500,500,500,
500,10500
5000,5000,2000

Projects
1

Investment
$-5,000

- 8,000

- 9,000

-10,000

0,0,0,17000

1,2

-13,000

1,3

-14,000

1,4

-15,000

1500,2200,2900,
3500,14300
6000,6700,4400,
3000,3800
1000,1700,2400,
20000,3800

Chapter 12

PW at 12%
$3019
- 523
874
804
2496
3893
3823

12.19 (a) Select projects C and E.

(b) Change MARR to 12% and the budget constraint to $500,000. Select projects A, C
and E.

Chapter 12

12.22 Select projects 1 and 4 with $3.5 million invested.

Chapter 12

12.25 Use SOLVER repeatedly to find the best projects and corresponding value of Z.
Develop an Excel chart for the two series.

Chapter 12

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 13
Solutions included for problems: 1, 5, 8, 11, 14, 17, 21, 23b, 26
13.1 (a)
(b)

Q BE = 1,000,000/(8.50-4.25) = 235,294 units

Profit = 8.50Q 1,000,000 - 4.25Q
at 200,000 units: Profit = $-150,000 (loss)
at 350,000 units: Profit = $487,500

13.5

From Equation [13.4], plot C u = 160,000/Q + 4.

(a) If C u = $5, from the graph, Q is approximately 160,000. If Q is determined by
Equation [13.4], it is
5 = 160,000/Q + 4
Q = 160,000/1 = 160,000 units
(b)

13.8

From the plot, or by equation, Q = 100,000 units.

C u = 6 = 200,000/Q + 4
Q = 200,000/2 = 100,000 units

On spreadsheet for 13.7, include an IF statement for the computation of Q BE for

the reduced FC of $750,000. The breakeven point reduces to 521,739.

Chapter 13

13.11 FC = $305,000
(a)

(b)

v = $5500/unit

Profit = (r v)Q FC
0 = (r 5500)5000 305,000
(r 5500) = 305,000 / 5000
r = $5561 per unit
Profit = (r v)Q FC
500,000 = (r 5500)8000 305,000
(r 5500) = (500,000 + 305,000) / 8000
r = $5601 per unit

13.14 Let x = hours per year

-800(A/P,10%,3) - (300/2000)x -1.0x = -1,900(A/P,10%,5) - (700/8000)x - 1.0x
-800(0.40211) - 0.15x - 1.0x = -1,900(0.2638) - 0.0875x - 1.0x
x = 2873 hours per year
13.17 (a) Let x = breakeven days per year. Use annual worth analysis.
-125,000(A/P,12%,8) + 5,000(A/F,12%,8) - 2,000 - 40x = -45(125 +20x)
-125,000(0.2013) + 5,000(0.0813) - 2,000 - 40x = -5625 900x
x = 24.6 days per year
Chapter 13

(b) Since 75 > 24.6 days, buy. Annual cost is $-29,756

13.21 Let x = yards per year to breakeven
(a) Solution by hand
-40,000(A/P,8%,10) - 2,000 -(30/2500)x = - [6(14)/2500]x
-40,000(0.14903) - 2,000 - 0.012x = -0.0336x
x = 368,574 yards per year
(b) Solution by computer: There are many Excel set-ups to work the problem.
One is: Enter the parameters for each alternative, including some number of
yards per year as a guess. Use SOLVER to force the breakeven equation to
equal 0, with a constraint that total yardage be the same for both alternatives.

13.23 (b) Enter the cash flows and develop the PW relations for each column. Breakeven
is between 15 and 16 years. Selling price is estimated to be between $206,250
and $210,000.

Chapter 13

Breakeven
occurs here

13.26 (a) By hand: Let P = first cost of sandblasting. Equate the PW of painting each 4
years to PW of sandblasting each 10 years, up to 38 years.
PW of painting
PW p = -2,800 - 3,360(P/F,10%,4) - 4,032(P/F,10%,8) - 4,838(P/F,10%12)
5,806(P/F,10%,16) - 6,967(P/F,10%,20) -8,361(P/F,10%,24)
10,033(P/F,10%,28) - 12,039(P/F,10%,32) -14,447(P/F,10%,36)
= $-13,397

13.26 (cont)
PW of sandblasting
PW s = -P - 1.4P(P/F,10%,10) - 1.96P(P/F,10%,20) - 2.74P(P/F,10%,30)
-P[1 + 1.4(0.3855) + 1.96(0.1486) + 2.74(0.0573)]
= -1.988P

Chapter 13

Equate PW relations to obtain P = $6,739

(b) By computer: Enter the periodic costs. Use SOLVER to find breakeven
at P = $6739.

(c) Change MARR to 30% and 20%, respectively, and re-SOLVER to get:
30%: P = -$7133
20%: P = -$7546

Chapter 13

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 14
Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43,
46, and 49
14.1 Inflated dollars are converted into constant value dollars by dividing by one
plus the inflation rate per period for however many periods are involved.
14.4 Then-current dollars = 10,000(1 + 0.07)10
= $19,672
14.7

CV 0 for amt in yr 1 = 13,000/(1 + 0.06)1

= $12,264
CV 0 for amt in yr 2 = 13,000/(1 + 0.06)2
= $11,570
CV 0 for amt in yr 3 = 13,000/(1 + 0.06)3
= $10,915

14.10

(a) At a 56% increase, $1 would increase to $1.56. Let x = annual increase.

1.56 = (1 + x)5
1.560.2 = 1 + x
1.093 = 1 + x
x = 9.3% per year
(b) Amount greater than inflation rate: 9.3 2.5 = 6.8% per year

14.13

i f = 0.04 + 0.27 + (0.04)(0.27)

= 32.08% per year

14.16

For this problem, i f = 4% per month and i = 0.5% per month

0.04 = 0.005 + f + (0.005)(f)
1.005f = 0.035
f = 3.48% per month

14.19 Buying power = 1,000,000/(1 + 0.03)27

= $450,189
Chapter 14

14.22

(a) PW A = -31,000 28,000(P/A,10%,5) + 5000(P/F,10%,5)

= -31,000 28,000(3.7908) + 5000(0.6209)
= $-134,038
PW B = -48,000 19,000(P/A,10%,5) + 7000(P/F,10%,5)
= -48,000 19,000(3.7908) + 7000(0.6209)
= $-115,679
Select Machine B
(b)

i f = 0.10 + 0.03 + (0.10)(0.03) = 13.3%

PW A = -31,000 28,000(P/A,13.3%,5) + 5000(P/F,13.3%,5)
= -31,000 28,000(3.4916) + 5000(0.5356)
= $-126,087

PW B = -48,000 19,000(P/A,13.3%,5) + 7000(P/F,13.3%,5)

= -48,000 19,000(3.4916) + 7000(0.5356)
= $-110,591
Select machine B
14.25

(a) New yield = 2.16 + 3.02

= 5.18% per year
(b) Interest received = 25,000(0.0518/12)
= $107.92

14.28

740,000 = 625,000(F/P,f,7)
(F/P,f,7) = 1.184
(1 + f)7 = 1.184
f = 2.44% per year

14.31 In constant-value dollars, cost will be $40,000.

14.34

Future amount is equal to a return of i f on its investment

i f = (0.10 + 0.04) + 0.03 + (0.1 + 0.04)(0.03) = 17.42%
Required future amt = 1,000,000(F/P,17.42%,4)
= 1,000,000(1.9009)
= $1,900,900
Company will get more; make the investment.

14.37

i f = 0.15 + 0.06 + (0.15)(0.06) = 21.9%

AW = 183,000(A/P,21.9%,5)
= 183,000(0.34846)

Chapter 14

= $63,768
14.40

Find amount needed at 2% inflation rate and then find A using market rate.
F = 15,000(1 + 0.02)3
= 15,000(1.06121)
= $15,918
A = 15,918(A/F,8%,3)
= 15,918(0.30803)
= $4903

14.43

(a) For CV dollars, use i = 12% per year

AW A = -150,000(A/P,12%,5) 70,000 + 40,000(A/F,12%,5)
= -150,000(0.27741) 70,000 + 40,000(0.15741)
= $-105,315
AW B = -1,025,000(0.12) 5,000
= $-128,000
Select Machine A
(b) For then-current dollars, use i f
i f = 0.12 + 0.07 + (0.12)(0.07) = 19.84%
AW A = -150,000(A/P,19.84%,5) 70,000 + 40,000(A/F,19.84%,5)
= -150,000(0.3332) 70,000 + 40,000(0.1348)
= $-114,588
AW B = -1,025,000(0.1984) 5,000
= $-208,360
Select Machine A

14.46 Answer is (d)

14.49 Answer is (a)

Chapter 14

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 15
Solutions included for problems: 2, 4, 6, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40, 43, 46,
49, and 51
15.2

The bottom-up approach uses price as output and cost estimates as inputs. The
design-to-cost approach is just the opposite.

15.4

Property cost: (100 X 150)(2.50) = $37,500

House cost: (50 X 46)(.75)(125) = $215,625
Furnishings: (6)(3,000) = $18,000
Total cost: $271,125

15.6

Cost = 1200_ (78,000) = $91,095

1027.5

15.10 (a) First find the percentage increase (p%) between 1990 and 2000.
6221 = 4732 (F/P,p,10)
1.31467 = (1+p)10
p% increase = 2.773 %/year
Predicted index value in 2002 = 6221(F/P,2.773%,2) = 6571
(b) Difference = 6571 6538 = 33
15.13 Find the percentage increase between 1994 and 2002.
395.6 = 368.1(F/P,p,8)
1.0747 = (1+p)1/8
(1+p) = 1.009046
p % increase = 0.905 % per year
15.16 Index in 2005 = 1068.3(F/P,2%,6) = 1203.1
15.19 C 2 = 13,000(450/250)0.32 = $15,690
15.22 (a) 450,000 = 200,000(60,000/35,000)x
2.25 = 1.7143x
x = 1.504
(b) Since x > 1.0, there is diseconomy of scale and the larger CFM capacity is
Chapter 15

more expensive than a linear relation would be.

15.25 (a) C 2 = (1 million)(3)0.2(1.1)
= (1 million)(1.246)(1.1) = $1.37 million
Estimate was $630,000 low
(b) 2 million = (1 million)(3)x(1.25)
1.6 = (3)x
x = 0.428
15.28 ENR construction cost index ratio is (6538/4732).
Cost -capacity exponent is 0.60.
Let C 1 = cost of 5,000 sq. m. structure in 1990
C 2 in 1990 = $220,000 = C 1 (10,000/5,000)0.60
C 1 = $145,145
Update C 1 with cost index.
C 2002 = C 1 (6538/4732) = $200,540
15.31 h = 1 + 0.2 + 0.5 + 0.25 = 1.95
C T in 1994: 1.75 (1.95) = $3.41 million
Update with the cost index to now.
C T now: 3.41 (3713/2509) = 3.41(1.48) = $5.05 million
15.34 Indirect cost rate for 1 = 50,000 = $ 83.33 per hour
600
Indirect cost rate for 2 = 100,000 = $500.00 per hour
200
Indirect cost rate for 3 = 150,000 = $187.50 per hour
800
Indirect cost rate for 4 = 200,000 = $166.67 per hour
1,200
15.37 Housing: DLH is basis; rate is $16.35
Actual charge = 16.35(480) = $7,848
Subassemblies: DLH is basis; rate is $16.35
Actual charge = 16.35(1,000) = $16,350
Final assembly: DLC is basis; rate is $0.23
Actual charge = 0.23 (12,460) = $2,866

Chapter 15

15.40 DLC average rate = (1.25 + 5.75 + 3.45) /3 = $3.483 per DLC $
Department 1:
Department 2:

3.483(20,000) = $ 69,660
3.483(35,000) = 121,905

Total actual charges: $1,068,584

Allocation variance = 800,000 1,068,584 = $-268,584
15.43 As the DL hours component decreases, the denominator in Eq. [15.7], basis level,
will decrease. Thus, the rate for a department using automation to replace direct
labor hours will increase in the computation
15.46

DLH rate = $400,00/51,300 = $7.80 per hour

Old cycle time rate = $400,000/97.3 = $4,111 per second
New cycle time rate = $400,000/45.7 = $8,752.74 per second
Actual charges = (rate)(basis level)
Line
DLH basis
Old cycle time
New cycle time

10
$156,000
53,443
34,136

11
99,060
229,394
148,797

12___
145,080
117,164
217,068

The actual charge patterns are significantly different for all 3 bases.
15.49 89,750 = 75,000(I 2 /1027)
I 2 = 1229
Answer is (a)
15.51 Cost now = 15,000(1164/1092) (2)0.65 = $25,089
Answer is (b)

Chapter 15

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 16
Solutions included for problems: 2, 4, 8, 11, 14, 17, 20, 23, 26, 29, 32, 35, 38, 41, and 43
16.2

Book depreciation is used on internal financial records to reflect current capital

investment in the asset. Tax depreciation is used to determine the annual taxdeductible amount. They are not necessarily the same amount.

16.4

Asset depreciation is a deductible amount in computing income taxes for a

corporation, so the taxes will be reduced. Thus PW or AW may become positive
when the taxes due are lower.

16.8
Year
0
1
2
3
4
5

Book
value
$100,000
90,000
81,000
72,900
65,610
59,049

Part (a)
Annual
depreciation
0
$10,000
9000
8100
7290
6561

Part (b)
Depreciation
rate____
10 %
9
8.1
7.3
6.56

(c) Book value = $59,049 and market value = $24,000.

(d) Plot year versus book value in dollars for the table above

Chapter 16

16.11 (a) D t = (12,000 2000)/8 = $1250

(b) BV 3 = 12,000 3(1250) = $8250
(c) d =1/n = 1/8 = 0.125

16.14 (a) B = $50,000, n = 4, S = 0, d = 0.25

Year
0
1
2
3
4

Depreciation
$12,500
12,500
12,500
12,500

Accumulated
depreciation
$12,500
25,000
37,500
50,000

Book
value
$50,000
37,500
5,000
12,500
0

(b) S = $16,000; d = 0.25; (B - S) = $34,000

Chapter 16

Year

Depreciation

Accumulated
depreciation

0
1
2
3
4

$8,500
8,500
8,500
8,500

$ 8,500
17,000
25,500
34,000

Book
value
$50,000
41,500
33,000
24,500
16,000

16.17 (a) B = $50,000, n = 3, d = 0.6667 for DDB

Annual depreciation = 0.6667X(BV of previous year)

Year
0
1
2
3

Depreciation

Accumulated
depreciation

$33,335
11,112
3,704

$33,335
44,447
48,151

Book
value
$50,000
16,667
5,555
1,851

(b) Use the function =DDB(50000,0,3,t,2) for annual DDB depreciation.

Chapter 16

16.20 SL: d t = 0.20 of B = $25,000

BV t = 25,000 - t(5,000)

Fixed rate: DB with d = 0.25

BV t = 25,000(0.75)t

DDB: d = 2/5 = 0.40

BV t = 25,000(0.60)t

Declining balance methods

125% SL
200% SL

Year

SL

0.20

0.25

0.40

$25,000
20,000
15,000
10,000
5,000
0

$25,000
18,750
14,062
10,547
7,910
5,933

$25,000
15,000
9,000
5,400
3,240
1,944

0
1
2
3
4
5
16.23 (a)

d = 1.5/12 = 0.125
D 1 = 0.125(175,000)(0.875)11 = $21,875
BV 1 = 175,000(0.875)1 = $153,125
D 12 = $5,035

BV 12 = $35,248

(b)

The 150% DB salvage value of $35,248 is larger than S = $32,000.

(c)

=DDB(175000,32000,12,t,1.5) for t = 1, 2, , 12

16.26 B = $500,000; S = $100,000; n = 10 years

SL:
d = 1/n = 1/10
DDB:
d = 2/10 = 0.20
150% DB: d = 1.5/10 = 0.15
MACRS: d = 0.10

D1
D1
D1
D1

= (B-S)/n = (500,000 100,000)/10 = $40,000

= dB = 0.20(500,000) = $100,000
= dB = 0.15(500,000) = $75,000
= 0.10(500,000) = $50,000

First-year tax depreciation amounts vary considerably from $40,000 to $100,000.

16.29 Classical SL, n = 5
D t = 450,000/5 = $90,000
BV 3 = 450,000 3(90,000) = $180,000
16.29 (cont)

MACRS, after 3 years for n = 5 sum the rates in Table 16.2.

D t = 450,000(0.712) = $320,400
BV 3 = $450,000-320,400 = $129,600

Chapter 16

The difference is $50,400 that is not removed by classical SL.

16.32

16.35 Percentage depletion for copper is 15% of gross income, not to exceed 50% of
taxable income. Use GI = (tons)($/pound)(2000 pounds/ton).

Year
1
2
3

Gross
income
$3,200,000
7,020,000
2,990,000

% Depl
@ 15%
$480,000
1,053,000
448,500

50%
of TI
$750,000
1,000,000
500,000

Allowed
depletion
$480,000
1,000,000
448,500

16.38 Depreciation factor is 17.49%. D = 35,000(0.1749) = $6122. Answer is (d)

16.41 For SL method, BV at end of assets life MUST equal salvage value of $10,000.
Answer is (c)
16.43 Straight line rate is always used as the reference. So, answer is (a)

Chapter 16

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 17
Solutions included for all or part of problems: 4, 6, 9, 12, 15, 18, 21, 24, 27, 29, 33, 36,
39, 42, 45, 48, 51, 54, 57, and 60
17.4

(a) Company 1
TI
= (1,500,000 + 31,000) 754,000 148,000 = $629,000
Taxes = 113,900 + 0.34(629,000 335,000) = $213,860
Company 2
TI
= $236,000
Taxes = $75,290
(b) Co. 1:
Co. 2:

213,860/1.5 million = 14.26%

75,290/820,000 = 9.2%

(c) Company 1
Taxes = (TI)(T e ) = 629,000(0.34) = $213,860
% error with graduated tax = 0%
Company 2
Taxes = 236,000(0.34) = $80,240
% error = + 6.6%
17.6

T e = 0.076 + (1 0.076)(0.34) = 0.390

TI = $2.4 million
Taxes = 2,400,000(0.390) = $936,000

17.9

(a)

GI = 98,000 + 7500 = $105,500

TI = 105,500 10,500 = $95,000
Taxes = 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(26,200)
= $21,346

(b) 21,346/98,000 = 21.8%

(c) Reduced taxes = 0.9(21,346) = $19,211
$19,211 = 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(TI 26,200)
= 700 + 3210 + 10,100 + 0.28(x 68,800)
= 14,010 + 0.28(x 68,800)
0.28x = 24,465
Chapter 17

x = $87,375
Let y = new total of exemptions and deductions
TI = 87,375 = 105,500 y
y = $18,125
Total must increase from $10,500 to $18,125, which is a 73% increase.
17.12 Depreciation is used to find TI. Depreciation is not a true cash flow, and as such is
not a direct reduction when determining either CFBT or CFAT.
17.15 CFBT = CFAT + taxes
= [CFAT D(T e )]/(1 T e )
T e = 0.045 + 0.955(0.35) = 0.37925
CFBT = [2,000,000 (1,000,000)(0.37925)]/(1 0.37925)
= $2,610,955
17.18 (a) BV 2 = 80,000 16,000 25,600 = $38,400
(b)
Year
0
1
2

P or
(GI E)
S
80,000
50,000
50,000
38,400

D
16,000
25,600

TI
34,000
24,400

Taxes
12,920
9,272

CFAT
-$80,000
37,080
79,128

17.21 Here Taxes = (CFBT depr)(tax rate). Select the SL method with n = 5 years.

Chapter 17

17.24 (a)

t=n

PW TS = (tax savings in year t)(P/F,i,t)

t=1

Select the method that maximizes PW TS .

(b) TS t = D t (0.42). PW TS = $27,963
Year,t
1
2
3
4

17.27 (a)

(b)

Chapter 17

d
0.3333
0.4445
0.1481
0.0741

Depr
$26,664
35,560
11,848
5,928

CL = 5000 500 = $4500

TI = $4500
Tax savings = 0.40(4500) = $1800
CG = $10,000
DR = 0.2(100,000) = $20,000
TI = CG + DR = $30,000
Taxes = 30,000(0.4) = $12,000
3

TS ____
$11,199
14,935
4,976
2,490

17.29 (a)

BV 2 = 40,000 - 0.52(40,000) = $19,200

DR = 21,000 19,200 = $1800
TI = GI E D + DR = $6,000
Taxes = 6,000(0.35) = $2100

(b) CFAT = 20,000 3000 + 21,000 2100

= $35,900
17.33 In brief, net all short term, then all long term gains and losses. Finally, net the
gains and losses to determine what is reported on the return and how it is taxed.
17.36

0.08 = 0.12(1-tax rate)

Tax rate = 0.333

17.39 Since MARR = 25% exceeds the incremental i* of 17.26%, the incremental
investment is not justified. Sell NE now, retain TSE for the 4 years and then
dispose of it.

17.42 (a) PW A = -15,000 3000(P/A,14%,10) + 3000(P/F,14%,10)

= $-29,839
PW B = -22,000 1500(P/A,14%,10) + 5000(P/F,14%,10)
= $-28,476

Chapter 17

Select B with a slightly smaller PW value.

(b)

Machine A
Annual depreciation = (15,000 3,000)/10 = $1200
Tax savings = 4200(0.5) = $2100
CFAT = 3000 + 2100 = $900
PW A = 15,000 900(P/A,7%,10) + 3000(P/F,7%,10)
= $19,796
Machine B
Annual depreciation = $1700
Tax savings = $1600
CFAT = 1500 + 1600 = $100
PW B = 22,000 + 100(P/A,7%,10) + 5000(P/F,7%,10)
= $18,756
Select machine B
Machine A

(c)
Year
0
1
2
3
4
5
6
7
8
9
10
10
17.42 (cont)

P or S
$15,000

Year
0
1
2
3
4
5
6

P or S
$22,000

Chapter 17

3000

AOC
$3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
-

AOC
$1500
1500
1500
1500
1500
1500

Depr
Tax savings
$3000
$3000
4800
3900
2880
2940
1728
2364
1728
2364
864
1932
0
1500
0
1500
0
1500
0
1500
1500
Machine B
Depr
$4400
7040
4224
2534
2534
1268
5

CFAT
$15,000
0
900
-60
-636
-636
-1068
-1500
-1500
-1500
-1500
1500

Tax savings
CFAT
$22,000
$2950
1450
4270
2770
2862
1362
2017
517
2017
517
1384
116

7
8
9
10
10

5000

1500
1500
1500
1500
-

0
0
0
0
-

750
750
750
750
2500

750
750
750
750
2500

PW A = $18,536. PW B = $16,850. Select machine B, as above.

17.45 (b1 and 2)

17.48 (a) From Problem 17.42(b) for years 1 through 10.

CFAT A = $900

CFAT B = $+100

Use a spreadsheet to find the incremental ROR and to determine the PW of

incremental CFAT versus incremental i values. If MARR < 9.75%, select B,
otherwise select A.

Chapter 17

(b) Use the PW vs. incremental i plot to select between A and B.

MARR
5%
9
10
12

Select
B
B
A
A

17.51 Defender
Annual SL depreciation = 450,000 /12 = $37,500
Annual tax savings = (37,500 + 160,000)(0.32) = $63,200
AW D = -50,000(A/P,10%,5) 160,000 + 63,200
= $109,990
Challenger
Book value of D = 450,000 7(37,500) = $187,500
CL from sale of D = BV 7 Market value = $137,500
Tax savings from CL, year 0 = 137,500(0.32) = $44,000
Challenger annual SL depreciation = $65,000
Annual tax saving = (65,000 +150,000)(0.32) = $68,800
AW C = $-184,827
Select the defender. Decision was incorrect.

Chapter 17

17.54

Succession options
Option
1
2
3
Defender
AW D1 = $300,000

Defender
2 years
1
0

Challenger
1 year
2
3

AW D2 = $240,000

Challenger
No tax effect if defender is cancelled. Calculate CFAT for 1, 2, and 3 years of
ownership. Tax rate is 35%.
Year 1:
Year 2:
Year 3:

TI = 120,000 266,640 + 66,640 = $320,000

TI = 120,000 355,600 + 222,240 = $253,360
TI = 120,000 118,480 + 140,720 = $97,760

Year 1: CFAT = 120,000 + 600,000 (112,000) = $592,000

Year 2: CFAT = -120,000 + 400,000 (-88,676) = $368,676
Year 3: CFAT = -120,000 + 200,000 (-34,216) = $114,216
AW C1 = $ 288,000
AW C2 = $+24,696
AW C3 = $+51,740
Selection of best option: Replace now with the challenger.
Year
Option
1
2
3
AW___
1
$240,000
$240,000
$288,000
$254,493
2
300,000
24,696
24,696
94,000
3
51,740
51,740
51,740
+ 51,740
17.57 (a) Before taxes: Let RV = 0 to start and establish CFAT column and AW of CFAT
series. If tax rate is 0%, RV = $415,668.

Chapter 17

17.60 (a) Take TI, taxes and D from Example 17.3. Use i = 0.10 and T e = 0.35.

Chapter 17

Chapter 17

10

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 18
Solutions included for problems: 1, 4, 7, 10, 13, 16, 19, 22, 25, 29, 31, and 34
18.1

10 tons/day: PW = 62,000 + 1500P/F,10%,8) 0.50(10)(200)(P/A,10%,8)

4(8)(200)(P/A,10%,8)
= $100,779
20 tons/day: PW = $140,257
30 tons/day: PW = $213,878

18.4

PW Build = 80,000 70(1000) + 120,000(P/F,20%,3)

= $-80,556
PW Lease = (2.5)(12)(1000) (2.50)(12)(1000)(P/A,20%,2)
= $75,834
Lease the space.
New construction cost = 70(0.90) = $63 and lease at $2.75
PW Build
= $73,556
PW Lease = $83,417
Select build. The decision is sensitive.

18.7 (a) Breakeven number of vacation days per year is x.

AW cabin = 130,000(A/P,10%,10) + 145,000(A/F,10%,10) 1500
+ 150x (50/30) (1.20)x
AW trailer = 75,000(A/P,10%,10) + 20,000(A/F,10%,10) 1,750
+ 125x [300/30(0.6)](1.20)x
AW cabin = AW trailer
x = 19.94 days

(Use x = 20 days per year)

(b) Determine AW for 12, 16, 20, 24, and 28 days.

AW cabin = 13,558.75 + 148x
Days, x
12
16
Chapter 18

AW cabin
$-11,783
-11,191

AW trailer = 12,701.25 + 105x

AW trailer
$-11,441
-11,021
1

Selected
Trailer
Trailer

20
24
28

-10,599
-10,007
- 9415

-10,601
-10,181
- 9761

Cabin
Cabin
Cabin

Each pair of AW values are close to each other, especially for x = 20.
18.10 For spreadsheet analysis, use the PMT functions to obtain the AW for each n
value for each G amount.

The AW curves are quite flat; there are only a few dollars difference for the
various n values around the n* value for each gradient value.

Chapter 18

18.13 (a) First cost sensitivity: AW = P(0.22251) + 24,425

(b) AOC sensitivity: AW = AOC + 21,624
(c) Revenue sensitivity: AW = 32,376 + Revenue

18.16 Water/wastewater cost = (0.12 + 0.04) per 1000 liters = 0.16 per 1000 liters
Spray Method
Pessimistic - 100 liters
Water required = 10,000,000(100) = 1.0 billion
AW = (0.16/1000)(1.00 X 109) = $160,000
Most Likely - 80 liters
Water required = 10,000,000(80) = 800 million
AW = (0.16/1000)(800,000,000) = $128,000
Optimistic - 40 liters
Water required = 10,000,000(40) = 400 million
AW = (0.16/1000)(400,000,000) = $64,000
Immersion Method
AW = 10,000,000(40)(0.16/1000) 2000(A/P,15%,10) 100 = $64,499
Immersion method is cheaper, unless optimistic estimate of 40 L is the actual.
18.19 (a) E(time) = (1/4)(10 + 20 + 30 + 70) = 32.5 seconds
(b) E(time) = 20 seconds
Chapter 18

The 70 second estimate does increase the mean significantly.

18.22

E(i) = 103/20 = 5.15%

18.25

E(revenue) = $222,000
E(AW) = 375,000(A/P,12%,10) 25,000[(P/F,12%,4) + (P/F,12%,8)]
(A/P,12%,10) 56,000 + 222,000
= $95,034
Construct mock mountain.

18.29 AW = annual loan payment + (damage) x P(rainfall amount or greater)

Subscript on AW indicates the rainfall amount.
AW 2.00 = $42,174
AW 2.25 = $35,571
AW 2.50 = $43,261
AW 3.00 = $54,848
AW 3.25 = $61,392
Build a wall to protect against a rainfall of 2.25 inches with an expected AW of
$35,571.
E(value) = $30
18.31 D3: Top:
Bottom: E(value) = $10
Select top at D3 for $30
D1: Top:
Value at D1 = 77-50 = $27
Bottom: 90 80 = $10
Select top at D1 for $27
D2: Top:
E(value) = $66
Middle: E(value) = 0.5(200 100) = $50
Bottom: E(value) = $50

18.31 (cont) At D2, value = E(value) investment

Top:
66 25 = $41
Middle: 50 30 = $20
Bottom: 50 20 = $30
Select top at D2 for $41
Chapter 18

Conclusion: Select D2 path and choose top branch ($25 investment)

18.34 (a) Construct the decision tree.

(b)

Expansion option
(PW for D2, $120,000) = $4352
(PW for D2, $140,000) = $21,744
(PW for D2, $175,000) = $52,180
E(PW) = $28,700

18.34 (cont)

No expansion option
(PW for D2, $100,000 = $86,960
E(PW) = $86,960
Conclusion at D2: Select no expansion option

(c)
Chapter 18

Complete foldback to D1.

5

Produce option, D1
E(PW of cash flows) = $202,063
E(PW for produce) = $47,937
Buy option, D1
At D2, E(PW) = $86,960
E(PW for buy) = cost + E(PW of sales cash flows)
= 450,000 + 0.55(PW sales up) + 0.45(PW sales down)
= 450,000 + 0.55 (228,320) + 0.45(195,660)
= $236,377
Conclusion: Both returns are less than 15%, but the expected return is
larger for produce option than buy.
(d)

Chapter 18

The return would increase on the initial investment, but would increase
faster for the produce option.

SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 19
Solutions included for problems: 2, 5, 8, 11, 14, 17, and 20
19.2 Needed or assumed information to be able to calculate an expected value:
1. Treat output as discrete or continuous variable.
2. If discrete, center points on cells, e.g., 800, 1500, and 2200 units per week.
3. Probability estimates for < 1000 and /or > 2000 units per week.
19.5

(a)

P(N) = (0.5)
N
P(N)
F(N)

N = 1,2,3,... is discrete
1
0.5
0.5

2
0.25
0.75

3
0.125
0.875

4
0.0625
0.9375

5
etc.
0.03125
0.96875

P(L) is a triangular distribution with the mode at 5.

f(mode) = f(M) = 2 = 2
5-2 3
F(mode) = F(M) = 5-2 = 1
5-2

19.8

(b)

P(N = 1, 2 or 3) = F(N 3) = 0.875

(a)

Xi
F(X i )

(b)

P(6 X 10) = F(10) F(3) = 1.0 0.6 = 0.4

P(X = 4, 5 or 6) = F(6) F(3) = 0.7 0.6 = 0.1

(c)

P(X = 7 or 8) = F(8) F(6) = 0.7 0.7 = 0.0

1
0.2

2
0.4

3
0.6

6
0.7

9
0.9

10
1.0

No sample values in the 50 have X = 7 or 8. A larger sample is needed to

observe all values of X.

Chapter 19

19.11 Use the steps in Section 19.3. As an illustration, assume the probabilities that are
assigned by a student are:

P(G = g) =

0.30
0.40
0.20
0.10
0.00
0.00

G=A
G=B
G=C
G=D
G=F
G=I

Steps 1 and 2: The F(G) and RN assignment are:

RNs
0.30 G=A 00-29
0.70 G=B 30-69
F(G = g) =
0.90 G=C 70-89
1.00 G=D 90-99
1.00 G=F
-1.00 G=I
-Steps 3 and 4: Develop a scheme for selecting the RNs from Table 19-2. Assume
you want 25 values. For example, if RN 1 = 39, the value of G is B. Repeat for
sample of 25 grades.
Step 5: Count the number of grades A through D, calculate the probability of each
as count/25, and plot the probability distribution for grades A through I. Compare
these probabilities with P(G = g) above.
19.14 (a) Convert P(X) data to frequency values to determine s.
X
1
2
3
6
9
10

P(X)
.2
.2
.2
.1
.2
.1

XP(X)
.2
.4
.6
.6
1.8
1.0
4.6

f
10
10
10
5
10
5

X
1
4
9
36
81
100

Sample average: Xbar = 4.6

2

Sample variance: s = 1630 50 (4.6) = 11.67

49
49
s = 3.42
19.14 (cont) (b) Xbar 1s is 4.6 3.42 = 1.18 and 8.02
25 values, or 50%, are in this range.
Chapter 19

fX
10
40
90
180
810
500
1630

Xbar 2s is 4.6 6.84 = 2.24 and 11.44

All 50 values, or 100%, are in this range.
19.17 P(N) = (0.5)N
E(N) = 1(.5) + 2(.25) + 3(.125) + 4(0.625) + 5(.03125) + 6(.015625) +
7(.0078125) + 8(.003906) + 9(.001953) + 10(.0009766) + ..
= 1.99+
The limit to the series N(0.5)N is 2.0, the correct answer.
19.20 Use the spreadsheet Random Number Generator (RNG) on the tools toolbar to
generate CFAT values in column D from a normal distribution with = $2040
and = $500. The RNG screen image is shown below. (This tool may not be
available on all spreadsheets.)

19.20 (cont)

Chapter 19

The decision to accept the plan uses the logic:

Conclusion: For certainty, accept the plan if PW > $0 at MARR of 7% per year.
For risk, the result depends on the preponderance of positive PW values
from the simulation, and the distribution of PW obtained.

Chapter 19