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Comparison of Alternatives

The document compares alternatives for an asphalt plant owner: 1) continuing with old equipment for 5 more years with annual repairs of $100,000 and annual output of 100,000 tons, or 2) selling the old equipment and purchasing new equipment for $5M with annual repairs of $50,000 and annual output of 120,000 tons. It asks which alternative should be selected using RORA and AWC methods with an interest rate of 6%.

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Bryan Yu
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357 views

Comparison of Alternatives

The document compares alternatives for an asphalt plant owner: 1) continuing with old equipment for 5 more years with annual repairs of $100,000 and annual output of 100,000 tons, or 2) selling the old equipment and purchasing new equipment for $5M with annual repairs of $50,000 and annual output of 120,000 tons. It asks which alternative should be selected using RORA and AWC methods with an interest rate of 6%.

Uploaded by

Bryan Yu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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COMPARISON OF ALTERNATIVES

1. The owner of a 10 year old asphalt plant is considering two alternatives:


a.) To continue with the old equipment for possibly 5 years more, at which time there
will be no salvage value. Its present value is P400,000. Annual repairs cost
P100,000 and annual output is 100,000 tons. Operating cost is P200 per ton.
b.) To sell the old equipment for salvage value now and purchase new equipment at
a cost of P5M. it has a capacity of 120,000 tons per year and has an estimated
life of 20 years and will be scrapped at the end of its life. Operating costs will be
about P160 per ton and annual repairs about P50,000.
If the rate of interest is 6%, which of this alternatives should be selected?
Use : RORAI and AWC methods.
2. An industrial firm received an offer for the supply of two electric motors which are
being considered to power an industrial hoist. Each motor is capable of providing
100hp. Other pertinent data for each motor are as follows:
Motor A
Motor B
Motor C
Investment

P250,000

P320,000

P400,000

Efficiency

84%

88%

90%

Maintenance per year

P40,000

P60,000

P 70,000

Life, years

10

10

10

Money is worth 20%. If the expected usage of the hoist is 700 hours per year,
a.) what should be the cost of electric power before Motor A is favored over Motor B.
b.) using AWC which motor must be purchased if energy rate is P8.00/kWhr?
3. A company has a machine for which it spends P180,000 a year for operation and
maintenance. If sold now it can bring P120,000. If it is continued in service it is
expected to last for 10 more years, at the time its salvage value will be zero.
Another plan is to overhaul the machine at a cost of P80,000, which is expected to
reduce annual disbursements to P150,000. Its economic life is expected to be also
10 years with a P20,000 salvage value.
Alternatively, a new machine can be purchased for P450,000 which is expected to
reduce annual cost of operation and maintenance to P100,000 for a life of 10 years,
at which time the salvage value is expected to be P100,000. If money is worth 15%
to the company, which alternative would you recommend?

4.A

project is estimated to cost Php625,000, lasts 16 years, and have a Php85,000


salvage value. The annual gross income is expected to average Php 230,000 and

annual expenses, excluding depreciation, will total Php145,500. If capital is earning


12% before income taxes, determine if this is a desirable investment.
5. A mining property is offered for sale for $ 57,000. On the basis of estimated
production, an annual return of
$ 8,000 is foreseen for a period of 10 years.
After 10 years the property will be worthless. What annual rate of return is in
prospect?
a. 6.4%
b. 6.5%
c. 6.6%
d. 6.7%
6. A machine in under consideration for investment. The cost of the machine is
$25,000. Each year it operated, the machine will generate a savings of $ 15,000.
Given an effective annual interest rate of 18%, what is the discounted payback
period, in years, on the investment in the machine?
a. 1.67 years
b. 1.75 years
c. 2.16 years
d. 3.17 years
7. A company has a machine for which it spends P130,000 a year for operation and
maintenance. If sold now it can bring P100,000. If it is continued in service it is
expected to last for 12 more years, at the time its salvage value will be zero.
Another plan is to overhaul the machine at a cost of P80,000, which is expected to
reduce annual disbursements to P90,000. Its economic life is expected to be also 12
years with a P20,000 salvage value.
Alternatively, a new machine can be purchased for P400,000 which is expected to
reduce annual cost of operation and maintenance to P80,000 for a life of 12 years, at
which time the salvage value is expected to be P80,000. If money is worth 12% to the
company, which alternative would you recommend using RORAI?
8. An existing machine in a factory has an annual maintenance cost of P100,000.
Salvage value now is P10,000, and will last for 8 years.
A new and more efficient machine will require an investment of P190,000 and is
estimated to have a salvage value of P30,000 at the end of 8 years. Its annual
expenses for maintenance and upkeep, totals P52,000. Tax and insurance amounts to
3% of the first cost. If the company expects to earn 12% on its investment, will it be
worthwhile to purchase the new machine using AWC method, depreciation method
used is SLM.

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