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Project Appraisal Tutorial

Model A has a lower purchase price but higher annual operating costs than Model B. Given the information provided about the expected life, salvage value, and interest rate, Model B would be the more economical choice for the local council to purchase. The pumping plan for supplying additional water to the Highridge Water District has lower initial costs but higher average annual costs over the 40-year period than the gravity plan. Based on a present worth analysis at an 8% discount rate, the gravity plan is more economical. Project 1 has a higher capital cost but also a higher annual income than Project 2. At discount rates of 15% and 8%, Project 1 would have a higher net present value, making it the

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Rahul Sharma
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54 views

Project Appraisal Tutorial

Model A has a lower purchase price but higher annual operating costs than Model B. Given the information provided about the expected life, salvage value, and interest rate, Model B would be the more economical choice for the local council to purchase. The pumping plan for supplying additional water to the Highridge Water District has lower initial costs but higher average annual costs over the 40-year period than the gravity plan. Based on a present worth analysis at an 8% discount rate, the gravity plan is more economical. Project 1 has a higher capital cost but also a higher annual income than Project 2. At discount rates of 15% and 8%, Project 1 would have a higher net present value, making it the

Uploaded by

Rahul Sharma
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Project Appraisal Exercises

7. A local council plans to purchase a new garbage truck. Two models are
equally acceptable. Which truck would you recommend they purchase on
economic grounds?

Model A Model B
Purchase Price ($) 50,000 60,000
Operating Cost (Annual)($) 9,000 7,000

The expected life of each truck is 5 years with zero salvage value and an interest
rate of 7%.

8. (After DeGarmo et al ,1984) The Highridge Water District needs an


additional supply of water from Steep Creek. The engineer has selected two plans
for comparison.

(a) Gravity plan: Divert water at a point 10 miles up Steep Creek and carry it
through a pipeline by gravity to the district.
(b) Divert water at a point near the district and pump it through 2 miles of pipeline
to the district. The pumping plant can be built in two stages, with one-half
capacity installed initially and the other one-half 10 years later.

All costs are to be repaid within 40 years, with interest at 8%. Salvage values can
be ignored. During the first 10 years, the average use of water will be less than the
average during the remaining 30 years. Costs are as follows:

Gravity Pumping
Initial investment $2,800,000 $1,400,000
Additional investment in tenth year None $200,000
Operation, maintenance, and $10,000/year $25,000/year
replacements
Power cost:
Average first 10 years None $50,000/year
Average next 30 years None $100,000/year

Required: Select the more economical plan for a 40-year period on the basis of
present worth.

CV492 Project Appraisal Exercises Page 1


9. Compare the following two projects using present value analysis over a life
of 25 years at discount rates of 15% and 8%. Comment on the difference. The
capital costs and incomes for each project are:

Project Capital Cost Annual Income


1 $100,000 $20,000
2 $30,000 $11,000

10. (After DeGarmo et al, 1984) A construction company is going to purchase


several heavy-duty trucks. Its M.A.R.R. before taxes is 18%. It is considering two
makes, and the following relevant data are available.

Wiltsbilt Big Mack


Cost $10,000 $15,000
Life (estimated by 3 years 5 years
manufacturer)
Salvage value at end of life $2,000 $3,000
Annual out-of-pocket costs $4,000 $3,000

(a) Which type of truck should be selected when the repeatability assumption is
appropriate?
(b) Which type of truck would you recommend if the study period is limited to 3
years (coterminated assumption) and it is estimated that a Big Mack truck will
have a salvage value of $5,600 at that time?

11. Three alternative schemes are being considered for the provision of
machinery for a pumping station. For each scheme the capital cost, annual running
cost and salvage value are indicated below. Determine the most economical
proposal, assuming a constant discount rate of 8%, to provide a pumping facility
for an indefinite number of years.

Note The expected life of each scheme is different.

Scheme A B C
Capital Cost $25,000 $50,000 $35,000
Annual Cost $3,000 $2,000 $2,500
Salvage $5,000 $7,000 $6,000
Value
Life (years) 10 29 16

CV492 Project Appraisal Exercises Page 2


12. The Department of Highways is considering building motorways between
Apple Town, Banana City, and Coconut Village. Three options are being
considered:
• Option 1 involves a motorway connecting Apple Town and Banana City only.
• Option 2 involves a motorway connecting Banana City and Coconut Village only.
• Option 3 involves both of the motorways in the previous options plus a bypass around
Banana City connecting the two motorways.

Benefits and costs are given in the following table.

Option 1 Option 2 Option 3


Construction Cost 100,000,000 50,000,000 170,000,000
Operating Cost 4,000,000 2,000,000 7,000,000
Annual Benefit 12,000,000 5,000,000 20,000,000
Salvage Value 30,000,000 20,000,000 60,000,000

All motorways are expected to have a 50 year life. The Department of Highways
always uses a discount rate of 7%. Determine which option should be selected
using Benefit Cost Ratio.

13. (After DeGarmo et al, 1984) A company has the opportunity to take over a
redevelopment project in an industrial area of a city. No immediate investment is
required, but it must raze the existing buildings over a 4-year period and at the end
of the fourth year invest $2,400,000 for new construction. It will collect all
revenues and pay all costs for a period of 10 years, at which time the entire project,
and the properties thereon, will revert to the city. The net cash flow is estimated to
be as follows:

Year End Net Cash Flow


1 +$500,000
2 +$300,000
3 +$100,000
4 -$2,400,000
5 +$150,000
6 +$200,000
7 +$250,000
8 +$300,000
9 +$350,000
10 +$400,000

CV492 Project Appraisal Exercises Page 3


Tabulate net present worth versus the interest rate and determine whether multiple
I.R.R.'s exist.

14. A company is considering investing in one of three different projects.

Year A B C
0 -2400 -2400 -2400
1 600 800 500
2 600 800 700
3 600 800 900
4 600 800 1100
5 600 800 1300

The company would consider each project to have a discount rate of 10%. For each
project determine the conventional payback period, the discounted payback period,
and the net present value.

CV492 Project Appraisal Exercises Page 4

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