Question

In: Operations Management

Your cat's summer kitty-cottage needs a new roof. You feel a 15-year analysis period is in...

Your cat's summer kitty-cottage needs a new roof. You feel a 15-year analysis period is in line with your cat's remaining lives. (there is no salvage value for old roofs.)

Thatch Slate

First cost $200 $350

Annual upkeep 50 20

Service life, in years 3 5

A. Graph the EUAC or EUAW for the alternatives. Construct a choice table for interest rates from 0% to 100%.

B. Which roof should you choose if your MARR is 12%? What is the actual value of the IRR on the incremental cost?

Solutions

Expert Solution

A.Calculation of EUAC
Interest rate 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
Annuity factor = (1- (1/(1+interest rate)^3))/interest rate 2.94 2.88 2.83 2.78 2.72 2.67 2.62 2.58 2.53 2.49 2.44 2.40 2.36 2.32 2.28 2.25 2.21 2.17 2.14 2.11 2.07 2.04 2.01 1.98 1.95 1.92 1.90 1.87 1.84 1.82 1.79
EUAC of Thatch = 200/annulty +50 118.00 119.35 120.71 122.07 123.44 124.82 126.21 127.61 129.01 130.42 131.84 133.27 134.70 136.15 137.60 139.05 140.51 141.98 143.46 144.95 146.44 147.93 149.43 150.94 152.46 153.98 155.51 157.04 158.58 160.13 161.68
Annuity factor = (1- (1/(1+interest rate)^5))/interest rate 4.85 4.71 4.58 4.45 4.33 4.21 4.10 3.99 3.89 3.79 3.70 3.60 3.52 3.43 3.35 3.27 3.20 3.13 3.06 2.99 2.93 2.86 2.80 2.75 2.69 2.64 2.58 2.53 2.48 2.44 2.39
EUAC of Slate = 350/annulty factor +20 92.11 94.26 96.42 98.62 100.84 103.09 105.36 107.66 109.98 112.33 114.70 117.09 119.51 121.95 124.41 126.89 129.40 131.92 134.47 137.03 139.62 142.22 144.85 147.49 150.15 152.82 155.52 158.23 160.96 163.70 166.46

Used excel sheet, and one can do in the same manner upto 100% interest

And option Slate is better option uoto interest rate of 28% and beyond Thatch is best option.

b. If MARR is 12 percent
IRR of Thatch = -200 - 50(1-(1.12)^-3)/0.12 =-200 - 120.09 = -320.09
IRR of Slate = -350 - 20(1-(1.12)^-5)/0.12 =-350 - 72.09= -422.09
So option Thatch is the best option will less negative but life is three years only.
Formula = present value of annual out flow = annual flow(( 1-(1+MARR)^-N))/MARR, where N= Life

Related Solutions

How did you feel about your new position as programmer Analyst? Do you feel your academic...
How did you feel about your new position as programmer Analyst? Do you feel your academic preparation which is MBA has been sufficient for you to be able to fulfil your current job expectations? Explain why or why not. PLEASE ANSWER IN 350 WORDS AND IN WORD FORMAT ONLY. THANKS
You and your friend Peter are putting new shingles on a roof pitched at 23 ∘...
You and your friend Peter are putting new shingles on a roof pitched at 23 ∘ . You're sitting on the very top of the roof when Peter, who is at the edge of the roof directly below you, 5.0 m away, asks you for the box of nails. Rather than carry the 2.5 kg box of nails down to Peter, you decide to give the box a push and have it slide down to him. If the coefficient of...
You are evaluating a new product. In year 3 of your analysis, you are projecting pro...
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $5.8 million and cost of goods sold of $3.48. You will be depreciating a $1 million machine for 5 years using straight-line depreciation. Your tax rate is 38%. Finally, you expect working capital to increase from $190,000 in year 2 to $300,000 in year 3. What are your pro forma earnings for year 3? What are your pro forma free cash...
Your firm needs $15 million of new manufacturing equipment. If purchased, the equipment will be depreciated...
Your firm needs $15 million of new manufacturing equipment. If purchased, the equipment will be depreciated straight-line over five years, after which you estimate you could sell the equipment for $1.25 million. In this case, you are also responsible for $1 million per year of maintenance costs. If leased, the annual lease payments will be $4.2 million per year for five years (beginning of year payments). Maintenance is included with the lease, but the lease does require a $0.5 million...
Discuss the activity that you feel is one of the most important that needs to be...
Discuss the activity that you feel is one of the most important that needs to be done as part of closing a project? What are the risks of skipping this activity? What is one crucial question that you could ask during a post-project evaluation and how could you use what you learn to improve the next project.
Discuss the activity that you feel is one of the most important that needs to be...
Discuss the activity that you feel is one of the most important that needs to be done as part of closing a project. What are the risks of skipping this activity? What is one crucial question that you could ask during a post-project evaluation and how could you use what you learn to improve the next project.
Your company needs $ 15 million to build a new assembly line. Your target debt-to-equity ratio...
Your company needs $ 15 million to build a new assembly line. Your target debt-to-equity ratio is 0.6. The cost of issuing new equity is 8%, while the cost of issuing debt is 5%. What is the real cost of the new assembly line if you factor in issuance costs?
Owen needs a new roof for his home across the 125 freeway near Grossmont College. After...
Owen needs a new roof for his home across the 125 freeway near Grossmont College. After extensive research he chooses concrete tile due to its durability. He signs a contract with Marshall of Phoenix Roofing, Inc., an Arizona-based roofing company expanding into the San Diego area. The tiles are delivered the day before installation is to begin. As a standard practise, the tiles are lifted by a crane to the roof, and stacked in piles of 10. Owen questions why...
You purchase a cottage for $170,000. You obtain a 20-year, fixed rate mortgage loan at 12.0%...
You purchase a cottage for $170,000. You obtain a 20-year, fixed rate mortgage loan at 12.0% after paying a down payment of 20%. Of the second month's mortgage payment, how much is interest and how much is applied to the principal? (Round your answers to the nearest cent.) interest = $ applied to the principal = $
You purchase a cottage for $185,000. You obtain a 25-year, fixed rate mortgage loan at 12.5%...
You purchase a cottage for $185,000. You obtain a 25-year, fixed rate mortgage loan at 12.5% after paying a down payment of 25%. Of the second month's mortgage payment, how much is applied to the principal ? (Round your answers to the nearest cent.)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT